Revised June 3, 1999
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
________________________
No. 98-50368 ________________________
THE CADLE COMPANY,
Plaintiff-Appellant,
-vs-
WHATABURGER OF ALICE, INC.; M. LOUISE ANDREWS; KATHY A. REESE; HERBERT E. POUNDS, JR.; GEORGE P. BRAUN; AND JOE ALVIN ANDREWS, JR.,
Defendants-Appellees.
____________________________________________
Appeal from the United States District Court for the Western District of Texas
____________________________________________ May 7, 1999
Before KING, Chief Judge, STEWART, Circuit Judge, and LITTLE, District Judge.*
LITTLE, District Judge:
The Cadle Company (“Cadle”) appeals the district court’s
decision to dismiss its RICO and state law claims under the
“first-to-file” rule. Cadle argues that the district court
* District Judge of the Western District of Louisiana, sitting by designation. should have applied the rule only if it first determined that
the first-filed court’s jurisdiction was proper, and erred by
failing to do so in this case. Cadle argues in the
alternative that even if the lower court did not err in
applying the rule, it should have transferred the case rather
than dismissed it. We find that the district court properly
applied the first-to-file rule, but should have transferred
the suit rather than dismissed it. The judgment of the
district court is therefore vacated and the case is remanded
to the district court with instructions to transfer the case.
I. Background
The following events are gleaned from Cadle’s complaint
in the district court. Appellee Whataburger of Alice
(“Whataburger”) is a family-owned corporation founded by Joe
Alvin Andrews (“Andrews”) in 1968. Whataburger grew into a
successful business and supplied Andrews with funds to invest
in other business ventures. One of these ventures, Anshad,
Inc. (“Anshad”), owned apartment buildings in the San Antonio
area. As part of his dealings with Anshad, Andrews in 1987
guaranteed a loan to Anshad from the Windsor Savings
Association (“Windsor”) in the amount of $2,495,000. In 1988
Anshad defaulted on its obligation to repay Windsor and
Andrews defaulted on his guarantee. Windsor filed suit
2 against Andrews to recover the debt in 1989. Windsor obtained
a judgment against Andrews on 13 June 1991 in the amount of
$1,075,167.47, plus post judgment interest (“the Windsor
judgment”). That judgment forms the basis for the instant
dispute.
Windsor went bankrupt and into receivership in or about
1992. Cadle claims to have acquired the right to collect on
the Windsor judgment from Windsor’s receiver on 23 June 1992.
As we shall see infra, Cadle’s claim of ownership is the
subject of a vigorous debate in the bankruptcy proceedings,
and the parties have attempted to carry on that debate in this
court as well. The defendants have even based a motion to
dismiss pursuant to Fed. R. App. Proc. 38 on their argument
that Cadle does not own the claims and therefore lacks
standing to argue about its dismissal in this court. That
motion is denied. Cadle has suffered an adverse ruling in the
district court, and has standing to appeal. See Deposit
Guaranty National Bank v. Roper, 445 U.S. 326, 333 (1980)
(“[A] party aggrieved by a judgment or order of a district
court may exercise the statutory right to appeal therefrom.”).
Moreover, we need not (and as we shall see should not) decide
who owns these claims in order to answer the question
presented by this appeal. We assume without deciding that
3 Cadle does own the right to collect on the Windsor judgment
for purposes of this appeal only.
Cadle claims that the defendants (Andrews’ wife,
daughter, lawyer, accountant, and son, respectively) conspired
with Andrews in the execution of two fraudulent transfers
intended to insulate Andrews from collection of the Windsor
judgment. First, Cadle claims that Andrews and Whataburger,
co-plaintiffs in a suit against Whataburger’s franchisor,
structured the settlement agreement that resulted from the
litigation to shield the proceeds from ownership by Andrews:1
Whataburger received the entire amount of the $16,450,000
settlement, while Andrews received nothing. Whataburger,
flush with cash from the settlement, distributed sizeable
bonus payments to all of its shareholders but Andrews, even
though he owned 23.7% of Whataburger’s stock. Cadle claims
that the settlement should have filtered to the shareholders
on a pro rata basis. Andrews should have received his share
of the stockholder bonus. If so, Andrews would have had
assets that Cadle could have seized to satisfy the Windsor
judgment.
