Crestmark Bank v. Electrolux Home Products, Inc.

Filing 14

OPINION and ORDER Denying Defendant's 3 MOTION to Stay or Transfer - Signed by District Judge Judith E. Levy. (FMos)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MICHIGAN
SOUTHERN DIVISION
Crestmark Bank,
Plaintiff,

Case No. 14-cv-11595
Hon. Judith E. Levy
Mag. Judge David R. Grand

v.
Electrolux Home Products, Inc.,
Defendant.
________________________________/

OPINION AND ORDER DENYING [3] DEFENDANT’S MOTION
TO STAY OR TRANSFER
This is a contract dispute between a creditor (plaintiff here) and a
customer (defendant here) of a company that supplied parts for home
appliances. Pending before the Court is defendant’s motion to stay this
case in favor of an action in North Carolina state court, or,
alternatively, to transfer this case to the United States District Court
for the Western District of North Carolina. For the reasons discussed
below, the Court will deny the motion.

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I.

Background
In 2008, defendant Electrolux approved Tarheel Plastics, LLC

(“Tarheel”) as a supplier of plastic parts for the manufacture of
defendant’s home appliances.

Tarheel is located in North Carolina.

Defendant provided Tarheel with certain tooling and molds to
manufacture the parts. On December 28, 2011, defendant recorded its
security interest in certain “Tools” possessed by Tarheel. (Dkt. 3-2, Ex.
B to Defendant’s Motion to Stay 2).
Defendant also supplied Tarheel with resin, the raw material used
to make the plastic parts. Defendant and Tarheel agreed – although it
is unclear whether this agreement was in writing – that defendant
would periodically set off the resin costs against what defendant owed
on outstanding invoices from Tarheel.

The setoffs did not always

correspond to the cost of the resin actually used in the parts for which
defendant owed payment.
Plaintiff Crestmark was Tarheel’s primary lender. The loans were
secured by a security interest in “[a]ll assets of the Debtor [sc. Tarheel]
now owned or hereafter acquired and wherever located.” (Dkt. 3-3, Ex.

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C to Def.’s Mot. 2). Plaintiff recorded its security interest on November
5, 2012.
Defendant notified plaintiff, by letter dated March 1, 2013, of
defendant’s security interest in Tarheels’ tooling. Soon after, by letter
dated March 11, 2013, defendant released any security interest it held
in Tarheel’s accounts receivable or inventory. (Dkt. 1-3, Ex. B to Notice
of Removal 15).
Tarheel ceased it operations in late summer or early fall of 2013.
Defendant sought immediate possession of the tooling, molds, and
inventory held by Tarheel in North Carolina.

Plaintiff disputed

defendant’s right to take the tooling, molds, and inventory, until
defendant had paid all of its outstanding invoices, amounting to
approximately $1,109,000. Defendant maintained it was entitled to set
off remaining resin costs against the outstanding invoices.
To resolve their disputes, plaintiff, defendant, and Tarheel
executed an Accommodation Agreement on October 4, 2013. (Dkt. 3-5,
Ex. E to Def.’s Mot.). As part of the Agreement, plaintiff relinquished
any interest in the tooling defendant owned; in turn, defendant
relinquished any interest in “any inventory or equipment other than”

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the tooling defendant owned. The Agreement further established that
1) defendant would immediately pay plaintiff $100,000, in exchange for
the finished parts that had not yet been shipped to defendant; 2)
defendant would wire to plaintiff $332,000 of the outstanding accounts
receivable, to be held in escrow according to the terms of an Escrow
Agreement; 3) upon payment of the $332,000, defendant would have the
right to take immediate possession of its tooling; and 4) defendant could
take possession of the resins and other raw materials it had supplied to
Tarheel.
Importantly, the Agreement also limits defendant to setting off
only the costs of resin or other raw materials 1) supplied to Tarheel and
2) actually used in producing parts for defendant. Defendant agreed to
provide, within 5 days of the Agreement’s execution, a reconciliation of
the outstanding invoices, including reasonable support for any setoffs
claimed.
The Accommodation Agreement provides that it will be governed
by Michigan law and that jurisdiction “will be proper in federal district
court or in state court in Oakland County [Michigan].”

