Sto Corp. v. Lancaster Homes, Inc. ( 2001 )

UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
STO CORPORATION, individually and 
as Assignee and Subrogee of J.
Kent Pepper and Martha N. Pepper,
Plaintiff-Appellant,
 No. 00-1475
v.
LANCASTER HOMES, INCORPORATED,
Defendant-Appellee.

Appeal from the United States District Court
for the Eastern District of North Carolina, at Wilmington.
W. Earl Britt, Senior District Judge.
(CA-99-213-7-BR)
Argued: January 23, 2001
Decided: April 27, 2001
Before WILLIAMS and MICHAEL, Circuit Judges, and
Claude M. HILTON, Chief United States District Judge for
the Eastern District of Virginia, sitting by designation.
Affirmed in part, reversed in part, and remanded with instructions by
unpublished per curiam opinion.
COUNSEL
ARGUED: Charles Lyman Becker, WOMBLE, CARLYLE, SAN-
DRIDGE & RICE, Raleigh, North Carolina, for Appellant. Rodney
Allen Dean, DEAN & GIBSON, L.L.P., Charlotte, North Carolina,
2 STO CORP. v. LANCASTER HOMES
for Appellee. ON BRIEF: Robert E. Fields, III, Mary S. Pollard,
WOMBLE, CARLYLE, SANDRIDGE & RICE, Raleigh, North Car-
olina, for Appellant. Christopher J. Culp, DEAN & GIBSON, L.L.P.,
Charlotte, North Carolina; Julie Goodman, Steven Embry, BROWN,
TODD & HEYBURN, P.L.L.C., Lexington, Kentucky, for Appellee.
Unpublished opinions are not binding precedent in this circuit. See
Local Rule 36(c).
OPINION
PER CURIAM:
Sto Corporation (Sto) brought a diversity action against Lancaster
Homes, Inc. (Lancaster) in federal court, alleging state law claims of
breach of warranty, breach of contract, and contribution. These same
claims are the subject of ongoing litigation in North Carolina state
court. The district court abstained from exercising jurisdiction under
the principles articulated in Colorado River Water Conservation Dis-
trict v. United States, 424 U.S. 800 (1976). Because we agree that this
case presents exceptional circumstances warranting abstention, we
affirm the district court’s decision to abstain. However, the resolution
of the state court proceedings may not completely dispose of Sto’s
claims in federal court. We therefore reverse the district court’s order
dismissing this case and remand for entry of a stay order pending the
disposition of the case in state court.
I.
In November 1996 J. Kent and Martha Pepper instituted an action
in North Carolina Superior Court. The Peppers sued Lancaster, a gen-
eral contractor; Sto, a manufacturer of insulation; and Prime South
Homes, a subcontractor who installs insulation. Their complaint
alleged state law claims of negligence, breach of contract, breach of
express warranty, and breach of implied warranty. The suit arose out
of the construction of their house, which occurred in 1993. The Pep-
STO CORP. v. LANCASTER HOMES 3
pers maintained that faulty application and defective manufacture of
the exterior insulation finish system caused water damage to the struc-
ture.
Sto filed a cross-claim against Lancaster, alleging that if Sto was
liable to the Peppers, Sto was entitled to indemnification or contribu-
tion from Lancaster. Lancaster brought third-party claims against
Western Cedar Roofs, Inc. (the roofer), Coastal Window & Door
Center (the window distributor), and Lincoln Wood Products, Inc.
(the window manufacturer). After almost two years of discovery a
jury trial commenced in state court on September 28, 1998. The case
was tried for six weeks. Then, on November 6, 1998, after the Pep-
pers and Lancaster had rested their case, the Peppers entered into a
settlement agreement with Sto. On that same day the Peppers orally
moved to dismiss all of their claims, including those against Lancaster
and Prime South Homes. The judge granted the motion from the
bench and dismissed the jury. However, the judge did not make any
findings, and he never entered a written order of dismissal. A week
later, on November 13, the Peppers assigned to Sto "all claims and
causes of action against any person or entity . . . for damages to [the
Pepper] house."
