Save Power Limited v. Syntek Finance Corp

IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
_____________________
No. 96-11081
_____________________
SAVE POWER LIMITED
Plaintiff - Counter Defendant - Appellant
v.
SYNTEK FINANCE CORP
Defendant - Counter Claimant - Appellee
_________________________________________________________________
Appeals from the United States District Court
for the Northern District of Texas
_________________________________________________________________
August 26, 1997
Before POLITZ, Chief Judge, KING, Circuit Judge, and DUPLANTIER,*
District Judge.
KING, Circuit Judge:
Plaintiff Save Power Limited appeals the district court’s
grant of summary judgment declaring that defendant Syntek Finance
Corporation is a “Senior Lender” for purposes of the
subordination agreement at issue in this case. Save Power also
*
District Judge of the Eastern District of Louisiana,
sitting by designation.
appeals the district court’s denial of its motion to transfer
this case to Judge Means, a different judge in the same division
before whom a previously filed, related action is pending.
Finding substantial overlap between the present case and the
original action, for reasons of comity and sound judicial
administration we vacate the judgment of the district court and
remand with instructions to transfer this case to Judge Means.
I. BACKGROUND
This dispute concerns the respective rights of Save Power
Limited (“Save Power”) and Syntek Finance Corporation (“Syntek”)
to the assets of Pursuit Athletic Footwear, Inc. (“Pursuit”).
Pursuit is a wholesale distributor of athletic shoes and is a
wholly-owned subsidiary of Riddell Athletic Footwear, Inc.
(“Riddell”). Prior to 1994, Save Power served for an extended
period of time as the primary supplier of inventory to Pursuit.
In settlement of litigation arising from obligations incurred
during that time, Save Power, Pursuit, and a number of other
parties executed a series of agreements on February 15, 1994.
The agreements relevant to this litigation are the License
Agreement, Finance and Security Agreement (“Finance Agreement”),
Loan and Security Agreement (“Loan Agreement”), and Subordination
Agreement.
The License Agreement bears on this case to the extent that
it constitutes Pursuit’s most valuable asset. Under the License
Agreement, Pursuit acquired the exclusive right to manufacture
2
and sell worldwide athletic footwear bearing the “Riddell”
trademark and name. The Finance Agreement, executed by Save
Power and Pursuit, provides for Save Power to advance working
capital and athletic shoe inventory to Pursuit in excess of the
$23 million in capital and inventory previously advanced.
Pursuit was to repay its obligations to Save Power through the
sale of shoes to third-party retailers. All account payments for
such sales were to be directed to Heller Financial, Inc.
(“Heller”), which, after deducting amounts owed to it
periodically under the Loan Agreement, would forward the balance
to Save Power. The Finance Agreement further provides that Save
Power acquired a security interest in the assets of Pursuit,
including the License Agreement, inventory, and accounts
receivable. To obtain additional financing, Pursuit entered into
the Loan Agreement with Heller. Pursuant to the Loan Agreement,
Heller made a term loan to Pursuit and received a security
interest in the assets of Pursuit. This security interest
excludes Pursuit’s rights under the License Agreement. Pursuit,
Save Power, and Heller contemporaneously executed the
Subordination Agreement, which references both the Finance
Agreement and the Loan Agreement. Under the Subordination
Agreement, Save Power agreed to subordinate to Heller, as “Senior
Lender,” the debt owed to Save Power by Pursuit.1 The
1
The parties disagree as to the amount of subordinated
debt. Save Power contends that only $20 million of the
outstanding debt was subordinated to Heller’s security interest,
while Syntek contends that $20 million represents the minimum,
not the maximum, subordinated debt.
3
Subordination Agreement defines “Senior Lender” as “Heller, its
successors and assigns and any person who refinances or refunds
all or any portion of the Senior Debt.” “Senior Debt” is defined
in the Subordination Agreement as all indebtedness of Pursuit
owed to “Senior Lender” under the Loan Agreement.
Shortly after these agreements were executed, Pursuit halted
its payments to Save Power. Save Power contends that Pursuit’s
outstanding debt had grown to $31 million, but Save Power was
unable to foreclose on its security interest due to the terms of
the Subordination Agreement and Pursuit’s outstanding debt to
Heller. The debt owed to Heller was due to be fully paid by the
end of May 1995 (which would relieve Save Power of the
restrictions of the Subordination Agreement), and Heller had
informed Pursuit that it did not intend to renew its loan.
