                                                                                                                           Opinions of the United
2004 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


4-26-2004

ITT Corp v. Intelnet Intl Corp
Precedential or Non-Precedential: Precedential

Docket No. 02-4035




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Recommended Citation
"ITT Corp v. Intelnet Intl Corp" (2004). 2004 Decisions. Paper 740.
http://digitalcommons.law.villanova.edu/thirdcircuit_2004/740


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                   PRECEDENTIAL          Intelnet International Corporation;
                                         Intelnet Services of North America,
                                         Inc.;
      UNITED STATES                      Inntraport International, Inc.;
     COURT OF APPEALS                    Intelnet N.A., Inc.;
   FOR THE THIRD CIRCUIT                 Intelepower N.A., Inc.;
                                         Intelemedia N.A., Inc.;
                                         Associated Business Telephone
                                         Systems Corp.;
    Nos. 02-4035 / 02-4205               A.B.T.S. International Corporation;
                                         Michael Dalia;
                                         Craig Brunet

      ITT CORPORATION;                          Appellants (No. 02-4205)
ITT SHERATON CORPORATION;
   STARWOOD HOTELS AND
           RESORTS                          On Appeal from the
       WORLDWIDE, INC.                  United States District Court
                                       for the District of New Jersey
        Appellants (No. 02-4035)     D.C. Civil Action No. 01-cv-05410
                                      (Honorable Jerome B. Simandle)
              v.

  INTELNET INTERNATIONAL                 Argued December 11, 2003
        CORPORATION;
INTELNET SERVICES OF NORTH
        AM ERICA, INC.;               Before: AMBRO, FUENTES and
       CONCIERGE PLUS;                    GARTH, Circuit Judges
INNTRAPORT INTERNATIONAL,
              INC.;                    (Opinion filed April 26, 2004)
      INTELNET N.A., INC.;
   INTELEPOWER N.A., INC.;         Edward J. Yodowitz, Esq.
    INTELECABLE N.A., INC.;        Skadden, Arps, Slate, Meagher & Flom
    INTELEMEDIA N.A., INC.;        Four Times Square
     ASSOCIATED BUSINESS           New York, NY 10036
          TELEPHONE
        SYSTEM CORP.;              Robert J. Del Tufo, Esq. (Argued)
   A.B.T.S. INTERNATIONAL          Cynthia V. Fitzgerald, Esq.
        CORPORATION;               Danielle A. Cutrona, Esq.
        DOMINIC DALIA;             Skadden, Arps, Slate, Meagher & Flom
        MICHAEL DALIA;             One Newark Center, 18th Floor
        CRAIG BRUNET;              Newark, NJ 07102
        JOHN DOES 1-10                   Attorneys for Appellants/
                                         Cross-Appellees
                                                  comply with the applicable statute of
Arthur R. Miller, Esq. (Argued)                   limitations. ITT’s RICO claims allege that
Harvard Law School                                Intelnet has engaged in a pattern of
1755 Massachusetts Avenue                         entering into contracts it cannot perform
Cambridge, MA 02138                               with the intent of seizing upon its
                                                  customers’ purported breaches to extort
Jerome M. Congress, Esq.                          settlements by threats of vexatious
Milberg, Weiss, Bershad, Hynes & Lerach           litigation. Prior to initiating its federal
One Pennsylvania Plaza                            action, ITT raised substantially identical
48 th Floor                                       claims in a state court case by means of a
New York, NY 10119                                motion to amend its pleadings. The state
                                                  court denied the motion.
Carl D. Poplar, Esq.
                                                          On cross-appeal, Intelnet argues
Poplar & Eastlack
                                                  that the District Court erred in holding that
1010 Kings Highway South
                                                  it had jurisdiction, as the Rooker-Feldman
Building Two
                                                  doctrine “preclude[s] lower federal court
Cherry Hill, NJ 08034
                                                  jurisdiction over claims that were actually
       Attorneys for Appellees/
                                                  litigated or ‘inextricably intertwined’ with
       Cross-Appellants
                                                  adjudication by a state’s courts.” Parkview
                                                  Assocs. P’shp. v. City of Lebanon, 225
                                                  F.3d 321, 325 (3d Cir. 2000) (quoting
                                                  Gulla v. North Strabane Township, 146
      OPINION OF THE COURT
                                                  F.3d 168, 171 (3d Cir. 1998)). We agree
                                                  with Intelnet that Rooker-Feldman bars
                                                  federal jurisdiction in this case.
AM BRO, Circuit Judge
                                                    I. Factual and Procedural History
       Plaintiffs ITT Corporation (“ITT
                                                         ITT Corp. owns and operates hotels
Corp.”), ITT Sheraton C orporation
                                                  and casinos.2       Its affiliates include
(“Sheraton”) and Starwood Hotels and
                                                  Sheraton and Caesar’s World, Inc.
Resorts Worldwide, Inc. (“Starwood”)
                                                  (“Caesar’s”). Intelnet International Corp.
appeal the District Court’s dismissal of
                                                  (“Intelnet International”), Intelnet Services
their Racketeer Influenced and Corrupt
                                                  of North America, Inc. (“Intelnet
Organization Act (“RICO”) action against
                                                  Services”), INNtraport International, Inc.,
various Intelnet entities1 for failure to
                                                  Intelecable N.A., Inc., and Intelemedia

  1
   Unless the context requires otherwise,
for convenience purposes we use “ITT”             entity or entities on the other.
when referring to any ITT-related entity or
                                                    2
entities on the one hand, and “Intelnet”            In February 1998, ITT Corp. became a
when referring to any Intelnet-related            wholly owned subsidiary of Starwood.

