Smith v. McLean
Filing
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MEMORANDUM OPINION AND ORDER granting 19 MOTION to Dismiss.(Signed by Judge Kenneth M. Hoyt) Parties notified.(dpalacios, )
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF TEXAS
HOUSTON DIVISION
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LESTER H. SMITH,
Plaintiff,
vs.
JOSEPH J. McLEAN,
Defendant.
CIVIL ACTION NO. 4:10-cv-00792
MEMORANDUM OPINION AND ORDER
I.
INTRODUCTION
Pending before the Court are Lester H. Smith’s, (the “plaintiff”), motion for summary
judgment and memorandum in support thereof (Dkt. Nos. 17 & 18) and Joseph J. McLean’s
(“McLean”), response in opposition to the plaintiff’s motion for summary judgment (Dkt. Nos.
20 & 21). Also before the Court are McLean’s motion to dismiss or alternative motion to stay
declaratory judgment (Dkt. No. 19) and the plaintiff’s response in opposition to that motion (Dkt.
No. 22).
After having carefully considered the parties’ submissions, the record and the
applicable authorities, the Court determines that McLean’s motion to dismiss should be
GRANTED. All other motions are hereby DENIED as moot.
II.
FACTUAL BACKGROUND
In early 2008, McLean was a member and employee of New InMarket Media, LLC
(“NIMM”), a Texas limited liability corporation in the business of purchasing and reselling air
time in retail shopping centers whereby its customers would advertise their businesses in captive
radio commercials in retail establishments. In mid-2008, NIMM sought an infusion of operating
capital from Smith Marketing, LLC (“Smith Marketing”) due to its distressed financial
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condition.1 Upon Smith Marketing’s agreement to invest in NIMM, NIMM was restructured
with Smith Marketing designated as its controlling member and its name changed to Attention
Shoppers, LLC (“Attention Shoppers”). Additionally, McLean was required to enter into an
employment agreement with Attention Shoppers whereby he would serve as the Senior Vice
President of National Sales for Attention Shoppers. The terms of the parties’ agreement was
memorialized in a written agreement dated November 17, 2008 (the “Employment Agreement”).
In addition to denoting the express terms and conditions of McLean’s employment, including his
salary, incentive compensation, bonus structure and benefits, the Employment Agreement set
forth the following relevant information:
Non Recourse Loan: Upon execution of this letter agreement, a loan of
$300,000 will be made from an entity controlled by Lester H. Smith to Joseph
McLean (“Loan”). The loaned money will be invested by you [McLean] with
LIM Partners, Ltd., in an individual account (“LIM Account”), subject to
satisfaction by you of all applicable account requirements, which are subject to
your advance approval. The loan will be repaid only as provided for in this
agreement and the entity that made the loan, and its successors and assigns, will
not look to, or have any recourse to or seek to have any liability imposed on you
or your heirs and assigns for repayment of such loan, except as provided herein.
The outstanding principal amount of the Loan will accrue interest at a rate equal
to the Applicable Federal Rate (“AFR”). The Loan and accrued interest may be
repaid at any time without a prepayment penalty. The outstanding loan balance
and accrued interest will be credited with 9% of all booked, commissionable
sales, net of cancellations, at the Company, excluding sales for which commission
is paid to Larry Enzer, Scot Herd or Jennifer Scheiderer. These credited amounts
will be treated as compensation to you for all applicable tax purposes and are in
addition to and not in lieu of, any other compensation due you under this
agreement. At your discretion, a portion of the 9% corresponding to your
marginal income tax rate (federal, state, and local) may be set aside for income
tax payments, with the remainder being credited to pay interest and principal on
the loan.
In the event that your employment with the Company ends before the loan is fully
repaid as provided herein, then within 10 days after termination of your
employment (or 30 days after the appointment of a legal representative if
termination is due to incapacity or death), you or your legal representative may
1
The plaintiff, Lester H. Smith (“the plaintiff”), is the sole member of Smith Marketing. (See Dkt. No 18, Ex. A.)
