McMurray v. De Vink

Opinions of the United
2002 Decisions States Court of Appeals
for the Third Circuit
1-4-2002
McMurray v. De Vink
Precedential or Non-Precedential:
Docket 1-1346
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NON-PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 01-1346
RUSSELL W. MCMURRAY, JR., on behalf of himself and all others
similarly situated
v.
LODWEIJK J.R. DE VINK; ROBERT N. BURT; DONALD C. CLARK; JOHN A.
GEORGES; WILLIAM H. GRAY, III; WILLIAM R. HOWELL; LASALLE D.
LEFFALL, JR.; GEORGE A. LORCH; ALEX J. MANDL; MICHAEL I. SOVERN;
WARNER-LAMBERT CO.; AMERICAN HOME PRODUCTS CORP.
(D. C. N. J. No. 99-cv-05253)
ELLIOT WALSEY, derivatively on behalf of himself and all others
similarly situated
v.
LODEWEIJK J.R. DE VINK; ROBERT N. BURT; DONALD C. CLARK; JOHN A.
GEORGES; WILLIAM H. GRAY, III; WILLIAM R. HOWELL; LASALLE D.
LEFFALL, JR.; GEORGE A. LORCH; ALEX J. MANDL; MICHAEL I. SOVERN;
AMERICAN HOME PRODUCTS CORP.; WARNER LAMBERT CO.
(D. C. N. J. No. 99-cv-5499)
Elliot Walsey and Russell W. McMurray, Jr.,
Appellants
Appeal from the Judgment of the District Court
of the District of New Jersey
District Judge: Hon. Katharine Sweeney Hayden
Argued: November 7, 2001
Before: BECKER, Chief Judge, McKEE and RENDELL, Circuit Judges
(Opinion filed: January 3, 2002)
RICHARD B. BRUALDI, Esq. (Argued)
THE BRUALDI LAW FIRM
29 Broadway, Suite 1515
New York, NY 10006
DAVID J. MANOGUE
SPECTER SPECTER EVANS & MANOGUE, P.C.
Koppers Building, 26th Floor
436 Seventh Avenue
Pittsburgh, PA 15219
Attorneys for Appellants
DENNIS J. BLOCK, Esq. (Argued)
CADWALADER WICKERSHAM & TAFT
100 Maiden Lane
New York, NY 10038
ELIZABETH J. SHER
PITNEY, HARDIN, KIPP & SZUCH
P.O. Box 1945
Morristown, NJ 07962
Attorneys for Appellees
MEMORANDUM OPINION
McKEE, Circuit Judge.
Appellants Russell McMurray, Jr. and Elliot Walsey appeal an order by the
District Court for the District of New Jersey staying this diversity
action in favor of
concurrent litigation that is proceeding in state court in Delaware.
Appellants rely upon
Colorado River Water Conserv. Dist. v. United States, 424 U.S. 800 (1976)
and its
progeny in arguing that the district court abused its discretion by
entering the stay. For
the reasons that follow, we will reverse.
I. Facts
These consolidated actions arise from an aborted takeover battle between
Appellees Warner-Lambert Company ("Warner"), and American Home Products
Corporation ("AHP"). Warner is a Delaware corporation, with its
principal place of
business in New Jersey. It manufactures and sells pharmaceuticals world-
wide. AHP
also manufactures pharmaceutical products, and is also a Delaware
corporation with its
principal place of business in New Jersey.
On November 4, 1999, Warner announced an agreement to merge with AHP. The
merger was valued at approximately $70 billion. The merger agreement
valued each
share of Warner stock at $83.55. The combined company was to have 20
directors, with
ten coming from Warner and ten from AHP. Warner's CEO was to be CEO of
the
combined company. AHP's CEO was to be Chairman for 18 months, and was
then to
step aside in favor of Warner's CEO. The merger agreement also contained
a liquidated
damage clause or "break-up fee" that required Warner to pay AHP $2 billion
if Warner
terminated the agreement.
