Itt Corporation Itt Sheraton Corporation Starwood Hotels and Resorts Worldwide, Inc. v. Intelnet International Corporation Intelnet Services of North America, Inc. Concierge Plus Inntraport International, Inc. Intelnet N.A., Inc. Intelepower N.A., Inc. Intelecable N.A., Inc. Intelemedia N.A., Inc. Associated Business Telephone System Corp. A.B.T.S. International Corporation Dominic Dalia Michael Dalia Craig Brunet John Does 1-10 Intelnet International Corporation Intelnet Services of North America, Inc. Inntraport International, Inc. Intelnet N.A., Inc. Intelepower N.A., Inc. Intelemedia N.A., Inc. Associated Business Telephone Systems Corp. A.B.T.S. International Corporation Michael Dalia Craig Brunet
Docket: 02-4035
Court: Court of Appeals for the Third Circuit; April 26, 2004; Federal Appellate Court
Plaintiffs ITT Corporation, ITT Sheraton Corporation, and Starwood Hotels and Resorts Worldwide, Inc. appealed the dismissal of their RICO claims against several Intelnet entities due to statute of limitations issues. ITT alleged that Intelnet engaged in a scheme of entering non-viable contracts to exploit customer breaches for extortionate settlements through threats of litigation. Prior to the federal lawsuit, ITT attempted to amend similar claims in state court, which was denied. In a cross-appeal, Intelnet contended that the District Court incorrectly asserted jurisdiction, citing the Rooker-Feldman doctrine, which restricts federal jurisdiction over claims that have been litigated or are intertwined with state court adjudications. The Circuit Court agreed with Intelnet, affirming that Rooker-Feldman barred federal jurisdiction. The factual background details ITT's operation of hotels and casinos and Intelnet’s role in providing telecommunications services under contracts initiated in 1996, including the C+ Operating Agreement and the RMPA, where Intelnet promised advanced service capabilities.
Concierge Plus, L.L.C. was established under the C+ Agreement to facilitate profit-sharing between Intelnet International and ITT Intelnet Investment Corp., with Intelnet International responsible for providing telecommunications services. However, Concierge Plus failed to deliver these promised services. The RMPA granted Intelnet Services exclusive rights to provide enhanced telecommunications products, including high-speed internet, to ITT Corp. and its affiliates. In December 1997, Intelnet sued ITT in New Jersey for breach of contract, alleging that ITT's partnership with Microsoft to create Sheraton.Net violated both the C+ Agreement and the RMPA.
In response, ITT filed counterclaims against Intelnet, alleging fraud, misrepresentation, and breach of contract. Subsequently, ITT sought to amend its pleadings to include counterclaims under the federal and New Jersey RICO statutes, claiming Intelnet engaged in racketeering by knowingly entering unperformable contracts to extort settlements. Judge John A. Fratto denied this motion, stating that while amendments should be freely given, ITT’s proposed RICO claims were insufficient and not in line with the intended scope of RICO, particularly as the allegations primarily concerned contract breaches. The judge noted that the motion was filed over three years post-complaint and did not clarify whether the denial was with or without prejudice. ITT believed it was without prejudice, while Intelnet argued it was with prejudice based on the merits.
ITT initiated a lawsuit in the U.S. District Court for the District of New Jersey in November 2001, claiming that during discovery in a related New Jersey case, it uncovered that the Intelnet Parties lacked the ability and intent to fulfill their contractual obligations, and had a history of fraudulent behavior and racketeering. ITT accused Intelnet of making false representations about its capabilities, pursued extortionate objectives, and committing multiple acts of mail and wire fraud. The claims in this federal action mirrored those ITT attempted to introduce in the New Jersey litigation.
In February 2002, Intelnet moved to dismiss ITT's complaint, citing the four-year statute of limitations, which the District Court granted. The court applied the "injury discovery" rule from Mathews v. Kidder, Peabody & Co., concluding that ITT had enough "storm warnings" by January 1997 and failed to prove it could not discover its injuries within the statutory period.
ITT appealed, arguing that the District Court misunderstood its RICO claims as being based on extortion through litigation threats rather than fraudulent inducement, improperly relied on extrinsic information, and that it acted diligently after the warnings. Intelnet cross-appealed, asserting that the District Court lacked jurisdiction under the Rooker-Feldman doctrine or should have abstained under the Colorado River doctrine, and that ITT's RICO claims were insufficiently detailed.
The Rooker-Feldman doctrine, as interpreted by the Third Circuit, prohibits federal jurisdiction if a claim was "actually litigated" in state court or is "inextricably intertwined" with state adjudications. The discussion highlights that if a state court has addressed a claim, federal litigation of the same claim is likely intertwined. The "actually litigated" test is closely related to claim and issue preclusion, preventing a party from relitigating claims that were or could have been addressed in prior proceedings.
