Gross v. Spies ( 1998 )

UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
ALFRED W. GROSS, Commissioner of
Insurance, Bureau of Insurance, State
Corporation Commission of the
Commonwealth of Virginia, as Deputy
Receiver of Home Warranty
Corporation, Home Owners Warranty
Corporation and HOW Insurance
Company, a Risk Retention Group in
Receivership and successor to Steven
T. Foster (formerly Commissioner of
Insurance),
Plaintiff-Appellee,
v.
ROBERT F. SPIES; JOSEPH CHUDNOW;
DALE C. DEHARPPORT; JOHN J.
KOELEMIJ; AARON H. KOKLEY; E. RAY No. 96-2146
KOTHE; JACK LAGESCHULTE; SANFORD B.
MIOT; STANLEY WARANCH,
Defendants-Appellants,
and
WILLIAM F. KENNY; ROBERT W.
CRANDALL; J. ROGER GLUNT; MARY E.
POWERS; JOE N. VAN VALER; RICHARD
OPRENCHAK; H. KENNETH SEEBER;
JAMES I. BARNETT; GLENN M. BURNS;
TERENCE S. COOKE; NATIONAL ACADEMY
OF CONCILIATORS; NATIONAL
ASSOCIATION OF HOME BUILDERS OF THE
UNITED STATES; COLTON & BOYKIN,
P.C.; BOYKIN & CASANO, P.C.;
HAMILTON H. BOYKIN; HOME OWNERS
WARRANTY CORPORATION (COUNCIL)OF
HOUSTON, INCORPORATED; HOME OWNERS
WARRANTY COUNCIL OF METROPOLITAN
DALLAS, INCORPORATED; HOME OWNERS
WARRANTY COUNCIL OFTHE BUILDERS
ASSOCIATION, INCORPORATED, the Fort
Worth Council; ERNST & YOUNG, LLP;
DELOITTE & TOUCHE, LLP,
Defendants,
CIGNA INSURANCE COMPANY, d/b/a INA,
Underwriters Insurance Company;
STATE CORPORATION COMMISSION OF THE
COMMONWEALTH OF VIRGINIA,
Parties in Interest.
ALFRED W. GROSS, Commissioner of
Insurance, Bureau of Insurance, State
Corporation Commission of the
Commonwealth of Virginia, as Deputy
Receiver of Home Warranty
Corporation, Home Owners Warranty
Corporation and HOW Insurance
Company, a Risk Retention Group in
Receivership and successor to Steven
No. 96-2147
T. Foster (formerly Commissioner of
Insurance),
Plaintiff-Appellee,
v.
COLTON & BOYKIN, P.C.; BOYKIN &
CASANO, P.C.; HAMILTON H. BOYKIN,
Defendants-Appellants,
and
2
ROBERT F. SPIES; WILLIAM F. KENNY;
JOSEPH CHUDNOW; ROBERT W.
CRANDALL; DALE C. DEHARPPORT;
J. ROGER GLUNT; JOHN J. KOELEMIJ;
AARON H. KOKLEY; E. RAY KOTHE;
JACK LAGESCHULTE; SANFORD B. MIOT;
MARY E. POWERS; JOE N. VAN VALER;
STANLEY WARANCH; RICHARD
OPRENCHAK; H. KENNETH SEEBER; JAMES
I. BARNETT; GLENN M. BURNS; TERENCE
S. COOKE; NATIONAL ACADEMY OF
CONCILIATORS; NATIONAL ASSOCIATION OF
HOME BUILDERS OF THE UNITED STATES;
HOME OWNERS WARRANTY CORPORATION
(COUNCIL)OF HOUSTON, INCORPORATED;
HOME OWNERS WARRANTY COUNCIL OF
METROPOLITAN DALLAS, INCORPORATED;
HOME OWNERS WARRANTY COUNCIL OF
THE BUILDERS ASSOCIATION,
INCORPORATED, the Fort Worth Council;
ERNST & YOUNG, LLP; DELOITTE &
TOUCHE, LLP,
Defendants,
CIGNA INSURANCE COMPANY, d/b/a INA,
Underwriters Insurance Company;
STATE CORPORATION COMMISSION OF THE
COMMONWEALTH OF VIRGINIA,
Parties in Interest.
3
ALFRED W. GROSS, Commissioner of
Insurance, Bureau of Insurance, State
Corporation Commission of the
Commonwealth of Virginia, as Deputy
Receiver of Home Warranty
Corporation, Home Owners Warranty
Corporation and HOW Insurance
Company, a Risk Retention Group in
Receivership and successor to Steven
T. Foster (formerly Commissioner of
Insurance),
Plaintiff-Appellee,
v.
NATIONAL ASSOCIATION OF HOME
BUILDERS OF THE UNITED STATES,
Defendant-Appellant,
No. 96-2149
and
ROBERT F. SPIES; WILLIAM F. KENNY;
JOSEPH CHUDNOW; ROBERT W.
CRANDALL; DALE C. DEHARPPORT; J.