Second, Cadle alleges that the defendants helped Andrews
release 15,000 shares of Whataburger stock that Andrews had
1 Andrews and Whataburger had agreed to sell their restaurants in Bexar County, Texas and the exclusive right to operate the chain in the area for 10.5 million dollars. The franchisor challenged the sale, which caused the deal to fall through.
4 pledged to secure a debt he was repaying to Laredo National
Bank. Had the debt been paid in full, the 15,000 pledged
shares would have been returned to Andrews. Cadle then could
have seized those shares in partial satisfaction of the
Windsor debt. Whataburger, however, bought the debt from the
bank, which included the pledge of the stock. Andrews
defaulted, and Whataburger foreclosed on the pledged stock on
4 February 1994. Andrews, therefore, remained without any
assets that Cadle could seize to satisfy the Windsor judgment.
II. Procedural History
On 14 June 1994, Andrews filed for Chapter 7 bankruptcy
in the United States Bankruptcy Court for the Southern
District of Texas, Laredo Division. Cadle filed several
claims in those proceedings seeking to recover on the Windsor
judgment.2 On 10 April 1996, bankruptcy Judge Richard Schmidt
dismissed Cadle’s second amended complaint for lack of
standing because he found that the bankruptcy trustee, rather
than Cadle, actually owned the claims that Cadle was
attempting to assert. See In re Joe Alvin Andrews, No.
94-21308, slip op. (Apr. 10, 1996). Undaunted by this
2 The record in this case does not include that complaint, so we cannot set forth allegations with any more specificity.
5 setback, Cadle filed a third amended complaint in the
bankruptcy court on 24 November 1997.
Apparently unwilling to leave matters in the hands of the
bankruptcy court, Cadle filed the instant complaint in the
United States District Court for the Western District of
Texas, San Antonio Division, on 23 December 1997. Cadle
claims that the defendants violated RICO §§ 1962(b), (c), and
(d) by engaging in a pattern of wrongful conduct involving
bankruptcy fraud, mail fraud, wire fraud, and securities fraud
(1) to acquire an interest in and to maintain control over the
affairs of Whataburger and Andrews’ financial empire and (2)
fraudulently to transfer and otherwise maintain custodianship
over Andrews’ assets. Cadle also alleges that the defendants’
conduct constitutes tortious interference with Cadle’s right
to enforce its judgment against Andrews in violation of Texas
state law. Finally, Cadle alleges that Whataburger’s
corporate form should be pierced and set aside because Andrews
and the individual defendants operate the company as an
extension of themselves in furtherance of their fraudulent
scheme.
The defendants moved to dismiss, arguing again that Cadle
does not own the claims and that the pending bankruptcy matter
required the court to dismiss the case under the first-to-file
rule. Both parties devote their attention to the ownership of
6 the claims. As to the pending bankruptcy proceedings, Cadle
stated simply that the first-to-file rule should not apply
because “[t]he bankruptcy court . . . does not have
jurisdiction to entertain the RICO claims[.]”
The district court, in its ruling of 16 March 1998,
relied upon the first-to-file rule. See Cadle v. Whataburger
of Alice, Inc., No. 97-1502, slip op. (W.D. Tex. Mar. 16,
1998). In doing so, the court decided that the issues pending
before the bankruptcy court substantially overlapped those
raised by the suit before it. See id. at 3. The fact that
the attorney and accountant are named as defendants in the
district court suit but not in the bankruptcy complaint does
not, in the district court’s opinion, render the cases so
dissimilar as to warrant action at the district court level.
See id. The court did not specifically address Cadle’s
objection that the bankruptcy court lacked subject matter
jurisdiction over its claims, but closed with a comment on the
propriety of addressing any substantive issues in the case:
There are proper appellate procedures a dissatisfied litigant can employ. This Court does not sit as a super appellate court to review orders of bankruptcy courts in other districts, and will not be employed in a collateral attack on a decision of a sister court. This is one of the very abuses the first-to-file rule is designed to prevent, and is an illustration of why the principle of comity is so vital to our judicial system.
7 Id. at 3-4. The district court decided to dismiss the case
rather than transfer it to the Laredo proceedings because the
“plaintiff waited too long there to add Pounds and Braun as
defendants.” Id. at 3 n.2. Cadle filed this appeal
challenging the district court’s order of dismissal.
