Westbury Bank v. Potter et al
Filing
26
DECISION AND ORDER signed by Magistrate Judge Nancy Joseph on 8/8/2018 granting in part and denying in part 17 Motion to Dismiss. (cc: all counsel) (llc)
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF WISCONSIN
WESTBURY BANK
Plaintiff,
v.
Case No. 18-CV-655
KRISTIN A. POTTER and
RUSSELL LOWELL POTTER, II,
Defendants.
DECISION AND ORDER ON DEFENDANT’S MOTION TO DISMISS
Westbury Bank brought an action for statutory interpleader pursuant to 28 U.S.C. §§
1335, 1397, and 2361 against Kristin A. Potter and Russell Lowell Potter, II. The funds at
issue consist of $114,389.87. The bank was permitted to deposit the funds into the court’s
registry and was dismissed from the case. Russell Potter, along with his two companies, The
Concerned Group, Inc. and Granite Business Park, LLC, filed a cross-claim for declaratory
judgment against Kristin Potter, alleging that she improperly converted the funds and seeks
a declaration that he and his companies are entitled to the funds. Kristin Potter moved to
dismiss the cross-claim for failure to state a claim and under several abstention doctrines.
She also argues that the two companies were never properly joined and thus are not proper
parties to this action. For the reasons that follow, Kristin Potter’s motion to dismiss is
granted in part and denied in part.
BACKGROUND
Russell and Kristin Potter were married on May 27, 2010. (Russell Potter’s Answer
and Cross-Claims to Interpleader Compl. ¶ 32, Docket # 10.) The couple separated on
December 30, 2015 and Russell Potter filed for divorce on May 25, 2016 in the Circuit
Court of Benton County, Arkansas. (Id.) The Arkansas court issued a standing order for the
divorce proceedings, stating that “[i]f property rights are at issue, neither party shall sell,
agree to sell, mortgage, pledge or otherwise dispose of or destroy any of the property to
which the parties own an interest except in the ordinary course of business.” (Id.) The
divorce proceedings had the first two days of trial on April 12 and 13, 2018, and reconvened
in late July 2018. (Id.)
Russell Potter founded The Concerned Group, Inc. (“TCGI”) in 1971 and Granite
Business Park, LLC in 1999. (Id. ¶¶ 33-34.) Russell Potter sold the publishing rights of TCGI
on December 15, 2015 and on January 7, 2016, received an initial $2 million payment. (Id. ¶
39.) Kristin Potter “did the books” for TCGI and Granite through 2015. (Id. ¶ 42.) Russell
Potter alleges that Kristin Potter improperly withheld the books from Russell Potter’s CPA
until March 26, 2016. (Id. ¶ 45.) Russell Potter alleges that three major corporate accounts
contained a total balance of $842.837.42 and by early June 2016, Kristin Potter allegedly
misappropriated, embezzled, and/or converted $1.7 million of the $2.8 million dollars ($2
million in sale funds and the $842,837.42). (Id. ¶ 48.) Russell Potter further alleges that from
March 2016 through June 2016, continuing on through January 2018, Kristin Potter
misdirected, misappropriated, and converted/embezzled corporate money. (Id. ¶ 54.)
On September 9, 2016, Kristin Potter opened two accounts at Westbury Bank. (Id. ¶
104.) Russell Potter alleges that the $114,389.87 at issue in this case, previously held by
Westbury Bank, has been traced from the TCGI and/or Granite corporate funds, or in part
from Russell Potter’s funds. (Id. ¶ 108.)
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On April 25, 2018, Westbury Bank filed an interpleader action against Kristin Potter
and Russell Potter. (Id. ¶ 36.) On April 27, 2018, I issued an order allowing deposit of funds
by Westbury Bank into the Court’s Registry and Westbury Bank deposited $114,389.87 the
same day. (Docket # 5; Cross-Claim ¶ 38.) Westbury Bank was dismissed from this action
on June 29, 2018. (Docket # 21.) Russell Potter filed a cross-claim against Kristin Potter,
seeking a declaratory judgment that Russell Potter, TCGI, and Granite are the lawful
owners of the $114,389.87 and for an order turning the funds over to Russell Potter, TCGI,
and Granite.
ANALYSIS
Russell Potter seeks relief under the Declaratory Judgment Act, 28 U.S.C. §§ 2201.
(Id. ¶ 140.) Kristin Potter moves to dismiss Russell Potter’s cross-claim on several grounds.
First, she argues that TCGI and Granite were not properly joined and thus they are not
proper parties to the litigation and cannot bring a claim against Kristin Potter. Second, she
argues that Russell Potter’s cross-claim fails to state a claim on which relief can be granted
and thus must be dismissed pursuant to Fed. R. Civ. P. 12(b)(6). Finally, Kristin Potter
argues that I should decline to exercise jurisdiction over the claim because it involves
complex issues of Arkansas divorce law, because the parties are currently litigating the
distribution of marital assets in their Arkansas divorce trial, and because it is barred by the
Domestic Relations Exception and the Rooker-Feldman Doctrine. I will address each
argument in turn.
