Zellen v. Second New Haven Bank, Civ. No. N-78-107.

• Decision Date: 07 August 1978
• Docket Number: Civ. No. N-78-107.
• Citation: 454 F. Supp. 1359
• Court: U.S. District Court — District of Connecticut
• Parties: Larry P. ZELLEN et al. v. SECOND NEW HAVEN BANK.

454 F. Supp. 1359

Larry P. ZELLEN et al. v. SECOND NEW HAVEN BANK.

Civ. No. N-78-107.

United States District Court, D. Connecticut.

August 7, 1978.

COPYRIGHT MATERIAL OMITTED

John B. Nolan, Day, Berry & Howard, Dean M. Cordiano, Hartford, Conn., for plaintiffs.

Robert P. Burns, Marcus & Burns, New Haven, Conn., for defendant.

MEMORANDUM OF DECISION

BURNS, District Judge.

This case stems from the default of a $900,000 promissory note. The note was executed on October 19, 1977, by the Sawmill Brook Racing Association, Inc., Ronald Mooney, and Everett B. Zellen, and was made payable to the defendant Second New Haven Bank. As collateral security for the repayment of the debt, Zellen delivered to the Bank 26,250 shares of preferred stock in Monogram Industries, Inc., and Sawmill Brook delivered to the Bank a mortgage deed to certain real property in Middletown, Connecticut. The note became due and payable on December 28, 1977, and was not paid. An extension of time for payment was granted until January 5, 1978, and again the note was not paid. On January 24, 1978, the Bank sold sufficient shares of Zellen's Monogram stock to satisfy its debt of $940,500 (consisting of principal, interest, late charges, expenses, and attorney's fees).

Everett B. Zellen died after the execution of the note, and the plaintiffs were appointed administrators c.t.a. of his estate on January 18, 1978. Claiming a common law right of subrogation, the plaintiffs requested the Bank to return the 1,655 remaining shares of Monogram stock, assign the mortgage over to them, and endorse the note. However, in November, 1977, a group of four parties had notified the Bank that, in the event of default, they laid claim to whatever shares of the Monogram stock remained after the Bank had satisfied its debt. These parties had granted the Bank approval to sell the stock in January, 1978, only upon the condition that the Bank release the mortgage on the Middletown property. Faced with conflicting claims to the stock, mortgage, and note in its hands, the Bank, on March 8, 1978, filed an interpleader action in the Connecticut Superior Court seeking a full disposition of the disputed property and discharge of its liability to all parties claiming rights thereto.

On April 6, 1978, the Connecticut Superior Court, Grillo, J., issued a temporary injunction restraining Sawmill Brook, Ronald H. Mooney, and the other parties referred to above from taking any proceedings against the Bank in relation to the disputed property. Sylvia B. Zellen was not a party to the interpleader action at that time, but she has since been joined as a party. Such injunction did not apply to Larry P. Zellen because he had filed a Motion to Erase in the Superior Court on March 31, 1978; however, that Motion was denied by the Superior Court, Aspell, J. on April 26, 1978. On May 1, 1978, Larry P. Zellen filed a Plea in Abatement in the interpleader action claiming the Superior Court lacked jurisdiction over him. The Bank responded on May 16, 1978, by filing a Motion to Expunge the Plea in Abatement. Argument and decision on those motions are still pending in the Superior Court.

On May 1, 1978, the plaintiffs filed the present case in this District Court seeking one million dollars in damages for the Bank's allegedly wilful refusal to honor their common law rights of subrogation. The plaintiffs also allege the Bank collected $10,000 in excessive attorney's fees, and thus request $1,010,000 in damages, plus the return of the remaining Monogram stock, an assignment of the mortgage, an endorsement of the note without recourse, and an accounting of the collateral held by the Bank. On May 22, 1978, the Bank filed the instant Motion to Dismiss, arguing that this Court must decline jurisdiction in light of the interpleader suit pending in the Superior Court, and on June 2, 1978, the Bank filed the instant Motion for Stay of Proceedings, asking this Court to refrain from any further proceedings pending the outcome of the interpleader action currently before the Superior Court.

The Bank's argument in support of these motions is founded on the general rule of necessity that, when a state court acquires jurisdiction of the res in an action in rem or quasi-in-rem, a federal court is thereafter precluded from exercising jurisdiction over the same res so as to defeat or impair the state court's jurisdiction. This is especially true, the Bank maintains, when the state court suit is an interpleader action designed to determine every right, title, or interest to the disputed res. The plaintiffs argue that their federal suit should not be dismissed because its cause of action and issues are different from the state interpleader action. The plaintiffs claim that the gravamen of their complaint is the Bank's breach of duty to them, and thus any ruling in the federal suit would not interfere with the state court's control over the res.

