Caudill v. Eubanks Farms, Inc.

• Decision Date: 04 September 2002
• Docket Number: No. 01-5313.,01-5313.
• Parties: Jane B. CAUDILL; Richard T. Caudill; Christopher Caudill; Larry T. Caudill; Marian Pavioni, Plaintiffs-Appellants, v. EUBANKS FARMS, INC., a Kentucky Corporation; M.F. Eubank; John Eubank; Richard S. Eubank; Frances K. Eubank; Martha E. Gruhot, Defendants-Appellees.
• Court: U.S. Court of Appeals — Sixth Circuit

301 F.3d 658

Jane B. CAUDILL; Richard T. Caudill; Christopher Caudill; Larry T. Caudill; Marian Pavioni, Plaintiffs-Appellants, v. EUBANKS FARMS, INC., a Kentucky Corporation; M.F. Eubank; John Eubank; Richard S. Eubank; Frances K. Eubank; Martha E. Gruhot, Defendants-Appellees.

No. 01-5313.

United States Court of Appeals, Sixth Circuit.

Argued: July 16, 2002.

Decided and Filed: September 4, 2002.

J. Robert Lyons, Jr. (argued and briefed), Glen S. Bagby (briefed), Woodward, Hobson & Fulton, LLP, Lexington, KY, for Plaintiffs-Appellants.

Alan B. Peck, Grover A. Carrington (argued and briefed), White, Peck, Carrington, Williams & Neal, LLP, Mt. Sterling, KY, for Defendants-Appellees.

Before: SUHRHEINRICH, SILER, and GILMAN, Circuit Judges.

OPINION

SUHRHEINRICH, Circuit Judge.

Plaintiffs appeal the district court's dismissal of this diversity action arising out of claims for dissolution of a corporation and an accounting. The district court dismissed the case on the basis of Burford abstention. We AFFIRM.

I.

Plaintiffs are shareholders in a closely held Kentucky corporation, Eubanks Farms, Inc. In their complaint, Plaintiffs allege that a shareholder deadlock exists and that the business of the corporation can no longer be conducted to the advantage of the shareholders generally. Plaintiffs requested that Defendant Eubanks Farms, Inc. be dissolved pursuant to Ky. Rev.Stat. § 271B.14 on the grounds of deadlock, and its affairs be wound up. Plaintiffs also sought an accounting given their belief that one or more of the individual Defendants had engaged in certain transactions with Defendant Eubank Farms, Inc., and that as a result of these transactions those Defendants received benefits which were not available to shareholders generally, and for which Defendant Eubank Farms suffered a detriment. They brought suit in federal court on the basis of diversity jurisdiction.

Defendants filed a motion to dismiss, arguing that the district court should abstain. The district court granted the motion, holding that abstention was appropriate under Burford v. Sun Oil Co., 319 U.S. 315, 63 S.Ct. 1098, 87 L.Ed. 1424 (1943). The district court held that abstention was appropriate because "the Kentucky General Assembly and Kentucky Courts have worked to develop and preserve a uniform and coherent policy with respect to corporate dissolution," and that "the disposition of deadlocked corporations is certainly a matter of substantial public concern."

Plaintiffs filed this timely appeal.

II.

This Court reviews a district court's decision to abstain for abuse of discretion. See United States v. Kentucky, 252 F.3d 816, 825 (6th Cir.) (stating that "[w]hile we normally review de novo a district court's decision to abstain, ... we have at least on one occasion reviewed such a decision for abuse of discretion;" observing that, in any event, there is little practical difference between the two standards in abstention cases because the district court's discretion is narrowed by its obligation to exercise discretion in all but the most extraordinary cases), cert. denied, ___ U.S. ___, 122 S.Ct. 396, 151 L.Ed.2d 300 (2001).

Abstention is "an extraordinary and narrow exception to the duty of a District Court to adjudicate a controversy properly before it." Colorado River Water Conservation Dist. v. United States, 424 U.S. 800, 813, 96 S.Ct. 1236, 47 L.Ed.2d 483 (1976). The doctrine is based on principles of federalism and comity. Quackenbush v. Allstate Ins. Co., 517 U.S. 706, 728, 116 S.Ct. 1712, 135 L.Ed.2d 1 (1996). In Quackenbush, the Supreme Court articulated the doctrine as follows:

Ultimately, what is at stake is a federal court's decision, based on a careful consideration of the federal interests in retaining jurisdiction over the dispute and the competing concern for the "independence of state action," Burford, 319 U.S., at 334, ... that the State's interests are paramount and that a dispute would best be adjudicated in a state forum. See NOPSI, supra, 491 U.S., at 363, ... (question under Burford is whether adjudication in federal court would "unduly intrude into the processes of state government or undermine the State's ability to maintain desired uniformity"). This equitable decision balances the strong federal interest in having certain classes of cases, and certain federal rights, adjudicated in federal court, against the State's interests in maintaining "uniformity in the treatment of an `essentially local problem,'" 491 U.S., at 362, ... and retaining local control over "difficult questions of state law bearing on policy problems of substantial public import[.]" Colorado River, 424 U.S., at 814.

