Central States Industrial Supply v. Mccullough

Decision Date26 August 2002
Docket NumberNo. C02-0052-MWB.,C02-0052-MWB.
Citation218 F.Supp.2d 1073
PartiesCENTRAL STATES INDUSTRIAL SUPPLY, INC. and CPI Sales, Inc., Plaintiffs, v. Steve MCCULLOUGH, Defendant.
CourtU.S. District Court — Northern District of Iowa

Mark Zaiger, Huttleworth & Ingersoll, Cedar Rapids, IA, for Plaintiffs.

Scott Long, Rebecca Brommel, Brown, Winick, Graves, Gross, Baskerville & Schoenebaum, Des Moines, IA, for Defendant.

MEMORANDUM OPINION AND ORDER REGARDING DEFENDANT'S MOTION TO DISMISS FOR IMPROPER VENUE AND ALTERNATIVE MOTION TO STAY PROCEEDINGS

BENNETT, Chief Judge.

                TABLE OF CONTENTS
                I.  PROCEDURAL AND FACTUAL BACKGROUND .................................. 1076
                      A. Procedural Background ........................................... 1076
                      B. Factual Background .............................................. 1076
                         1. The parties and their agreements ............................. 1076
                         2. The Nebraska lawsuit ......................................... 1078
                         3. The Iowa lawsuit ............................................. 1079
                 II. LEGAL ANALYSIS ...................................................... 1079
                     A. Venue ............................................................ 1079
                        1. Improper venue ................................................ 1079
                        2. Forum non conveniens .......................................... 1080
                     B. Abstention Generally ............................................. 1083
                     C. Colorado River Abstention ........................................ 1084
                     D. Is Colorado River Abstention Appropriate? ........................ 1085
                        1. The "parallel litigation" prerequisite ........................ 1085
                           a. Arguments of the parties ................................... 1085
                           b. Parallelism ................................................ 1086
                           c. Analysis ................................................... 1088
                     E. Application of the First-Filed Rule .............................. 1091
                        1. The first-filed rule .......................................... 1091
                        2. Separate courts ............................................... 1092
                III. CONCLUSION .......................................................... 1094
                
I. PROCEDURAL AND FACTUAL BACKGROUND
A. Procedural Background

This litigation is before the court pursuant to the April 29, 2002, motion of defendant Steve McCullough, to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(3) on the basis of improper venue or to stay these proceedings pursuant to Colorado River Water Conservation Dist. v. United States, 424 U.S. 800, 96 S.Ct. 1236, 47 L.Ed.2d 483 (1976), and the principles of comity and federalism, in favor of another action brought by McCullough in Nebraska state court. On May 13, 2002, plaintiffs Central States Industrial Supply, Inc. (Central States) and CPI Sales, Inc. (CPI) resisted McCullough's motion, and on May 20, 2002, McCullough filed a reply in further support of his motion. McCullough timely requested oral argument on the motion to dismiss. The court granted that request and held oral argument on McCullough's motion on August 20, 2002. At the hearing, defendant McCullough was represented by Scott Long and Rebecca Brommel of Brown, Winick, Graves, Gross, Baskerville and Schoenebaum of Des Moines, Iowa. Plaintiffs Central States and CPI were represented by Mark Zaiger of Shuttleworth & Ingersoll of Cedar Rapids, Iowa. This matter is now fully submitted.

B. Factual Background
1. The parties and their agreements

The factual background for disposition of McCullough's motion to dismiss or stay proceedings is based on the facts as gleaned from Central States's and CPI's complaint in this lawsuit in federal court and McCullough's brief in support of its motion to dismiss or stay, as well as supporting documents. In their complaint in this court, Central States avers it is a Nebraska corporation with its principal place of business in Omaha, Nebraska, and CPI, its wholly owned subsidiary, is an Iowa corporation with its principal place of business in Cedar Rapids, Iowa. Central States and CPI contend that it was McCullough's conduct while he was a resident and citizen of Iowa and employed by CPI, an Iowa corporation located in Cedar Rapids, Iowa, under an Iowa contract, that gave rise to their claims. Central States and CPI acknowledge that McCullough was a Minnesota resident and citizen at the time this lawsuit was filed. The lawsuits between the parties are not mirror images of each other, but do involve similar factual and legal issues as described below. Two agreements between the parties are in dispute: an Employment Agreement and a Stock Repurchase Agreement with an Addendum.

