Foy v. SMA Ins. CV-95-97-SD 03/27/97 P
UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW HAMPSHIRE
James M. Foy
v. Civil No. 95-97-SD
S.M.A. Insurance Agency, Inc.; Jonathan Robinson, Receiver; Jonathan Robinson, individually
O R D E R
In this civil action, plaintiff James M. Foy seeks
declaratory and monetary relief against defendants S.M.A.
Insurance Agency, Inc. (SMA), and Jonathan Robinson individually
and in his capacity as receiver for SMA. The second amended
complaint contains a claim for declaratory relief pursuant to 28
U.S.C. § 2201 (1994), a reguest for injunctive relief, and
various state law claims for damages, including negligence and
breach of fiduciary obligations.
Before the court is a new avalanche of motions filed by
sundry parties, including (1) defendant Robinson's Motion for
Judgment on the Pleadings (document 73); (2) defendants' Motion
for Summary Judgment (document 74), Motion to File Reply
Memorandum (document 77), and Motion for Dismissal Based on
Abstention (document 80); (3) Motion of Craig 0. Linscott to Quash or Modify Subpoena . . . (document 71); (4) Linscott's
Motion to Intervene (document 54) and Request to File Reply
Memorandum (document 66); (5) defendants' Motion to Amend Answer
(document 65); (6) various motions for admission of counsel pro
hac vice (documents 57, 58, 59, 61); and (7) defendants'
Assented-to Motion on Disclosure of Experts and Expert Reports
(document 82). Plaintiff objects to all of these motions, except
the last.
Background
Plaintiff Foy is a resident of New Hampshire and was at one
time sole shareholder of defendant SMA, a Maine corporation.
In January of 1989, one Craig Linscott, then the manager of
SMA, filed an action against Foy and SMA in York County (Maine)
Superior Court (Civ. No. 90-67) based on Foy's alleged breach of
a previous settlement agreement involving a transfer of 50
percent of SMA's stock to Linscott. See Exhibit C to Defendants'
Motion for Summary Judgment. In July of 1992, that court
appointed defendant Robinson as interim receiver of SMA, setting
forth his duties to include, inter alia, management of SMA's
business affairs.
Following a jury-waived trial, the York County Superior
Court entered judgment in Linscott's favor on February 25, 1994,
2 and found that the defendant (Foy) had not complied with the
terms of the settlement agreement requiring him to supply the
necessary documentation to close the deal. The court ordered
that Foy comply with the agreement. This decision was affirmed
by the Maine Supreme Judicial Court on February 13, 1995.
SMA has elected subchapter S status under the Internal
Revenue Code, making it a pass-through entity for federal income
taxation purposes. Foy claims that while Robinson was receiver,
SMA issued reports for federal income tax purposes which
erroneously represented that Foy, as 100 percent shareholder of
SMA, received an aggregate income exceeding $730,000 for the tax
years 1992 through 1994. Although having described these funds
as income to Foy, SMA refuses, "without excuse or explanation, to
release these funds to Foy, despite his demand for their
release." Second Amended Complaint I 14. Foy also asserts that
some of the withheld funds are located in New Hampshire.
Specifically, Foy alleges that SMA maintained bank accounts in
Somersworth, New Hampshire, and that approximately $500,000 of
the money reported to be Foy's was held there. However, when
Robinson learned of the instant action, he transferred the bulk
of the funds out of New Hampshire. See id. 1 16.
On June 14, 1995, the York County Superior Court (Perkins,
J.) ordered that SMA be dissolved and that Robinson, in his
3 capacity as receiver, transfer all of SMA's assets and
liabilities, except for the corporation's taxes, to a corporation
owned by Linscott. See id. 5 17. Nonetheless, SMA and Robinson
have still failed to amend the tax reports to state that the
income was Linscott's, and not Foy's. See id. 5 18.
