Lux v. The Cadmus Supplemental Executive Retirement Plan et al

Filing 24

ORDER STAYING CASE, MEMORANDUM AND RECOMMENDATIONS on 20 MOTION to Dismiss Pursuant to Fed. R. Civ. Pr. 12(b)(1) filed by The Cadmus Supplemental Executive Retirement Plan, Cenveo Corporation ( Objections to M&R due by 2/22/2013). Signed by Magistrate Judge David S. Cayer on 2/5/2013. (blf)

IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF NORTH CAROLINA
CHARLOTTE DIVISION
DOCKET NO. 3:12-cv-00550-MOC-DSC
GERARD P. LUX,
Plaintiff,
vs.

CADMUS SUPPLEMENTAL
EXECUTIVE RETIREMENT PLAN
AND CENVEO CORPORATION,
Defendants.

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MEMORANDUM AND
RECOMMENDATION AND ORDER

THIS MATTER is before the Court on “Defendants’ Motion to Dismiss Pursuant to
Fed. R. Civ. Pr. 12(b)(1)” (document #20) filed November 30, 2012, and the parties’ associated
briefs and exhibits. (See documents # 21, 22 and 23).
This matter has been referred to the undersigned Magistrate Judge pursuant to 28 U.S.C.
§ 636(b)(1), and is now ripe for consideration.
Having fully considered the arguments, the record, and the applicable authority, the
undersigned respectfully recommends that Defendants’ Motion to Dismiss be granted, as
discussed below.
I.

PROCEDURAL AN FACTUAL BACKGROUND

On June 25, 2010, Cenveo Corporation (“Cenveo”) commenced a lawsuit in the United
States District Court for the District of South Carolina, Spartanburg Division (the "South
Carolina Federal Action"). Cenveo alleged that Plaintiff, acting with Copac, Inc. ("Copac"), his
new employer with corporate headquarters in South Carolina, as well as with several former
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Cenveo employees, engaged in tortious and other wrongful conduct against Cenveo. On May
11, 2011, Cenveo filed a related action in the Spartanburg County Court of Common Pleas
(“State Court Action”), against Copac Global Packing, Inc. ("CGP").

On May 23, 2011,

Plaintiff, as well as the other defendants, moved to dismiss the South Carolina Federal Action
for failure to name CGP as an indispensable party. The South Carolina District Court granted
the motion to dismiss by Order dated August 15, 2011.
On August 17, 2011, Cenveo filed a Motion to Amend the Complaint in the State Court
Action to add Plaintiff and others as defendants. On September 22, 2011, Plaintiff filed several
counterclaims against Cenveo in the State Court Action. The counterclaims allege that Cenveo
failed to pay Plaintiff under certain executive compensation or benefits plans, specifically,
Cenveo's Management Incentive Plan and Cadmus' Employee Retention Agreement. In the State
Court Action, Plaintiff did not allege that Cenveo owed him any monies under the Cadmus
Supplemental Executive Retirement Plan. (“SERP Plan”), which is the subject of this
Declaratory Judgment action.
On August 23, 2012, Plaintiff filed this Declaratory Judgment action. (Doc. 1). As
alleged in the Verified Complaint, Plaintiff worked in Charlotte, North Carolina for twenty-six
years. (Id. ¶ 13.) He worked for Cadmus Communications Corporation, and then for Cenveo
Corporation after the two companies merged. (Id.) During that time, Plaintiff participated in the
Cadmus Supplemental Executive Retirement Plan. (“SERP Plan”) (Id. ¶¶ 9, 13.) This plan
affords certain retirement benefits beginning at a participant’s separation from service or at age
fifty-five, whichever is later. (55). (Id. ¶¶ 15, 23.) The SERP Plan is an unfunded deferred
compensation plan and this action arises under the Employee Retirement Income Security Act of
1974 (“ERISA”).
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Plaintiff is now fifty-five (55) years old. In response to Plaintiff’s preliminary inquiries,
Cenveo asserted two different reasons why he is not entitled to benefits under the SERP Plan.
The first is that Plaintiff forfeited his benefits under paragraph 5.2 of the Plan by competing
against Cenveo (the “Competition Forfeiture Rationale”). (Id. ¶¶ 29-30.) The second is that
Cenveo claims to have “exercise[d] its equitable rights of setoff and recoupment” against
Plaintiff’s SERP benefits, based on claims it has pending against him in South Carolina (the
“Setoff Rationale”).
Plaintiff seeks to obtain a ruling from this Court that the “Competition Forfeiture
Rationale” and the “Setoff Rationale” are both invalid, and that he is thus entitled to retirement
benefits under the SERP Plan. (Id. at 9.)
In their Motion to Dismiss, Defendants argue that the Court should exercise its discretion
and abstain from hearing this Declaratory Judgment action. Defendants assert that the dispute
should be tried in in the pending State Court Action where similar claims by Plaintiff have been
adjudicated for over a year. Plaintiff argues that the claims in the State Court Action are neither
similar nor parallel to the claims brought in this Action and that neither of his claims should
require this Court to address any factual or legal issue in dispute in the State Court Action. The
Motion to Dismiss has been fully briefed and is now ripe for review.
II.