Id.

In Burford, the Sun Oil Company challenged in federal court the Texas Railroad Commission's grant of an oil drilling permit. The Supreme Court held that abstention was necessary because the order was part of a complex regulatory system established under Texas law to further the state's interest in oil and gas resources. See Burford, 319 U.S. at 325-26. The Court emphasized that Texas law consolidated judicial review of commission orders in a single state district court, which allowed the courts to acquire specialized knowledge of the oil and gas regulations and industry, and therefore act as "working partners with the Railroad Commission in the business of creating a regulatory system for the oil industry." Id. at 326.

The Supreme Court has subsequently explained that Burford abstention is appropriate where timely and adequate state-court review is available and (1) a case presents "difficult questions of state law bearing on policy problems of substantial public import whose importance transcends the result in the case then at bar," or (2) the "exercise of federal review of the question in a case and in similar cases would be disruptive of state efforts to establish a coherent policy with respect to a matter of substantial public concern." New Orleans Pub. Serv., Inc. v. Council of the City of New Orleans, 491 U.S. 350, 361 109 S.Ct. 2506, 105 L.Ed.2d 298 (1989) (quotation omitted) ("NOPSI"). See also Ada-Cascade Watch Co. v. Cascade Res. Recovery, Inc., 720 F.2d 897, 903 (6th Cir. 1983) (stating that Burford enunciated two factors which justify abstention, namely the presence of a complex state regulatory scheme which would be disrupted by federal review, and the existence of a state-created forum with specialized competence in the particular area).

A.

Plaintiffs argue that the district court erred because Burford abstention is limited to situations involving a particularized state administrative proceeding and specialized judicial review. Thus, Plaintiffs contend that Burford abstention was not meant to be applied to corporate dissolutions. Plaintiffs claim NOPSI limited the use of Burford abstention to situations where state administrative agencies are involved. We disagree.

In NOPSI, a utility company that had been ordered by the Federal Energy Regulatory Commission to pay part of the building and operating costs of a nuclear reactor sought a rate increase from the Council of the City of New Orleans. The council was the local ratemaking body with final authority over the utility's retail rates. NOPSI, 491 U.S. at 355. The council denied the rate increase, and the utility sought an injunction in federal court against enforcement of the council's order and a declaration that the utility was entitled to a rate increase. The utility claimed that federal law required the council to allow it to recover its share of the cost of the reactor.

The Supreme Court reversed the district court's dismissal under Burford, holding that the "case [did] not involve a state-law claim, nor even an assertion that the federal claims [were] in any way entangled in a skein of state law that must be untangled before the federal case can proceed," NOPSI, 491 U.S. at 361 (internal quotation marks omitted), and because there was no serious threat of conflict between adjudication of the federal claim presented and the state's interest in ensuring uniformity in ratemaking decisions.

While Burford is concerned with protecting complex state administrative processes from undue federal influence, it does not require abstention whenever there exists such a process, or even in all cases where there is a potential for conflict with state regulatory law or policy.... Here, NOPSI's primary claim is that the Council is prohibited by federal law from refusing to provide reimbursement for FERC-allocated wholesale costs. Unlike a claim that a state agency has misapplied its lawful authority or has failed to take into consideration or properly weigh relevant state-law factors, federal adjudication of this sort of pre-emption claim would not disrupt the State's attempt to ensure uniformity in the treatment of an essentially local problem.

NOPSI, 491 U.S. at 362 (internal quotation marks omitted). Although the foregoing language suggests that Burford may be as limited as Plaintiffs indicate, these statements must not be taken out of context, because in NOPSI the only issue presented was one of federal preemption, which overrides any state interest. Thus, there was no fear of federal disruption of state administrative processes, because in that instance the federal interest was superior. Indeed, the Supreme Court explicitly stated that the principles underlying Burford were "not implicated" because the central issue "does not demand significant familiarity with, and will not disrupt state resolution of, distinctly local regulatory facts or policies." NOPSI, 491 U.S. at 364.

Moreover, in a subsequent case, Quackenbush, the Supreme Court emphasized that there is no "formulaic test for determining when dismissal is appropriate under Burford." Quackenbush, 517 U.S. at 727. There, the California Insurance Commissioner, as trustee for insolvent reinsureds, brought suit in state court to recover reinsurance proceeds under common law tort and contract...