Clark, Marilyn v. Lacy, Alan ( 2004 )

In the
United States Court of Appeals
For the Seventh Circuit
____________
No. 03-3891
MARILYN CLARK, on behalf of Sears,
Plaintiff-Appellant,
v.
ALAN LACY, et al.,
Defendants-Appellees.
____________
Appeal from the United States District Court for the
Northern District District of Illinois, Eastern Division.
No. 02 C 7984—John A. Nordberg, Judge.
____________
ARGUED APRIL 7, 2004—DECIDED JULY 19, 2004
____________
Before FLAUM, Chief Judge, and DIANE P. WOOD and
WILLIAMS, Circuit Judges.
FLAUM, Chief Judge. In this case we are asked to con-
sider how the Colorado River abstention doctrine applies to
a derivative shareholder suit brought in federal court that
involves the same factual predicate, most of the same
defendants, and fundamentally the same legal issues as a
derivative shareholder suit brought by a different plaintiff
shareholder in New York state court. Pursuant to Colorado
River, the district court stayed this action in favor of the
2 No. 03-3891
state proceeding. For the reasons stated in this opinion, we
conclude that the district court did not abuse its discretion
in granting the stay.
I. Background
In 2000, Sears, one of the largest retailers of merchandise
and services in the world, expanded its existing credit
business by issuing MasterCards to individuals holding
credit accounts with Sears. Sears’ credit operations had
traditionally revolved around the “Sears Card,” issued to
Sears customers for use in Sears stores. Faced with declin-
ing sales and an increasingly crowded retail market, Sears
entered the MasterCard market to help increase revenue
and earnings growth. After experiencing some initial success
in the MasterCard market, in October 2002, Sears an-
nounced that its credit business was negatively impacting
the company’s financials. Following this announcement,
Sears’ stock price declined significantly.
A number of lawsuits ensued, including four derivative
shareholder suits filed on Sears’ behalf. The first, Brewster
v. Lacy, et al., 02/603873, was filed October 23, 2002, in the
Supreme Court of the State of New York (“Brewster”). This
matter, Clark v. Lacy, et al., was filed on November 5, 2002,
in the Northern District of Illinois (“Clark”). Additionally,
two separate derivative suits were filed in the Circuit Court
of Cook County. Both of those cases were consolidated
before the same judge and have been stayed in favor of the
New York litigation.
At issue in this appeal are the similarities between the
Brewster and Clark actions. On behalf of Sears, the Brewster
complaint alleges that certain officers and directors of Sears
breached their fiduciary duties under New York state law
in connection with Sears’ decision to enter the competitive
MasterCard market. The Brewster complaint seeks damages
on behalf of Sears from Sears officers and/or directors. Also
No. 03-3891 3
premised on New York law, the Clark complaint alleges
that officers and/or directors of Sears breached their fiduci-
ary duties with respect to Sears’ MasterCard operations and
seeks damages and equitable relief on behalf of Sears. The
Clark complaint names four defendants not named in the
Brewster lawsuit and states three additional causes of
action—abuse of control, gross mismanagement, and waste
of corporate assets. The defendants moved to dismiss both
Brewster and Clark for failure to make demand on the
board of directors as required by New York law and because
the claims are barred by Sears’ charter. On June 23, 2004,
the New York court issued its opinion dismissing Brewster
on the grounds that the derivative plaintiff failed to make
pre-suit demand on Sears’ board of directors. The time for
appeal is thirty days. See N.Y. C.P.L.R. § 5513(a).
Additionally, the Clark defendants filed a motion in the
district court to stay this action pursuant to the doctrine set
forth in Colorado River Water Conservation District v.
United States, 424 U.S. 800 (1976), or in the alternative to
dismiss. Based on a review of the parties’ briefs and exhi-
bits, the district court found that the differences between
the Brewster and Clark actions were more superficial than
substantive. Using the Colorado River factors, the district
court determined that a stay was warranted in this case
because it would promote judicial administration. On order
of the district court, the Clark action is stayed until final
disposition of the New York proceedings. Clark now ap-
peals. For the reasons discussed in this opinion, we affirm
the district court’s order.
II. Analysis
We review a district court’s ruling on a motion to stay
under the Colorado River doctrine for an abuse of discre-
tion. Sverdrup Corp. v. Edwardsville Community Unit Sch.
