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MERRILL LYNCH & CO., INC. v. ALLEGHENY ENERGY INC.

United States District Court, Southern District of New York


May 30, 2003

MERRILL LYNCH & CO., INC. ET AL., PLAINTIFFS,
v.
ALLEGHENY ENERGY, INC., DEFENDANT.

The opinion of the court was delivered by: Harold Baer, Jr., District Judge.

OPINION & ORDER

I. INTRODUCTION

Defendant, Allegheny Energy, Inc. ("Allegheny"), moves to stay this action in favor of a pending parallel state court action brought by it and Allegheny Energy Supply Company, LLC ("Supply") against Merrill Lynch & Co., Inc., Merrill Lynch Capital Services, Inc., and ML IBK Positions, Inc. (collectively, "Merrill Lynch"), the plaintiffs in the instant federal action. For the following reasons, defendant's motion to stay is DENIED.

II. BACKGROUND

Between 1997 and Enron's collapse, Merrill Lynch had performed investment banking and financial advisory services for Enron. During late 1999, Merrill Lynch and Enron purportedly engaged in a series of energy trades that created a false and misleading representation of Merrill Lynch's Global Energy Market business ("GEM") trading volume and financial condition. Merrill Lynch allegedly misrepresented and/or concealed from Allegheny, Supply, and Allegheny Energy Global Markets, LLC (collectively "the Buyers"), the nature of these transactions. In March 2001, the Buyers acquired certain assets of GEM from Merrill Lynch in exchange for $490 million in cash, plus a 2% equity interest in Supply. Under the purchase agreement, Allegheny was given a choice to either contribute certain generation assets to Supply by September 16, 2002, or it could be required, at Merrill Lynch's discretion, to repurchase the 2% equity interest in Supply from Merrill Lynch for $115 million plus interest.

On September 6, 2002, after Allegheny filed a Form 10-Q, purportedly reflecting that it would not be able to transfer to Supply the energy generation capacity as required by the purchase agreement, Merrill Lynch notified Allegheny of its plan to exercise its put right, i.e., to have Allegheny repurchase the 2% equity interest in Supply from Merrill Lynch. In response, Allegheny raised concerns about the accuracy of the representations that Merrill Lynch made concerning the initial purchase agreement. The parties agreed to extend the September 16, 2002 deadline to September 23, 2002, and then to September 25, 2002. On September 24, 2002, Merrill Lynch filed the instant federal action against Allegheny for breach of the purchase agreement. Specifically, Merrill Lynch claims that Allegheny breached the purchase agreement by failing to purchase the 2% membership interest in Supply. The day after, on September 25, 2002, Allegheny and Supply commenced the state court action against Merrill Lynch, seeking to rescind the purchase agreement and to collect damages for fraudulent inducement and breach of the purchase agreement arising from the alleged misrepresentations made by Merrill Lynch. The parties have agreed to suspend further proceedings in the state court action pending this Court's decision on Allegheny's stay motion.

III. DISCUSSION

When there are parallel state and federal court proceedings*fn1 and a party seeks to stay the federal proceeding, the court must consider six factors, including: (1) the assumption of jurisdiction over any res, (2) the inconvenience of the federal forum, (3) the desirability of avoiding piecemeal litigation, (4) the order in which the concurrent forums obtained jurisdiction, (5) the source of the applicable law, and (6) the adequacy of procedures in the state court to protect the federal plaintiff's rights. Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 16 (1983); Colorado River Water Conservation Dist. v. United States, 424 U.S. 800, 818 (1976). "[N]o one factor is necessarily determinative," Colorado River, 424 U.S. at 818, rather "[t]he weight to be given any one factor may vary from case to case, depending on the particular setting of the case." Cone, 460 U.S. at 16.

Allegheny admits that the first two factors are not applicable to the instant case. Here, there is no res at issue in these actions, and the federal and state actions were brought in New York, so there can be no dispute in regard to the convenience of one forum over another. As for the third factor, the ramifications of piecemeal litigation, Allegheny argues that the Court should stay the instant action because of the threat of inconsistent judgments if both the federal and state actions were allowed to proceed. Allegheny contends that the state court action, which includes claims for fraudulent inducement and rescission against Merrill Lynch, is more comprehensive than the federal action. The claims brought by Allegheny and Supply in state court purportedly cannot be asserted by Supply here because its presence as a party would destroy the Court's diversity jurisdiction.*fn2 Allegheny notes that the federal action brought by Merrill Lynch seeks to enforce an obligation that runs against only Allegheny, and the claims that Supply holds and has asserted against Merrill Lynch in the state action purportedly stand independent from the claim against Allegheny. Although the same claims may be asserted by Allegheny as compulsory counterclaims in the federal action, Allegheny argues the result of that litigation would not be binding on Supply as a non-party to the federal action. If the Court rejected Allegheny's counterclaims, Allegheny asserts that the state court could nonetheless find for Allegheny and Supply on the same claims, creating the possibility of inconsistent judgments.

