United States District Court, S.D. New York
March 18, 2004.
FLEET CAPITAL CORP., Plaintiff, -against- BILLY J. MULLINS, JR., et al., Defendants
The opinion of the court was delivered by: RICHARD J. HOLWELL, District Judge
Memorandum Opinion and Order
Fleet Capital Corporation ("Fleet") filed this action seeking
declaratory judgment and an injunction against Billy J. Mullins, Jr. and
Faraway Enterprises, Inc. (collectively "Mullins"). Mullins has moved to
dismiss, stay, or transfer this action. HIG Capital, LLC, HIG TestAmerica
Cayman, Inc., and TestAmerica Environmental Services, LLC (collectively
"HIG") have moved to intervene in the present case. Sagaponac Partners,
L.P. and Marc Weisman (collectively "Sagaponac") have also moved to
intervene and have submitted an opposition brief in response to Mullins's
motion to dismiss, stay, or transfer this action. For the following
reasons, Mullin's motion to stay the case is granted. HIG's and
Sagaponac's motions are denied without prejudice.
The following facts are gleaned from Fleet's complaint, as well as
HIG's and Sagaponac's motions, and are assumed true for the purposes of
resolving the present
motions. See Astor Holdings, Inc. v. Roski, No. 01 Civ. 1905 (GEL), 2002
WL 72936, at *7 (S.D.N.Y. Jan. 17, 2002) ("For the purposes of deciding
Defendants' motion to dismiss for improper venue or, in the alternative,
to transfer the case to another judicial district, the Court must accept
all of the uncontroverted allegations in Plaintiffs' complaint as true
and construe all reasonable inferences in plaintiffs' favor."); Herman v.
New York Metro Area Postal Union, No. 97 Civ. 6839 (KMW), 1998 WL
214787, at * 1 (S.D.N.Y. Apr. 30, 1998) ("The applicants' well pleaded
allegations must be accepted as true for purposes of considering a motion
to intervene, with no determination made as to the merits of the issues
In 1997, Sagaponac, an investment partnership, provided debt financing
to a company called TestAmerica Inc.*fn1 See Mem. of Law in Supp. of
Mot. to Intervene on Behalf of Sagaponac at 1 (hereinafter "Sagaponac
Mot."). As part of the financing arrangement, Sagaponac received the
right to block any sale by TestAmerica of a substantial portion of its
assets. See id. at 2; Compl. ¶ 21.
In 1998, Fleet entered into an agreement to provide TestAmerica with an
additional $37 million in debt financing. See Compl. ¶ 7. TestAmerica
used part of this additional financing to purchase from Muliins all the
assets of Mullins Environmental Testing Company. See id. ¶ 10. In
exchange for the assets, Mullins received, among other things, over $8
million in cash and an 8% Subordinated Convertible Note valued at
approximately $2 million. See id. ¶ 11.
The purchase transaction was executed through a set of agreements, one
of which was a Subordination Agreement signed by Mullins, Fleet, and
Sagaponac. See Sagaponac Mot. at 3; Compl. ¶ 12. The Subordination
Agreement made Mullins TestAmerica's juniormost subordinated creditor,
effectively placing Mullins's right to repayment of any debt owed by
TestAmerica behind Fleet's and Sagaponac's rights to repayment by
TestAmerica. See Sagaponac Mot. at 3; Compl. ¶ 13. The Subordination
Agreement also stated:
ANY ACTION OR PROCEEDING IN CONNECTION WITH THIS
AGREEMENT MAY BE BROUGHT IN A COURT OF RECORD IN THE
STATE OF NEW YORK, COUNTY OF NEW YORK, OR IN THE
UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT
OF NEW YORK, THE COMPANY, THE SUBORDINATED CREDITOR
AND ALL OTHER PRESENT OR FUTURE HOLDERS OF
SUBORDINATED DEBT HEREBY CONSENTING AND SUBMITTING TO
THE JURISDICTION THEREOF . . . AND MUTUALLY WAIVE
TRIAL BY JURY AND ANY CLAIM THAT NEW YORK COUNTY OR
THE SOUTHERN DISTRICT OF NEW YORK IS AN IMPROPER OR
INCONVENIENT FORUM OR VENUE.*fn2 Compl. ¶ 15.
On August 10, 2001, Fleet sent a notice of default to TestAmerica, a
copy of which was also sent to Mullins. Compl. ¶ 17. TestAmerica's
default to Fleet resulted in a cross-default under TestAmerica's
agreement with Sagaponac. See Sagaponac Mot. at 3.
In Fall 2002, HIG, a private equity management company, began looking
into purchasing the assets of TestAmerica. See Mem. of Law in Supp. of
HIG's Mot. to
Intervene at 1 (hereinafter "HIG Mot."). HIG discovered that TestAmerica
owed Fleet over $26 million. See id. at 2. HIG also discovered that
TestAmerica could not sell its assets without Sagaponac's consent. See
id. After extensive negotiations, HIG reached an agreement with
TestAmerica, Fleet, and Sagaponac whereby, in exchange for acquiring
TestAmerica's assets, HIG would pay Fleet approximately $23 million in
full settlement of the debt owed by TestAmerica and Fleet, in turn,
agreed that Sagaponac would be paid the remaining approximately $3
million for Sagaponac's consent to the sale of TestAmetica's assets. See
id. at 2-3; Compl. ¶¶ 22-25.
