Orix v. Wolfe

• Decision Date: 02 June 2000
• Docket Number: No. 99-11038,99-11038
• Citation: 212 F.3d 891
• Parties: (5th Cir. 2000) ORIX CREDIT ALLIANCE, INC., APPELLANT, v. FRANK A. WOLFE, JR. AND LEXIE D. WOLFE, APPELLEES
• Court: U.S. Court of Appeals — Fifth Circuit

Page 891

212 F.3d 891 (5th Cir. 2000)

ORIX CREDIT ALLIANCE, INC., APPELLANT, v. FRANK A. WOLFE, JR. AND LEXIE D. WOLFE, APPELLEES.

No. 99-11038

UNITED STATES COURT OF APPEALS FIFTH CIRCUIT

June 2, 2000

Appeal from the United States District Court For the Northern District of Texas

Reavley, Smith, and Emilio M. Garza, Circuit Judges.

Emilio M. Garza, Circuit Judge.

Orix Credit Alliance, Inc. ("OCAI") appeals the district court's (1) dismissal of its Complaint for Issuance of Preliminary Injunction, Permanent Injunction and Declaratory Judgment (the "declaratory judgment complaint"), and (2) denial of its subsequent motion for leave to amend the declaratory judgment complaint. For the reasons set forth below, we vacate the judgment of the district court and remand with instruction to dismiss OCAI's complaint as unripe for adjudication.

I.

The declaratory judgment complaint is the most recent filing in a long and complicated history of litigation between OCAI, ABC Utilities Services, Inc. ("ABC Utilities"), ABC Asphalt, Inc. ("Asphalt"), and Utilities Equipment Leasing Company, Inc. ("UELCO") (collectively, "the ABC entities"). Between 1984 and 1989, OCAI, a commercial finance company, entered into a series of secured lease and finance transactions with UELCO and Asphalt to finance the acquisition of construction equipment (the "financing transactions"). ABC Utilities, the parent company of Asphalt and UELCO, guaranteed the debts of these entities to OCAI. Frank Wolfe is the president and sole director of ABC Utilities, UELCO and Asphalt. Lexie Wolfe is Frank Wolfe's mother.

In April 1989, the ABC entities filed for bankruptcy under Chapter 11. In October 1989, the ABC entities filed a complaint in federal district court against OCAI alleging, inter alia, that some of the transactions between OCAI and the ABC entities were usurious ("ABC I"). In May 1993, the district court granted summary judgment in favor of OCAI. The ABC entities' subsequent motion for a new trial and to set aside the judgment was denied.

Shortly thereafter, in July 1993, the ABC entities commenced an adversary proceeding against OCAI in the bankruptcy court on behalf of the bankruptcy Trustee alleging, inter alia, fraud on the part of OCAI in the transactions with the ABC entities ("ABC II"). In ABC II, the entitites raised several issues that they had previously raised in ABC I. Accordingly, the district court withdrew its reference to the bankruptcy court, and the case was transferred to the district court. In January 1994, the district court granted summary judgment in favor of OCAI on the grounds of res judicata.¹ In May 1995, we affirmed the judgments of the district court in both ABC I and ABC II and held that the ABC entities were not entitled to relief under Fed. R. Civ. P. 50(b)(3) or (b)(6).

During this time period, related actions were proceeding in the bankruptcy court. After the ABC entities filed for chapter 11 bankruptcy, OCAI began filing motions for relief from the automatic stay provision of 11 U.S.C. 362 against Asphalt and UELCO in which OCAI asserted that it was owed a specific amount by the ABC entities. In opposing OCAI's third motion for relief in November 1991,² UELCO stated that it owed OCAI approximately $150,000 less than OCAI claimed it was owed. The bankruptcy court held an evidentiary hearing during which it heard testimony concerning the amount of money owed OCAI by Asphalt and UELCO. Ultimately, the bankruptcy court granted OCAI's third motion for relief from the stay and rendered findings of fact specifying the amount owed to OCAI.

Frank Wolfe and a creditor of UELCO subsequently filed objections to OCAI's claims against the bankruptcy estates of the ABC entities, alleging that OCAI overstated the amount that it was owed by UELCO and Asphalt (the "Objections to Claims"). In February 1996, the bankruptcy court granted OCAI's motion for summary judgment, dismissing the Objections to Claims on the basis of res judicata. Specifically, the court found that the judgments in ABC I and ABC II and the judgment of the bankruptcy court on the third motion to lift the stay barred the objections.

Later that year, Frank Wolfe retained attorney Bruce Budner and commenced a malpractice action in Texas state court on behalf of the bankruptcy estates of the ABC entities against several of the attorneys who had represented the entities throughout this litigation (the "Malpractice Action"). Wolfe alleged that as a result of the attorneys' malpractice, the ABC entities lost their claims against OCAI. Several disputes arose between OCAI and the ABC entities as a result of the latter's discovery requests. Budner litigated several disputes and was able to obtain some discovery from OCAI. Ultimately, OCAI and the ABC entities entered into a settlement resolving these disputes, which was approved by the state court (the "OCAI Settlement").

