Brookline Special Situations Fund LLC et al v. Cup Food You Pick Up LLC et al
MEMORANDUM OPINION AND ORDER DENYING 18 MOTION to Dismiss as set out herein. Signed by Judge Virginia Emerson Hopkins on 6/13/2016. (JLC)
2016 Jun-13 PM 01:03
U.S. DISTRICT COURT
N.D. OF ALABAMA
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ALABAMA
SITUATIONS FUND LLC and MAC )
) Case No.: 2:16-CV-388-VEH
CUP FOOD YOU PICK UP LLC et )
MEMORANDUM OPINION AND ORDER
Defendants Cup Food You Pick Up, LLC, Cuplement Management, LLC,
Bryan Degraw, Sr., and Paulette Degraw (collectively, “Cup”) have moved to dismiss
Plaintiffs Brookline Special Situations Fund, LLC’s and Mac, LLC’s (collectively,
“Plaintiffs”) complaint under the Securities Exchange Act of 1934’s (“Exchange
Act”) section 20(a) and section 10(b) and Rule 10b-5 promulgated thereunder. In
particular, Cup argues that the court should dismiss the complaint as barred by
Alabama’s abatement statute, or that the court should stay this case under the
Colorado River doctrine. Neither argument has merit, so the motion will be
As this is a motion to dismiss, the well-pleaded factual allegations are accepted
as true. See Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). Because the issues in this
motion have little to do with the alleged underlying fraud, those allegations are only
briefly set out. Cup was founded in 2013 by Bryan and Paulette Degraw, Sr. as a
business that would “prepare and sell reasonably priced healthy meal options for
people on the go packaged in cups.” (Doc. 15 at 3 n. 2). In 2014, Cup made a private
offering under section 4(a)(2) of the Securities Act of 1933, 15 U.S.C. § 77d, and
Regulation D thereunder of certain convertible promissory notes. (Docs. 15, ¶ 21; 1-1
at 2). Also in 2014, Plaintiff Brookline agreed to act as “the exclusive placement
agent for [Cup’s] private offering of securities” and to use “best efforts” to find
accredited investors. (Doc. 15, ¶¶ 11–12). Plaintiffs invested $125,000 in Cup in 2014
and 2015. (Id., ¶¶ 20–23; 25). Things “went south” for Cup, which ceased operations
in December 2014. (Id., ¶ 24).
On December 21, 2015, Defendants, aside from Cuplement, sued Brookline
(but not Mac) in the Circuit Court of Jefferson County, Alabama, in an action arising
“out of the same facts and involv[ing] essentially the same legal issues” as this action.
(Doc. 18, ¶ 1). This federal action was filed on March 3, 2016, with the state
defendant becoming the federal plaintiff and vice-versa. The initial complaint
contained a defective jurisdictional allegation, so the court ordered repleader on the
same day that Cup moved to dismiss, April 15, 2016. (See docs. 13 and 14). After the
amended complaint was filed, see doc. 15, Cup again moved to dismiss on the same
grounds: Alabama’s abatement statute or, alternatively, Colorado River abstention.
The so-called abatement statute provides that
No plaintiff is entitled to prosecute two actions in the
courts of this state at the same time for the same cause and
against the same party. In such a case, the defendant may
require the plaintiff to elect which he will prosecute, if
commenced simultaneously, and the pendency of the
former is a good defense to the latter if commenced at
ALA. CODE § 6-5-440. “Unquestionably,” this statute “stands for the proposition that
a person cannot prosecute two suits at the same time, for the same cause against the
same party.” Johnson v. Brown-Service Ins. Co., 307 So.2d 518, 520 (Ala. 1974).
“The purpose of the rule is to avoid multiplicity of suits and vexatious litigation.” Id.
