Freedman, Levy, Kroll & Simonds v. Mendelson , 11 F. App'x 288 ( 2001 )

UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
FREEDMAN, LEVY, KROLL & SIMONDS; 
PATRICK J. KEARNEY; EMIL HIRSCH,
Plaintiffs-Appellants,
v.
RICHARD S. MENDELSON, Special  No. 00-2050
Receiver of Interlase Limited
Partnership Land, Clark, Carrol,
Mendelson & Blair,
Defendant-Appellee.

Appeal from the United States District Court
for the Eastern District of Virginia, at Alexandria.
Leonie M. Brinkema, District Judge.
(CA-00-915-A)
Argued: February 28, 2001
Decided: June 7, 2001
Before WILKINSON, Chief Judge, KING, Circuit Judge,
and Cynthia Holcomb HALL, Senior Circuit Judge of the
United States Court of Appeals for the Ninth Circuit,
sitting by designation.
Affirmed as modified by unpublished per curiam opinion.
COUNSEL
ARGUED: Emil Hirsch, Patrick John Kearney, FREEDMAN,
LEVY, KROLL & SIMONDS, Washington, D.C., for Appellants.
2 FREEDMAN, LEVY, KROLL & SIMONDS v. MENDELSON
John William Toothman, TOOTHMAN & WHITE, P.C., Alexandria,
Virginia, for Appellee. ON BRIEF: David H. White, TOOTHMAN
& WHITE, P.C., Alexandria, Virginia, for Appellee.
Unpublished opinions are not binding precedent in this circuit. See
Local Rule 36(c).
OPINION
PER CURIAM:
The law firm of Freedman, Levy, Kroll & Simonds, along with two
of its individual attorneys, Patrick J. Kearney and Emil Hirsch (col-
lectively "Freedman, Levy"), appeal an order of the district court for
the Eastern District of Virginia, denying their motion for summary
judgment and instead granting a motion to dismiss in favor of defen-
dant Richard S. Mendelson. For the reasons stated below, we con-
clude that Freedman, Levy’s suit was properly dismissed, but that it
was error to enter the dismissal with prejudice. We therefore affirm
the judgment, as modified to reflect dismissal without prejudice.
I.
The instant lawsuit represents an effort by Freedman, Levy to resist
a state court’s orders to produce files and assets on behalf of the
firm’s client, White Star Holdings, Inc. ("White Star"). White Star
had been embroiled in litigation relating to, inter alia, its asserted
rights in certain patents issued between November 1988 and August
1991 for medical laser devices invented by Drs. Kenneth R. Fox and
A. Arthur Coster. The patents, which were licensed to Spectranetics
Corporation ("Spectranetics") on February 1, 1993, were the subject
of a series of assignments and transfers, culminating in White Star’s
September 11, 1998 acquisition of the patent rights from Interlase
Limited Partnership ("Interlase").
Due to concerns that Interlase’s assets were being improperly
diverted out of the country, the Circuit Court for the County of
FREEDMAN, LEVY, KROLL & SIMONDS v. MENDELSON 3
Arlington, Virginia ("Arlington Circuit Court") entered an order on
September 14, 1998, appointing Mendelson as Special Receiver of
Interlase. When, in October 1998, White Star sued Spectranetics in
the Eastern District of Colorado alleging breach of the license agree-
ment, Mendelson intervened, claiming that Interlase was the true
owner of the disputed patents. The Colorado case was subsequently
transferred to the Eastern District of Virginia. In separate proceed-
ings, the Arlington Circuit Court ruled, on December 18, 1998, that
any transfer of Interlase’s assets, including its patent and patent
license rights, constituted a fraudulent conveyance — and thus was
void. According full faith and credit to that ruling, the district court,
on July 13, 1999, concluded that White Star had "no claim for an
interest or rights to the patent License Agreement at issue in their
Amended Complaint," J.A. 92, and therefore dismissed White Star’s
complaint.
Meanwhile, pursuant to the receivership action — and his obliga-
tion to identify and collect all of Interlase’s assets —Mendelson suc-
cessfully brought a motion before the Arlington Circuit Court to quiet
title to the patents and patent licenses. By its order of June 2, 2000,
the Arlington Circuit Court found that such patents and patent license
rights "are within the exclusive control of the Special Receiver and
may not be transferred or conveyed without the express authorization
of the Special Receiver." J.A. 75. Asserting its valid jurisdiction over
White Star, the Arlington Circuit Court ordered White Star and its
attorneys to "deliver immediately to the Special Receiver all assets of
Interlase Limited Partnership within their possession, custody or con-
trol." J.A. 80. By subsequent order entered on January 27, 2000
("Order"), that court made explicit the mandate that Freedman, Levy
produce to the Special Receiver all of White Star’s files, along with
any other assets and information rightfully belonging to Interlase. J.A.
130-31.