After the state court approved the settlement, Budner filed a motion to approve the OCAI Settlement in the bankruptcy court. Wolfe, however, retained new counsel and opposed the OCAI Settlement. Wolfe also noticed the deposition of his former attorney Budner and issued a subpoena duces tecum seeking to compel Budner to turn over the documents that OCAI had produced in the Malpractice Action. OCAI filed an emergency motion for a protective order and to quash both subpoenas. The Wolfes filed a motion in opposition in which they stated that "the documents which Bruce A. Budner will produce at the deposition will support a Motion for Reconsideration by Frank A. Wolfe and his mother, Lexie D. Wolfe" of the denial of the Objections to Claims. As an exhibit to their opposition papers, the Wolfes attached a draft of a motion to set aside the judgment on the Objections to Claims (the "draft motion").³ The bankruptcy court denied the motion to quash, and OCAI sought leave to file an interlocutory appeal of that ruling.⁴

Finally, in December 1998, OCAI filed this declaratory judgment complaint. The complaint alleged that the threatened claim in the draft motion sought to reopen issues that were barred under the doctrine of res judicata by ABC I, ABC II, our decision affirming these cases, and the final order of the bankruptcy court. OCAI sought relief in the form of: (1) a declaratory judgment stating that "any and all claims, objections to claims, actions and proceeding which arise out of or relate in any way to the relationship between ORIX Credit Alliance, Inc. and ABC Asphalt, Inc. and/or Utilities Equipment Leasing Co., Inc., and/or ABC Utilities Services, Inc. are barred by res judicata and other doctrines of claim and issue preclusion"; (2) a declaratory judgment that "any and all claims against OCAI relating to transactions between OCAI and the ABC entities are estopped"; and (3) a preliminary and permanent injunction "enjoining Frank A. Wolfe, Lexie D. Wolfe, and all other persons and entities in privity with either as an owner, officer, and/or creditor of any ABC Entity, or acting in concert with them, from commencing, pursuing, or prosecuting any claim, objection, action, or proceeding, however denominated, against ORIX Credit Alliance, Inc., its successors and assigns, arising out of or relating to any transaction between or involving OCAI and ABC Asphalt, Inc., and/or Utilities Equipment Leasing Co., Inc. and/or ABC Utilities Services, Inc. and requiring them to return the documents to OCAI in accordance with the Confidentiality Order and the Settlement entered by the [state court]."

The Wolfes moved to dismiss, alleging that no actual controversy existed between them and OCAI. The district court granted the Wolfes' motion to dismiss on different grounds. Specifically, the court found that there was an actual controversy between the Wolfes and OCAI based upon the threatened action. However, the district court exercised its discretion to abstain from hearing the declaratory judgment complaint.⁵

In June 1999, OCAI filed a motion for reconsideration of the district court's dismissal, which also sought leave to amend the declaratory judgment complaint so as to invoke bankruptcy court jurisdiction. The district court denied the motion, and OCAI filed this timely appeal.⁶

OCAI now argues that the district court abused its discretion by dismissing the declaratory judgment complaint. Alternatively, OCAI contends that the district court erred in denying it leave to amend the declaratory judgment complaint so as to assert bankruptcy jurisdiction.

II.

When considering a declaratory judgment action, a district court must engage in a three-step inquiry. First, the court must determine whether the declaratory action is justiciable. Typically, this becomes a question of whether an "actual controversy" exists between the parties to the action. See Rowan Co., Inc. v. Griffin, 876 F.2d 26, 27-28 (5th Cir. 1989). A court's finding that a controversy exists such that it has subject matter jurisdiction is a question of law that we review de novo. See Canion v. Evans, 196 F.3d 579, 584 (5th Cir. 1999). Second, if it has jurisdiction, then the district court must resolve whether it has the "authority" to grant declaratory relief in the case presented. See Travelers Ins. Co. v. Louisiana Farm Bureau Fed'n, Inc., 996 F.2d 774, 776 (5th Cir. 1993) ("Prior to determining whether the district court abused its discretion by failing to review the merits of this case, this Court must first determine whether the district court had authority to grant a declaratory judgment here."). Third, the court has to determine how to exercise its broad discretion to decide or dismiss a declaratory judgment action. See id. at 778 (recognizing a district court's vast discretion in the declaratory judgment context). We review the dismissal of a declaratory judgment action for abuse of discretion. See Wilton v. Seven Falls Co., 41 F.3d 934, 935 (5th Cir. 1994). Here, the district court erred in moving beyond the first...