Healthcare Company, Ltd. v. Upward Mobility, Inc.

• Court: Court of Appeals for the Sixth Circuit
• Decided: August 22, 2019
• Docket: 18-5781
• Status: Unpublished

Opinion

NOT RECOMMENDED FOR PUBLICATION File Name: 19a0443n.06

No. 18-5781

UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT FILED Aug 22, 2019 HEALTHCARE COMPANY LTD.. ) DEBORAH S. HUNT, Clerk ) Plaintiff-Appellant, ) ) ON APPEAL FROM THE v. ) UNITED STATES DISTRICT ) COURT FOR THE EASTERN UPWARD MOBILITY, INC. dba Bed Boss. ) DISTRICT OF TENNESSEE ) Defendant-Appellee ) )

BEFORE: BOGGS, BATCHELDER, and BUSH, Circuit Judges.

ALICE M. BATCHELDER, Circuit Judge. Healthcare Co. Ltd. (“Healthcare Co.”)

appeals the district court’s decision in a breach of contract case to abstain under the Colorado River 1 doctrine until the conclusion of related state court proceedings. Healthcare Co. argues the federal

case is not parallel to the state case and that, even if the cases are parallel, a balancing of the

Colorado River factors weighs against abstention. We disagree and affirm the district court.

I.

At some point prior to 2009, Ben Folkins and his wife, Andrea, founded Upward Mobility,

a mattress distributorship in Chattanooga, Tennessee, that did business under the name “The Bed

Boss.” Upward Mobility’s mattresses were manufactured by Healthcare Co., a Chinese company.

While producing mattresses for Upward Mobility, Healthcare Co. simultaneously manufactured

1 The abstention doctrine derives from the Supreme Court’s decision in Colorado River Water Conservation District v. United States, 424 U.S. 800 (1976). No. 18-5781, Healthcare Co. Limited v. Upward Mobility, Inc.

and marketed mattresses under its own label, MLILY, in various countries. In 2011, Zhanggen

Ni, the President and Chief Executive Officer of Healthcare Co., approached Ben Folkins to

request his assistance in marketing MLILY-branded bedding in the United States. Folkins and Ni

created a new partnership, China Beds Direct (CBD), to be the exclusive distributor of MLILY

products in the United States to companies that owned or distributed to fewer than twenty

storefronts. Folkins owned 45% of CBD, and Healthcare Group owned 55%.2 Folkins was named

President and Chief Operating Officer of CBD, and Ni was named its Vice-President and Chief

Executive Officer.

Over the ensuing years, Folkins and Ni frequently disagreed and accused each other of

violating the partnership’s terms. On December 8, 2016, Folkins told Ni that he intended to

withdraw as a member of CBD effective September 31, 2017. Pursuant to the CBD Operating

Agreement, Folkins requested a $3,122,500 buyout, which Healthcare Co. refused, countering

instead with a $1,080,000 buyout offer. Folkins refused the counteroffer, and the relationship

between Folkins and Healthcare Co. continued to deteriorate.

At some point during 2016, while the dispute between them brewed, Folkins ordered six

containers of mattresses from Healthcare Co. for Upward Mobility. The containers were shipped

and delivered. Prior to payment’s coming due on those six containers, Folkins ordered three more

containers of mattresses. Healthcare Co. shipped the containers, but before they were delivered to

Upward Mobility, payment for the six containers came due and Folkins refused to pay. Healthcare

Co. responded by diverting the three containers. Folkins struck back on March 17, 2017, by filing

a complaint in the Chancery Court for Hamilton County, Tennessee, against Healthcare Co.,

Healthcare Group, and Ni. Folkins’s complaint covered much more than the dispute about the

2 Healthcare Group is a wholly-owned subsidiary of Healthcare Co. and is registered to do business in Tennessee.

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nine containers of mattresses. The complaint covered all the disagreements between Folkins and

his Chinese counterparts over CBD and contained nine counts: unjust enrichment, breach of

fiduciary duties, intentional interference with business relationships, procurement of breach of

contract, conversion, defamation, declaratory judgment, and two counts of breach of contract. The

count of conversion related specifically to the dispute between Folkins and Healthcare Co. over

the nine containers of mattresses.

Approximately six months after Folkins filed his state-court complaint, Healthcare Co.

filed a federal claim for breach of contract regarding only the nine containers of mattresses.

