Opinion
Civil Action No. 00-0519-P-L
October 16, 2000
REPORT AND RECOMMENDATION
This cause is before the undersigned on defendant's motion to dismiss and supporting brief (Docs. 6 and 7), and plaintiff's brief in opposition (Doc. 9) and defendant's response thereto. (Doc. 21). This matter has been referred to the undersigned pursuant to 28 U.S.C. § 636 (b)(1)(B) for entry of report and recommendation. Oral argument was held on September 7, 2000. Upon consideration of all matters presented, and for the reasons stated herein, the undersigned recommends that defendant's motion to dismiss be DENIED.
On April 28, 2000, Alabama Exterior Supply, Inc. (AES), and Florida Vinyl Products of Pensacola, Inc. (FVP), filed a complaint against Private Business, Inc., AmSouth Bank, Cedric Hatcher, Alan Woods and CNA, Inc. in the Circuit Court of Mobile County alleging fraudulent misrepresentation and breach of contract. AmSouth, Private Business, Hatcher, and Woods filed answers asserting the existence of an arbitration agreement as an affirmative defense. On June 8, 2000, Private Business filed in the United States District Court for the Southern District of Alabama, a complaint to enforce the arbitration agreement based upon diversity jurisdiction under 28 U.S.C. § 1332. (Doc. 1). AES is an Alabama corporation, FVP is a Florida corporation, Private Business is a Tennessee corporation, AmSouth is an Alabama corporation, and Hatcher and Woods are both Alabama residents. The parties do not dispute that there is complete diversity between Private Business, AES, and FVP, the parties to the federal court action. Neither do the parties dispute that the amount in controversy exceeds $75,000. However, the defendants AES and FVP, allege that AmSouth, Hatcher, and Woods are necessary and indispensable parties under Rule 19 of the Federal Rules of Civil Procedure and as such diversity jurisdiction does not exist. In a supplemental pleading filed on September 6, 2000 (Doc. 21), AES and FVP also argue that the court should abstain from this action because of the parallel state court action.
AmSouth and Hatcher also filed a motion to compel arbitration in the state court action. On September 18, 2000, the Circuit Court granted the motion. State court defendants Private Business and Woods did not file a motion to compel in the state court action.
Private Business, Inc, is the developer and owner of the "Business Manager System", an accounts receivable management program, and accompanying "Flex-O-Pay" software, which it licenses to other entities. Private Business has granted AmSouth a license to offer the Business Manager System to AmSouth customers. Under the agreement, Private Business provided AmSouth with hardware and software, network support, and training. The defendants AES and FVP were customers of AmSouth and participated in the Business Manager Program. The Business Manager Program was an arrangement where accounts receivables were purchased by AmSouth from the participants. Disputes arising from this arrangement form the basis of the state court action. Specifically, AES and FVP allege in the underlying state court action that AmSouth, AmSouth employee Hatcher, Private Business and Private Business employee Wood made material misrepresentations to AES and FVP regarding how the Business Manager program worked and that they breached the contract with Private Business regarding the program.
It is not disputed that jurisdiction of this action is contingent on diversity jurisdiction. Therefore, "[a]s with any federal action, diversity of citizenship is determined by reference to the parties named in the proceeding before the district court, as well as any indispensable parties who must be joined pursuant to Rule 19 of the Federal Rules of Civil Procedure. Where joinder of a party would destroy subject matter jurisdiction, the court must dismiss the action if that party is indispensable to the litigation." Doctor's Associates, Inc. v. Distajo, 66 F.3d 438, 445 (2nd Cir. 1995) (citations omitted). Rule 19 provides that:
Section 4 of the Federal Arbitration Act confers jurisdiction in the district court over petitions to compel arbitration only to the extent that the federal court would otherwise have jurisdiction over the case. 9 U.S.C.A. § 4.
(a) A person . . . shall be joined as a party in the action if (1) in the person's absence complete relief cannot be accorded among those already parties, or (2) the person claims an interest relating to the subject of the action and is so situated that the disposition of the action in the person's absence may (i) as a practical matter impair or impede the person's ability to protect that interest or (ii) leave any of the persons already parties subject to a substantial risk of incurring double, multiple, or otherwise inconsistent obligations by reason of the claimed interest. If the person has not been so joined, the court shall order that the person be made a party.