Syntek became involved at this juncture as a provider of new
financing to Pursuit. Syntek is a shell corporation affiliated
with one of the owners of Pursuit. On May 19, 1995, Syntek and
Pursuit entered into an agreement whereby Syntek agreed to make a
term loan to Pursuit in an amount sufficient to satisfy Pursuit’s
obligations to Heller. Funds of just over $200,000 were wired to
Heller on that day pursuant to this agreement.2 Syntek thus
claims to have refinanced Pursuit’s debt to Heller and become a
“Senior Lender” under the terms of the Subordination Agreement.
Later that year Riddell and Pursuit filed suit against Save
2
We are unable to determine from the record the specifics
of this transaction, e.g., what entity actually supplied the
wired funds.
4
Power and several affiliated corporations (the “Original Action”)
in state court in Tarrant County, Texas. Save Power removed this
action to the United States District Court for the Northern
District of Texas, Fort Worth Division, on August 11, 1995, where
it was assigned to Judge Means. Save Power filed a counterclaim
on August 15, 1995. On August 25, 1995, Save Power filed an
application for temporary restraining order and preliminary
injunction seeking to enjoin Pursuit from dissipating the assets
in which Save Power claimed a security interest. During this
time period Save Power filed a related action in the Dallas
Division of the Northern District (the “Related Action”). The
Related Action was transferred to Judge Means on August 28, 1995,
and consolidated with the Original Action on August 31, 1995. On
September 11, 1995, Pursuit filed in the Original Action its own
application for temporary restraining order and preliminary
injunction seeking to enjoin Save Power from foreclosing on its
security interest on the ground that Syntek was a holder of
outstanding senior debt under the Subordination Agreement. The
court held a joint hearing on both applications in late September
and issued an order denying both applications on October 6.
Save Power filed the present action on September 11, 1995,
in the Fort Worth division of the Northern District. Save Power
sought a declaratory judgment that Save Power has a perfected
security interest in the assets of Pursuit that is superior to
that of any third party, that Save Power is entitled to foreclose
on this security interest, and that Syntek does not possess any
5
rights or standing under the Subordination Agreement. This case
was assigned by random draw to Judge McBryde.
On September 28, 1995, Syntek filed a counterclaim against
Save Power and moved for partial summary judgment. On October
16, 1995, in addition to its response in opposition to Syntek’s
motion, Save Power filed a motion to transfer the case to Judge
Means. Judge McBryde denied Syntek’s motion for partial summary
judgment on October 18, 1995. Subsequently, on November 7, 1995,
Judge McBryde denied Save Power’s motion to transfer, citing his
familiarity with the case as a result of studying the record in
connection with Syntek’s motion for partial summary judgment.
On June 6, 1996, Save Power filed a motion for summary
judgment, which was followed shortly thereafter by Syntek’s
second motion for partial summary judgment. On July 26, 1996,
Judge McBryde issued a memorandum opinion and order granting
Syntek’s motion for partial summary judgment and denying Save
Power’s motion for summary judgment. The court entered final
judgment on August 2, 1996, declaring Syntek to be a “Senior
Lender” under the terms of the Subordination Agreement and
assessing all costs against Save Power. Save Power filed a
timely notice of appeal.
II. DISCUSSION
Save Power challenges the declaratory judgment entered by
Judge McBryde as well as his denial of its motion to transfer.
Because we conclude that Judge McBryde abused his discretion in
6
denying the motion to transfer,3 we do not reach the merits of
the declaratory judgment.
The Fifth Circuit adheres to the general rule that the court
in which an action is first filed is the appropriate court to
determine whether subsequently filed cases involving
substantially similar issues should proceed. See West Gulf
Maritime Ass’n v. ILA Deep Sea Local 24, 751 F.2d 721, 728 (5th
Cir. 1985); Mann Mfg., Inc. v. Hortex, Inc., 439 F.2d 403, 408
(5th Cir. 1971). Syntek, in fact, states that it “does not
disagree with the legal proposition advanced by Save Power that
where duplicative issues and parties exist in two cases the court
with the first case should resolve the issues between the parties
and the second court should defer.”