State and federal claims are considered inextricably intertwined when a federal court's determination requires concluding that a state court judgment was made in error or when the federal court's actions would undermine the state court's ruling. In such cases, the federal district court lacks subject matter jurisdiction. To establish this connection, it must be determined whether the state court addressed the merits of ITT's RICO claims. If it is found that the state court did not decide the merits, then a federal judgment would not contradict the state court's ruling regarding ITT's motion to amend, thus not rendering it erroneous or ineffectual. Conversely, if the state court resolved the claims on the merits, the federal and state claims would be intertwined, making any federal court ruling on those issues impermissible under the Rooker-Feldman doctrine.
The initial step in a Rooker-Feldman analysis involves clarifying the state court's holding. The order denying ITT's motion to amend is of limited clarity, necessitating a review of the motion hearing transcript. ITT clearly presented its RICO claims to the state court, dedicating substantial documentation to these claims. Judge Fratto explicitly addressed the substantive aspects of the RICO claims and indicated he intended to resolve the motion on the merits. This is reinforced by the arguments from ITT’s counsel during the hearing, which suggested a recognition that the amendment could be denied based on legal grounds. Counsel for Intelnet also argued that ITT’s claims did not meet the legal criteria for RICO, with minimal focus on the timing of the amendment request, emphasizing the viability of the claims instead.
Judge Fratto's limited reference to the merits in his final ruling does not preclude the application of the Rooker-Feldman doctrine, which bars federal court jurisdiction when a state court has considered and rejected a constitutional claim on the merits. To avoid this doctrine, ITT must demonstrate either that Judge Fratto's denial of its motion to amend is not considered an adjudication on the merits under New Jersey law, or that the merits should not have been addressed.
The first argument revolves around whether the denial of a motion to amend, which does not specify if it is with prejudice, constitutes a decision on the merits. ITT contends that such a denial is without prejudice unless explicitly stated otherwise. However, the conclusion drawn is contrary; if the denial was "with prejudice," it would bar ITT from pursuing similar claims in federal court under Rooker-Feldman.
New Jersey law does not explicitly define the prejudicial nature of a motion to amend denial when unstated. However, case law suggests that objections based on failure to state a cause of action should apply the same standard as a motion to dismiss. According to New Jersey Rule 4:37-2(d), an order dismissing a case without specifying prejudice operates as an adjudication on the merits unless exceptions apply, which do not in this case. Thus, a denial of an amendment for failure to state a claim is treated similarly. Judge Fratto's denial did not indicate whether it was with prejudice, nor was it jurisdictional or disciplinary, leading to the conclusion that it constitutes an "adjudication on the merits" under New Jersey law.
Judge Fratto's intention to address the merits of ITT's proposed amendments triggers the Rooker-Feldman doctrine, which restricts federal jurisdiction over state court decisions. Under Pennsylvania law, a state court cannot rule on the merits if the plaintiff lacks standing. Therefore, Judge Fratto's denial of ITT's proposed amendment only precludes federal jurisdiction if state law permitted him to address the merits.
New Jersey law, specifically Rule 4:9-1, allows courts to freely grant motions for amendments in the interest of justice, though courts retain discretion to deny amendments under certain circumstances. New Jersey case law indicates that while courts typically do not consider the merits when ruling on amendments, they may deny leave if the new claim is legally unsustainable.
Judge Fratto concluded that ITT's claims, even when viewed favorably, did not constitute valid RICO violations, asserting that RICO does not apply to mere breaches of contract. His denial was based on the finding that ITT failed to state a claim as a matter of law, a determination he was authorized to make under New Jersey law. Consequently, since the denial of the amendment was grounded in legal reasons, the Rooker-Feldman doctrine bars federal jurisdiction, leading to the vacating of the District Court's decision and a dismissal for lack of jurisdiction.
For convenience, "ITT" refers to ITT-related entities and "Intelnet" to Intelnet-related entities. In February 1998, ITT Corp. became a wholly owned subsidiary of Starwood. Initially, the complaint named only ITT Corp. and Sheraton as defendants, but it was later amended to include Starwood and various affiliates. ITT asserts that Intelnet claimed it could not perform in Asia and that Sheraton.Net was never implemented. The court will not evaluate the breach of contract claim by Intelnet as it is irrelevant to the appeal's outcome. ITT's federal complaint alleges that Intelnet engaged in practices that entangled customers in unperformable contracts, using threats of litigation as a strategy to extort settlements. ITT's prior state court counterclaim accused the Intelnet parties of using U.S. Mail in a fraudulent scheme to declare breaches of agreement and demand excessive payments. The Rooker-Feldman doctrine limits federal court jurisdiction in cases duplicative of state court proceedings, and while federal courts generally have an obligation to exercise jurisdiction, the lower courts lack jurisdiction in this case. Habeas corpus petitions are an exception to this jurisdictional bar. Factors for determining if an issue was "actually litigated" in state courts include whether federal claims were presented and decided by the state court. Demonstrating "actually litigated" claims is more stringent than showing claims that are "inextricably intertwined," which can involve different theories or parties but still affect enforcement of state court orders.