“The statute treats a defendant asserting a counterclaim as a plaintiff and thus may bar
that defendant from asserting the same claim in another, simultaneous or later
lawsuit.” Am. Cas. Co. of Reading, Pennsylvania v. Skilstaf, Inc., 695 F. Supp. 2d
1256, 1258 (M.D. Ala. 2010) (citing Ex parte Parsons & Whittemore Alabama Pine
Construction, 658 So.2d 414, 419 (Ala. 1995)). The statute also requires the
abatement of compulsory counterclaims raised for the first time in a subsequent
lawsuit. Ex parte Bremen Lake View Resort, L.P., 729 So.2d 849, 851 (Ala. 1999).
“[A] state court action may be abated if there is pending a federal court action
involving the same cause against the same party.” Johnson, 307 So.2d at 520.
Defendants’ position is that, because this action under the Exchange Act
includes what would be compulsory counterclaims (or so they say), the abatement
statute bars this claim. Plaintiffs, for their part, cite two Alabama cases for the
proposition that, as a matter of Alabama law, the abatement statute does not bar a suit
when the second action is filed in federal court. For brevity, the court will call this the
“later-federal exception.” Neither party’s position is entirely persuasive, although an
argument implied in the penumbras and emanations of Plaintiffs’ explicit argument
is sufficient to reject the abatement statute as ground for dismissal.
The problem with the plaintiffs’ explicit position is that it reads the Alabama
cases too broadly; their holdings do not suggest that the abatement statute becomes
a total nullity when the second suit is federal. Rather, one case, Johnson, supplies an
exception to the abatement statute’s application for Alabama courts when the second
suit is federal; it says nothing about what a federal court must do. The other case,
Clark v. Wells Fargo Bank, N.A., 24 So.3d 424 (Ala. 2009), applied the Johnson rule
to a counterclaim added by an amended answer in an earlier-filed state action after
the later filing of a federal action pursuing claims identical to the counterclaims. The
Alabama Supreme Court held that, at the intersection of the relation-back doctrine of
ALA. R. CIV. P. 13 and Johnson, the counterclaims need not be abated. Id. at 429.
To understand why the later-federal exception is a bridge too far, one need only
look at the assumption underlying the Johnson exception. The Alabama Supreme
Court thought that a federal court “would not have abated the federal action,”
Johnson, 307 So.2d at 520. Were it otherwise, it would make little sense to exempt
a state court from the abatement statute’s “clear statutory prohibition” Clark, 24
So.3d at 429, on the maintenance of redundant lawsuits. So Chase and Johnson
cannot purport to direct a federal court’s application of the abatement statute when
the fundamental premise of the exception established in those cases was a federal
court’s non-application of the abatement statute. Cf. First Tennessee Bank, N.A. v.
Snell, 718 So.2d 20, 27 n. 3 (Ala. 1998) (See, J., concurring in the result) (“The
abatement statute . . . cannot abate federal actions.”). Put another way, it is
oxymoronic for Alabama law to compel an outcome that the Alabama courts deem
The Alabama Supreme Court does not say so, but the reason for their
assumption is obvious: the Erie doctrine.1 See Johnson, 307 So.2d at 520 (citing
Ermentrout v. Commonwealth Oil Co., 220 F.2d 527, 530 (5th Cir. 1955) (concluding
that a federal court would apply the federal “rule” of abatement);2, 3 Hanna v. Plumer,
380 U.S. 460, 465 (1965) (“federal courts are to apply . . . federal procedural law.”).
And the Erie doctrine is why Cup’s argument fails, because “a veritable avalanche of
recent (and apparently unanimous) federal precedent has found that,” James v.
Nationstar Mortgage, LLC, 92 F. Supp. 3d 1190, 1198 (S.D. Ala. 2015), section “6-5440 should not play any role in the decision whether to retain or dispose of
litigation.” Skilstaf, 695 F. Supp. 2d at 1260 (alteration, citation, and internal
quotation marks omitted).
It is true, as Cup suggests, that federal courts in this state have held that the
abatement statute is applicable in federal court. See, e.g., Central Reserve Life Ins.
