Theodore R. Sayers and Peter Gettinger, Composing the Sole General Partners Doing Business Under the Firm Name of Forsyth Building Company, et al., Plaintiffs-appellants, v. Forsyth Building Corporation, Defendant-appellee, 417 F.2d 65 (5th Cir. 1969)

Then on January 17, 1966, the plaintiffs amended the complaint in this action to allege a conspiracy on the part of Samuel Rothberg and his corporation, the defendant, to defraud the plaintiffs by unlawfully declaring a default in the indebtedness underlying the second security deed and by filing and prosecuting the previously described state court suits involving the property, which it alleges are collusive. Thus, the proposed refinancing of the indebtedness underlying the first security deed would be inhibited and Rothberg would collect the sum due under the first security deed much earlier than the repayment schedule provided. Plaintiffs thereby seek to have the special liens on the property declared void, and also seek additional damages, including punitive damages. Defendant's answer of January 28, 1966, denied the material allegations.

On April 8, 1966, defendant filed a motion for summary judgment on the ground that this action had been rendered moot by (1) the default judgments entered by the state courts, and by (2) the fact that the property was then in the hands of a state court receiver and all questions concerning it were thus removed from consideration of all other courts. By its order filed August 18, 1966, the district court held as to the first ground that the state court judgments did not moot the federal court questions, since the plaintiffs were not parties to those actions, were not bound by the judgments and could thus litigate the questions relating to the propriety of the enforcement suit, but that, as to the second ground, the state court had first acquired possession of the property through its receiver and to prevent unseemly conflicts between state and federal courts, the state court retain possession. The "injunction previously issued by this court" was then dissolved so that the parties might proceed in the state court. Partial summary judgment was entered for the defendant "in regard to those allegations and prayers of the complaint which relate to the issuance of an injunction,"⁸  but denied as to all other issues.

ON TO THE BANKRUPTCY COURT

About two months later the federal district court, Southern District of New York, in response to the New York partnership's petition in a real property arrangement proceeding instituted under Chapter 12 of the Bankruptcy Act⁹  by referee's order filed October 18, 1966, assumed jurisdiction of the property and enjoined the parties to this action, along with Rothberg and the state court receiver, from proceeding in any court or interfering with the property.

Thereafter, the referee on November 23, 1966, directed the state court receiver to turn over to the clerk of the bankruptcy court some $110,000 in rents collected on the building by him. On February 16, 1967, the referee directed the state court receiver to turn over to the debtor (the partnership) the Forsyth Building and all funds in his hands. However, neither of these orders was complied with by the receiver, who has continued to collect the rents and manage the property. The latter order also restrained all persons from transferring or interfering with the property of the debtor and from instituting or continuing any proceedings relative to the property. But this order was later specifically modified to authorize the partnership to prosecute the district court action involving the property in the Northern District of Georgia.

Rothberg and Forsyth Building Corporation filed a motion to dismiss before the referee on the ground that there was no possibility of any plan of arrangement being accepted since they represented more than two-thirds in amount of the secured creditors, objected to the proposed plan of arrangement, and would continue to object to any plan except one providing for the payment of the full amounts of the judgments rendered in their favor by the Georgia state courts. This motion was not ruled on by the referee.

A petition for review of the referee's turnover order of February 16, 1967, and of the referee's failure to grant the motion to dismiss was then filed by Rothberg and Forsyth Building Corporation. The bankruptcy judge, by order of July 14, 1967, denied the petition with respect to the motion to dismiss since it was then pending before the referee and review was plainly immature. With regard to the turnover order, the court held that the referee had failed to make findings which reflected the sound exercise of his discretion, and remanded the matter to the referee "for consideration and determination in his sound discretion of the scope and content of whatever turnover order should be made in this case, and the limitations, restrictions, terms, and conditions to be prescribed. * * *" The turnover order was stayed pending such consideration and determination by the referee.

Thereafter, on November 21, 1967, the referee entered an order specifically authorizing the partnership to conduct and carry to final conclusion this action in the district court for the Northern District of Georgia. And by order of April 11, 1968, the referee again restrained all persons, including Rothberg and Forsyth Building Corporation, from proceeding with the litigation then pending in the Superior Court of Fulton County, Georgia.