ROGER GLUNT; JOHN J. KOELEMIJ;
AARON H. KOKLEY; E. RAY KOTHE;
JACK LAGESCHULTE; SANFORD B. MIOT;
MARY E. POWERS; JOE N. VAN VALER;
STANLEY WARANCH; RICHARD
OPRENCHAK; H. KENNETH SEEBER;
JAMES I. BARNETT; GLENN M. BURNS;
TERENCE S. COOKE; NATIONAL ACADEMY
OF CONCILIATORS; COLTON & BOYKIN,
P.C.; BOYKIN & CASANO, P.C.;
HAMILTON H. BOYKIN; HOME OWNERS
WARRANTY CORPORATION (COUNCIL)OF
HOUSTON, INCORPORATED; HOME OWNERS
4
WARRANTY COUNCIL OF METROPOLITAN
DALLAS, INCORPORATED; HOME OWNERS
WARRANTY COUNCIL OF THE BUILDERS
ASSOCIATION, INCORPORATED, the Fort
Worth Council; ERNST & YOUNG, LLP;
DELOITTE & TOUCHE, LLP,
Defendants,
CIGNA INSURANCE COMPANY, d/b/a INA,
Underwriters Insurance Company;
STATE CORPORATION COMMISSION OF THE
COMMONWEALTH OF VIRGINIA,
Parties in Interest.
ALFRED W. GROSS, Commissioner of
Insurance, Bureau of Insurance, State
Corporation Commission of the
Commonwealth of Virginia, as Deputy
Receiver of Home Warranty
Corporation, Home Owners Warranty
Corporation and HOW Insurance
Company, a Risk Retention Group in
Receivership and successor to Steven
T. Foster (formerly Commissioner of
No. 96-2150
Insurance),
Plaintiff-Appellee,
v.
WILLIAM F. KENNY; H. KENNETH
SEEBER; JAMES I. BARNETT; GLENN M.
BURNS; TERENCE S. COOKE,
Defendants-Appellants,
and
5
ROBERT F. SPIES; JOSEPH CHUDNOW;
ROBERT W. CRANDALL; DALE C.
DEHARPPORT; J. ROGER GLUNT; JOHN J.
KOELEMIJ; AARON H. KOKLEY; E. RAY
KOTHE; JACK LAGESCHULTE; SANFORD B.
MIOT; MARY E. POWERS; JOE N. VAN
VALER; STANLEY WARANCH; RICHARD
OPRENCHAK; NATIONAL ACADEMY OF
CONCILIATORS; NATIONAL ASSOCIATION OF
HOME BUILDERS OF THE UNITED STATES;
COLTON & BOYKIN, P.C.; BOYKIN &
CASANO, P.C.; HAMILTON H. BOYKIN;
HOME OWNERS WARRANTY CORPORATION
(COUNCIL)OF HOUSTON, INCORPORATED;
HOME OWNERS WARRANTY COUNCIL OF
METROPOLITAN DALLAS, INCORPORATED;
HOME OWNERS WARRANTY COUNCIL OF
THE BUILDERS ASSOCIATION,
INCORPORATED, the Fort Worth Council;
ERNST & YOUNG, LLP; DELOITTE &
TOUCHE, LLP,
Defendants,
CIGNA INSURANCE COMPANY, d/b/a INA,
Underwriters Insurance Company;
STATE CORPORATION COMMISSION OF THE
COMMONWEALTH OF VIRGINIA,
Parties in Interest.
6
ALFRED W. GROSS, Commissioner of
Insurance, Bureau of Insurance, State
Corporation Commission of the
Commonwealth of Virginia, as Deputy
Receiver of Home Warranty
Corporation, Home Owners Warranty
Corporation and HOW Insurance
Company, a Risk Retention Group in
Receivership and successor to Steven
T. Foster (formerly Commissioner of
Insurance),
Plaintiff-Appellee,
v.
HOME OWNERS WARRANTY CORPORATION
(COUNCIL)OF HOUSTON, INCORPORATED;
No. 96-2203
HOME OWNERS WARRANTY COUNCIL OF
METROPOLITAN DALLAS, INCORPORATED,
Defendants-Appellants,
and
ROBERT F. SPIES; WILLIAM F. KENNY;
JOSEPH CHUDNOW; ROBERT W.
CRANDALL; DALE C. DEHARPPORT;
J. ROGER GLUNT; JOHN J. KOELEMIJ;
AARON H. KOKLEY; E. RAY KOTHE;
JACK LAGESCHULTE; SANFORD B. MIOT;
MARY E. POWERS; JOE N. VAN VALER;
STANLEY WARANCH; RICHARD
OPRENCHAK; H. KENNETH SEEBER;
JAMES I. BARNETT; GLENN M. BURNS;
TERENCE S. COOKE; NATIONAL ACADEMY
7
OF CONCILIATORS; NATIONAL
ASSOCIATION OF HOME BUILDERS OF THE
UNITED STATES; COLTON & BOYKIN,
P.C.; BOYKIN & CASANO, P.C.;
HAMILTON H. BOYKIN; HOME OWNERS
WARRANTY COUNCIL OFTHE BUILDERS
ASSOCIATION, INCORPORATED, the Fort
Worth Council; ERNST & YOUNG, LLP;
DELOITTE & TOUCHE, LLP,
Defendants,
CIGNA INSURANCE COMPANY, d/b/a INA,
Underwriters Insurance Company;
STATE CORPORATION COMMISSION OF THE
COMMONWEALTH OF VIRGINIA,
Parties in Interest.