Meanwhile, back in the bankruptcy court, proceedings
continued apace. The bankruptcy court, on 9 June 1998, again
decided that Cadle did not own the claims and therefore lacked
standing to bring the motion. On 12 November 1998, the
bankruptcy court entered a take nothing judgment against Cadle
on all of its claims. Cadle appealed that judgment, as well
as Judge Schmidt’s earlier ruling, to the Laredo district
court.
II. Analysis
Cadle argues here that the district court should not have
applied the first-to-file rule because the bankruptcy court in
the first-filed suit never had jurisdiction over the claims.
The first-to-file rule is a discretionary doctrine, see
Kerotest Mfg. Co. v. C-O-Two Fire Equip. Co., 342 U.S. 180,
183-84 (1952) (“Necessarily, an ample degree of discretion,
appropriate for disciplined and experienced judges, must be
left to the lower courts.”), the application of which we
normally review for abuse of that discretion. See Sutter
8 Corp. v. P&P Indus., Inc., 125 F.3d 914, 917 (5th Cir.1997).
Cadle, however, does not raise issues of application, such as
the district court’s findings that the issues raised by the
cases substantially overlap and that such a finding is not
precluded by the lack of complete identity of parties between
the cases. Cadle instead questions the contours of the rule
itself. This is a purely legal matter that we review de novo.
See id.
A. Contours of the First-To-File Rule
Under the first-to-file rule, when related cases are
pending before two federal courts, the court in which the case
was last filed may refuse to hear it if the issues raised by
the cases substantially overlap. See Save Power Ltd. v.
Syntek Fin. Corp., 121 F.3d 947, 950 (5th Cir. 1997); West
Gulf Maritime Ass’n v. ILA Deep Sea Local 24, 751 F.2d 721,
728 (5th Cir. 1985). The rule rests on principles of comity
and sound judicial administration. See Save Power, 121 F.3d
at 950; West Gulf, 751 F.2d at 728. “The concern manifestly
is to avoid 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.” West Gulf, 751 F.2d at 729. The defendants, rather
than undertake a comprehensive response to Cadle’s argument,
have gone to tremendous length arguing yet again that Cadle
9 does not even own the claims it is attempting to assert, and
therefore that Cadle lacks standing. The only proper subject
for our attention at this point, however, is the district
court’s decision to dismiss Cadle’s claims under the first-to-
file rule and to leave Cadle’s jurisdiction and the
defendants’ standing arguments for the bankruptcy court.
Cadle essentially argues that the first-to-file rule
should include a precondition that requires the district court
to find proper jurisdiction in the first-filed court before
applying the rule at all. Although Cadle does not say so, it
has imported this notion from the doctrine of collateral
estoppel, which “applies to bar litigation of an issue
previously decided in another proceeding by a court of
competent jurisdiction . . . .” Copeland v. Merrill Lynch &
Co., Inc., 47 F.3d 1415, 1421 (5th Cir. 1995). Cadle’s
argument misses the mark for at least two reasons.
1. The Relationship Between the First-To-File Rule and Collateral Estoppel
First, Cadle’s implicit comparison to the doctrine of
collateral estoppel is inapposite. The comparison does have
some surface appeal in light of our statement in another case
that the first-filed court takes priority “[b]y virtue of its
prior jurisdiction over the common subject matter . . . .”
Mann Mfg. Inc. v. Hortex, Inc., 439 F.2d 403, 408 (5th Cir.