Seven months later, on June 11, 1999, Sto filed a motion in state
court to amend its pleadings to assert the assigned claims against Lan-
caster and Western Cedar Roofs. Lancaster opposed the motion to
amend. Lancaster’s principal argument was that Sto cannot assert the
Peppers’ claims because they were dismissed with prejudice. Sto’s
motion to amend is still pending in state court.
On November 5, 1999, five months after filing its motion to amend
with the state court, Sto brought an action against Lancaster in federal
court. Sto asserts its assigned claims — breach of express warranty,
breach of implied warranty, and breach of contract — in the federal
action. In the alternative, Sto alleges that it is entitled to contribution
from Lancaster. Lancaster filed a motion to dismiss or stay the case,
arguing that the district court should abstain from exercising jurisdic-
tion pursuant to Colorado River Water Conservation District v.
United States, 424 U.S. 800 (1976).1 The district court granted the
1
"Although not technically a doctrine of abstention, the Colorado
River doctrine has become known as such . . . ." Al-Abood v. El-Shamari,
217 F.3d 225, 232 n.3 (4th Cir. 2000).
4 STO CORP. v. LANCASTER HOMES
motion and dismissed the case. Sto then filed a motion for reconsider-
ation, asking the district court to stay the action instead of dismissing
it. The district court denied the motion for reconsideration. Sto
appeals.
II.
We start with the premise that "[a]bstention from the exercise of
federal jurisdiction is the exception, not the rule." Id. at 813. The fed-
eral courts have a "virtually unflagging obligation . . . to exercise the
jurisdiction given them." Id. at 817. However, Colorado River held
that in certain exceptional circumstances, a federal court should
abstain in the face of a state court’s contemporaneous exercise of
jurisdiction. See id. at 818. Colorado River abstention rests on "con-
siderations of wise judicial administration, giving regard to conserva-
tion of judicial resources and comprehensive disposition of litigation."
Id. at 817 (internal quotation marks and citations omitted).
In order for a federal court to abstain under the Colorado River
doctrine, two conditions must be satisfied. First, there must be parallel
proceedings in state and federal court. "Suits are parallel if substan-
tially the same parties litigate substantially the same issues in differ-
ent forums." New Beckley Mining Corp. v. Int’l Union, UMWA, 946
F.2d 1072, 1073 (4th Cir. 1991). Second, exceptional circumstances
warranting abstention must exist. The Court in Colorado River
announced several factors that are relevant in determining whether a
particular case presents such exceptional circumstances. A federal
court should consider whether a state court has assumed jurisdiction
over property. In addition, such factors as "the inconvenience of the
federal forum; the desirability of avoiding piecemeal litigation; and
the order in which jurisdiction was obtained by the concurrent
forums" should be considered. Colorado River, 424 U.S. at 818 (cita-
tions omitted). In Moses H. Cone Mem’l Hosp. v. Mercury Constr.
Corp., 460 U.S. 1 (1983), the Supreme Court added two additional
factors: whether state or federal law is implicated and whether the
state court proceedings are adequate to protect the parties’ rights. See
id. at 23, 26.
We review a district court’s abstention on Colorado River grounds
for abuse of discretion. See New Beckley, 946 F.2d at 1074. "The dis-
STO CORP. v. LANCASTER HOMES 5
trict court must nevertheless exercise its discretion in accordance with
the Colorado River ‘exceptional circumstances test.’" Id.A.