In the June order, the York County Superior Court stated
that the receiver should file a report of sale and that a hearing
on the report would be set by the court for approval, "at which
time any outstanding related claims may be submitted and
determined." See Linscott v. Fov, No. 90-67, slip op. at 3 (York
County Superior Court June 14, 1995) (attached to defendants'
motion to dismiss).
Foy asks this federal court to declare either that the funds
are in fact his or that the information returns are in error; he
also seeks an order directing correction of the tax forms. Other
counts in the complaint allege that Robinson, both individually
and in his capacity as receiver, was negligent and that he
breached his fiduciary duty in his capacity as receiver.
Discussion
1. Defendant Robinson's Motion for Judgment on the Pleadings
a. Judgment on the Pleadings Standard
Under Rule 12(c), Fed. R. Civ. P., "[a]fter the pleadings
4 are closed but within such time as not to delay the trial, any
party may move for judgment on the pleadings." "The standard for
evaluating a Rule 1 2 (c) motion for judgment on the pleadings is
essentially the same as the standard for evaluating a Rule
12(b)(6) motion." Metromedia Steakhouses Co., L.P. v. Resco
Management, 168 B.R. 483, 485 (D.N.H. 1994) (citation omitted).
"In reviewing the defendants' motion for judgment on the
pleadings . . . the court must accept all of the factual
averments contained in the complaint as true and draw every
reasonable inference helpful to the plaintiff's cause." Sinclair
v. Brill, 815 F. Supp. 44, 46 (D.N.H. 1993) (citing Santiago de
Castro v. Morales Medina, 943 F.2d 129, 130 (1st Cir. 1991)); see
also Rivera-Gomez v. de Castro, 843 F.2d 631, 635 (1st Cir. 1988)
("because rendition of judgment in such an abrupt fashion
represents an extremely early assessment of the merits of the
case, the trial court must accept all of the nonmovant's well-
pleaded factual averments as true and draw all reasonable
inferences in his favor") (citations omitted).
Even then, judgment may not be entered on the pleadings
"'"unless it appears beyond doubt that the plaintiff can prove no
set of facts in support of [her] claim which would entitle [her]
to relief."'" Rivera-Gomez, supra, 843 F.2d at 635 (guoting
George C. Frev Ready-Mixed Concrete, Inc. v. Pine Hill Concrete
5 Mix Corp., 554 F.2d 551, 553 (2d Cir. 1977) (quoting Conley v.
Gibson, 355 U.S. 41, 45-46 (1957))).
b. The Merits
Defendant Robinson moves for judgment on the pleadings as to
all claims against him in his personal capacity--as distinguished
from his capacity as a receiver. The court has already had
occasion to outline the law relative to actions maintained
against receivers in their personal capacities. See Order of
Oct. 1, 1996, at 10-11.1 To summarize, a receiver is not
personally liable for actions performed in his capacity as
receiver unless his actions were outside the scope of his
authority as receiver. See, e.g., Capitol Indem. Corp. v.
Curiale, 871 F. Supp. 205, 209 (S.D.N.Y. 1994); Federal Home Loan
Mortgage Corp. v. Tsinos, 854 F. Supp. 113, 116 (E.D.N.Y. 1994).
Instead, all actions against a receiver are generally against the
funds in the receivership.
Plaintiff argues that the factual allegations against
Robinson in his personal capacity, when viewed as true, support
that Robinson acted outside the scope of the authority delegated
to him by the York County (Maine) Superior Court. Robinson
1The court's previous order concerned, inter alia, the assertion of personal jurisdiction.
6 allegedly "failed, refused, or neglected" to correct the Schedule
K-l forms at issue here "to conform them to Judge Perkins'
decision," such decision being an order that defendant SMA be
dissolved and that Robinson, in his capacity as SMA's receiver,
transfer all of SMA's assets and liabilities, except for taxes,
to a corporation owned by Linscott, and take all additional
action necessary to conclude SMA's affairs, including tax
matters. See Second Amended Complaint 55 17-19. In addition,
plaintiff points to the allegation in the complaint that Robinson
acted personally and outside his role as receiver. See i d . at
5 72.