(b) If a person as described in subdivision (a)(1)-(2) hereof cannot be made a party, the court shall determine whether in equity and good conscience the action should proceed among the parties before it, or should be dismissed, the absent person being thus regarded as indispensable. The factors to be considered by the court include: first, to what extent a judgment rendered in the person's absence might be prejudicial to the person or those already parties; second, the extent to which, by protective provisions in the judgment, by the shaping of relief, or other measures, the prejudice can be lessened or avoided; third, whether a judgment rendered in the person's absence will be adequate; fourth, whether the plaintiff will have an adequate remedy if the action is dismissed for nonjoinder.
The court must use a two-step analysis in determining whether a party should be joined under Rule 19. The court must first determine if the party is necessary using those factors listed in Rule 19(a). and then determine if the party is indispensable and whether the action should be dismissed using those factors listed in Rule 19(b).
The defendants argue that AmSouth, Hatcher, and Woods are necessary and indispensable parties under Rule 19. They first argue that the omitted parties are necessary because of the possibility of conflicting and contradictory legal obligations. The defendants then argue that the omitted parties are indispensable due to the possibility of inconsistent rulings, the lack of measures that can be taken to lessen the potential for prejudice, and the fact that the Mobile County Circuit Court is capable of providing an adequate remedy.
In support of their argument defendants cite Owens-Illinois, Inc. v. Meade, 186 F.3d 435, (4th Cir. 1999). In Meade, a number of plaintiffs from West Virginia and Ohio filed an action in state court against Owens-Illinois after it failed to meet the terms of a settlement. Owens-Illinois, whose principal place of business was in Ohio, filed a motion to compel arbitration in the United States District Court for the Southern District of West Virginia, naming as defendant, only those parties in the state action that were from West Virginia. The defendants filed a motion to dismiss arguing that the other non-diverse state court plaintiffs were necessary and indispensable under Rule 19, and thus the case should be dismissed for lack of subject matter jurisdiction. The district court dismissed the case, and the Court of Appeals for the Fourth Circuit affirmed the decision. The court relied on the two-step analysis set out in Rule 19 and the factors it lists for determining whether a party is necessary and indispensable. The court first found that the omitted parties were necessary because "permitting the suit to continue in both state and federal courts would likely subject all of the parties to conflicting legal obligations". The court then found that the omitted parties were indispensable in part because there was a high potential for inconsistent judgments and the federal court could not fashion a remedy that would avoid prejudice to the parties. To the extent that Meade is persuasive, there is one significant distinguishable fact: the omitted parties in Meade were plaintiffs in the state action, while the omitted parties in the case at hand are defendants in the state action. This is significant because no prejudice will result to the plaintiffs in the state court action since they are all present as defendants in the present federal action. Moreover, there cannot be "inconsistent judgments" against the state court defendants because, as explained below, the claims against the state court defendants constitute an independent action against each defendant.
In First Franklin Financial Corp. v. Gary McCollum, 144 F.3d 1362 (11th Cir. 1998), the Court determined that it was an abuse of discretion for the district court not to assert jurisdiction over a suit filed in federal court to compel arbitration. In First Franklin, Gary McCollum, an Alabama resident, brought a state court action against First Franklin, a Georgia corporation, and Kevin Dingle, an employee of First Franklin and an Alabama resident, for claims arising from a loan transaction. First Franklin then filed a petition, based on diversity jurisdiction, against McCollum in federal court to compel arbitration. The district court dismissed the petition on the grounds of abstention. The Eleventh Circuit vacated the decision and remanded the action. In so doing, the Court reasoned that abstention was not proper because there were two separate disputes. Specifically, the Court stated,
The `underlying dispute' that 1st Franklin seeks to arbitrate is not McCollum's quarrel with 1st Franklin's codefendant Dingle, but McCollum's quarrel with 1st Franklin. Although 1St Franklin accuses McCollum of suing Dingle just to defeat removal, for present purposes we assume that McCollum honestly believes that Dingle is for some reason independently liable to McCollum. So there are two underlying disputes, McCollum v. Dingle and McCollum v. 1st Franklin, even though both may arise from the same transaction. 1st Franklin seeks to arbitrate only McCollum v. 1st Franklin, and there is undoubtedly diversity in that underlying dispute. There is, therefore, federal subject matter jurisdiction over the petition.Id. at 1364.