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1.
Joinder of TCGI and Granite
Kristin Potter argues that TCGI and Granite were never properly joined to the
lawsuit; thus, they are not proper parties to this litigation and their cross-claims must be
dismissed. Russell Potter argues that Fed. R. Civ. P. 13(h) permits the joining of additional
parties to a cross-claim, governed by Fed. R. Civ. P. 19 and 20. Westbury Bank filed this
interpleader action against Kristin Potter and Russell Potter—the interpleader complaint did
not include TCGI and Granite. In Russell Potter’s answer and cross-claim to the
interpleader complaint, Russell Potter simply added two additional parties to the lawsuit.
(Docket # 10 at 4.) While Russell Potter is correct that the federal rules allow for the joining
of additional parties to a cross-claim, pursuant to Fed. R. Civ. P. 13(h), 19, and 20, a
defendant cannot simply join an additional party by adding the party to his responsive
pleading.
Rule 19 requires joinder of a nonparty if, without joinder, “the court cannot accord
complete relief among existing parties.” A Rule 19 motion for joinder is ordinarily brought
by a defendant who believes that the case cannot be tried in the absence of some party that
the plaintiff chose not to name. Robertshaw Controls Co. v. Therm-O-Disc, Inc., No. 09 C 1816,
2009 WL 4043083, at *1 (N.D. Ill. Nov. 20, 2009). Under Rule 20, which governs
permissive joinder, a court must consider whether the moving party met the requirements of
Rule 20, as well as considering “other relevant factors in a case in order to determine
whether the permissive joinder of a party will comport with the principles of fundamental
fairness.” Intercon Research Assocs., Ltd. v. Dresser Indus., Inc., 696 F.2d 53, 58 (7th Cir. 1982)
(internal quotation and citation omitted).
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While TCGI and Granite may be proper parties to this litigation, neither defendant
has properly moved to join them and made the requisite showing under either Rule 19 or
Rule 20. For this reason, neither TCGI nor Granite are proper parties to this litigation at
this time.
2.
Motion to Dismiss for Failure to State a Claim
Kristin Potter moves to dismiss for failure to state a claim upon which relief may be
granted pursuant to Fed. R. Civ. P. 12(b)(6). A complaint must contain “a short and plain
statement of the claim showing that the pleader is entitled to relief.” Fed. R. Civ. P. 8(a)(2).
The Supreme Court has interpreted this language to require that the plaintiff plead “enough
facts to state a claim to relief that is plausible on its face.” Bell Atlantic Corp. v. Twombly, 550
U.S. 544, 570 (2007). In Ashcroft v. Iqbal, the Supreme Court elaborated further on the
pleadings standard, explaining that a “claim has facial plausibility when the plaintiff pleads
factual content that allows the court to draw the reasonable inference that the defendant is
liable for the misconduct alleged,” though this “standard is not akin to a ‘probability
requirement.’” 556 U.S. 662, 678 (2009). The allegations in the complaint “must be enough
to raise a right to relief above the speculative level.” Twombly, 550 U.S. at 555 (internal
citation omitted).
Kristin Potter argues that Russell Potter’s cross-claim consists of only two paragraphs
and is rife with legal conclusions. Russell Potter seeks a declaratory judgment pursuant to 28
U.S.C. § 2201. Because of constitutional limits on the jurisdiction of federal courts, the
Declaratory Judgment Act “allows federal courts, in their discretion, to render declaratory
judgments only where there exists an ‘actual controversy.’” Trippe Mfg. Co. v. Am. Power
Conversion Corp., 46 F.3d 624, 627 (7th Cir. 1995) (citing Crown Drug Co., Inc. v. Revlon, Inc.,
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703 F.2d 240, 243 (7th Cir. 1983)). Accordingly, to survive a motion to dismiss, a complaint
seeking declaratory relief “must allege facts sufficient to establish such an actual
controversy.” Int’l Harvester Co. v. Deere & Co., 623 F.2d 1207, 1210 (7th Cir. 1980).
I find that Russell Potter has alleged facts in his counter-claim sufficient to establish
an actual controversy. The cross-claim details multiple instances in which Kristin Potter
allegedly misappropriated, converted, and/or embezzled funds belonging to Russell Potter.
The counter-claim sets forth the dates and the accounts from which Kristin Potter allegedly
improperly converted the funds. The cross-claim asks the court for a declaratory judgment
that the funds at issue of $114,389.87 belong to Russell Potter. For these reasons, Kristin
Potter’s motion to dismiss for failure to state a claim is denied.
3.
