PCH Lab Services, LLC v. Newman Memorial Hospital Inc et al

Filing 15

MEMORANDUM Opinion and Order: For the reasons stated in the attached memorandum opinion and order, the Hospital's motion to dismiss on Colorado River abstention grounds is granted. The case is dismissed and PCH's petition is denied as moot. Enter Memorandum Opinion and Order. Signed by the Honorable Harry D. Leinenweber on 3/16/2018:Mailed notice(maf)

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION

PCH LAB SERVICES, LLC,
Plaintiff,
Case No. 17 C 7971
v.
Judge Harry D. Leinenweber
NEWMAN MEMORIAL HOSPITAL
INC., and SHATTUCK HOSPITAL
AUTHORITY,
Defendants.

MEMORANDUM OPINION AND ORDER
Plaintiff

PCH

Lab

Services,

LLC

(“PCH”)

petitions

this

Court to compel arbitration of the claims brought against it by
Newman Memorial Hospital, Inc. and Shattuck Hospital Authority
(together, “the Hospital”).

In response, the Hospital moves to

dismiss PCH’s petition and this case for lack of subject matter
jurisdiction or, in the alternative, because the Colorado River
abstention doctrine demands it.

The Court finds that it has

subject matter jurisdiction to entertain this case but grants
the Hospital’s Motion to Dismiss on abstention grounds.
I.
In

May

agreement

2016,

with

PCH

Newman
whereby

BACKGROUND
Memorial
PCH

Hospital

would

manage

entered
the

into

an

financially

distressed Hospital and help it walk back from the brink of

financial collapse.
Amended

Petition

(Ex. 1 to PCH’s Petition, Okla. Ct. Second

¶ 16-21,

ECF

1-1.)

But

with

its

newfound

authority to enter into agreements on the Hospital’s behalf, PCH
allegedly undertook a fraudulent scheme that violated local laws
and regulations and ultimately worsened, rather than improved,
the

Hospital’s

financial

health.

The

Hospital

sued

PCH

in

Oklahoma state court in June 2017, alleging sixteen causes of
action

including

fraud

and

numerous

contract

claims.

(Hospital’s Response at 1, ECF No. 11; see generally, Second Am.
Pet.)

PCH took issue, claiming that its agreement with the

Hospital contained an arbitration provision.

On September 19,

2017, PCH petitioned the Oklahoma court to compel arbitration.
(Hospital’s Resp. at 1; ECF No. 11-2.)

The Oklahoma court heard

oral argument on the motion and, finding a material dispute as
to the formation of the agreement, set the arbitration issue for
trial

on

March

15,

2018.

Notwithstanding

those

Oklahoma

proceedings, PCH filed a second petition to compel arbitration
on November 3, 2017—this time with this Court.
II.

(ECF No. 1.)

DISCUSSION

PCH petitions the Court to compel arbitration.
part,

the

grounds:

Hospital
lack

of

moves

to

subject

dismiss

PCH’s

For its

petition

matter—specifically,

on

two

diversity—

jurisdiction and abstention under the Colorado River doctrine.
- 2 -

The Hospital fails on the first argument but succeeds on the
latter.

The

Court

accordingly

dismisses

PCH’s

Motion

and

terminates this case.
A.
The

Oklahoma

Diversity Jurisdiction

dispute—but

not

the

instant

case—includes

defendant/Oklahoma entity SNB Bank, N.A. (“SNB”), which holds a
first

lien

assets.

(secured

by

a

promissory

note)

on

the

Hospital’s

The Hospital, itself an Oklahoma entity, maintains that

even though SNB is not a party to the case at bar, the Court
must include SNB in its diversity analysis and thereby conclude
that

there

is

no

diversity

jurisdiction

in

this

case.

The

Hospital advances two independent rationales for this argument:
First,

Vaden

v.

Discover

Bank,

556

U.S.

49

(2009),

directs

courts contemplating arbitration petitions to “look through” to
the underlying controversy to determine whether subject matter
jurisdiction

exists.

The

Hospital

says

that

once

the

Court

“looks through” to the underlying controversy (which includes
the

non-diverse

SNB),

the

lack

of

diversity

there will dispel this Court’s jurisdiction.

the

Court

finds

Alternatively, the

Hospital argues that the Court should find that SNB Bank is
necessary
Procedure

and
19,

indispensable
but

the

under

required

- 3 -

Federal

inclusion

of

Rule

of

Civil

SNB

here

would

destroy diversity and thus jurisdiction.

