Lead Opinion
Dissent by Judge Bybee
OPINION
When it is necessary for a federal district court with diversity jurisdiction to determine the preclusive effect of a prior decision by a different federal district court sitting in diversity, the second court must apply preclusion principles according to the law of the initial court’s state. See Semtek Int’l Inc. v. Lockheed Martin Corp.,
I. BACKGROUND
Underlying this case are the unpaid debts of GoVideo (a non-party) for the purchase of DVD players from Plaintiff-Appellant Daewoo Electronics America Inc. (Daewoo). Daewoo brought the present action to recover this debt from four entities affiliated with GoVideo: TCL Corporation (TCLC), TCL Industries Holdings Limited (TCLI), TCL Multimedia Technology Holding Limited (TCLM), and Opta Corporation (Opta).
GoVideo operated a consumer electronics business in which it owned patents on electronics technology, bought DVD players from manufacturers (made pursuant to GoVideo’s patents), and sold those players to third-party retailers. From October 2003 through April 2005, Daewoo manufactured DVD players that it sold to GoVideo on credit. Shortly after this arrangement began, (on December 4, 2003) Daewoo, TCLI, and Opta entered into a guaranty agreement.
During 2004 and 2005, GoVideo had substantial-operating losses. As a result, beginning in late December 2004, GoVideo stopped paying for the DVD players it was receiving from Daewoo. As of June 2005, GoVideo owed Daewoo $7,775,670.98. In November 2005, GoVideo brought suit in the United States District Court for the District of New Jersey against Daewoo for breach of contract and other claims based on allegations that Daewoo manufactured defective products for GoVideo. Daewoo asserted counterclaims to collect the unpaid debts GoVideo owed for DVD players. In April 2007, after GoVideo had abandoned its claims, the district court entered default judgment on the counterclaims, awarding Daewoo . $8,385,168.84 (the amount of the debt, plus interest).
Unable to collect from GoVideo on this judgment, Daewoo filed suit in May 2008 against TCLI and Opta, in the United States District Court for the District of New Jersey, seeking to enforce the guaranty-agreement. In August 2010, the district court granted Defendants’ motion for summary judgment in the guaranty action. Applying New Jersey contract law, the court found that the effective date of the guaranty was December 4, 2003; that such date was “clear on [the] face” of the agreement; and that the guaranty expired by its terms on December 3, 2004, twelve mjonths from that date. Because the default judgment against GoVideo arose from debt incurred starting on December 23, 2004— after the guaranty expired-—the district court held that TCLI and Opta never had an obligation to pay this debt under the guaranty.
In March 2013, Daewoo brought the present suit against Opta, TCLM, TCLC, and TCLI in the United States District Court for the Northern District of California, asserting California state law claims for (1) actual fraudulent transfer, (2) constructive fraudulent transfer, (3) alter ego liability, and (4) successor liability. Defendants moved to dismiss based on the res judicata effect of the guaranty action. Judge White from the Northern District of California rejected the res judicata argument, holding that the actions were not sufficiently related so as to arise from the same transaction or occurrence. Instead, these California claims for relief relied on entirely different facts. Daewoo later vol-, uptarily dismissed its claims for fraudulent transfer.
The case was reassigned to Judge Chhabria in April 2014. Shortly thereafter, Judge Chhabria sua sponte ordered the parties to brief “whether this lawsuit , is barred in whole or in part under the doctrine of res judicata,” based on the summary judgment in the guaranty action. Defendants then moved, under Federal Rule of Civil Procedure 12(c), for judgment on the pleadings based on res judica-ta. In ruling on the motion, the district court found that most of the facts on which Daewoo bases its present claims were available to Daewoo during the period that the guaranty action was pending. Thus, the court held that, because Daewoo could have asserted the present claims at the same time it brought the prior action, Dae-woo was barred from bringing-those claims in the present action. Daewoo now appeals.
