Orix Credit Alliance v. Wolfe

REVISED - June 9, 2000
UNITED STATES COURT OF APPEALS
FIFTH CIRCUIT
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No. 99-11038
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ORIX CREDIT ALLIANCE, INC.,
Appellant,
versus
FRANK A. WOLFE, JR. and LEXIE D. WOLFE,
Appellees.
Appeal from the United States District Court
For the Northern District of Texas
June 2, 2000
Before REAVLEY, SMITH, and EMILIO M. GARZA, Circuit Judges.
EMILIO M. GARZA, Circuit Judge:
Orix Credit Alliance, Inc. (“OCAI”) appeals the district court’s (1) dismissal of its Complaint
for Issuance of Preliminary Injunction, Permanent Injunction and Declaratory Judgment (the
“declaratory judgment complaint”), and (2) denial of its subsequent motion for leave to amend the
declaratory judgment complaint. For the reasons set forth below, we vacate the judgment of the
district court and remand with instruction to dismiss OCAI’s complaint as unripe for adjudication.
I
The declaratory judgment complaint is the most recent filing in a long and complicated history
of litigation between OCAI, ABC Utilities Services, Inc. (“ABC Utilities”), ABC Asphalt, Inc.
(“Asphalt”), and Utilities Equipment Leasing Company, Inc. (“UELCO”) (collectively, “the ABC
entities”). Between 1984 and 1989, OCAI, a commercial finance company, entered into a series of
secured lease and finance transactions with UELCO and Asphalt to finance the acquisition of
construction equipment (the “financing transactions”). ABC Utilities, the parent company of Asphalt
and UELCO, guaranteed the debts of these entities to OCAI. Frank Wolfe is the president and sole
director of ABC Utilities, UELCO and Asphalt. Lexie Wolfe is Frank Wolfe’s mother.
In April 1989, the ABC entities filed for bankruptcy under Chapter 11. In October 1989, the
ABC entities filed a complaint in federal district court against OCAI alleging, inter alia, that some
of the transactions between OCAI and the ABC entities were usurious (“ABC I”). In May 1993, the
district court granted summary judgment in favor of OCAI. The ABC entities’ subsequent motion
for a new trial and to set aside the judgment was denied.
Shortly thereafter, in July 1993, the ABC entities commenced an adversary proceeding against
OCAI in the bankruptcy court on behalf of the bankruptcy Trustee alleging, inter alia, fraud on the
part of OCAI in the transactions with the ABC entities (“ABC II”). In ABC II, the entitites raised
several issues that they had previously raised in ABC I. Accordingly, the district court withdrew its
reference to the bankruptcy court, and the case was transferred to the district court. In January 1994,
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the district court granted summary judgment in favor of OCAI on the grounds of res judicata.1 In
May 1995, we affirmed the judgments of the district court in both ABC I and ABC II and held that
the ABC entities were not entitled to relief under Fed. R. Civ. P. 50(b)(3) or (b)(6).
During this time period, related actions were proceeding in the bankruptcy court. After the
ABC entities filed for chapter 11 bankruptcy, OCAI began filing motions for relief from the automatic
stay provision of 11 U.S.C. § 362 against Asphalt and UELCO in which OCAI asserted that it was
owed a specific amount by the ABC entities. In opposing OCAI’s third motion for relief in November
1991,2 UELCO stated that it owed OCAI approximately $150,000 less than OCAI claimed it was
owed. The bankruptcy court held an evidentiary hearing during which it heard testimony concerning
the amount of money owed OCAI by Asphalt and UELCO. Ultimately, the bankruptcy court granted
OCAI’s third motion for relief from the stay and rendered findings of fact specifying the amount owed
to OCAI.
Frank Wolfe and a creditor of UELCO subsequently filed objections to OCAI’s claims against
the bankruptcy estates of the ABC entities, alleging that OCAI overstated the amount that it was
owed by UELCO and Asphalt (the “Objections to Claims”). In February 1996, the bankruptcy court
granted OCAI’s motion for summary judgment, dismissing the Objections to Claims on the basis of
res judicata. Specifically, the court found that the judgments in ABC I and ABC II and the judgment
of the bankruptcy court on the third motion to lift the stay barred the objections.
Later that year, Frank Wolfe retained attorney Bruce Budner and commenced a malpractice
1
The district court found that “[t]here is no question that the claims asserted in this
action are the same claims asserted in [ABC I] . . . which was denied adversely to the Plaintiffs
therein.”