Merrill Lynch argues that no such danger is present here because Supply may simply intervene pursuant to Rule 24 of the Federal Rules of Civil Procedure ("FRCP") and assert in this Court its state court claims, which no party disputes as related to the "same case or controversy" pending before me. Although Supply and Merrill Lynch are non-diverse, Merrill Lynch contends that the Court could exercise supplemental jurisdiction under 28 U.S.C. § 1367(a) over Supply's claims if it intervened. Because the sole claim in the federal action is to enforce an obligation that runs to Allegheny only, Supply's entry into the action would be, according to Allegheny, pursuant to Rule 24(b), i.e. as a permissive intervenor.*fn3 Allegheny cites Zell/Merrill Lynch Real Estate Opportunity Partners Ltd. Partnership III v. Rockefeller Center Properties, Inc., 1996 WL 120672 (S.D.N.Y. Mar. 19, 1996) for the proposition that "[p]ermissive intervention is proper only where an independent basis of jurisdiction exists as to the intervenors. . . . The proposed intervenors must therefore adequately invoke the Court's diversity jurisdiction over their claims." Id. at *3.

The rule for permissive intervenors has since been clarified by the Second Circuit in Viacom Int'l, Inc. v. Kearney, 212 F.3d 721 (2d Cir. 2000). In Viacom, Circuit Judge Sotomayor noted that 28 U.S.C. § 1367(a) provides district courts, subject to the limitation imposed by § 1367(b), authority to exercise supplemental jurisdiction over all claims "that are so related to claims in the action within such original jurisdiction that they form part of the same case or controversy." 28 U.S.C. § 1367(a); Viacom, 212 F.3d at 726. While it is true that section 1367(b) provides that the:

district court shall not have supplemental jurisdiction under subsection (a) over claims by plaintiffs against persons made parties under Rule 14, 19, 20, or 24 of the Federal Rules of Civil Procedure, or over claims by persons proposed to be joined as plaintiffs under Rule 19 of rules, or seeking to intervene as plaintiffs under Rule 24 of such rules, when exercising supplemental jurisdiction over such claims would be inconsistent with the jurisdictional requirements of section 1332[,]
28 U.S.C. § 1367(b)(emphasis added), Judge Sotomayor emphasized that:

§ 1367(b) reflects Congress' intent to prevent original plaintiffs — but not defendants or third parties — from circumventing the requirements of diversity. See H.R.Rep. No. 101-734, at 29 (1990), reprinted in 1990 U.S.C.C.A.N. 6860, 6875 (explaining that the purpose of § 1367(b) is to prevent "plaintiffs [from being able] to evade the jurisdictional requirement of 28 U.S.C. § 1332 by the simple expedient of naming initially only those defendants whose joinder satisfies section 1332's requirements and later adding claims not within original federal jurisdiction against other defendants who have intervened or been joined on a supplemental basis") (emphasis added); see also David D. Siegel, Practice Commentary, reprinted in 28 U.S.C.A. § 1367, at 832 (West 1993) (noting that § 1367(b) "is concerned only with efforts of a plaintiff to smuggle in claims that the plaintiff would not otherwise be able to interpose. . . . The repetition of the word `plaintiffs' at several rule-citing junctures in subdivision (b) makes this clear.").
Viacom, 212 F.3d at 726-27 (emphasis added). In view of the Second Circuit's analysis, section 1367(b) would not bar the Court from exercising supplemental jurisdiction over claims brought by Supply as an intervening third party, despite the lack of diversity between it and Merrill Lynch.

In its analysis of the facts in Viacom, the Second Circuit found that the district court could exercise supplemental jurisdiction over claims brought by Taylor Forge, who had been brought into the case as a defendant by a fourth party complaint. Id. at 724. This Circuit acknowledged that section 1367(b) does not deprive the district court of supplemental jurisdiction over a counterclaim or cross-claim, i.e., "downsloping claims," raised by a non-diverse intervening defendant. Id. at 727 (citing Compare Development Finance Corp. v. Alpha Housing & Health Care, Inc., 54 F.3d 156, 161 (3d Cir. 1995)). Further, this Circuit acknowledged that it is generally assumed that supplemental jurisdictional will not support claims by an intervening plaintiff, i.e., "upsloping claims." Id. at 727 (citing 4 Moore's Federal Practice § 19.04[1][b]). Even if I were to read Viacom as a limitation on supplemental jurisdiction over claims brought by an intervening plaintiff, Allegheny's argument that the Court may not exercise supplemental jurisdiction over Supply's claims would still fail.