The Court ultimately

finds neither argument to be persuasive.
1.

The
“look

Whether Vaden Applies to the Diversity
Jurisdiction Analysis

Hospital

through”

parties here.
(2009).

believes

procedure

to

Court

determine

should
the

apply

the

diversity

Vaden

of

the

See, Vaden v. Discover Bank, 556 U.S. 49, 53

But Vaden is not obviously as broad as the Hospital

maintains.

The explicit ruling in Vaden dealt only with federal

question jurisdiction.
court

the

may

parties’

“look

556 U.S. at 49 (holding that a federal

through”

underlying

a

dispute

§ 4

petition

to

determine

and

“examine

whether

question jurisdiction exists” over the petition).

the

federalIt is not

clear that Vaden should be read as extending the “look through”
procedure to the diversity jurisdiction analysis as well, and
the Seventh Circuit has not yet taken up this question.

But

see, We Care Hair Dev., Inc. v. Engen, 180 F.3d 838, 842 (7th
Cir. 1999) (rejecting, in a pre-Vaden case, the argument that
presence

of

non-diverse

parties

in

the

underlying

action

destroyed diversity jurisdiction).
The Eighth Circuit, however, has taken up this question and
concluded that Vaden should be read narrowly.

Northport Health

Servs. of Ark., LLC v. Rutherford, 605 F.3d 483, 491 (8th Cir.

- 4 -

2010) (holding diversity of citizenship is determined not by the
parties in the underlying controversy but rather by the parties
named

in

the

district

court

parties who must be joined).

plus

any

Rule

19

indispensable

Rutherford relies in large part on

the earlier case of Moses H. Cone Memorial Hospital v. Mercury
Construction Corp., 460 U.S. 1, 3 (1983), superseded by statute
on other grounds as recognized in Finnie v. H & R Block Fin.
Advisors, Inc., 307 F. App’x 19, 21 (8th Cir. 2009), to bolster
its conclusion.

In Cone, the district court sat in diversity

jurisdiction and stayed proceedings before it pending resolution
of a concurrent state-court suit.

460 U.S. at 4.

The court of

appeals reversed the stay, and the Supreme Court affirmed.

Id.

But the Supreme Court opinion never discussed the basis for the
threshold

diversity,

despite

noting

the

presence

of

a

non-

diverse party in the parallel state court action which rendered
that

action

non-removable.

Rutherford,

(describing Cone, 460 U.S. at 7 & 7 n.4).

605

F.3d

at

490

All federal courts

carry the obligation to raise, sua sponte if necessary, the lack
of subject matter jurisdiction.
Better

Env’t,

523

U.S.

83,

Steel Co. v. Citizens for a
93

(1998)

(noting

obligation extends to the Supreme Court as well).

that

this

The Eighth

Circuit relied on that rule for the following reasoning:

By

ruling in Cone, the Supreme Court tacitly endorsed the case’s
- 5 -

diversity
action

jurisdiction

included

a

even

though

non-diverse

the

parallel,

party.

state

Accordingly,

the

court
Cone

Court must not have believed that “looking through” the petition
was
Under

appropriate
this

finding

view

that

underpinnings.”

it

for

the

purposes

of

Cone,

reading

“implicitly

of

determining

Vaden

overruled

expansively
Cone’s

Rutherford, 605 F.3d at 490.

Circuit refused to do.

Id.

diversity.
requires

jurisdictional
This the Eighth

(citing Shalala v. Ill. Council on

Long Term Care, Inc., 529 U.S. 1, 18 (2000)) (remarking that the
Supreme Court “does not normally overturn, or so dramatically
limit, earlier authority sub silentio”); but cf. Magruder v.
Fid. Brokerage Servs. LLC, 818 F.3d 285, 289 (7th Cir. 2016)
(citing Steel Co., 523 U.S. at 91) (reiterating that drive-by
jurisdictional rulings have no precedential effect).

District

courts that have taken up this question have also read Vaden
narrowly.