2
OCAI’s first two motions for relief were denied.
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action in Texas state court on behalf of the bankruptcy estates of the ABC entities against several of
the attorneys who had represented the entities throughout this litigation (the “Malpractice Action”).
Wolfe alleged that as a result of the attorneys’ malpractice, the ABC entities lost their claims against
OCAI. Several disputes arose between OCAI and the ABC entities as a result of the latter’s
discovery requests. Budner litigated several disputes and was able to obtain some discovery from
OCAI. Ultimately, OCAI and the ABC entities entered into a settlement resolving these disputes,
which was approved by the state court (the “OCAI Settlement”).
After the state court approved the settlement, Budner filed a motion to approve the OCAI
Settlement in the bankruptcy court. Wolfe, however, retained new counsel and opposed the OCAI
Settlement. Wolfe also noticed the deposition of his former attorney Budner and issued a subpoena
duces tecum seeking to compel Budner to turn over the documents that OCAI had produced in the
Malpractice Action. OCAI filed an emergency motion for a protective order and to quash both
subpoenas. The Wolfes filed a motion in opposition in which they stated that “the documents which
Bruce A. Budner will produce at the deposition will support a Motion for Reconsideration by Frank
A. Wolfe and his mother, Lexie D. Wolfe” of the denial of the Objections to Claims. As an exhibit
to their opposition papers, the Wolfes attached a draft of a motion to set aside the judgment on the
Objections to Claims (the “draft motion”).3 The bankruptcy court denied the motion to quash, and
OCAI sought leave to file an interlocutory appeal of that ruling.4
3
We note that neither party has included a copy of the draft motion in its record
excerpts. Nor are we able to locate a copy of the motion in the record on appeal.
4
Ruling on the motion to appeal the bankruptcy court’s discovery ruling, the district
court refused to stay the depo sition and document production for the pendency of the appeal and
ordered that the document productions proceed subject to a confidentiality order essentially identical
to the order in the state court case. Budner’s deposition went forward in October 1998.
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Finally, in December 1998, OCAI filed this declaratory judgment complaint. The complaint
alleged that the threatened claim in the draft motion sought to reopen issues that were barred under
the doctrine of res judicata by ABC I, ABC II, our decision affirming these cases, and the final order
of the bankruptcy court. OCAI sought relief in the form of: (1) a declaratory judgment stating that
“any and all claims, objections to claims, actions and proceeding which arise out of or relate in any
way to the relationship between ORIX Credit Alliance, Inc. and ABC Asphalt, Inc. and/or Utilities
Equipment Leasing Co., Inc., and/or ABC Utilities Services, Inc. are barred by res judicata and other
doctrines of claim and issue preclusion”; (2) a declaratory judgment that “any and all claims against
OCAI relating to transactions between OCAI and the ABC entities are estopped”; and (3) a
preliminary and permanent injunction “enjoining Frank A. Wolfe, Lexie D. Wolfe, and all other
persons and entities in privity with either as an owner, officer, and/or creditor of any ABC Entity, or
acting in concert with them, from commencing, pursuing, or prosecuting any claim, objection, action,
or proceeding, however denominated, against ORIX Credit Alliance, Inc., its successors and assigns,
arising out of or relating to any transaction between or involving OCAI and ABC Asphalt, Inc.,
and/or Utilities Equipment Leasing Co., Inc. and/or ABC Utilities Services, Inc. and requiring them
to return the documents to OCAI in accordance with the Confidentiality Order and the Settlement
entered by the [state court].”
The Wolfes moved to dismiss, alleging that no actual controversy existed between them and
OCAI. The district court granted the Wolfes’ motion to dismiss on different grounds. Specifically,
the court found that there was an actual controversy between the Wolfes and OCAI based upon the
threatened act ion. However, the district court exercised its discretion to abstain from hearing the
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declaratory judgment complaint.5
In June 1999, OCAI filed a motion for reconsideration of the district court’s dismissal, which
also sought leave to amend the declaratory judgment complaint so as to invoke bankruptcy court
jurisdiction. The district court denied the motion, and OCAI filed this timely appeal.6
OCAI now argues that the district court abused its discretion by dismissing the declaratory
judgment complaint. Alternatively, OCAI contends that the district court erred in denying it leave
to amend the declaratory judgment complaint so as to assert bankruptcy jurisdiction.
