Kelly Investment Inc v. Cntntl Common Corp

• Court: Court of Appeals for the Fifth Circuit
• Decided: December 18, 2002
• Docket: 01-31385
• Status: Published

Opinion

UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT

_______________________

No. 01-31385 _______________________

KELLY INVESTMENT, INC.,

Plaintiff-Appellant,

versus

CONTINENTAL COMMON CORP., ET AL.,

Defendants-Appellees.

________________________________________________________________

Appeal from the United States District Court for the Eastern District of Louisiana

_________________________________________________________________ December 18, 2002

Before JONES, SMITH and SILER,* Circuit Judges.

SILER, Circuit Judge:

Kelly Investment, Inc. (“Kelly”)appeals the district court’s

decision to abstain from exercising its jurisdiction and to stay

the consolidated actions of a Texas state court. The district

court erred in finding abstention appropriate under the factors

* Circuit Judge of the Sixth Circuit, sitting by designation. enunciated in Colorado River Conservation Dist. v. United States,

424 U.S. 800 (1976), so we reverse.

I. BACKGROUND

This case involves concurrent proceedings in the Eastern

District of Louisiana and Texas state court. In April 1999,

Continental Common Corp., Continental Poydras Corp., and

Continental Baronne Corp. (“the Continental Defendants”), along

with other related entities, filed suit in Texas state court

against Dynex Commercial, Inc. (“Dynex”),1 alleging that Dynex

breached promissory notes on which the Continental Defendants were

obligees. These promissory notes were secured by mortgages on the

Continental Defendants’ office buildings in New Orleans. In

addition, unrelated claims were brought against Dynex by parties

who are not involved in the federal proceeding.

On July 6, 2000, Kelly purchased the interest in the

promissory notes from Dynex. In doing so, Kelly agreed to

participate in the Texas litigation. In November 2000, the

Continental Defendants added Kelly as a separate defendant in the

Texas suit, alleging that Kelly individually breached the

promissory notes by unjustly withholding tenant improvement funds.2

The Continental Defendants also announced their intent to

1 Dynex is not a party to the federal proceeding. 2 At this point in the state proceedings, the Continental Defendants did not seek to renege or otherwise extend the maturity date of the promissory notes.

2 unilaterally extend the maturity date of the promissory notes,

which was originally dated April 1, 2001. Kelly filed a special

appearance in the Texas action, challenging the court’s right to

invoke in personam jurisdiction over it. Nearly a year later, in

October 2001, the Texas state court overruled Kelly’s special

appearance.

On February 6, 2001, with its special appearance pending in

state court, Kelly filed three petitions for declaratory judgment

against the Continental Defendants in Louisiana state court. Kelly

sought declarations that (1) the term “stabilization,”3 as defined

in the three promissory notes used to finance the three Continental

properties was a condition precedent to the extension of the due

date of the Promissory Notes; (2) because stabilization had not

occurred, the Continental Defendants did not have a right to extend

the maturity date of the notes; and (3) Kelly did not have any

obligation under the promissory notes to make advances for tenant

improvements. The Continental Defendants successfully removed to

federal court, where the cases were consolidated. Kelly filed a

3 The promissory notes used to finance the three Continental Defendants’ properties defined “stabilization”:

“Stabilization” is defined to mean stabilized occupancy of the Property for a period of three (3) consecutive months and based on net operating income (calculated on an annualized basis and based on actual rents, executed leases and verified expenses, and a debt service ratio of 1.25:1.00) sufficient to support a loan principal amount of at least $12,000,000.00 bearing interest at the Extension Interest Rate amortized over a 25 year period.

3 motion to remand, while the Continental Defendants filed a Rule

12(b)(6) motion to dismiss. The district court denied both motions

on June 6, 2001. On June 14, 2001, the Continental Defendants

filed an amended petition in the Texas proceeding to include a

declaratory judgment claim against Kelly. This claim, unlike the

previous state claims brought by the Continental Defendants, raised

the same issues brought by Kelly in the federal proceeding --

namely, whether stabilization of the New Orleans properties was a

prerequisite to extension of the Continental Loans’ maturity date.