STANDARD OF REVIEW

Under the Declaratory Judgment Act, a district court, in a case or controversy otherwise
within its jurisdiction, “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.” 28 U.S.C. §
2201(a). The Supreme Court has “repeatedly characterized the Declaratory Judgment Act as ‘an
enabling Act, which confers a discretion on the courts rather than an absolute right upon the
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litigant.’” Wilton v. Seven Falls Co., 515 U.S. 277, 287 (1995) (quoting Pub. Serv. Comm'n of
Utah v. Wycoff Co., 344 U.S. 237, 241 (1952)).
As an initial matter, “a declaratory judgment action is appropriate ‘when the judgment
will serve a useful purpose in clarifying and settling the legal relations in issue, and ... when it
will terminate and afford relief from the uncertainty, insecurity, and controversy giving rise to
the proceeding.’ ” Centennial Life Ins. Co. v. Poston, 88 F.3d 255, 256 (4th Cir. 1996) (quoting
Aetna Cas. & Sur. Co. v. Quarles, 92 F.2d 321, 325 (4th Cir.1937)).
A declaratory judgment, however, “should not be used ‘to try a controversy by
piecemeal, or to try particular issues without settling the entire controversy, or to interfere with
an action which has already been instituted.’” Id. at 256–57. A district court's discretion “is
especially crucial when . . . a parallel or related proceeding is pending in state court.” Riley v.
Dozier Internet Law, PC, 371 F. App'x 399, 401 (4th Cir. 2010) (quoting New Wellington Fin.
Corp. v. Flagship Resort Dev. Corp., 416 F.3d 290, 297 (4th Cir. 2005)). “In such cases, district
courts have 'wide discretion' to decline jurisdiction.” Id. at 401-02 (citing Centennial Life Ins.
Co. v. Poston, 88 F.3d 255, 257 (4th Cir. 1996)). Finally, courts are guided by “the same
consideration of federalism, efficiency, and comity that traditionally inform a federal court's
discretionary decision whether to abstain from exercising jurisdiction over state-law claims in the
face of parallel litigation in the state courts.” Nautilus Ins. Co. v. Winchester Homes, Inc., 15
F.3d 371, 376 (4th Cir. 1994), abrogated on other grounds by Centennial Life Ins. Co. v. Poston,
88 F.3d 255, 257-58 (4th Cir. 1996).
These concerns led the Fourth Circuit to require the consideration of four factors, often
known as the “Nautlius” factors, when deciding whether to hear a declaratory judgment action
when there is a related state court proceeding:
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(1) whether the state has a strong interest in having the issues decided in its
courts; (2) whether the state courts could resolve the issues more efficiently
than the federal courts; (3) whether the presence of “overlapping issues of fact
or law” might create unnecessary “entanglement” between the state and
federal courts; and (4) whether the federal action is mere “procedural
fencing,” in the sense that the action is merely the product of forum-shopping.
New Wellington Financial Corp. v. Flagship Resort Development Corp., 416 F.3d 290, 297 (4th
Cir. 2005)(quoting United Capitol Ins. Co. v. Kapiloff, 155 F.3d 488, 493 (4th Cir. 1998)).
III.

DISCUSSION

As discussed more fully below, the Nautilus factors support this Court’s declining to hear the
present Declaratory Judgment action.
A. South Carolina’s Interest
The first Nautilus factor addresses the strength of the state's interest in having the issues
raised in the federal declaratory judgment action decided in the state courts. The undersigned
finds that South Carolina does not have a particularly strong interest in deciding a claim brought
under ERISA. To the extent that state law applies to the SERP, the plan is governed by the law
of Virginia and not South Carolina. South Carolina does have an interest in determining whether
Plaintiff engaged in tortious and anti-competitive conduct in the state while employed as the
Chief Executive Officer of Copac, Inc., a South Carolina company and competitor of Cenveo.
Plaintiff’s conduct will be a significant issue in determining whether he is entitled to certain
compensation and benefits from Cenveo in light of such conduct. Therefore, South Carolina
does have a strong interest in this action.