A party's designation by the court as a plaintiff or defendant must be made "according to their real interests so as to produce an actual collision of interests." Maryland Casualty Co. v. W.R. Grace Co., 23 F.3d 617, (2d Cir. 1994). The Supreme Court cautioned that "[d]iversity jurisdiction cannot be conferred upon the federal courts by the parties' own determination of who are plaintiffs and who [are] defendants. It is our duty, as it is that of the lower federal courts, to `look beyond the pleadings and arrange the parties according to their sides in the dispute.'" City of Indianapolis v. Chase Nat'l Bank, 314 U.S. 63, 69 (1941) (quoting Dawson v. Columbia Ave. Sav. Fund, Safe Deposit, Title & Trust Co., 197 U.S. 178, 180 (1905)). More specifically, courts are obligated, based on the "realities of the record," to "align[] the parties in relation to their real interests in the `matter in controversy.'" Id.; Maryland Casualty, 23 F.3d at 623. Here, the counterclaims that Allegheny will probably assert in the federal action are sure to be substantially the same claims brought by Allegheny and Supply in the state court action. There can be little dispute that Supply is aligned with Allegheny, and therefore if it intervened in the federal action, it would be as a third-party defendant. Its claim, along with Allegheny's, borrowing the Second Circuit's parlance, would be downsloping, and the Court would not be excluded from exercising supplemental jurisdiction over such claims. The piece-meal litigation that Allegheny contends it seeks to avoid may be resolved by discontinuing the state court action and having Supply intervene in the federal action.

As to the remaining factors in regard to a stay in the federal action, none present such "exceptional circumstances," Colorado River, 424 U.S. at 817-18, so as to overcome the heavy presumption favoring the exercise of jurisdiction. Id. at 813; Bethlehem Contracting Co. v. Lehrer/McGovern, Inc., 800 F.2d 325, 327 (2d Cir. 1986). The fourth factor, the order in which the courts obtained concurrent jurisdiction, "does not turn exclusively on the sequence in which the cases were filed, `but rather in terms of how much progress has been made in the two actions.'" Village of Westfield v. Welch's, 170 F.3d 116, 122 (2d Cir. 1999) (quoting Cone, 460 U.S. at 21). Here, discovery has been stayed during the pendency of defendant's motion, and thus little progress has been made in either the state or federal forum. This factor therefore does not point the Court towards relinquishing the "virtually unflagging obligation" to exercise jurisdiction. Colorado River, 424 U.S. at 817; see also Woodford v. Community Action Agency of Greene, 239 F.3d 517, 522 (2d Cir. 2001) ("facial neutrality of a factor is a basis for retaining jurisdiction, not for yielding it."). As to the fifth factor, the source of the applicable law, "the fact that federal substantive law does not govern this case is of little weight." Bethlehem, 800 F.2d at 328. "`[O]nly in rare circumstances [may] the presence of state law issues . . . weigh in favor of . . . surrender' of federal jurisdiction." Giardina v. Fontana, 733 F.2d 1047, 1053 (2d Cir. 1984) (quoting Cone, 460 U.S. at 26). Here, there are no novel or unique state law issues that suggest state court expertise would be particularly valuable. Village of Westfield v. Welch's, 170 F.3d 116, 124 (2d Cir. 1999); cf. Telesco v. Telesco Fuel and Masons' Materials, Inc., 765 F.2d 356, 363 (2d Cir. 1985) (novel state law theory may be a factor warranting a finding of "exceptional circumstances"). As for the last factor, the adequacy of procedures in the state court to protect the federal plaintiff's rights, the mere possibility that "the state court proceeding might adequately protect the interests of the parties is not enough to justify the district court's deference to the state action." Bethlehem, 800 F.2d at 328. In summary, none of the six factors provide sufficient basis to stay the instant action.

Finally, although I agree with Allegheny that the instant action need not be dismissed because Supply is not an indispensable party, I reach my conclusion for entirely different reasons. In view of the claims asserted in the parallel state and federal court actions, Supply has "an interest relating to the subject of the [federal] action[, i.e., the enforcement of the purchase agreement,] and is so situated that the disposition of the action in [Supply's] absence may . . . leave . . . persons already parties subject to a substantial risk of incurring double, multiple, or otherwise inconsistent obligations by reason of the claimed interest." See Fed.R.Civ.P. 19(a). In view of the possible inconsistent obligations that may arise between forums, Supply is a "necessary party" here. See Provident Tradesmens Bank & Trust Co. v. Patterson, 390 U.S. 102, 124 (1968) ("`[p]ersons having an interest in the controversy, and who ought to be made parties . . . are commonly termed necessary parties.'" (quoting Shields v. Barrow, 58 U.S. 130 (1854)). Having determined that Supply's presence as a party here would not destroy this Court's diversity jurisdiction, Supply's joinder is feasible, and I need not determine whether Supply is "indispensable" within the meaning of Rule 19(b). See Viacom, 212 F.3d at 725. Because Supply is a necessary party, the Court now orders that Supply be joined as a party pursuant to Rule 19(a).

IV. CONCLUSION

For the foregoing reasons, defendant's motion to stay is DENIED. Supply is ordered to join the action and serve its pleading on all other parties within the next two weeks from the date hereof. A pre-trial conference with all the parties will be held on June 19, 2003 at 12:30 pm, at which time the parties will have agreed upon and filled out a pre-trial scheduling order, in accordance with my local rules.

SO ORDERED


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