See, e.g., Garner v. BankPlus, 484 B.R. 134, 140

(S.D. Miss. 2012); THI of New Mexico at Hobbs Center, LLC v.
Spradlin, 893 F. Supp. 2d 1172 (D.N.M. 2012); Minn. Life Ins.
Co. v. Mungo, No. 0:11-681, 2011 WL 2518768, at *1-2 (D.S.C.
June 23, 2011); L.A. Fitness Intern. LLC v. Harding, No. 095537, 2009 WL 3676272, at *2-3 (W.D. Wash. Nov. 2, 2009); Credit
Acceptance Corp. v. Davisson, 644 F. Supp. 2d 948, 953 (N.D.
Ohio 2009).
- 6 -

This

Court

agrees

with

the

Eighth

Circuit

that

Vaden

limited its holding to federal question jurisdiction and should
not

be

read

to

have

overruled

implicitly

diversity cases from other circuit courts.

the

pre-Vaden

§ 4

See, e.g., Circuit

City Stores, Inc. v. Najd, 294 F.3d 1104, 1106 (9th Cir. 2002)
(refusing

to

consider

for

diversity

purposes

the

non-diverse

defendant present only in the state court action); We Care Hair
Dev.,

Inc.

(rejecting
parties

v.

Engen,

appellants’
in

the

180

F.3d

argument

underlying

838,

that

842

(7th

presence

action

of

Cir.

1999)

non-diverse

destroyed

diversity

jurisdiction); Doctor’s Assocs., Inc. v. Distajo, 66 F.3d 438,
445 (2d Cir. 1995) (rejecting same).

Rutherford also emphasized

the Supreme Court’s rule that “[i]f a precedent of this Court
has direct application in a case, yet appears to rest on reasons
rejected in some other line of decisions, [lower courts] should
follow the case which directly controls, leaving to this Court
the prerogative of overruling its own decisions.”

Rutherford,

605 F.3d at 491 (quoting Rodriguez de Quijas v. Shearson/Am.
Exp., Inc., 490 U.S. 477, 484 (1989)); see, Agostini v. Felton,
521 U.S. 203, 237 (1997) (stating same).
rule

to

heart.

In

a

pre-Vaden

ruling,

This Court takes that
the

Seventh

Circuit

rejected the argument advanced now by the Hospital, see, We Care
Hair,

180

F.3d

at

842,

and

Vaden
- 7 -

did

no

violence

to

that

holding.

The

Court

Circuit

precedent

will

to

not

fashion

hopscotch
a

new

controlling

rule

out

of

Seventh

the

Vaden

decision where the Supreme Court did not deign to do so.

The

Hospital’s Vaden argument fails.
2.

Whether SNB Bank Is a Necessary and Indispensable Party
The Hospital argues in the alternative that SNB Bank is a

necessary

and

indispensable

party

under

Rule

inclusion destroys the Court’s jurisdiction.
motion

to

dismiss

for

failure

to

join

19,

and

its

In ruling on a
a

necessary

and

indispensable party, the court must accept the allegations of
the complaint as true.
F.3d

477,

479

n.2

Davis Cos. v. Emerald Casino, Inc., 268

(7th

Cir.

2001)

(citation

omitted).

The

moving party has the burden of showing that the absent party is
both

“necessary”

Rule 19(b).

under

Rule

19(a)

and

“indispensable”

under

See, Florian v. Sequa Corp., No. 98 C 7459, 2002 WL

31844985, at *3 (N.D. Ill. Dec. 18, 2002).
The Rule 19(a)(1) prong is concerned with whether the Court
can accord “complete relief” among the parties before the Court.
FED. R. CIV. P. 19(a)(1); United States v. Tribal Dev. Corp., 100
F.3d 476, 480 (7th Cir. 1996) (citations omitted).

Here, it is

not

is

clear

necessary.
equipment,

from

the

filings

why

SNB’s

presence

at

all

SNB Bank holds a first lien on all of the Hospital’s
inventory,

accounts,
- 8 -

and

contract

rights.

(Hospital’s

Resp.

at

13.)

In

the

Oklahoma

action,

SNB

counterclaimed, asserting that the promissory notes secured by
those

liens

are

due

and

unpaid.

Hospital’s Resp., ECF No. 11-5.)
SNB

has

the

allegations

lien
for

intrinsically

it

the

claims.
assertion

interwoven,

and

(SNB

Sure it does.

Ex.

