## Facts

- Miguel A. Gargallo maintained a margin brokerage account with Merrill Lynch, Pierce, Fenner & Smith, Inc., beginning in 1976.
- The account incurred substantial losses and was liquidated on March 10, 1980, leaving Gargallo owing Merrill Lynch about $17,000.
- Merrill Lynch sued Gargallo in an Ohio common pleas court to collect the debit balance.
- Gargallo filed a counterclaim alleging negligence, misrepresentation, churning, and federal securities-law violations (including Exchange Act and Regulation T theories).
- The Ohio trial court dismissed Gargallo’s counterclaim with prejudice under Ohio Civ. R. 37 for failure to comply with discovery orders; the Ohio appellate court affirmed.
- Gargallo later filed a federal action in the Southern District of Ohio against Merrill Lynch and his account executive, Larry Tyree, asserting essentially the same federal securities claims arising from the same transactions.
- The federal district court granted summary judgment to Merrill Lynch on res judicata grounds and to Tyree on collateral estoppel grounds.

## Issues

1. Whether, under 28 U.S.C. § 1738 and applicable Ohio preclusion law, the Ohio Rule 37 dismissal with prejudice could bar later federal securities claims that are within exclusive federal jurisdiction.
2. Whether the Ohio discovery-sanction dismissal could collaterally estop Gargallo from litigating fact issues underlying his federal securities claims against Tyree.

## Decision

- The Sixth Circuit reversed the summary judgment for Merrill Lynch.
- Applying Ohio preclusion law, the court held that a state-court judgment has no claim-preclusive effect as to causes of action over which the state court lacked subject-matter jurisdiction.
- Because Exchange Act-based claims fall within exclusive federal jurisdiction, the Ohio dismissal could not bar Gargallo’s subsequent federal securities claims.
- The Sixth Circuit also reversed the summary judgment for Tyree.
- The court held collateral estoppel did not apply because the Ohio dismissal for discovery violations did not actually litigate or necessarily decide the factual issues underlying the securities allegations.
- The case was remanded for further proceedings in federal court.

## Legal Principles

- Under 28 U.S.C. § 1738, a federal court must give a state-court judgment the same preclusive effect the rendering state’s courts would give it.
- When a later claim is within exclusive federal jurisdiction, the federal court first determines the state judgment’s preclusive effect under the rendering state’s preclusion rules.
- Under Ohio law, a judgment cannot have claim-preclusive effect on a cause of action over which the adjudicating court lacked subject-matter jurisdiction, even if the judgment was a dismissal “with prejudice.”
- Federal securities claims under the Securities Exchange Act of 1934 are within the exclusive jurisdiction of federal courts; state courts lack subject-matter jurisdiction to adjudicate those claims.
- Issue preclusion requires that the issue have been actually litigated and necessarily decided; a dismissal imposed as a discovery sanction does not, by itself, decide the merits of underlying factual allegations.

## Conclusion

The Sixth Circuit held that Ohio’s discovery-sanction dismissal could not preclude later federal securities claims that Ohio courts lacked jurisdiction to hear, and it also could not estop litigation of factual issues never actually decided; the federal case was remanded for merits proceedings.


Gargallo v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 918 F.2d 658 (6th Cir. 1990)