Clark v. Lacy

• Decision Date: 19 July 2004
• Docket Number: No. 03-3891.,03-3891.
• Citation: 376 F.3d 682
• Parties: Marilyn CLARK, on behalf of Sears, Plaintiff-Appellant, v. Alam LACY, et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

376 F.3d 682

Marilyn CLARK, on behalf of Sears, Plaintiff-Appellant, v. Alam LACY, et al., Defendants-Appellees.

No. 03-3891.

United States Court of Appeals, Seventh Circuit.

Argued April 7, 2004.

Decided July 19, 2004.

Appeal from the District Court for the Northern District of Illinois, John A. Nordberg, J Bradley R. Matthews (argued), Robbins, Umeda & Fink, San Diego, CA, Patrick Sherlock, Chicago, IL, for Plaintiff-Appellant.

Harold C. Hirshman (argued), Sonnenschein, Nath & Rosenthal, Chicago, IL, for Defendants-Appellees.

Before FLAUM, Chief Judge, and DIANE P. WOOD and WILLIAMS, Circuit Judges.

FLAUM, Chief Judge.

In this case we are asked to consider 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 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 declining 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 announced 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 premised on New York law, the Clark complaint alleges that officers and/or directors of Sears breached their fiduciary 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, 96 S.Ct. 1236, 47 L.Ed.2d 483 (1976), or in the alternative to dismiss. Based on a review of the parties' briefs and exhibits, 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 appeals. 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 discretion. Sverdrup Corp. v. Edwardsville Community Unit Sch. Dist. No. 7, 125 F.3d 546, 550 (7th Cir.1997). Under the 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, 96 S.Ct. 1236. 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, 96 S.Ct. 1236. Reiterating this admonition, the Court stated in Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 25, 103 S.Ct. 927, 74 L.Ed.2d 765 (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 jurisdiction." (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 ordinarily 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 particular 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 federal forum; (3) the desirability of avoiding piecemeal litigation; (4) the order in which jurisdiction was obtained by the concurrent forums; (5) the source of governing law, state 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 discretion 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. Moreover, 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 foremost, although some of the names appearing on the two 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 & Iatarola v. Behnke Warehousing, Inc., 962 F.2d 698, 700-01 (7th 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 interests 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...