We agree with the district court that the state and federal cases are
parallel proceedings.2 The issues are the same in the two forums. In
state court Sto asserted an indemnity or a contribution claim against
Lancaster. In addition, in state court Sto seeks to assert against Lan-
caster the causes of action that the Peppers assigned to Sto. In federal
court Sto’s claims include the assigned claims from the Peppers as
well as a claim for contribution against Lancaster. Sto argues that
because the state court has not yet ruled on its motion to amend, the
assigned claims have not entered the state court case. Thus, although
there is a potential for parallel proceedings after the state court rules
on the motion, Sto claims that the lawsuits as they currently stand are
not parallel. We disagree. The federal court and the state court are in
essentially the same position because Sto seeks to assert the same
causes of action in both courts, namely, contribution/indemnity and
the Peppers’ substantive claims that have been assigned to Sto. There-
fore, we hold that Sto is attempting to litigate the same issues in both
the state and federal forums.
We recognize that although the issues are identical, the parties are
not exactly the same in the two courts. Additional parties were
involved in the state court suit at its inception, including Prime South
Homes and the third-party defendants against which Lancaster
asserted claims. In contrast, Sto chose to sue only Lancaster in the
federal forum. However, the parties only need to be substantially the
same for the Colorado River abstention doctrine to apply. Sto and
Lancaster are the only parties that are both original defendants and
involved in Sto’s motion to amend. Furthermore, Prime South Homes,
Coastal Window & Door Center, and Lincoln Wood Products may no
longer be involved in the state case because of the Peppers’ dismissal.
2
Sto argues that in reviewing the district court’s determination of
whether there are parallel proceedings, we should adopt a de novo or
more rigorous abuse of discretion standard of review. We do not need to
reach this question because even under a de novo standard of review our
result would be the same.
6 STO CORP. v. LANCASTER HOMES
That leaves Western Cedar Roofs as the only party in the state suit
that is missing from the federal suit. The absence of this one party
does not defeat the parallel nature of the lawsuits. See Nakash v. Mar-
ciano, 882 F.2d 1411, 1417 (9th Cir. 1989) ("We should be particu-
larly reluctant to find that the actions are not parallel when the federal
action is but a ‘spin-off’ of more comprehensive state litigation.").
Accordingly, in addition to the identical nature of the issues, the
parties in the two forums are now substantially the same. Thus, we
hold that the first condition of the Colorado River doctrine is satis-
fied.
B.
We also hold that the district court did not abuse its discretion by
concluding that this case presents the exceptional circumstances
allowing for Colorado River abstention. We recognize, of course, that
not all of the factors favoring abstention are present. This case does
not involve property, and the federal court is just as convenient for the
parties as the state court. However, a decision to abstain does not
require the presence of all of the factors. Instead, the factors are to be
applied "in a pragmatic, flexible manner with a view to the realities
of the case at hand." Moses H. Cone, 460 U.S. at 21. When the
remaining factors are examined in this case, two factors slightly favor
abstention and one overwhelmingly favors it.
First, because of the presence of at least one other party in the state
suit, there is a possibility of piecemeal litigation.3 The threat of incon-
sistent results and judicial inefficiency, without more, does not satisfy
this factor. See Villa Marina Yacht Sales, Inc. v. Hatteras Yachts, 915
F.2d 7, 13, 16 (1st Cir. 1990). Exercising federal jurisdiction in this
case would present a problem in addition to the inherent inefficiency
3
In Colorado River the federal law at issue created a clear policy of
avoiding piecemeal adjudication with respect to river system water
rights. Therefore, abstention was appropriate. See 424 U.S. at 819. In
contrast, the Federal Arbitration Act requires piecemeal litigation if nec-
essary to effectuate an arbitration agreement. Therefore, abstention was
inappropriate in Moses H. Cone. See 460 U.S. at 20. In this case there
is no federal law or policy at issue.
STO CORP. v. LANCASTER HOMES 7
of parallel litigation. Sto’s state court motion to amend seeks to
include claims against Western Cedar Roofs as well as Lancaster.
However, Western Cedar Roofs is not a defendant in the federal suit,
and a federal court ruling that Lancaster is liable to Sto may not
resolve the issue of Western Cedar Roofs’s liability. In other words,
an issue might be left for resolution in state court. Cf. Am. Bankers
Ins. Co. v. First State Ins. Co., 891 F.2d 882, 885 (11th Cir. 1990)
(the presence of an additional party in state court weighs slightly in
favor of abstention because piecemeal litigation may result).