II. STANDARD OF REVIEW
We review de novo the district court’s ruling on a motion for judgment on the pleadings under Federal Rule of Civil Procedure 12(c). Lyon v. Chase Bank USA, N.A.,
III. DISCUSSION
In short, the summary judgment ruling of the federal district court in New Jersey on Daewoo’s prior breach of contract claim' (based on the guaranty agreement) against Opta and TCLI does not preclude Daewoo from bringing the present alter ego and succéssor liability claims against Opta and TCLM.
Semtek International Inc. v. Lockheed Martin Corp.,
The parties do not dispute that we begin with New Jersey law for the preclusion question; they disagree as to how that law operates. Their arguments concern two state law doctrines: (1) New Jersey’s version of traditional res judicata, and (2) New Jersey’s “entire controversy doctrine.” We address the application of each doctrine in turn.
A. Res Judicata
Because there is not substantial overlap of the facts material to proving, first, the breach of contract claim in the prior guaranty action and, second, the alter ego and successor liability claims in the present action, the two actions do not grow from the same transaction or occurrence, and res judicata does not apply; For res judicata to apply, “[ (1) ] the 'judgment relied upon must be valid, final and on the merits; [ (2) ] the parties in the two actions must be either identical or in privity with one another; and [(3)] the claims must grow but of the same transaction or occurrence.” Olds v. Donnelly, 291 N.J.Super; 222,
Therefore, we turn to whether Daewoo’s alter ego and successor liability claims grow out of the same transaction or occurrence as the cláim on the guaranty contract. To answer that question, we must consider four factors:
(1) whether the acts complained of and the demand for relief are the same (that is, whether the wrong for which redress is sought is the same in both actions); (2) whether the theory of recovery is the same; (3) whether the witnesses and documents necessary at trial are the same (that is, whether the same evidence necessary to maintain the second action would have been sufficient to support the first); and (4) whether the material facts alleged are the same.
Culver v. Ins. Co. of N. Am.,
With respect to the first factor, 'Defendants’ acts (of which Daewoo complained and for which Daewoo demanded corresponding relief) differed in each action. Although Daewoo’s claims in both actions could have had the effect of satisfying part of the default judgment against GoVideo (as both district court judges in the present action acknowledged), the underlying bases giving Daewoo a right to bring each suifcr-the wrongs for which Daewoo sought redress—did not overlap.
As Judge White observed, the prior suit was an action for “a breach of a guaranty contract.”-Daewoo’s complaint in the prior action alleged that Defendants became liable to Daewoo under the contract for $5 million, that Daewoo demanded payment from Defendants, and that Defendants refused to pay. It was the breach of the guaranty—Defendants’ refusal to fulfill their contractual obligation to pay $5 million—that was the wrong for which Dae-woo sought relief. Although proof of this claim would require showing that GoVideo was in debt to Daewoo, the purpose of suing in the guaranty action would not have been to fulfill Go Video’s obligation to pay its debt. Instead, the suit would fulfill Defendants’ independent contractual obligation under an agreement to which GoVi-. deo was not a party. Conversely, Daewoo seeks redress in the present action fqr an obligation to pay a $7.75 million debt incurred by GoVideo that had nothing to do with the guaranty contract. Daewoo seeks to hold Defendants directly liable for GoVi-deo’s unpaid debt, rather than for Defendants’ independent obligation.
