Burgett v. Hellickson et al

Filing 32

MEMORANDUM AND ORDER : IT IS HEREBY ORDERED that the motion of Defendants Jason Hellickson and Susan Hellickson to dismiss Plaintiff Seth Burgetts complaint for lack of subject matter jurisdiction, or to abstain, is GRANTED to the extent that t his case is STAYED pending resolution of the parallel case in the Iowa state court. (Doc. No. 17 .) IT IS FURTHER ORDERED that Clerks Office shall close this case for Administrative purposes only. IT IS FURTHER ORDERED that the parties shall notify the Court of the final disposition of the Iowa case at the trial court level within 14 days of such disposition.. Signed by District Judge Audrey G. Fleissig on 12/14/2016. (KCB)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MISSOURI
EASTERN DIVISION
SETH BURGETT,
Plaintiff,
vs.
JASON HELLICKSON, et al.,
Defendants.

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Case No. 4:16CV00622 AGF

MEMORANDUM AND ORDER
This diversity action for declaratory relief is before the Court on the motion
(Doc. No. 17) of Defendants Jason Hellickson and Susan Hellickson to dismiss
Plaintiff Seth Burgett’s complaint, pursuant to Federal Rule of Civil Procedure
12(b)(1) for lack of subject matter jurisdiction. 1 Alternatively, the Hellicksons
request a stay under the abstention doctrine set forth in Colorado River Water
Conservation District v. United States, 424 U.S. 800 (1976), and Wilton v. Seven
Falls Co., 515 U.S. 277 (1995), during the pendency of a related action in Iowa
state court. For the reasons set forth below, the Hellicksons’ motion to stay will
be granted.

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Defendants also invoke Federal Rule of Civil Procedure 12(b)(3) in their
motion to dismiss but do not otherwise address venue in their motion, supporting
memorandum, or reply.