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Also on October 4, 2013, plaintiff, defendant, and the escrow agent
(the same law firm serving as plaintiff’s counsel) executed the Escrow
Agreement referred to in the Accommodation Agreement. (Dkt. 1-6, Ex.
E to Notice of Removal 15). The Escrow Agreement governs the holding
and delivery of the $332,000 specified in the Accommodation
Agreement. The Escrow Agreement contains mandatory choice-of-law
and forum selection clauses, pursuant to which 1) Michigan law governs
the Escrow Agreement, and 2) “any action, suit or proceeding arising
out of [the] Escrow Agreement or the transactions between [the parties]
contemplated by [the] Escrow Agreement” must be brought in the
Eastern District of Michigan or in a state court in Oakland County,
Michigan.
Defendant paid the $100,000 to plaintiff and the $332,000 into
escrow, as required by the Accommodation Agreement. According to
plaintiff, defendant then repeatedly failed to provide the reconciliation
required by the Accommodation Agreement. Instead, plaintiff alleges,
defendant sought to set off the entire cost of resin and other raw
materials, in violation of the Accommodation Agreement’s express
limitations on allowable setoffs.

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The parties agree that, at some point, defendant took possession of
the tooling and molds, and at least some of the resin.
On February 21, 2014, the escrow agent filed an interpleader
action in Oakland County Circuit Court, Michigan, naming both parties
here as defendants.
On February 28, 2014, defendant here filed an action in North
Carolina Superior Court in Mecklenburg County, naming plaintiff here,
the escrow agent, and Tarheel as defendants (the “North Carolina
action”). (Dkt. 9-1, Ex. 4 to Plaintiff’s Supplemental Brief to Response
to Defendant’s Motion to Stay 16-21). In that action, defendant seeks,
among other relief, declaration of its rights to the setoffs and the escrow
funds, possession of the escrow funds, recovery of the $100,000 already
paid to plaintiff, and damages for Tarheel’s alleged breach of contract.
Defendant also alleges plaintiff engaged in unfair business practices
and tortiously interfered with defendant’s business relationship with
Tarheel by preventing return of the tooling and molds, thereby forcing
defendant to enter the Accommodation and Escrow Agreements.
On March 18, 2014, plaintiff answered the interpleader complaint
and filed a crossclaim against defendant, alleging defendant had

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breached the Accommodation Agreement by failing to provide the
required reconciliation and by claiming setoffs prohibited by the
Agreement.

Plaintiff claims a right to the escrow funds based on

defendant’s alleged breach.
On April 7, 2014, the state court granted the escrow agent’s
motion to deposit the escrow funds with the court and dismissed the
agent from the interpleader action.

On April 22, 2014, defendant

removed the interpleader action to this Court, and filed this motion on
April 29, 2014.
On June 16, 2014, after the parties had fully briefed this motion,
but before the hearing, plaintiff removed the North Carolina action to
the United States District Court for the Western District of North
Carolina. At the hearing on this motion, defendant informed the Court
of its intent to move to remand the North Carolina action back to the
North Carolina state court.
II.

Analysis
A.

Motion to Stay

Defendant first asks the Court to stay this matter in favor of a
state court action in North Carolina.

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In Colorado River Water

Conservation District v. United States, 424 U.S. 800 (1976), the
Supreme Court established that a federal court may, in exceptional
circumstances, abstain from exercising its jurisdiction when parallel
proceedings are pending in a state court, in the interests of “judicial
economy and federal-state comity.” Romine v. Compuserve Corp., 160
F.3d 337, 339 (6th Cir. 1998).
“The threshold question in Colorado River abstention is whether
there are parallel proceedings in state court.”

Bates v. Van Buren

Township, 122 F. App’x 803, 806 (6th Cir. 2004). The relevant state
court action in this instance is the suit filed in North Carolina by
defendant against plaintiff and Tarheel Plastics. Because plaintiff has
since removed that action to federal court, there is no longer a parallel
state court action, and Colorado River abstention does not apply.
Crawley v. Hamilton County Comm’rs, 744 F.2d 28, 31 (6th Cir. 1984)
(“A necessary requirement for application of this Colorado River
doctrine, however, is the presence of a parallel, state proceeding”).
Therefore, although the Court would otherwise find that abstention is
not warranted here, the lack of a parallel state court action alone
compels the denial of defendant’s motion to stay as moot.

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B.

Motion to Transfer

In the alternative, defendant seeks to transfer this case to the
Western District of North Carolina, pursuant to 28 U.S.C. § 1404(a).
Since the state court action has been removed to the Western District of
North Carolina, the Court must determine whether the first-to-file rule
applies here.
1.

First-to-file rule

“The first-to-file rule is a well-established doctrine that
encourages comity among federal courts of equal rank. The rule
provides that when actions involving nearly identical parties and issues
have been filed in two different district courts, the court in which the
first suit was filed should generally proceed to judgment.” Zide Sport
Shop of Ohio, Inc. v. Ed Tobergte Associates, Inc., 16 F. App'x 433, 437
(6th Cir. 2001) (citation and internal quotation marks omitted). “Courts
have identified three factors to consider in determining whether to
invoke the first-to-file rule: (1) the chronology of the actions; (2) the
similarity of the parties involved; and (3) the similarity of the issues at
stake.” Clear!Blue, LLC. v. Clear Blue, Inc., 521 F. Supp. 2d 612, 61415 (E.D. Mich., November 7, 2007).