Central States and CPI allege that CPI entered into a written Employment Agreement with McCullough on January 5, 1998, as a condition precedent to Central States purchase of CPI. See Pl.'s Compl., at Ex. A. The salient terms of the Employment Agreement consist of a proprietary information clause and a three-year covenant not to compete clause. Pl.'s Compl., at Ex. A, para. 5-6. With regard to the proprietary information clause, Central States and CPI allege the Employment Agreement acknowledged the existence of CPI's confidential, proprietary business information and trade secrets and imposed restrictions upon the removal, retention and disclosure of such information by the undersigned employee — in this case McCullough. Pl.'s Compl., at Ex. A, para. 5. The Employment Agreement contains no forum selection clause, although it does contain a choice-of-law clause that provides, "[t]his employment arrangement shall be governed by the laws of the State of Iowa." Pl.'s Compl., at Ex. A, para. 9.

On or about October 5, 1999, Central States and CPI entered into a written contract with McCullough, called a Stock Repurchase Agreement, as an incentive to him to further the interests of CPI. Def.'s Mot. to Dismiss or Stay, at Ex. 1, Ex. A. This agreement authorized McCullough to purchase 114 shares of CPI for $120,000. The agreement identifies circumstances which would compel McCullough to sell back his shares to CPI and trigger an obligation on the part of CPI to repurchase McCullough's shares. The agreement also contemplates the procedure for determining the price of the shares and the method of payment. The Stock Repurchase Agreement contains a three-year covenant not to compete provision with largely the same or similar language contained in the Employment Agreement.1 Unlike the Employment Agreement, the Stock Repurchase Agreement includes a provision that is both a choice-of-law and a forum selection clause, because it states,

This Agreement shall be construed and enforced in accordance with the laws of the State of Nebraska and it is hereby irrevocably agreed that all actions, suits or proceedings, in connection with or relating to this Agreement shall be litigated only in the State or Federal Courts, in the county of Douglas, in the State of Nebraska, U.S.A.

Def.'s Mot. to Dismiss or Stay, at Ex. 1, Ex. A.

The parties executed another written contract, called an Addendum to Stock Repurchase Agreement, on or about April 12, 2000. Def.'s Mot. to Dismiss or Stay, at Ex. 1, Ex. B. The Addendum provided for the issuance of an additional twenty-one shares to McCullough in order for McCullough to become a 15% owner of CPI. The Addendum provided that the additional shares issued to McCullough, and all other provisions therein, would be bound by the terms and conditions of the original Stock Repurchase Agreement. Def.'s Mot. to Dismiss or Stay, at Ex. 1, Ex. B.

Central States and CPI allege McCullough continued his employment with CPI until July of 2001, when he voluntarily terminated his position with CPI and commenced employment with Fluid Solutions, Inc., a Minnesota corporation and a wholly owned subsidiary of Custom Fabricators. After McCullough's departure from CPI, two lawsuits were instituted in two separate fora, one on behalf of McCullough alleging the failure of Central States and CPI to perform their payment obligations under the Stock Repurchase Agreement and Addendum, and one on behalf of Central States and CPI alleging breach of the Employment Agreement.

2. The Nebraska lawsuit

On January 24, 2002, McCullough filed a complaint against Central States, CPI, Steve Anderson, and Dick Stenger in Nebraska District Court for Douglas County. Count I alleges a breach of the Stock Repurchase Agreement by Central States and CPI for failure to perform their payment obligations thereunder. Count II seeks to enforce the provision in the Stock Repurchase Agreement which requires specific performance in the event the agreement is breached.2 Count III alleges a violation of the Nebraska Wage Payment and Collection Act, § 48-1231. Lastly, Count IV alleges a breach of fiduciary duties by Steve Anderson and Dick Stenger as officers, directors, and/or majority shareholders in CPI owing to McCullough as a minority shareholder. Def.'s Mot. to Dismiss or Stay, at Ex. 1. McCullough demanded judgment in an amount not less than $238,000 plus interest, and requested that the Nebraska court require Central States and CPI to specifically perform pursuant to the terms of the Stock Repurchase Agreement.

On February 28, 2002, Central States and CPI filed an Answer to Count I and a Demurrer to Counts II, III, and IV in the Nebraska lawsuit. On April 8, 2002, oral arguments were heard on the demurrers and the court in the Nebraska lawsuit denied Central States's and CPI's demurrer to Count II; sustained the demurrer to Counts III and IV; and granted McCullough an extension of time to amend his complaint. Def.'s Mem. of Law in Support of Mot. to Dismiss or Stay, at 3. McCullough served Requests for Production on Central States and CPI on or about April 8, 2002, and Central States and CPI served McCullough with...

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