Eight days later, on June 22, 2001, the Continental Defendants

filed a motion to abstain in federal district court. On August 2,

2001, with the motion to abstain pending, Kelly added a claim for

money damages against the Continental Defendants. In addition,

Kelly sought a writ of fieri facias directing the United States

Marshal to seize and sell the New Orleans office buildings to

satisfy its damage claim.

The district court stayed the federal proceeding on

November 23, 2001. It declined to apply the standard set forth in

Brillhart v. Excess Ins. Co. of Am., 316 U.S. 491 (1942), which

gives district courts discretion to dismiss a declaratory judgment

action when a parallel suit not governed by federal law and

presenting the same issues is pending in state court.

Specifically, the district court rejected the Continental

Defendants’ contention that the Brillhart standard should control

4 in light of the fact that Kelly’s coercive claims were added only

after the Continental Defendants’ motion to abstain was filed.4

Instead, the district court applied the abstention analysis of

Colorado River, finding that the inconvenience of the federal

forum, the threat of piecemeal litigation, and the order in which

jurisdiction was obtained supported staying the proceedings.

II. STANDARD OF REVIEW

A district court’s decision to stay a proceeding is generally

reviewed for abuse of discretion. Murphy v. Uncle Ben’s, Inc., 168

F.3d 734, 737 (5th Cir. 1999). However, to the extent that such a

decision rests on an interpretation of law, the review is de novo.

Id.

III. DISCUSSION

Both the district court and the Texas state court have

concurrent jurisdiction over this dispute. A court may abstain

from a case that is part of parallel, duplicative litigation

typically only under “exceptional” circumstances. Colorado River,

4 The district court’s ruling on this point is correct. Brillhart is only applicable “when a district court is considering abstaining from exercising jurisdiction over a declaratory judgment action.” Southwind Aviation, Inc. v. Bergen Aviation, Inc., 23 F.3d 948, 950 (5th Cir. 1994). In contrast, when an action contains any claim for coercive relief, the Colorado River abstention doctrine is ordinarily applicable. Black Sea Inv., Ltd. v. United Heritage Corp., 204 F.3d 647, 652 (5th Cir. 2000). Kelly’s claims for coercive relief are not frivolous, and there is no evidence that Kelly added them solely as a means of defeating Brillhart. Therefore, Colorado River provides the appropriate abstention standard.

5 424 U.S. at 818. Here, the lawsuits are parallel since Kelly and

the Continental Defendants are contesting stabilization and its

effect on the maturity date of the promissory notes in concurrent

state and federal proceedings.

In making the determination of whether "exceptional

circumstances" exist that allow abstention in deference to pending

state court proceedings, the Supreme Court has identified six

relevant factors:

(1) assumption by either court of jurisdiction over a res,(2) relative inconvenience of the forums, (3) avoidance of piecemeal litigation, (4) the order in which jurisdiction was obtained by the concurrent forums, (5) to what extent federal law provides the rules of decision on the merits, and (6) the adequacy of the state proceedings in protecting the rights of the party invoking federal jurisdiction.

Diamond Offshore Co. v. A & B Builders, Inc., 302 F.3d 531, 540 n.6

(5th Cir. 2002) (internal quotation marks and citation omitted).

The decision of whether to abstain “does not rest on a mechanical

checklist” of these factors, but rather “on a careful balancing of

[them] as they apply in a given case, with the balance heavily

weighted in favor of the exercise of jurisdiction.” Moses H. Cone

Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 16 (1983).

In its decision staying the proceedings, the district court

found that Louisiana was an inconvenient forum, that piecemeal

litigation would result if concurrent proceedings were permitted,

and that the Texas proceeding had progressed further. An analysis

of the individual factors reveals that the district court’s

6 determination was flawed in several respects. For example, the

second factor, relative inconvenience of the forums, should be

analyzed as to “whether the inconvenience of the federal forum is

so great” that abstention is warranted. Evanston Ins. Co. v.