At oral argument Sto suggested that any necessary parties could be
joined in the federal suit. This suggestion does not change our conclu-
sion. First of all, if Western Cedar Roofs is a nondiverse party, the
federal court will have no jurisdiction. Furthermore, Sto was the one
who chose to fashion its federal suit in the way that it did, and it has
to accept those consequences. As the federal case stands now, the
absence of a party may result in piecemeal litigation. This possibility
lends some support for federal court abstention.
Second, exercising jurisdiction would require the federal court to
delve into complicated issues of North Carolina procedural law. The
presence of state law issues in itself does not create a circumstance
in which a federal court should surrender jurisdiction. After all, fed-
eral courts sitting in diversity regularly grapple with questions of state
law. See Evans Transp. Co. v. Scullin Steel Co., 693 F.2d 715, 717
(7th Cir. 1982). However, in "rare circumstances" the presence of
state law issues will serve as a factor in a federal court’s abstention
decision. Moses H. Cone, 460 U.S. at 26. See also Gordon v. Luksch,
887 F.2d 496, 498 (4th Cir. 1989) (refusing to abstain because the
case required interpretation of state law issues that are "uncompli-
cated and permit little legal disagreement"); Bethlehem Contracting
Co. v. Lehrer/McGovern, Inc., 800 F.2d 325, 328 (2d Cir. 1986)
(refusing to abstain because the case did not present "novel or unique"
state law issues).
Resolving this case requires an interpretation of North Carolina
Rule of Civil Procedure 41(a)(2). That rule provides that after a plain-
tiff rests her case, she is allowed to dismiss without prejudice only
"upon order of the judge and upon such terms and conditions as jus-
tice requires." The rule says nothing about whether the order has to
8 STO CORP. v. LANCASTER HOMES
be in writing or what kind of findings are required. The trial judge in
the state court case said he was dismissing without prejudice, but he
issued no findings and no written order. Determining the nature of the
Peppers’ dismissal will not be a straightforward inquiry. Therefore,
the questions of North Carolina procedure are another reason to favor
federal court abstention in this case.
Finally, the most persuasive factor in favor of abstention is the
order in which the forums assumed jurisdiction. In considering this
factor, we look not only to which action was filed first but also to
"how much progress has been made in the two actions." Moses H.
Cone, 460 U.S. at 21. The state court action has made substantial
progress. The state suit commenced three years before the federal one.
There was extensive pretrial activity, including discovery and media-
tion, as well as a six-week jury trial. After the state judge orally
granted the Peppers’ motion to dismiss, Sto filed a motion to amend
its pleadings (to assert the assigned claims), Lancaster filed a
response, and a hearing was held. Cf. Nakash v. Marciano, 882 F.2d
1411, 1413 (9th Cir. 1989) (federal court abstention was proper where
state court history consisted of 70 hearings, 100 depositions, and
300,000 documents). This long, active history in state court stands in
stark contrast to the brief history in federal court. After Sto filed its
complaint in federal court, the activity there was essentially limited
to consideration of whether that action should be dismissed or stayed.
Sto’s status in both suits also bears on the filing sequence (or litiga-
tion progress) factor. The fact that the same plaintiff files suit in fed-
eral court after first filing in state court weighs in favor of abstention,
according to several courts. See Villa Marina Yacht Sales, Inc. v. Hat-
teras Yachts, 915 F.2d 7, 14 (1st Cir. 1990); LaDuke v. Burlington N.
R.R. Co., 879 F.2d 1556, 1561 (7th Cir. 1989); Am. Int’l Underwrit-
ers, (Phil.), Inc. v. Continental Ins. Co., 843 F.2d 1253, 1260-61 (9th
Cir. 1988); Telesco v. Telesco Fuel & Masons’ Materials, Inc., 765
F.2d 356, 363 (2d Cir. 1985). In the state court action, which was
instituted first, Sto filed a motion to amend its pleadings in order to
stand in the place of the Peppers, the original plaintiffs. Thereafter,
Sto (as plaintiff) instituted the federal action. This, we believe, offers
some support for abstention.