Motion to Dismiss on Abstention Grounds
Kristin Potter moves to dismiss the cross-claim on several abstention grounds. She
argues that because the parties are currently mid-way through a bifurcated trial in which the
Arkansas Family Court will determine and distribute the marital assets, it would waste
judicial resources to litigate this matter twice in two separate courts. Kristin Potter also
argues the cross-claim should be dismissed as barred by the domestic relations exception,
which states that federal courts cannot hear certain family law related matters, and the
Rooker-Feldman doctrine, which bars a lower federal court from reviewing a state court
judgment. Russell Potter argues that the Arkansas state court found that the funds at issue
are not marital property and not part of the divorce proceedings and dismissed his
conversion claims against Kristin Potter without prejudice. Thus, as his conversion claim is
not being litigated in Arkansas court, this lawsuit is not redundant.
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A motion to dismiss based on an abstention doctrine raises the question of whether a
court should exercise subject matter jurisdiction. Miller Brewing Co. v. ACE U.S. Holdings, Inc.,
391 F. Supp. 2d 735, 739 (E.D. Wis. 2005). In reviewing a Rule 12(b)(1) motion, I look both
to the allegations in the complaint and to other materials relating to the exercise of
jurisdiction. Id. Specifically, I may look to the filings in the state court action without
converting the motion into one for summary judgment. Id. I must take the plaintiff’s
allegations as true and draw all reasonable inferences from them in the light most favorable
to the plaintiff. Id.
Because Russell Potter is not asking to set aside a state court judgment, the RookerFeldman doctrine does not apply. Rooker v. Fidelity Trust Co., 263 U.S. 413, 415–16 (1923);
District of Columbia Court of Appeals v. Feldman, 460 U.S. 462, 482–86 (1983). Kristin Potter
more properly asks the court to abstain pursuant to the Wilton/Brillhart abstention doctrine.
In Wilton v. Seven Falls Co., 515 U.S. 277 (1995) and Brillhart v. Excess Ins. Co. of Am., 316
U.S. 491 (1942), the Supreme Court held that district courts possess significant discretion to
dismiss or stay claims seeking declaratory relief, even though they have subject matter
jurisdiction over such claims. Envision Healthcare, Inc. v. PreferredOne Ins. Co., 604 F.3d 983,
986 (7th Cir. 2010) (citing R.R. Street & Co., Inc. v. Vulcan Materials Co., 569 F.3d 711, 713
(7th Cir. 2009)). “This discretion arises from the Declaratory Judgment Act, 28 U.S.C. §§
2201–2202 itself, which provides that district courts ‘may declare the rights and other legal
relations of any interested party seeking such declaration.’” Id. (quoting 28 U.S.C. §
2201(a)) (emphasis in original). The discretionary nature of the Act led the Supreme Court
to hold in Brillhart and Wilton that district courts have substantial discretion in deciding
whether to declare the rights of litigants and may, in the sound exercise of their discretion,
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stay or dismiss an action seeking a declaratory judgment in favor of an ongoing state court
case. Id. Although the Supreme Court did not set criteria for when a court should exercise
its discretion to abstain, the “classic example of when abstention is proper” occurs when a
complaint solely seeks declaratory relief and parallel state proceedings are ongoing. Id.
Proceedings are parallel when “substantially the same parties are contemporaneously
litigating substantially the same issues in two fora.” Id.
The factors the court considers in deciding whether to abstain under Wilton/Brillhart
are:
[W]hether the declaratory suit presents a question distinct from the issues
raised in the state court proceeding, whether the parties to the two actions are
identical, whether going forward with the declaratory action will serve a
useful purpose in clarifying the legal obligations and relationships among the
parties or will merely amount to duplicative and piecemeal litigation, and
whether comparable relief is available to the plaintiff seeking a declaratory
judgment in another forum or at another time.
Nationwide Ins. v. Zavalis, 52 F.3d 689, 692 (7th Cir. 1995). If the federal court action is being
used merely for the purpose of “procedural fencing” or “to provide an arena for a race for
res judicata,” declaratory judgment serves no useful purpose. NUCOR Corp. v. Aceros Y
Maquilas de Occidente, S.A. de C. V., 28 F.3d 572, 579 (7th Cir. 1994).
Although Russell Potter argues that the Arkansas court ruled that the funds at issue
are not marital property, he has not included this ruling as part of the pleadings. What he
does include; however, is the Arkansas Family Court’s order dismissing Russell Potter’s
amended complaint as to the conversion claims against Kristin Potter. (Docket # 22-2.)
Thus, it does not appear that the Arkansas state court is addressing the conversion claim.
Because there are no parallel state court proceedings, I find it proper to retain jurisdiction
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over Russell Potter’s claim. For these reasons, Kristin Potter’s motion to dismiss based on
the abstention doctrines is denied.
ORDER
NOW, THEREFORE, IT IS HEREBY ORDERED that the defendant’s motion to
dismiss (Docket # 17) is GRANTED IN PART AND DENIED IN PART. Because The
Concerned Group, Inc. and Granite Business Park, LLC were never properly joined, they
are not proper parties to this action. However, Kristin Potter’s motion to dismiss the crossclaim for failure to state a claim and based on abstention grounds is denied.
Dated at Milwaukee, Wisconsin this 8th day of August, 2018.
BY THE COURT
s/Nancy Joseph_____________
NANCY JOSEPH
United States Magistrate Judge
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