II
When considering a declaratory judgment action, a district court must engage in a three-step
inquiry. First, the court must determine whether the declaratory action is justiciable. Typically, this
becomes a question of whether an “actual controversy” exists between the parties to the action. See
Rowan Co., Inc. v. Griffin, 876 F.2d 26, 27-28 (5th Cir. 1989). A court’s finding that a controversy
exists such that it has subject matter jurisdiction is a question of law that we review de novo. See
Canion v. Evans, 196 F.3d 579, 584 (5th Cir. 1999). Second, if it has jurisdiction, then the district
court must resolve whether it has the “authority” to grant declaratory relief in the case presented.
See Travelers Ins. Co. v. Louisiana Farm Bureau Fed’n, Inc., 996 F.2d 774, 776 (5th Cir. 1993)
(“Prior to determining whether the district court abused its discretion by failing to review the merits
of this case, this Court must first determine whether the district court had authority to grant a
declaratory judgment here.”). Third, the court has to determine how to exercise its broad discretion
5
The court also denied OCAI’s interlocutory appeal of the bankruptcy court’s
discovery rulings.
6
In September 1999, the bankruptcy court entered an order approving the OCAI
Settlement.
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to decide or dismiss a declaratory judgment action. See id. at 778 (recognizing a district court’s vast
discretion in the declaratory judgment context). We review the dismissal of a declaratory judgment
action for abuse of discretion. See Wilton v. Seven Falls Co., 41 F.3d 934, 935 (5th Cir. 1994).
Here, the district court erred in moving beyond the first step of this inquiry.
While none of the parties challenge the ripeness of the declaratory judgment complaint on
appeal, we have a duty to consider objections to our jurisdiction sua sponte. See United Transp’n
Union v. Foster, 205 F.3d 851, 857 (5th Cir. 2000) (“[E]very federal appellate court has a special
obligation to ‘satisfy itself not only of its own jurisdiction, but also that of the lower courts in a cause
under review,’ even though the parties are prepared to concede it.”) (citation omitted); see also
Abbott Labs v. Gardner, 387 U.S. 136, 148-49, 87 S. Ct. 1507, 18 L. Ed. 2d 681 (1967) (“Ripeness
is a constitutional prerequisite to the exercise of jurisdiction.”). In New Orleans Public Service, Inc.
v. Council of New Orleans, 833 F.2d 583 (5th Cir. 1987), we set out the standard for determining
whether a dispute is ripe for adjudication in this circuit:
A court should dismiss a case for lack of ‘ripeness’ when the case is abstract or
hypothetical. The key considerations are ‘the fitness of the issues for judicial decision
and the hardship to the parties of withholding court consideration.’ A case is
generally ripe if any remaining questions are purely legal ones; conversely, a case is
not ripe if further factual development is required.
Id. at 586-87 (quoting Abbott Labs. 387 U.S. at 149, 87 S. Ct. 1507 (hol ding that a ripeness
determination considers (1) fitness for review, and (2) hardship to parties of withholding judicial
consideration)).
Many courts have recognized that applying the ripeness doctrine in the declaratory judgment
context presents a unique challenge. See, e.g., Rhode Island v. Narragansett Indian Tribe, 19 F.3d
685, 692 (1st Cir. 1994) (“Applying this [Abbott Labs] test in the declaratory judgment context often
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requires custom tailoring, for there are at least two salient differences between declaratory actions
and the mind-run of other cases: first, declaratory relief is more likely to be discretionary; and,
second, declarat ory actions contemplate an ‘ex ante determination of rights’ that ‘exists in some
tension with traditional notions of ripeness’”) (citations omitted)). Nonetheless, a declaratory
judgment action, like any other action, must be ripe in order to be justiciable. See United Transp.
Union v. Foster, 205 F.3d 851, 857 (5th Cir. 2000) (“Declaratory judgments are typically sought
before a completed ‘injury-in-fact’ has occurred . . . but still must be limited to the resolution of an
‘actual controversy.’”) (citation omitted).
A declaratory judgment action is ripe for adjudication only where an “actual controversy”
exists. See 28 U.S.C. § 2201(a) (“In a case of actual controversy within its jurisdiction . . . any court
of the United States . . . may declare the right and other legal relations of any interested party seeking
such declaration.”) (emphasis added); Texas v. West Publ’g. Co., 882 F.2d 171, 175 (5th Cir. 1989).
