Cohen v. Citibank, N.A., 95 Civ. 4826 (BSJ).

• Decision Date: 05 December 1996
• Docket Number: No. 95 Civ. 4826 (BSJ).,95 Civ. 4826 (BSJ).
• Citation: 954 F.Supp. 621
• Parties: Adina COHEN, Plaintiff, v. CITIBANK, N.A., David Blech and D. Blech & Co., Inc., Defendants.
• Court: U.S. District Court — Southern District of New York

954 F.Supp. 621

Adina COHEN, Plaintiff, v. CITIBANK, N.A., David Blech and D. Blech & Co., Inc., Defendants.

No. 95 Civ. 4826 (BSJ).

United States District Court, S.D. New York.

December 5, 1996.

Nathaniel B. Smith, Ranni & Smith, New York City, for plaintiff.

R. Paul Wickes, Ann M. Vermes, Shearman & Sterling, New York City, for defendant Citibank, N.A.

MEMORANDUM & ORDER

JONES, District Judge.

In 1992, defendant Citibank, N.A. ("Citibank"), a banking institution, extended an advance of $1,120,000 to plaintiff Adina Cohen ("Cohen"). Two years later, Citibank notified Cohen that the amounts outstanding on the advance were due and payable. At least a portion of the loan still remains outstanding.

Cohen now asserts seventeen causes of action, essentially alleging that Citibank acted in concert with defendants David Blech ("Blech") and D. Blech & Company, Incorporated ("DBC") to grant her the advance in violation of various federal and state laws, thereby rendering any obligation based on the advance void and unenforceable. Pending is Citibank's motion to dismiss the amended complaint pursuant to Fed.R.Civ.P. 12(b)(6).

BACKGROUND¹

Cohen and Blech met in the early 1980s. (Am.Compl. ¶ 24.) Over time, Blech became Cohen's investment advisor and broker and asserted control over the day-to-day handling of her financial affairs. (Id. ¶ 26.)

On or about February 9, 1990, Blech opened DBC as a registered broker-dealer under the Securities Exchange Act of 1934 (the "1934 Act"). (Id. ¶ 10.) DBC specialized in the promotion, placement, sale, and marketing of "bio-technology" securities (the "Blech Securities"). (Id. ¶ 13.) At all times relevant to this motion, Blech was DBC's sole shareholder, director, and controlling person. (Id. ¶ 11.) In addition, Blech was the beneficial owner of a large portion of the Blech Securities. (Id. ¶ 14.) However, it was Citibank that financed the securities operations of both Blech and DBC, maintaining and operating various accounts on behalf of Blech, DBC, and others. (Id. ¶ 15-18.)

In or about December 1992, Cohen obtained a line of credit from Citibank for $1,120,000 (the "1992 Advance"). (Id. ¶¶ 36-37.) Cohen signed a Demand Note and other documents reflecting the loan (id. ¶ 38), but Blech guaranteed the loan. (Id. ¶ 39.)

Over the course of the next two years, Citibank maintained in Cohen's name a collateral account, a loan account, a regular checking account, and money market accounts. (Id. ¶ 43.) From December 1992 through September 1994, Blech, DBC and Citibank transferred money into and out of Cohen's collateral account and various other accounts maintained by Citibank. (Id. ¶¶ 47, 17-19.) With a few exceptions, Cohen, herself, never authorized these transfers. (Id. ¶ 48.) In fact, Cohen alleges that the transfers were effected in order to further a parking and manipulation scheme between Citibank, Blech, and others to manipulate the market and bolster the value of the Blech Securities. (Id. ¶¶ 51-53.) In this connection, Cohen maintains that the 1992 Advance was a "sham" constituting an unlawful extension of credit with the sole purpose of allowing Blech to acquire biotechnology securities. (Id. ¶¶ 39-40, 77.) Accordingly, she states that Blech is the true obligor on the loan. (Id.)

In the spring of 1994, the market value of the Blech Securities fell, causing Blech, DBC, and Citibank to experience financial problems. (Id. ¶¶ 52 & 59.) Around that time, Citibank "looked to" Blech and DBC to provide it with additional securities in connection with and to pay interest on the 1992 Advance. (Id. ¶¶ 59-60.)

In September 1994, with the prices of the Blech Securities falling, DBC began to collapse. (Id. ¶ 63.) On September 22, 1994, Citibank declared the 1992 Advance due and informed Cohen of its intent to sell the collateral in her collateral account. (Id. ¶ 67.) On April 12, 1995, Citibank sent a letter to Cohen reminding her of her obligations under the terms of the 1992 Advance and notifying her of its intent to seek legal redress if necessary. (Id. ¶¶ 73-74.)

On June 27, 1995, Cohen filed (but did not serve) this federal action against Citibank, alleging that the 1992 Advance was illegally effectuated and seeking declaratory relief to that effect. On October 3, 1995, Citibank filed and served a motion for summary judgment in lieu of complaint in the Supreme Court for the State of New York, seeking a judgment in the amounts then due under the 1992 Advance. That day, Cohen served Citibank with the complaint in this action. The state court action is fully briefed and awaiting decision.

On November 13, 1995, Cohen filed an Amended Complaint in this case, adding Blech and DBC as defendants and asserting seventeen causes of action seeking declaratory and monetary relief against the defendants. Of those seventeen claims, thirteen are levied against Citibank, six of which assert federal causes of action under the 1934 Act.