Healthcare Co. and Upward Mobility partially settled as to the first six containers, leaving only

the dispute about the three remaining containers and miscellaneous costs related to the six

containers. Healthcare Co. refuses to deliver the three containers because it claims Upward

Mobility still owes unspecified “costs” for Upward Mobility’s “breach of payment on the

containers already delivered” as well as “storage and handling fee[s]” for the three containers “in

excess of $79,067.35,” exclusive of interest. Healthcare Co. claims that it “has financial concerns

that if it delivers the three containers to the Defendant, who has breached payment on previous

containers, it will be difficult to collect the debt owed to the Plaintiff.” However, Healthcare Co.

promises to “deliver the three containers to Defendant” upon full payment for the three containers

and all outstanding costs.

Upward Mobility moved to dismiss Healthcare Co.’s federal claim pursuant to Federal

Rules of Civil Procedure 8(a), 12(b)(1), and 12(b)(6), or, in the alternative, for a stay under the

Colorado River abstention doctrine. The district court declined to decide the motion to dismiss

but granted the stay. Healthcare Co. appeals only the stay. Upward Mobility argues that the state

and federal proceedings are parallel proceedings and the enumerated Colorado River factors weigh

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in favor of the district court’s declining to exercise jurisdiction until the completion of the state

proceeding. We agree.

II.

We must determine first whether we have jurisdiction to decide this appeal. Federal courts

of appeals have jurisdiction over “final decisions of the district courts of the United States.” 28

U.S.C. § 1291. Both parties assume that the district court’s decision to abstain was a final decision,

but we have found previously that not all abstention decisions are final, appealable orders. See,

e.g., Clark v. Adams, 300 F. App’x 344, 351 (6th Cir. 2008) (holding that abstention under the

Younger abstention doctrine was not a final, appealable order because the district court’s decision

to abstain did not put the plaintiffs “effectively out of court”).

A district court’s decision to abstain is a final decision if “there [will] be no further

litigation in the federal forum” because “the state court’s judgment on the issue [will] be res

judicata.” Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 10 (1983). Thus,

in Clark, where we determined there were four issues for the district court to decide after the state

proceeding concluded, we held the district court’s decision to abstain was not a final, appealable

order because “there [were] clearly issues that remain to be decided by the federal court after

resolution of the state court case.” 300 F. App’x at 348, 351. Conversely, in RSM Richter, Inc. v.

Behr Am., Inc., we held that the district court’s abstention decision was appealable because after

the state court proceedings there would be nothing left for the district court to decide—abstaining

was “the practical equivalent of an order dismissing the case.” 729 F.3d 553, 557 (6th Cir. 2013)

(quoting Quackenbush v. Allstate Ins. Co., 517 U.S. 706, 713 (1996)).

The district court’s order leaves open the possibility that some litigation could continue in

federal court after the state proceeding has concluded. RE 62 at 512 (“Upon resolution of the State

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Court Case . . . the parties shall jointly submit a report to the Court indicating the status of the State

Court Case, and . . . whether either party believes there are any remaining issues for this Court to

address.”) But the only issue in the federal case—breach of contract—is part-and-parcel of one of

the claims before the state court—Upward Mobility’s claim of conversion for the containers of

mattresses. In Tennessee, “[t]he elements of a conversion claim include: (1) an appropriation of

another’s tangible property to one’s use and benefit; (2) an intentional exercise of dominion over

the chattel alleged to have been converted; and (3) defiance of the true owner’s rights to the

chattel.” White v. Empire Express, Inc., 395 S.W.3d 696, 720 (Tenn. Ct. App. 2012). In making

determinations regarding elements (1) and (3), the state court will have to adjudicate the contract

dispute. Because the state court’s decision on the contract will be res judicata in the federal case,

the district court’s decision to abstain puts Healthcare Co. “effectively out of [federal] court,” and

therefore we have jurisdiction to consider its appeal. Moses H. Cone, 460 U.S. at 10.

III.

The Colorado River abstention doctrine is premised on “considerations of judicial

economy and federal-state comity.” Romine v. Compuserve Corp., 160 F.3d 337, 339 (6th Cir.

1998). The doctrine recognizes that although federal courts have a “virtually unflagging

obligation . . . to exercise the jurisdiction given them, considerations of judicial economy and

federal-state comity may justify abstention in situations involving the contemporaneous exercise

of jurisdiction by state and federal courts.” Id. (quoting Colo. River Water Conservation Dist. v.

United States, 424 U.S. 800, 817 (1976)). A Colorado River analysis has two steps. First, we

must determine whether the state and federal proceedings are parallel. Id. If they are not parallel,

the district court should not abstain. If they are parallel, we weigh the eight Colorado River factors

to determine whether abstention is merited. Id. at 340–41.

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We review de novo the district court’s determination that the proceedings are parallel.