As a general rule, an actual controversy exists where “a substantial controversy of sufficient
immediacy and reality [exists] between parties having adverse legal interests.” Middle South Energy,
Inc. v. City of New Orleans, 800 F.2d 488, 490 (5th Cir. 1986) see generally West Publ’g. Co., 882
F.2d at 175 (noting that the “case or controversy” requirement of Article III of the United States
Constitution is “identical to the actual controversy requirement under the Declaratory Judgment
Act.”). Whether particular facts are sufficiently immediate to establish an actual controversy is a
question that must be addressed on a case-by-case basis. See Mobil Oil Corp. v. Oil, Chem. &
Atomic Workers Int’l Union,483 F.2d 603 (5th Cir. 1973); 10B Charles A. Wright, et al., FEDERAL
PRACTICE AND PROCEDURE § 2757, at 470 (1984).
Here, the district court found that an “actual controversy” existed such that it had jurisdiction
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to consider the declaratory judgment complaint. We disagree. The “controversy” that OCAI seeks
to resolve through a declaratory judgment and injunction is largely, if not purely, hypothetical. See
United Transp. Union, 205 F.3d at 857 (holding that a declaratory judgment action is premature
where a controversy is “abstract or hypothetical”). OCAI seeks a res judicata ruling barring not only
the filing of the draft motion, but all future actions arising out of or related to the financing
transactions. The content of the broad class of potential claims that OCAI seeks to bar, and the
certainty that any of these claims will ever be filed, are wholly unknown. Future claims could raise
any number of issues—some of which may never have been litigated in prior actions—or they could
never be filed at all. Such unasserted, unthreatened, and unknown claims do not present an immediate
or real threat to OCAI such that declaratory relief is proper. See Middle South Energy, 800 F.2d at
490.
The district court based its determination that an actual controversy existed on the “potential
litigation which can arise in the bankruptcy court.” Indeed, in its pleadings, OCAI appears to root
its entire “actual controversy” argument in the threatened draft motion. While this presents a
somewhat closer question, we do not believe that the possibility that this motion will be filed is
sufficiently immediate and real so as to constitute a justiciable controversy. See Middle South Energy,
800 F.2d at 490.
The threat of litigation, if specific and concrete, can indeed establish a controversy upon which
declaratory judgment can be based. See Nucor Corp. v. Acertos y Maquilas de Occidente, 28 F.3d
572, 578 (7th Cir. 1994) (finding that once a buyer sent “notice letter” informing manufacturer that
suit would be filed in state court if dispute was not resolved, disagreement was no longer an abstract
question and therefore was ripe for adjudication); see also Texas v. West Publ’g. Co., 882 F.2d at
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176 (finding that, in the intellectual property context, an actual controversy exists “(1) when the
declaratory plaintiff has a real and reasonable apprehension of litigation and (2) when the declaratory
plaintiff has engaged in a course of conduct that brings it into adversarial conflict with the declaratory
defendant”). The fact that the filing of the lawsuit is contingent upon certain factors does not defeat
jurisdiction over a declaratory judgment action. See Assoc’d Indem. Corp. v. Fairchild Indus., Inc.,
961 F.2d 32, 35 (2d Cir. 1992); 10B Charles A. Wright, et al., FEDERAL PRACTICE AND PROCEDURE
§ 2757, at 476 (1984) (“It is clear that in some instances a declaratory judgment is proper even
though there are future contingencies that will determine whether a controversy ever actually
becomes real.”). However, in determining whether a justiciable controversy exists, a district court
must take into account the likelihood that these contingencies will occur. See Associated Indem.
Corp., 961 F.2d at 35 (“That the liability may be contingent does not necessarily defeat jurisdiction
of a declaratory judgment action . . .. Rather, courts should focus on the ‘practical likelihood that
the contingencies will occur.’”) (citation omitted). Thus, the ripeness inquiry “focuses on whether
an injury that has not yet occurred is sufficiently likely to happen to justify judicial intervention.”
Chevron U.S.A., Inc. v. Trailour Oil Co., 987 F.2d 138, 1153 (5th Cir. 1993).