The same day the Warner/AHP merger was announced, Pfizer, Inc. another
major
manufacturer of pharmaceutical products, disclosed a bid for an
"unfriendly" takeover of
Warner. Pfizer's offer to Warner was for $82.4 billion, and valued Warner
stock at
$96.40 per share, or $17.85 more per share than AHP's offer. Pfizer's
offer was
therefore more favorable to Warner shareholders. Unlike the AHP
agreement, however,
the Pfizer offer did not contain a provision for the Warner CEO or Warner
directors to
have a position in the company that would have been formed by the merger.
The Warner/AHP merger agreement lead to a flurry of lawsuits, including
the one
before us. Russell McMurray and Elliot Walsey (collectively, "the
shareholders") are
shareholders of Warner. On November 10, 1999, McMurray filed a
shareholder class
action on behalf of Warner shareholders in the District Court for the
District of New
Jersey against Warner and AHP. Shortly thereafter, on November 23, 1999,
Walsey filed
a corporate derivative suit against Warner and AHP in the same court. The
two
complaints both arise from the merger agreement between Warner and AHP,
contain the
same facts and allegations, and rely exclusively upon Delaware law.
The shareholders' complaint alleges that Warner directors initially
refused to
pursue serious merger discussions with Pfizer in violation of their
fiduciary obligation to
Warner's shareholders. The alleged breach is based upon their reluctance
to pursue
Pfizer's substantially higher offer. According to the averments, Pfizer
attempted merger
discussions with Warner on three previous occasions, but the Warner
directors simply
refused to entertain the possibility. The complaints also claim that
Warner breached its
fiduciary duty by agreeing to pay AHP the $2 billion break-up fee.
In addition to the federal suits, other Warner shareholders also began
filing suits
against Warner in state court in Delaware. To date, over 30 shareholder
class action suits
are pending in the Delaware courts as well as one derivative action. The
Delaware suits
were consolidated into Rosman v. De Vink, C.A. No. 17519-NC. The Delaware
litigation is based upon the same allegations and requests the same relief
as the Walsey
and McMurray actions.
Warner and AHP filed motions asking the district court to abstain in favor
of the
litigation in Delaware state court, or in the alternative, to stay the
proceedings while the
Delaware litigation was pending. The district court refused to abstain,
but issued an
order "granting a stay and administratively terminating these cases."
McMurray and
Walsey filed a motion for reconsideration, which the district court
denied. This appeal
followed.
II. Discussion
A. Jurisdiction
Preliminarily, Warner and AHP argue that the district court's stay was not
a final
order under 28 U.S.C. 1291, and that we therefore have no jurisdiction.
However, that
issue has already been resolved by the Supreme Court. In Moses H. Cone
Memorial
Hosp. v Mercury Construction, Corp. 460 U.S. 1 (1983), the district court
stayed federal
litigation in favor of parallel proceedings in state court, and the
propriety of that stay was
challenged on appeal. In analyzing the jurisdictional issue, the Supreme
Court concluded
that "a stay of the federal suit pending resolution of the state suit
meant that there would
be no further litigation in the federal forum; the state court's judgment
on the issue
would be res judicata." 460 U.S. at 10. The Court held that the stay was
therefore
equivalent to a dismissal because the defendant was "effectively out of
[federal] court."
Id. at 10, 13.
We have previously held that the pertinent jurisdictional inquiry under
Moses H.
Cone is whether the district court has surrendered its jurisdiction to the
state court such
that the stay will have res judicata effect in subsequent litigation in
state court. See
Spring City Corp. v. Am. Buildings Co., 193 F.3d 165, 171 (3d Cir. 1999).
If it has that
effect, the order staying the federal litigation is final and appealable.
Id.Here, the issues raised in the Delaware litigation will be res judicata
for purposes
of the federal adjudication. The defendants in the state and federal suits
are the same, and
plaintiffs Walsey and McMurray are represented in the Delaware shareholder
action.
Warner Br. at 6. Thus, a decision on the merits in state court will have
a preclusive
effect on the stayed federal case, putting the shareholders "effectively
out of [federal]
court." See Moses H. Cone, 460 U.S. at 10. The stay is therefore a final
order that is
reviewable under 1291.
B. The Stay
The shareholders contend that the district court applied the wrong legal
standard
in granting the stay. They insist that the abstention that resulted from
the district court's
order is inconsistent with Colorado River and its progeny, and that the
stay was,
therefore, an abuse of discretion.
