Judgment "On the Merits"

Case: Saylor v. Lindsley (2nd, 1968) [App 188-192]

391 F.2d 965

Facts:
○ 1st action: Hawkins, on behalf of Tonopah Corp, brought an action against
various officers and directors of Tonopah and against corporations controlled by
such officers and directors, alleging securities law violations and breaches of
fiduciary obligations. The complaint was dismissed "with prejudice" when Hawkins
failed to post a bond for security for costs as required by NY statute.
○ 2nd Action: Saylor (Pl) then brought a derivative action on the basis of
the same transactions and same defendants of the 1st action. District court
granted motion for summary judgment on the ground that res judicata barred this
2nd action. Pls appealed.
○ Appellant (Saylor) had 3 arguments why his 2nd action shouldn’t be
dismissed, b/c it's not res judicata. Any of the arguments would reverse the trial
court's dismissal.
§ The two suits are not based upon the same cause of action because
additional legal theories for recovery have been added to the instant complaint.
§ The dismissal in Hawkins for failure to post a securities-for-costs
bond is not a judgment "on the merits" for the purposes of res judicata.
§ The dismissal in Hawkins, even if on the merits, is not binding on
the Pl, Saylor, and other stockholders of Tonopah who were not given actual notice
and an opportunity to intervene before the action was ordered dismissed.

Issue: Whether the 2nd action should be dismissed on the basis that res judicata
barred it b/c of the 1st action, when the 1st action was dismissed for procedural
reasons (for failure to post a securities-for-costs bond).

Holding: Reversed and remanded.

Reasoning: The bar to the 2nd action cannot be resolved on summary judgment b/c
there are unresolved issues of fact.
• Res judicata says that a valid, final judgment on the merits bars subsequent
action between the same parties, or those in privity, upon the same claim or
demand. But it only binds parties to issues actually litigated and determined in
the 1st action.
○ Requirement that a judgment to be res judicata must be rendered on the
merits:
§ Guarantees the Pl the right once to be heard on the substance of his
claims.
• Therefore, a dismissal on a ground that did not resolve the substantive merit of
the complaint (like because of procedural or jurisdictional reasons) was not a bar
to a subsequent action on the same claim.
○ Exception to this rule (which the lower court cited as a reason for the
dismissal):
§ Rule 41(b): an involuntary dismissal for failure to prosecute, or for
failure to comply with the Rules or any order of the Court, shall operate as
"adjudication upon the merits," although the substantive issues of the case are
never reached. This exception does not apply to dismissals for lack of
jurisdiction or for improper venue.
□ Court notes that the policy behind this rule is to bar
subsequent actions only in situations in which the defendant must incur the
inconvenience of preparing to meet the merits because there is no initial bar to
the Court's reaching them.
® Court here says: the Dfs in this 2nd action make no claim
that they were put to the inconvenience of preparing a defense in the Hawkins
litigation. Moreover, b/c the bond was not filed, the court in Hawkins did not
reach the point of considering a motion to dismiss, based on claims that the court
lacked jurisdiction as to some of the dfs, which if reached and granted, would
have, under Rule not have been on the merits.
◊ Pl was never permitted to approach the point where
the court could even consider its own power to go "forward to determine the merits
of his substantive claim," it would be wrong to say that the dismissal in Hawkins
was res judicata to this action.

Notes:
○ Rule 41(b) - Any dismissal (except for one for lack of jurisdiction,
improper venue, or failure to join a party under Rule 19), operates as an
adjudication on the merits.