In this case, whether or not the Wolfes will ever file the draft motion hinges upon several
contingencies. Specifically, in order to file the motion, the Wolfes must discover documents in the
Budner subpoena production that support a claim to reconsider their Objections to Claims. At this
point in the litigation, the types of documents that would allow the Wolfes to file a credible motion
for reconsideration are few.7 At oral argument, the Wolfes conceded that in order to file such a
7
It is worthy of notice that in the eleven years since the Wolfes first filed suit against
OCAI, they have been unable to uncover documents to support their claims. It is also noteworthy
that the documents that the Wolfes subpoenaed from Budner were, presumably, available to the
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motion after the final ruling of the bankruptcy court, the Budner production would have to include
documents demonstrating that OCAI engaged in “fraud . . . misrepresentation, or some other
misconduct.” Fed. R. Civ. P. 60(b). OCAI simply fails to allege facts that show that these
contingencies are likely to occur. See West Publ’g. Co., 882 F.2d at 175 (holding that party suing
for declaratory relief bears burden on proving, by a preponderance of the evidence, that an actual
controversy exists); cf. Texas v. United States, 523 U.S. 296, 300, 118 S. Ct. 1257 (1998) (“A claim
is not ripe for adjudication if it rests upon ‘contingent future events that may not occur as anticipated,
or indeed may not occur at all.’”) (citation omitted).
Using res judicata to bar the Wolfes from filing the draft motion is particularly problematic.
The precise legal issues that the Wolfes will raise in the motion are unclear at this time. The
proposed motion for reconsideration was attached, in draft form, as an exhibit to the Wolfes’
opposition to OCAI’s motion to quash the Budner subpoenas.8 Clearly, the contours of that motion
could, and likely would, change depending upon, amongst other things, the content of the subpoena
production. At this point, we cannot say that the threatened dispute has “taken on final shape so that
the court can see what legal issues it is deciding.” El Paso Building & Constr. Trades Council v. El
Paso Chapter Ass’n General Contractors of America, 376 F.2d 797, 800 (5th Cir. 1967).
Consequently, a ruling on the declaratory judgment complaint would essentially amount to an opinion
advising the parties what the law would be should the Wolfes (1) find documents that support a
motion to reconsider, and (2) assert the legal issues that they included in the draft motion written two
Wolfes throughout the Malpractice Action and yet did not prompt them to file a motion for
reconsideration at that time.
8
We reiterate that we have not had the opportunity to review the draft motion. See
supra note 3.
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years ago. See Life Partners, Inc. v. Life Ins. Co. of N. America, 203 F.3d 324, 325 (5th Cir. 1999)
(“Federal courts do not render advisory opinions.”).9
In sum, we find that the district court erred in finding that an “actual controversy” existed
such that the court had jurisdiction to consider the declaratory judgment complaint.10 Because no
such controversy exists, OCAI’s declaratory judgment action is not ripe for adjudication.
Accordingly, we VACATE the judgment of the district court and REMAND with instruction to
dismiss the complaint as unripe.11
9
The procedural posture of this case—OCAI’s filing of a declaratory judgment
complaint to obtain a res judicata ruling—raises some more general concerns. Generally speaking,
res judicata is an affirmative defense to a case that has been filed. See Fed. R. Civ. P. 8(c); cf.
Warnock v. Pecos Cty., 116 F.3d 776, 778 (5th Cir. 1997) (noting that res judicata is generally an
affirmative defense that courts generally should not raise sua sponte). In one sense, the ruling that
OCAI seeks is premature, given that the Wolfes have not actually filed a lawsuit. In another sense,
a res judicata ruling—which can be used to determine the liability rights of the parties—is moot,
given that the rights of the parties were already resolved in ABC I and ABC II. However, because
we base our decision on the fact that OCAI’s claim is not ripe for adjudication, we need not resolve
the question of whether a party can ever use a declaratory judgment to enforce res judicata.
10
Nor do we think that withholding judicial consideration of t his action presents a
hardship to the parties. See Abbott Labs., 387 U.S. at 149 (holding that key consideration in ripeness
doctrine is “hardship to parties of withholding court consideration); United Transp. Union, 205 F.3d
at 857 (same). The only immediate hardship that OCAI suffers from a decision to withhold court
review is that they will continue to worry that the Wolfes will file another lawsuit relating to the
financing transactions. Should this come to pass, and should the Wolfes in fact raise issues that have
been previously litigated, then OCAI can file a motion to dismiss, alleging res judicata and seeking
an injunction barring future litigation of the same issues. We believe that this is the proper, and not
onerous, course of action under the circumstances.
11
Since we find that the declaratory judgment complaint is not ripe for adjudication,
OCAI’s claim that the district court erred in denying it leave to amend the complaint so as to assert
bankruptcy court jurisdiction is moot.
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