Co. v. Kiefer, 211 F.R.D. 445, 448 (S.D. Ala. 2002); Simmons v. Pulsoman Safety
Equip. Corp., Inc., 471 F. Supp. 999 (S.D. Ala. 1979). But no federal court in
So named for Erie R. Co. v. Tompkins, 304 U.S. 64 (1938). The court generally uses
“Erie,” as shorthand for the complicated body of law that has grown up around the Rules of
Decision Act, the Rules Enabling Act, and vertical choice of law generally.
Ermentrout would be binding authority in the Eleventh Circuit. Bonner v. City of
Prichard, Ala., 661 F.2d 1206 (11th Cir. 1981) (adopting as binding authority all decisions of the
former Fifth Circuit as that court existed on September 30, 1981 and handed down prior to that
But it has probably been abrogated by Colorado River Water Conservation Dist. v.
United States, 424 U.S. 800 (1976).
Alabama has even assumed in a published opinion—let alone held—since 2008 that
the abatement statute applies in federal court. The impetus for this sea change appears
to be Judge Thompson’s 2010 Skilstaf opinion, 695 F. Supp. 2d 1256, in which he
persuasively rejected the first Alabama district court opinion to pass on the issue,
Simmons v. Pulsoman Safety Equip. Corp., 471 F. Supp. 999 (S.D. Ala. 1979).
In Simmons, a federal district judge sitting in Alabama, while noting that the
parties had not addressed the Erie issue, relied on an Illinois federal district court
decision conducting an Erie analysis of an Illinois statute that the Simmons judge
believed was similar to Alabama’s abatement statute. Id. at 1001. The Illinois statute,
now cited as 735 ILL. COMP. STAT. 5/2-619(a)(3), provided that a lawsuit may be
dismissed involuntarily when “there is another action pending between the same
parties for the same cause.” The Illinois federal judge concluded that the Illinois
statute applied in federal court, and the Simmons judge reasoned that the Alabama
statute should as well. Id.
Judge Thompson began by noting that the Seventh Circuit has expressly
rejected the case on which Simmons relied. See Skilstaf, 695 F. Supp. 2d at 1259
(citing AXA Corp. Sol. v. Underwriters Reinusrance Corp., 347 F.3d 272 (7th Cir.
2003)). He then adopted the Seventh Circuit’s reasoning as equally applicable to
Alabama’s abatement statute:
In our view, the problem addressed by § 2–619(a)(3) is
closely akin to topics such as forum non conveniens, lis
pendens, and venue statutes. Each of those areas addresses
an organizational matter that is governed by the law of the
sovereign that established the forum. In the case of a
federal court, that sovereign is obviously the United States.
We see no way for a federal court simultaneously to follow
the Supreme Court's Colorado River doctrine and to apply
the rule of § 2–619(a)(3). Given that conflict, and given the
procedural nature of this problem, we conclude that the
state statute should not have played any role in the decision
whether to retain or dispose of this litigation.
AXA Corp., 347 F.3d at 278. Although this court is inclined to think that ALA. CODE
§ 6-5-440 is more similar to the venue statutes than the Colorado River doctrine,4 that
taxonomy simply reinforces Judge Thompson’s holding that Alabama’s abatement
statute does not apply in federal court. If a judicial exception to the jurisdictional and
venue statutes trumps a similar state provision, federal statutes trump such a state
provision a fortiori, to say nothing of the supreme elephant in the room, U.S. CONST.
art. VI, cl. 2.
The AXA Corp. court characterized the issue there as Illinois’s and the United States’
competing approaches to dealing with duplicative litigation. Undoubtedly, the Alabama statute is
aimed at the same problem. But the Alabama statute is by its terms limited to the abatement of
actions when two or more of the suits are in the “courts of [Alabama],” and the Alabama
Supreme Court “has long been committed to the proposition that the pendency of a suit upon the
same cause of action in [a]nother state is no cause of abatement of a suit instituted in this state.”
Ex parte Buck, 287 So.2d 441, 443 (Ala. 1973). The Illinois statute is not so limited, permitting
the dismissal of suits even when the concurrent litigation is outside of Illinois. See, e.g.,
Seaboard Finance Co. v. Davis, 276 F. Supp. 507 (N.D. Ill. 1967). Thus, the Alabama statute
(mostly) addresses intrasystem redundancy, like the venue statutes, while the Illinois rule is
capacious enough to address intersystem redundancy, like Colorado River.