ALFRED W. GROSS, Commissioner of
Insurance, Bureau of Insurance, State
Corporation Commission of the
Commonwealth of Virginia, as Deputy
Receiver of Home Warranty
Corporation, Home Owners Warranty
Corporation and HOW Insurance
No. 96-2204
Company, a Risk Retention Group in
Receivership and successor to Steven
T. Foster (formerly Commissioner of
Insurance),
Plaintiff-Appellant,
v.
8
NATIONAL ASSOCIATION OF HOME
BUILDERS OF THE UNITED STATES;
COLTON & BOYKIN, P.C.; BOYKIN &
CASANO, P.C.; HAMILTON H. BOYKIN;
HOME OWNERS WARRANTY CORPORATION
(COUNCIL)OF HOUSTON, INCORPORATED;
HOME OWNERS WARRANTY COUNCIL OF
METROPOLITAN DALLAS, INCORPORATED;
HOME OWNERS WARRANTY COUNCIL OF
THE BUILDERS ASSOCIATION,
INCORPORATED, the Fort Worth Council;
ERNST & YOUNG, LLP; DELOITTE &
TOUCHE, LLP,
Defendants-Appellees,
and
ROBERT F. SPIES; WILLIAM F. KENNY;
JOSEPH CHUDNOW; ROBERT W.
CRANDALL; DALE C. DEHARPPORT; J.
ROGER GLUNT; JOHN J. KOELEMIJ;
AARON H. KOKLEY; E. RAY KOTHE;
JACK LAGESCHULTE; SANFORD B. MIOT;
MARY E. POWERS; JOE N. VAN VALER;
STANLEY WARANCH; RICHARD
OPRENCHAK; H. KENNETH SEEBER;
JAMES I. BARNETT; GLENN M. BURNS;
TERENCE S. COOKE; NATIONAL ACADEMY
OF CONCILIATORS,
Defendants,
CIGNA INSURANCE COMPANY, d/b/a INA,
Underwriters Insurance Company;
STATE CORPORATION COMMISSION OF THE
COMMONWEALTH OF VIRGINIA,
Parties in Interest.
9
Appeals from the United States District Court
for the Eastern District of Virginia, at Richmond.
Robert R. Merhige, Jr., Senior District Judge.
(CA-95-832-3)
Argued: December 4, 1997
Decided: January 13, 1998
Before WILKINS and HAMILTON, Circuit Judges, and
MICHAEL, Senior United States District Judge for the
Western District of Virginia, sitting by designation.
_________________________________________________________________
Affirmed by unpublished per curiam opinion.
_________________________________________________________________
COUNSEL
ARGUED: Charles Frederick Witthoefft, HIRSCHLER, FLEI-
SCHER, WEINBERG, COX & ALLEN, Richmond, Virginia, for
Appellants. Robert Dean Perrow, WILLIAMS, MULLEN, CHRIS-
TIAN & DOBBINS, Richmond, Virginia, for Appellees. ON BRIEF:
Michael P. Falzone, David W. Robinson, HIRSCHLER, FLEI-
SCHER, WEINBERG, COX & ALLEN, Richmond, Virginia;
Michael S. Sundermeyer, WILLIAMS & CONNOLLY, Washington,
D.C.; Jack B. McClard, Edward J. Fuhr, Mark E. Merrmann, Kathleen
B. Murphy, HUNTON & WILLIAMS, Richmond, Virginia; Craig T.
Merritt, John Tracy Walker, IV, CHRISTIAN & BARTON, L.L.P.,
Richmond, Virginia; William A. Musgrove, MEZZULLO &
MCCANDLISH, Richmond, Virginia, for Appellants. Howard W.
Dobbins, Robert E. Eicher, John L. Walker, III, Elizabeth P. Mason,
WILLIAMS, MULLEN, CHRISTIAN & DOBBINS, Richmond, Vir-
ginia, for Appellees.
_________________________________________________________________
Unpublished opinions are not binding precedent in this circuit. See
Local Rule 36(c).
10
OPINION
PER CURIAM:
The issue in this case is whether the district court abused its discre-
tion when it granted a Federal Rule of Civil Procedure 41(a)(2)
motion for voluntary dismissal in a suit filed by the Commissioner of
Insurance of the State Corporation Commission of the Common-
wealth of Virginia (the Commission), acting as Deputy Receiver of
a group of insurance companies under an order of receivership,
against numerous individuals and entities who allegedly engaged in
illegal and improper conduct that resulted in the insolvency and haz-
ardous financial condition of the companies. Concluding that the dis-
trict court did not abuse its discretion, we affirm.
I.
Prior to receivership, the Homeowners Warranty Corp. (HOW)
administered one of the largest new home warranty programs in the
nation. HOW was formed in 1973 by the National Association of
Homebuilders (NAHB), a trade association of homebuilders and affil-
iated entities. HOW administered a homebuilder warranty protection
plan, known as the Homeowners Warranty Program (HOW Program).
NAHB owned both HOW and the HOW Program until approximately
1981. Thereafter, NAHB transferred its stock in HOW to the Home
Warranty Corporation (HWC), a non-stock membership corporation.