BACKGROUND
Burgett, an Illinois citizen, filed this complaint for declaratory judgment on
May 5, 2016, against the Hellicksons, both Iowa citizens, and John Does 1-100.
Burgett alleges that he is the “prime founder,” Chairman, and CEO of Verto
Medical Solutions, LLC (“Verto”), a Delaware limited liability company with its
principal place of business in Missouri. Verto developed “Yurbuds” headphones
for athletes. As alleged in the complaint, Verto was founded in 2008, and sold its
assets to Harman International Industries, Inc., (“Harman”) in 2014 for a purchase
price of $38 million. The Asset Purchase Agreement (“APA”) included a
“holdback” provision and an “earn-out” provision. The holdback provision called
for Harman to retain $3.7 million of the purchase price to cover adjustments to
Verto’s debt or potential indemnities, with the terms and release of the holdback
funds governed by the APA. The earn-out provision provided for possible
additional payments from Harman, over a three-year period, of up to $38 million
based on better-than-anticipated sales of Yurbuds. The Operating Agreement
between Verto and its shareholders provided that all holdback and earn-out
payments from Harman were to be distributed to Verto shareholders pro-rata. As
part of the acquisition transaction, Burgett became an employee of Harman.
In August 2014, Burgett entered into Reallocation Agreements (Doc. No. 13) with Defendants (the Hellicksons and the Does), who were all Verto
shareholders who, after the pro rata distribution of the purchase price and some
released holdback funds, had not yet received a full return on their initial
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investments. Pursuant to the Reallocation Agreements, Burgett agreed that any
monies received by him as a shareholder for earn-out under the APA would be
reallocated to Defendants until they were repaid their initial investment in full.
After the Harman acquisition, disputes arose between Harman and Verto
culminating the termination of Burgett’s employment, and a confidential
Settlement Agreement dated February 17, 2016. As alleged in the complaint,
Verto was paid “certain amounts in exchange for typical releases of liability.”
Burgett asserts that the settlement proceeds consisted of a combination of (1) a
holdback payment and (2) a severance payment for the termination of his
employment. He asserts that he distributed the non-severance portion of the
proceeds to Verto shareholders pro-rata, in accordance with the Operating
Agreement. The Hellicksons contend that the settlement proceeds constituted an
earn-out payment and should have been distributed pursuant to the Reallocation
Agreements. Burgett seeks a declaration from the Court that none of the
settlement proceeds constituted earn-out funds that were subject to the
Reallocation Agreements.
On July 11, 2016 (a little more than two months after the present action was
filed), the Hellicksons and 57 other Verto shareholders who had Reallocation
Agreements with Burgett, filed suit against Burgett in Iowa state court. Of the 59
plaintiffs, 40, including the Hellicksons, were from Iowa; eight were from
Missouri; two were from Illinois; two were from Belgium; and the remaining
seven were from other states in the United States. The plaintiffs asserted claims of
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fraud, breach of fiduciary duty, breach of contract, promissory estoppel, unjust
enrichment, and conversion, all based on Burgett’s treatment of the settlement
proceeds (identified in the Iowa lawsuit as $3.5 million) as severance and
holdback payments. (Doc. No. 18-2.) The plaintiffs maintained that all of the
$3.5 settlement proceeds paid by Harman should be treated as earn-out funds. The
breach of contract claim asserts that Burgett breached his Reallocation
Agreements with plaintiffs by failing to distribute the settlement proceeds in
accordance with those agreements.
On July 15, 2016, the Hellicksons filed the motion now under
consideration. They first argue that the Court lacks subject matter jurisdiction
over this action, because by failing to identify the citizenship of the Doe
Defendants, Burgett failed to plead sufficient facts to establish complete diversity;
and further, two of the Doe Defendants were Illinois citizens, as shown by the
Iowa complaint, defeating diversity jurisdiction. The Hellicksons further argue
that in light of the action pending in Iowa state court, abstention is warranted
under Colorado River, 424 U.S. at 813 (holding that a federal court may divest
itself of jurisdiction by abstaining only when parallel state and federal actions exist
and “exceptional circumstances” warrant abstention), because all the factors to be
considered weigh in favor of abstention.
According to the Hellicksons, the Eastern District of Missouri is an
especially inconvenient forum, because key witnesses and documents are located
in Iowa; maintaining separate actions will result in piecemeal litigation; even
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though this case was filed first, it does not have priority as both lawsuits are in the
same early procedural posture; state law, not federal law will govern; and the state
forum is adequate to protect Burgett’s rights, as he can bring his cause of action as
a counterclaim in the Iowa lawsuit.
On July 25, 2016, Burgett voluntarily dismissed the Doe Defendants, and
on the same day, responded to the Hellicksons’ motion to dismiss or to stay this
action. Burgett argues that the dismissal of the Doe Defendants renders the
Hellicksons’ jurisdictional argument moot. Burgett also argues that there is no
basis for Colorado River abstention. As a preliminary matter, Burgett argues that
the two lawsuits are not parallel, as the parties are not the same, the claims are not
the same, and the relief sought is not the same. Burgett further argues that in any
event, the Hellicksons have failed to show that extraordinary circumstances are
present so as to justify this Court’s surrender of its jurisdiction.
In reply, the Hellicksons argue that as this is a declaratory judgment action,
the Court’s decision whether to stay the action during the pendency of the Iowa
state court action is governed, under Wilton, 515 U.S. at 280, by the discretionary
standard of Brillhart v. Excess Insurance Co. of America, 316 U.S. 491 (1942)
rather than the “exceptional circumstances” test of Colorado River.
DISCUSSION
The Court first agrees with Burgett that the dismissal of the Doe
Defendants renders the Hellicksons’ jurisdictional argument moot, even assuming
two of the Does were from Illinois. See Pac. Marine Freight, Inc. v. Foster, No.
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10-CV-0578-BTM-BLM, 2010 WL 3339432, at *3 (S.D. Cal. Aug. 24, 2010).
But the Court agrees with the Hellicksons that staying this declaratory judgment
action is warranted, in light of the case against Burgett now pending in Iowa state
court.
As the Hellicksons argue in their reply, in Wilton, 515 U.S. at 280, the
Supreme Court held that a district court’s decision to stay a declaratory judgment
action during parallel state court proceedings is governed by the discretionary
standard of Brillhart, not the “exceptional circumstances” test developed in
Colorado River. Wilton, 515 U.S. at 289. Brillhart held that in a declaratory
judgment action, a federal district court is under no compulsion to exercise its
jurisdiction. Accordingly, the district court had broader discretion in ruling on
motion to dismiss a declaratory judgment action on the ground that another
proceeding is pending in state court in which all matters in controversy between
the parties can be fully adjudicated. Brillhart, 316 U.S. at 496. The district court
should consider 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. Id. at 496-97. “This
broader discretion arises out of the Declaratory Judgment Act’s language that a
court ‘may declare the rights and other legal relations of any interested party
seeking such declaration.’ 28 U.S.C. § 2201(a).” Royal Indem. Co. v. Apex Oil
Co., 511 F.3d 788, 792 (8th Cir. 2008).

