                                                                                                                           Opinions of the United
2005 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


8-29-2005

Brody v. Hankin
Precedential or Non-Precedential: Non-Precedential

Docket No. 04-1376




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Recommended Citation
"Brody v. Hankin" (2005). 2005 Decisions. Paper 648.
http://digitalcommons.law.villanova.edu/thirdcircuit_2005/648


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                                                              NOT PRECEDENTIAL

                 IN THE UNITED STATES COURT OF APPEALS
                          FOR THE THIRD CIRCUIT




                                 Case No: 04-1376


                                MARTIN BRODY;
                               FLORENCE BRODY;
                               MFB PARTNERS, L.P.,

                                         Appellants

                                           v.

                           MARK HANKIN, IND. d/b/a
                        HANKIN MANAGEMENT COMPANY;
                          HANKIN MANAGEMENT, INC.
                                _______________

                  On appeal from the United States District Court
                      for the Eastern District of Pennsylvania
                          District Court Civ. No. 03-4739
                        District Judge: Hon. J. Curtis Joyner
                                  _______________

                          Submitted Pursuant to LAR 34.1(a)
                                    April 1, 2005
                                 _______________

                Before: ALITO, SMITH, and FISHER Circuit Judges

                              (Filed: August 29, 2005)
                              ____________________

                             OPINION OF THE COURT
                              ____________________

SMITH, Circuit Judge.
       We consider in this appeal whether the District Court erred in granting a motion to

dismiss under Federal Rule of Civil Procedure 12(b)(6) on the grounds of res judicata, or

claim preclusion. Because res judicata is an affirmative defense, and the basis for

dismissing this case on res judicata grounds was not apparent on the face of the

complaint, we will reverse the District Court.

                                              I.

       In the early 1980s, Martin and Florence Brody invested in real estate partnerships

formed and operated by Mark Hankin. The partnerships were referred to collectively as

“HanMar.” According to the terms of the partnership agreements, the Brodys were to

receive an eight percent annual preferred distribution on their investment. These

distributions were made until 1991, when Hankin purportedly unilaterally amended the

partnership agreements pursuant to an amendment made to them in 1988. Hankin’s 1991

amendment, inter alia, rearranged the priority of distribution so that the preferred

distributions were subordinated to “virtually all” other payments.1

       The Brodys first learned of Hankin’s 1991 amendments in 2001, after they

commenced arbitration proceedings against Hankin, HanMar, and HanMar’s general

partner alleging breach of fiduciary duty and breach of contract. In particular, the Brodys

argued that the 1988 amendment partly was void because it changed the amendment

  1
   As we review the grant of a motion to dismiss for failure to state a claim, we accept
the facts alleged in the complaint and view them in the light most favorable to the non-
moving party – here, the Brodys. See Christopher v. Harbury, 536 U.S. 403, 406 (2002).

                                              2
process itself without unanimous support from other partners. As a result, the Brodys

claimed, the 1991 amendment was void ab initio because it rested on an illicit

amendment. Hankin was dismissed from the arbitration on the ground that he signed no

arbitration clause. In 2002, the Brodys filed suit by a writ of summons in the Philadelphia

Court of Common Pleas against Hankin and his company, Hankin Management, Inc.

(HMI). In June 2003, the arbitrator awarded limited damages to the Brodys. After the

arbitration award was entered, the Philadelphia Common Pleas Court issued a rule to file

a complaint, and the Brodys complied in August 2003 by filing a complaint against

Hankin and HMI. After Hankin and HMI removed the case to the District Court on the

basis of diversity, the Brodys amended their complaint to add a RICO claim.

       Hankin and HMI moved to dismiss the complaint on res judicata grounds, and in

support of their motion filed part of the arbitration record with the District Court. In

January 2004, the District Court granted the motion to dismiss. “Although it is an

affirmative defense,” the District Court wrote, “res judicata may be raised in a Rule

12(b)(6) motion and such a motion is particularly appropriate if the defense is apparent on

the face of the complaint.” Brody v. Hankin, 299 F. Supp.2d 454, 458 (E.D. Pa. 2004)

(citing Rycoline Prod’s. v. C & W Unlimited, 109 F.3d 883, 886 (3d Cir. 1997)).

According to the District Court, the attachments to the defendant’s motion to dismiss

established that the nature of the dispute heard by the arbitrator was the same as the

dispute the Brodys now pressed in the District Court. Id. at 459. The District Court also



                                              3
determined that Hankin was in privity with the general partner of the HanMar

partnerships, and that confirmation of the arbitration award was imminent. Id. at 461. As

such, the District Court held that the three federal requirements for res judicata – a final

judgment on the merits, claims involving the same parties or their privies, and a suit based

on the same cause of action – were met. Id.2 The Brodys filed a notice of appeal in

February 2004.3

                                              II.

