Stone Street Asset Trust v. Blue et al
Filing
14
MEMORANDUM OPINION. Signed by Judge Sue L. Robinson on 8/1/2011. (nmf)
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF DELAWARE
STONE STREET ASSET TRUST,
)
Plaintiff,
)
)
)
v.
ARCHIE BLUE and
OBEY FINANCIAL GROUP, INC.,
Defendants.
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)
)
)
)
)
Civ. No. 10-541-SLR
R. Karl Hill, Esquire of Seitz Van Ogtrop & Green, P.A., Wilmington, Delaware.
Counsel for Plaintiff.
Ericka F. Johnson, Esquire of Womble Carlyle Sandridge & Rice, PLLC, Wilmington,
Delaware and Bradley L. Drell, Esquire and Michael J. Floyd, Esquire of Gold, Weems,
Bruser, Sues & Rundell, Alexandria, Louisiana. Counsel for Defendants.
MEMORANDUM OPINION
Dated: August [ ,2011
Wilmington, Delaware
R~N
I. INTRODUCTION
Plaintiff Stone Street Asset Trust ("Stone Street Trust") instituted the case at bar,
seeking a declaration of ownership to property located within the district. Currently
before the court is defendant Obey Financial Group's ("Obey's") motion to dismiss or, in
the alternative, stay proceedings in federal court. Obey moves for the court to abstain
from exercising its subject matter jurisdiction pending the resolution of a proceeding
currently ongoing in Louisiana. Because both parties have applied the incorrect
abstention doctrine, the court finds, sua sponte, that Stone Street Trust's claims arise
under the Declaratory Judgment Act ("DJA") and grants the motion to stay the action.
II. BACKGROUND
On May 8, 1997, defendant Archie Blue ("Blue"), a citizen of Louisiana, won a
casino jackpot prize in the total amount of $5,204,748.00, consisting of 20 annual
payments ("Prize Payments"). (0.1. 1 at,-r 2) On April 26,2006, Blue and Stone Street
Capital, Inc. ("Old SSC") entered into a contract wherein Blue sold five years of future
Prize Payments to Old SSC ("Assigned Payments"). (/d.
at,-r 8;
0.1. 11, ex. B1) On
July 20, 2007, Blue and Stone Street Capital, LLC ("New SSC") entered into a contract
wherein Blue sold three additional Prize Payments to New SSC ("Additional Assigned
Payments"). (0.1. 1 at,-r 9; 0.1. 11, ex. B1) New SSC assigned the rights under the
contract regarding the Additional Assigned Payments to Stone Street Trust. (0.1. 1 at,-r
9)
2
On September 6,2007, Obey, a Louisiana corporation, obtained a monetary
judgment against Blue in the Ninth Judicial District Court for the State of Louisiana. 1
(D.1. 12, ex. C)
On September 13, 2007, New SSC obtained a court order from the Second
Judicial District Court, Washoe County, Nevada approving, ordering, and declaring that
Stone Street Trust was the owner of the Assigned Payments and Additional Assigned
Payments. (D.1. 1 at 1r 11; D.1. 1, ex. A) Stone Street Trust protected its security
interest in the Additional Assigned Payments by filing a UCC-1 financing statement in
Louisiana that reflects the purchase and ownership of the Prize Payments. (D.1. 1 at 1r
14; D.1. 1. ex. B) According to Stone Street Trust, at the time of the transfer, Blue was
solvent and the Prize Payments were free of any liens or encumbrances. (D.1. 1 at 1r
13)
On April 22, 2010, Obey filed a revocatory action in the Ninth Judicial District
Court for the State of Louisiana against Stone Street Trust's alleged agent Sydney
Grider ("Grider"), Blue, and "Stone Street," which is a non-existent entity (the "Louisiana
action"). (D.1. 8 at 2) Obey filed a third amended and supplemental petition properly
naming Stone Street Trust as a defendant on October 26.2010. 2 (D.I. 12 at 2; D.1. 12.
