Res Judicata: Whether a Nonparty to a Prior Action is In Privity with The Prior Action

Print Article

Posted on: Jan 14 2026

In Cantor Fitzgerald & Co. v. PEI Global Partners Holdings LLC, 2026 N.Y. Slip Op. 00080 (1st Dept. Jan. 13, 2026), the Appellate Division, First Department, affirmed the dismissal of a complaint under CPLR 3211(a)(5) based on res judicata. The plaintiff, an investment bank, sued PEI Global Partners Holdings LLC for tortious interference, unfair competition, and unjust enrichment, alleging the same facts previously raised in consolidated FINRA arbitrations against former employees and their newly acquired broker-dealer. Although defendant was not a party to the prior arbitration, the Court found privity because the former employees wholly owned the defendant and the broker-dealer, shared a common purpose, and were represented by the same counsel. Applying a flexible privity analysis, the Court held that functional representation existed, giving the defendant a “vicarious day in court.” Thus, the prior arbitration award barred the subsequent action under res judicata.[1]

Under the doctrine, a party may not litigate a claim where a judgment on the merits exists from a prior action between the same parties involving the same subject matter.[2] The doctrine applies not only to claims actually litigated but also to claims that could have been raised in the prior litigation.[3] The rationale underlying the doctrine is that a party who has been given a full and fair opportunity to litigate a claim should not be allowed to do so again.[4]

New York has adopted a transactional approach in deciding res judicata issues.[5] Under this approach, once a claim is brought to a final conclusion, all other claims arising out of the same transaction or series of transactions are barred, even if based upon different theories or if seeking a different remedy.[6]

“Res judicata is designed to provide finality in the resolution of disputes to assure that parties may not be vexed by further litigation.”[7] “The policy against relitigation of adjudicated disputes is strong enough generally to bar a second action even where further investigation of the law or facts indicates that the controversy has been erroneously decided, whether due to oversight by the parties or error by the courts.”[8] As the Court of Appeals noted, “[c]onsiderations of judicial economy as well as fairness to the parties mandate, at some point, an end to litigation.”[9]

The doctrine of res judicata applies to prior arbitration proceedings,[10] as well as prior determinations by state appellate and federal courts.[11]

In New York, the Civil Practice Law and Rules (“CPLR”) specifically recognizes res judicata as a basis for dismissal.[12] Res judicata is also an affirmative defense under the CPLR.[13]

Pursuant to CPLR 3211(a)(5), a party may seek dismissal of a cause of action based upon the doctrine of res judicata.[14] To prevail, the moving party must show: “(1) a final judgment on the merits, (2) identity or privity of parties, and (3) identity of claims in the two actions.”[15] To establish privity with regard to non-parties,[16] as in Cantor Fitzgerald, “the connection between the parties must be such that the interests of the nonparty can be said to have been represented in the prior proceeding.”[17] Although relationship alone is not sufficient to support preclusion, “[privity] includes those who are successors to a property interest, those who control an action although not formal parties to it, and those whose interests are represented by a party to the action.”[18] The party asserting the conclusive effect of a prior judgment has the burden to establish it.[19]

In Cantor Fitzgerald, plaintiff brought an action against defendant seeking, inter alia, damages for tortious interference with prospective business relations. Defendant moved, pre-answer, to dismiss the complaint in its entirety on the grounds that, among other things, the claim was barred by the doctrine of res judicata based on a prior consolidated FINRA arbitration.

In early September 2021, non-parties Kevin Phillips, John Bills, Schuyler Fabian, and Adil Sener (collectively, the “PEI Bankers”) resigned from their employment with plaintiff, an investment banking firm, and together founded defendant, PEI Global Partners Holdings LLC, which they controlled and in which they collectively held 100% of the equity.

On November 5, 2021, plaintiff commenced separate arbitrations before FINRA against each of the PEI Bankers. On February 10, 2022, plaintiff commenced a fifth FINRA arbitration against PEI Global Partners LLC (“PEI Broker-Dealer”), a FINRA-licensed broker-dealer that was wholly owned by the defendant. These five arbitrations were administratively consolidated and constitute the “Prior Proceeding.”