                                              2
N.A., Inc. purchase telephone services in            ITT for breach of contract.3 Intelnet
volume from major carriers and resell                alleged that in early 1997 Sheraton began
those services to hotels and hotel                   working with other companies, such as
companies, as well as residential                    Microsoft Corporation, to develop
customers, at a reduced rate.                        Sheraton.Net, which w ould service
                                                     Sheraton hotel guests in Asia. Intelnet
        In 1996, ITT and Intelnet entered
                                                     argued that the negotiations between
into a series of contracts for Intelnet’s
                                                     Sheraton and M icrosoft breached the C+
provision of telecommunications and
                                                     Agreement and the RMPA.4
media services to ITT’s hotels and casinos.
Intelnet represented that it would provide                   In February 1998 ITT filed various
to ITT a proprietary system called the               state law counterclaims against Intelnet,
“Intelnet Platform,” which it claimed                including fraud, misrepresentation, and
would provide enhanced services such as              breach of contract. Some time later, based
high-speed internet access and video-on-             purportedly upon information obtained
demand. The principal contracts were the             through discovery in the New Jersey state
C+ Ope rating Ag reeme nt (“C+                       court action and through its independent
Agreement”), dated July 3, 1996, and the             investigation, ITT filed a motion to amend
A m e n d e d a n d R e s t a te d M a s t e r       its pleadings to add counterclaims against
Promotional Agreement (“RMPA”), dated                Intelnet under the federal and New Jersey
October 3, 1996.                                     RICO statutes, 18 U.S.C. § 1962(c) & (d)
                                                     and N.J. Stat. Ann. § 2C:41-2(c) & (d).
       The C+ Agreement formed a
                                                     The proposed counterclaims asserted that
limited liability company, Concierge Plus,
                                                     Intelnet had engaged in a pattern of
L.L .C.,       through which Intelnet
                                                     racketeering activity by entering into
International and ITT Intelnet Investment
                                                     contracts, knowing that it was incapable of
Corp., a wholly owned subsidiary of ITT
                                                     performing them, with the intent of
Corp., would share future profits and
                                                     extorting settlements from its customers by
Intelnet International would provide
telecommunications products and services.
But Concierge Plus never provided any of
                                                           3
the promised services. The RMPA, a                       Intelnet initially named as defendants
contract between ITT Corp. and Intelnet              only ITT Corp. and Sheraton.           The
Services, gave the latter the exclusive right        complaint was later amended to include
to p rovid e c e r ta i n e n h a n c ed             Starwood as well as various affiliates.
telecommunications products and services,              4
including high-speed internet access, to the            According to ITT, Intelnet had advised
offices, hotels, and casinos of ITT Corp.            ITT that it could not perform in Asia. ITT
and several of its affiliates.                       also notes that Sheraton.Net was never
                                                     implemented. We need not examine the
       In December 1997 Intelnet filed an            viability of Intelnet’s claim for breach of
action in New Jersey state court against             contract, which is irrelevant to our
                                                     disposition of this appeal.

                                                 3
threatening to entangle them in extensive               intended to encompass
and costly litigation based on their                    breaches of contract, even
purported breaches. The State Court, per                breaches of contract that
Judge John A. Fratto, denied the motion to              involve $800 million. . . .
amend. Judge Fratto explained:                          And, I don’t see sufficient in
                                                        the proposed complaint that
       The      ru l e  s a ys  t h at
                                                        I should permit after three
       amendments to pleadings
                                                        and a half years an
       should be freely given. The
                                                        amendment to an answer to
       rule provides that there be a
                                                        raise a RICO claim with all
       motion in order to obtain the
                                                        of its concomitant results[;]
       amendment to the pleading,
                                                        so the motion to amend the
       so it does not mean that you
                                                        answer will be denied.
       are automatically entitled to
       amend the pleadings at any
       time. . . . Whether it be
                                                 Judge Fratto’s accompanying Order did
       RICO or some other cause
                                                 not specify whether ITT’s motion was
       of action, there are judges .
                                                 denied with or without prejudice. ITT
       . . that will allow all
                                                 suggests that the motion was denied
       amendments on the theory
                                                 without prejudice because it was filed
       that they can be dealt with
                                                 three and one half years after the
       later on when the other side
                                                 complaint. Intelnet, by contrast, contends
       m a k e s a m o ti o n f o r
                                                 that the state court also rejected the motion
       summ ary judgm ent, a
                                                 on the merits and therefore it was with
       motion to dismiss[], motion
                                                 prejudice.
       to strike the pleadings. That
       has not been my                                   ITT filed this action in the United
       procedure. . . .                          States District Court for the District of
                                                 New Jersey in November 2001. Its
               I’ve looked at the
                                                 complaint states that “it only was after
       proposed amendments . . .
                                                 discovery commenced in the New Jersey
       and at best it seems that the
                                                 Litigation . . . that the ITT Parties
       allegation is . . . that the
                                                 discovered that the Intelnet Parties had no
       plaintiffs were unable to
                                                 ability or intent to perform under Intelnet’s
       fulfill their contract, and
                                                 contract with the ITT Parties, and further,
       every time they wrote a
                                                 that the Intelnet parties had a history of
       letter or sent a wire,
                                                 engaging in this pattern of fraudulent
       knowing that they were
                                                 conduct and racketeering activity.” ITT
       unab le to fulfill their
                                                 also alleges a variety of fals e
       contract, the[y] committed a
                                                 representations by Intelnet regarding its
       RICO violation.
                                                 capabilities, describes evidence of
       I don’t think RICO is or was              Intelnet’s “extortionate objectives,” and