10 1971). But it makes no sense to read this statement to
establish a jurisdictional precondition for the first-to-file
rule similar to that required for the doctrine of collateral
estoppel. Although both doctrines rest on notions of judicial
economy and consistency in judgments, they address these
issues at different times. Collateral estoppel is a backward-
looking doctrine. Courts apply it to avoid relitigation of,
and inconsistency with, issues already decided by other
courts. See Parklane Hosiery Co. v. Shore, 439 U.S. 322, 326
(1979). We examine the prior court’s jurisdiction before
applying the doctrine of collateral estoppel because we should
only bind the present litigants with a past ruling if that
ruling was rendered by a court of competent jurisdiction. See
18 Charles Alan Wright & Arthur R. Miller, Federal Practice
and Procedure § 4428 (1981) (“[A] judgment entered by a court
lacking subject matter jurisdiction is ‘void’ and is not
entitled to res judicata effect.”).3
The first-to-file rule, by contrast, is essentially a
forward-looking doctrine. Courts use this rule to maximize
3 The quoted passage discusses the subject matter jurisdiction of the decision-rendering court in the context of closely related doctrine of res judicata. The importance of the decision-rendering court’s jurisdiction is now apparently very rarely brought into issue. “Today, it is safe to conclude that most federal court judgments are res judicata notwithstanding a lack of subject matter jurisdiction.” 18 Charles Alan Wright & Arthur R. Miller, Federal Practice and Procedure § 4428 (1981). No such clear statement as to the importance of the decision-rendering court’s subject matter jurisdiction seems to exist in the context of collateral estoppel. The fact that the decision-rendering court in this case was a bankruptcy court may further complicate the issue. See Copeland v. Merrill Lynch & Co., Inc., 47 F.3d 1415, 1422 (5th Cir. 1995) (noting live question as to whether or not the jurisdiction of a decision-rendering bankruptcy court must be “core” in order to satisfy the “competent jurisdiction” component of collateral estoppel).
11 judicial economy and minimize embarrassing inconsistencies by
prophylactically refusing to hear a case raising issues that
might substantially duplicate those raised by a case pending
in another court. Because the second-filed court is not
binding the litigants before it to a ruling of the first,
there is no reason to examine the jurisdiction of the first-
filed court. Such a requirement would actually undercut the
values of economy, consistency, and comity that the rule is
designed to maximize: the jurisdictional ruling of the second-
filed court would either conflict with a ruling already made,
rehash an issue already decided, or trench on a sister court’s
treatment of the issue before it has been reached there.
Because the doctrines approach the problem of inconsistent
rulings and judicial economy from different perspectives,
different procedures are required for proper operation of the
rules. As such, the district court properly declined to
accept Cadle’s suggestion to apply a jurisdictional
requirement to the first-to-file rule.
2. Why the Jurisdiction of the First-Filed Court Might Matter
In light of this distinction between collateral estoppel
and the first-to-file rule, it comes as no surprise that Cadle
has not presented any persuasive case law to support its
analogy. The only support that Cadle provides for its
12 argument comes from a case decided by a district court in the
Third Circuit, Jefferson Ward Stores, Inc. v. Doody Co., 560
F. Supp. 35 (E.D. Pa. 1983). Jefferson Ward had contracted
with Doody to renovate its stores; after several rounds of
complaints by Jefferson Ward, Doody filed an action in the
Southern District of Ohio seeking a declaration that it had
not breached their contract. Jefferson Ward then filed suit
in the Eastern District of Pennsylvania against Doody for
breach of contract and negligence. The “dispositive” factor
in the court’s decision to keep the case rather than dismiss
it in favor of the first-filed court was “a serious question
as to that court’s jurisdiction.” Jefferson Ward, 560 F.
Supp. at 36. The court supported its decision with the
following statement, which provides the sole basis for Cadle’s
argument in its brief: “It is not the first case filed which
has precedence, but ‘the court first obtaining jurisdiction of
the parties and the issues’ which should proceed with the
litigation.” Jefferson Ward, 560 F. Supp. at 37 (quoting
Omni-Exploration, Inc. v. McGookey, 520 F. Supp. 36, 37 (E.D.
Pa. 1981)). This excerpt would seem to lend support to
Cadle’s view that the first-to-file rule requires the second-
filed court to consider the jurisdiction of the first.
Jefferson Ward’s analysis of the first-to-file rule,
however, is unpersuasive. The court’s decision to consider
13 the jurisdiction of the first-filed court sprang from Columbia
Pictures Industries., Inc. v. Schneider, 435 F. Supp. 762
(S.D.N.Y. 1977).4 That case presents a much clearer picture
of how the jurisdiction of the first-filed court fits into the
rule and indicates that Jefferson Ward failed to place the
relevance of the first-filed court’s jurisdiction in the
proper context. The defendants in Columbia had threatened
antitrust litigation against Columbia; Columbia responded by
filing an action in the Southern District of New York seeking
a declaration that it had not violated any antitrust laws.
See id. at 745-46. The defendants filed their antitrust suit
in the Central District of California six days later.
Columbia moved the New York court to enjoin the defendants
from pursuing their claim in California. Id.