Defendant was not a party to the Prior Proceeding. There was no dispute that it could not be involuntarily made a party to the arbitrations as it was not a FINRA member and had no agreement consenting to FINRA’s jurisdiction.

In the Prior Proceeding, plaintiff alleged that the PEI Bankers devised a scheme to leave plaintiff’s employ and form a competing firm, taking with them plaintiff’s employees and its existing and prospective clients. Plaintiff alleged, inter alia, that the PEI Bankers and PEI Broker-Dealer accomplished this scheme by, among other things: (i) soliciting and/or enticing plaintiff’s existing and/or prospective clients, in breach of the non-solicitation and non-compete provisions of the PEI Bankers’ employment agreements; (ii) directing and inducing other of the plaintiff’s employees to breach their own employment agreements by soliciting clients on the PEI Bankers’ behalf, transferring pending work from plaintiff to the PEI Bankers, and resigning from plaintiff’s employ to join the PEI Bankers’ competing business; and (iii) stealing plaintiff’s proprietary work product to engage and service plaintiff’s clients.

Plaintiff’s claims against the PEI Bankers in the Prior Proceeding included claims against each individual for breach of the non-solicitation provisions in their employment agreements and breach of forgivable loan agreements they executed with plaintiff, claims against PEI Bankers Phillips and Bills for breach of their employment agreements by competing with plaintiff through PEI Broker-Dealer, a claim against Phillips alone for tortious interference with the plaintiff’s employee contracts and a claim against each PEI Banker for tortious interference with prospective business relations and contracts based on purportedly tortious conduct undertaken by them through the defendant herein.

Plaintiff’s claims against PEI Broker-Dealer in the Prior Proceeding were for unfair competition, aiding and abetting breach of fiduciary duty, tortious interference with plaintiff’s employee contracts, tortious interference with prospective business prospects, and unjust enrichment.

The FINRA arbitration panel issued its award on October 30, 2023, finding each of the PEI Bankers liable to plaintiff in the exact amount of the unforgiven balance owed on their respective forgivable loan agreements. As to the remainder of the claims against the PEI Bankers, the panel expressly denied “[a]ny and all claims for relief not specifically addressed herein.” The panel also denied plaintiff’s claim against the PEI Broker-Dealer and the PEI Bankers’ counterclaim for declaratory relief, i.e., a declaration that the plaintiff breached the agreements and constructively terminated the PEI Bankers, was denied.

Plaintiff commenced the action on March 8, 2024, against defendant, PEI Global Partners Holdings LLC, asserting four causes of action: (1) tortious interference with prospective business relations, (2) tortious interference with contractual relations, (3) unfair competition, and (4) unjust enrichment, pleading the same facts previously alleged in the Prior Proceeding regarding the PEI Bankers’ purported scheme to steal plaintiff’s business. Plaintiff alleged that defendant, through the PEI Bankers and PEI Broker-Dealer, solicited plaintiff’s existing and prospective clients, induced plaintiff’s clients and employees to breach their contracts with plaintiff, and stole plaintiff’s proprietary work product.

Defendant moved to dismiss the complaint. The motion court granted the motion.

The motion court held that, based upon defendant’s submissions, “including the pleadings in the Prior Proceeding, and the FINRA panel’s final arbitration award,” defendant “demonstrated that there was a final judgment on the merits, there [was] identity or privity of parties, and identity of claims in the two actions.” The motion court explained that a “[c]omparison of the complaint [in the action] with the pleadings in the Prior Proceeding reveal[ed] that the Prior Proceeding involved the same claims and underlying facts” that were alleged in the action.

Looking at whether there was privity between plaintiff and defendant (a non-party to the Prior Proceeding), the motion court concluded that there was privity: “while the defendant was not a party to the Prior Proceeding, it is in privity with both the Broker-Dealer, which it wholly owns, and the PEI Bankers, which wholly own the PEI Broker-Dealer.” “Thus,” concluded the motion court, “defendant was in privity with PEI Banker and PEI Broker-Dealer so as to have had “functional representation” in the Prior Proceeding.”

Plaintiff appealed and the First Department affirmed.