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make a written election to the entity that made the loan selecting one of the two
following options: (i) pay off the remainder of the outstanding Loan balance,
including all accrued interest, within 15 days after termination of your
employment in which event you or your estate will be fully vested in the LIM
Account upon such payment; or (ii) vest that portion of the LIM Account in an
amount proportionate to the percentage of the original principal loan balance of
$300,000 that has been repaid as of the termination date. Under this option (ii),
you and the lending entity will notify LIM Partners, Ltd. and cause the limited
partnership interest and account balance held in your name to be reallocated in the
calculated percentage between you and the lending entity, subject to the transfer
restrictions and procedures of the LIM Partners, Ltd. Agreement of Limited
Partnership.
(See Dkt. No. 18, Ex. A-1.)
McLean performed his duties under the Employment Agreement until Attention Shoppers
filed for Chapter 7 bankruptcy protection and ceased operations on December 30, 2009. The
non-recourse loan, however, was never funded. Consequently, on January 18, 2010, McLean, by
and through his then-acting attorney, wrote to the plaintiff advising him of his personal liability
with regard to the non-recourse loan and demanding payment. On January 22, 2010, after receipt
of McLean’s letter, the plaintiff filed a petition for declaratory judgment in a Harris County state
court seeking a declaration of his indebtedness to McLean under the Employment Agreement
and under a theory of promissory estoppel. McLean timely removed the state-court action to this
Court. Thereafter, McLean filed an action in Harris County state court asserting claims against
the plaintiff for breach of the non-recourse loan agreement, fraud, promissory estoppel, and other
equitable relief. The plaintiff now moves for summary judgment on his breach of contract and
promissory estoppel claims. McLean moves to dismiss or stay the current action.
III.
CONTENTIONS OF THE PARTIES
A.
The Plaintiff’s Contentions
The plaintiff contends that he is not liable in his individual capacity for any claim by
McLean arising out of the Employment Agreement.
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He also contends that he is not
individually liable to McLean for failing to fund the $300,000 non-recourse loan and
consequent hedge fund investment detailed in the Employment Agreement. Consequently, he
argues that he is entitled to a summary judgment that he is not indebted to McLean for breach
of the Employment Agreement or under any promissory estoppel theory. With regard to
McLean’s motion to dismiss and/or stay, he avers that the motion should be denied because
McLean’s now-pending state court claims should have been filed as counterclaims in the
instant declaratory judgment action.
He contends that McLean seeks an eleventh-hour
dismissal and/or stay only after realizing the jeopardy of having failed to raise any
counterclaims or timely make a jury demand. Accordingly, the plaintiff avers that this Court
should exercise its discretion and adjudicate the instant declaratory judgment action and deny
McLean’s motion to dismiss and/or stay.
B.
McLean’s Contentions
McLean argues that the plaintiff’s motion for summary judgment should be denied
because a genuine issue of material fact exists as to whether the plaintiff breached his alleged
unilateral loan agreement with McLean. Additionally, he contends that the plaintiff’s
declaratory judgment action should be dismissed because a more comprehensive proceeding is
pending in state court which involves the same parties, the limited issues now before this
Court as well as other related issues at the heart of the parties’ controversy. McLean argues
that the subsequent Texas state court action filed by him will fully resolve all of the issues
between the parties rather than the limited issue of whether the plaintiff breached an
obligation to him under the Employment Agreement and can be held personally liable under a
promissory estoppel theory. Finally, McLean argues that the weight of authority mandates
dismissal of the instant declaratory action in order to preserve his legal right to bring a more
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comprehensive action before a jury in a forum of his choice. Therefore, McLean alleges that
the plaintiff’s declaratory judgment action should be dismissed or alternatively stayed.
IV.
STANDARD OF REVIEW
A.
The Declaratory Judgment Act
The Declaratory Judgment Act, 28 U.S.C. § 2201(a), has often been characterized as “an
enabling act, which confers a discretion on the courts rather than an absolute right upon the
litigant.” Wilton v. Seven Falls Co., 515 U.S. 277, 287 (1995) (quoting Public Serv. Comm'n of
Utah v. Wycoff Co., 344 U.S. 237, 241 (1952)).