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The determination of whether suits are parallel “is a threshold
determination for identifying the extent of a district court’s discretion to grant a
stay.” Lexington Ins. Co. v. Integrity Land Title Co., 721 F.3d 958, 968 (8th Cir.
2013). State and federal proceedings are parallel “if they involve the same parties
or if the same parties may be subject to the state action and if the state action is
likely to fully and satisfactorily resolve the dispute or uncertainty at the heart of
the federal declaratory judgment action.” Id. (citation omitted); see also
Scottsdale Ins. Co. v. Detco Indus., Inc., 426 F.3d 994, 997 (8th Cir. 2005).
Here the Court concludes that this declaratory judgment action and the
Iowa state court action are parallel for purposes of the abstention doctrine. Burgett
and the Hellicksons are parties to both actions, the core issue in both actions is
whether the settlement proceeds constituted holdback or earn-out funds under the
APA, and resolution of the claims in the state action will dispose of the federal suit
for declaratory relief. No federal claims or defenses are involved in either action.
See, e.g., James River Ins. Co. v. Impact Strategies, Inc., 699 F. Supp. 2d 1086,
1090 (E.D. Mo. 2010) (holding that a declaratory judgment action by an insurer,
seeking to determine whether it had duty to defend and indemnify an insured
pursuant to commercial general liability policy with respect to claims in a state
court action, was parallel to the underlying state court action).
In determining whether to abstain under Wilton, the Eighth Circuit has
instructed that a district court’s “key consideration . . . is ‘to ascertain whether the
issues in the controversy between the parties to the federal action . . . can be better
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settled by the state court’ in light of the ‘scope and nature of the pending state
court proceeding.’” Evanston Ins. Co. v. Johns, 530 F.3d 710, 713 (8th Cir. 2008)
(quoting Capitol Indem. Corp. v. Haverfied, 218 F.3d 872, 874 (8th Cir. 2000)).
Here, with the dismissal of the Doe Defendants from the present action, the scope
and nature of the Iowa state court proceeding renders that action a superior vehicle
to resolve the issues between the parties, as the Iowa proceeding includes as
plaintiffs all those with whom Burgett has a Reallocation Agreement. A decision
in favor of Burgett in this federal action, involving only the Hellicksons as
adversaries, may not be binding on nonparties, who are parties in the Iowa state
court action. Further, other claims that could impact the result are included in the
state court action.
The timing of the declaratory judgment action in comparison with the state
court action is not of significant import, as the cases are both in the initial stage of
litigation; the parties in the present case have not yet had a Federal Rule of Civil
Procedure 16 scheduling conference. See Empire Fire & Marine Ins. Co. v.
Scheibler, No. 4:16CV594 HEA, 2016 WL 6524341, at *2 (E.D. Mo. Nov. 3,
2016) (dismissing an earlier-filed declaratory judgment action in light of a parallel
state court garnishment action, where the parties had not yet had a Rule 16
scheduling conference in the federal action; “[T]he Court is not compelled to
strictly follow the first-to-file rule when determining whether to exercise
jurisdiction under the Declaratory Judgment Act.”).

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In sum, the Court concludes that Wilton abstention is warranted here.
“[W]here the basis for declining to proceed is the pendency of a state proceeding,
a stay will often be the preferable course, because 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 288 n. 2; see also Int’l
Ass’n of Entrepreneurs of Am. v. Angoff, 58 F.3d 1266, 1271 (8th Cir. 1995); HBE
Corp. v. Burrus, No. 4:09CV906 HEA, 2009 WL 3517532, at *4 (E.D. Mo. Oct.
23, 2009).
CONCLUSION
Accordingly,
IT IS HEREBY ORDERED that the motion of Defendants Jason
Hellickson and Susan Hellickson to dismiss Plaintiff Seth Burgett’s complaint for
lack of subject matter jurisdiction, or to abstain, is GRANTED to the extent that
this case is STAYED pending resolution of the parallel case in the Iowa state
court. (Doc. No. 17.)
IT IS FURTHER ORDERED that Clerk’s Office shall close this case for
Administrative purposes only.
IT IS FURTHER ORDERED that the parties shall notify the Court of the
final disposition of the Iowa case at the trial court level within 14 days of such

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disposition.

AUDREY G. FLEISSIG
UNITED STATES DISTRICT JUDGE
Dated this 14th day of December, 2016.

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