                                             4
lists numerous acts of alleged mail and             its burden of demonstrating the existence
wire fraud. In essence, ITT’s federal               of “storm warnings” more than four years
action raises the same claims it sought to          prior to the initiation of the federal action
introduce in the New Jersey case before             (specifically, as early as January 1997). It
Judge Fratto.5                                      further determined that ITT had failed to
                                                    show that it was unable to discover its
        In February 2002, Intelnet filed a
                                                    injuries, despite exercising due diligence,
motion to dismiss ITT’s federal complaint
                                                    within the applicable period.
based on the four-year statute of
limitations. The District Court granted                     ITT appeals on the bases that: (1)
Intelnet’s motion. In so doing, the Court           the District Court misconstrued the nature
applied the two-step “injury discovery”             of its RICO claims, which were founded
rule set out in Mathews v. Kidder, Peabody          on extortion through threat of litigation
& Co., Inc., 260 F.3d 239, 250 (3d Cir.             rather than fraudulent inducement; (2) the
2001). It concluded that Intelnet had met           District Court relied on information
                                                    extrinsic to the pleadings, thereby
                                                    converting Intelnet’s motion to dismiss
   5
     To illustrate, the federal complaint of        into a motion for summary judgment
ITT alleges that: (1) Intelnet had “an              without providing notice of conversion;
extensive history of entangling their               and (3) ITT did in fact act with reasonable
customers and vendors in contracts that the         diligence subsequent to the “storm
Intelnet Companies could not perform,               warnings” cited by the District Court.
with the ultimate goal of seizing upon a            Intelnet cross-appeals, alleging that the
pretextual breach of contract by the                District Court lacked jurisdiction in light
contracting party to extort a settlement            of the Rooker-Feldman doctrine or should
payment from them under the threat of               have abstained from exercising jurisdiction
protracted and expensive litigation,” (2)           under the Colorado River doctrine.6
that the strategy of extortion was integral
to Intelnet’s business strategy, and (3) that
                                                      6
ITT, through discovery, had identified                  While “[i]t is axiomatic that the federal
many similar lawsuits. In its prior state           courts have a ‘virtually unflagging
court counterclaim, ITT alleged that “the           obligation . . . to exercise the jurisdiction
Intelnet parties used the U.S. Mail as a            given them’ by Congress,” Ryan v.
critical part of their scheme to defraud the        Johnson, 115 F.3d 193, 195 (3d Cir. 1997)
ITT parties, all in order to . . . wait until       (quoting Colo. River Water Conservation
the Intelnet parties could seize upon some          Dist. v. United States, 424 U.S. 800, 817
pretext to declare that the ITT parties had         (1976)), the Colorado River doctrine
breached their agreements with Intelnet             permits a federal court to refrain from
and then sue the ITT parties for an                 exercising its jurisdiction when the
extraordinary sum of money (hundreds of             litigation would be duplicative of a
millions of dollars) unless the ITT parties         concu rrent foreign or state court
paid the Intelnet [sic] exorbitant sums.”           proceeding. Because the lower federal

                                                5
Intelnet also argues that ITT has failed to               satisfied to trigger Rooker-Feldman, and
plead its RICO claims with sufficient                     we struggle to conjure a scenario in which
particularity. As the Rooker-Feldman                      a claim would be “actually litigated” by a
doctrine bars federal jurisdiction in this                state court and yet federal litigation of the
case, we go no further.                                   same claim would not be “inextricably
                                                          intertwined” with the state court
                II. Discussion
                                                          judgment.8 The “actually litigated” test is
A . Rooker-Feldman Doctrine                     as
Interpreted in the Third Circuit
               Our Court’s boundaries for
the Rooker-Feldman doctrine are pinched
indeed. See, e.g., Parkview Assocs. P’ship                   8
                                                               In Desi’s Pizza, we noted the factors
v. City of Lebanon, 225 F.3d 321, 326 (3d                 for determining whether an issue was
Cir. 2000). Nonetheless, the facts of this                “actually litigated” by the state courts: a
case point to its application here.                       plaintiff must present its federal claims to
           The Rooker-Feldman doctrine bars               the state court, and the state court must
f e d e r a l j u r i s d ic t i o n u n d er t w o       decide those claims.          Id. at 419.
circumstances: if the claim was “actually                 Ordinarily, it will be more difficult to
litigated” in state court or if the claim is              demonstrate that a claim was “actually
“inextricably intertwined” with the state                 litigated” than to show that the federal
adjudication. Desi’s Pizza, Inc. v. City of               claim is “inextricably intertwined” with
Wilkes-Barre, 321 F.3d 411, 419 (3d Cir.                  the state court judgment. The former
2003); Parkview Assocs., 225 F.3d at                      requires that the state court has considered
325.7 Our discussion examines whether a                   and decided precisely the same claim that
District Court judgment in favor of ITT on                the plaintiff has presented in the federal
the RICO claims would be inextricably                     court.     Conversely, two claims may
intertwined with the state court litigation.              proceed on different theories or involve
Only one prong of the test need be                        different parties and yet be inextricably
                                                          intertwined if the District Court’s
                                                          judgment would “prevent a state court
courts lack jurisdiction in this case under               from enforcing its orders.” Id. at 422.
the Rooker-Feldman doctrine, we need not                          The actually litigated prong is
address whether abstention would be                       principally useful where the claims before
appropriate.                                              the state and federal courts are in all
                                                          respects identical. In such cases, the
  7
   Habeas corpus petitions are, of course,                straightforward application of the “actually
an exception to the Rooker-Feldman                        litigated” test avoids the more complicated
jurisdictional bar. Blake v. Papadakos,                   “inextricably intertwined” inquiry. See,
953 F.2d 68, 72 n.2 (3d Cir. 1992)                        e.g., Saudi Basic Indus. Corp. v. Exxon
(quoting Sumner v. Mata, 449 U.S. 539,                    Corp., No. 02-2130, ___ F.3d ___ (3d Cir.
543-44 (1981)).                                           2004).