The court finds that the sort of negligent dereliction of
duty alleged by plaintiff is not conduct so clearly outside the
scope of Robinson's authority as receiver to make him personally
liable. There is no factual allegation to support that Robinson
was acting in any other capacity than an official capacity at the
relevant time, nor is there any allegation that Robinson acted in
order to profit personally or that he acted in bad faith.
Furthermore, plaintiff's argument is not saved by his conclusory
allegation that Robinson acted "personally". Accordingly, the
court grants defendant Robinson's motion for judgment on the
pleadings as to all claims alleged against him in his personal or
individual capacity.
7 2. Abstention
The court previously has permitted the parties, at their
option, to submit supplemental briefs on the issue of whether the
court should abstain from the exercise of jurisdiction over the
case on the basis of Younger v. Harris, 401 U.S. 37 (1971), and
its progeny. Defendant then filed a motion to dismiss based on
abstention principles, and plaintiff filed a corresponding
obj ection.
This court, as a federal court, has a "strict duty" to
exercise jurisdiction over an action, when such jurisdiction is
conferred by Congress. Ouackenbush v. Allstate Ins. Co . ,
U.S. , 116 S. C t . 1712, 1720 (1996) (citing, inter alia,
Colorado River Water Conservation Dist. v. United States, 42 4
U.S. 800, 821 (1976)). Only under certain exceptional
circumstances--where abstention would serve an important
countervailing interest such as "'regard for federal-state
relations'" or "'wise judicial administration,'" i d . (guoting
Colorado River, supra, 424 U.S. at 817)--can the court decide to
abstain from exercising jurisdiction.
As recently noted by the First Circuit, Younger abstention
principles reguire a federal court to abstain from reaching the
merits of a case over which it has jurisdiction when there is
(1) an ongoing state judicial proceeding, instituted prior to the federal proceeding (or. at least, instituted prior to any substantial progress in the federal proceeding), that (2) implicates an important state interest, and (3) provides an adeguate opportunity for the plaintiff to raise the claims advanced in his federal lawsuit.
Brooks v. New Hampshire Supreme Court, 80 F.3d 633, 638 (1st Cir.
1996) (citing Middlesex County Ethics Comm, v. Garden State, 457
U.S. 423, 432 (1982)). Here, the three reguirements are met.
The parties agree that state judicial proceedings are
ongoing. The dispute over ownership of SMA Insurance Agency,
Inc., began in Maine Superior Court (York County) in January
1990. Foy "was and is a party to that proceeding." Defendants'
Motion to Dismiss at 3. In 1992, Robinson was appointed by the
superior court to serve as receiver for SMA. The events that
followed are recounted by defendants:
A settlement agreement resolving the overall dispute was reached in April 1993, and when Foy refused to close on the agreement the dispute went to trial. The plaintiff in that underlying lawsuit, Craig 0. Linscott, prevailed at trial and the decision ordering Foy to close on the Settlement Agreement was affirmed by the Maine Law Court. The Maine Superior Court thereafter granted Linscott's reguested relief pursuant to M.R.Civ.P. 70 based on Foy's continued refusal to close on the Settlement Agreement. The Maine Superior Court proceeding, however, is still pending. In its Rule 70 Order, the Superior Court stated that when and if Foy signs all documents contemplated by the Settlement Agreement it intends to convene another hearing at which it will entertain a final report from its Receiver. At that final hearing, the Rule 70 Order states that "any outstanding related claims mav be submitted and determined." See Order, June 14, 1995 . . . .