       The District Court prematurely dismissed this case based on a misreading of our

res judicata jurisprudence. The law in this Circuit has long been that a district court may

grant a Rule 12(b)(6) motion on the basis of an affirmative defense “if the predicate

establishing the defense is apparent from the face of the complaint.” Bethel v. Jendoco

Constr. Corp., 570 F.2d 1168, 1174 n.10 (3d Cir. 1978) (emphasis in original) (citing,

inter alia, Hartmann v. Time, 166 F.2d 127, 131 n.3 (3d Cir. 1947)). Rycoline, on which

the District Court relied, applied this rule to a district court decision holding that New


  2
   We note that the District Court erroneously applied federal res judicata principles, and
federal cases elucidating those principles, in granting the motion to dismiss. “Federal
courts must ‘give the same preclusive effect to state court judgments that those judgments
would be given in the courts of the State from which the judgments emerged.’”
Allegheny Int’l, Inc. v. Allegheny Ludlum Steel Corp., 40 F.3d 1416, 1429 (3d Cir. 1994)
(quoting Kremer v. Chem. Constr. Corp., 456 U.S. 461, 466 (1982) (applying
Pennsylvania’s four-pronged test for establishing res judicata); O’Leary v. Liberty Mut.
Ins. Co., 923 F.2d 1062, 1064-65 (3d Cir. 1991) (same).
  3
   We exercise jurisdiction over the final order of the District Court under 28 U.S.C. §
1291, and review its grant of Hankin’s motion to dismiss de novo. Wheeler v. Hampton
Twp., 399 F.3d 238, 242 (3d Cir. 2005).

                                              4
Jersey’s version of res judicata barred suit in federal court where the plaintiff-appellant

already filed a similar suit in state court. 109 F.3d at 886-87.

       The state suit in Rycoline was for breach of fiduciary duty, various business torts,

and violations of the Lanham Act. Id. at 884. After the state court denied two

applications for temporary injunctive relief, Rycoline sued in federal court asserting

“essentially the same claims,” and adding New Jersey fraud and RICO claims, and a

federal RICO claim. Id. The defendants moved to dismiss under Rule 12(b)(6), arguing

that New Jersey’s Entire Controversy Doctrine barred the suit because the claims could

have been brought in the state court action. Id. at 885. The district court held that New

Jersey’s Entire Controversy Doctrine negated the Court’s subject matter jurisdiction over

Rycoline’s suit under Rule 12(b)(1). Id. We noted that the Entire Controversy Doctrine

is New Jersey’s application of res judicata principles, and observed that res judicata does

not defeat subject matter jurisdiction. Nevertheless, we concluded that New Jersey’s

Entire Controversy Doctrine was not apparent on the face of the complaint and that

therefore Rule 12(b)(6) dismissal likewise would have been inappropriate. Id. at 886-87.4

       What was critical in Rycoline, and what the District Court failed to understand, is

that an affirmative defense will serve as grounds for a Rule 12(b)(6) dismissal only if the

basis for the defense is evident on the face of the complaint. We held in Bethel, we



  4
    Though Rycoline took issue with factual assertions made by the defendants, it refused
to dispute the facts lest it waive its position that such matters were inappropriate to
consider on a Rule 12(b)(6) motion. 109 F.3d at 885.

                                              5
explained in Rycoline,

                that if a statute of limitations “bar is not apparent on the face of
                the complaint, then it may not afford the basis for a dismissal of
                the complaint under Rule 12(b)(6).” This holding applies not
                only to a statute of limitations defense, but also to any affirmative
                defense raised pursuant to Rule 8(c), including res judicata and
                the Entire Controversy Doctrine.

109 F.3d at 886 (citation omitted); see also Robinson v. Johnson, 313 F.3d 128, 135 (3d

Cir. 2002) (quoting Rycoline). Here, the District Court expressly relied on facts from

documents related to the arbitration proceeding, but not mentioned in, or attached to, the

Brodys’ complaint. It thus violated the Rycoline rule and effectively converted Hankin’s

motion to dismiss into a motion for summary judgment without notifying the Brodys.5

       Hankin argues that the Brodys “opened the door” for the District Court to consider

materials submitted to the arbitrators by discussing the arbitration in the complaint. That



  5
   As in Rycoline, the Brodys declined to engage Hankin in the District Court in disputes
over what happened at arbitration for fear they would waive their position that such
matters were irrelevant to a Rule 12(b)(6) motion. Answering Hankin’s motion to
dismiss, the Brodys stated:

                Plaintiffs’ Brief does not specifically address the extraneous matters
                raised by the defendants because plaintiffs believe it would constitute
                a waiver and have the effect of allowing the Motion to be converted
                to a Summary [J]udgment motion. . . . In the event this Court
                believes it is appropriate to consider matters outside the Complaint
                and treat the motion as one filed under Rule 56, plaintiffs now
                request that the Court so notify the parties and give them a reasonable
                opportunity to take discovery, obtain affidavits, and otherwise
                prepare an appropriate answer.

App. at 1007.