                                                      6
a recent development unique to our Court, 9                    State and federal claims are
and it is potentially misleading in this case          inextricably intertwined “(1) ‘when in
because of its close relationship to the               order to grant the federal plaintiff the relief
concepts of claim and issue preclusion.                sought, the federal court must determine
See, e.g., Ivy Club v. Edwards, 943 F.2d               that the state court judgment was
270, 294 (3d Cir. 1991) (“A party is                   erroneously entered’ [or] 11 (2) when ‘the
precluded from litigating in a subsequent              federal court must . . . take action that
proceeding both claims that it actually                would render [the state court’s] judgment
litigated and claims that it could have                ineffectual.’” Desi’s Pizza, 321 F.3d at 421
litigated in an earlier proceeding.”)                  (quoting FOCUS v. Allegheny Cty. Court
(citation omitted)). Whereas the term                  of Common Pleas, 75 F.3d 834, 840 (3d
“inextricably intertwined” has been                    Cir. 1996)). “If the relief requested in the
integral to Rooker-Feldman doctrine since              federal action requires determining that the
its inception, Feldman, 460 U.S. at 486,               state court’s decision is wrong or would
the term “actually litigated” derives from             void the state court’s ruling, then the
the preclusion context. 10                             issues are inextricably intertwined and the
                                                       district court has no subject matter
                                                       jurisdiction to hear the suit.” FOCUS, 75
    9
       In Parkview Associates, 225 F.3d at             F.3d at 840 (quoting Charchenkov v. City
325, we briefly inquired whether the state             of Stillwater, 47 F.3d 981, 983 (8th Cir.
court had “actually litigated” the claims at           1995)).
issue. We are not aware of the term’s use
in any prior discussion by our Court of the
Rooker-Feldman doctrine. Other courts                  with reference to actual litigation: “When
have occasionally invoked Rooker-                      an issue of fact or law is actually litigated
Feldman and the “actually litigated” test in           and determined by a valid and final
the same breath. See, e.g., Kropelnicki v.             judgment, and the determination is
Siegel, 290 F.3d 118, 128 (2d Cir. 2002)               e s s e nt i a l t o t he ju d gm e n t , t h e
(noting that “[i]n addition to claims that             determination is conclusive in a
were actually litigated in state court, the            subsequent action between the parties,
Rooker-Feldman doctrine bars lower                     whether on the same or a different claim.”
federal courts from exercising jurisdiction            Comment d. to § 27 defines the term
over claims that are ‘inextricably                     “actu ally litigated” for preclu sion
i n t e rt w i n e d ’ w i t h s ta t e c o u rt       purposes: “When an issue is properly
determinations,” but discussing only the               raised, by the pleadings or otherwise, and
latter). To our knowledge, however, none               is submitted for determination and is
has established a formal “actually                     determined, the issue is actually litigated.”
litigated” alternative under the Rooker-
                                                           11
Feldman doctrine.                                            The passage in Desi’s Pizza reads
                                                       “and” rather than “or.”     The Court,
        10
       The Restatement (Second) of                     however, considered the two tests in the
Judgments, § 27, defines issue preclusion              alternative.