Heitmanis v. Austin, 899 F.2d 521, 527 (6th Cir. 1990). Healthcare Co. argues that the district

court erred in three ways: (1) the state court and federal court proceedings involve different legal

theories for recovery; (2) the court should look only at claims that were made, not claims that

might have been made; and (3) the parties in the two proceedings are not identical. We address

these objections in turn.

The state and federal proceedings involve different legal theories for recovery. Healthcare

Co. cites Baskin v. Bath Twp. Bd. of Zoning Appeals for the proposition that when “two actions

arise out of the same basic facts, but they each contest a different aspect of” the disputed issue and

each party seeks “different relief,” the actions are not parallel. 15 F.3d 569, 572 (6th Cir. 1994).

Healthcare Co. argues that conversion and breach of contract are separate causes of action and

cites several Tennessee court cases that have distinguished between contractual and tort liability.

Thus, Healthcare Co. asserts that the district court erred in holding that a final decision on

conversion in the state court would decide the breach of contract issue in the federal action.

Healthcare Co. is wrong. Parallelism does not require identical causes of action in the state

and federal lawsuits. In Romine, for example, four class-action lawsuits were filed—two at the

state level, and two at the federal level. 160 F.3d at 338–39. The two federal cases were filed in

the same district court, and the court consolidated the federal cases and stayed them pending

resolution of the state proceedings. Id. at 339. In affirming the district court, we acknowledged

that the “state action [was] . . . more comprehensive than the consolidated federal cases.” Id. at

340. But we went on to state that “exact parallelism is not required; [i]t is enough if the two

proceedings are substantially similar.” Id. at 340 (quotation marks omitted). We concluded that

where the federal claims were “predicated on the same allegations as to the same material

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facts . . . the actions must be considered ‘parallel’ for the purposes of the Colorado River

abstention doctrine.” Id.

Applying this principle to Baskin, the case that Healthcare Co. relies on, it is easy to see

why the result was different. Baskin applied for a zoning variance for five amateur-radio towers

and antennae. 15 F.3d at 570. He received the variance but was then sued in state court by a group

of local homeowners opposing the variance. Id. Baskin intervened in the state proceeding to

defend the variance. Id. Simultaneously, he filed a federal lawsuit claiming that the Board of

Zoning Appeals “failed to reasonably accommodate his use of his FCC amateur radio operator’s

license and violated his federal constitutional rights to equal protection and substantive due

process.” Id. In the state action, Baskin was defending the variance as not overly excessive; in

the federal action, Baskin was attacking the variance as too restrictive. The district court abstained,

and Baskin appealed. We reversed, noting that although the two lawsuits arose “out of the same

basic facts . . . they each contest[ed] a different aspect of the variance granted by the Township

zoning board and they [sought] different relief.” Id. at 572.

The instant case is similar to Romine, not Baskin. The state lawsuit is broader, but just as

in Romine, the proceedings are nevertheless “substantially similar.” Romine, 160 F.3d at 340. As

discussed in Part II supra, adjudication of Upward Mobility’s conversion claim will require

determination of issues dispositive of Healthcare Co.’s breach of contract claim. The proceedings

in both courts are therefore “predicated on the same allegations as to the same material facts;” that

the two parties pursue separate legal theories is of no consequence. Id.

Only actual claims, not theoretical claims, count in a parallelism analysis. Healthcare Co.

again cites Baskin, this time for the proposition that, “in deciding whether a state action is parallel

for abstention purposes, the district court must compare the issues in the federal action to the issues

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actually raised in the state court action, not those that might have been raised.” 15 F.3d at 572.

Healthcare Co. admits that it could have brought a counterclaim for breach of contract in the state

action but did not do so. Healthcare Co. appears to be arguing that the lawsuits would have been

parallel if it had brought a breach of contract counterclaim in state court, but because it did not,

the lawsuits are not parallel. Healthcare Co. is correct that Baskin says we may examine only

claims that were made, not claims that might have been made. But as our prior analysis shows,

here we do not need to examine claims that might have been made to determine that the two

proceedings are substantially similar. This argument fails.

The parties in the two proceedings are not identical. Healthcare Co. does not cite any

cases for its argument that if the parties in two actions are not identical, the actions are not parallel.

And for good reason: we have never held that identity of parties is required for parallelism. In

fact, we have held the opposite. See, e.g., Preferred Care of Delaware, Inc. v. VanArsdale, 676 F.

App’x 388, 394 (6th Cir. 2017) (“Even if, as [Appellant] argues, the state suit includes

parties . . . beyond those in the federal suit, this court has nonetheless held that such [a] difference[]

will not upset an otherwise substantial symmetry between a federal and state action.”). Here,

Healthcare Co. and Upward Mobility are each parties in both the federal and state proceedings.