In 1981, the How Insurance Company (HOWIC) was incorporated as
a risk retention group, and in 1982, HOWIC began underwriting the
HOW Program. HWC, a Delaware corporation, wholly owned both
HOW, a District of Columbia corporation, and HOWIC, a Virginia
corporation. All three companies (collectively, the HOW Companies)
were operated as a single business enterprise.
In 1991, the Virginia Bureau of Insurance (Bureau) began an inves-
tigation into HOWIC's financial status. This investigation ultimately
led to receivership proceedings. On October 14, 1994, pursuant to
Chapter 15, Article 38.2 of the Virginia Code, the Circuit Court of the
City of Richmond, Virginia (the Circuit Court) entered a final order
(the Receivership Order) appointing the Commission as Receiver for
the HOW Companies. Three days later, the United States District
11
Court for the Eastern District of Virginia entered a permanent injunc-
tion enjoining the HOW Companies from engaging in the business of
insurance and enjoining certain parties from interfering with the Com-
mission's receivership. Both orders were entered with the consent of
the HOW Companies.
Under the terms of the Receivership Order, the Receiver was
authorized to take all actions it deemed advisable in connection with
the rehabilitation or liquidation of the HOW Companies. Steven T.
Foster, the Commissioner of Insurance of Virginia's State Corpora-
tion Commission, was appointed as the Deputy Receiver (D.R.).1 In
addition to setting forth the terms of the receivership, the Receiver-
ship Order included a provision requiring all claims against the Dep-
uty Receiver to be filed with the Commission and permanently
enjoined any claimant from filing a claim against the Deputy Receiver
in another jurisdiction, except with leave of the Commission.
While exercising his duties under the Receivership Order, the D.R.
identified certain persons who, by their allegedly improper and illegal
conduct, were most responsible for the financial condition of the
HOW Companies. On October 10, 1995, the D.R. filed a complaint
in the United States District Court for the Eastern District of Virginia
against fifteen former officers, directors, and an employee of the
HOW Companies (collectively, the Original Defendants), alleging
one federal securities fraud claim and eleven claims under Virginia
law, including breach of fiduciary duty and fraud. The D.R. sought
compensatory damages in excess of $100 million, as well as "substan-
tial" punitive damages and other relief. Essentially, the D.R. alleged
that the defendants' illegal and improper conduct had resulted in the
insolvency and hazardous financial condition of the HOW Compa-
nies.
In the complaint, the D.R. also alleged misconduct by certain other
individuals and entities he did not name as defendants. For example,
the D.R. alleged that the HOW Companies' arrangement with NAHB
was so extensive as to "effectively make the HOW Program an exten-
_________________________________________________________________
1 Alfred W. Gross has succeeded Steven T. Foster as Commissioner of
Insurance and, therefore, he has been substituted for Steven Foster in
these proceedings.
12
sion of the NAHB." (J.A. 48). Similarly, in several places in the com-
plaint, the D.R. alleged the defendants acted with substantial
assistance from their consultants, such as auditors and actuaries.
Additionally, the complaint stated that the D.R. was engaging in a
continuing investigation of "the causes of, and circumstances sur-
rounding, the receivership of the [HOW] Companies" and that in con-
nection with this investigation, certain tolling agreements had been
entered into by the D.R. and other persons or entities. (J.A. 33). The
complaint stated further that "[b]ut for the existence of these Tolling
Agreements, these other persons or entities would be named as defen-
dants in this Complaint and may ultimately be so named." Id. On
December 15, 1995, the Original Defendants moved to dismiss the
state law claims on statute of limitations and other grounds.
On January 15, 1996, the D.R. and twelve individuals residing in
Texas and representing a putative class of homeowners, filed suit in
state court in Dallas County, Texas, against a number of defendants,
including NAHB, several local "HOW Councils," regional affiliates
that performed agency functions for the HOW Companies, accoun-
tants, actuaries, lawyers and law firms, and individual officers and
directors of the HOW Companies, alleging a variety of violations of
state law. None of the defendants named in the Texas class action suit
was named as a defendant in the federal suit in Virginia. According
to the D.R., he filed suit in Texas because at the time he took over
the affairs of the HOW Companies, their executive offices were
located in Arlington, Virginia, but their operations center and most
company employees were located in Dallas, Texas. In addition, all
claims and underwriting functions for the HOW Companies were
handled from the Dallas, Texas location, and the largest percentage
of insured homeowners and the largest percentage of claims against
the HOW Companies were located in Texas.
On February 7 and 8, 1996, fourteen of the defendants in the Texas
class action suit (the Intervenors) filed motions to intervene in this
federal suit. At the time they filed their motions, the Intervenors also
filed proposed answers to the D.R.'s complaint, and two of them,
NAHB and Deloitte & Touche, LLP, filed proposed counterclaims.
The Intervenors argued that the disposition of the federal suit might,
as a practical matter, impair or impede their ability to protect their
interests and that the claims of the D.R. and the defenses of the Origi-
13
nal Defendants had questions of law and fact in common with the
claims and defenses of the Intervenors. In addition, the Intervenors
argued that some of the allegations contained in the D.R.'s complaint
in the federal suit in Virginia alleged wrongdoing by parties named
as defendants in the Texas action.