On January 3, 2003, HIG consummated this agreement by wiring the agreed
upon sums to Fleet and Sagaponac. See Sagaponac Mot. at 4. However, HIG's
payment to Sagaponac did not reduce TestAmerica's debt to Sagaponac. See
id. TestAmerica used the remaining proceeds from the sale of assets to
pay off part of its debt to Sagaponac, but the debt was not fully paid off
See id. Mullins, as the most subordinated debt holder, did not receive
any sums owed under the Subordinated Note. See id.
In Winter 2002, just before HIG consummated the agreement, Mullins
filed suit against TestAmerica and Sagaponac in Texas state court. See
id. The case was removed to the United States District Court for the
Northern District of Texas. See id. The Texas district court promptly
dismissed Sagaponac from the suit, upon Sagaponac's motion, for lack of
personal jurisdiction. See id. Neither Fleet nor HIG were named as parties
originally. See id. However, on July 17, 2003, Mullins sought leave from
Texas district court to amend his complaint to, among other things,
add Fleet, Sagaponac, and HIG.*fn3
On September 3, 2003, Fleet filed the present action in the United
States District Court for the Southern District of New York. The
complaint seeks a declaratory judgment decreeing that the approximately
$3 million payment to Sagaponac did not violate Mullins's rights and that
the claims asserted against Fleet in Mullins's Texas action lack merit.
Compl. ¶ 34. The complaint also seeks an injunction against Mullins
from prosecuting any claim against Fleet related to this dispute in any
action other than the present action. Compl. ¶ 35.
On October 16, 2003, Mullins moved to dismiss, stay, or transfer the
present action in light of the Texas action. That same day, Sagaponac
moved to intervene in the present action. On October 28, 2003, HIG
similarly moved to intervene in the present action.
On December 16, 2003, the Texas court granted Mullins leave to amend
his complaint, and Mullins has since filed an amended complaint in that
action naming Fleet, Sagaponac, and HIG as parties. On January 30, 2004,
Sagaponac again moved in the Texas action to dismiss the complaint as
against Sagaponac for lack of personal jurisdiction.
I. Motion to Dismiss, Stay, or Transfer
Mullins's arguments for dismissing, staying, or transferring this case
revolve around the fact that a Texas action is already pending. Mullins
expounds on judicial economy, deference to the Texas federal court, the
avoidance of forum shopping, the propriety of the Texas venue, and the
interests of justice.*fn4 See Mullins Mot. at 11-16.
Fleet counters that, pursuant to the forum selection clause in the
Subordination Agreement, it is contractually entitled to bring this suit
in the Southern District of New York. See Mem. in Opp'n to Def.'s Mot. at
9-10 (hereinafter "Fleet Opp'n"). Fleet argues that "the parties freely
contracted to litigate in New York and Mullins should be prevented from
evading his contractual obligation by adding Fleet to a two-year-old
lawsuit in Texas concerning a host of issues unrelated to the precise
issue" in this suit. Id. at 10. Fleet also argues that this suit has
"first-filed" priority over the Texas suit. See id. at 10-13.
In reply, Mullins argues that "the special circumstances of this case
merit a dismissal or stay in favor of the Texas action". Def.'s Reply Br.
in Further Supp. of their Mot. at 1 (hereinafter "Mullins Reply"). These
special circumstances, Mullins argues, show that the "forum selection
clause only authorizes suit in New York courts rather than providing an
exclusive forum." Id. Furthermore, Mullins alleges that he filed
for leave to amend his Texas complaint after having numerous telephone
conversations with Fleet regarding the basis for his amended complaint
and after providing Fleet copies
of the proposed amended complaint. See id. at 4-5. Mullins argues that
Fleet should not profit from Mullins's forthrightness by having the
first-filed rule mechanically applied to favor Fleet. See id. at 4-6.
In a surreply submission, Fleet argues that this Court should deny
Mullins's motion because, according to the plain language of the
Subordination Agreement's forum selection clause, Mullins has waived any
claim that New York is an improper or inconvenient forum or venue.
See Pl.'s Surreply in Opp. to Def.'s Mot. at 1.
The Court finds that, according to the language of the forum selection
clause, Mullins indeed has agreed to waive any claim that New York is an
improper or inconvenient forum or venue. However, the Court also finds
that, as Mullins contends, that same forum selection clause "empowers the
New York courts to adjudicate this matter, but does not indicate that New
York is the exclusive or the only appropriate forum where the case may be
heard." Credit Alliance Corp. v. Crook, 567 F. Supp. 1462, 1465
(S.D.N.Y. 1983) (emphasis in original). Thus, the Court's inquiry does
not end with the language of the forum selection clause, even striking
Mullins's arguments regarding the propriety of the Texas forum. While
Fleet may be contractually entitled to file suit in New York, the parties
to the Subordination Agreement appear not to have contracted to litigate
only in New York and Mullins cannot be said to "evade his contractual
obligations" solely by attempting to add Fleet as a party to a lawsuit in
a different forum.