That is enough for “substantial symmetry.” Id. “If the rule were otherwise, the Colorado River

doctrine could be entirely avoided by the simple expedient of naming additional parties.” quoting

Romine, 160 F.3d at 340 (quoting Lumen Constr., Inc. v. Brant Constr. Co., 780 F.2d 691, 695

(7th Cir.1985)).

We hold that the state and federal proceedings are parallel.

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IV.

Because the proceedings are parallel, we proceed to step two of the analysis and consider

the eight Colorado River factors:

(1) whether the state court has assumed jurisdiction over any res or property; (2) whether the federal forum is less convenient to the parties; (3) avoidance of piecemeal litigation . . . (4) the order in which jurisdiction was obtained. . . . (5) whether the source of governing law is state or federal; (6) the adequacy of the state court action to protect the federal plaintiff’s rights; (7) the relative progress of the state and federal proceedings; and (8) the presence or absence of concurrent jurisdiction.

Romine, 160 F.3d at 340–41 (citations omitted). These factors do not constitute “a mechanical

checklist.” Moses H. Cone, 460 U.S. at 16. Rather, courts should “careful[ly] balanc[e] . . . the

important factors as they apply in a given case, with the balance heavily weighted in favor of the

exercise of jurisdiction.” Id.

The first, second, and seventh factors weigh against abstention. Regarding the first factor,

neither court has assumed jurisdiction over any res or property; regarding the second factor, the

state and federal courts are less than a mile apart. See Bates v. Van Buren Twp., 122 F. App’x 803,

807 (6th Cir. 2004) (holding that when no res was involved and “there is no reason to think the

federal forum is less convenient,” the factors weigh against abstention). The seventh factor weighs

against abstention but, as the district court noted, “only slightly” because “[b]oth cases appear to

be in their early stages.” The edge goes to the federal proceeding because the parties have already

settled as to six containers, for $241,690.00. No settlement has occurred in the state proceeding.

However, as neither case has yet proceeded to discovery, the district court was correct to find that

both cases are in their early stages, and the weight against abstention is therefore very light.

The remaining factors weigh in favor of abstention. Regarding the third factor, the state

court will necessarily address whether there was a breach of contract in its determination of the

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conversion claim because adjudication of a conversion claim requires the court to identify to whom

the property belongs. If both actions were permitted to go forward, two courts would be

adjudicating the same legal issue—the classic piecemeal litigation situation. See Cass River

Farms, LLC v. Hausbeck Pickle Co., 2016 WL 5930493, at *6 (E.D. Mich. Oct. 12, 2016) (“If the

Court were to exercise jurisdiction, the contracts between the parties would be interpreted twice

and potentially in contradictory ways. That result would not only waste of judicial resources, but

it would also harm the legitimacy of the court system.” (quoting Romine, 160 F.3d at 341).

The fourth factor weighs in favor of abstention because the state suit was filed six months

prior to the filing of the federal case; Bates, 122 F. App’x at 807. The fifth factor weighs in favor

of abstention because Tennessee law would govern the breach of contract claim. Id. The sixth

factor weighs in favor of abstention because, despite Healthcare Co.’s arguments to the contrary,

there is no legitimate reason the state court is not adequate to adjudicate the dispute. Healthcare

Co. argues that “the state court proceeding involves many issues and many parties that may confuse

the jury if it goes to trial,” but complex litigation does not render a state court inadequate to hear

a dispute. Finally, the eighth factor weighs in favor of abstention because there is no exclusive

federal jurisdiction over the breach of contract at issue in the federal case. VanArsdale, 676 F.

App’x at 397 (“[T]he presence of concurrent jurisdiction . . . counsels in favor of abstention.”).

In conclusion, three factors weigh against abstention, and five factors weigh in favor of

abstention. The weight of the factors is in favor of abstention, and we therefore hold the district

court did not err in deciding to abstain. In so holding, we recognize that abstention “is an

extraordinary and narrow exception to the duty of a District Court to adjudicate a controversy

properly before it.” Colorado River, 424 U.S. at 813. We nevertheless find abstention warranted

because the driving principle of Colorado River abstention is “[w]ise judicial administration,

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giving regard to conservation of judicial resources and comprehensive disposition of litigation.”

Colorado River, 424 U.S. at 817 (quoting Kerotest Mfg. Co. v. C-O-Two Fire Equipment Co.,

342 U.S. 180, 183 (1952)). Where, as here, the only issue in the federal litigation will be decided

by a state proceeding that was filed first, is governed by state law, and is at least as far along as

the federal proceeding, to hold otherwise would contravene the spirit of the Colorado River

doctrine.

V.

For the foregoing reasons, we AFFIRM the decision of the district court.

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