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SFM Holdings, Ltd. v. Banc of America Sec., LLC

United States Court of Appeals, Eleventh Circuit

September 4, 2014

SFM HOLDINGS, LTD. and SALOMON MELGEN, Plaintiffs--Appellants,

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Appeal from the United States District Court for the Southern District of Florida. D.C. Docket No. 9:06-cv-80652-KLR.

For Sfm Holdings Ltd, Salomon Melgen, Plaintiffs - Appellants: John Scarola, Patrick E. Quinlan, Searcy, Denney, Scarola, Barnhart & Shipley, West Palm Beach, FL; Lawrence Walter Duffy, Lawrence Duffy, PA, Palm Beach Gardens, FL; Joel D. Eaton, Podhurst Orseck, PA, Miami, FL; Edward Labaton, Labaton Sucharow, LLP, New York, NY; David Joseph Sales, David J. Sales, PA, Jupiter, FL.

For Banc of America Securities, LLC, Defendant - Appellee: Robert J. Anello, Jodi Misher Peikin, Megan Elizabeth Wall-Wolff, Morvillo Abramovitz Grand Iason & Anello, PC, New York, NY; Frank Patrick Cuneo, Liebler Gonzalez & Portuondo, PA, Miami, FL.

Before PRYOR and JORDAN, Circuit Judges, and FRIEDMAN,[*] District Judge. PRYOR, Circuit Judge, concurring in part and dissenting in part.


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FRIEDMAN, District Judge.

The district court enjoined Plaintiffs-Appellants SFM Holdings, Ltd. and Salomon Melgen (collectively " SFM" ) from prosecuting an action in Florida state court against Defendant--Appellee Banc of America Securities, LLC (" BAS" ). The district court considered the injunction necessary " to protect and effectuate" judgments that were issued in an earlier federal lawsuit brought by SFM against BAS, in which SFM's claims were dismissed. See SFM Holdings, Ltd. v. Banc of America Sec., LLC, No. 88, 06-cv-80652-KLR (S.D. Fla. Jan. 17, 2013). SFM appeals from the issuance of this injunction, arguing that it does not fall within the narrow " relitigation exception" to the Anti-Injunction Act, 28 U.S.C. § 2283. We agree in large part, holding that SFM's state court action presents some legal claims that differ from those decided in the prior federal action. With respect to other claims now advanced by SFM, however, we conclude that the district court had authority to enjoin their relitigation in state court.


This appeal concerns the effect of an earlier federal lawsuit on a pending state lawsuit, both arising from the same course of events between the parties. The facts alleged in each case, however, tell the story somewhat differently; indeed, these factual differences are integral to resolution of this appeal. We draw on the facts as alleged in SFM's most recent state court complaint, the " 2012 State Complaint," an amended complaint filed in its state case, which was initiated in 2008. References to the complaint from SFM's earlier federal lawsuit will employ the label " 2006 Federal Complaint."

In September of 2004, Dr. Salomon Melgen, a Florida ophthalmologist, invested a total of $15,000,000 in an account at BAS and granted permission to a man named John Kim to trade securities in the account. 2012 State Complaint ¶ ¶ 1-2, 19. The investment was made through an entity, SFM Holdings, Ltd., controlled solely by Dr. Melgen. He made the decision to put his assets under Kim's management on the recommendation of a friend, Jerome Fisher, who told Dr. Melgen that Kim had been producing strong returns for him. Id. ¶ 12. To establish SFM's account at BAS, Dr. Melgen signed two contracts: a Prime Broker Margin Account Agreement (" PBA" ) and an Institutional Account Agreement (" IAA" ). Id. ¶ 19. Melgen also signed a Trading Authorization form, through which he designated Kim as his agent with authority to trade in the account. Id.

Unbeknownst to Dr. Melgen, Fisher was in financial trouble and, more specifically, it is alleged that this trouble was attributable

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to John Kim, who was not the expert securities trader that Fisher had made him out to be. Id. ¶ 15. In fact, Fisher's account at BAS was incurring large losses on margin, due to the poor stewardship of Kim and his business partner, Won Lee. Because of the losses that Kim and Lee -- through an entity called Shoreland Trading -- were causing in Fisher's account, BAS had notified Lee that an infusion of new assets was needed to cover the margin calls. Id. ¶ 87. Fortunately for Kim, Lee, and Fisher, they found a source of fresh money to plug this gap: SFM.