The D.R. opposed the Intervenors' motions, arguing that because
he represented a putative class in the Texas action, regardless of the
district court's decision on the motions to intervene, there would still
be an action in Texas against the Intervenors and, therefore, duplica-
tive litigation. In addition, the D.R. argued that the addition of four-
teen defendants would add a significant amount of time and expense
to the federal litigation because of different issues and additional par-
ties involved.
On March 6, 1996, the district court entered an order granting the
Intervenors' motions to intervene under Federal Rule of Civil Proce-
dure 24(b), allowing permissive intervention. In its order, the district
court also granted the D.R. thirty days to amend his complaint if he
wished. That same day, the answers and counterclaims of two Interve-
nors, NAHB and Deloitte & Touche, LLP, were filed. In its counter-
claim, NAHB sought indemnity, based on an alleged indemnity
agreement between NAHB and HOW, for any losses that NAHB
might incur as a result of claims pending against it in the Texas action
and the Virginia action.
On March 15, 1996, the district court entered a memorandum opin-
ion and order in which it denied the Original Defendants' motions to
dismiss the D.R.'s complaint on all bases argued by the defendants,
with the exception of the statue of limitations defense. With respect
to the Original Defendants' statute of limitations defense, the district
court took this argument under advisement and simply denied the
motions to dismiss in all other respects.
On April 5, 1996, the D.R. filed a First Amended Complaint
against all defendants, including the Original Defendants and the
Intervenors, in which he eliminated the federal securities claim and
asserted additional state law claims, including numerous violations of
Texas law. At the same time, the D.R. moved to dismiss his own case
for lack of jurisdiction or, alternatively, for voluntary dismissal under
14
Federal Rule of Civil Procedure 41(a)(2), or for a stay, or for a contin-
uance of the July 1, 1996 trial date. The D.R. asked, in particular, that
the district court enter an order declining to exercise supplemental
jurisdiction over the remaining state law claims, since there were no
federal causes of action remaining in the suit, and dismissing the
action without prejudice or, in the alternative, that the district court
enter an order voluntarily dismissing the action without prejudice
under Rule 41(a)(2). If the district court declined to dismiss the
action, the D.R. moved for the entry of an order staying the action
pending resolution of the Texas action or for the entry of an order res-
cheduling the trial date until March 1997.
Also in early April 1996, the Intervenors filed a motion in the Cir-
cuit Court, seeking clarification of the Receivership Order. Specifi-
cally, the Intervenors sought permission to assert counterclaims
against the D.R. in the Virginia and Texas actions. On April 9, 1996,
the Circuit Court released a letter opinion in which it agreed to mod-
ify the Receivership Order to permit the Intervenors to file counter-
claims against the D.R. in the Virginia action and the Texas action,
despite the fact that the D.R. had not consented to suit against him in
either forum. The opinion stated that the Circuit Court would modify
the Receivership Order to permit the Intervenors' counterclaims and
that counsel for the Intervenors could "draft a suitable order allowing
the change." (J.A. 1970). On April 22, 1996, several of the Interve-
nors, Colton & Boykin, P.C.; Boykin & Casano, P.C.; and Hamilton
H. Boykin (collectively, the Boykin Intervenors) filed an answer and
counterclaims to the D.R.'s First Amended Complaint. The Boykin
Intervenors' counterclaims consisted of three indemnity claims
against HOW, HWC, and HOWIC, respectively.
On April 23 and April 29, 1996, the district court held hearings on
the D.R.'s voluntary motion to dismiss the action under Federal Rule
of Civil Procedure 41(a)(2). On May 9, 1996, the district court
entered an order granting the D.R.'s motion for voluntary dismissal
on the condition that the D.R. would not be able to assert in the Texas
action any claims against the defendants barred by the laws of the
Commonwealth of Virginia and that the D.R. pay to each of the
defendants a reasonable sum for the reimbursement of expenses
incurred in opposing the D.R.'s motion for dismissal without preju-
dice.
15
Various of the defendants subsequently moved the district court
under Federal Rule of Civil Procedure 59(e) and 60 to reconsider
and/or to clarify its order of dismissal. On July 17, 1996, the district
court verbally clarified its order by indicating that the condition pre-
cluding the assertion of any claims against the defendants barred
under Virginia state law referred only to claims that may be asserted
against the Original Defendants, not to claims that may be asserted
against the Intervenors in the Texas action. On July 18, 1996, the dis-
trict court entered its final order, declaring the clarification issue to
be moot and denying all remaining motions.
Eighteen of the twenty-nine defendants affected by the May 9 order
noted a timely appeal, including ten of the fourteen Intervenors. One
of the Intervenors that asserted a counterclaim against the D.R.,
Deloitte & Touche, LLP did not appeal. The other Intervenors with
counterclaims, NAHB and the Boykin Intervenors, have joined in this
appeal.2
On October 8, 1996, the Circuit Court issued a second letter opin-
ion, in which it reconsidered, pursuant to a motion for reconsideration
filed by the D.R. and the Commission, its previous letter opinion per-
mitting the modification of the Receivership Order to permit claims
against the D.R. in the Virginia and Texas suits. In this second letter
opinion, the Circuit Court reversed and declined to modify its October
1994 Receivership Order precluding any claims against the D.R.
unless filed with the Commission. Approximately one month later, on
November 15, 1996, the Circuit Court entered two orders: in one
order, the court officially ordered, in accordance with its first letter
opinion of April 9, 1996, that the Receivership Order be modified to
permit the Intervenors to assert counterclaims against the D.R. in the
Virginia and Texas suits; in the second order, the court officially
reversed its position as set forth in the April 9, 1996 letter opinion and
ordered that all claims, including counterclaims, of any type asserted
_________________________________________________________________
2 The D.R. noted a timely cross-appeal and argues that the district court
abused its discretion when it permitted the intervention of fourteen addi-
tional defendants by granting the Intervenors' motions to intervene.