Dist. No. 7, 125 F.3d 546, 550 (7th Cir. 1997). Under the
4 No. 03-3891
Colorado River abstention doctrine, a federal court may
stay a suit in exceptional circumstances when there is a
concurrent state proceeding and the stay would promote
“wise judicial administration.” Colorado River, 424 U.S. at
818. While recognizing the availability of judicial abstention
in “exceptional circumstances,” the Court also cautioned that
federal courts have a “virtually unflagging obligation . . . to
exercise the jurisdiction given to them.” Id. at 817-18.
Reiterating this admonition, the Court stated in Moses H.
Cone Memorial Hospital v. Mercury Construction Corp., 460
U.S. 1, 25 (1983): “[W]e emphasize that our task in cases
such as this is not to find some substantial reason for the
exercise of federal jurisdiction by the district court; rather,
the task is to ascertain whether there exist ‘exceptional’
circumstances, the ‘clearest of justifications,’ that can suffice
under Colorado River to justify the surrender of that jurisdic-
tion.” (emphasis in original). Given this clear command, “we
treat as paramount the overriding rule that abstention is
the exception.” Sverdrup, 125 F.3d at 550. Indeed, “the
mere fact that an action is pending in state court is ordi-
narily no bar to parallel federal proceedings.” LaDuke v.
Burlington N. R.R. Co., 879 F.2d 1556, 1558 (7th Cir. 1989).
To determine whether a stay is appropriate in a particu-
lar case, a court must conduct a two-part analysis. First,
the court must consider “whether the concurrent state and
federal actions are actually parallel.” Id. at 1559, see also
Interstate Material Corp. v. City of Chicago, 847 F.2d 1285,
1287 (7th Cir. 1988). Then, once it is established that the
suits are parallel, the court must consider a number of non-
exclusive factors that might demonstrate the existence of
“exceptional circumstances.” See LaDuke, 879 F.2d at 1559.
These factors are: (1) whether the state has assumed
jurisdiction over property; (2) the inconvenience of the fed-
eral forum; (3) the desirability of avoiding piecemeal liti-
gation; (4) the order in which jurisdiction was obtained by
the concurrent forums; (5) the source of governing law, state
No. 03-3891 5
or federal; (6) the adequacy of state-court action to protect
the federal plaintiff’s rights; (7) the relative progress of
state and federal proceedings; (8) the presence or absence
of concurrent jurisdiction; (9) the availability of removal;
and (10) the vexatious or contrived nature of the federal
claim. See id. (citing Lumen Constr., Inc. v. Brant Constr.
Co., 780 F.2d 691, 694-95 (7th Cir. 1985)).
A. Parallel Actions
Clark contends that the district court abused its discre-
tion by finding that the Brewster and Clark actions are
parallel. According to Clark, that finding was improper
because the parties and the issues in this case are more
numerous and diverse than in the Brewster action. More-
over, Clark argues that the relief sought in the two actions
is different. The Brewster action seeks only monetary relief
while the Clark action requests equitable relief in addition
to money damages.
To meet the “parallel” requirement, suits need not be
identical. See Interstate Material Corp., 847 F.2d at 1288.
Two suits are considered “ ‘parallel’ when substantially the
same parties are contemporaneously litigating substantially
the same issues in another forum.” Id. (quoting Calvert Fire
Insurance Co. v. American Mutual Reinsurance Co., 600
F.2d 1228, 1229 n.1 (7th Cir. 1979)). To be sufficiently
similar it is not necessary that there be “formal symmetry
between the two actions.” Lumen, 780 F.2d at 695. Rather,
there should be a “substantial likelihood that the state
litigation will dispose of all claims presented in the federal
case.” Id.