While the Court did not address in First Franklin whether Dingle was an indispensable party, they did provide guidance relating to factors to be considered under Rule 19 as to whether a party is indispensable. Rule 19 provides that a party is necessary to be joined if that party is essential for complete relief to be provided. As stated in First Franklin, the claims against Private Business are an independent action from the claims asserted against AmSouth, Hatcher and Woods. Therefore, the relief sought by Private Business, enforcement of the arbitration agreement as to Private Business, is not affected by the fact that the other state court defendants are not joined. Moreover, no interest is being asserted in federal court that is contrary to an absent party. Therefore, neither AmSouth, Hatcher or Woods is a necessary party.
Neither would the absent parties be indispensable. Rule 19(b) provides that the court consider what prejudice would result from a judgment rendered in the parties absence. Since the actions against each state court defendant are separate claims the undersigned fails to see any prejudice that can result to the absent parties. The Advisory Committee Notes to Rule 19 state that a "tortfeasor with the usual `joint and several' liability is merely a permissive party to an action against another with like liability." Moreover, "Rule 19, as amended in 1966, was not meant to unsettle the well-established authority to the effect that joint tortfeasors or coconspirators are not persons whose absence from a case will result in dismissal for nonjoinder". Herpich v. Wallace, 430 F.2d 792, 817 (5th Cir. 1970). Therefore, the fact that AmSouth, Hatcher and Woods are jointly sued with Private Business in state court does not make them necessary and indispensable to the federal court action.
The issue of whether a state court defendant is an indispensable party to a petition to compel arbitration was addressed directly in MS Dealer Service Corp. v. Franklin, 177 F.3d 942 (11th Cir. 1999). In MS Dealer, Franklin, an Alabama resident, sued MS Dealer, a Mississippi corporation, and Jim Burke Motors, Inc., an Alabama auto dealership, in state court. MS Dealer filed a petition to compel arbitration in the United States District Court for the Northern District of Alabama based on diversity jurisdiction. The district court dismissed the petition because MS Dealer was not a signatory to the arbitration agreement. The Eleventh Circuit reversed the district court, holding in part that Burke was not an indispensable party with respect to Franklin's claims against MS Dealer. The Court specifically held that the fact that MS Dealer and Burke were listed in the state action as joint tortfeasors and coconspirators did not render Burke an indispensable party to the action between MS Dealer and Franklin, and thus diversity was not destroyed. MS Dealer at 946. In the present case, it may be determined in state court that AmSouth, Hatcher and Woods are in fact jointly liable, however, this fact does not render them indispensable parties to the federal action to compel arbitration with Private Business. AES and FVP also argue that the Court should abstain from proceeding on the petition to compel arbitration primarily because the state court case has progressed significantly and because a consideration of the petition to compel arbitration would result in piecemeal litigation. However, the law is clear that federal court has a "virtually unflagging obligation" to exercise jurisdiction once jurisdiction is established. Moses H. Cone Memorial Hospital. v. Mercury Construction Corp., 460 U.S. 1 (1983). Moses H. Cone, involved a North Carolina hospital that filed suit against an Alabama contractor and a North Carolina architect in state court. The contractor then filed a motion to compel arbitration in federal court based upon diversity jurisdiction. The district court stayed the motion, pending resolution of the state action, based on the conclusion that the federal and state actions involved the identical issue of arbitrability. The Court of Appeals for the Fourth Circuit reversed the stay and the Supreme Court affirmed, noting the narrow application of the abstention doctrine:
While the Court noted that Burke had been dismissed from the state court action, the undersigned does not believe that this factor was crucial to the determination that Burke was not an indispensable party. Specifically, the Court, prior to noting that Burke had already been dismissed from the state court action, rejected the argument that Burke was indispensable because he was a joint tortfeasor.
