Medema v. Medema Builders, Inc.

• Decision Date: 02 August 1988
• Docket Number: No. 87-3082,87-3082
• Citation: 854 F.2d 210
• Parties: , Fed. Sec. L. Rep. P 93,962 Roger E. MEDEMA, Plaintiff-Appellant, v. MEDEMA BUILDERS, INC., Service Investment Corp. of America, Land of Lincoln Savings and Loan Association, Thomas A. Kinst, Frank J. Kinst, Ralph C. Gibson, Robert J. Hajek, John J. Lachajewski, Warren H. Muchow, Andrew B. Neely, John A. Storcel, and Gordon L. Teach, Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 210

854 F.2d 210

57 USLW 2103, Fed. Sec. L. Rep. P 93,962

Roger E. MEDEMA, Plaintiff-Appellant, v. MEDEMA BUILDERS, INC., Service Investment Corp. of America Land of Lincoln Savings and Loan Association, Thomas A Kinst, Frank J. Kinst, Ralph C. Gibson, Robert J. Hajek John J. Lachajewski, Warren H. Muchow, Andrew B. Neely, John A. Storcel, and Gordon L. Teach, Defendants-Appellees.

No. 87-3082.

United States Court of Appeals Seventh Circuit.

Argued May 17, 1988.

Decided Aug. 2, 1988.

Howard A. Davis, Shefsky Saitlin & Froelich Ltd., Chicago, Ill., for plaintiff-appellant.

Neil H. Cohen, Lord Bissel & Brook, Chicago, Ill., for defendants-appellees.

Before CUDAHY, FLAUM and RIPPLE, Circuit Judges.

CUDAHY, Circuit Judge.

The district court stayed this action in deference to ongoing state court proceedings, under the doctrine of Colorado River Water Conservation District v. United States, 424 U.S. 800, 96 S.Ct. 1236, 47 L.Ed.2d 483 (1976). Plaintiff appeals, arguing that the district court abused its discretion in granting a stay of this case involving claims over which Congress has mandated exclusive federal jurisdiction. We reverse and remand for further proceedings.

I.

In 1983, plaintiff Roger Medema sold half the shares of his wholly-owned corporation, defendant Medema Builders, Inc. ("MBI"), to another defendant, Service Investment Corporation of America ("SICA"). SICA is a wholly owned subsidiary of defendant Land of Lincoln Savings and Loan Association ("Lincoln"). At bottom, the deal was a financing transaction with SICA making a $300,000 capital contribution to MBI to bail the company out of Chapter 11 reorganization.

In conjunction with the stock sale, Medema placed his remaining shares in a voting trust for SICA's benefit, giving SICA effective control of MBI. In addition, Medema extended MBI an option to redeem all of his remaining shares if he ceased to be an MBI employee before December 31, 1986. On October 31, 1986, MBI's board fired Medema. A few days later, it exercised its option on his remaining shares. Medema refused to deliver the shares.

On April 10, 1987, MBI and SICA sued Medema and REM Realty ("REM"), his new wholly-owned company, in Illinois state court. The complaint in that case alleges various contract breaches and interference with prospective economic advantage. SICA and MBI seek compensatory and punitive damages and a declaratory judgment that MBI owns the disputed stock.

On July 21, 1987, Medema and REM filed their joint answer and defense in the state action. That same day, Medema filed this action in federal district court against MBI and SICA, as well as Lincoln and nine of its directors. Four of the federal complaint's counts allege common law violations, including fraud, breach of employment contract, and breach of fiduciary duties. Jurisdiction over those counts is based on diversity of citizenship. Count II, however, raises a federal question, alleging violations of section 10(b) of the Securities Exchange Act of 1934 ("the 1934 Act"), 15 U.S.C. Sec. 78j(b) (1982), and Rule 10b-5, 17 C.F.R. Sec. 240.105(5) (1988).

The answer in the state case echoes the allegations made in the federal complaint, including references to Lincoln's alleged misconduct even though Lincoln is not a party to the state action. The answer includes, as a defense, the state plaintiffs' alleged 1934 Act violations. Medema did not file a counterclaim, however; indeed, he could not do so in the case of the 1934 Act claims. Although those violations can be raised defensively in state court, Congress has established exclusive federal jurisdiction over affirmative 1934 Act claims. 15 U.S.C. Sec. 78aa (1982); see also Andrea Theatres, Inc. v. Theatre Confections, Inc., 787 F.2d 59, 63 (2d Cir.1986).

Defendants moved to stay the federal proceedings in light of the concurrent state-court case. The district court granted the stay. It first held that while the presence of an exclusively federal claim cuts strongly against a stay, that factor is not determinative. Medema v. Medema Builders, Inc., No. 87 C 6445, mem. op. at 8 (Nov. 17, 1987). The court then applied a twelve-factor balancing test, gleaned from Colorado River and its progeny. Id. at 9-11. It found that deference to the state-court proceedings was appropriate, given the predominance of state law issues, the probability that resolution of the state case would determine all of the substantive factual issues (if not conclusively resolving the 1934 Act claim), and that the federal suit might be vexatious (an assertion made with little analysis). The court acknowledged the strong federal interest in a federal forum for 1934 Act suits, as well as the fact that the state case had not progressed very far at that time. Still, it felt the balance tipped in favor of deference.