FURTHER PROCEEDINGS IN DISTRICT COURT; ORDERS APPEALED

The district court below, pursuant to defendant's motion to partially dismiss, entered an order on March 13, 1968, later modified on March 28, 1968, and May 13, 1968, which is the basis of part of this appeal.¹⁰  The court, though denying the motion held that the controlling question in the New York real property arrangement, as well as in this action, concerned the validity and effect of the default judgment entered in the second security deed enforcement proceedings by the Civil Court of Fulton County in favor of the defendant and against Cortan. This appears to be correct because if the default judgment for the defendant and the resulting special lien against the property are valid, then the property is subject to enforcement proceedings to satisfy the judgment debt and the availability of the property as an asset in the Chapter 12 proceeding in New York would thus be effectively removed. And, of course, the validity of the judgment lien is central to plaintiffs' charges of conspiracy to defraud as contained in the complaint.

The other part of the appeal arises from the district court's order of July 23, 1968, which restrained the parties on motion of the defendant from proceeding further in the Chapter 12 proceeding in New York until the questions in this action and in the Superior Court of Fulton County, Georgia, had been determined. The court also again affirmatively directed the parties to proceed to adjudicate the questions in the Superior Court. On August 20, 1968, the district court denied plaintiffs' motion for reconsideration, and in addition, denied plaintiffs' request that the court certify this case for an interlocutory appeal under 28 U.S.C. § 1292(b). This appeal followed.

THE ABSTENTION DOCTRINE

The first question to be decided is whether the district court erred in directing the parties to adjudicate in the Superior Court of Fulton County, Georgia the validity and effect of the default judgment entered in the Civil Court of Fulton County in favor of defendant and against Cortan. The order is an affirmative direction to the parties to adjudicate the issue in the state court and it is clear that the lower court has declined to exercise its jurisdiction in favor of resolution of the issue in the state court. Thus, we are dealing basically with an order of abstention, although the appellant has stated six different issues for determination.

There can be no doubt that abstention by a federal court when it has jurisdiction, in favor of resolution of the issues by a state court serves a useful and salutary function in a proper case. Wright, Federal Courts § 52. Such cases fall generally into the following categories: (1) The first and most important is commonly known as the Pullman doctrine, after its founder, Railroad Commission of Texas v. Pullman Co., 312 U.S. 496, 61 S. Ct. 643, 85 L. Ed. 971 (1941). That case and its progeny stand for the rule that a federal court may stay proceedings before it pending litigation in state courts of questions of state law where decisions on federal constitutional questions may thereby be rendered unnecessary. (2) The second abstention doctrine recognizes that federal courts should in the interest of comity and to avoid needless conflict defer to the state courts when basic questions of state policy, such as regulatory legislation, are involved. Burford v. Sun Oil Company, 319 U.S. 315, 63 S. Ct. 1098, 87 L. Ed. 1424 (1942); Alabama Public Service Comm. v. Southern Rwy. Co., 341 U.S. 341, 71 S. Ct. 762, 95 L. Ed. 1002 (1951).

This action falls into neither category. It involves issues of state law not coupled with any constitutional or other federal question. Nor does it involve any basic state policy consideration calling for the exercise of comity. There is not even a suggestion that the issues of state law are novel or unsettled, nor that they are exceptionally difficult or complex. Even if that were true, the Supreme Court has held in a leading case that such reasons are insufficient to invoke abstention:

But we are of the opinion that the difficulties of ascertaining what the state courts may hereafter determine the state law to be [that situation is not involved in this case] do not in themselves afford a sufficient ground for a federal court to decline to exercise its jurisdiction to decide a case which is properly brought to it for decision. * * *

In the absence of some recognized public policy or defined principle guiding the exercise of the jurisdiction conferred, which would in exceptional cases warrant its nonexercise, it has from the first been deemed to be the duty of the federal courts, if their jurisdiction has been properly invoked, to decide questions of state law whenever necessary to the rendition of a judgment. [Citing cases]. When such exceptional circumstances are not present, denial of that opportunity by the federal courts merely because the answers to the questions of state law are difficult or uncertain or have not yet been given by the highest court of the state, would thwart the purpose of the jurisdictional act. Meredith v. City of Winter Haven, 320 U.S. 228, 234, 64 S. Ct. 7, 11, 88 L. Ed. 9 (1943). [Emphasis added.]

The Supreme Court has continued to follow the holding in Meredith. McNeese v. Board of Education for Community Unit School District 187, 373 U.S. 668, 83 S. Ct. 1433, 10 L. Ed. 2d 622 (1963). This court has also recognized this principle in recent cases. American Universal Insurance Co. v. Chauvin, 329 F.2d 174 (5 Cir. 1964); Akin v. Louisiana National Bank of Baton Rouge, 322 F.2d 749 (5 Cir. 1963).