The New York court declined to issue the injunction,
finding that although it was the first-filed court,
exceptional circumstances militated against exercising its
priority under the rule. Id. at 747. Among other factors
(not relevant in this case), the court considered the effect
that a potential dispute about its personal jurisdiction over
Columbia would have on the value of judicial economy so
central to the first-to-file rule.
4 Omni Exploration, quoted by Jefferson Ward above, also relied on Columbia Pictures in its analysis. See Omni Exploration, 520 F. Supp. at 37-38.
14 There is a substantial question . . . whether [personal] jurisdiction exists under the New York long arm statute against these defendants, all of whom reside in California. The possibility of an erroneous determination of personal jurisdiction in New York followed by lengthy proceedings thereafter over which we were ultimately found to lack jurisdiction, and the desirability of avoiding decisions unnecessary to ultimate resolution of the merits by a federal court strongly suggest that California is a more appropriate forum.
Columbia Pictures, 435 F. Supp. at 748. The mere existence of
such questions suggested “that considerations of judicial
economy require the case to be litigated first in California.”
Id. at 750. Subsequent case law, uncited by Cadle, casts the
Jefferson Ward and Columbia Pictures decisions in the
appropriate light. While the likelihood of a jurisdictional
dispute in the first-filed court may be a factor to consider
in applying the rule, resolving the dispute in favor of that
court’s jurisdiction is never a condition precedent to
applying it. See Berisford Capital Corp. v. Central States,
Southeast and Southwest Areas Pension Fund, 677 F. Supp. 220
(S.D.N.Y. 1988) (“I would not conclude in the ‘sound
discretion’ allotted to me in this matter that [jurisdictional
uncertainty in the first filed court], standing virtually
alone, should be so compelling as to cause me to depart from
the well established and salutary first-filed rule.”); Brower
v. Flint Ink Corp., 865 F. Supp. 564, 570 (N.D. Iowa 1994)
(noting that Berisford “rejected the suggestion that
15 jurisdictional uncertainties standing alone should be so
compelling as to cause the court to depart from the ‘first
filed rule.’”); Firstier Bank, N.A. v. G-2 Farms, No. 95-3118,
1996 WL 539217, at *4 (D. Neb. Mar. 11, 1996) (noting that a
jurisdictional dispute is only one factor to consider).
3. The District Court Properly Applied the First- To-File Rule
In sum, Cadle’s view of the first-to-file rule is
supported by neither the policies behind the rule nor the
cases that apply it. While the jurisdictional certainty of
the first-filed court might be a proper factor for a district
court to weigh in maximizing judicial economy, Cadle does not
allege that the court below erred in this respect. Nor could
it: the district court in this case was the second-filed
court, and under Fifth Circuit precedent that balancing act is
reserved only for the first-filed court. “Once the likelihood
of a substantial overlap between the two suits ha[s] been
demonstrated, it [is] was no longer up to the [second filed
court] to resolve the question of whether both should be
allowed to proceed.” Mann, 439 F.2d at 407. The district
court correctly refused to act as a “super appellate court” by
entertaining either Cadle’s jurisdiction or the defendants’
standing arguments, and properly limited its inquiry to the
potential overlap between the two cases. By so limiting its
16 analysis, the district court indeed avoided trenching on the
authority of its sister court, one of “the very abuses the
first-to-file rule is designed to prevent.” Cadle, No. 97-
1502, slip op. at 4.
B. Transfer or Dismiss?
Cadle argues in the alternative that the district court
should have transferred the case back to the Laredo division
rather than dismiss it entirely. We agree. “[T]he ‘first to
file rule’ not only determines which court may decide the
merits of substantially similar issues, but also establishes
which court may decide whether the second suit filed must be
dismissed, stayed or transferred and consolidated.” Sutter
Corp., 125 F.3d at 920. As noted above, “[t]he 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.” Save Power, 121 F.3d at 948. Thus,
once the district court found that the issues might
substantially overlap, the proper course of action was for the
court to transfer the case to the Laredo court to determine
which case should, in the interests of sound judicial
administration and judicial economy, proceed. The district
court erred by dismissing the suit.
17 MOTIONS DENIED. The judgment of the district court is
VACATED, and the case is REMANDED to the district court with
instructions to transfer the case to the United States
Bankruptcy Court for the Southern District of Texas, Laredo
Division, for further proceedings consistent with this
opinion. Each party shall bear its own costs.