ex. A at 1r 1) The Louisiana action is ongoing. (D.1. 8 at 2)
1
Obey alleges it was Blue's financial planner after Blue's lottery win. (D.1. 8 at
n.3)
Obey did not correct the Louisiana action pleadings until after Stone Street
Trust noticed that Obey had named a non-existent entity as a defendant. (D.1. 11 at 4)
2
3
On June 21,2010, Stone Street Trust, a separate sub-account of a Delaware
business trust, filed the present litigation seeking a declaratory judgment quieting title to
the Additional Assigned Payments. (D.1. 1; D.1. 11, ex. 82)
III. APPLICABILITY OF THE DJA
Although, Stone Street Trust does not specifically cite to the DJA, 3 for all intents
and purposes, Stone Street Trust has requested in its complaint that the court render a
declaratory judgment, i.e., quieting title to property and declaring said property to be
free of any liens or encumbrances. (D.1. 1 at 1f 17) See Keiser Land Co., Inc. v. Naifeh,
Civ. No. 09-1253, 2010 WL 3220642, at *1 (W.D. Tenn. Aug. 13,2010) (finding that,
even though plaintiff did not explicitly cite to the statute in its complaint, plaintiffs
requests that the court declare it owned real property invoked the DJA). Notably, Obey
cites to the DJA numerous times throughout its memorandum of law in support of its
motion to stay (D.1. 8), and nowhere in its answer does Stone Street Trust explicitly
deny that its suit would fall under the DJA 4 (D.I. 11)
A. Quiet Title Proceedings Arise Under the DJA
The right to quiet title or remove cloud upon personal property arises under the
DJA See 105 AL.R. 291. In the Third Circuit, the majority of DJA cases arise from
328 U.S.C. § 2201 (a) provides in pertinent part: "In a case of actual controversy
within its jurisdiction ... any court of the United States, upon the filing of an appropriate
pleading, may declare the rights and other legal relations of any interested party
seeking such declaration, whether or not further relief is or could be sought."
Stone Street Trust obliquely acknowledges that its suit would arise under the
DJA by asserting that: "this action is not simply a declaratory judgment action ...."
(D.1. 11 at 9)
4
4
insurance liability disputes;5 however, other claims invoke the DJA as well. Declaratory
proceedings regarding the construction and interpretation of a written instrument, such
as contracts, ordinances, statutes, wills, and trusts, are "particularly appropriate" for
remedy under the DJA. See Stern & Co. v. State Loan & Fin. Corp., 205 F. Supp. 702,
710 n.6 (D. Del. 1962) (citing Motor Terminals v. Nat'l Car. Co., 92 F. Supp. 155, 161
(D. Del. 1949)); see also Lehigh Coal & Nav. Co. v. Cent. R. of N.J., 33 F. Supp. 362,
365 (E.D. Pa. 1940). According to the Third Circuit, "[t]he objectives of the Federal
[DJA] are 'to avoid accrual of avoidable damages to one not certain of his rights and to
afford him an early adjudication without waiting until his adversary should see fit to
begin suit, after damage had accrued.'" Travelers Ins. Co. v. Davis, 490 F.2d 536, 543
(1974) (quoting E. Edelmann & Co. v. Triple-A Speciality Co., 88 F.2d 852, 854 (7th Cir.
1937». Therefore, when a plaintiff "only requests a declaration of its rights, not
coercive relief, the suit is a declaratory judgment action ...." U.S. v. City of Las
Cruces, 289 F.3d 1170,1181 (10th Cir. 2002) (citing SafetyNat'lCas. Corp. v.
Bristol-Myers Squibb Co., 214 F.3d 562, 564 (5th Cir. 2000».
5 See, e.g., State Auto Ins. Co. v. Summy, 264 F.3d 131, 135 (3d Cir. 2001)
(finding that the district court should have declined to hear an insurance action because
there was a pending state case involving the same issues); Dixon v. Progressive N. Ins.
Co., Civ. No. 08-1010, 2008 WL 4072816, at *1 (W.O. Pa. Aug. 27, 2008) (declining to
exercise jurisdiction over insurance benefits claim); Am. Gen. Life Ins. Co. v. Mann, Civ.