Defendants' Motion at 3-4 (emphasis added) . In the June order,
the court also stated that it continues to retain jurisdiction to
enforce compliance, should that be necessary. It is thus clear
that the state judicial proceeding is ongoing.2
In addition, the proceedings presently pending in the state
court implicate an important state interest. A state has a vital
interest in a proceeding that is necessary for the "vindication
of important state policies or for the functioning of the state
judicial system . . . ." Middlesex, supra, 457 U.S. at 432. A
court-appointed receiver acts only as an officer of the court; he
may dispose of property in his custody only in compliance with an
order of the appointing court. See, e.g., Hazzard v. Westview
Golf Club, Inc., 217 A.2d 217, 223 (Me. 1966). It follows that
the appointing court has an interest in supervising the receiver
as he carries out his appointed duties and in deciding any
resulting disputes. The appointing court is also more eguipped
to serve as referee. It has the benefit of past experience with
the facts and players of the case and is uniguely situated to
2Ordinarily, under Younger abstention principles, state proceedings are "ongoing" unless a party has exhausted his state appellate remedies. See Port Auth. PBA v. Port Auth. of N.Y. & N.J., 973 F.2d 169, 173 n.2 (3d Cir. 1992) (guoting Huffman v. Pursue, L t d ., 420 U.S. 592 (1975)).
10 interpret and amend its prior orders defining the scope of the
receiver's duties. Under these circumstances, it would be
disruptive, to say the least, for a federal court without such
advantages to step in and interfere with the state court's
supervision of the receiver. See, e.g., Howard v. Roesch, No.
93-15281, 999 F.2d 543 (Table), 1993 WL 263447, at *2 (9th Cir.
July 13, 1993) (upholding abstention and noting that California
had an important state interest in regulating receivership
estates and the activity of its appointed receivers).
Aside from the state court's general interest in supervising
its appointed receivers, the York County Superior Court has a
particular interest in this matter because it has issued orders
on the very subject presently at issue. C f . Port Auth. PBA,
supra note 3, 973 F.2d at 174 (finding that, under Younger, New
York has an important interest in "preserving its courts' power
to enforce their orders"). Review of plaintiff's second amended
complaint reveals that Foy seeks either to enforce or to dissolve
orders issued by the state court. As a result of the court's
order to transfer all of SMA's assets and liabilities to a
corporation owned by Linscott, Foy seeks "to have the [tax forms]
conformed to the Maine court's decision that the money in
guestion is not his." See Plaintiff's Objection to Motion for
Summary Judgment at 13. The state court has also authorized the
11 receiver to "conclude any tax matters" relating to SMA. See
Order of June 14, 1995, 5 3 (emphasis added) (attached to
Defendants' Motion for Summary Judgment). Thus the eguitable
relief sought by Foy in this court would reguire the court to
enforce and interpret the orders of the state court--functions
most properly carried out by the state court. To hold otherwise
would reguire that this court ignore Maine's interest in
preserving its courts' power to enforce their own orders.
Finally, the court finds that the state court proceeding
provides an adeguate opportunity for the plaintiff to raise the
claims asserted in his federal lawsuit. Plaintiff argues that as
part of his remedy he seeks a declaration by this court that
certain federal tax forms were issued erroneously, as well as an
order that they be corrected by the receiver. Continuing, he
states that as matters of federal taxation are within the
exclusive jurisdiction of the federal government, the state court
would not have jurisdiction to grant him the relief he reguests.
However, in addition to the Declaratory Judgment Act count,
plaintiff's action asserts only that defendants have violated
state common law. There is no allegation that defendants have
violated any federal law or regulation, much less a law or
regulation whose interpretation rests within the exclusive
jurisdiction of the federal court. The plaintiff has not invoked
12 a specific provision of or a ruling or regulation issued under
the Internal Revenue Code. Indeed, if it did, this court would
plainly lack jurisdiction under the tax exception of the
Declaratory Judgment Act.3 See McCarthy v. Marshall, 723 F.2d
1034, 1036-37 (1st Cir. 1983) .
A case relied upon by plaintiff. Dominion Trust Co. of
Tennessee v. United States, 786 F. Supp. 1321, 1323-24 (M.D.