Finally, a word on why the court undertook an Erie analysis when it was, at
most, peripheral to the parties’ arguments. Cf. Esfeld v. Costa Crociere, S.P.A., 289
F.3d 1300, 1305 (11th Cir. 2002) (noting the district court’s sua sponte Erie analysis,
but not offering approval of it). The chief concern, since the Erie analysis comes out
in Plaintiffs’ favor, is whether the issue was sufficiently developed to put Cup on
notice of it. First, Cup noted in its brief that the abatement statute applies in federal
court, implicitly acknowledging the Erie issue. (See doc. 18, ¶ 7) (“Alabama courts
have held that the abatement statute applies to both state and federal courts.”).
Second, the Alabama cases assumed the Erie analysis. This is not to say that
Alabama’s determination that a federal court would not apply the Alabama rule is
dispositive of the federal court’s decision on application (the circularity is dizzying);
the point is that the Alabama cases were decided in Erie’s shadow, providing some
notice to Cup of the issue.
Third, and most importantly, Plaintiffs cited Skilstaf, which held that the
abatement statute does not apply in federal court under Erie. And, although they
appear to have (no doubt, unintentionally) misstated the holding as a broad laterfederal exception, one need only read the page from which Plaintiffs’ Skilstaf block
quote5 is taken to see that it was immediately preceded by a lengthy quotation from
AXA Corp., making it clear beyond peradventure that Skilstaf was an Erie case. A
federal court may rely on the true holding of a case cited by a party—even if the
citing party misstates it and the other party ignores it.
“The federal courts” have a “virtually unflagging obligation . . . to exercise the
jurisdiction given them,” Colorado River Water Conservation Dist. v. United States,
424 U.S. 800, 817 (1976), and the abstention doctrines are the chief reason for the
qualifier “virtually.” Most of those doctrines are limited to narrowly circumscribed
and quite specific scenarios. See, e.g., Younger v. Harris, 401 U.S. 37 (1971)
(abstention applied when federal jurisdiction would interfere with state criminal or
quasi-criminal proceedings); Burford v. Sun Oil Co., 319 U.S. 315 (1943) (abstention
applied when delicately balanced, and very important, state policies would be gravely
disrupted by federal intervention); Railroad Comm’n. of Tex. v. Pullman Co., 312
U.S. 496 (1941) (abstention applied to case presenting a novel question of state law
in which one interpretation presented serious constitutional questions). Colorado
“‘This court therefore rejects [the] holdings in Simmons and Kiefer and holds instead
that, for a district court sitting in diversity, § 6-5-440 should not play any role in the decision
whether to retain or dispose of litigation. The defendants’ § 6-5-440 argument is without merit.’”
(Doc. 20 at 8) (quoting Skilstaf, 695 F. Supp. 2d at 1260) (alteration supplied by the court to
correct a typographic error appearing in Skilstaf and accurately reflected by Plaintiffs’ quotation).
River is yet another flavor of abstention. It is more flexible in the sense that its
application is not neatly pigeonholed, but this flexibility is tempered by its infrequent
application; “abstention as a general matter is rare, [and] Colorado River abstention
is particularly rare.” Jackson-Platts v. General Elec. Capital Corp., 727 F.3d 1127,
1140 (11th Cir. 2013).
The necessary—but not themselves sufficient—conditions for Colorado River
abstention are “a parallel state action” involving “substantially the same parties and
substantially the same issues.” Ambrosia Coal and Const. Co. v. Pages Morales, 368
F.3d 1320, 1330 (11th Cir. 2004). With that out of the way, the court must consider
six factors before taking the “extraordinary step,” Noonan S., Inc. v. Cnty. of Volusia,
841 F.2d 380, 383 (11th Cir. 1983), of abstaining:
(1) the order in which the courts assumed jurisdiction over
property; (2) the relative inconvenience of the fora; (3) the
order in which jurisdiction was obtained and the relative
progress of the two actions; (4) the desire to avoid
piecemeal litigation; (5) whether federal law provides the
rule of decision; and (6) whether the state court will
adequately protect the rights of all parties.