Jimco, Inc., 844 F.2d 1185, 1192 (5th Cir. 1988). The district

court, however, merely found that Texas is a “more convenient”

forum in light of the fact that the Texas proceeding commenced in

April 1999, while the federal proceeding was not filed until 2001.

The court concluded that many of the witnesses and exhibits are

already located in Texas. Although the court determined that

witnesses located in Virginia and California would be equally

inconvenienced if forced to travel to Texas or Louisiana, it found

that the prospect of witness travel to both locations weighed in

favor of abstention. The court should not have considered the

inconvenience of requiring these witnesses to travel to two

separate proceedings as cutting in favor of abstention. See New

Orleans Public Serv., Inc. v. Council of New Orleans, 911 F.2d 993,

1005 n.8 (5th Cir. 1990). This possibility is present whenever

there are concurrent federal and state proceedings. Overall, the

inconvenience of Louisiana is not “so great,” Evanston, 844 F.3d at

1192, for both the evidence and witnesses that abstention is

warranted.5

5 The court correctly noted that at least some of the documents relating to the loan agreements, originally owned by Dynex, have already been produced in the Texas litigation.

7 With regard to the avoidance of piecemeal litigation, both

parties agree that the court relied principally on this factor in

deciding to abstain. The court recognized that

[t]he prevention of duplicative litigation is not a factor to be considered in an abstention determination. Black Sea, supra. However, in the instant case, there is not just the risk of duplicative litigation. If the case proceeds in both Courts, there is a risk that the two Courts involved might reach inconsistent rulings on the same issues. This weighs heavily in favor of abstention.

The court’s conclusion fails to realize that any time duplicative

litigation exists, the possibility of inconsistent judgments also

exists. In both Evanston and Murphy, the court recognized that the

problem of inconsistent judgments can be obviated through a plea of

res judicata should one court render judgment before the other.

Evanston, 844 F.2d at 1192; Murphy, 168 F.3d at 738. Therefore,

the district court incorrectly relied upon the possibility of

inconsistent judgments as its main reason for abstaining. Neither

court has accepted jurisdiction over a res; with the same parties

before both the federal and state court, and the same issues of

stabilization and foreclosure pending, the litigation is merely

duplicative. Unlike Colorado River, there is no risk that

However, there is no evidence that documents relating to the tenant improvement funds, which are located in Louisiana, have been produced in the Texas proceeding. At best, the location of the evidence, which consists solely of an unspecified number of documents, tilts in the Continental Defendants’ favor.

8 irreconcilable rulings may result. Should one court render

judgment before the other, res judicata will ensure proper order.

Finally, with regard to the fourth factor, the court’s

conclusion that the Texas suit has progressed further is flawed.

Although the state proceeding was initiated in April 1999, Kelly

was not added as a party until November 2000. More importantly,

the issues of stabilization and contract reformation, which were

first raised in the federal declaratory action, did not arise in

the Texas action until June 14, 2001, when the Continental

Defendants filed an amended petition. No discovery has taken place

in state court regarding these issues. In fact, the extent of

discovery in state court appears to consist of Kelly’s amenability

to personal jurisdiction. As the court recognized, discovery in

federal court has been stalled by several protective orders granted

in favor of the Continental Defendants. Currently, trial in state

court is immediate. As Kelly notes, with several additional

parties and issues present in the state litigation, there is a

strong chance that the federal court will be the first to render a

decision, which bolsters the conclusion that the court erred in its

determination that the state proceeding had progressed further.

In sum, none of the Colorado River factors supports the

court’s decision to abstain.6 Because the facts of this case do

6 The district court properly noted that the absence of the first factor, assumption by either court over a res, weighs against abstention. Black Sea, 204 F.3d at 650. The court also correctly

9 not justify the application of an “extraordinary and narrow

exception to the virtually unflagging obligation of the federal

courts to exercise the jurisdiction given them,” Colorado River,

424 U.S. at 817, the decision of the district court is REVERSED

and REMANDED.

determined the fifth and sixth factors, whether federal law provides the basis of decision and the adequacy of the state proceedings, to be neutral.