No. 09-434,2011 WL 446048, at *6 (D. Del. Feb. 3, 2011) (declining to stay the case
after finding the Colorado River exceptional circumstances doctrine does not apply to
declaratory judgment action pertaining to insurance claims).
5
While there is no on-point caselaw from any court in the Third Circuit analyzing
whether a quiet title action falls under the DJA,6 district courts in other circuits have
verified that it would. See Keiser Land, 2010 WL 3220642, at *1. The lack of caselaw
in this circuit designating that a quiet title action would fall under the DJA does not
preclude the court from construing the case at bar as such. First, the property at issue
are the Additional Assigned Payments, which are assigned to a trust. The construction
of trusts is one of the areas within the purview of the DJA. See Lehigh Coal, 33 F.
Supp. at 365.
The present litigation relates to the contract Blue entered into with New SSC
wherein Blue assigned the Additional Assigned Payments to Stone Street Trust.
Contract construction is also a type of claim that fits squarely within the reaches of the
DJA. See id. Indeed, it is apparent from its exhibits that Stone Street Trust will attempt
to legitimize the contract between New SSC and Blue and confirm its title to the
Additional Assigned Payments. 7 Because Stone Street Trust seeks only a declaration
of rights and no coercive relief, the DJA is the applicable law. See City of Las Cruces,
289 F.3d at 1181.
6 In the Third Circuit, only one case interprets the interaction of a quiet title action
and the DJA; however, in that case, the party instituting the quiet title action was the
United States government. See Aqua Bar & Lounge, Inc. v. U.S. Dept. of Treasury
Internal Revenue Serv., 539 F.2d 935, 937 (3d Cir. 1976).
Stone Street Trust claims that when it contracted with Blue for the rights to the
Additional Assigned Payments, Blue was financially stable and the property was free of
any liens or encumbrances. (0.1. 1 at 11 13) Obey argues that a week before Stone
Street Trust obtained a declaration that the Additional Assigned Payments belong to it,
Obey obtained a monetary judgment against Blue, rendering any contracts between
Blue and third parties after that date void under Louisiana law. (0.1. 12, ex. C; 0.1. 8 at
3; 0.1. 8, ex. A at 11 20)
7
6
B. Stone Street Trust's Complaint Satisfies the Prerequisites of a DJA
Claim
Since the enactment of the DJA, caselaw has developed to outline when a claim
arises under the DJA. In cases of "actual controversy," with the exception offederal
taxes, the federal courts have the ability to declare such rights as outlined above. See
172 A.L.R. 847. To determine whether an actual controversy arises, the district court
must ascertain whether "there is a substantial controversy, between parties having
adverse legal interests, of sufficient immediacy and reality to warrant the issuance of a
declaratory judgment." Lake Carriers' Ass'n v. MacMullan, 406 U.S. 498,506 (1972)
(citation omitted). The Third Circuit has elaborated on the standard: "The fundamental
test is whether the plaintiff seeks merely advice or whether a real question of conflicting
legal interests is presented for judicial determination." Zimmerman
v. HBG Affiliate
Group, 834 F.2d 1163, 1170 (1987).
In the case at bar, it is clear that Obey and Stone Street Trust have adverse legal
interests because both parties are attempting to claim ownership over the same
property.8 Certainly, the case creates a substantial controversy as Obey has already
instituted the Louisiana action in an indirect effort to secure title to the Additional
Assigned Payments. See Simmonds Aerocessories, Ltd. v. Elastic Stop Nut Corp. of
Am., 257 F.2d 485, 490 (3d Cir. 1958) (there need not be a direct threat of litigation to
invoke the DJA). Additionally, it is evident from Stone Street Trust's complaint that it
8 Stone Street Trust looks for this court to issue a declaratory judgment quieting
title on the Additional Assigned Payments. Obey seeks to have the Louisiana court
void the sales agreement between Blue and New SSC and mandate that Blue pay it a
monetary judgment therefrom.