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The parties do not dispute that this action and the action in North
Carolina involve nearly identical parties and issues. These two factors
thus favor invoking the first-to-file rule.
The parties do, however, dispute the chronology of the actions.
Plaintiffs maintain this case was filed first: the interpleader action was
filed on Feb. 21, 2014, before the North Carolina action was filed on
Feb. 28, 2014. Defendant argues that the North Carolina action was
filed first, as that action was filed before plaintiff’s crossclaim in the
interpleader action was filed on March 18, 2014. The central question,
then, is which date counts for purposes of the first-to-file rule: the filing
of the interpleader action, or the filing of plaintiff’s crossclaim in the
interpleader action?
2.

Interpleader

Defendant’s position depends on characterizing the interpleader
action and plaintiff’s crossclaim as two distinct actions. Defendant goes
so far as to state that “[t]he Interpleader action is over” because the
escrow agent, which filed the interpleader complaint, “was dismissed
from the action.” (Dkt. 7, Defendant’s Reply 5). This mischaracterizes
the nature of an interpleader action.

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Interpleader “affords a party who fears being exposed to the
vexation of defending multiple claims to a limited fund or property that
is under his control a procedure to settle the controversy and satisfy his
obligation in a single proceeding.”

United States v. High Tech.

Products, Inc., 497 F.3d 637, 641 (6th Cir. 2007) (citation and internal
quotation marks omitted) (emphasis added).
An interpleader action typically proceeds in two stages.
During the first stage, the court determines whether the
stakeholder has properly invoked interpleader . . . During
the second stage, the court determines the respective rights
of the claimants to the fund or property at stake via normal
litigation processes, including pleading, discovery, motions,
and trial . . .
[I]n a typical interpleader action, a disinterested stakeholder
would deposit with the court the fund or property at issue
and be discharged from further liability during the first
stage of the action, before the court determined the relative
possessory and ownership rights of the parties and
distributed the fund or property.
Id. at 641 & n.2 (citing WRIGHT, MILLER, & KANE, FEDERAL PRACTICE &
PROCEDURE § 1714).
The interpleader action in this case is not “over.” The first stage
has concluded with the deposit of the funds in state court and the
dismissal of the escrow agent. The state court’s order clearly indicated
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that the action remained pending – hardly surprising, since the court
had not yet determined the parties’ rights to the interpleaded funds.
The second stage of the action began in state court “via normal
litigation processes”: plaintiff filed a crossclaim alleging its right to the
funds, and the state court authorized the parties to begin discovery. All
of this activity was part of the interpleader action filed on Feb. 21, 2014
– the same interpleader action defendant removed to this Court.
3.

Horton Archery

Defendant has submitted two cases in support of its position that
the date of plaintiff’s crossclaim, not of the interpleader complaint, is
the relevant date for purposes of the first-to-file rule.
The first is an unpublished case, Horton Archery, LLC v. Am.
Hunting Innovations, LLC, No. 09-1604, 2010 WL 395572, at *3-5 (N.D.
Ohio Jan. 27, 2010). In that case, the defendants had filed a patent
infringement action in the Southern District of Iowa on April 29, 2009.
The plaintiff was not a party to that litigation. The plaintiff then filed a
complaint in the Northern District of Ohio on July 14, 2009, seeking to
invalidate the same patent at issue in the Iowa action. The defendants
then amended the Iowa complaint on Sept. 4, 2009, adding plaintiff as a

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party. The question before the court in Ohio was which action had been
filed first: the Ohio action, filed July 14, or the Iowa action, filed earlier,
but to which plaintiff had only been added later, on Sept. 4?
The court determined that the Iowa action had been filed first.
Relying on a number of decisions, including one from the Sixth Circuit,
Barber-Greene Co. v. Glaw-Knox Co., 239 F.2d 774, 778 (6th Cir. 1957),
the court adopted the principle that “the critical inquiry for first-to-file
purposes is which court first obtains possession of the subject of the
dispute, not the parties of the dispute.”