                                                   7
         In assessing whether the claims                 There can be little doubt that ITT
here are inextricably intertwined, we must       presented its RICO claims to the state
resolve whether the state court decided          court. In its “First Amended Answers and
ITT’s RICO claims on the merits. If we           First Amended Counterclaims,” ITT
conclude that Judge Fratto did not decide        devoted more than fifty pages to its state
(or should not have decided) the merits of       and federal RICO claims. In denying the
ITT’s RICO claims, then federal judgment         motion to amend, Judge Fratto explicitly
for ITT would neither render the state           addressed both the substantive allegations
court’s remaining judgment—namely, the           (“I don’t think RICO is or was intended to
denial of the motion to amend based on           encompass breaches of contract”) and
balancing the sufficiency of the proposed        ITT’s delay in filing its motion (“And, I
claim with ITT’s delay in                        don’t see sufficient in the proposed
filing 1 2 — nece ssarily erroneous nor          complaint that I should permit after three
ineffectual. Gulla v. North Strabane             and a half years an amendment”). 13 He
Township, 146 F.3d 168, 172–73 (3d Cir.          differentiated himself from those judges
1998). Conversely, if we conclude that the       who “allow all amendments on the theory
state court did resolve the claims on the        that they can be dealt with later on.” In
merits, then the state and federal claims        short, Judge Fratto intended to dispose of
would be “inextricably intertwined” (as          the motion on the merits.14
well as “actually litigated”). A contrary
decision by a federal court on an issue
resolved on the merits by a state court is
                                                        13
precisely the brand of federal appellate                  Arguably, even the language
review that Rooker-Feldman is intended to        pertaining to delay reflects a judgment on
prevent.                                         the merits. Judge Fratto did not simply
                                                 deny the amendment based on delay.
B. What Did the State Court Hold and             Rather, he emphasized that the proposed
Did It Intend That Holding To Be on the          complaint was insufficient to warrant a
Merits?                                          late amendment. Of course, as discussed
       “[T]h e     f i r st s te p   in  a       below, Judge Fratto’s intent to dispose of
Rooker-Feldman analysis is to determine          the amendment on the merits will not
exactly what the state court held.” Gulla,       alone trigger the Rooker-Feldman
146 F.3d at 171 (internal quotation              doctrine; if he should not have reached the
omitted). Unfortunately, the order denying       merits, Rooker-Feldman does not apply.
ITT’s motion for leave to file its amended         14
counterclaims is of limited usefulness on            Whether Judge Fratto’s conclusion is
this score. Thus we devote substantial           correct as a matter of federal law is, of
attention to the transcript of the motion        course, irrelevant for Rooker-Feldman
hearing before Judge Fratto.                     purposes. The underlying rationale of the
                                                 Rooker-Feldman doctrine is to prevent the
                                                 lower federal courts from reviewing state
  12
       See infra note 13.                        court decisions in an appellate capacity.

                                             8
        In addition to the statements made           exclusively on the viability of the claims.
by Judge Fratto, comments made by
counsel at the motion hearing support this
                                                             While Judge Fratto’s reference to
view. For example, counsel for ITT
                                                     the merits in his final disposition of the
argued that because it needed to develop
                                                     motion was limited, a state court’s brevity
the facts, it was entitled to discovery. He
                                                     does not prevent application of Rooker-
noted that, if ITT were permitted to amend
                                                     Feldman. Gulla, 146 F.3d at 172 (“If a
its pleadings, Intelnet could “bring [a]
                                                     state court considers and rejects a
multiplicity of summary and partial
                                                     constitutional claim on the merits, a
summary judgment motions.” ITT would
                                                     paucity of explicit analysis in the court’s
then bear the burden of demonstrating that
                                                     opinion will not strip the holding of its
“a reasonable juror could conclude from
                                                     validity for purposes of Rooker-Feldman’s
the activities and facts deduced that
                                                     jurisdictional bar.”).
litigation, both in this case and in other
cases, was entered into with the absolute
understanding by the plaintiffs that it was
                                                     C. Would New Jersey Law Regard the
spurious and was done simply as a method
                                                     State Court’s Judgment As Properly on
of extorting goods or services.” Implicit in
                                                     the Merits?
this line of reasoning is the possibility that
Judge Fratto could dismiss the amendment                     Judge Fratto’s intent alone,
on legal grounds. Significantly, ITT’s               however, will not support application of
counsel referenced Intelnet’s argument               Rooker-Feldman.        ITT might avoid
“that we are precluded as a matter of law            application of the doctrine if it can
this morning from such allegations”                  establish that (1) Judge Fratto’s denial of
(emphasis added).                                    the motion to amend would not be
                                                     recognized as an adjudication on the
        From this we glean that ITT
                                                     merits under New Jersey law (and
recognized that denial of the amendment
                                                     therefore does not constitute a state court
on the merits was possible. Moreover,
                                                     judgment for Rooker-Feldman purposes),
counsel for Intelnet clearly promoted the
                                                     or (2) Judge Fratto should not have
position that ITT could not make out a
                                                     considered the merits of the amendment
RICO claim based on extortionate
                                                     under New Jersey law. We consider these
litigation.     He referenced Intelnet’s
                                                     issues in turn.
argument “that the commencement of a
lawsuit . . . does not in any way arguably           1. Is the Denial of a Motion to Amend
constitute RICO as a matter of law”                  That Does Not Specify Whether It Is
(emphasis added).          He deemed it              with Prejudice Nonetheless a Decision
unnecessary to “get into the facts . . . at          on the Merits Under New Jersey Law?
this point in time.” There was virtually no
                                                            The first potential argument for
discussion before Judge Fratto of the
                                                     evading Rooker-Feldman is that Judge
timeliness of ITT’s motion to amend.
                                                     Fratto’s order denying ITT’s motion to
Instead, oral argument focused almost