Colorado River involved the application of the McCarran Amendment, 43
U.S.C.
666, which waives the federal government's sovereign immunity in water
rights cases
and permits the United States to be joined in state suits involving those
rights. The
United States had filed suit in federal district court seeking a
declaration of certain water
rights. Shortly thereafter, one of the defendants in that declaratory
action brought an
action against the United States in state court in an effort to adjudicate
both state and
federal claims pursuant to the provisions of the McCarran Amendment.
Several of the
defendants in the federal action then attempted to dismiss the federal
suit arguing that the
federal court lacked jurisdiction under the McCarran Amendment. The
district court
never decided the jurisdictional issue, but did abstain in favor of the
ongoing state
actions. The Supreme Court granted certiorari in an appeal from that
abstention "to
consider whether the McCarran Amendment terminated jurisdiction of federal
courts to
adjudicate federal water rights and whether, if that jurisdiction was not
terminated, the
District Court's dismissal was nevertheless appropriate." Colorado River,
424 U.S. at
806.
The Supreme Court affirmed largely because of the federal policy reflected
in the
McCarran Amendment. "The clear federal policy evinced by that legislation
is the
avoidance of piecemeal adjudication of water rights in a river system.
This policy is akin
to that underlying the rule requiring that jurisdiction be yielded to the
court first
acquiring control of property." Id. at 819. The Court reasoned that the
policy against
piecemeal litigation reflected Congress' assessment that state courts and
state
administrators had more expertise in adjudicating water rights than
federal courts. See
Moses H. Cone, 460 U.S. at 16.
The Court considered four factors in determining if abstention was
warranted: 1)
which forum first assumed jurisdiction over the property at issue, 2) the
inconvenience of
the federal forum, 3) the desirability of avoiding piecemeal litigation,
and 4) the order in
which jurisdiction was obtained in the concurrent forums. Colorado River,
424 U.S. at
818. In doing so, however, the Court stressed that "no one factor is
necessarily
determinative." Rather, the combination of these factors must be balanced
against "the
obligation to exercise jurisdiction . . .". Id. Once the balancing is
completed, "[o]nly the
clearest of justifications will warrant dismissal [in favor of the
concurrent state
litigation]." Id. at 818-19.
In Moses H. Cone, supra, the Court identified two additional factors that
must be
considered. These additional considerations require the trial court to
weigh: which
forum's law provides the rule of decision, and the adequacy of the state
proceeding in
protecting the parties' rights. Moses H. Cone, 460 U.S. at 23, 26.
Here, the district court correctly noted that Colorado River states that a
court may
abstain only in extremely limited circumstances. However, the court then
proceeded to
make a distinction between abstaining and granting a stay. See A-1, Letter
Opinion dated
October 26, 2000 at 2. The court concluded that our discussion of
Colorado River in
Ryan v. Johnson, 115 F.3d 193 (3d Cir. 1997) furnished the most recent
pronouncement
on the law of abstention. However, the court then relied upon several
factors enunciated
in Tabas v. Mullane, 608 F. Supp. 759, 763 (D.N.J. 1985) in holding that a
stay was
appropriate here even though it also held that abstention was not. See
Letter Op. at 2.
Compared with other forms of abstention, like Pullman, where a court is
required
to dismiss the case, the Supreme Court expressly left open the question
whether a federal
court should dismiss or stay its proceedings when ordering abstention
because of
duplicative state court litigation. In Moses H. Cone, the Court stated:
[w]e have no occasion . . . to decide whether a
dismissal or stay should ordinarily be the preferred course of
action when a district court properly finds that
Colorado River counsels in favor of deferring to a parallel
state-court suit. We can say, however, that a stay is as much a
refusal to exercise federal jurisdiction as a dismissal. When a
district court decides to dismiss or stay under Colorado River,
it presumably concludes that the parallel state-court litigation
will be an adequate vehicle for the complete and prompt
resolution of the issues between the parties.