Because of the presence of three factors favoring abstention, we
hold that the district court exercised its discretion within the bounds
STO CORP. v. LANCASTER HOMES 9
of the Colorado River conditions. A federal court should be reluctant
to decline to exercise its jurisdiction, but in the unique circumstances
of this case abstention will promote the efficient and comprehensive
resolution of the dispute.
C.
Sto argues that even if the district court did not err in abstaining,
it should have stayed the federal case pending the resolution of the
state court action. A federal court abstaining on Colorado River
grounds should dismiss the case if "the determinative issues will
unfailingly be resolved within the parameters of the state-court litiga-
tion . . . as no further action by the district court is anticipated." Cox
v. Planning Dist. I Cmty. Mental Health & Mental Retardation Servs.
Bd., 669 F.2d 940, 943 (4th Cir. 1982). However, if the federal case
has a chance of continuing even after the resolution of the state case,
a stay pending the resolution of the state suit is the appropriate dispo-
sition in federal court. See Kelser v. Anne Arundel County Dep’t of
Soc. Servs., 679 F.2d 1092, 1094 (4th Cir. 1982).
In this case the state court’s resolution of the pending motion may
or may not completely dispose of the case. A state court decision that
the Peppers’ dismissal was with prejudice will be conclusive because
it will mean that the Peppers had nothing to assign to Sto and that Sto
cannot revive the Peppers’ causes of action. Similarly, a state court
decision to grant Sto’s motion to amend and proceed with the case
will leave nothing for the federal court to do.
On the other hand, the state court may deny Sto’s motion to amend
because its cross-claims were dismissed when the Peppers’ claims
were dismissed. See Jennette Fruit & Produce Co. v. Seafare Corp.,
331 S.E.2d 305, 308 (N.C. Ct. App. 1985). Alternatively, the state
court may deny Sto’s motion because it would not be in the interest
of justice to grant it or because granting it would result in undue delay
or prejudice. See N.C. R. Civ. P. 15(a); Outer Banks Contractors, Inc.
v. Daniels & Daniels Constr., Inc., 433 S.E.2d 759, 762 (N.C. Ct.
App. 1993). The presence of these options make it necessary for the
federal court to retain the present case on its docket because otherwise
the statute of limitations could bar Sto from refiling its claims against
10 STO CORP. v. LANCASTER HOMES
Lancaster in any court.4 A stay of the federal action would avoid any
potential statute of limitations problems. See Evans Transp. Co. v.
Scullin Steel Co., 693 F.2d 715, 717-18 (7th Cir. 1982).
III.
We affirm the district court’s decision to abstain. However, we
reverse the district court’s order to dismiss the case and remand with
instructions that the court enter an order staying this action pending
resolution of the state court case.
AFFIRMED IN PART, REVERSED IN PART,
AND REMANDED WITH INSTRUCTIONS
4
In North Carolina a defective construction claim must be brought
within six years of the substantial completion of the improvement. See
N.C. Gen. Stat. § 1-50(a)(5). The Peppers occupied their house on Janu-
ary 4, 1994. Therefore, Sto, as an assignee of the Peppers, had to bring
its claim by January 4, 2000, at the latest. Furthermore, North Carolina
law provides that an action dismissed without prejudice must be refiled
within one year of the dismissal. See N.C. R. Civ. P. 41(a). Since the trial
court orally dismissed the Peppers’ claims on November 6, 1998, Sto
might have had only until November 6, 1999, to refile its assigned
claims. That same deadline would apply to Sto’s contribution claim,
which has to be brought a year after the settlement agreement. See N.C.
Gen. Stat. § 1B-3(d)(2).