                                                 9
amend would not be regarded as deciding                disciplinary dismissals.15 Thus a dismissal
the merits under state law. ITT suggests               that is not jurisdictional or disciplinary is
that an order denying a motion to amend is             on the merits.
without prejudice, and thereby not on the
                                                               Reviewing the first two predicates,
merits, in the absence of explicit language
                                                       an objection to a motion to amend for
to the contrary. We conclude otherwise.
                                                       failure to state a cause of action is treated
       If the state court’s denial of ITT’s            like a motion to dismiss, and a motion to
motion to amend its pleadings was “with                dismiss is governed by a certain set of
prejudice,” and therefore on the merits, the           rules—namely, the dismissal is on the
Rooker-Feldman doctrine precludes ITT                  merits unless (1) it states that it is without
from filing substantially the same claims              prejudice or (2) it is jurisdictional or
in the federal courts by withholding                   disciplinary. We may conclude that denial
jurisdiction from those courts. New Jersey             of an amendment for failure to state a
case law does not address explicitly                   cause of action is governed by the same set
whether a denial of a motion to amend is               of rules.16 Therefore, if the order denying
with prejudice when the judgment does not
so specify. We resolve the question by
deductive reasoning based on the                         15
                                                            That rule provides: “For failure of the
following propositions.                                plaintiff to cause a summons to issue
        First, “[o]bjection to the filing of an        within 15 days from the date of the Track
amended complaint on the ground that it                Assignment Notice or to comply with
fails to state a cause of action should be             these rules or any order of court, the court
determined by the same standard                        in its discretion may on defendant’s
applicable to a motion to dismiss. . . .”              motion dismiss an action or any claim
Interchange State Bank v. Rinaldi, 696                 against the defendant. Such a dismissal
A.2d 744, 752 (N.J. App. Div. 1997).                   shall be without prejudice unless otherwise
                                                       specified in the order.” While ITT seeks
       Second, under New Jersey law an                 to apply the exception to this case, no basis
order granting a motion to dismiss that                exists to do so. Rule 4:37-2(a) extends
does not state whether it is with prejudice            only to the dismissal of a claim as a court-
is “on the merits” except under limited                i m p o s e d s a n c t io n , a p r i n c ip l e
circumstances not applicable here. New                 acknowledged by ITT in its own letter
Jersey Rule 4:37-2(d) provides: “Unless                brief.       See, e.g., Woodward-Clyde
the order of dismissal otherwise specifies,            Consultants v. Chem. & Pollution Scis.,
a dismissal under R. 4:37-2(b) or (c) and              523 A.2d 131, 134 (1987); Zaccardi v.
any dismissal not specifically provided for            Becker, 440 A.2d 1329, 1333 (1982).
by R. 4:37, other than a dismissal for lack
of jurisdiction, operate[] as . . .                       16
                                                            Our reasoning approximates what in
adjudication[s] on the merits.” Rule 4:37-             logic is termed a “hypothetical syllogism”:
2(a) carves out another exception for                  if A implies B, and B implies C, then A
                                                       implies C. See Ruggero J. Aldisert, Logic

                                                  10
the amendment is silent as to its prejudicial
value, the denial is on the merits unless it
is jurisdictional or disciplinary. As we             415, suggesting that, while it may be
explain in the next section, Judge Fratto            without prejudice, dismissal for failure to
denied ITT’s amendment because it failed             state a claim is nonetheless “an
to state a claim as a matter of law. His             adjudication on the merits entitled to res
order did not specify whether it was with            judicata effect.” Moreover, in Mystic Isle
prejudice, but neither was it jurisdictional         Development Corp. v. Perskie & Nehmad,
or disciplinary. It thus qualifies under             662 A.2d 523, 534 (N.J. 1995), the Court
New Jersey law as an “adjudication on the            emphasiz e d that Woodward-Clyde
merits.” 17                                          involved a defendant whose counterclaim
                                                     was dismissed without prejudice for failure
                                                     to comply with a discovery order—an
for Lawyers: A Guide to Clear Legal                  adjudication wholly unrelated to the
Thinking 159 & n.7 (3d ed. 1997).                    merits.
                                                             Whether a claim is dismissed on
   17
      New Jersey case law explaining the             factual or legal grounds is relevant to its
preclusive effect of a dismissal for failure         preclusive effect. For example, the New
to state a claim is somewhat confusing.              Jersey Supreme Court has cautioned that
Even if we concluded that Judge Fratto’s             applications for dismissal under Rule 4:6-
judgment was without prejudice, it might             2(e) for failure of a complaint to state a
still be on the merits. While a dismissal            claim “should be granted in only the rarest
with prejudice clearly constitutes an                of instances. If a complaint must be
adjudication on the merits, a dismissal              dismissed after it has been accorded . . .
without prejudice only “indicates,” as a             meticulous          and     indulgent
general matter, that there has been no               examination, then, barring any other
adjudication on the merits of the claim.             impediment such as a statute of
Velasquez v. Franz, 589 A.2d 143, 148                limitations, the dismissal should be
(N.J. 1991); Cornblatt v. Barow, 708 A.2d            without prejudice to a plaintiff’s filing of
401, 413 (N.J. 1998).                                an amended complaint.” Printing Mart-
        Per New Jersey’s Supreme Court in            Morristown v. Sharp Elecs. Corp., 563
Woodward-Clyde, 523 A.2d at 135, “[a]                A.2d 31, 48 (N.J. 1989). This principle,
dismissal without prejudice is not an                however, while framed in general terms, is
adjudication on the merits and does not bar          addressed to the “sufficiency of facts
reinstitution of the same claim in a later           alleged in a complaint,” id. at 34.
action.” Yet in Zaccardi v. Becker, 440              (emphasis added), and has little, if any,
A.2d 1329, 1333 (N.J. 1982), the same                bearing on pure determinations of law. As
Court implied that a dismissal without               we conclude in the next section that Judge
prejudice of a complaint may later be a              Fratto denied ITT’s proposed amendments
basis for dismissing a subsequently filed            on legal grounds, it follows that a
complaint. The Court attempted to resolve            subsequent suit on the same legal theory
these tensions in Cornblatt, 708 A.2d at             would be barred.