Moses H. Cone, 460 U.S. at 28. Thus, the District Court erred in
concluding that, by
staying the case, it was not abstaining. The stay that was entered is
nothing more than
the procedural mechanism for abstaining in favor of the concurrent state
litigation.
We reject any notion that Tabas could properly establish a separate test
for
abstention. The relevant inquiry must be guided by Colorado River and its
progeny, not
Tabas, or principles extrapolated from it. We therefore reject any
suggestion that Tabas
furnishes an analytical framework for a stay distinct from Colorado River.
It is well established in this Circuit that Colorado River governs motions
to
dismiss on grounds of abstention. See, e.g., Ryan, 115 F.3d at 196(applying Colorado
River to the motion to dismiss); Ingersoll-Rand, Corp. v. Callison, 844
F.2d 133, 137 (3d
Cir. 1988) (same); Western Auto Supply Co. v. Anderson, 610 F.2d 1126,
1127 (3d Cir.
1979) (same). We have consistently emphasized the narrowness of Colorado
River, and
stressed that a federal court is usually statutorily obligated to exercise
the jurisdiction that
Congress has bestowed. See Western Auto, 610 F.2d at 1127 (citing
Colorado River and
Calvert Fire as emphasizing a court's "unflagging obligation" to exercise
jurisdiction);
see Kentucky W. Virginia Gas Co. v. Penn. Public Utility Comm'n, 791 F.2d
1111, 1118
(3d Cir. 1986) (noting in dicta that the movant did not meet the Colorado
River
standards as there had been no showing of any congressional legislation
evincing an
intent to circumscribe the plaintiff's right to choose the federal forum).
In Ryan, we reversed a district court's decision to abstain and dismiss an
action in
favor of state litigation largely because there was no clear congressional
policy against
piecemeal litigation that would have counseled in favor of abstention.
See Ryan, 115
F.3d at 199. Ryan was a negligence suit involving state tort law. We
stated that "[t]he
presence of garden-variety state law issues has not, in this circuit, been
considered
sufficient evidence of a congressional policy to consolidate multiple
lawsuits for unified
resolution in the state courts." Id. at 198. We also cautioned that if
the presence of
concurrent litigation itself becomes the threshold test for meeting
Colorado River's
piecemeal litigation factor, then "the test becomes so broad that it
swallows up the
century-old principle . . . that the pendency of an action in the state
court is no bar to
proceedings concerning the same matter in the Federal court having
jurisdiction . . . ."
Id. (quoting Colorado River, 424 U.S. at 817) (internal quotations
omitted). That is
precisely the situation here.
We reaffirmed Ryan, supra, in Spring City Corp. In Spring City, we
concluded
that no "exceptional circumstances" warranted a stay. Our decision
focused in large part
upon the narrowness of the Colorado River doctrine as exemplified by its
requirement of
a clear federal policy against piecemeal litigation. We again noted that
such a policy is a
prime consideration in any attempt to overcome a federal court's
obligation to exercise
jurisdiction. See Spring City, 193 F.3d at 172. We also explicitly
stated that "Ryan
represents the applicable law under Third Circuit and Supreme Court
precedent"
regarding abstention. Id.We perceive no distinction between the circumstances here, and the
circumstances
that were insufficient to justify abstention in Ryan. In fact, only the
fourth Colorado
River factor--the order in which jurisdiction was obtained--weighs in
favor of abstention
here. That factor does not turn upon "which complaint is filed first, but
rather [on]. . .
how much progress has been made in the two actions." Moses H. Cone, 460
U.S. at 21.
We are advised without contradiction that
the Delaware Litigation proceeded on an expedited schedule.
. . . [T]he plaintiffs in the Delaware Litigation moved with
expedition. Court conferences were held; voluminous
documents were requested and produced; interrogatories
propounded, objected to and answered; and some twenty
depositions were taken. The Court of Chancery ruled upon
multiple discovery and scheduling issues. Indeed, discovery
in the Delaware Litigation is largely, if not altogether,
complete.
Warner Br. at 7. This does not weigh heavily in the balance however, given
our
consideration of all of the other Colorado River/Moses H. Cone factors and
the absence
of a federal policy against piecemeal litigation that was so important to
our inquiry in
Ryan.
