Kelly Investment Inc v. Cntntl Common Corp ( 2002 )

UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
_______________________
No. 01-31385
_______________________
KELLY INVESTMENT, INC.,
Plaintiff-Appellant,
versus
CONTINENTAL COMMON CORP., ET AL.,
Defendants-Appellees.
________________________________________________________________
Appeal from the United States District Court
for the Eastern District of Louisiana
_________________________________________________________________
December 18, 2002
Before JONES, SMITH and SILER,* Circuit Judges.
SILER, Circuit Judge:
Kelly Investment, Inc. (“Kelly”)appeals the district court’s
decision to abstain from exercising its jurisdiction and to stay
the consolidated actions of a Texas state court. The district
court erred in finding abstention appropriate under the factors
*
Circuit Judge of the Sixth Circuit, sitting by designation.
enunciated in Colorado River Conservation Dist. v. United States,
424 U.S. 800 (1976), so we reverse.
I. BACKGROUND
This case involves concurrent proceedings in the Eastern
District of Louisiana and Texas state court. In April 1999,
Continental Common Corp., Continental Poydras Corp., and
Continental Baronne Corp. (“the Continental Defendants”), along
with other related entities, filed suit in Texas state court
against Dynex Commercial, Inc. (“Dynex”),1 alleging that Dynex
breached promissory notes on which the Continental Defendants were
obligees. These promissory notes were secured by mortgages on the
Continental Defendants’ office buildings in New Orleans. In
addition, unrelated claims were brought against Dynex by parties
who are not involved in the federal proceeding.
On July 6, 2000, Kelly purchased the interest in the
promissory notes from Dynex. In doing so, Kelly agreed to
participate in the Texas litigation. In November 2000, the
Continental Defendants added Kelly as a separate defendant in the
Texas suit, alleging that Kelly individually breached the
promissory notes by unjustly withholding tenant improvement funds.2
The Continental Defendants also announced their intent to
1
Dynex is not a party to the federal proceeding.
2
At this point in the state proceedings, the Continental
Defendants did not seek to renege or otherwise extend the maturity
date of the promissory notes.
2
unilaterally extend the maturity date of the promissory notes,
which was originally dated April 1, 2001. Kelly filed a special
appearance in the Texas action, challenging the court’s right to
invoke in personam jurisdiction over it. Nearly a year later, in
October 2001, the Texas state court overruled Kelly’s special
appearance.
On February 6, 2001, with its special appearance pending in
state court, Kelly filed three petitions for declaratory judgment
against the Continental Defendants in Louisiana state court. Kelly
sought declarations that (1) the term “stabilization,”3 as defined
in the three promissory notes used to finance the three Continental
properties was a condition precedent to the extension of the due
date of the Promissory Notes; (2) because stabilization had not
occurred, the Continental Defendants did not have a right to extend
the maturity date of the notes; and (3) Kelly did not have any
obligation under the promissory notes to make advances for tenant
improvements. The Continental Defendants successfully removed to
federal court, where the cases were consolidated. Kelly filed a
3
The promissory notes used to finance the three Continental
Defendants’ properties defined “stabilization”:
“Stabilization” is defined to mean stabilized occupancy
of the Property for a period of three (3) consecutive
months and based on net operating income (calculated on
an annualized basis and based on actual rents, executed
leases and verified expenses, and a debt service ratio of
1.25:1.00) sufficient to support a loan principal amount
of at least $12,000,000.00 bearing interest at the
Extension Interest Rate amortized over a 25 year period.
3
motion to remand, while the Continental Defendants filed a Rule
12(b)(6) motion to dismiss. The district court denied both motions
on June 6, 2001. On June 14, 2001, the Continental Defendants
filed an amended petition in the Texas proceeding to include a
declaratory judgment claim against Kelly. This claim, unlike the
previous state claims brought by the Continental Defendants, raised
the same issues brought by Kelly in the federal proceeding --
namely, whether stabilization of the New Orleans properties was a
prerequisite to extension of the Continental Loans’ maturity date.