The relief available for each cause of action further evidences the difference in the underlying wrongs. Defendants acknowledge that the amount of damages available under the two actions was substantially different. In the prior action, Daewoo could have recovered no more than Defendants’ independent $5 million obligation under the guaranty. However, under the theories asserted in the present action, Daewoo could recover $7.75 million, because Defendants would be held directly liable for’ the full amount of GoVideo’s debts. See Wady v. Provident Life & Accident Ins. Co. of Am.,
Second, the parties and- both of the district court judges have acknowledged that the present action involves theories of recovery that are legally distinct from those asserted in the prior action. The guaranty action concerned liability under an express contract executed by the parties to' the litigation and governed by New Jersey law. The present action seeks to hold Defendants directly liable for a third-party’s debt under California actions of alter ego' and successor liability, where Defendants would otherwise have no independent basis for that debt. While this factor does not carry as much weight as others in the analysis, see Athlone,
The third and fourth factors are intertwined and both weigh in Daewoo’s favor, because there is not significant overlap between the material facts or the necessary evidence in each action. Daewoo argues that the claims asserted in the separate actions involve substantially different facts and evidence because the issues in the guaranty action concerned only formation and interpretation of the guaranty contract, which are-irrelevant to the claims of alter ego and successor liability. Instead, Daewoo argues, the present action “focuses on the conduct of Defendants-Appellees in stripping GoVideo of its assets,” which occurred well after formation of the guaranty. Daewoo further contends that (although Opta was involved in both actions) none of the facts or evidence in the guaranty action would have related to TCLM, because TCLM was not a party to ■that case or to the guaranty agreement. Defendants argue that Daewoo demonstrated ■ the substantial overlap between the two lawsuits by alleging several of the same facts in both actions. However, Defendants fail to explain why any of these common facts (and their supporting evidence) were- material to the guaranty action. Judge Chhabria’s analysis suffers the same flaw. As Judge White found, while some of the contextual background facts may overlap, “Daewoo’s alter ego and successor liability claims nonetheless do not directly relate in substance to the guaranty contract,” and they rely on an entirely different set of facts. In their analyses of res judicata, neither the district court nor the parties discuss what specifically must be proved for the various claims. Examining the required proof makes it clear that the two actions here would not involve significantly overlapping facts and' evidence.
New Jersey contract law requires a plaintiff to show that (1) the parties formed a contract, (2) the plaintiff performed under the terms of the contract, (3) the defendant breached, and (4) the breach caused a loss to thé plaintiff. Globe Motor Co. v. Igdalev,
The theory of “alter ego,” under California law, refers to situations where the “owner of a corporation will be held liable for the actions of the corporation.” Wady,
In considering whether there is sufficient unity of interest and ownership, relevant factors include whether there was
inadequate capitalization, commingling of funds and other assets, holding out by one entity that it is liable for the debts of the other, identical equitable ownership, use of the same offices and employees, use of one as a mere conduit for the affairs of the other, disregard of corporate formalities, lack of segregation of corporate records, and identical directors and officers.
Id. (citing VirtualMagic Asia, Inc. v. Fil-Cartoons, Inc.,
Under a California successor liability claim, a corporation acquiring substantially all the assets of another corporation may be liable for the debts of the terminated corporation where “(1) the purchaser expressly or impliedly agrees to such assumption, (2) the transaction amounts to a consolidation or merger of the two. corporations, (3) the purchasing corporation is merely a continuation of the selling corporation, or (4) the transaction is entered into fraudulently to escape liability for debts.” McClellan v. Northridge Park Townhome Owners Ass’n, Inc.,
In analyzing the third and fourth factors to determine whether claims grew out of the same transaction or occurrence, we consider “the material facts” and the evidence necessary to prove them. See Culver,
Comparing this required proof to that necessary for the claims in the present action, it is clear there would be very little overlap. Because the guaranty contract forms an obligation for Defendants to pay that is separate from GoVideo’s direct liability for its debt, the guaranty action would not require any proof concerning the entities’ relationships or an inequitable result, as in the alter ego claim. Likewise, the guaranty action would not have required proof of the circumstances necessary to establish successor liability. The one area of potential overlap is that both actions would require proof that GoVideo had a debt to Daewoo. However, Daewoo had a default judgment establishing GoVi-deo’s debt for $7.75 million well before it filed either action. Therefore, the only evidence required to establish the existence of the debt would be the default judgment. Because the existence of the debt is essentially uncontested, the burden imposed (and the judicial resources expended) by introducing the default judgment in each action would be minimal. Although there are some allegations common to the complaints in both actions, these allegations concern facts immaterial to the guaranty action. In light of the minimal overlap between the material facts and evidence necessary to pi’ove the claims in each action, the third and fourth factors weigh against finding that the actions grew from the same transaction or occurrence.
Because the two actions asserted distinct theories of liability to seek redress for different harms, and because the facts and evidence material to each action did not significantly overlap, the two actions did not grow from a common transaction or occurrence. Therefore, the judgment from the guaranty action does not preclude the claims in the present action under the New Jersey doctrine of res judicata.