Over a week-long period in late September and early October of 2004, SFM funded its BAS account with $12.3 million. Id. ¶ 22. Shortly thereafter, Dr. Melgen learned that his account had suffered some losses, and he informed Kim that he planned on closing the account. Id. ¶ ¶ 29, 33. Fisher and Kim then met with Melgen and persuaded him to keep the account open; as part of the inducement, Kim provided Melgen with a written guaranty of his principal. Id. ¶ ¶ 33-34. Kim also transferred an additional $2.7 million into SFM's account, money which belonged to Dr. Melgen and was being held by Kim as part of a separate investment. See id. ¶ 22; Appellants' Brief at 4.

Just a few months later, in February 2005, Dr. Melgen learned that the entire $15 million held in the SFM account at BAS was gone. 2012 State Complaint ¶ 57. The story of what happened to Melgen's money will be discussed in further detail later in this opinion, as these facts pertain directly to whether SFM can permissibly be enjoined from litigating its action in state court. For now, however, we present a snapshot of the basic allegations set out in the 2012 State Complaint. SFM first alleges that a substantial portion of its assets, roughly $9 million, was converted to Fisher's benefit by Won Lee, who allocated SFM's assets to cover margin calls in Fisher's account, as well as by Lee's allocation of trading gains to Fisher and trading losses to SFM. Id. ¶ ¶ 26-27, 76, 82. Moreover, SFM alleges that Lee was not even authorized to trade in its account, yet BAS permitted him to do so. Id. ¶ ¶ 24-25. Second, SFM alleges that the remainder of its funds was transferred out of its account and into a separate Shoreland Trading account at BAS, from which Lee eventually stole SFM's assets. Id. ¶ ¶ 41, 45. The transfer was executed by BAS, which relied on directions contained in a letter transmitted to it by facsimile; the letter purported to be written and signed by Dr. Melgen, but in fact was a forgery produced and sent by Won Lee. Id. ¶ ¶ 41-42, 131(c).

In March 2005, shortly after Melgen learned of the loss of his assets, SFM filed an action in Florida state court against Kim, Lee, Shoreland Trading, and the KL Group, another entity controlled by John Kim and Won Lee. Appellants' Brief at 5. At that time, no wrongdoing was alleged against BAS, but SFM sought discovery from BAS requesting the production of records relating to all accounts controlled by Shoreland. The parties bitterly dispute the subsequent course of events; SFM contends that BAS wrongfully refused to produce relevant documents, and that BAS was even sanctioned by the state court for its recalcitrance. Id. at 5-7. BAS maintains that it complied with all court orders, and, to the extent that it did not produce documents sought by SFM, it argues that its behavior was compelled by Florida law protecting its clients' privacy. Appellee's Brief at 14. In any event, SFM's state lawsuit was eventually dismissed pursuant to a receivership order entered by the federal district court, emanating from an action brought by the Securities and Exchange Commission against the KL Group. Appellants' Brief at 7 n.5.

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In June 2006, SFM filed a lawsuit against BAS in federal court. In its complaint -- the 2006 Federal Complaint -- SFM brought four claims: two for violations of federal and Florida securities law, as well as tort claims for breach of fiduciary duty and constructive fraud. The case was assigned to the same district court judge who was overseeing the receivership, and he ultimately dismissed SFM's complaint with prejudice. SFM Holdings, Ltd. v. Banc of America Sec., LLC, No. 06-cv-80652-KLR, 2007 WL 7124464 (S.D. Fla. Feb. 12, 2007). In its decision, the district court concluded that SFM had failed to state claims under either federal or state securities law, and it denied SFM leave to replead those claims. Id. at *7. The court also held that SFM's claims for breach of fiduciary duty and constructive fraud were deficient, stating that " [c]entral to both claims is the allegation that Banc of America was acting as SFM's fiduciary," but concluding that this requirement could not be satisfied, " [g]iven the plain language in the Prime Brokerage Agreement." Id. The court said it had examined that agreement, which contained a clause that " state[d] unequivocally that Banc of America was not 'acting as a fiduciary,' and was not 'advising [SFM], performing any analysis, or . . . offer[ing] any opinion, judgment or other type of information pertaining to the nature, value, potential or suitability of any particular invest[ment].'" Id. (quoting the PBA) (some alterations in original).