Eight days later, on June 22, 2001, the Continental Defendants
filed a motion to abstain in federal district court. On August 2,
2001, with the motion to abstain pending, Kelly added a claim for
money damages against the Continental Defendants. In addition,
Kelly sought a writ of fieri facias directing the United States
Marshal to seize and sell the New Orleans office buildings to
satisfy its damage claim.
The district court stayed the federal proceeding on
November 23, 2001. It declined to apply the standard set forth in
Brillhart v. Excess Ins. Co. of Am., 316 U.S. 491 (1942), which
gives district courts discretion to dismiss a declaratory judgment
action when a parallel suit not governed by federal law and
presenting the same issues is pending in state court.
Specifically, the district court rejected the Continental
Defendants’ contention that the Brillhart standard should control
4
in light of the fact that Kelly’s coercive claims were added only
after the Continental Defendants’ motion to abstain was filed.4
Instead, the district court applied the abstention analysis of
Colorado River, finding that the inconvenience of the federal
forum, the threat of piecemeal litigation, and the order in which
jurisdiction was obtained supported staying the proceedings.
II. STANDARD OF REVIEW
A district court’s decision to stay a proceeding is generally
reviewed for abuse of discretion. Murphy v. Uncle Ben’s, Inc., 168
F.3d 734, 737 (5th Cir. 1999). However, to the extent that such a
decision rests on an interpretation of law, the review is de novo.
Id.III. DISCUSSION
Both the district court and the Texas state court have
concurrent jurisdiction over this dispute. A court may abstain
from a case that is part of parallel, duplicative litigation
typically only under “exceptional” circumstances. Colorado River,
4
The district court’s ruling on this point is correct.
Brillhart is only applicable “when a district court is considering
abstaining from exercising jurisdiction over a declaratory judgment
action.” Southwind Aviation, Inc. v. Bergen Aviation, Inc., 23 F.3d
948, 950 (5th Cir. 1994). In contrast, when an action contains any
claim for coercive relief, the Colorado River abstention doctrine
is ordinarily applicable. Black Sea Inv., Ltd. v. United Heritage
Corp., 204 F.3d 647, 652 (5th Cir. 2000). Kelly’s claims for
coercive relief are not frivolous, and there is no evidence that
Kelly added them solely as a means of defeating Brillhart.
Therefore, Colorado River provides the appropriate abstention
standard.
5
424 U.S. at 818. Here, the lawsuits are parallel since Kelly and
the Continental Defendants are contesting stabilization and its
effect on the maturity date of the promissory notes in concurrent
state and federal proceedings.
In making the determination of whether "exceptional
circumstances" exist that allow abstention in deference to pending
state court proceedings, the Supreme Court has identified six
relevant factors:
(1) assumption by either court of jurisdiction over a
res,(2) relative inconvenience of the forums, (3)
avoidance of piecemeal litigation, (4) the order in which
jurisdiction was obtained by the concurrent forums, (5)
to what extent federal law provides the rules of decision
on the merits, and (6) the adequacy of the state
proceedings in protecting the rights of the party
invoking federal jurisdiction.
Diamond Offshore Co. v. A & B Builders, Inc., 302 F.3d 531, 540 n.6
(5th Cir. 2002) (internal quotation marks and citation omitted).
The decision of whether to abstain “does not rest on a mechanical
checklist” of these factors, but rather “on a careful balancing of
[them] as they apply in a given case, with the balance heavily
weighted in favor of the exercise of jurisdiction.” Moses H. Cone
Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 16 (1983).
In its decision staying the proceedings, the district court
found that Louisiana was an inconvenient forum, that piecemeal
litigation would result if concurrent proceedings were permitted,
and that the Texas proceeding had progressed further. An analysis
of the individual factors reveals that the district court’s
6
determination was flawed in several respects. For example, the
second factor, relative inconvenience of the forums, should be
analyzed as to “whether the inconvenience of the federal forum is
so great” that abstention is warranted. Evanston Ins. Co. v.
