Save Power Ltd. v. Syntek Finance Corp.

• Decision Date: 26 August 1997
• Docket Number: No. 96-11081.,96-11081.
• Citation: 121 F.3d 947
• Parties: SAVE POWER LIMITED, Plaintiff-Counter Defendant-Appellant, v. SYNTEK FINANCE CORP., Defendant-Counter Claimant-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

121 F.3d 947

SAVE POWER LIMITED, Plaintiff-Counter Defendant-Appellant, v. SYNTEK FINANCE CORP., Defendant-Counter Claimant-Appellee.

No. 96-11081.

United States Court of Appeals, Fifth Circuit.

August 26, 1997.

Alan W. Harris, Dallas, TX, John Carlton Wynne, Andrews & Kurth, Houston, TX, Timothy E. Taylor, Andrews & Kurth, Dallas, TX, for Plaintiff-Counter Defendant-Appellant.

J. Michael Weston, Bennett & Weston, Dallas, TX, for Defendant-Counter Claimant-Appellee.

Before POLITZ, Chief Judge, KING, Circuit Judge, and DUPLANTIER,^* District Judge.

KING, Circuit Judge:

Plaintiff Save Power Limited appeals the district court's grant of summary judgment declaring that defendant Syntek Finance Corporation is a "Senior Lender" for purposes of the subordination agreement at issue in this case. Save Power also appeals the district court's denial of its motion to transfer this case to Judge Means, a different judge in the same division before whom a previously filed, related action is pending. Finding substantial overlap between the present case and the original action, for reasons of comity and sound judicial administration we vacate the judgment of the district court and remand with instructions to transfer this case to Judge Means.

I. BACKGROUND

This dispute concerns the respective rights of Save Power Limited ("Save Power") and Syntek Finance Corporation ("Syntek") to the assets of Pursuit Athletic Footwear, Inc. ("Pursuit"). Pursuit is a wholesale distributor of athletic shoes and is a wholly-owned subsidiary of Riddell Athletic Footwear, Inc. ("Riddell"). Prior to 1994, Save Power served for an extended period of time as the primary supplier of inventory to Pursuit. In settlement of litigation arising from obligations incurred during that time, Save Power, Pursuit, and a number of other parties executed a series of agreements on February 15, 1994. The agreements relevant to this litigation are the License Agreement, Finance and Security Agreement ("Finance Agreement"), Loan and Security Agreement ("Loan Agreement"), and Subordination Agreement.

The License Agreement bears on this case to the extent that it constitutes Pursuit's most valuable asset. Under the License Agreement, Pursuit acquired the exclusive right to manufacture and sell worldwide athletic footwear bearing the "Riddell" trademark and name. The Finance Agreement, executed by Save Power and Pursuit, provides for Save Power to advance working capital and athletic shoe inventory to Pursuit in excess of the $23 million in capital and inventory previously advanced. Pursuit was to repay its obligations to Save Power through the sale of shoes to third-party retailers. All account payments for such sales were to be directed to Heller Financial, Inc. ("Heller"), which, after deducting amounts owed to it periodically under the Loan Agreement, would forward the balance to Save Power. The Finance Agreement further provides that Save Power acquired a security interest in the assets of Pursuit, including the License Agreement, inventory, and accounts receivable. To obtain additional financing, Pursuit entered into the Loan Agreement with Heller. Pursuant to the Loan Agreement, Heller made a term loan to Pursuit and received a security interest in the assets of Pursuit. This security interest excludes Pursuit's rights under the License Agreement. Pursuit, Save Power, and Heller contemporaneously executed the Subordination Agreement, which references both the Finance Agreement and the Loan Agreement. Under the Subordination Agreement, Save Power agreed to subordinate to Heller, as "Senior Lender," the debt owed to Save Power by Pursuit.¹ The Subordination Agreement defines "Senior Lender" as "Heller, its successors and assigns and any person who refinances or refunds all or any portion of the Senior Debt." "Senior Debt" is defined in the Subordination Agreement as all indebtedness of Pursuit owed to "Senior Lender" under the Loan Agreement.

Shortly after these agreements were executed, Pursuit halted its payments to Save Power. Save Power contends that Pursuit's outstanding debt had grown to $31 million, but Save Power was unable to foreclose on its security interest due to the terms of the Subordination Agreement and Pursuit's outstanding debt to Heller. The debt owed to Heller was due to be fully paid by the end of May 1995 (which would relieve Save Power of the restrictions of the Subordination Agreement), and Heller had informed Pursuit that it did not intend to renew its loan.