Because we are affirming the district court's dismissal of this action, we
need not address the merits of the D.R.'s cross-appeal.
16
against the receivership must be submitted in accordance with the
original provisions of the Receivership Order.
Subsequently, NAHB and the HOW Council of Houston, Texas
filed petitions with the Commission, seeking, inter alia, permission to
file counterclaims against the D.R. in any forum in which the D.R.
files suit. On November 4, 1997, the Commission entered a final
order dismissing these petitions.
II.
We review a district court's decision to grant a plaintiff's motion
to dismiss the complaint without prejudice under Federal Rule of
Civil Procedure 41(a)(2) for abuse of discretion. See Davis v. USX
Corp., 819 F.2d 1270, 1273 (4th Cir. 1987); see also Marex Titanic,
Inc. v. Wrecked & Abandoned Vessel, 2 F.3d 544, 546 (4th Cir. 1993)
(district court's decision to grant motion to dismiss under Rule
41(a)(2) is "within the court's discretion"). Rule 41(a)(2) provides, in
pertinent part:
Except as provided in paragraph (1) of this subdivision of
this rule . . ., an action shall not be dismissed at the plain-
tiff's instance save upon order of the court and upon such
terms and conditions as the court deems proper. If a counter-
claim has been pleaded by a defendant prior to the service
upon the defendant of the plaintiff's motion to dismiss, the
action shall not be dismissed against the defendant's objec-
tion unless the counterclaim can remain pending for inde-
pendent adjudication by the court.
FED. R. CIV. P. 41(a)(2). This rule, then, permits a plaintiff to dismiss
its case without prejudice but requires that the plaintiff get court
approval. See Marex Titanic, 2 F.3d at 546. In addition, if a counter-
claim is pending at the time the plaintiff files its motion, the district
court may not grant the plaintiff's motion unless the counterclaim can
remain pending for independent adjudication. The primary purpose of
the rule is to freely permit voluntary dismissals while protecting the
nonmovant from unfair treatment. See Grover v. Eli Lilly & Co., 33
F.3d 716, 718 (6th Cir. 1994); Davis, 819 F.2d at 1273; see also 9
17
Charles Alan Wright & Arthur R. Miller, Federal Practice and
Procedure § 2364 (1995).
In this case, appellants argue both that the D.R.'s motion was
improperly granted because it unduly prejudiced them and that the
D.R.'s motion was improperly granted because counterclaims of two
Intervenors were pending at the time the action was dismissed and the
district court failed to retain them for independent adjudication. We
will consider each argument in turn.
A.
As a general rule, a plaintiff's motion for voluntary dismissal with-
out prejudice under Rule 41(a)(2) should not be denied absent plain
legal prejudice to the defendant. See Ohlander v. Larson, 114 F.3d
1531, 1537 (10th Cir. 1997); Phillips v. Illinois Cent. Gulf R.R., 874
F.2d 984, 986 (5th Cir. 1989); Andes v. Versant Corp., 788 F.2d 1033,
1036 (4th Cir. 1986); McCants v. Ford Motor Co., Inc., 781 F.2d 855,
856-57 (11th Cir. 1986); 9 Wright & Miller, supra, § 2364. Factors
a district court should consider in ruling on such motions are: (1) the
opposing party's effort and expense in preparing for trial; (2) exces-
sive delay or lack of diligence on the part of the movant; (3) insuffi-
cient explanation of the need for a dismissal; and (4) the present stage
of the litigation, i.e., whether a motion for summary judgment is
pending. See Phillips USA, Inc. v. Allflex USA, Inc., 77 F.3d 354, 358
(10th Cir. 1996); Grover, 33 F.3d at 718; Paulucci v. City of Duluth,
826 F.2d 780, 783 (8th Cir. 1987). These factors are not exclusive,
however, and any other relevant factors should be considered by the
district court depending on the circumstances of the case. See
Ohlander, 114 F.3d at 1537. Courts generally agree, however, that the
mere prospect of a second lawsuit is not sufficient prejudice to justify
denying a motion for voluntary dismissal. See Grover, 33 F.3d at 718;
Paulucci, 826 F.2d at 782; Davis, 819 F.2d at 1275. Similarly, "the
possibility that the plaintiff will gain a tactical advantage over the
defendant in future litigation will not serve to bar a second suit."
Davis, 819 F.2d at 1275; see also American Nat'l Bank & Trust Co.
v. BIC Corp., 931 F.2d 1411, 1412 (10th Cir. 1991) ("The possibility
that plaintiffs may gain a tactical advantage by refiling in state court
is insufficient to deny a voluntary motion to dismiss without preju-
dice, especially when state law is involved.").