Jimco, Inc., 844 F.2d 1185, 1192 (5th Cir. 1988). The district
court, however, merely found that Texas is a “more convenient”
forum in light of the fact that the Texas proceeding commenced in
April 1999, while the federal proceeding was not filed until 2001.
The court concluded that many of the witnesses and exhibits are
already located in Texas. Although the court determined that
witnesses located in Virginia and California would be equally
inconvenienced if forced to travel to Texas or Louisiana, it found
that the prospect of witness travel to both locations weighed in
favor of abstention. The court should not have considered the
inconvenience of requiring these witnesses to travel to two
separate proceedings as cutting in favor of abstention. See New
Orleans Public Serv., Inc. v. Council of New Orleans, 911 F.2d 993,
1005 n.8 (5th Cir. 1990). This possibility is present whenever
there are concurrent federal and state proceedings. Overall, the
inconvenience of Louisiana is not “so great,” Evanston, 844 F.3d at
1192, for both the evidence and witnesses that abstention is
warranted.5
5
The court correctly noted that at least some of the
documents relating to the loan agreements, originally owned by
Dynex, have already been produced in the Texas litigation.
7
With regard to the avoidance of piecemeal litigation, both
parties agree that the court relied principally on this factor in
deciding to abstain. The court recognized that
[t]he prevention of duplicative litigation is not a
factor to be considered in an abstention determination.
Black Sea, supra. However, in the instant case, there is
not just the risk of duplicative litigation. If the case
proceeds in both Courts, there is a risk that the two
Courts involved might reach inconsistent rulings on the
same issues. This weighs heavily in favor of abstention.
The court’s conclusion fails to realize that any time duplicative
litigation exists, the possibility of inconsistent judgments also
exists. In both Evanston and Murphy, the court recognized that the
problem of inconsistent judgments can be obviated through a plea of
res judicata should one court render judgment before the other.
Evanston, 844 F.2d at 1192; Murphy, 168 F.3d at 738. Therefore,
the district court incorrectly relied upon the possibility of
inconsistent judgments as its main reason for abstaining. Neither
court has accepted jurisdiction over a res; with the same parties
before both the federal and state court, and the same issues of
stabilization and foreclosure pending, the litigation is merely
duplicative. Unlike Colorado River, there is no risk that
However, there is no evidence that documents relating to the tenant
improvement funds, which are located in Louisiana, have been
produced in the Texas proceeding. At best, the location of the
evidence, which consists solely of an unspecified number of
documents, tilts in the Continental Defendants’ favor.
8
irreconcilable rulings may result. Should one court render
judgment before the other, res judicata will ensure proper order.
Finally, with regard to the fourth factor, the court’s
conclusion that the Texas suit has progressed further is flawed.
Although the state proceeding was initiated in April 1999, Kelly
was not added as a party until November 2000. More importantly,
the issues of stabilization and contract reformation, which were
first raised in the federal declaratory action, did not arise in
the Texas action until June 14, 2001, when the Continental
Defendants filed an amended petition. No discovery has taken place
in state court regarding these issues. In fact, the extent of
discovery in state court appears to consist of Kelly’s amenability
to personal jurisdiction. As the court recognized, discovery in
federal court has been stalled by several protective orders granted
in favor of the Continental Defendants. Currently, trial in state
court is immediate. As Kelly notes, with several additional
parties and issues present in the state litigation, there is a
strong chance that the federal court will be the first to render a
decision, which bolsters the conclusion that the court erred in its
determination that the state proceeding had progressed further.
In sum, none of the Colorado River factors supports the
court’s decision to abstain.6 Because the facts of this case do
6
The district court properly noted that the absence of the
first factor, assumption by either court over a res, weighs against
abstention. Black Sea, 204 F.3d at 650. The court also correctly
9
not justify the application of an “extraordinary and narrow
exception to the virtually unflagging obligation of the federal
courts to exercise the jurisdiction given them,” Colorado River,
424 U.S. at 817, the decision of the district court is REVERSED
and REMANDED.
determined the fifth and sixth factors, whether federal law
provides the basis of decision and the adequacy of the state
proceedings, to be neutral.
10