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B. Efficiency
In considering the efficiency factor, a district court should determine “whether the
questions in controversy between the parties to the federal suit ... can better be settled in the
proceeding[s]’ that are already ‘pending in the state court[s].” Nautilus, 15 F.3d at 378 (quoting
Brillhart v. Excess Ins. Co., 316 U.S. 491, 495 (1942)). The State Court Action was filed before
this action. Discovery is ongoing and the State Court Action is much further along than the
federal action, creating a real efficiency advantage in allowing all the related issues to be
adjudicated in the State Court Action.
Plaintiff argues that this case does not involve overlapping issues and that requiring him
to proceed in the South Carolina court would cause pointless delay. The undersigned disagrees.
This Court would have to resolve factual issues surrounding Plaintiff’s alleged competition and
whether his actions triggered the forfeiture provisions under the SERP Plan. This Court would
also have to resolve factual issues regarding Plaintiff’s allegedly tortious conduct in connection
with Defendants’ anticipated defenses of waiver, estoppel and unclean hands. If the Court
allows this action to proceed, the litigation would proceed in piecemeal fashion. This Court
would litigate issues involving the SERP Plan while leaving many other claims for the state court
The efficiency factor weighs in favor of the pending State Court Action.
C. Entanglement
The third factor requires the district court to determine whether the state and federal
actions present “overlapping issues of fact or law.” Nautilus, 15 F.3d at 377 (quoting Mitcheson
v. Harris, 955 F.2d 235, 239 (4th Cir.1992)). In Mitcheson, the court held that dismissal of the
declaratory judgment action was appropriate because overlapping issues of fact and law would
have “‘frustrate[d] the orderly progress' of the state court proceedings by leaving the state court
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with some parts of a case foreclosed from further examination but still other parts in need of full
scale resolution.” 955 F.2d at 239 (quoting Phoenix Ins. Co. v. Harby Marina, Inc., 294 F.Supp.
663, 664 (N.D.Fla.1969)).

In Hartford Casualty Insurance Company v. BB&T Financial

Corporation, 131 F.Supp.2d 752 (W.D.N.C. 2001), this Court held as follows:
The second and third [Nautilus] factors, along with the prohibition against trying
a controversy by piecemeal, are particularly salient. While it is true that this Court
could efficiently adjudicate the rights and responsibilities between [the parties to
this action], the rights of all of the parties involved in the underlying dispute can
be resolved in the single action now pending in South Carolina state court.
Id. at 755.
Since Plaintiff’s alleged tortious and anti-competitive conduct would be at issue in this
case, it is clear that there would be overlapping issues of fact and law in both forums. Further, in
the event that the State Court and this Court both find facts related to the issues above, "the
common issues involved here could easily result in an unnecessary entanglement between the
two tribunals." Riley, 371 F. App'x at 403. If this Court retained jurisdiction, it would have to
resolve some of the same factual disputes that are before the State Court. Because of the near
certainty of entanglement, this factor weighs in favor of the pending State Court Action.
D. Procedural Fencing
Procedural fencing occurs when “a party has raced to federal court in an effort to get
certain issues that are already pending before the state courts resolved first in a more favorable
forum.” Riley, 371 F. App’x. at 403 (quoting Great Am. Ins. Co. v. Gross, 468 F.3d 199, 212
(4th Cir. 2006)). Plaintiff argues that his rights under the SERP plan did not even arise until
more than six months after he plead his counterclaims in the State Court Action and that he is
simply seeking a declaration of his rights under a plan governed by ERISA. The undersigned
agrees that the issues involved in this action are not part of the State Court Action. That being

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said, the underlying State Court Action will involve litigation of the same issues that this Court
has been asked to resolve. Plaintiff may raise his claim for benefits under the SERP Plan as an
additional counterclaim in the State Court Action. Given the pendency of the state proceedings
and the overlapping issues involved in those proceedings, the undersigned concludes that the
filing of this action may arguably constitute procedural fencing.
Therefore, applying the four Nautilus factors to the instant case, the undersigned
respectfully recommends that the Court should, in its discretion, abstain from exercising
jurisdiction over the instant Declaratory Judgement action and grant Defendant’s Motion to
Dismiss.
IV.

ORDER

IT IS ORDERED that all further proceedings in this action, including all discovery, are
STAYED pending the District Judge’s ruling on this Memorandum and Recommendation and
Order.
V.

RECOMMENDATION

FOR THE FOREGOING REASONS, the undersigned respectfully recommends that
“Defendants’ Motion to Dismiss Pursuant to Fed. R. Civ. Pr. 12(b)(1)” be GRANTED.
VI.

NOTICE OF APPEAL RIGHTS

The parties are hereby advised that, pursuant to 28 U.S.C. §636(b)(1)(c), written
objections to the proposed findings of fact and conclusions of law and the recommendation
contained in this Memorandum must be filed within fourteen (14) days after service of same.
Failure to file objections to this Memorandum with the District Court constitutes a waiver of the
right to de novo review by the District Judge. Diamond v. Colonial Life, 416 F.3d 310, 315-16
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(4th Cir. 2005); Wells v. Shriners Hosp., 109 F.3d 198, 201 (4th Cir. 1997); Snyder v. Ridenour,
889 F.2d 1363, 1365 (4th Cir. 1989).

Moreover, failure to file timely objections will also

preclude the parties from raising such objections on appeal. Thomas v. Arn, 474 U.S. 140, 147
(1985); Diamond, 416 F.3d at 316; Page v. Lee, 337 F.3d 411, 416 n.3 (4th Cir. 2003); Wells,
109 F.3d at 201; Wright v. Collins, 766 F.2d 841, 845-46 (4th Cir. 1985); United States v.
Schronce, 727 F.2d 91 (4th Cir. 1984).
The Clerk is directed to send copies of this Memorandum and Recommendation and
Order to the parties’ counsel; and to the Honorable Max O. Cogburn, Jr.
SO ORDERED AND RECOMMENDED.
Signed: February 5, 2013

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