There has been no assumption of jurisdiction over property here so that is
not
relevant to our analysis. The federal district court is situated in
Newark, New Jersey. That
forum is not inconvenient as both Warner and AHP have their principle
place of business
in New Jersey. Moreover, New Jersey and Delaware are neighboring states.
Even if we
were to assume that the participants must travel to New Jersey from the
most distant part
of Delaware, we would be hard put to define the resultant travel as
imposing such a
hardship that a federal court in New Jersey would be inconvenient for
purposes of
Colorado River. In addition, there is no credible allegation that this
litigation involves
anything more than garden-variety state corporate law issues.
Appellees seize upon the fact that the issues here are controlled by
Delaware law,
and they remind us of the expertise of Delaware courts in resolving issues
of corporate
law and shareholders' rights. We share the appellees' high regard for the
courts and
jurists of Delaware, and we are well aware of the unique stature of
corporate law in
Delaware. However, that is not a sufficient reason for a federal court to
refrain from
exercising its jurisdiction.
Moreover, "while the presence of federal issues militates against
abstention, the
converse cannot be said; abstention cannot be justified merely because a
case arises
entirely under state law." Ryan, 115 F.3d at 199; see also Spring City,
193 F.3d at 172.
Furthermore, application of state law is not as important where, as here,
the federal
forum is adequate to protect the parties' rights. It is a far more
important consideration
when the state court is an inadequate forum to protect the rights of the
litigants. See
Ryan, 115 F.3d at 200; Spring City, 193 F.3d at 172.
Given the parameters of Colorado River and Ryan, it is clear that the
district court
abused its discretion in staying this litigation. It is ironic that the
district court explained
the "alternative" relief here by stating: "[a]bstention would be an
extreme and
inappropriate response. But a stay meets the proper concerns raised by
the defendants,
and the motion for that relief is granted." A-3. However, as we stated
above, here there
is no distinction between abstaining from adjudicating the federal
litigation on the one
hand, and staying it on the other. We therefore hold that the district
court abused its
discretion by entering the stay.
III. CONCLUSION
For the reasons set forth above, we will vacate the district court's order
and
remand for further proceedings on the merits.
TO THE COURT:
Please file the foregoing opinion.
By
the Court,
CIRCUIT JUDGE
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 01-1346
RUSSELL W. MCMURRAY, JR., on behalf of himself and all others
similarly situated
v.
LODWEIJK J.R. DE VINK; ROBERT N. BURT; DONALD C. CLARK; JOHN A.
GEORGES; WILLIAM H. GRAY, III; WILLIAM R. HOWELL; LASALLE D.
LEFFALL, JR.; GEORGE A. LORCH; ALEX J. MANDL; MICHAEL I. SOVERN;
WARNER-LAMBERT CO.; AMERICAN HOME PRODUCTS CORP.
(D. C. N. J. No. 99-cv-05253)
ELLIOT WALSEY, derivatively on behalf of himself and all others
similarly situated
v.
LODEWEIJK J.R. DE VINK; ROBERT N. BURT; DONALD C. CLARK; JOHN A.
GEORGES; WILLIAM H. GRAY, III; WILLIAM R. HOWELL; LASALLE D.
LEFFALL, JR.; GEORGE A. LORCH; ALEX J. MANDL; MICHAEL I. SOVERN;
AMERICAN HOME PRODUCTS CORP.; WARNER LAMBERT CO.
(D. C. N. J. No. 99-cv-5499)
Elliot Walsey and Russell W. McMurray, Jr.,
Appellants
Appeal from the Judgment of the District Court
of the District of New Jersey
District Judge: Hon. Katharine Sweeney Hayden
Argued: November 7, 2001
Before: BECKER, Chief Judge, McKEE and RENDELL, Circuit Judges
JUDGMENT
This cause came to be considered on appeal from the United States
District Court
for the District of New Jersey, and was argued on November 7, 2001.
On consideration whereon, it is now ORDERED AND ADJUDGED by this
Court
that the order of the stay entered by the District Court is hereby
vacated, and the matter is
remanded to that court for further proceedings consistent with the
attached opinion.
ATTEST:
CLERK
DATED January 3, 2002