                                                11
2. Should the State Court Have                       claims only if state law authorized him to
Refrained from Considering the Merits                decide the motion on the merits.
of the Proposed Amended Complaint?                   Accordingly, we turn yet again to New
                                                     Jersey law.
        We have concluded that Judge
Fratto intended to dispose of ITT’s                         New Jersey Rule 4:9-1 provides
proposed amendments on the merits, and               that motions for leave to amend “shall be
that a judgment by the state court on                freely given in the interest of justice.” A
substantive grounds triggers Rooker-                 court nonetheless retains discretion to deny
Feldman regardless whether it is labeled             an amendment un der appropriate
“with prejudice.” These conclusions do               circumstances. Kernan v. One Washington
not, however, get Intelnet home. In Gulla,           Park Urban Renewal Assocs., 713 A.2d
we held that the District Court had                  411, 421 (N.J. 1998). ITT points to a
jurisdiction to hear a claim addressed by            substantial body of New Jersey case law
the state court because the latter, though it        addressing whether a court, in determining
purported to decide the merits of the                whether to grant a motion to amend, may
plaintiff’s claims, should not have done so          consider the merits of the amendment.
under Pennsylvania law. Gulla, 146 F.3d              See, e.g., Hansen v. Hansen, 770 A.2d
at 172 (“Under Pennsylvania law, the court           1278, 1286 (N.J. Super. Ct. App. Div.
could not resolve the merits of the                  2001); Interchange State Bank v. Rinaldi,
[plaintiffs’] claims if they lack standing to        696 A.2d 744, 752 (N.J. Super. Ct. App.
bring their suit.”). Judge Fratto’s denial           Div. 1997); City Check Cashing, Inc. v.
of the proposed amendment precludes                  Nat’l State Bank, 582 A.2d 809, 811 (N.J.
federal jurisdiction over ITT’s RICO                 Super. Ct. App. Div. 1990). These cases
                                                     do indeed limit a court’s freedom to
                                                     consider substantive issues in ruling on a
       We need not resolve these nuances             motion to amend. See, e.g., Rinaldi, 696
of New Jersey law because we have                    A.2d at 752 (stating that a motion for leave
determined that ITT’s state and federal              to amend should ordinarily be decided
claims are substantially the same.                   “without consideration of the ultimate
Consequently, under New Jersey                       merits of the amendment”).
preclusion law, a second action would be                    Nonetheless, New Jersey case law
barred regardless whether Judge Fratto               is explicit that there are no firm rules
previously denied them on factual or legal           prohibiting consideration of the merits in
grounds and regardless whether the                   these cases. “[C]ourts are free to refuse
dismissal was with prejudice. For even a             leave to amend when the newly asserted
judgment that is without prejudice has               claim is not sustainable as a matter of law.
preclusive effect with respect to a                  In other words, there is no point to
“subsequent suit between the same parties,           permitting the filing of an amended
asserting the same claims, based on the              pleading when a subsequent motion to
same facts in state court.” Velasquez, 589           dismiss must be granted.” Rinaldi, 696
A.2d at 144.

                                                12
A.2d at 752 (quoting Mustilli v. Mustilli,           explicitly construed the claims in a light
681 A.2d 650 (N.J. Super. Ct. Ch. Div.               most favorable to the moving party (“at
1995)). Denial of an amendment for                   best it seems”). Judge Fratto denied the
failure to state a claim should be examined          amendment based on his conviction that
under the standard applicable to a motion
to dismiss under New Jersey Rule 4:6-2(e).
 See Maxim Sewerage Corp. v. Monmouth                language, one might argue that the state
Ridings, 640 A.2d 1216, 1219 (N.J. Super.            court did not “actually litigate” the claim
Ct. Law Div. 1993) (citing Banks v. Wolk,            advanced by ITT in federal court because
918 F.2d 418 (3d Cir. 1990)), which                  Judge Fratto misc onstrue d IT T ’s
“requires treating all the allegations of the        allegations. We hesitate to parse the
pleading as true, and considering only               language in this fashion, given that ITT
whether those allegations are legally                explained its RICO theory to the state
sufficient to establish the necessary                court in the same terms as in the federal
elements of the claimed cause of action.”            litigation. We construe Judge Fratto’s
                                                     reference to “breaches of contract” as
       It is in this context that our earlier        convenient shorthand for the alleged
examination of whether Judge Fratto                  scheme. According to ITT, Intelnet used
denied ITT’s motion to amend its                     the United States mail (a) fraudulently to
counterclaims for legal reasons becomes              induce the ITT parties to execute their
important. As already noted, there is little         agreements, (b) consistently to postpone
doubt that he denied ITT’s proposed                  performance while concealing its inability
amendment as a matter of law. After                  to perform, with the purpose (c) of seizing
examining ITT’s lengthy allegations and              upon pretexts to declare that ITT had
hearing counsel at argument, Judge Fratto            breached the agreements and extorting
concluded, “[A]t best it seems that the              settlements.      There was extensive
allegation is . . . that the plaintiffs were         discussion at the motion hearing as to what
unable to fulfill their contract, and every          these allegations entailed, and Judge Fratto
time they wrote a letter or sent a wire,             likely believed his oral summation was
knowing that they were unable to fulfill             adequate against that backdrop.
their contract, the[y] committed a RICO                      In any case, this strategy is
violation.” He continued, “I don’t think             unavailing because it runs up against the
RICO is or was intended to encompass                 “inextricably intertwined” prong of the
breaches of contract, even breaches of               Rooker-Feldman doctrine. If Judge Fratto
contract that involve $800 million.” 18 He           denied ITT’s proposed amendment
                                                     because he concluded, whatever his
                                                     reasoning, that it failed to state a claim
   18
     Judge Fratto appears subtly to have             upon which relief might be granted, a
misstated the theory advanced by ITT in              federal judgment permitting a substantially
federal court—that Intelnet violated RICO            identical claim to proceed would render
by seizing on a pretextual breach to                 the state court decision necessarily
threaten litigation.     Based on this               erroneous.