7
does not seek advice regarding the quieting of title but is seeking affirmative action from
the court in an effort to stop the Louisiana action from continuing to judgment, which
could create a res judicata scenario. See Zimmerman, 834 F.2d at 1170. Because
there is a SUbstantial controversy between Obey and Stone Street Trust, Stone Street
Trust's complaint satisfies the prerequisites of a DJA claim.
C. When a DJA Claim is Pending in a Federal Court, the Correct Abstention
Doctrine is the Brillhart Abstention Doctrine
Both Obey and Stone Street Trust misstate the law regarding a district court's
ability to abstain from exercising jurisdiction under the DJA. The Colorado River
abstention doctrine is available to courts when there is simply a parallel proceeding
pending in state court. See Colorado River Water Conservation Dist. v. United States,
424 U.S. 800, 817-19 (1976) (finding that when a case does not arise under the DJA,
and absent exceptional circumstances, a court must employ its "unflagging obligation"
to exercise jurisdiction). However, when there is a parallel proceeding in state court
and the case arises under the DJA, the Brillhart abstention doctrine controls. See
Brillhart v. Excess Ins. Co. of Am., 316 U.S. 491,494-95 (1942).
After the Supreme Court released its decision in Colorado River, there was some
confusion in the legal community regarding its effect on Brillhart.9 However, all
confusion was laid to rest after the Court decided Wilton v. Seven Fal/s Co., which
reaffirmed Bril/harfs holding. See 515 U.S. 277, 282 (1995) ("Brillhart makes clear that
9 For more information on the doctrinal discussion which took place after the
Court released its decision in Colorado River, see Grace M. Giesel, The Expanded
Discretion of Lower Courts to Regulate Access to the Federal Courts After Wilton v.
Seven Falls Co.: Declaratory Judgment Actions and Implication Far Beyond, 33 Hous.
L. REV. 393, 394-96.
8
district courts possess discretion in determining whether and when to entertain an
action under the [DJA], even when the suit otherwise satisfies subject matter
jurisdictional prerequisites."). The pivotal difference between the two doctrines is the
presence or absence of the DJA in the underlying claim. The Supreme Court treats the
two doctrines differently because of "distinct features" of the DJA which the Court views
as "an enabling Act," that confers "unique and sUbstantial discretion in deciding whether
to declare the rights of litigants." Id.
The Brillhart and Colorado River doctrines are two distinct doctrines. Thus, the
court finds that the proper analysis is the Brillhart abstention doctrine, not the Colorado
River exceptional circumstances abstention doctrine. See Am. Gen. Life Ins. Co. v.
Mann. Civ. No. 09-434, 2011 WL 446048, at *2 n.2 (D. Del. Feb. 3,2011) (holding that
because the parties incorrectly analyzed a DJA issue under the Colorado River
doctrine, it could, sua sponte, rule that the correct abstention doctrine is Brillhart).
IV. STANDARD OF REVIEW
When a claim arises under the DJA, district courts have discretionary jurisdiction,
but are "under no compulsion to exercise it." State Auto Ins. Cos. v. Summy, 234 F.3d
131, 133 (3d Cir. 2000) (citing Brillhart, 316 U.S. at 495). When a court faces a DJA
claim, it has much broader discretion regarding exercising its jurisdiction than that which
is afforded under Colorado River. See U.S. v. Com. of Pa., Dept. Of Envtl. Res., 923
F.2d 1071, 1074 (1991) (3d Cir. 1991) ("[T]he traditional discretion of the federal courts
to decide whether to hear declaratory judgment cases is not limited by Colorado River .
. . but will be subject to the 'liberal interpretation' to be accorded the [DJA].") (quoting
9
Terra Nova Ins. Co., Ltd. v. 900 Bar, Inc., 887 F.2d 1213, 1223 (3d Cir. 1989)). Further,
the Court has stressed that "it would be uneconomical as well as vexatious for a federal
court to proceed in a declaratory judgment suit where another suit is pending in a state
court presenting the same issues, not governed by federal law. between the same
parties." Brillhart. 316 U.S. at 495. If the district court allowed for the declaratory action
to proceed, it could be engaging in "gratuitous interference." Wilton, 515 U.S. at 283
(quoting Brillhart. 316 U.S. at 495)).