`Abstention from the exercise of federal jurisdiction is the exception, not the rule. The doctrine of abstention, under which a District Court may decline to exercise or postpone the exercise of its jurisdiction, is an extraordinary and narrow exception to the duty of a District Court to adjudicate a controversy properly before it. Abdication of the obligation to decide cases can be justified under this doctrine only in the exceptional circumstances where the order to the parties to repair to the State court would clearly serve an important countervailing interest.'Cone, 460 U.S. at 14, quoting Colorado River Water Conservation District v. United States, 424 U.S. 800 (1976), County of Allegheny v. Frank Mashuda Co., 360 U.S. 185, 188-89 (1959). The Supreme Court has stated that"[abstention] was never a doctrine of equity that a federal court should exercise its judicial discretion to dismiss a suit merely because a State court could entertain it." Alabama Pub. Serv. Comm'n. v. Southern R. Co., 341 U.S. 341, 361, 71 S.Ct. 762, 774, 95 L.Ed. 1002, 1015 (1951) (Frankfurter, J., concurring in result). The Colorado River doctrine, as modified by the Supreme Court in Moses H. Cone, requires federal courts to consider six factors in determining whether abstention in favor of a concurrent state proceeding is appropriate. These factors are "(1) the order in which the courts assumed jurisdiction over property; (2) the relative inconvenience of the fora; (3) the order in which jurisdiction was obtained and the relative progress of the two actions; (4) the desire to avoid piecemeal litigation; (5) whether federal law provides the rule of decision; and (6) whether the state court will adequately protect the rights of all parties." Transouth Financial Corp. v. Bell, 149 F.3d 1292 (11th Cir. 1998).
The defendants correctly acknowledge that the first two factors are inapplicable in this case. However, the third factor regarding whether piecemeal litigation will result and the fourth factor regarding progress of the state court case are relevant. In Transouth, the lender and affiliated companies brought action against the borrower in federal court, seeking to compel arbitration of the borrowers state court claims of fraud and misrepresentation. Applying the factors set forth above, the Eleventh Circuit held in Transouth that it was an abuse of discretion for the district court to abstain because no "exceptional circumstances" existed. Id. Specifically, the court addressed the factor of piecemeal litigation and stated, that no piecemeal litigation would ensue with regard to the arbitrability of the dispute. Id at 1295. The Court in Transouth relied heavily on the factually analogous case of First Franklin, discussed supra, in which the Eleventh Circuit also held the it was an abuse of discretion for the district court to abstain. First Franklin at 1365. Specifically, the Court held that no "piecemeal litigation of the merits can occur", because "the federal proceedings has only two possible outcomes: an order compelling arbitration or an order refusing to compel arbitration and dismissing the petition". Moreover, "even if arbitration results, this is piecemeal litigation that the parties and federal policy have together made mandatory." First Franklin at 1364. The same is true in the present case. The only question before this Court is whether the plaintiffs should be compelled to arbitrate their dispute with Private Business. Although Private Business has raised the arbitration issue as a defense in the state court action, they have not asked the state court to compel arbitration.
The next factor, which the defendants argue weigh heavily for abstention, is the progress of the actions. Defendants argue that the state court proceedings concerning the arbitration issue are ahead of the proceedings in this Court and therefore this Court should abstain. Since oral argument, this Court has been notified that the state court has ordered AES and FVP to arbitrate their claims against AmSouth Bank and Hatcher. (Doc. 23). However, the undersigned is not aware of any pending state court motions regarding arbitration concerning Private Business. The issue is before the state court only as a defense to the complaint. There is no indication from any of the pleadings that the case has progressed significantly on this issue. Therefore, the progress of the state court case does not provide the extraordinary circumstances required for abstention.
The next factor, whether federal law provides the rule of decision, also weighs against abstention. The petition to compel arbitration is brought pursuant to the Federal Arbitration Act, 9 U.S.C. § 3-4. Therefore, "any legal interpretation [of this Act] will be of federal law." First Franklin at 1365. Hence, this also does not provide any basis for abstention.
The last factor, whether the state court will adequately protect the rights of all parties, is not in dispute. However, this factor alone is insufficient to require abstention. "The mere fact that [the plaintiff] may possibly get relief at some point from the state court does not provide the `clearest of justification,' needed to warrant refusing to exercise jurisdiction." Id. (quoting Moses H. Cone, 460 U.S. at 25).
After considering the factors delineated above, the undersigned finds that no extraordinary circumstances exist which require the Court to refuse to exercise jurisdiction. Therefore, it is recommended that the motion to dismiss be DENIED.
The attached sheet contains important information about this Report and Recommendation.