5

to

For its part, PCH denies that
The

Hospital

that

“the

SNB

Bank

interest in the outcome of this action.”
13.)

Answer,

relies

parties’
has

a

on

these

rights

are

significant

(Hospital’s Resp. at

But the prospect of later litigation is not

in itself sufficient to make SNB a necessary party.
2002 WL 31844985, at *5.

Florian,

If the Hospital loses its case against

PCH (in whatever forum), its position vis-à-vis SNB Bank, its
creditor, does not change.

If the Hospital wins its case and

recovers damages from PCH, its financial condition and ability
to pay back SNB improves.

If under this second hypothetical the

Hospital refuses to pass along any of its litigation winnings to
SNB, SNB could bring a discrete suit against the Hospital under
the notes.

In short, SNB’s absence does not impair the Court’s

ability to accord complete relief among PCH and the Hospital.
The Court cannot go beyond the materials at bar in ruling upon
the

Hospital’s

Motion

to

Dismiss,

and

on

that

record

the

Hospital has failed to meet its burden to show that SNB is a
necessary party under Rule 19(a).
- 9 -

B.
As

set

forth

above,

Abstention
the

Court

has

the

subject

jurisdiction necessary to entertain PCH’s petition.

matter

But should

it?

The Hospital argues that the Court should abstain from

doing

so

under

the

Colorado

River

doctrine.

See

generally,

Colorado River Water Conservation Dist. v. United States, 424
U.S. 800 (1976).

Under that doctrine, “a federal court may stay

or dismiss a suit in exceptional circumstances when there is a
concurrent

state

proceeding

and

the

stay

promote ‘wise judicial administration.’”

or

dismissal

would

Caminiti & Iatarola,

Ltd. v. Behnke Warehousing, Inc., 962 F.2d 698, 700 (7th Cir.
1992)

(quoting

Colorado

River,

424

U.S.

at

818).

Although

abstention is the overriding exception and not the rule, we have
here exceptional circumstances that warrant it.

Clark v. Lacy,

376 F.3d 682, 685 (7th Cir. 2004) (quoting Sverdrup Corp. v.
Edwardsville Cmty. Unit Sch. Dist. No. 7, 125 F.3d 546, 550 (7th
Cir. 1997)).
The Colorado River abstention analysis involves two steps.
First, the court must consider “whether the concurrent state and
federal actions are actually parallel.”

Clark, 376 F.3d at 685

(quoting LaDuke v. Burlington N. R.R. Co., 879 F.2d 1556, 1558
(7th Cir. 1989)).
weighs

several

If the cases are parallel, the court next

non-exclusive

factors

- 10 -

to

determine

whether

exceptional circumstances exist that warrant abstention.

Id.

(citing LaDuke, 879 F.2d at 1559).
The case at bar is parallel to the Oklahoma suit.
cases need not be identical.

The two

See, Interstate Material Corp. v.

City of Chi., 847 F.2d 1285, 1288 (7th Cir. 1988).

Two suits

are considered parallel “when substantially the same parties are
contemporaneously

litigating

substantially

the

same

issues

in

another forum.”

Clark, 376 F.3d at 686 (quoting Calvert Fire

Ins. Co. v. Am. Mut. Reinsurance Co., 600 F.2d 1228, 1229 n.1
(7th Cir. 1979)).

The addition of parties to a proceeding does

not by itself destroy the parallel nature of state and federal
proceedings.

See, Schneider Nat’l Carriers, Inc. v. Carr, 903

F.2d 1154, 1156 (7th Cir. 1990) (finding cases parallel where
plaintiff

named

Ultimately,

the

additional
question

defendants

is

whether

in

there

state
is

a

action).

substantial

likelihood that the state litigation will dispose of all claims
presented in the federal case.
certainly

the

case

here.

Clark, 376 F.3d at 686.

PCH

argues

against

That is

abstention

by

pointing out that (1) there are fewer parties here than in the
state court matter and (2) this case involves a single count (a
request for compelled arbitration) rather than the litany that
appear in Oklahoma.

These are contentions without merit.

Case

law does not reserve the “parallel proceedings” label for twin
- 11 -

actions that share identical parties.

Carr, 903 F.2d at 1156.