DISCUSSION

I. PARALLEL ACTIONS

Since there is a parallel action pending in state court, the threshold issue is whether this court should stay these proceedings until the state court action is resolved. See Colorado River Conservation District v. United States, 424 U.S. 800, 96 S.Ct. 1236, 47 L.Ed.2d 483 (1976). In this connection, Citibank argues that the court should dismiss the complaint under the principles expressed by the Supreme Court in both Colorado River, 424 U.S. 800, 96 S.Ct. 1236, and Wilton v. Seven Falls Co., ___ U.S. ___, 115 S.Ct. 2137, 132 L.Ed.2d 214 (1995). Cohen disagrees. For the following reasons, we decline to abstain at this time.

A. The Colorado River Abstention Doctrine

The Supreme Court in Colorado River held that district courts have a "virtually unflagging obligation" to exercise the jurisdiction conferred on them by Congress. Colorado River, 424 U.S. at 813, 96 S.Ct. at 1244; accord Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983). Indeed, only "the clearest of justifications" constituting "exceptional circumstances" may temper this obligation. Colorado River, 424 U.S. at 813, 96 S.Ct. at 1244.

The Supreme Court has identified six non-exhaustive factors a district court should carefully balance in determining whether such "exceptional circumstances" exist. They are: (1) assumption by federal or state court of jurisdiction over any res or property; (2) whether the federal forum is any less convenient to the parties than the state forum; (3) whether there is a danger of piece-meal litigation; (4) the order of the two suits; (5) whether federal law provides the rule of decision on the merits; and (6) whether the state court is inadequate to protect the "plaintiff's rights." Moses Cone 460 U.S. 1, 14, 103 S.Ct. 927, 936; Bernstein v. Hosiery Mfg. Corp. of Morganton, Inc., 850 F.Supp. 176, 182 (E.D.N.Y.1994); see also Will v. Calvert Fire Ins. Co. 437 U.S. 655, 664, 98 S.Ct. 2552, 2558, 57 L.Ed.2d 504 (1978) ("... the decision whether to defer to the concurrent jurisdiction of a state court is ... a matter committed to the district court's discretion.")

Applying the principles of Colorado River, this Court finds that abstention is inappropriate here. First, despite Citibank's protestations to the contrary, this action began before the state proceeding. See Fed. R.Civ.P. 3 ("A civil action is commenced by filing a complaint with the court.") (emphasis supplied). Second, this case involves numerous allegations that defendant Citibank violated the federal securities laws. While the Court recognizes that state courts may properly consider federal claims raised as defenses to state actions, even where federal courts have exclusive jurisdiction, Hathorn v. Lovorn, 457 U.S. 255, 266 & n. 18, 102 S.Ct. 2421, 2428-29 & n. 18, 72 L.Ed.2d 824 (1982); Andrea Theatres, Inc. v. Theatre Confections, Inc., 787 F.2d 59, 61 (2d Cir.1986); Banque Indosuez v. Pandeff, 193 A.D.2d 265, 603 N.Y.S.2d 300, 302 (1st Dep't 1993), lv. to appeal dismissed, 83 N.Y.2d 907, 614 N.Y.S.2d 388, 637 N.E.2d 279 (1994), it also notes that state courts may not grant affirmative relief based on claims for which federal jurisdiction is exclusive, Andrea Theatres, Inc., 787 F.2d at 61; see also Canaday v. Koch, 608 F.Supp. 1460, 1474 n. 24 (S.D.N.Y.) (even if case for abstention is very strong, "in certain suits" if jurisdiction over some claims is exclusively federal, court should sever the federal claims and decide them), aff'd, 768 F.2d 501 (1985). In this connection, if a state court rejects a federal defense, it is unsettled whether Cohen would be precluded from asserting the claim as the basis for affirmative relief in a federal suit. Id. (citing Marrese v. American Academy of Orthopaedic Surgeons, 470 U.S. 373, 105 S.Ct. 1327, 84 L.Ed.2d 274 (1985)). As a result, the Court finds that the state proceedings are an inadequate forum to protect the plaintiff's rights to seek affirmative relief pursuant to her federal causes of action. See Will v. Calvert Ins. Co., 437 U.S. 655, 670, 98 S.Ct. 2552, 2561, 57 L.Ed.2d 504 (1978) (Brennan, J., dissenting) (state court decisions should not have preclusive effect over matters within exclusive federal court jurisdiction); Note, The Collateral Estoppel Effect of Prior State Court Findings in Cases Within Exclusive Federal Jurisdiction, 91 Harv.L.Rev. 1281 (1978). Accordingly, in an effort to avoid future litigation over collateral issues and because the balance of factors tips in favor of refraining from abstention, the Court finds that the Colorado River doctrine does not counsel abstention in this case.

B. Abstention Under Wilton

Citibank urges that even if this court refrains from abstention under the Colorado River doctrine, it should abstain under the standard articulated by the Supreme Court in Wilton v. Seven Falls Co., ___ U.S. ___, 115 S.Ct. 2137, 132 L.Ed.2d 214 (1995). In Wilton, the court held that where a party seeks a declaratory judgment and...