During a July 2014 hearing, “Daewoo’s counsel stated on the record that Daewoo could have brought the claims at issue in this case during the, [guaranty action] but chose not to do so.” Defendants and Judge Chhabria place great weight on this point, seeming to argue that it should dispositively preclude Daewoo from maintaining the present action. However, this argument reflects a misunderstanding of the test for res judicata. While res judicata permits claims to be barred where they could have been raised in the prior action but were not, the requirement remains that the un-alleged claims must be so closely related to those claims on which the prior judgment was rendered that they are considered to grow from the same transaction or occurrence. The required elements of the res judicata doctrine do not cease to apply simply because a claim was not alleged when it could have been. Even if Daewoo could have brought the present claims in the prior action, it was not required to do so, because the present claims did not grow from the same transaction or occurrence as did the guaranty claim.
B, Entire Controversy Doctrine
The present claims are riot precluded by New Jersey’s entire controversy doctrine.
In Semtek, the Supreme Court outlined that we must look to state law to resolve preclusion issues under the present circumstances. The Court acknowledged the possibility that a state’s law could have two preclusion rules that applied differently (under the same set of facts) depending on the jurisdiction in which the F2 action was brought. See
The New Jersey court system has a “long-held preference that related claims and matters arising among related parties be adjudicated together rather than in separate, successive, fragmented, or piecemeal litigation.” Kent Motor Cars, Inc. v. Reynolds & Reynolds, Co.,
These joinder rules are distinct from traditional preclusion rules like res judicata. Unlike res judicata, the primary purpose of the entire controversy doctrine is not to enforce an adjudication that has already taken place. See Fioriglio v. City of Atl. City,
For example, in Mortgagelinq Corp. v. Commonwealth Land Title Insurance, the New Jersey Supreme Court considered whether the state court (sitting as F2) was permitted to apply the state’s own entire controversy doctrine to preclude claims that could have been (but were not) brought in a prior action in Pennsylvania federal court (FI).
However, this goal of preserving New Jersey’s judicial resources does not benefit from a non-New Jersey court (sitting as F2) closing its courthouse doors. Accordingly, New Jersey does “not export [its] entire controversy doctrine to other jurisdictions.” Id. at 537. Rather, given the nature and principal goal of the doctrine, the New Jersey Supreme Court has indicated that—even if the entire controversy doctrine would have precluded an F2 decision in New Jersey—the entire controversy doctrine would not preclude a different jurisdiction sitting as F2 (whose own procedural rules allow the claim) from entertaining the case, because New Jersey law does not impose on other jurisdictions its procedural joinder requirements or the preclusive effect of those requirements. See id. at 537, 540-42; see also Paramount,
The dissent argues that the entire controversy doctrine’s exception should not be applied in this case. This is incorrect for three reasons. First, the dissent incorrectly applies New Jersey law. Although the dissent argues that “[t]he majority nevertheless refuses to apply the entire controversy doctrine,” it is the dissent which truly implements only half of the doctrine. As the dissent correctly notes, we must “implement New Jerséy preclusion law just as a New Jersey state court would.” Indeed, this is the central holding in Semtek. Semtek,
Second, the dissent incorrectly reads the import of this doctrine. New Jersey’s'ability to treat this housekeeping mechanism as preclusive in its own. courts, but not in other courts, is supported by.analogy to other mechanisms that reach a comparable result, such as statutes of limitation or forum non coveniens. Semtek foresaw and acknowledged situations where state law statute of limitations would be preclusive in one state, but not another. Semtek,
Finally, assuming the dissent is correct that failing to apply the entire controversy doctrine as a bar in this case would lead to forum shopping and other problems, Dae-woo’s claims would still- not be barred under Semtek. Where applying the state law would be “incompatible with federal interests,” “[tjhis federal reference to state law will not obtain.” Id. at 509,
In sum, New Jersey law does not require extrajurisdietional application of its entire controversy doctrina This approach complies with the Supreme Court’s decision in Semtek, which recognized that a state may have preclusion rules that bar certain claims within that state While permitting the same claims elsewhere. Therefore, following Semtek to give full effect to the preclusion laws of New Jersey, we must decline to apply the entire controversy doctrine to this case.