Tenn. 1991) is not to the contrary. That case held that a
federal district court does have jurisdiction to provide
declaratory relief pursuant to 28 U.S.C. § 2201, when asked to
determine the parties' respective duties to file federal and
state income tax returns. I d . at 1323. The court did not hold
or discuss whether such matters rest within the exclusive
jurisdiction of the federal court. Instead, the court noted that
jurisdiction is limned by a section of the Anti-Injunction Act,
26 U.S.C. § 7421, which focuses on whether the suit would have
the effect of restraining the assessment or collection of any
tax:
"The jurisdictional boundaries in tax cases are drawn by the Anti-Injunction Act, 26 U.S.C. § 7421, which provides . . . that 'no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any
3The Act specifically provides that a federal district court may grant declaratory relief in cases within its jurisdiction, "except with respect to Federal taxes . . . ." 28 U.S.C. § 2201.
13 court by any person, whether or not such person is a person against whom such tax was assessed.'"
Dominion Trust, supra, 786 F. Supp. at 1323 (quoting McCarthy,
supra, 723 F.2d at 1037) . The court then found that the
declaratory relief sought by the plaintiff would not have the
effect of preventing the IRS from assessing or collecting taxes.
I d . at 1324.
Applying these principles to the case at bar, there are two
possible outcomes. Either (1) Foy's case does not have the
effect of preventing the IRS from assessing or collecting taxes,
in which case he would have the opportunity to raise his claim in
state court, or (2) his suit would have such effect, in which
case both courts would be stripped of their jurisdiction by the
Anti-Injunction Act, 26 U.S.C. § 7421. Under outcome (1), the
state court would provide an adequate opportunity for Foy to
assert his claims advanced in federal court. Under outcome (2),
the abstention question would become moot. Accordingly, the
court finds that the third Younger abstention requirement is met
he r e .
For the above-stated reasons, and because the plaintiff has
not indicated that there is any bad faith, self-dealing, or other
similar epithet that can be attached to the state judicial
proceeding, see Brooks, supra, 80 F.3d at 639, the court finds
14 and rules that it should abstain.4
The next question is whether the court should dismiss the
case altogether or stay the case until resolution of the state
court proceedings. Neither party has relied on Ouackenbush,
which recently held that "federal courts have the power to
dismiss or remand cases based on abstention principles only where
the relief being sought is equitable or otherwise discretionary."
Ouackenbush, supra, ___ U.S. at ___ , 116 S. C t . at 1728.
Plaintiff states in his complaint that he seeks both equitable
relief and damages. For the reasons stated above, the court
abstains from exercising jurisdiction over, and thus dismisses.
4The court's decision is also supported under a Colorado River analysis, which entails considering the following factors:
(1) whether either court has assumed jurisdiction over a res; (2) the inconvenience of the federal forum; (3) the desirability of avoiding piecemeal litigation[;] . . . (4) the order in which the forums obtained jurisdiction[;] . . . (5) whether state or federal law controls [;] and (6) the adequacy of the state forum to protect the parties' rights.
Elmendorf Grafica, Inc. v. D.S. America (East), Inc., 48 F.3d 46, 50 (1stCir. 1995). Here, the state court has obtained jurisdiction over the "res" in dispute here by placing the assets of SMA in the custody of a receiver. The remaining five factors similarly weigh in favor of abstention: (1) the state forum would be more convenient for most of the parties; (2) piecemeal litigation would be avoided; (3) the state court obtained jurisdiction before the federal court; (4) state law controls; and (5) the state forum is adequate to protect the parties' rights.
15 plaintiff's equitable claims, including his request for
declaratory relief and an order directing the receiver to correct
the tax forms. Plaintiff's remaining damages claims are stayed
pending the outcome of the state action. See Ouackenbush, supra,
116 S. C t . at 1728 (noting that federal district courts may enter
a stay when applying abstention principles to damages actions).