After reviewing the two complaints, we agree with the
district court that no meaningful distinction can be made
between the Clark and Brewster lawsuits. First and fore-
most, although some of the names appearing on the two
6 No. 03-3891
complaints are different, the parties’ interests in the disputes
are nearly identical. Parties with “nearly identical” interests
are considered “substantially the same” for Colorado River
purposes. See Caminiti & Iatorola v. Behnke Warehousing,
Inc., 962 F.2d 698, 700-01 (7thc Cir. 1992) (finding an estate
and a business to be substantially the same parties in
disputes involving legal fees owed by the business where
the estate owned one-fourth of the business). As Brewster
and Clark are derivative shareholder suits, Sears is the
true party in interest in both cases. As such, we consider
only Sears’ interests, not the individual interests of the
plaintiffs who brought the actions on Sears’ behalf. Clark
has not presented us with any reason why Sears’ own in-
terests would diverge in these two lawsuits.
Nor does the presence of the four additional defendants in
Clark render these lawsuits non-parallel. The addition of a
party or parties to a proceeding, by itself, does not destroy
the parallel nature of state and federal proceedings. See
Schneider Nat’l Carriers, Inc. v. Carr, 903 F.2d 1154, 1156
(7th Cir. 1990) (finding cases parallel where plaintiff named
additional defendants in state action). Again, the require-
ment is that the parties be substantially the same— not
completely identical. When we focus on the parties’ litiga-
tion interests in these two lawsuits, it is clear that the
addition of these four defendants has little impact on the
overall similarity of the disputes. As with the other defen-
dants, the four additional defendants have been sued
collectively in their capacity as Sears officers and no indivi-
dualized allegations have been made against any of them.
Their inclusion in the federal proceeding does not alter the
case’s central issue (the same one presented by the Brewster
action), i.e., whether Sears officers and/or directors breached
their fiduciary duties to Sears in connection with Sears’
entry into the MasterCard market.
Clark’s argument relating to the additional claims pre-
sented in her complaint is equally unavailing. Each “addi-
No. 03-3891 7
tional” claim (abuse of control, gross mismanagement, and
waste of corporate assets) is premised on the defendants’
alleged breach of their fiduciary duties. Cf. Amfesco Indus-
tries, Inc. v. Greenblat, 568 N.Y.S.2d 593, 596-97 (N.Y. App.
Div. 1991) (categorizing claims of waste and mismanage-
ment of corporate assets as breaches of fiduciary duty).
Clark has not presented any authority that casts doubt on
the likelihood that in resolving the fiduciary duty issue, the
state litigation will dispose of all claims presented in this
case. Just as the parallel nature of the actions cannot be
destroyed by simply tacking on a few more defendants,
neither can it be dispelled by repackaging the same issue
under different causes of action.
The same is true for Clark’s prayer for equitable relief.
Even though an additional remedy is sought in the federal
action, the liability issues (which are the central legal is-
sues) remain the same in both cases. Moreover, the relief
requested in this case is substantially similar to that re-
quested in the Brewster action. Although Clark states in her
complaint that “[p]laintiff on behalf of Sears has no ade-
quate remedy at law,” both complaints request jury trials
and seek to recover damages from the individual defen-
dants. While we are mindful that remedies need not be
plead with specificity, Clark’s vague request for equitable
relief does not convince us that both lawsuits do not in the
end seek substantially the same relief, i.e., damages.
Accordingly, the district court did not abuse its discretion
in finding the Brewster and Clark actions parallel. We agree
with the district court that the thrust of these lawsuits is
the same—they rely on the same factual predicate to raise
substantially similar legal issues against substantially
similar parties. If we were to reach the opposite conclusion,
future federal plaintiffs would have an incentive to tag on
redundant and non-essential claims, parties, and remedies
to create straw distinctions with an otherwise parallel state
proceeding.
8 No. 03-3891
B. Exceptional Circumstances
Of course, a conclusion that federal and state proceedings
are parallel only begins the inquiry into whether a stay is
appropriate under Colorado River. We must now review the
district court’s determination that abstention was war-
ranted in this case under the 10-factor “exceptional circum-
stances” test. As we examine the district court’s analysis,
we are guided by the Supreme Court’s instruction that “[n]o
one factor is necessarily determinative; a carefully considered
judgment taking into account both the obligation to exercise
jurisdiction and the combination of factors counselling
against that exercise is required.” Colorado River, 424 U.S.
at 818-19. “The weight to be given any one factor is deter-
mined solely by the circumstances of the particular
case—there is no mechanical formula by which to determine
when a stay is appropriate.” Schneider Nat’l Carriers, 903
F.2d at1157 (citing Moses H. Cohn, 460 U.S. at 16).