The court added that " [t]he tort claims are also barred by the application of the economic loss rule, which provides that parties to a contract can only seek tort damages if the alleged tortious conduct constitutes a tort distinct from the parties' contractual rights and obligations." Id. at *8. Finally, the court held that " [r]epleading will not enable SFM to surmount the hurdles of the economic loss rule or the language of the Prime Broker Agreement." Id. It therefore dismissed the complaint with prejudice. Id.

SFM appealed the dismissal of the constructive fraud and breach of fiduciary duty claims, but this court affirmed. See SFM Holdings, Ltd. v. Banc of America Sec., LLC, 600 F.3d 1334, reh'g en banc denied, 402 F.App'x 513 (11th Cir. 2010). In reaching our decision, we examined not only the PBA, but also the IAA, and concluded that these two contractual agreements foreclosed SFM's tort claims. Id. at 1339-40. We did not consider the district court's alternative holding that Florida's economic loss rule operated to bar these claims. See id. But our ruling did address SFM's argument -- made only in its appellate briefing -- that it should be granted leave to amend its complaint by adding a claim for breach of contract, on the ground that the factual allegations already in its complaint could support such a claim. Id. at 1340. In the final paragraph of our decision, we denied such leave by concluding that " Banc of America Securities's compliance with its obligations under [the PBA and IAA] precludes liability for breach of contract. Therefore, the suggested amendment would be futile." Id.

Prior to oral argument before this court in that appeal, however, SFM had already filed a new lawsuit in state court. Its complaint there included claims for breach of contract with respect to both the PBA and the IAA, as well as for breach of the implied covenant of good faith and fair dealing in these agreements. Appellants' Brief at 10-11. SFM also named Jerome Fisher -- the friend who had drawn Dr. Melgen into this mess -- as a defendant in that action. BAS thereupon removed the case to federal court on the ground that Fisher had been fraudulently joined in order to destroy diversity; the federal district court accepted that argument. Id. at

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11. Eventually, the district court dismissed the removed action on res judicata grounds. Id. SFM appealed, and this court, in a per curiam decision, held that removal had been improper and the district court therefore lacked subject matter jurisdiction over the case. SFM Holdings, Ltd. v. Fisher, 465 F.App'x 820, 821-22 (11th Cir. 2012). We vacated the district court's dismissal of the action and ordered that it be remanded to state court. Id. at 822. After the remand to state court, SFM amended its complaint to add a claim alleging civil conspiracy between BAS, Fisher, Kim, Lee, and Shoreland Trading. This complaint, the " 2012 State Complaint," is now the operative complaint in the state action. Appellants' Brief at 15.

Finally, we arrive at the federal decision that is the source of this appeal. After SFM's case was remanded to state court and SFM had filed its amended complaint there, BAS went back to federal court to seek an injunction against SFM's pursuit of the state action against it. BAS argued that the district court's 2007 judgment dismissing SFM's original federal case with prejudice, along with our 2010 affirmance of that dismissal -- which included the denial of leave to add a claim for breach of contract -- together deserved insulation from a potentially inconsistent state court judgment. The district court agreed and granted the injunction. See SFM Holdings, Ltd., No. 88, 06-cv-80652-KLR (S.D. Fla. Jan. 17, 2013). SFM now appeals, arguing that the federal injunction was inconsistent with this court's mandate that the lawsuit be remanded to the Florida court, and that the injunction was impermissible under the Anti-Injunction Act, 28 U.S.C. § 2283, which generally forbids federal courts from enjoining proceedings in state court.[1]


We have jurisdiction pursuant to 28 U.S.C. § 1291, as the district court's injunction was permanent rather than interlocutory. " Whether a district court has the authority to enjoin a state court action under an exception to the Anti-Injunction Act is a question of law that we review de novo." Estate of Brennan ex rel. Britton v. Church of Scientology Flag Serv. Org., Inc., 645 F.3d 1267, 1272 (11th Cir. 2011). " If the court had such authority, whether the [i]njunction should have issued presents a mixed question of law and fact, which we review for abuse of discretion." Burr & Forman v. Blair, 470 F.3d 1019, 1030 n.31 (11th Cir. 2006).