TranSouth Fin. Corp. v. Bell, 149 F.3d 1292, 1294–95 (11th Cir. 1998). No single
factor is dispositive, but they must be weighed “with a heavy bias” in favor of
exercising jurisdiction. Jackson-Platts, 727 F.3d at 1141. “Only the clearest of
justifications will warrant” abstention. Moses H. Cone Mem’l. Hosp. v. Mercury
Const. Corp., 460 U.S. 1, 16 (1983) (quoting Colorado River, 424 U.S. at 818–19)
(emphasis added in Moses H. Cone). Should abstention be warranted, the proper
course is a stay of the action. Moorer v. Demopolis Waterworks and Sewer Bd., 374
F.3d 994, 998 (11th Cir. 2004).
On this issue, the parties have spilled a substantial amount of ink arguing about
whether this action and the state court action are truly the same, with Cup saying
“yes” and Plaintiffs saying “no.” This effort is misplaced because, even assuming
arguendo that Colorado River’s threshold requirement is satisfied, consideration of
the six factors reveals abstention is not warranted.
Applying the factors to this case, I note that neither court has assumed
jurisdiction over property; “where ‘there is no real property at issue, this factor does
not favor abstention.’” Jackson-Platts, 727 F.3d at 1141 (quoting Maharaj v. Sec’y
Dep’t of Corr., 432 F.3d 1292, 1306 (11th Cir. 2005)) (emphasis in Maharaj). The
fora are within a mile of each other, and so they are equally convenient (or
inconvenient). Cup argues that the maintenance of a second lawsuit is inconvenient
because it is litigating outside of its home state (true), so the second-filed federal suit
means the federal forum is inconvenient. This is question-begging; the mere existence
of duplicative litigation and its attendant inconvenience does not make the second
forum inconvenient relative to the first. Rather, this factor weighs whether one forum
is logistically superior to another, not whether unified litigation is superior to
piecemeal. Moving on, federal law—esoteric federal law, at that—supplies the rule
of decision in this Exchange Act suit. This factor militates against abstention. The one
factor that seriously counsels in favor of abstention is the order of retention and
progress of the litigation. The earlier suit was filed in state court, and discovery is
underway in that case. But this is not enough to tip the scales in favor of abstention.
The sixth factor, the state court’s ability to protect the parties’ rights, counsels
strongly—no, overwhelmingly—in favor of the exercise of federal jurisdiction. The
parties do not mention it, but the Exchange Act “provides federal district courts with
exclusive jurisdiction ‘of all suits in equity and actions at law brought to enforce any
liability or duty created by [the Exchange Act] or the rules and regulations
thereunder.’” Merrill Lynch, Pierce, Fenner & Smith Inc. v. Manning, 136 S.Ct. 1562,
1568 (2016) (quoting 15 U.S.C. § 78aa(a)) (alteration in original). “[S]tate courts do
not possess power to hear and decide this controversy.” Fin. Ind. Reg. Auth., Inc. v.
Fiero, 882 N.E.2d. 879, 882 (N.Y. 2008) (dismissing Exchange Act suit filed in New
York state court). Thus, the Alabama court is totally unable to protect Plaintiffs’
federal rights. This dovetails into the remaining undiscussed factor, the avoidance of
piecemeal litigation. Where, as here, a federal court is the only forum for the
vindication of federal claims, the litigation will necessarily be piecemeal as long as
the state claims remain in state court. There is no avoiding it.
Taking these factors together, along with the necessary bias in favor of
retaining jurisdiction, the court concludes it should not close its doors when it is the
only available doorway. Abstention is inappropriate. The motion is DENIED.
DONE and ORDERED this 13th day of June, 2016.
VIRGINIA EMERSON HOPKINS
United States District Judge
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