The district court found that a stay would eliminate piece-
meal and duplicative litigation. We agree that this factor
weighs in favor of a stay. As explained above, the claims in
Clark and Brewster are all predicated on the same showing
of a breach of fiduciary duty. Without staying the federal
proceeding, the two actions would proceed simulta-
neously—duplicating the amount of judicial resources re-
quired to reach a resolution. If Brewster is reinstated, the
two courts would oversee similar pre-trial motions and
discovery matters and two different triers of fact would be
asked to consider the same issues, evidence and witnesses.
Our Court has held that this sort of redundancy counsels in
favor of a stay. See Caminiti, 962 F.2d at 701 (concluding
that where the same issues must be resolved in two cases,
a stay would prevent duplicative and wasteful litigation).
Not only would a stay save judicial resources, but it would
also protect against the danger of the two proceedings
reaching inconsistent results, especially in light of the
recent dismissal of Brewster by the New York Supreme
Court.
No. 03-3891 9
Next, we agree with the district court’s determination
that because both cases are governed by New York law, it
is better to defer to the New York courts to consider the
issues presented. “[A] state court’s expertise in applying
its own law favors a Colorado River stay.” Day v. Union
Mines, Inc., 862 F.2d 652, 660 (7th Cir. 1988). In this case,
it makes more sense to allow a New York state court to
resolve whether under New York law pre-suit demand was
excused and whether a claim for breach of fiduciary duty
has been stated against the defendants.
As the district court also noted, the Brewster action was
filed first, albeit by only a few weeks. At best, this factor is
neutral, but it does not push us towards allowing the
federal case to proceed. The district court also found that a
stay was warranted because the “claims here can be ad-
judicated in New York, and the New York claims cannot be
removed here.” Clark does not dispute that the claims in
this proceeding may be brought in New York state court.
Not only does the availability of concurrent jurisdiction
weigh in favor of a stay, so does the inability to remove the
New York action to federal court. See Day, 862 F.2d at 659-
60 (there is a “policy against hearing a federal claim which
is related to ongoing non-removable state proceedings”).
The district court found the remaining factors to be neu-
tral. Of these factors, Clark most vigorously contests the
district court’s determination with respect to the relative
convenience of the federal forum. To support her argument
that the federal forum is more convenient, Clark points out
that ten of the fifteen defendants live in this district and
that many of the relevant documents and witnesses are
located at Sears’ Illinois headquarters. While this may
be true, the district court’s finding was not improper. The
Brewster action will continue in New York regardless of
whether the Clark action is stayed in Illinois. Moreover, the
thrust of Clark’s argument regarding convenience of the
Illinois forum (as well as her arguments relating to other
10 No. 03-3891
factors) is that the district court assigned this factor
insufficient weight in the its analysis. However, a disa-
greement over weight assigned to a factor by the district
court does not necessarily amount to an abuse of discretion.
Given the flexible nature of the ten-factor balancing test, we
are reluctant to tinker with the district court’s assignment
of weight to any particular factor.
The remaining factors can be disposed of summarily. No
persuasive arguments have been presented as to why any
of them would counsel against a stay in this case. Clark
does not dispute that two of them—jurisdiction over property
and vexatious litigation—are indeed neutral. Moreover,
there is no fear that Sears’ rights will not be adequately
protected in the state proceeding as the same questions of
law and fact are presented as in the federal case and the
state court can resolve these questions just as effectively.
Lastly, as the motion to dismiss has been fully briefed, ar-
gued, and decided in Brewster, the progress of the state
court proceeding is currently more advanced than that of
the federal action.
Accordingly, since the state and federal proceedings at
issue are parallel and a stay would promote wise judicial
administration, we decline to hold that the district court
abused its discretion in finding that the exceptional nature
of this case justified a stay. The district court appropriately
addressed the Colorado River factors, applying more signi-
ficant analysis to those factors most relevant in this case.
Moreover, a stay is a measured approach that protects the
substantial rights of the parties and allows Clark the pos-
sibility of continuing this litigation once the Brewster action
reaches a conclusion in New York.
III. Conclusion
We AFFIRM the district court’s stay order.
No. 03-3891 11
A true Copy:
Teste:
________________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—7-19-04