“Since its inception, the [Act] has been
understood to confer on federal courts unique and substantial discretion in deciding whether to
declare the rights of litigants.” Wilton, 515 U.S. at 286. The literal language of the Act provides
that a federal court may declare the rights of an interested party seeking such a declaration.2 See
28 U.S.C. § 2201(a) (emphasis added). Although the word may gives a federal court more
discretion to refuse to hear a claim for declaratory relief than other kinds of claims, such
discretion, however, is not without limitation. See Vulcan Materials Co. v. City of Tehuacana,
238 F.3d 382, 390 (5th Cir. 2001); St. Paul Ins. Co. v. Trejo, 39 F.3d 585, 590 (5th Cir. 1994).
In determining whether to retain a declaratory judgment action, the Fifth Circuit has
delineated three issues that a federal court must first consider: “(1) whether the declaratory
action is justiciable; (2) whether the court has the authority to grant declaratory relief; and (3)
whether to exercise its discretion to decide or dismiss the action.” Sherwin-Williams Co. v.
2
The Declaratory Judgment Act provides in pertinent part as follows:
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. Any such
declaration shall have the force and effect of a final judgment or decree and shall be reviewable as
such.
28 U.S.C. § 2201(a)
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Holmes Cnty., 343 F.3d 383, 387 (5th Cir. 2003) (citing Orix Credit Alliance, Inc. v. Wolfe, 212
F.3d 891, 895 (5th Cir. 2000)). Once a court determines that the action is justiciable and that it
has the authority to grant the declaratory relief requested, it must then consider the following
nonexclusive factors in exercising its discretion to decide or dismiss a declaratory judgment
action:
(1) whether there is a pending state action in which all of the matters in
controversy may be fully litigated;
(2) whether the plaintiff filed suit in anticipation of a lawsuit filed by the
defendant;
(3) whether the plaintiff engaged in forum shopping in bringing the suit;
(4) whether possible inequities in allowing the declaratory plaintiff to gain
precedence in time or to change forums exist;
(5) whether the federal court is a convenient forum for the parties and
witnesses;
(6) whether retaining the lawsuit would serve the purposes of judicial
economy; and
(7) whether the federal court is being called on to construe a state judicial
decree involving the same parties and entered by the court before
whom the parallel state suit between the same parties is pending.
Trejo, 39 F.3d at 590 – 91. These factors, often referred to as the Trejo factors, “must be
considered on the record before a discretionary, nonmerits dismissal of a declaratory judgment
action occurs.” Vulcan Materials Co., 238 F.3d at 390 (emphasis in original). As observed by
the Fifth Circuit in Sherwin-Williams, the Trejo factors address three broad concerns common to
all circuits: federalism, fairness and efficiency. See Sherwin-Williams, 343 F.3d at 390 – 91
(citing Brillhart v. Excess Ins. Co. of Am., 16 U.S. 491, 62 S. Ct. 1173, 86 L. Ed. 1620 (1942)).
B.
Summary Judgment
Rule 56 of the Federal Rules of Civil Procedure authorizes summary judgment against a
party who fails to make a sufficient showing of the existence of an element essential to the
party’s case and on which that party bears the burden at trial. See Celotex Corp. v. Catrett, 477
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U.S. 317, 322 (1986); Little v. Liquid Air Corp., 37 F.3d 1069, 1075 (5th Cir. 1994) (en banc).
The movant bears the initial burden of “informing the Court of the basis of its motion” and
identifying those portions of the record “which it believes demonstrate the absence of a genuine
issue of material fact.” Celotex, 477 U.S. at 323; see also Martinez v. Schlumber, Ltd., 338 F.3d
407, 411 (5th Cir. 2003). Summary judgment is appropriate where “the pleadings, the discovery
and disclosure materials on file, and any affidavits show that there is no genuine issue as to any
material fact and that the movant is entitled to judgment as a matter of law.” Fed. R. Civ. P.
56(c).
If the movant meets its burden, the burden then shifts to the nonmovant to “go beyond the
pleadings and designate specific facts showing that there is a genuine issue for trial.” Stults v.