Second, the fact that PCH here distilled the case pending in
Oklahoma to its current crucial question (to compel or not to
compel?) does not transmogrify that action into something new.
Certainly, there is a substantial likelihood that the Oklahoma
litigation
proceed.

would

resolve

this

issue

if

simply

allowed

to

If the Oklahoma hearing took place on March 15th as

planned, this issue might even be resolved already.
The

cases

circumstances”

are

parallel,

factors:

(1)

so

on

whether

to

the

the

state

“exceptional
has

assumed

jurisdiction over property; (2) the inconvenience of the federal
forum; (3) the desirability of avoiding piecemeal litigation;
(4)

the

order

in

which

jurisdiction

was

obtained

by

the

concurrent forums; (5) the source of governing law, state or
federal; (6) the adequacy of state-court action to protect the
federal plaintiff’s rights; (7) the relative progress of state
and

federal

proceedings;

(8)

the

presence

or

absence

of

concurrent jurisdiction; (9) the availability of removal; and
(10) the vexatious or contrived nature of the federal claim.
Clark,

376

F.3d

at

685

(citing

LaDuke,

879

F.2d

at

1559)

(citation omitted).
These

factors

do

PCH

no

favors.

All

are

either

inapplicable (such as the jurisdiction-over-property factor and
- 12 -

the

availability

of

toward abstention.
forum.
(PCH’s

removal)

or

weigh,

to

varying

degrees,

This district is a relatively inconvenient

Though PCH’s sole member and manger calls Chicago home
Reply

at

6,

ECF

No.

12),

the

vast

majority

of

the

Hospital’s employees, witnesses, and evidence are in Oklahoma,
where it filed its case against PCH.

(Hospital’s Resp. at 6.)

The third factor, concerning the courts’ interest in avoiding
piecemeal litigation, does not help PCH either.
that

federal

law

actually

requires

piecemeal

PCH is correct
resolution

when

necessary to give effect to an arbitration agreement, Cone, 460
U.S. at 20, but the agreement at issue here can be given effect
by the Oklahoma court without this Court’s intervention.
the timing of jurisdiction set out in factor four:

As to

The Hospital

initiated its Oklahoma suit four months before PCH filed the
instant petition, so this factor weighs toward abstention.
governing

law

factor

somewhat less heavily.

also

weighs

toward

abstention,

The

though

PCH emphasizes that this case concerns

the Federal Arbitration Act, but the Oklahoma court has already
uncovered material questions as to the formation of the at-issue
arbitration

agreement;

Oklahoma state law.

these

questions

must

be

resolved

by

See, First Options of Chi., Inc. v. Kaplan,

514 U.S. 938, 944 (1995) (finding that when deciding whether
parties agreed to arbitrate a claim, courts generally should
- 13 -

apply

state

law

regarding

contract

formation).

Both

the

adequacy of state-court action and the concurrent jurisdiction
factors weigh toward abstention for the simple reason that state
courts

have

concurrent

jurisdiction

compel arbitration on the merits.

to

consider

motions

to

See, Nationstar Mortg. LLC v.

Knox, 351 F. App’x 844, 852 (5th Cir. 2009).

Next, the relative

progress factor tips the scales further toward abstention.

The

Oklahoma judge set a contract formation hearing for March 15,
2018.

Unless the judge later continued that date, that hearing

has no doubt already occurred.
instant

action

direction.

is

The

vexatious
Court

The final factor—whether the

or

contrived—points

understands

PCH

believes

in
it

the

same

and

the

Hospital agreed to arbitrate their claims, and that the Hospital
violated that agreement by filing suit in Oklahoma.
proceedings

there,

whether

proper

or

not,

are

But the

underway.

It

seems that PCH simply did not like the way the wind was blowing
in Oklahoma and thought it best to try its chances out here
instead.

Entertaining

that

undermine,

rather

strengthen,

These

qualify

as

than

“exceptional

duplicative

action

judicial

circumstances”

here

would

administration.
under

Colorado

River, and the Court will abstain from sticking its nose into a
neighboring court that is perfectly qualified to rule on matters
already and properly before it.
- 14 -

III.

CONCLUSION

For the reasons stated herein, the Hospital’s Motion to
Dismiss on Colorado River abstention grounds is granted.

The

case is dismissed and PCH’s Petition is denied as moot.

IT IS SO ORDERED.

Harry D. Leinenweber, Judge
United States District Court
Dated:

3/16/2018

- 15 -