                                                6
contention is meritless. We have held that “a court may consider an undisputedly

authentic document that a defendant attaches as an exhibit to a motion to dismiss if the

plaintiff’s claims are based on the document.” Pension Benefit Guar. Corp. v. White, 998

F.2d 1192, 1996 (3d Cir. 1993). That proposition does not bring Hankin close to showing

res judicata on the face of the Brodys’ complaint, however. The Brodys’ complaint

mentions two documents unearthed in arbitration: copies of the alleged 1991 amendments

to the HanMar agreements (along with related management and leasing agreements, and

maintenance agreements), and a statement by HanMar’s counsel, presumably contained in

a letter or deposition transcript, that no letters to a limited partner referring to the 1991

amendments could be found. The District Court thus properly could have considered

these documents under White. See In re Burlington Coat Factory Sec. Litig., 114 F.3d

1410, 1426 (3d Cir. 1997) (holding that the district court permissibly considered annual

report where data contained in the annual report repeatedly was referenced in complaint

but was not cited). The District Court exceeded its mandate, however, when it

incorporated in its decision the Amended Supplemental Description of Nature of Claim

submitted to the arbitrators, and relied on that document to conduct its res judicata

analysis. See 299 F. Supp.2d at 459-60. The Brodys did not mention information from

that document in their complaint, and as such it was off-limits to the District Court. See

In re Burlington Coat Factory, 114 F.3d at 1426.

       Nor do we find merit in Hankin’s contention that the District Court permissibly



                                               7
took judicial notice of the substance of the arbitration award. “[O]n a motion to dismiss,

we may take judicial notice of another court’s opinion – not for the truth of the matter

asserted, but for the existence of the opinion.” Southern Cross Overseas Agencies, Inc. v.

Wah Kwong Shipping Group Ltd., 181 F.3d 410, 426 (3d Cir. 1999). Thus, “a court that

examines a transcript of a prior proceeding to find facts converts a motion to dismiss into

a motion for summary judgment.” Id. Here, the District Court not only noticed the

existence of the arbitration award, but seemed to notice facts found in that document. See

299 F. Supp.2d at 460. For example, a predicate to holding an action barred under the

federal doctrine of res judicata is that the suit be against the same parties or their privies.6

The District Court stated that privity exists “where a party adequately represented the

nonparties’ interests in the prior proceeding.” 299 F. Supp.2d at 461. The District Court

then summarily concluded that Hankin adequately represented his own interests in the

arbitration proceedings. Id. As Hankin was dismissed as a party from the arbitration, we

are unsure how the District Court so swiftly reached this conclusion. We are sure,

however, that for the District Court to determine that Hankin “adequately” represented his

own interests at the arbitration proceedings the District Court had to go beyond merely

  6
    As we said earlier, we do not condone the District Court’s employment of the federal
res judicata test or its use of federal cases applying that test. Though the parties have not
briefed this issue, it appears to us that Pennsylvania law may require precise identity of
parties. See AMTRAK v. Pennsylvania Pub. Util. Comm’n, 343 F.3d 242, 256 (3d Cir.
2003); In re Iulo, 766 A.2d 335, 337 (Pa. 2001). In other words, privity may not be
enough to support a finding of res judicata in Pennsylvania. We leave it to the District
Court on remand to decide that question, should it become necessary to do so, in the first
instance.

                                               8
taking notice of the existence of the arbitration award. That being said, even if the

District Court merely noticed the existence of the award, that limited use of the award

was impermissible because the Brodys did not rely on the award in their complaint. See

Southern Cross, 181 F.3d at 427. Like its reliance on documents filed during the

arbitration, the District Court’s reliance on the arbitration award also was error.

                                             III.

       Whether claim preclusion applies is a delicate question often requiring factual

comparisons, and thus often is decided on a motion for summary judgment. See, e.g.,

O’Leary v. Liberty Mut. Ins. Co., 923 F.2d 1062, 1070-71 (3d Cir. 1991) (upholding

summary judgment dismissing suit on res judicata grounds where plaintiffs failed to

compel arbitration in Pennsylvania state court suit). While a district court may dismiss a

claim on res judicata grounds on a Rule 12(b)(6) motion, in order to do so those grounds

must be evident on the face of the complaint. As such grounds were not present on the

face of the Brodys’ complaint, the District Court erred in granting Hankin’s motion to

dismiss. Accordingly, we will reverse the judgment of the District Court and will remand

for further proceedings.7

  7
    We recognize that a District Court’s formal conversion of a Rule 12(b)(6) motion to a
Rule 56 motion may be held harmless error, but we cannot say that such is the case here.
Typically, where harmless error conversions are found, “we [have been] able to determine
the propriety of dismissal by applying established law to relatively straightforward
allegations in the complaint. Although material beyond the pleadings had been submitted,
it does not appear to have been voluminous or to have raised complex issues of pleading.”
In re Rockefeller Ctr. Prop’s. Sec. Litig., 184 F.3d 280, 289 (3d Cir. 1999). Here, the
record is voluminous, totaling more than 1100 pages, and the pleading issues involve

                                              9
questions of Pennsylvania law that the District Court has not considered in the first
instance. Additionally, the District Court here did not formally convert the motion to
dismiss into a motion for summary judgment. Accordingly, we will reverse and remand.
See id. (declining to decide a motion to dismiss after conversion because the case
involved a voluminous, 1800-page appendix, with which the district court was more
familiar, and complex issues of law).

                                          10