Syntek became involved at this juncture as a provider of new financing to Pursuit. Syntek is a shell corporation affiliated with one of the owners of Pursuit. On May 19, 1995, Syntek and Pursuit entered into an agreement whereby Syntek agreed to make a term loan to Pursuit in an amount sufficient to satisfy Pursuit's obligations to Heller. Funds of just over $200,000 were wired to Heller on that day pursuant to this agreement.² Syntek thus claims to have refinanced Pursuit's debt to Heller and become a "Senior Lender" under the terms of the Subordination Agreement.

Later that year Riddell and Pursuit filed suit against Save Power and several affiliated corporations (the "Original Action") in state court in Tarrant County, Texas. Save Power removed this action to the United States District Court for the Northern District of Texas, Fort Worth Division, on August 11, 1995, where it was assigned to Judge Means. Save Power filed a counterclaim on August 15, 1995. On August 25, 1995, Save Power filed an application for temporary restraining order and preliminary injunction seeking to enjoin Pursuit from dissipating the assets in which Save Power claimed a security interest. During this time period Save Power filed a related action in the Dallas Division of the Northern District (the "Related Action"). The Related Action was transferred to Judge Means on August 28, 1995, and consolidated with the Original Action on August 31, 1995. On September 11, 1995, Pursuit filed in the Original Action its own application for temporary restraining order and preliminary injunction seeking to enjoin Save Power from foreclosing on its security interest on the ground that Syntek was a holder of outstanding senior debt under the Subordination Agreement. The court held a joint hearing on both applications in late September and issued an order denying both applications on October 6.

Save Power filed the present action on September 11, 1995, in the Fort Worth division of the Northern District. Save Power sought a declaratory judgment that Save Power has a perfected security interest in the assets of Pursuit that is superior to that of any third party, that Save Power is entitled to foreclose on this security interest, and that Syntek does not possess any rights or standing under the Subordination Agreement. This case was assigned by random draw to Judge McBryde.

On September 28, 1995, Syntek filed a counterclaim against Save Power and moved for partial summary judgment. On October 16, 1995, in addition to its response in opposition to Syntek's motion, Save Power filed a motion to transfer the case to Judge Means. Judge McBryde denied Syntek's motion for partial summary judgment on October 18, 1995. Subsequently, on November 7, 1995, Judge McBryde denied Save Power's motion to transfer, citing his familiarity with the case as a result of studying the record in connection with Syntek's motion for partial summary judgment.

On June 6, 1996, Save Power filed a motion for summary judgment, which was followed shortly thereafter by Syntek's second motion for partial summary judgment. On July 26, 1996, Judge McBryde issued a memorandum opinion and order granting Syntek's motion for partial summary judgment and denying Save Power's motion for summary judgment. The court entered final judgment on August 2, 1996, declaring Syntek to be a "Senior Lender" under the terms of the Subordination Agreement and assessing all costs against Save Power. Save Power filed a timely notice of appeal.

II. DISCUSSION

Save Power challenges the declaratory judgment entered by Judge McBryde as well as his denial of its motion to transfer. Because we conclude that Judge McBryde abused his discretion in denying the motion to transfer,³ we do not reach the merits of the declaratory judgment.

The Fifth Circuit adheres to the general rule that the court in which an action is first filed is the appropriate court to determine whether subsequently filed cases involving substantially similar issues should proceed. See West Gulf Maritime Ass'n v. ILA Deep Sea Local 24, 751 F.2d 721, 728 (5th Cir.1985); Mann Mfg., Inc. v. Hortex, Inc., 439 F.2d 403, 408 (5th Cir.1971). Syntek, in fact, states that it "does not disagree with the legal proposition advanced by Save Power that where duplicative issues and parties exist in two cases the court with the first case should resolve the issues between the parties and the second court should defer."

The "first to file" rule is grounded in principles of comity and sound judicial administration. "The federal courts long have recognized that the principle of comity requires federal district courts — courts of coordinate jurisdiction and equal rank — to exercise care to avoid interference with each other's affairs." West Gulf, 751 F.2d at 728. "The concern manifestly is to avoid the waste of duplication, to avoid rulings which may trench upon the authority of sister courts, and to avoid piecemeal resolution of issues that call for a uniform result." Id. at 729; see also Colorado River Water Conservation Dist. v. United States, 424 U.S. 800, 817-20, 96 S.Ct. 1236, 1246-48, 47 L.Ed.2d 483 (1976). This concern applies where related cases are pending before two judges in the same district, as is the case here, as well as where related cases have been filed in different districts. Dillard v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 961 F.2d 1148, 1161 n. 28 (5th Cir.1992) ("The same concern with...