Conoco, Inc., 76 F.3d 651, 656 (5th Cir. 1996) (citing Tubacex, Inc. v. M/V Risan, 45 F.3d 951,
954 (5th Cir. 1995); Little, 37 F.3d at 1075). “To meet this burden, the nonmovant must
‘identify specific evidence in the record and articulate the ‘precise manner’ in which that
evidence support[s] [its] claim[s].’” Stults, 76 F.3d at 656 (citing Forsyth v. Barr, 19 F.3d 1527,
1537 (5th Cir.), cert. denied, 513 U.S. 871, 115 S. Ct. 195, 130 L. Ed.2d 127 (1994)). It may not
satisfy its burden “with some metaphysical doubt as to the material facts, by conclusory
allegations, by unsubstantiated assertions, or by only a scintilla of evidence.” Little, 37 F.3d at
1075 (internal quotation marks and citations omitted). Instead, it “must set forth specific facts
showing the existence of a ‘genuine’ issue concerning every essential component of its case.”
Am. Eagle Airlines, Inc. v. Air Line Pilots Ass'n, Intern., 343 F.3d 401, 405 (5th Cir. 2003)
(citing Morris v. Covan World Wide Moving, Inc., 144 F.3d 377, 380 (5th Cir. 1998)).
“A fact is material only if its resolution would affect the outcome of the action, . . . and
an issue is genuine only ‘if the evidence is sufficient for a reasonable jury to return a verdict for
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the [nonmovant].’” Wiley v. State Farm Fire and Cas. Co., 585 F.3d 206, 210 (5th Cir. 2009)
(internal citations omitted). When determining whether a genuine issue of material fact has been
established, a reviewing court is required to construe “all facts and inferences . . . in the light
most favorable to the [nonmovant].” Boudreaux v. Swift Transp. Co., Inc., 402 F.3d 536,
540 (5th Cir. 2005) (citing Armstrong v. Am. Home Shield Corp., 333 F.3d 566, 568 (5th Cir.
2003)). Likewise, all “factual controversies [are to be resolved] in favor of the [nonmovant], but
only where there is an actual controversy, that is, when both parties have submitted evidence of
contradictory facts.” Boudreaux, 402 F.3d at 540 (citing Little, 37 F.3d at 1075 (emphasis
omitted)). Nonetheless, a reviewing court is not permitted to “weigh the evidence or evaluate the
credibility of witnesses.” Boudreaux, 402 F.3d at 540 (quoting Morris, 144 F.3d at 380). Thus,
“[t]he appropriate inquiry [on summary judgment] is ‘whether the evidence presents a sufficient
disagreement to require submission to a jury or whether it is so one-sided that one party must
prevail as a matter of law.’” Septimus v. Univ. of Hous., 399 F.3d 601, 609 (5th Cir. 2005)
(quoting Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 251 – 52 (1986)).
V.
DISCUSSION AND ANALYSIS
A.
Justiciability of the Action
As denoted above, under the test enunciated by the Fifth Circuit in Orix Credit Alliance,
a federal court must first determine whether a declaratory action presents a justiciable issue.
Sherwin-Williams, 343 F.3d at 387 (citing Orix Credit Alliance, 212 F.3d at 895). A declaratory
judgment action is justiciable if “a substantial controversy of sufficient immediacy and reality
exists between parties having adverse legal interests.”
Venator Grp. Specialty, Inc. v.
Matthew/Muniot Family, L.L.C., 332 F.3d 835, 838 (5th Cir. 2003); Orix Credit Alliance, 212
F.3d at 896. Here, the plaintiff seeks a judicial declaration of his personal indebtedness to
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McLean for any claims arising under the Employment Agreement and under a promissory
estoppel theory. In a subsequently-filed state-court action, McLean has sued the plaintiff for
breach of the non-recourse loan agreement, fraud, and promissory estoppel, seeking the recovery
of actual and exemplary damages, pre-judgment and post-judgment interests, specific
performance, attorneys’ fees and costs. Consequently, the Court finds that a substantial and
immediate controversy does exist between the parties and the plaintiff’s declaratory action
presents a justiciable issue.
B.