The circumstances of this case have progressed to the point where this federal court and the state court are now poised in a position of jurisdictional competition. When such unwanted conflicts arise, the rule is that they "must be resolved according to the applicable statutes, if any, the rules developed by the courts themselves and the general principles of comity, in order that a harmonious relationship may be maintained." 1A J. Moore, Federal Practice ¶ 0.201 at 2024 (1977). Since there are no statutes applicable here, this conflict must be resolved by reference to extant court rulings and the general principles of comity. In the light of these criteria, and keeping in mind the maintenance of a harmonious relationship between federal and state courts as the overriding consideration, the Bank's Motion to Dismiss must be denied and its Motion for Stay of Further Proceedings granted.

Initially, it is necessary to resolve the threshold question of whether the state interpleader action is a proceeding in rem, quasi-in-rem, or in personam. No Connecticut court has expressly ruled on this question. The general rule is that "whether a proceeding is in rem or in personam is determined by its nature and purpose, and by these only." 1 Am.Jur.2d, Actions § 39 at 573 (Rev. to 1977). The Connecticut Supreme Court specifically construed the purpose of the Connecticut Interpleader Statute, now C.G.S. § 52-484, in Union Trust Co. v. Stamford Trust Co., et al., 72 Conn. 86, 43 A. 555 (1899) as follows:

It requires the court to which any complaint founded upon it may be brought to "hear and dispose of all questions which may arise in such case," and by the provision for making not only all who claim to be "entitled to," but all who claim to be "interested in," the property in question, parties defendant, shows that its purpose is to secure a determination of every right, title, or interest that can by possibility be set up.

Union Trust at 93, 43 A. at 558 emphasis added. Since the generally accepted definition of a proceeding in rem is "a proceeding to determine the right in specific property, against all the world, equally binding on everyone," 1 Am.Jur.2d, Actions § 40, it follows that an interpleader suit in a Connecticut state court may be reasonably construed to be a proceeding in rem.

This conclusion is strengthened by a comparison of the purpose of an in personam action with the purpose of an interpleader action. The object of an in personam action is to obtain a judgment against a person rather than to obtain a judgment determining the status and disposition of property. 1 Am.Jur.2d, Actions § 39 (Rev. to 1977). Here, the Bank has instituted the interpleader action for the express purpose of avoiding a judgment against its corporate person and to insure that any right, title, or interest concerning the disputed property will be finally adjudicated. The effect of the state court interpleader action, then, will not be to render a judgment against the Bank but to render a judgment disposing of all questions concerning the rights of the various parties to the disputed property. As such, the interpleader action cannot be construed to be in personam.

There are four recognized instances when a federal court may stay or dismiss a federal action pending the determination of a state court proceeding: in order to avoid an unnecessary determination of a federal constitutional question, Railroad Commission of Texas v. Pullman Co., 312 U.S. 496, 61 S.Ct. 643, 85 L.Ed. 971 (1941), and 1A J. Moore, Federal Practice ¶ 0.2031 (1977); in order to avoid interference with a state criminal prosecution, Younger v. Harris, 401 U.S. 37, 91 S.Ct. 746, 27 L.Ed.2d 669 (1971); in cases where there is a predominant state interest, Louisiana Power & Light v. Thibodaux, 360 U.S. 25, 79 S.Ct. 1070, 3 L.Ed.2d 1058 (1959), Burford v. Sun Oil Co., 319 U.S. 315, 63 S.Ct. 1098, 87 L.Ed. 1424 (1943), and 1A J. Moore, Federal Practice ¶ 0.2032 (1977); and in order to foster the interests of sound judicial administration, 1A J. Moore, Federal Practice ¶ 0.2034 (1977).

It is the latter instance that is relevant here. In the words of Prof. Moore, "In a number of tightly drawn situations, federal courts may stay or dismiss federal actions in order to foster the interests of judicial administration: comprehensive disposition of litigation; conservation of judicial resources; and fairness to the parties." 1A J. Moore, Federal Practice ¶ 0.2034 at 2135 (1977). The influence of this strong policy in favor of efficient judicial administration is reflected in the well-established rule that when a federal and a state court have actions whose subject is the same res which each court must control and dispose of in order to make its relief effective, "the court first assuming jurisdiction over the property may maintain and exercise that jurisdiction to the exclusion of the other." Penn. General Casualty Co. v. Pennsylvania, 294 U.S. 189, 195, 55 S.Ct. 386, 389, 79 L.Ed. 850 (1935). Furthermore, the effect of this...