A. All Writs Act and the Relitigation Exception to the Anti-Injunction Act

The All Writs Act provides that federal courts " may issue all writs necessary or appropriate in aid of their respective jurisdictions and agreeable to the usages and principles of law." 28 U.S.C. § 1651(a). The statute codifies " the long recognized power of courts of equity to effectuate their decrees by injunctions or writs of assistance." Burr & Forman, 470 F.3d at 1026 (quoting Wesch v. Folsom, 6 F.3d 1465, 1470 (11th Cir. 1993)) (alteration and quotation marks omitted). Although its express language refers only to writs issued " in aid of [courts'] jurisdictions," it is understood that the All Writs Act " also

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empowers federal courts to issue injunctions to protect or effectuate their judgments." Id. (quoting Wesch, 6 F.3d at 1470).

The Anti-Injunction Act, however, " serves as a check on the broad authority recognized by the All Writs Act." Id. at 1027. The Anti-Injunction Act provides:

A court of the United States may not grant an injunction to stay proceedings in a State court except as expressly authorized by Act of Congress, or where necessary in aid of its jurisdiction, or to protect or effectuate its judgments.

28 U.S.C. § 2283.

The Anti-Injunction Act's " core message is one of respect for state courts," and it " broadly commands that those tribunals 'shall remain free from interference by federal courts.'" Smith v. Bayer Corp., 131 S.Ct. 2368, 2375, 180 L.Ed.2d 341 (2011) (quoting Atlantic Coast Line R. Co. v. Locomotive Engineers, 398 U.S. 281, 282, 90 S.Ct. 1739, 26 L.Ed.2d 234 (1970)). The statute allows three exceptions to this general prohibition, but " those exceptions, though designed for important purposes, 'are narrow and are not [to] be enlarged by loose statutory construction.'" Id. (quoting Chick Kam Choo v. Exxon Corp., 486 U.S. 140, 146, 108 S.Ct. 1684, 100 L.Ed.2d 127 (1988)) (internal quotation marks omitted) (alteration in original). The Supreme Court has long emphasized that " [a]ny doubts as to the propriety of a federal injunction against state court proceedings should be resolved in favor of permitting the state courts to proceed." Id. (quoting Atlantic Coast Line, 398 U.S. at 297).

The third of the Anti-Injunction Act's exceptions provides that a federal court may issue an injunction " to protect or effectuate its judgments." 28 U.S.C. § 2283. This provision " is designed to implement 'well-recognized concepts' of claim and issue preclusion," and is commonly labeled the " relitigation exception." Smith, 131 S.Ct. at 2375 (quoting Chick Kam Choo, 486 U.S. at 147). The exception " authorizes an injunction to prevent state litigation of a claim or issue 'that previously was presented to and decided by the federal court.'" Id. (quoting Chick Kam Choo, 486 U.S. at 147). But because preclusion decisions are " usually the bailiwick of the second court . . . every benefit of the doubt goes toward the state court [and] an injunction can issue only if preclusion is clear beyond peradventure." Id. (citing Atlantic Coast Line, 398 U.S. at 287).

In Smith, the Supreme Court's most recent decision explicating the relitigation exception, the Court invalidated a district court's injunction " for two reasons." Id. at 2373. First, the state court action involved a legal issue that " was not identical to the one decided in the federal tribunal." Id. Second, the plaintiff in the state action had not been a party to the federal lawsuit in which the prior judgment was issued, nor did he fall within one of the " handful of discrete and limited exceptions" under which nonparty preclusion is permissible. Id. at 2379. Consequently, the Court held that the ...

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