Drawing upon Brillhart as a foundation. the Wilton court laid out the basic test a
district court must use when analyzing a DJA claim. "whether the questions in
controversy between the parties to the federal suit. and which are not foreclosed under
the applicable substantive law, can better be settled in the proceeding pending in the
state court." 515 U.S. at 282. The Supreme Court has enumerated factors a district
court ought to consider while construing the test, including the scope of the state court
proceeding. available state court defenses, whether the claims of all interested
parties can be settled in the state proceeding. whether the necessary parties have been
joined. and whether such parties are amenable to process in the state court. See
Brillhart. 316 U.S. at 495; see also Mann. 2011 WL 446048, at *3.
In DJA actions involving both insurance and interpleader cases. 10 the Third
Circuit has outlined additional factors for consideration. In the insurance arena, the'
"The federal interpleader statute, 28 U.S.C. § 1335 (1993), is a remedial
device which enables a person holding property or money to compel two or more
persons asserting mutually exclusive rights to the fund to join and litigate their
respective claims in one action." NYLife Distribs., Inc. v. Adherence Group, Inc., 72
F.3d 371,374 (3d Cir. 1995) (citing 3A J. Moore & J. Lucas, Moore's Federal Practice §
22.02[1] (2d ed. 1994».
10
10
Third Circuit has suggested that district courts embrace "a general policy of restraint
when the same issues are pending in a state court," with a view to avoiding duplicative
litigation. Glenbrook Estates, Inc. v. Wausau Ins. Cos., Civ. No. 07-678, 2007 WL
4259993, at *5 (D.N.J. Nov. 30, 2007); see also Mann, 2011 WL 446048, at *3. In the
interpleader case of NYLife Distribs., Inc. v. Adherence Group, Inc., 72 F.3d 371,382
(3d Cir. 1995), the Third Circuit applied the broad discretionary standard set forth in
Brillhart, as opposed to the narrow Colorado River doctrine, and directed that
[t]he district court should determine, as a threshold matter, whether the
state court action is indeed 'parallel' .... [s]ince the very basis for
deference is the avoidance of needless duplicative litigation. . .. [T]he
court should evaluate which forum will protect the [plaintiff] more
effectively while providing the [defendants] with the more efficient,
convenient, and expeditious vehicle to settle their dispute. . .. We would
also expect the district court to evaluate the conduct of the parties in
litigating both the federal and state actions to ensure that procedural
fencing, forum shopping or gamesmanship is not rewarded. We do not
intend the considerations we have enunciated to be comprehensive, and
leave it to the district court to consider any other factors it finds relevant.
Mann, 2011 WL 446048, at *3 (citing NYLife, 72 F.3d at 382-83).
v.
DISCUSSION
The court's initial inquiry is whether the concurrent actions are parallel. See id.
Parallel actions are those which "generally involve the same parties and claims." Id.
(citing Ryan v. Johnson, 115 F.3d 193, 196 (3d Cir. 1997». The pending actions do not
need to be identical; however, they must be "substantially similar." Id. (citing Sea
Colony, Inc. v. Alcan Aluminum Corp., 653 F. Supp. 1323, 1326 (D. Del. 1987».
Obey argues, inter alia, that the present litigation and the Louisiana action are
parallel to one another. The Louisiana action revolves around Blue's financial
11
insolvency. In its Louisiana complaint, Obey alleges that, after Blue contracted to sell
the Additional Assigned Payments, his solvency was questionable. 11 (0.1. 12, ex. A at
~
14) Obey asks the Louisiana court to nullify and revoke the sales agreement between
Blue and New
sse and order Blue to pay Obey partial satisfaction of its judgment out
of said revocation. (0.1. 12, ex. A at ~ 20) The litigation at bar pertains to Stone Street
Trust's attempt to confirm title to the Additional Assigned Payments.