The Court’s Authority to Grant Declaratory Relief
Next, this Court must determine whether it has the authority to grant the declaratory relief
requested. Sherwin-Williams, 343 F.3d at 387. “[A] district court does not have authority to
consider the merits of a declaratory judgment action when:
(1) the declaratory defendant
previously filed a cause of action in state court; (2) the state case involved the same issues as
those in the federal court; and (3) the district court is prohibited from enjoining the state
proceedings under [the Anti-Injunction Act, 28 U.S.C.A. §] 2283.” Id. at 388 n. 1. (citing
Travelers Ins. Co. v. La. Farm Bureau Fed’n, Inc., 996 F.2d 774, 776 (5th Cir. 1993)). “The
absence of any of the three factors defeats mandatory abstention . . . .” Sealed v. Sealed, No. 9430148, 1994 WL 487245, *2 (5th Cir. Aug. 18, 1994) (citing Torch, Inc. v. LeBlanc, 947 F.2d
193, 194 (5th Cir. 1991)).
Because the plaintiff in the case sub judice filed the instant
declaratory action in federal court before McLean, the declaratory defendant, ever sought relief
in state court, mandatory abstention appears inapplicable here and this Court has authority to
grant declaratory relief.
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C.
The Court’s Exercise of Discretion; Analysis of the Trejo Factors
As a third and final step, the Court must consider whether to exercise its discretion to
decide or dismiss this action. Sherwin-Williams, 343 F.3d at 387. The Court is of the opinion
that an evaluation of the Trejo factors weighs in favor of a dismissal of the plaintiff’s declaratory
action.
1.
Pending State Court Action
The first Trejo factor addresses federalism and asks “whether there is a pending state
action in which all of the matters in controversy may be fully litigated. Trejo, 39 F.3d at 590.
McLean argues that the pending Texas state court action will fully resolve all the issues between
the parties rather than the limited issues of whether the plaintiff is liable for breach of the
Employment Agreement and/or whether McLean can recover against him for failing to fund the
non-recourse loan under a promissory estoppel theory . This Court agrees. Given that federal
jurisdiction in this case is premised on diversity of citizenship, all issues at the heart of the
parties’ controversy are state law issues and are well-suited for resolution by a state court.
Accordingly, this controversy can be better settled in the proceeding pending in state court. See
Sphere Drake Ins. Co. v. Tiger Tennis Camp, 839 F. Supp. 403, 405 (M.D. La. 1993) (reasoning
that where federal jurisdiction is based on diversity, all issues are “particularly suited to
resolution by the state courts.”) Thus, this factor weighs in favor of dismissal of the instant
declaratory judgment action.
2.
Anticipatory Filing, Forum Shopping and Fairness
The second and third Trejo factors relate to fairness and ask “whether the declaratory
plaintiff filed suit in anticipation of a lawsuit filed by the defendant” and “whether the plaintiff
engaged in forum shopping.” Trejo, 39 F.3d at 591. In this case, McLean claims that the
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plaintiff filed the instant declaratory judgment action in a race to the courthouse in anticipation
of his action for damages. The plaintiff, in opposition, argues that McLean’s state-court action is
based on exactly the same matters in controversy now before this Court and that the claims
alleged by him in his state-court action should have been filed as counterclaims in the instant
action rather than as a subsequent separate suit. Consequently, he contends that the “exceptional
circumstances” test enunciated in Colorado River and Moses Cone require this Court to retain
jurisdiction over the instant declaratory action. This Court disagrees and finds the Colorado
River/Moses Cone “exceptional circumstances” test inapplicable here. See Sherwin-Williams,
343 F.3d at 389 - 90.
Indeed, “[m]erely filing a declaratory judgment action in a federal court with jurisdiction
to hear it, in anticipation of state court litigation, is not in itself improper anticipatory litigation or
otherwise abusive ‘forum shopping.’” Sherwin-Williams, 343 F.3d at 391. However, where
declaratory relief is sought in an effort to avoid the state court system and to otherwise set
precedence in time and venue, improper anticipatory litigation or otherwise abusive ‘forum
shopping’ will be found. See Id. at 397 – 98 (citing Mission Ins. Co. v. Puritan Fashions Corp.,
706 F.2d 599, 602 (5th Cir.1983)); see also Rowan Companies, Inc. v. Blanton, 764 F. Supp.
1090, 1092 - 93 (E.D. La. 1991).