IV. CONCLUSION
Because the claims in the present action and -in the guaranty action did not arise from the same transaction or occurrence, New Jersey’s version of traditional res judicata does not apply. And, although the entire controversy doctrine may have prevented Daewoo from bringing the present claims in New Jersey, this procedural join-der rule does not bar the claims from being .heard in the. federal district court sitting in- California. Thus, the district court erred in ruling that the claims in the present action were precluded under New Jersey law.
REVERSED and REMANDED for further proceedings.
Notes
. Although Daewoo named all four entities as defendants, only TCLM and Opta are proper parties to this appeal. Daewoo voluntarily dismissed TCLC prior to appeal. The district court also dismissed all claims against TCLI for lack of personal jurisdiction. Daewoo did not contest this ruling on appeal. Therefore, the issue is waived. Smith v. Marsh,
Concerning Defendants' relationships to GoVideo, the record indicates that ownership of GoVideo changed substantially during the course of the parties' dealings. However, as alleged in the complaint, TCLC wholly owned TCLI. TCLI owned 55% of TCLM and 89% of Lotus International Holdings (Lotus). TCLI and Lotus owned, respectively, 19% and 32% of Opta. And Opta wholly owned Opta Systems LLC, which formerly did business as GoVideo.
. Opta .was formerly "Lotus Pacific Inc.” and executed the guaranty under that name.
. For purposes of our discussion, we refer to the first forum to address a particular case as ' "FI." The second forum, tasked with determining the preclusive effect of an fl judgment, we refer to as "F2,”
. The present case considers the effect of a federal district court judgment rendered by a court sitting with diversity jurisdiction on a subsequent adjudication in a different federal district court also sitting in diversity. Although Semtek considered the effect of a federal district court diversity-jurisdiction judgment on a subsequent adjudication in a state court,
. However, the state law is not incorporated in cases where "the state law is incompatible with federal interests.” Semtek,
. Daewoo argues that Defendants waived their right to raise a preclusion defense in the present action, because they failed to plead res judicata in the prior guaranty action (based on the preclusive efféct of Daewoo’s default judgment against GoVideo). Daewoo waived this argument by failing to raise it in its opening brief. Martinez-Serrano v. I.N.S.,
.- New Jersey's res judicata standard is very similar to its federal counterpart applied by the Third Circuit. See In re Mullarkey,
. New Jersey courts and their federal counterparts cannot claim to be entirely consistent when it comes to treatment of the entire controversy doctrine. Mortgagelinq, itself, acknowledges that “the entire controversy doctrine is hardly one of either uniform application or universal acceptance."
Dissenting Opinion
dissenting:
This case presents a complex issue of interjurisdictional preclusion, but it can be solved easily if one adheres to first principles. The preclusive effect of a prior judgment in a federal diversity action is governed by the law of the state in which the rendering court sits. Semtek Int’l Inc. v. Lockheed Martin Corp.,
There are two twists. First, New Jersey has an unusually robust preclusion rule called the “entire controversy doctrine,” and applying that doctrine here would bar Daewoo’s claims. Second, the New Jersey Supreme Court has said that only its own courts, not federal or other state courts, need apply the entire controversy doctrine. Mortgagelinq Corp. v. Commonwealth Land Title Ins. Co.,
The majority nevertheless refuses to apply the entire controversy doctrine, citing New Jersey’s limitation of the doctrine to its own courts. Maj. Op. at 1252-54. According to the majority, we cannot apply the doctrine “as if [we] were the New Jersey state court,” but rather must apply the “state court’s law as the Ninth Circuit.” Id. at 1254 (emphasis omitted). Simply put, this is an aberration. We are required to apply the same laiv New Jersey state courts would apply. 'See Semtek,
I respectfully dissent.
■I
This dispute stems from a sour business deal between Daewoo and GoVideo. Dae-woo obtained a default judgment against GoVideo for some $7.78 million. Unable to collect from GoVideo itself, Daewoo sued GoVideo’s parent companies and other affiliates—entities the majority calls TCLC, TCLI, TCLM, and Opta'. Maj. Op; at 1244-45. Specifically, Daewoo filed two lawsuits, each asserting a different theory of liability regarding the affiliate companies’ responsibility to cover GoVideo’s debt'.