The Louisiana action and the present action are similar enough to be considered
parallel because essentially the same parties are litigating over substantially the same
property. In addition, Stone Street Trust's attempts to differentiate the proceedings by
arguing that one of its fellow defendants from the Louisiana action, Grider, is not a party
to the action at bar is unpersuasive. (0.1. 11 at 4) Stone Street Trust explicitly denies
that Grider ever acted as an agent for, or was employed by, Stone Street Trust,
rendering his absence from the caption above as not surprising. (Id.) While the legal
theories of the two actions are not the same, the ultimate goals of each are: both seek
title over the Additional Assigned Payments. If the present action were to go forward, a
judgment in this court could run counter to the Louisiana action, or vice versa, creating
inconsistent results regarding the same property.
The court further finds that the issues in this action "can better be settled" in
Louisiana rather than in this district. See Mann, 2011 WL 446048, at *3 (citing Brillhart,
316 U.S. at 495). While the trust itself is located within the district, the contract in
According to Obey, Blue had liabilities that included his Obey judgment,
indebtedness secured by mortgage, and Internal Revenue Service tax liabilities. (0.1.
12, ex. A at ~ 14)
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12
dispute was executed in Louisiana. Thus, Louisiana law controls.12 Effective
administration of justice would only be achieved by granting the stay and allowing the
Louisiana court to analyze its own state law. 13
Moreover, because Obey is incorporated in Louisiana, maintains its principal
place of business in Louisiana, appears to be a regionally based entity, and all relevant
events took place in Louisiana - including the original sales agreement between Blue
and New SSC - abstention is warranted. 14 Thus, the convenience of the state forum
weighs heavily in favor of granting the stay.
Finally, as described by the Third Circuit, the factors detailed above are not
exhaustive and the district court may rely on any additional factors it finds prudent. See
id. The court today stresses that, because there is no federal law at issue and only
complicated state contract construction law is relevant, the need to stay the action is
heightened. The time sensitivity of the two proceedings is highlighted by both parties
filing separate suits, as well as other filings, to secure title to the Additional Assigned
12 This case is not akin to Mann, where both the trust and the contract at issue
had connections to Delaware, rendering the district court "more familiar with Delaware
law." See Mann, 2011 WL 416048, at *3.
13 While there has not been direct evidence that litigating in this forum would
disadvantage Obey, the court infers from the complicated nature of the contract claims
that this case would be resolved more efficiently in Louisiana. The state court is better
equipped to resolve these types of matters.
.
14 The record before the court is not similar to Mann, wherein the defendant had
sought dismissal of the state action under the doctrine of forum non conveniens in favor
of the district court. See Mann, 2011 WL 446048, at *3.
13
Payments within months of one another. 15 A stay is the most "preferable course" at this
juncture as "it assures that the federal action can proceed without risk of a time bar if
the state case, for any reason, fails to resolve the matter in controversy." Wilton, 515
U.S. at 287 n.2.
Therefore, from the record presented, the court finds that because there are
parallel proceedings, and other factors warrant it, the court must stay the litigation at
bar. If the court did not deny the motion, it would be "gratuitously interfering" with the
state court because of the presence of complex state contract issues. See Wilton, 515
U.S. at 283.
VI. CONCLUSION
Despite not explicitly citing to it, Stone Street Trust's complaint, which seeks a
declaratory judgment quieting title to property, falls under the DJA. DJA claims arise
under the Brillhart abstention doctrine, not the Colorado River exceptional circumstances
abstention doctrine. Under the Brillhart abstention doctrine, it would be judicially
"vexatious" to maintain this suit while the state court case proceeds. See Brillhart, 316
U.S. at 495. For these reasons, defendant Obey's motion to stay proceedings in federal
court is granted. An order shall issue.
In this regard, it is prudent for the court to make sure that "procedural fencing,
forum shopping, or gamesmanship is not rewarded." See Mann, 2011 WL 446048, at
*3 (citing NYLife, 72 F.3d at 383). Because the litigation at bar was filed a mere two
months after the Louisiana action, and because both proceedings deal with the ultimate
ownership of the same property, it is likely that the present action is a defensive move
on behalf of Stone Street Trust. See Mann, 2011 WL 446048, at *3.
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