In this case, the plaintiff received a demand letter from McLean’s then-acting attorney
advising him of McLean’s retention of a lawyer in connection with his claims associated with the
plaintiff’s failure to fund the non-recourse loan detailed in the parties’ Employment Agreement.
Four days later, on January 22, 2010, the plaintiff filed the instant declaratory judgment action.
That same day, the plaintiff, by and through his attorney, responded to McLean’s demand letter
setting forth his defenses and/or objections to McLean’s claims, advising of his pending
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declaratory action, and proposing an offer of settlement. This sequence of events, while not
sufficient to establish forum shopping, is enough to suggest that, by filing this declaratory
judgment action in anticipation of any claim or action by McLean, the plaintiff engaged in
procedural fencing. This finding weighs in favor of dismissal of the declaratory judgment action.
The fourth Trejo factor also addresses fairness. In resolving this factor, a court must
determine whether inequities exist in allowing the declaratory judgment to be decided in federal
court. Trejo, 39 F.3d at 591. This Court is of the opinion that allowing the plaintiff to litigate his
limited issues in federal court is inequitable, especially in light of the fact that the plaintiff’s
issues as well as McLean’s questions concerning the plaintiff’s liability can be fully resolved in
the pending state-court proceeding. Furthermore, deciding this case would do little to clarify the
applicable legal issues or afford relief from uncertainty since many of McLean’s claims are not
before this Court. This factor weighs in favor of dismissal of the declaratory judgment action.
3.
Convenience of the Forum
The fifth Trejo factor concerns efficiency and asks “whether the federal court is a
convenient forum for the parties and witnesses.” Trejo, 39 F.3d at 591. In this case, the plaintiff
is an individual residing in Houston, Harris County, Texas. McLean, on the other hand, is a
resident of Springfield, Pennsylvania. Nevertheless, McLean has filed a related state court action
in Harris County, Texas. Because both forums appear to be equally convenient to the parties, the
Court finds this factor to be neutral, favoring neither forum.
4.
Judicial Economy
The sixth Trejo factor, also an efficiency concern, asks “whether retaining the lawsuit
would serve the purposes of judicial economy.” Id. This factor weighs heavily in favor of
dismissal of the instant declaratory judgment action because to allow the instant action to
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proceed would result in piecemeal litigation, as the issue presented for decision in this action will
definitely be addressed and resolved in McLean’s lawsuit now pending in the Texas state court.
To have both this Court and the Texas state court proceed towards judgment runs the risk of
inconsistent rulings and compels an unnecessary duplication of judicial resources. See PPG
Indus., Inc. v. Cont’l Oil Co., 478 F.2d 674, 680 (5th Cir. 1973). Certainly, the public interest
demands that a federal court’s time be more judiciously spent. To quote Justice Frankfurter, “[I]t
would be uneconomical as well as vexatious for a federal court to proceed in a declaratory
judgment suit” when the entire controversy is already being litigated in a state court that is
capable of resolving the dispute. Brillhart, 316 U.S. at 495. “Gratuitous interference with the
orderly and comprehensive disposition of a state court litigation should be avoided.” Id.
5.
Construction of State Judicial Decree
The seventh Trejo factor, which also addresses federalism, asks “whether the federal
court is being called on to construe a state judicial decree involving the same parties and entered
by the court before whom the parallel state suit between the same parties is pending.” Trejo, 39
F.3d at 591. If so, this factor clearly weighs in favor of dismissing the action for federalism
concerns. Sherwin-Williams, 343 F.3d at 392. Because neither party has asked the Court to
interpret a state judicial decree, this factor is neutral.
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VI.
CONCLUSION
All aspects of the Trejo test - federalism, fairness, and efficiency - weigh against this
Court exercising jurisdiction over the plaintiff’s declaratory judgment action. Therefore, the
Court declines to exercise jurisdiction over this case and hereby dismisses it.
It is so ORDERED.
SIGNED at Houston, Texas this 14th day of July, 2011.
___________________________________
Kenneth M. Hoyt
United States District Judge
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