First, Daewoo brought a diversity action against TCLI and Opta in the District of New Jersey, alleging that those companies had guaranteed repayment of GoVideo’s debt in a written agreement. The district court rejected Daewoo’s theory and entered summary judgment against it. Second, Daewoo filed this diversity action in the Northern District of California against all four entities affiliated with GoVideo (although only TCLM and Opta remain Defendants). Daewoo alleged, inter alia, that Defendants, were alter egos of GoVi-deo and liable for its debts. The district court dismissed almost all of Daewoo’s claims as barred by the prior judgment. Daewoo appealed.
II
The majority and I agree that the pre-clusive effect of the prior judgment is governed .by New Jersey state law. See Maj. Op.. at .1251-52. We disagree, however, about how to apply that law here. What complicates this case, is the unique structure of New- Jersey’s preclusion rules, which encompass both a traditional res judicata doctrine and the entire, controversy doctrine.
New Jersey’s res judicata doctrine “requires substantially similar or identical causes of action and issues, parties, and relief sought.” Wadeer v. New Jersey Mfrs. Ins. Co.,
Applying the correct preclusion doctrine is of critical importance in this case. Under New Jersey’s res judicata doctrine, there is a strong argument that the prior judgment does not bar Daewoo’s claims here. See Maj. Op. at 1247-52. As the majority notes, the two actions seek slightly different relief (Daewoo hopes to recover more here), and involve different theories of recovery, allegations, and potential .evidence., See id. at 1248-50. The majority and Dae-woo appear to agree, however, that this action would not survive under the entire controversy doctrine. Both actions arise from the same core set of facts, which is all that is necessary for the entire controversy doctrine to apply. See Wadeer,
Ill
According to the majority, we can follow New Jersey law and yet not apply the entire controversy doctrine because New Jersey has limited the doctrine to its own courts. This reasoning is both an affront to controlling federal common law and an open invitation to forum shopping. To show precisely where the majority goes astray, I first discuss general principles of interjurisdictional preclusion and then explain why the New Jersey Supreme Court’s decision in Mortgagelinq cannot keep us from applying the entire controversy doctrine here. Throughout, I refer to the first court to render a judgment as Forran 1 (“FI”) and the second court considering whether to give preclusive effect to that judgment as Forum 2 (“F2”).
A
Intel-jurisdictional preclusion rules are least complicated when FI is a state court. When a state court enters judgment, the Full Faith and Credit Clause of the Constitution, implemented through the Full Faith and Credit Act, requires every subsequent court occupying the role of F2— whether state or federal—to protect that judgment by applying the preclusion law of FI. U.S. Const, art. IV, § 1; 28 U.S.C. § 1738. F2 must put itself in the shoes of FI and give the same preclusive effect to FI’s judgment as FI would. See Kremer v. Chem. Const. Corp.,
The full faith and credit obligations of F2 have equal force even when FI purports to limit the extraterritorial effects of its preclusion rules. It is simply not FI’s prerogative to tell other courts to apply its preclusion doctrines differently than it itself would. See Thomas,
To vest the power of determining the extraterritorial effect of a State’s own laws and judgments in the State itself risks the very kind of parochial entrenchment on the interests of other States that it was the purpose of the Full Faith and Credit Clause and other provisions of Art. IV of the Constitution to prevent.
Thomas,
In accord with the Supreme Court’s guidance, federal and state courts sitting as F2 have consistently applied New Jersey’s entire controversy doctrine where FI was a New Jersey state court. For example, in Rycoline Products, Inc. v. C & W Unlimited, the Third Circuit addressed whether a federal court presented with a mix of federal and state claims should apply the entire controversy doctrine when a New Jersey state court had previously issued a judgment on the same subject matter.