Rather than comply, Freedman, Levy filed its complaint in the
Eastern District of Virginia on June 27, 2000, alleging, inter alia, that
the Order was entered in violation of the Due Process Clause of the
Fourteenth Amendment, inasmuch as the Arlington Circuit Court
lacked personal jurisdiction and the firm had not been served with
lawful process. Mendelson promptly moved to dismiss or for sum-
mary judgment, contending that Freedman, Levy’s suit was barred by
4 FREEDMAN, LEVY, KROLL & SIMONDS v. MENDELSON
the Anti-Injunction Act ("AIA"), 28 U.S.C. § 2283, as well as by the
abstention doctrine enunciated in Younger v. Harris, 401 U.S. 37(1971). Mendelson also argued that Freedman, Levy’s complaint
failed to state a claim upon which relief could be granted, presenting
no justiciable case or controversy.
II.
Based on its review of the parties’ pleadings and supporting docu-
ments, the district court issued an order on July 17, 2000, dismissing
Freedman, Levy’s suit with prejudice. In its accompanying Memoran-
dum Opinion of that date, the district court explained that dismissal
was appropriate under Younger abstention principles. The court
applied the three-factor Younger analysis set forth in Richmond, Fred-
ericksburg & Potomac R.R. Co. v. Forst, 4 F.3d 244, 251 (4th Cir.
1993), finding each factor to be satisfied: first, that the Arlington Cir-
cuit Court’s orders with respect to Freedman, Levy constitute an
ongoing state judicial proceeding; second, that such proceedings
implicate the Commonwealth of Virginia’s important interest in see-
ing that its courts’ orders are followed and its citizens are protected
against fraudulent conveyances; and, finally, that Freedman, Levy
would have an adequate opportunity to raise its federal claims in the
state court proceedings.1
Having determined that Younger abstention was warranted, the dis-
trict court identified the Anti-Injunction Act as an additional, indepen-
1
In concluding that Younger abstention was proper, the district court
rejected Freedman, Levy’s argument that the Order was procured in vio-
lation of an automatic stay imposed by the Bankruptcy Court, pursuant
to 11 U.S.C. § 362(a). Adding a further wrinkle to this already convo-
luted matter, on July 1, 1999, Lucre Investments, a Turks & Caicos cor-
poration purporting to be the sole general partner of Interlase, filed a
voluntary petition for relief under Chapter 7 of the Bankruptcy Code in
the Bankruptcy Court for the Northern District of Georgia. This action
was subsequently transferred to the Bankruptcy Court for the Eastern
District of Virginia, which entered a sequence of orders suspending the
bankruptcy proceedings in deference to the ongoing receivership action
in the Arlington Circuit Court. See J.A. 248. We agree with the district
court that the stayed bankruptcy proceedings do not render Younger
abstention or the AIA inapplicable.
FREEDMAN, LEVY, KROLL & SIMONDS v. MENDELSON 5
dent basis for dismissal. The AIA prohibits a federal court from
enjoining proceedings in a state court "except as expressly authorized
by Act of Congress, or where necessary in aid of its jurisdiction, or
to protect or effectuate its judgments." See 28 U.S.C. § 2283. Finding
none of these exceptions to be present, the district court concluded
that it was barred by the AIA from granting the injunctive relief
requested by Freedman, Levy.
III.
With the benefit of oral argument and the briefs submitted by the
parties, we find ourselves in substantial agreement with the analysis
and conclusions of the district court. Thus, we are content to affirm
the district court’s decision to dismiss Freedman, Levy’s complaint
under both the AIA and Younger abstention principles.2
We conclude, however, that the district court erred in dismissing
Freedman, Levy’s suit with prejudice. This apparent exercise of juris-
diction cannot be reconciled with the court’s decision to abstain —
either on statutory or equitable grounds — from adjudicating the suit.
Having concluded that abstention was proper, the district court should
have refrained from passing on the merits, even implicitly. See, e.g.,
Greening v. Moran, 953 F.2d 301, 304 (7th Cir. 1991) ("To say that
abstention is in order then is to say that federal courts should not
address the merits, period."). Thus, while we affirm the dismissal, we
modify the judgment to reflect dismissal "without prejudice."
AFFIRMED AS MODIFIED
2
In contending that neither the AIA nor Younger abstention principles
govern its suit, Freedman, Levy raises a number of issues that were not
specifically addressed by the district court. The firm insists, for instance,
that its suit seeks only declaratory relief (as opposed to injunctive relief)
and is therefore not subject to the AIA; that Freedman, Levy was never
properly brought under the state court’s jurisdiction, and thus it may seek
an injunction as a "stranger" to the state court proceedings; that the reliti-
gation exception to the AIA applies, in light of the Spectranetics litiga-
tion; and that, in conducting its Younger analysis, the district court
overstated Virginia’s interest in the suit. We have examined each of these
contentions, and we conclude that none warrants reversal of the district
court’s decision.