                                                13
ITT had failed to state a claim as a matter
of law, and he had the discretion to do so
under      New       Jersey        law.19             p r o c e ed i n g . S e e , e .g . , D i c i v .
                                                      Pennsylvania, 91 F.3d 542, 548 (3d Cir.
                                                      1996).
  19
    ITT raises a final objection to Rooker-                     We see no reason why a different
Feldman based on the non-identity of the              rule should govern Rooker-Feldman. On
parties in the state versus federal actions.          several occasions, to be sure, we have
(Various Intelnet affiliates are defendants           declined to apply Rooker-Feldman to bar
in the federal case but were not parties in           a federal claim by a non-party to a state
the New Jersey action, and ITT affiliates             action. For example, in Marks v. Stinson,
that were named defendants in state court             19 F.3d 873, 885 n.11 (3d Cir. 1994), we
are not plaintiffs in the federal action.)            held that “Rooker-Feldman [does] not bar
The argument finds some support in our                the district court from hearing the claims
decision in Valenti v. Mitchell, 962 F.2d             of the [] plaintiffs because they were not
288 (3d Cir. 1992). In that case, we                  parties to any of the state court
declined to apply Rooker-Feldman against              proceedings on the matter.” Similarly, in
plaintiffs who were not parties to the state          National Railroad Passenger Corp. v.
action. Relying on the “close affinity”               Pennsylvania Public Utility Commission,
between the Rooker-Feldman doctrine and               342 F.3d 242, 257 (3d Cir. 2003), we
claim and issue preclusion, we explained              noted that “[a] state court order to which
that “[w]e [had] found no authority which             [the plaintiff] was not a party cannot be the
would extend the Rooker-Feldman                       basis to deny [the plaintiff] its statutory
doctrine to persons not parties to the                right to a federal forum.” Id. But we have
proceedings before the state . . . court.” Id.        n e v e r d e e m e d R o o k e r - F e ld m a n
at 297.                                               inapplicable based on the non-participation
          However, the “close affinity”               in state court of a party asserting the
between the Rooker-Feldman and                        jurisdictional bar. On the contrary, we
preclusion doctrines that supported federal           have applied Rooker-Feldman to bar a
jurisdiction in Mitchell undercuts ITT’s              federal claim by a plaintiff whose state
theory that Rooker-Feldman does not                   proceeding was non-adversarial (in other
apply in this case. We did not decide in              words, there was apparently no defendant
Valenti whether the Rooker-                           at the state level). The parties to the
Feldman jurisdictional bar can be asserted            federal action in that case were necessarily
by a non-party to the state court action              non-identical. See E.B. v. Verniero, 119
against a party to both proceedings. In the           F.3d 1077, 1092 (3d Cir. 1997).
preclusion context, however, the rule is                        In this case, ITT lost in state court:
quite clear. While res judicata may                   Judge Fratto denied its motion to amend its
require total identity of the parties,                pleadings. Now, after raising the same
collateral estoppel usually requires only             claims in federal court, it asserts that
that the party against whom preclusion is             jurisdiction is appropriate because it has
being sought participated in the prior                named defendants who were not parties to

                                                 14
                                                      jurisdiction in this case. Accordingly, we
                                                      vacate the decision of the District Court
              III. Conclusion
                                                      and dismiss for lack of jurisdiction.
         We summarize as follows. ITT
presented its RICO claims to the state
court in the form of a proposed pleading
amendment adding counterclaims. New
Jersey law permits a state court to deny an
amendment on procedural grounds (such
as inordinate delay in filing) or because
the amendment fails to state a claim. The
latter is treated like a motion to dismiss for
failure to state a claim and is a permissible
decision on the merits under state law and
thus for Rooker-Feldman purposes. Judge
Fratto denied the amendment at least in
part on the ground that it failed, as a matter
of law, to state a claim upon which relief
can be granted. In this context, the
Rooker-Feldman doctrine bars federal


the state court action. We will not permit
a party to end-run the Rooker-Feldman
doctrine in this manner. The opinion of
our Court in Saudi Basic Industries Corp.
v. Exxon Corp., No. 02-2130, ___ F.3d
___, ___ (3d Cir. 2004), borrowing from
preclusion concepts, concluded that
“[c]laims and issues decided against an
entity bind also its parties in privity” for
Rooker-Feldman purposes. Per Saudi
Basic, ITT may not evade Rooker-
Feldman’s grasp by adding affiliates as
plaintiffs in the federal suit. In a similar
vein, we now hold that Rooker-Feldman
bars jurisdiction where, as here, related but
non-identical defendants (the Intelnet
affiliates) were drawn into the federal
litigation by the parties (ITT Corp. and its
affiliates) against whom the state court
action was decided.

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