3. Remaining Motions
Linscott has moved to intervene in this action on the ground
that he has an interest in the funds in dispute. The Federal
Rules of Civil Procedure require that the court permit an
applicant to intervene in an action when (1) the applicant claims
an interest relating to the property in dispute and (2) the
disposition of the action would impair or impede the applicant's
ability to protect that interest, unless he is adequately
represented by existing parties. See Rule 2 4 ( a ) (2), Fed. R. Civ.
P.5
Specifically, Rule 2 4 ( a ) (2), Fed. R. Civ. P., provides:
(a) Intervention of Right. Upon timely application anyone shall be permitted to intervene in an action . . . (2) when the applicant claims an interest relating to the property or transaction which is the subject of the action and the applicant is so situated that the disposition of the action may as a practical matter impair or impede the applicant's ability to protect that
16 Foy responds that Linscott has no interest insofar as Foy
seeks correction of the tax forms. But, as explained above, the
court has dismissed Foy's request for correction of the tax
forms. All that remains of this case is Foy's claim for the
resulting damages, which may well evaporate once the state court
proceedings have been resolved. Nonetheless, the possibility
exists that Foy's damages action will persist. Any liabilities
incurred by SMA would likely affect Linscott in that the receiver
has been directed to transfer all of SMA's liabilities and assets
to a corporation owned by Linscott. In such circumstances,
Linscott would at least have a "relating" interest to the
property here at issue.
The court has also considered the timeliness argument raised
by plaintiff, as well as his other arguments concerning
prejudice, but has determined that the relevant factors balance
out in favor of permitting Linscott to intervene. Accordingly,
the court grants Linscott's motion to intervene.
The court also grants Linscott's motion to quash a subpoena
(document 71). Rule 45(c) (3)(A)(iv), Fed. R. Civ. P., provides
that "the court by which a subpoena was issued shall quash or
modify the subpoena if it . . . subjects a person to undue
interest, unless the applicant's interest is adequately represented by existing parties.
17 burden." In light of the court's decision to dismiss plaintiff's
primary claim and to stay the remainder of the case, the subpoena
represents an "undue burden" on the parties.
Conclusion
For the above-stated reasons, defendants' motion to dismiss
(document 80) is granted in part and denied in part. Count I of
the second amended complaint (seeking declaratory relief against
all defendants) is dismissed. The court also grants the
following motions: (1) Craig 0. Linscott's Motion to Intervene
(document 54) and Reguest for Leave to File Reply Memorandum
(document 66); (2) Motion of Craig 0. Linscott to Quash or Modify
Subpoena (document 71); (3) motions for admission of counsel pro
hac vice (documents 57, 58, 59); (4) defendants' assented-to
motion on disclosure of experts (document 82); (5) defendant
Robinson's Motion for Judgment on the Pleadings (document 73);
and (6) Defendants' Motion to Amend Answer (document 65).
The court stays the remainder of this action (specifically,
all of plaintiff's damages claims against SMA) pending the
resolution of the state court proceedings. Defendants' remaining
motions need not remain active during the pendency of the stay,
as no action can be taken on them. See Local Rule 83.10.
Accordingly, the Clerk is directed to terminate the remaining
18 pending motions; namely. Defendants' Motion for Summary Judgment
(document 74) and their reguest to file a reply (document 77).
When the stay is lifted, counsel should each notify the court to
specify what motions, if any, they wish to renew or refile. No
action will be taken until such notification is received. Any
renewed motions shall be considered refiled as of the date the
stay is lifted, and any deadlines imposed by Local Rule 7 shall
run from that date.
It is further ordered that counsel for the plaintiff shall
file a status report on October 1 and April 1 of each year until
the issues pending in the Maine state court are resolved. The
court should, of course, immediately be notified upon ultimate
resolution of the issues. Failure to respond may result in
sanctions, which may include imposition of fines.
SO ORDERED.
Shane Devine, Senior Judge United States District Court
March 27, 1997
cc: Gregory T. Uliasz, Esg. Edward A. Haffer, Esg. James E. Townsend, Esg. Sidney Thaxter, Esg.