B
The rules are slightly more complex when FI is a federal court. In that scenario, the Full Faith and Credit Act offers no guidance because it protects only judgments -of state courts. See 28 U.S.C. § 1738. The Supreme Court, however,- has addressed this doctrinal gap and filled it with federal common law. See Taylor v. Sturgell,
The federal common law takes two forms depending on whether FI exercises federal-question or diversity jurisdiction. If the former, F2 applies federal preclusion rules. See Taylor,
C
Deferring to the New Jersey Supreme Court’s decision in Mortgagelinq—as the majority does here, Maj. Op. at 1252-53— contravenes these fundamental principles of interjurisdictional preclusion. Mortga-gelinq addressed whether federal law or New Jersey’s entire controversy doctrine governs the preclusive effect of a judgment by a Pennsylvania federal court (FI) on claims subsequently brought in New Jersey state court (F2).
Had Mortgagelinq I and Mortgagelinq II been brought successively in New Jersey courts, there would be little doubt that application of the entire controversy doctrine would preclude the omitted claims. The issue is whether, the non-joinder of parties,in a related action in the Pennsylvania federal court results in the same party preclusion in New Jersey. ,
Id. The New Jersey Supreme Court concluded that the entire controversy doctrine applied, but only as a bar to “successive actions in New Jersey” and not as “a barrier elsewhere.” Id. at 542. The court therefore affirmed dismissal of the action based on the entire- controversy doctrine, but without prejudice, inviting the plaintiffs to file their claims elsewhere. Id. (“Maintaining a cohesive federal system ,.. does-not.require that the other parts of the : federal system honor our entire controversy doctrine.”).
A vigorous dissent noted the perversity of this “untoward result,” preferring a straightforward- application of traditional interjurisdictional preclusion rules:
Under established choice-of-law principles, the preclusive effect of a judgment is determined by the law of the jurisdiction that rendered it,.., Restatement (Second ■ of Judgments) § 87 (1982) (“Federal law determines the effects under the rules of res judicata of a judgment of a federal court.”), “If [a] plaintiff would be precluded from, maintaining ... a second action in the [jurisdiction] of rendition, he will similarly be barred from maintaining such an action in other [jurisdictions].” Restatement (Second of Judgments) § 95 comment e (1971). Federal law would not preclude plaintiffs from maintaining an action against these defendants in federal courts. Consequently, I would not bar plaintiffs from pursuing the defendants in the courts of this State.
Id. at 543 (Pollock, J., dissenting) (all but the first alteration in original).
Not surprisingly, Mortgagelinq attracted considerable controversy among federal-courts scholars almost immediately after it was issued. See generally Stephen B. Burbank, Where’s The Beef? The Interju-risdictional Effects of New Jersey’s Entire Controversy Doctrine, 28 Rutgers L.J. 87 (1996); Rochelle Cooper Dreyfuss & Linda J. Silberman, Interjurisdictional Implications of the Entire Controversy Doctrine, 28 Rutgers L.J. 123 (1996); Perry Dane, Sovereign Dignity and Glorious Chaos: A Comment on the Interjurisdictional Implications of the Entire Controversy Doctrine, 28 Rutgers L.J. 173 (1996). More importantly, it led directly to the majority’s error in this case.
D
The majority followed Mortgagelinq’s two-system approach: apply one rule if F2 is a New Jersey state court; apply a different rule if F2 is a federal court. That principle flatly contradicts Semtek. Under Semtek, we must, as F2, apply “the law that would be applied by state courts in the State in which [FI sits].”