18
In this case, appellants argue the district court's order granting the
D.R.'s motion has caused them to suffer clear legal prejudice. The
first basis alleged by appellants is the loss of their statute of limita-
tions defense that, according to appellants, bars the D.R.'s Virginia
state law claims. At the time the district court granted the D.R.'s
motion for voluntary dismissal, the district court had taken the Origi-
nal Defendants' motions to dismiss based on the applicable Virginia
statutes of limitations under advisement.
As noted above, the fact that a plaintiff may gain a tactical advan-
tage by dismissing its suit without prejudice and refiling in another
forum is not sufficient legal prejudice to justify denying a motion for
voluntary dismissal. See BIC Corp., 931 F.2d at 1412; Davis, 819
F.2d at 1275. Courts are divided, however, on the precise issue of
whether a valid statute of limitations defense precludes granting a
plaintiff's motion for voluntary dismissal under Rule 41(a)(2).
Compare McCants, 781 F.2d at 857-59 (holding that valid statute of
limitations defense does not preclude voluntary dismissal without
prejudice), with Metropolitan Fed. Bank v. W.R. Grace & Co., 999
F.2d 1257, 1262 (8th Cir. 1993) (holding there is clear legal prejudice
where a Rule 41(a)(2) dismissal is granted in the face of a valid stat-
ute of limitations defense), and Phillips, 874 F.2d at 987 (same). Nev-
ertheless, the appellants did not suffer clear legal prejudice in this
case, even if the forfeiture of a valid statute of limitations defense
constitutes clear legal prejudice and generally bars voluntary dis-
missal under Rule 41(a)(2), because those defendants who had filed
a motion to dismiss based on Virginia statutes of limitations did not
lose their defense.
As set forth above, the district court dismissed this action on the
condition that the D.R. could not assert in the Texas action any claims
against the Original Defendants barred by the laws of Virginia. To the
extent that the appellants had asserted a legal defense under Virginia
law to the Virginia state claims, such that the loss of that defense
would constitute legal prejudice, then, they still have the same
defense to the same claims to the extent they are raised in the Texas
action. In other words, if the D.R. asserts claims against the Original
Defendants under Virginia law, those defendants will be able to assert
the same Virginia statute of limitations defense in Texas that they
asserted in this action in the district court.
19
The appellants argue, however, that the D.R. has stated his inten-
tion to restyle the claims in the Texas action as Texas state law
claims, such that the Virginia statute of limitations defense would be
useless. However, this argument assumes that the D.R. has valid
Texas claims against the appellants. If he does, he could have prop-
erly asserted those claims in the Virginia action and a Virginia statute
of limitations defense would have been similarly useless. A Virginia
statute of limitations defense pertains only to claims under Virginia
law, regardless of the forum in which they are raised. By preserving
the appellants' right to raise that defense to any claims asserted under
Virginia law, the district court ensured that the appellants did not suf-
fer clear legal prejudice because of forfeiture of the defense when it
dismissed the D.R.'s Virginia federal suit without prejudice.
In addition to the loss of their statute of limitations defense, the
appellants also argue that the district court's order dismissing the
complaint legally prejudices them because: (1) the appellants made an
extraordinary effort and incurred significant expense in obtaining dis-
covery and preparing the case for trial; (2) the D.R.'s purpose in seek-
ing voluntary dismissal was to avoid the consequences of his lack of
due diligence and trial preparation; (3) the effect of the dismissal is
to reverse the district court's ruling in favor of intervention; (4) the
appellants are insured under "wasting" liability insurance policies; (5)
key witnesses were within the subpoena power of the district court
but are not subject to subpoena in Texas; and (6) Virginia's business
judgment rule is more favorable to appellants than Texas'. It is cer-
tainly true, as appellants argue, that they incurred significant expense
in obtaining discovery and preparing for trial in this case, particularly
since much of the discovery they sought was located in Texas. How-
ever, there is no evidence suggesting that the D.R. was not diligent
in pursuing his claims or that the D.R.'s explanation of needing addi-
tional time to prepare to try claims against fourteen additional defen-
dants (following intervention) was disingenuous. With respect to the
appellants' insurance policies, some of the appellants are apparently
insured under a policy in which the policy coverage is reduced by
defense costs and, thus, is "wasting." Although the D.R. contests this
interpretation of the policies at issue, even if the appellants' interpre-
tation is correct, this consequence can hardly constitute legal preju-
dice. Finally, with respect to the subpoena power and business
judgment rule, appellants assert these arguments without providing
20
any support for the proposition that these concerns constitute legal
prejudice. Witnesses are often outside the reach of a court's subpoena
power; their testimony is still available by deposition. With respect to
the business judgment rule, as set forth above, a motion for voluntary
dismissal should not be denied simply because the plaintiff gains a
tactical advantage in a different forum. Thus, while each of the appel-
lants' reasons disfavoring dismissal is valid, none rises to the level of
legal prejudice required to deny the D.R.'s motion.
In addition, as the D.R. argues, there were valid grounds for dis-
missal: (1) as a result of the intervention order, there was duplicative
litigation in Virginia and Texas; (2) Texas was the only forum where
all claims against all defendants could be resolved; and (3) only state
law claims remained in this federal suit after the D.R. filed his First
Amended Complaint in April 1996. Ultimately, it was the role of the
district court to consider all relevant circumstances in this case and
decide whether, in its discretion, the D.R.'s motion should be granted.