The Court found that the “individual bankers who were respondents in the arbitration [were] defendant’s principals and hold 100% of its equity.”[20] “Moreover,” said the Court, “all arbitration respondents, including the entity respondent, were aligned with defendant by common purpose and were represented by the same counsel in the arbitration as defendant is here.”[21] Accordingly, the Court held that the motion court “properly dismissed the complaint on the ground of res judicata because defendant was in privity with the arbitration respondents.”[22]

Takeaway

As discussed, the First Department affirmed dismissal of plaintiff’s complaint under CPLR 3211(a)(5) based on res judicata. Plaintiff sued PEI Global for tortious interference and related claims, alleging facts previously raised in a consolidated FINRA arbitration against former employees and their broker-dealer. Although PEI Global was not a party to the prior arbitration, the court found privity because the former employees wholly owned PEI Global and the broker-dealer, shared a common purpose, and used the same counsel. Applying New York’s transactional approach and flexible privity analysis, the Court held that functional representation existed, giving PEI Global a “vicarious day in court.” Thus, the prior arbitration award barred the subsequent action.

Cantor Fitzgerald highlights three important principles. First, courts apply a flexible privity analysis, recognizing functional representation when ownership, common purpose, and shared counsel exist. Second, New York’s transactional approach to res judicata bars all claims arising from the same transaction once a final judgment is reached, regardless of differing legal theories or remedies. Finally, arbitration awards have a preclusive effect, meaning entities with functional representation in arbitration may be bound by its outcome even if not formally involved.

__________________________________

Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

[1] Previously, this Blog has examined the doctrine of res judicata (here, here, here, and here).

[2] Simmons v. Trans Express Inc., 37 N.Y.3d 107, 111 (2021) (internal quotation marks omitted); see also Watts v. Swiss Bank Corp., 27 N.Y.2d 270, 277 (1970); Gregg v. Lan Zhen Chen, 220 A.D.3d 697, 698 (2d Dept. 2023); Bayer v. City of New York, 115 A.D.3d 897, 898 (2d Dept. 2014).

[3] Jacobson Dev. Group, LLC v. Grossman, 198 A.D.3d 956, 959 (2d Dept. 2021) (internal quotation marks omitted); Gregg, 220 A.D.3d at 698.

[4] See O’Connell v. Corcoran, 1 N.Y.3d 179, 184-185 (2003); Gramatan Home Invs. Corp. v. Lopez, 46 N.Y.2d 481, 485 (1979)).

[5] Matter of Reilly v. Reid, 45 N.Y.2d 24 (1978).

[6] O’Brien v. City of Syracuse, 54 N.Y.2d 353, 357 (1981) (citation omitted).

[7] See Matter of Reilly, 45 N.Y.2d at 28 (citations omitted).

[8] Id. (citations omitted).

[9] Id.

[10] Mahler v. Campagna, 60 A.D.3d 1009 (2d Dept. 2009); see also Rembrandt Ind. v. Hodges Intl., 38 N.Y.2d 502, 504 (1976); Lopez v. Parke Rose Mgt. Sys., 138 A.D.2d 575, 577 (2d Dept. 1988)

[11] Milone v. City University of New York, 153 A.D.3d 807, 808-809 (2d Dept. 2017); see also Emmons v. Broome County, 180 A.D.3d 1213 (3d Dept. 2020).

[12] See CPLR § 3211(a)(5).

[13] See CPLR § 3018(b).

[14] See Ciafone v. City of New York, 227 A.D.3d 946, 946 (2d Dept. 2024).

[15] Paramount Pictures Corp. v. Allianz Risk Transfer AG, 31 N.Y.3d 64, 73 (2018) (citing cases).

[16] “The identity requirement is a ‘linchpin of res judicata.’” Gulf LNG Energy, LLC v. Eni S.p.A., 232 A.D.3d 183, 190 (1st Dept. 2024), lv denied, 44 N.Y.3d 902 (2025).

[17] Green v. Santa Fe Indus., 70 N.Y.2d 244, 253 (1987); see also D’Arata v. New York Cent. Mut. Fire Ins. Co., 76 N.Y.2d 659, 664 (1990).

[18] Watts v. Swiss Bank Corp., 27 N.Y.2d 270, 277 (1970).

[19] Id. at 275.

[20] Slip Op. at *1.

[21] Id.

[22] Id. (citing Green, 70 N.Y.2d at 253).

Tagged with: Commercial Litigation, Privity, res Judicata