As noted at the outset, the majority responds that we cannot apply “the [entire controversy] doctrine as if [we] were the New Jersey state court,” but rather must apply “the New Jersey state court’s law as the Ninth Circuit.” Maj. Op. at 1254. This simply makes no-sense. Our task is to put ourselves in the New Jersey state court’s shoes and to give the same, preclusive effect to New Jersey’s judgments as, New Jersey would. It is not for New Jersey to tell any other court, including our, own, to apply the entire controversy doctrine differently than it itself would. See Thomas,
The majority also contends that the entire controversy doctrine is a mere “procedural- housekeeping tool” meant only to ‘“preserv[e] [New Jersey’s] judicial resources.’” Maj. Op. at 1252-53 (quoting Paramount Aviation Corp. v. Agusta,
Indeed, the New Jersey Supreme Court has stated, time and time again, that the purpose of the entire controversy doctrine is threefold: “(1) the need for complete and final disposition through the avoidance of piecemeal decisions; (2) fairness to parties to the action and those with a material interest in the action; and (3) efficiency and the avoidance of waste and the reduction of delay.” Wadeer,
Res judicata, like the entire controversy doctrine, serves the purpose of providing “ ‘finality and repose; prevention of needless litigation; avoidance of duplication; reduction of unnecessary burdens of time and expenses; elimination of conflicts, confusion and uncertainty; and basic fairness[.]’ ”
Wadeer,
Because the entire controversy doctrine is a rule of preclusion, we must apply it here. We do not look to whether New Jersey harbors especially warm feelings for its preclusion mies or could not care less about preclusion generally. All that matters is that New Jersey has a rule that applies in its courts. Federal common law requires us to honor that rule, and that is the end of the matter.
Finally, if there is an arch-principle overlaying interjurisdictional preclusion, it is one of fairness to all parties. When we sit in diversity, we sit in the place of state courts and do not want parties to game the system by choosing a forum based on what preclusion rules will apply. The majority ignores this principle and, in doing so, not only facilitates forum shopping but approves it in this case. Cf. Semtek,
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Interjurisdictional preclusion can be complex, but this case boils down to a few simple premises. New Jersey gets to decide its preclusion law. It does not get to dictate how federal courts apply that law. We apply New Jersey law just as New Jersey state courts would apply it. The majority did not do that.
I respectfully dissent.
. The doctrine is currently enforced through New Jersey Court Rule 4:30A:
Non-joinder of claims required to be joined by the entire controversy doctrine shall re-suit in the preclusion of the omitted claims to the extent required by the entire controversy doctrine, except as otherwise provided by R. 4:64-5 (foreclosure actions) and R. 4:67-4(a) (leave required for counterclaims or cross-claims in summary actions). Claims of bad faith, which are asserted against an insurer after an underlying uninsured motorist/underinsured motorist claim is resolved in a Superior Court action, are not precluded by the entire controversy doctrine.
See also N.J. Ct. R. 4:5-l(b)(2), (imposing a duty for parties to disclose "the names of any non-party who should be joined in the action”). New Jersey courts have not always clearly articulated the distinction between res judicata and the entire controversy doctrine, and some have even equated the two. See, e.g., Long v. Lewis,
. Although Thomas’ s discussion of the extraterritorial effects of state judgments appears in a plurality opinion, at least six Justices agreed with the principle. See id. at 290-91,
. Mortgagelinq was decided pre-Semtek. Neither opinion distinguished the two types of federal preclusion rules discussed above.- In fact, at the time, there was considerable debate over what rule applied to protect the judgment of a federal court sitting in diversity as FI. Compare Stephen B, Burbank, Interju-risdictional Preclusion, Full Faith and Credit and Federal Common Law: A General Approach, 71 CORNELL L. REV, 733, 805-17 (1986) (arguing in favor of the rule that Sem-tek eventually adopted), with Ronald E, Deg-nan, Federalized Res Judicata, 85 YALE L.J. 741, 750-55 (1976) (arguing in favor of uniform federal res judicata rules irrespective of the source of FI’s jurisdiction). It is not clear which federal preclusion rule should have applied in Mortgagelinq because the decision does not mention the basis for jurisdiction in FI.
, Accord Prevratil v. Mohr,
. Even if New Jersey's reasons for adopting the entire controversy doctrine were relevant, would not preserving federal judicial resources be an equally valid reason to apply the same rule New Jersey courts would? That is, even granting that New Jersey is not concerned with our time—"this goal of preserving New Jersey's judicial resources does not benefit from a non-New Jersey court (sitting as F2) closing its courthouse doors,” Maj. Op. at 1253—we still care about our time as much as New Jersey courts care about theirs. The majority’s contention that applying New Jersey’s doctrine here would be "incompatible with federal interests,” Maj. Op. at 1254, is both unsupported and inapplicable.