II.

The Colorado River determination is left to the discretion of the district court, and we will therefore reverse only if the judge exceeded the bounds of that discretion. Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 19, 103 S.Ct. 927, 938, 74 L.Ed.2d 765 (1983); Lumen Constr., Inc. v. Brant Constr. Co., 780 F.2d 691, 695 (7th Cir.1985). We must decide whether Colorado River deference is ever appropriate where the federal action involves claims over which the federal courts have exclusive jurisdiction. We hold that, except perhaps in rare circumstances not present here, it is not.

Colorado River created an extraordinary exception to the "virtually unflagging obligation of the federal courts to exercise the jurisdiction given them." 424 U.S. at 817, 96 S.Ct. at 1246. The doctrine allows federal courts to stay or dismiss actions in deference to parallel and ongoing state proceedings in circumstances where abstention doctrines do not apply. ¹ The Colorado River Court was driven by concerns of "wise judicial administration." Id. at 818, 96 S.Ct. at 1246. It stated firmly, however, that "the circumstances permitting the dismissal of a federal suit due to the presence of a concurrent state proceeding for reasons of wise judicial administration are considerably more limited than the circumstances appropriate for abstention." Id.

The Court's reluctance to create an expansive exception to jurisdiction is understandable. While such an exception is necessary in a few instances to ensure judicial economy and deter abusive "reactive" litigation, a tension exists between this judge-made doctrine and the explicit statutes conferring federal jurisdiction. Congress has made a considered judgment that federal jurisdiction is appropriate in certain classes of cases. Where the statutory prerequisites are met, courts should be extremely wary about refusing to hear a case based on sometimes inpalpable notions of efficiency.

In its effort to craft a narrow exception, the Colorado River Court set out a two-pronged test. The threshold inquiry is whether the cases are "parallel." See Interstate Material Corp. v. City of Chicago, 847 F.2d 1285, 1287 (7th Cir.1988). Cases are parallel if " 'substantially the same parties are contemporaneously litigating substantially the same issues in another forum.' " Id. at 1288 (quoting Calvert Fire Ins. Co. v. American Mut. Re-insurance Co., 600 F.2d 1228, 1229 n. 1 (7th Cir.1979) ("Calvert IV ")). The district court here neglected to undertake that initial analysis, but its discussion evinces a clear opinion that the cases are indeed parallel.

The second part of the Colorado River analysis is a multi-factor balancing test. See Colorado River, 424 U.S. at 818, 96 S.Ct. at 1246; see also Interstate Material, 847 F.2d at 1288. This court has noted ten factors that are relevant to the inquiry. See Lumen Construction, 780 F.2d at 694 (listing factors). "No one factor is necessarily determinative." Colorado River, 424 U.S. at 818, 96 S.Ct. at 1237. The balance is "heavily weighted in favor of the exercise of jurisdiction." Moses H. Cone, 460 U.S. at 16, 103 S.Ct. at 937. The district court in this case applied the balancing analysis and issued the stay. In so doing, the court stated its belief that the presence of a claim over which the federal courts have exclusive jurisdiction is an important consideration, but is not in itself determinative.

The district court took Colorado River at its word. The Supreme Court said no single factor was determinative; so the court below refused to give conclusive weight to the presence of the 1934 Act claims. That refusal was erroneous. We agree with every court of appeals to decide this question that "the district court has no discretion to stay proceedings as to claims within exclusive federal jurisdiction under the wise judicial administration exception." Silberkleit v. Kantrowitz, 713 F.2d 433, 436 (9th Cir.1983); see also General Motors Corp. v. California State Bd. of Equalization, 815 F.2d 1305, 1309 (9th Cir.1987) (Kennedy, J.), cert. denied, --- U.S. ----, 108 S.Ct. 1122, 99 L.Ed.2d 282 (1988); Andrea Theatres, 787 F.2d at 62; Comment, Federal Court Stays and Dismissals in Deference to Parallel State Court Proceedings: The Impact of Colorado River, 44 U.Chi.L.Rev. 641, 678 & n. 7 (1977).

The Second Circuit's opinion in Andrea Theatres is especially persuasive. That court, after noting that Congress established exclusive federal jurisdiction over the case's Clayton Act claims, explained why deference is inappropriate:

[A]bstention would run counter to Congress' determination, reflected in grants of exclusive federal jurisdiction, that federal courts should be the primary forum for handling such claims. The grant of such jurisdiction could be severely hampered if federal courts exercised discretionary power to await the outcome of related state court proceedings.

787 F.2d at 63. Congress grants exclusive federal jurisdiction in order to cultivate uniformity and expertise, and sometimes to ensure the use of more liberal federal procedural protections. See Will v. Calvert Fire...