The “first to file” rule is grounded in principles of comity
and sound judicial administration. “The federal courts long have
recognized that the principle of comity requires federal district
courts -- courts of coordinate jurisdiction and equal rank -- to
exercise care to avoid interference with each other’s affairs.”
West Gulf, 751 F.2d at 728. “The concern manifestly is to avoid
3
While a district court’s decision whether to transfer a
case pursuant to 28 U.S.C. § 1404(a) is reviewed for abuse of
discretion, Peteet v. Dow Chem. Co., 868 F.2d 1428, 1436 (5th
Cir.), cert. denied, 493 U.S. 935 (1989), “[t]he standard of
appellate review of district court decisions to accept or decline
jurisdiction over declaratory and injunctive actions when comity
issues are at stake is not entirely clear.” West Gulf Maritime
Ass’n v. ILA Deep Sea Local 24, 751 F.2d 721, 729 n.2 (5th Cir.
1985). As in West Gulf, however, we need not settle the standard
of review question because we conclude that, even if the district
court had broad discretion to decide whether to transfer this
case to Judge Means, it abused its discretion in retaining
jurisdiction under the particular circumstances here. See id.
7
the waste of duplication, to avoid rulings which may trench upon
the authority of sister courts, and to avoid piecemeal resolution
of issues that call for a uniform result.” Id. at 729; see also
Colorado River Water Conservation Dist. v. United States, 424
U.S. 800, 817-20 (1976). This concern applies where related
cases are pending before two judges in the same district, as is
the case here, as well as where related cases have been filed in
different districts. Dillard v. Merrill Lynch, Pierce, Fenner &
Smith, Inc., 961 F.2d 1148, 1161 n.28 (5th Cir. 1992) (“The same
concern with avoiding duplicative litigation is present where
similar suits have been filed in two courts within the same
district.”), cert. denied, 506 U.S. 1079 (1993).4
Syntek argues that the “first to file” rule does not apply
in this case because neither the issues nor the parties are
identical to those in the Original Action. The rule does not,
however, require that cases be identical. The crucial inquiry is
one of “substantial overlap”:
Once the likelihood of substantial overlap between
the two suits had been demonstrated, it was no longer
up to the court in Texas to resolve the question of
4
Syntek suggests in its brief on appeal that Save Power
waived its right to appeal the transfer issue because Save Power
relied on 28 U.S.C. § 1404 before the district court as authority
for a transfer between judges in the same division, but now
“raises a new justification for its argument.” Syntek cites In
re Fairchild Aircraft Corp., 6 F.3d 1119, 1128 (5th Cir. 1993),
in which this court affirmed the district court’s conclusion that
appellant had waived his appeal of an issue that he raised only
by implication in case cites before the bankruptcy court. We
stated that for an argument to be preserved for appeal, “the
argument must be raised to such a degree that the trial court may
rule on it.” Id. As indicated in our discussion infra, Save
Power met this standard in the motion to transfer it filed below.
8
whether both should be allowed to proceed. By virtue
of its prior jurisdiction over the common subject
matter and its injunction of suit involving that
subject matter in Texas, the ultimate determination of
whether there actually was a substantial overlap
requiring consolidation of the two suits in New York
belonged to the United States District Court in New
York.
Mann Mfg., 439 F.2d at 408. “[R]egardless of whether or not the
suits here are identical, if they overlap on the substantive
issues, the cases would be required to be consolidated in . . .
the jurisdiction first seized of the issues.” Id. at 408 n.6;
see also TPM Holdings, Inc. v. Intra-Gold Indus., Inc., 91 F.3d
1, 4 (1st Cir. 1996) (“Where the overlap between two suits is
less than complete, the judgment is made case by case, based on
such factors as the extent of overlap, the likelihood of
conflict, the comparative advantage and the interest of each
forum in resolving the dispute.” (citation omitted)).
Both the Original Action and the present case center on the
question whether Save Power can proceed with foreclosure on any
or all of its security interest in the assets of Pursuit under
the terms of the Subordination Agreement. This question involves
several component issues, most notably: (1) whether Syntek is a
“Senior Lender” under the Subordination Agreement, (2) whether
there is unsubordinated debt on which Save Power may foreclose
even if Syntek qualifies as a “Senior Lender,” and (3) whether
Save Power may proceed as the secured party with superior rights.
