I had posted this issue on Adobe’s forum as well and here’s what the problem was and how we fixed it.
I had two opacity keyframes at the beginning of the video as my fade up from black and a cross dissolve at the end to the second clip on the same video layer. The problem was at the first frame of the cross dissolve to the second clip, it actually cut to black, then did the dissolve.
After some tests I tried turning off the Mercury Playback Engine and used software only which fixed the problem, but not the best way of working with my hardware. So, I then took out the opacity keyframes at the beginning and replaced it with a cross dissolve, turned the MPE back on, and the wierd cross dissolve to the second clip went away. Hope this helps someone else if they come across something like this.