Horton Archery, 2010 WL

395572, at *4 (citation and internal quotation marks omitted). Because
the subject matter of the two lawsuits – the validity and infringement of
the same patent – was “identical,” the court concluded that the Iowa
action was first-filed. Id. at *5.
Horton Archery supports plaintiff’s position here, not defendant’s.
The subject matter of the interpleader action is identical to that of the
North Carolina action. In fact, defendant has repeatedly argued this.
(E.g., Dkt. 7, Defendant’s Reply 2-3). The interpleader action concerns
the rights of the parties to the escrow funds. Those funds represent the
minimum amount, as calculated by plaintiff and Tarheel Plastics, that

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defendant owes on the outstanding accounts receivable. To determine
the parties’ respective rights to the escrow funds, the Court necessarily
must determine what defendant owes on Tarheel’s outstanding
accounts receivable, as well as the amount of any setoffs defendant may
claim against what it owes. And to determine the allowable setoffs, the
Court necessarily must interpret the Accommodation Agreement and
resolve any challenges defendant may raise to the validity of that
Agreement.
Defendant

brought

the

North

Carolina

action

seeking

a

declaration of its right to certain setoffs against the amounts it owes on
the outstanding accounts receivable. Defendant also asserts a right to
the escrow funds and challenges the validity of the Accommodation
Agreement. All of these issues must be determined in the interpleader
action as well.

Horton Archery thus supports a finding that the

interpleader action was filed first.
4.

Sun Life

The second case, Sun Life and Health Insurance Co. v. Colavito,
No. 11-5225, 2014 WL 1613201 (S.D.N.Y. Mar. 28, 2014), does not
involve the first-to-file rule. The plaintiff, an insurance company, filed

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an interpleader action in diversity against several defendants who
claimed to be beneficiaries of a life insurance policy.

The case was

before the court on one defendant’s motion for summary judgment. The
nonmovants had brought a crossclaim against the movant, claiming
that, to the extent that the movant was a beneficiary of the policy, she
had been unjustly enriched.

The nonmovants thus sought a

constructive trust over the policy proceeds.
The court found it “questionable” whether it had supplemental
jurisdiction over the crossclaim, but ultimately did not decide the issue.
The court questioned whether the crossclaim and the interpleader
action “derive[d] from a common nucleus of operative fact” and thus
formed part of the same case or controversy. The court noted that the
crossclaim “does not address the sole issue raised in the Interpleader
Complaint – i.e., who is the beneficiary of the proceeds of the policy.”
Rather, the crossclaim challenged the movant’s right to the proceeds
based not on the policy itself, but on a separation agreement between
the deceased and the nonmovant.
Sun Life does not change the analysis in this case. There is no
question that the Court has jurisdiction over plaintiff’s crossclaim in the

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interpleader action, and defendant has not argued otherwise.

The

interpleader action was brought pursuant to the Escrow Agreement,
which in turn is referenced in the Accommodation Agreement.

The

issue in the interpleader action is which party is entitled to the escrow
funds. The parties’ rights to the escrow funds can only be determined
through

the

interpretation

of

the

Accommodation

Agreement.

Plaintiff’s crossclaim concerns its right, under the Escrow and
Accommodation Agreements, to the escrow funds. The crossclaim and
the interpleader clearly arise from the same nucleus of operative facts,
and are thus part of the same case, originally filed on Feb. 21, 2014 –
one week before defendant filed its claims in North Carolina.
The relevant date for purposes of the first-to-file rule, then, is the
date the interpleader complaint was filed: Feb. 21, 2014.
5.

Equitable considerations

District courts may “dispense with the first-to-file rule where
equity so demands.” Id. Circumstances that justify dispensing with the
rule include “inequitable conduct, bad faith, anticipatory suits, forum
shopping or significant policy considerations.”

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Natron Corp. v.

Quantum Research Group, Ltd., 473 F. Supp. 2d 790, 795 (E.D. Mich.
2007) (quoting Zide, 16 F. App’x at 437).
None of these circumstances counsels dispensing with the rule
here. If anything, they cut in the opposite direction. Defendant agreed
to a mandatory forum selection clause that requires “any action, suit, or
proceeding arising out of [the] Escrow Agreement” to be brought in
either Michigan state court or in the Eastern District of Michigan.
(Dkt. 1-2, Ex. A to Notice of Removal 13). Defendant also agreed to a
mandatory choice-of-law clause establishing that the Accommodation
Agreement would be governed by Michigan law. (Dkt. 1-3, Ex. B to
Notice of Removal 20). Finally, defendant agreed to a permissive forum
selection clause specifying jurisdiction in federal or state court in
Oakland County, Michigan.
III.

Conclusion

Accordingly, defendant’s motion to stay these proceedings in favor
of the North Carolina action is DENIED AS MOOT; and defendant’s
motion in the alternative to transfer this case to the Western District of
North Carolina is DENIED.
IT IS SO ORDERED.

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Dated: August 11, 2014
Ann Arbor, Michigan

s/Judith E. Levy
JUDITH E. LEVY
United States District Judge

CERTIFICATE OF SERVICE

The undersigned certifies that the foregoing document was served
upon counsel of record and any unrepresented parties via the Court’s
ECF System to their respective email or First Class U.S. mail addresses
disclosed on the Notice of Electronic Filing on August 11, 2014.

s/Felicia M. Moses
FELICIA M. MOSES
Case Manager

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