The Court begins it analysis, then, by examining the relationship
between this matter and the Texas litigation. Ignoring for the moment the
issue of which lawsuit was filed first, it is clear this litigation is
intended to shield Fleet from liability in the Texas litigation. That
intent is expressly stated in Fleet's claim for relief: "By virtue of
the foregoing, Fleet is entitled to a declaratory judgment providing that
. . . all the claims asserted by [Mullins] in their proposed amended
complaint in the Texas action lack merit." Compl. ¶ 34. Thus, although
the two actions may not be identical in every aspect, a decision in one
would likely have res judicata effect in the other and, in fact, a
decision in the Texas action might extinguish completely this action.
This conclusion, which suggests that the two actions should not go
forward simultaneously, brings the Court to the first-filed rule. Under
this rule, well established in the Second Circuit, "where two actions
involve substantially the same issues, the first suit should have
priority absent the showing of a balance of convenience in favor of the
second action, or unless there are special circumstances which justify
giving priority to the second." Regions Bank v. Wieder & Mastroianni,
PC, 170 F. Supp.2d 436, 439 (S.D.N.Y. 2001) (quotations omitted). The
purposes behind this rule are to avoid duplication of judicial effort, to
avoid vexatious litigation in multiple forums, to achieve comprehensive
disposition of litigation among parties over related issues,*fn5 and to
eliminate the risk of inconsistent judgments. See id.
However, the first-filed rule is not to be applied in a mechanical
way, disregarding other considerations. See Tucker Anthony, Inc. v.
Bankers Trust Co., No. 93 Civ. 0257 (SWK), 1994 WL 9683, at *9 (S.D.N.Y.
Jan. 10, 1994). The Second Circuit has cautioned courts against acting as
"umpires on `race to the courthouse' disputes," and courts, in response,
have paid careful attention to a variety of factors, taken as a whole, in
adjudicating such disputes. See Viacom Int'l, Inc. v. Melvin Simon
Prods., Inc., 774 F. Supp. 858, 867 (S.D.N.Y. 1991). Thus, in applying
the rule, a court may use its
discretion to dismiss, stay, or transfer a proceeding. See Regions Bank,
170 F. Supp.2d at 439 ("Ultimately, `[t]he decision whether or not to
stay or dismiss a proceeding rests within the district judge's
discretion."); Tucker Anthony, 1994 WL 9683, at *9 ("[T]he decision to
transfer is within the court's discretion.").
Fleet filed the present action after Mullins moved for leave to file an
amended complaint adding Fleet as a party in the Texas action, but before
the Texas court granted Mullins's motion. Thus, this action may be
considered the first-filed with respect to Fleet. Cf. Aerotel, Ltd. v.
Sprint Corp., 100 F. Supp.2d 189, 195-96 (S.D.N.Y. 2000) (explaining
amended complaint does not relate back to filing date of original
complaint in considering first-filed rule unless, inter alia, added party
knew or should have known that, but for mistake, original complaint would
have been brought against added party).
However, the Court finds that there are special circumstances that
justify giving priority to the Texas action despite it being the
second-filed action. The Texas action has been proceeding for two years
and contains issues broader than in this action. In contrast, this action
has yet to even begin the discovery stage. Given the history and scope of
the Texas action, it cannot reasonably be stayed in favor of this action
nor transferred to this Court. These special circumstances justify giving
priority to the Texas action. Having determined that this action and the
Texas action are sufficiently similar so as to pose a risk of conflicting
judgments and duplication of judicial efforts should both proceedings go
forward simultaneously, the Court finds that the most efficient and
equitable way to resolve both litigations is to stay this action.
II. Motions to Intervene
Mullins's opposition to the motions of HIG and Sagaponac to intervene
in the present action is based on the same arguments that Mullins makes
in support of the motion to dismiss, stay, or transfer this case. The
crux of Mullins's arguments is that the motions should be denied so that
the litigation in Texas could proceed properly and efficiently. See Mem.
of Law in Opp'n to Mots, to Intervene at 10-15.
These arguments do not address the requirements for intervention set
forth in Fed.R.Civ.P. 24(b)(2), a rule that is to be construed
liberally. See German v. Fed. Home Loan Mortgage Corp., 899 F. Supp. 1155,
1166 (S.D.N.Y. 1995). Nor do these arguments address whether, as HIG and
Sagaponac assert, the Court has supplemental subject matter jurisdiction
over the claims of HIG and Sagaponac pursuant to 28 U.S.C. § 1332 and
Having decided to stay the present action, the Court declines to rule
on the merits of HIG's and Sagaponac's respective motions to intervene.
Thus, the Court denies HIG's and Sagaponac's motions without prejudice to
the movants renewing their motions to intervene when the stay of the
present action is lifted.
For the foregoing reasons, defendant Mullins's motion to dismiss, stay,
or transfer this action [5-1] is GRANTED. Sagaponac's and HIG's motions
to intervene [7-1 and 10-1, respectively] are DENIED without prejudice.