Here, there were reasons favoring dismissal, and the conditions on
dismissal imposed by the district court ensured that the appellants
would suffer no legal prejudice as a result of the dismissal.
B.
The appellants next assert that the district court abused its discre-
tion when it granted the D.R.'s Rule 41(a)(2) motion for voluntary
dismissal because there were counterclaims pending at the time the
action was dismissed and the district court failed to retain jurisdiction
over them. As set forth above, Rule 41(a)(2) provides that "[i]f a
counterclaim has been pleaded by a defendant prior to the service
upon the defendant of the plaintiff's motion to dismiss, the action
shall not be dismissed against the defendant's objection unless the
counterclaim can remain pending for independent adjudication." FED.
R. CIV. P. 41(a)(2). In order for this provision to apply, however, the
counterclaim must have been properly filed--that is, the district court
must have properly had subject matter jurisdiction over the claim. See
Sams v. Beech Aircraft Corp., 625 F.2d 273, 277 (9th Cir. 1980);
Armstrong v. Armstrong, 132 F.R.D. 69, 71 (D. Colo. 1990); 9 Wright
& Miller, supra, § 2365.
21
In this case, two of the Intervenors, NAHB and Deloitte & Touche,
filed proposed answers and counterclaims against the D.R. at the time
they intervened, and these counterclaims and answers were officially
filed on March 6, 1996, the day the district court permitted interven-
tion and before the D.R. filed its motion to dismiss on April 5, 1996.3
As noted above, Deloitte & Touche did not appeal the district court's
order of voluntary dismissal and, as a result, the propriety of the dis-
trict court's failure to retain jurisdiction over its counterclaim against
the D.R. is not before us. However, NAHB does appeal the district
court's dismissal of the Virginia action. Therefore, we must address
whether the district court erred in doing so in light of NAHB's pend-
ing counterclaim.
It is undisputed that the district court did not retain jurisdiction
over NAHB's counterclaim against the D.R. Therefore, if the counter-
claim was properly filed, the district court's dismissal of the counter-
claim was error. The D.R. argues, however, that NAHB's
counterclaim was not properly filed because under the terms of the
Receivership Order, claims against the D.R. could not be asserted in
the Virginia action. We agree.
The straightforward terms of the Receivership Order provided that
all claims against the D.R. had to be filed with the Commission,
unless the D.R. agreed that a claim could be filed against him in
another jurisdiction. On April 9, 1996, the Circuit Court issued a letter
opinion, stating its intention to modify its Receivership Order to per-
mit the Intervenors to file counterclaims against the D.R. in the Vir-
ginia action and the Texas action, despite the fact that the D.R. had
not consented to suit against it in either forum. However, the Circuit
_________________________________________________________________
3 As noted earlier, a third set of Intervenors, the Boykin Intervenors,
also filed an answer and counterclaim after the D.R. amended his com-
plaint. Unlike NAHB and Deloitte & Touche, however, the Boykin Inter-
venors failed to file their counterclaim prior to the D.R.'s motion to
dismiss and, therefore, by its terms, Rule 41(a)(2) does not act to require
the district court to retain jurisdiction over this counterclaim prior to per-
mitting dismissal. See FED. R. CIV. P. 41(a)(2) (precluding voluntary dis-
missal unless counterclaim can remain pending in the district court "if a
counterclaim has been pleaded by a defendant prior to the service upon
the defendant of the plaintiff's motion to dismiss") (emphasis added).
22
Court did not enter an order to that effect, and on October 8, 1996,
the court reconsidered its previous letter opinion and reversed itself,
declining to modify the Receivership Order precluding any claims
against the D.R. unless filed with the Commission. Then, on Novem-
ber 15, 1996, the Circuit Court entered two orders: one officially
modifying the Receivership Order in accordance with its April 1996
letter opinion and a second one reversing that decision and ordering
all claims, including counterclaims, asserted against the D.R. as repre-
sentative of the HOW Companies to be submitted in accordance with
the Receivership Order. The second November 15, 1996 order, then,
effectively nullified any legal effect the April 1996 letter opinion may
have had and reinstated the full terms of the October 1994 Receiver-
ship Order. The Commission has recently ruled likewise, dismissing
NAHB's petition seeking permission to file counterclaims in any
forum in which the D.R. sues.
These decisions make clear that NAHB's counterclaim against the
D.R. was improperly filed because under the terms of the Receiver-
ship Order, such claims must be filed with the Commission. While
NAHB successfully challenged this provision in the Circuit Court,
that court subsequently reconsidered its decision and reinstated the
terms of the Receivership Order in full. Because the district court
lacked subject matter jurisdiction over NAHB's counterclaim, it was
not properly filed and its pendency did not preclude the voluntary dis-
missal of the Virginia action.
III.
In conclusion, we hold that the district court did not abuse its dis-
cretion when it granted the D.R.'s motion to voluntarily dismiss the
Virginia action pursuant to Rule 41(a)(2). Accordingly, the judgment
of the district court is affirmed.
AFFIRMED
23