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Gargallo v. Merill, Lynch, Pierce, Fenner & Smith

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Bloomberg Law

Citation. 918 F.2d 658, 1990 U.S. App. 19815

Brief Fact Summary. A brokerage firm sued a client for failure to pay debts relating to a margin account. After the client filed a counterclaim against the brokerage firm, the presiding court dismissed the counterclaim with prejudice due to the client’s failure to comply with court’s discovery orders.
Synopsis of Rule of Law. A state court final judgment on the merits has no claim preclusive effect with respect to federal claims not within the jurisdiction of the state court, even though the federal claims arose out of the same transaction as the state court claims.

Facts. The Defendant, Miguel Gargallo (Defendant), opened a margin brokerage account with the Plaintiff, Merrill, Lynch (Plaintiff), in 1976. Defendant maintained the account until 1980 when he incurred losses resulting in a debt owed to Plaintiff for $17,000. When the obligation was not paid, Plaintiff filed suit for collection in the Franklin County, Ohio, Court of Common Pleas. In response, Defendant filed a counterclaim against Plaintiff, alleging that Plaintiff caused his losses through negligence, misrepresentations, and churning. Due to a history of discovery difficulties, the state court dismissed Defendant’s counterclaim with prejudice, for refusal to comply with Plaintiff’s discovery requests and the court’s discovery orders. Defendant then filed a complaint in United States District Court, charging Plaintiff with violating federal securities laws based on the same transactions at issue in the state litigation. The district court dismissed the suit on res judicata grounds. This appeal followed.

Issue. Whether a court should apply claim preclusive effect to a dismissal based solely on failure to comply with discovery orders.

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