The "actually litigated" test simplifies the application of the Rooker-Feldman doctrine by avoiding the complex "inextricably intertwined" analysis, as evidenced in cases like Exxon Corp. v. Saudi Basic Indus. Corp. and Parkview Associates. The term "actually litigated" has not been previously discussed in relation to Rooker-Feldman by this Court, though it has been referenced alongside it in other jurisdictions, which emphasize that both actually litigated claims and those inextricably intertwined with state court determinations are barred from federal jurisdiction. The Restatement (Second) of Judgments defines "actually litigated" as an issue that has been formally raised, submitted for determination, and conclusively decided in a prior ruling, thereby establishing issue preclusion for subsequent actions between the same parties.
The Court noted that even when a judge's denial of an amendment is based on delay, it must also consider whether the underlying merits were properly addressed to invoke Rooker-Feldman. The intent of the Rooker-Feldman doctrine is to prevent lower federal courts from acting in an appellate capacity over state court decisions. Additionally, procedural rules state that a court may dismiss a claim without prejudice if a plaintiff fails to issue a summons within a specified timeframe, but this rule is not applicable in the case ITT is arguing. The reasoning applied resembles a logical syllogism, and New Jersey case law regarding the preclusive nature of dismissals for failure to state a claim is not entirely clear, leaving open the possibility that a judgment could still be deemed on the merits even if labeled as without prejudice.
A dismissal with prejudice signifies a final judgment on the merits of a claim, whereas a dismissal without prejudice generally indicates that the claim has not been adjudicated on its merits. In New Jersey, a dismissal without prejudice allows for the same claim to be reinstated in a future action, as established in Velasquez v. Franz and further clarified in Cornblatt v. Barow. However, in Zaccardi v. Becker, the New Jersey Supreme Court suggested that a dismissal without prejudice might later support the dismissal of a new complaint. The Court in Cornblatt noted that while such dismissals are without prejudice, those based on failure to state a claim can have res judicata effects. The distinction between dismissals on factual versus legal grounds is significant for their preclusive impact, with a caution against dismissing complaints for failure to state a claim unless warranted. If a complaint must be dismissed after thorough examination, it should generally be without prejudice to allow for amendments. The principles set forth in Printing Mart-Morristown v. Sharp Electronics emphasize the focus on the sufficiency of factual allegations, which does not significantly affect legal determinations.
The conclusion drawn is that regardless of whether a prior dismissal was based on factual or legal grounds, ITT's subsequent action is barred under New Jersey preclusion law due to the substantial similarity of state and federal claims. Even a dismissal without prejudice can carry preclusive effects in subsequent litigations involving the same parties and claims. Judge Fratto’s interpretation of ITT's claims in federal court may have misrepresented the legal theory, but given that ITT articulated its RICO theory consistently across both courts, the mischaracterization does not negate the preclusive effect of the prior dismissal. ITT alleges that Intelnet used fraudulent means to induce contract execution while delaying performance to claim breaches and extort settlements.
Extensive discussions at the motion hearing indicated Judge Fratto likely believed his oral summary was sufficient, yet this strategy fails due to the "inextricably intertwined" prong of the Rooker-Feldman doctrine. If Judge Fratto denied ITT's amendment on grounds it failed to state a claim, a federal judgment allowing a similar claim would contradict the state court's decision. ITT contends that Rooker-Feldman should not apply due to different parties in the state and federal actions; various Intelnet affiliates are defendants in the federal case but were not in the New Jersey action, and vice versa for ITT affiliates.
Although the court's decision in Valenti v. Mitchell suggests Rooker-Feldman does not apply to non-parties in state actions, the relationship between Rooker-Feldman and preclusion doctrines complicates ITT's argument. While res judicata demands total party identity, collateral estoppel can apply with only participation from the party at issue. The court has previously declined to bar claims from non-parties to state actions but has never found Rooker-Feldman inapplicable when a party asserting the jurisdictional bar was involved in the state court.
In E.B. v. Verniero, the court applied Rooker-Feldman even with non-identical parties when state proceedings were non-adversarial. ITT, having lost its motion to amend in state court, now seeks to relitigate similar claims in federal court, arguing jurisdiction based on new defendants. The court rejects this maneuver, referencing Exxon Corp. v. Saudi Basic Industries Corp., which established that claims decided against an entity also bind its affiliated parties. Consequently, Rooker-Feldman bars jurisdiction in cases like this where related but non-identical defendants are involved.