In ruling on Pursuit’s application for preliminary injunction,
Judge Means did not decide the first issue because he determined
that Pursuit lacked standing to assert the rights of a “Senior
9
Lender” under the Subordination Agreement. The overarching
question being whether Save Power should be enjoined from
foreclosing on Pursuit’s assets, however, Judge Means did decide
the second and third issues. Assuming for purposes of these
issues that Syntek is a “Senior Lender” under the Subordination
Agreement, Judge Means concluded that the amount of Pursuit’s
debt to Save Power that is in excess of $20 million is not
subordinate to the Syntek debt and that Syntek does not have a
security interest in the License Agreement. Based in large part
on these findings, Judge Means declined to enjoin Save Power from
foreclosing on Pursuit’s assets. The same issues were before
Judge McBryde, who reached a contrary result. After determining
that Syntek is a “Senior Lender” under the Subordination
Agreement, Judge McBryde ruled that Save Power was not entitled
to foreclose on any of Pursuit’s assets under the lien
subordination provision of the Subordination Agreement because
Save Power had not shown that “any liens it seeks to foreclose do
not also serve as security for the subordinated debt.” Not only
do the issues “substantially overlap,” but inconsistent rulings
have already resulted.5
5
At oral argument before this court, counsel for Save
Power stated that Save Power initiated foreclosure proceedings in
reliance on Judge Means’s order, but Pursuit filed bankruptcy
before the foreclosure sale took place. Then, following Judge
McBryde’s judgment, Save Power was sued for allegedly wrongfully
proceeding with foreclosure. This suit was filed originally in
the Delaware bankruptcy court where Pursuit’s bankruptcy was
pending. The Delaware district court withdrew the reference on
the wrongful foreclosure suit and then transferred it to Judge
Means, where it was consolidated with the Original Action.
10
The fact that Syntek is not a party to the Original Action
does not undermine the appropriateness of transfer in view of all
the facts of this case. Complete identity of parties is not
required for dismissal or transfer of a case filed subsequently
to a substantially related action. See West Gulf, 751 F.2d at
731 n.5 (noting that incomplete identity of parties does not
mandate that two “essentially identical” actions remain pending
simultaneously where complete relief was nevertheless available
in one forum and the missing parties probably could be made
parties to the action in that forum); see also National Health
Fed’n v. Weinberger, 518 F.2d 711 (7th Cir. 1975) (dismissing
second-filed action without prejudice even though it involved
different plaintiffs than the first-filed action). In this case,
Syntek filed a motion for leave to intervene in the Original
Action on September 11, 1995, but withdrew the motion before Save
Power had filed a response and before Judge Means had ruled on
it. Although Syntek claims that it was unable to intervene in
the Original Action as a result of Save Power’s opposition to its
motion, the procedural history of the Original Action does not
bear this out. Syntek’s interest in the Original Action,
moreover, was represented to the court via Pursuit, which faced
the likelihood of being put out of business if Save Power were
not enjoined from foreclosure. The fact that Syntek was not an
active participant in the preliminary injunction hearing does not
alter our analysis of the relevant factors.
The record indicates that the facts militating in favor of
11
transfer were before Judge McBryde prior to his rulings on any
substantive matters in this case. Save Power disclosed on its
civil cover sheet when it filed this action that two related
cases were pending before Judge Means. The motion to transfer
itself contained Judge Means’s order on the applications for
preliminary injunction, which reveals the substantial overlap of
issues, and indicated that Syntek had moved to intervene in the
Original Action. Save Power filed its motion to transfer on the
same day it filed a response to Syntek’s motion for partial
summary judgment. Although briefing with respect to the summary
judgment motion was completed before that concerning the transfer
motion, the court need not have expended resources on the summary
judgment motion given notice of the motion to transfer. Under
these circumstances, Judge McBryde’s denial of the motion to
transfer was an abuse of discretion.
We express no opinion on the merits.
III. CONCLUSION
For the foregoing reasons, the judgment of the district
court is VACATED and this case is REMANDED with instructions that
it be transferred immediately to Judge Means. Each party shall
bear its own costs.
12