The jurisdiction of the district court in this action was properly invoked before any other case was filed involving this property, and absent the most compelling reason the plaintiffs have a right to have the case adjudicated in the federal system. McClellan v. Carland, 217 U.S. 268, 281, 282, 30 S. Ct. 501, 504, 505, 54 L. Ed. 762; Franklin Life Insurance Co. v. Johnson, 157 F.2d 653 (10 Cir. 1946); In re President and Fellows of Harvard College, 149 F.2d 69 (1 Cir. 1945). It is the duty of a district court to interpret state law and apply it in diversity cases. Erie R. Co. v. Tompkins, 304 U.S. 64, 58 S. Ct. 817, 82 L. Ed. 1188 (1938).

In addition, the state court is not the proper forum to determine the issues for a variety of reasons: (1) The issues in this action in the district court involving the alleged conspiracy to defraud plaintiffs by Rothberg and Forsyth Building Corporation are not embraced within the Superior Court receivership suit nor any other state court action, as is the narrower question of the validity and effect of the default judgment of the Civil Court of Fulton County in the second security deed enforcement action; (2) The partnership appears in the receivership action only as an intervenor with an intervenor's limited rights in interjecting new matter; (3) The long-term lessees, Drew and Delta, who had the primary obligation to maintain the property are not parties to the state court litigation; (4) The state court receivership action has long been dormant under restraining order of the bankruptcy division of the Southern District of New York, as well as the earlier restraining order of the lower court in this action; (5) Even if the broad conspiracy issues of the district court were made issues in and determined by the state court, there would still remain the damage question to be determined in the district court, in the event the plaintiffs here should prevail in the state court.

The court below has no power to control the course of the litigation in the state court. Moreover, it is apparent that referral of the limited issue to the state court will not expedite the completion of this litigation which is now more than five years old. The district court is the proper forum to untangle the complex web which has resulted from the differences between the parties. The failure of the court to exercise its jurisdiction and settle the controversy is error.

STAY OF REAL PROPERTY ARRANGEMENT

The second question for determination concerns the propriety of the lower court's order restraining the parties from proceeding further in the Chapter 12 real property arrangement in the bankruptcy division of the Southern District of New York. It is basic law that a court may take such steps as are necessary to protect its jurisdiction. This appears to be such a case. As the lower court recognized, the resolution of the issues before that court has a material bearing on the issues before the New York bankruptcy court; that is, as earlier discussed, if the default judgment and resulting lien are valid, then the property would not be available as an asset in the Chapter 12 proceeding.

Furthermore, if the litigation in both courts should proceed simultaneously, varying adjudications might result on the same point; that is, the availability of the property as an asset in the Chapter 12 real property arrangement. Thus, it is desirable for the lower court to conclude its litigation on the point prior to the determination on the same point in the Southern District of New York.

Fortunately, we may also consider the happy circumstance that such a procedure was approved by the New York court when it specifically authorized the partnership to employ counsel and prosecute this action in the Northern District of Georgia to conclusion.

Therefore, it is apparent that the lower court did not abuse its discretion in protecting its jurisdiction by restraining the parties from proceeding further in the Chapter 12 real property arrangement.

Affirmed in part; reversed in part, and remanded for further proceedings not inconsistent with this opinion.

JOHN R. BROWN, Chief Judge (concurring):

I concur in the result and all of the articulate and extended opinion except what I regard to be an over adulation of Meredith v. City of Winter Haven, 1943, 320 U.S. 228, 64 S. Ct. 7, 88 L. Ed. 9. Phrasing the problem of abstention in diversity cases in the stringent language of Meredith ignores too much the proposition that determining whether to abstain is judicial travail of the most exacting nature. While it is one thing to abdicate a function or duty, there is none of this when, after careful analysis the interest of good administration and respect for the State's exclusive power to determine what its law will be, the Federal Court reaches the conclusion that State judicial resources should first be exploited. The Court has done this frequently, most notable of which is the frequent use of the Clay-Florida¹  certification proceeding, the efficiency of which has often been extolled by this Court.²  As pointed out in W. S. Ranch Co. v. Kaiser Steel Corp., 10 Cir., 1967, 388 F.2d 257, 264-265 (dissenting opinion), which was reversed by the Supreme Court in its direction that, in that New Mexico diversity case between private parties, the Federal Court stay its hand pending determination of a declaratory judgment action filed in the New Mexico Courts after the decision of the Court of Appeals, Kaiser Steel Corp. v. W. S. Ranch Co., 1968, 391 U.S. 593, 88 S. Ct. 1753, 20 L. Ed. 2d 835, the Supreme Court of Florida has several times saved us from serious error by expressly rejecting the Fifth Circuit's reading of the Florida law.

When we get away from the rhetoric that describes abstention almost in terms of an ignominious shirking of an unpleasant duty, Judge Cabot's opinion for us in items (1) through (5) more than adequately demonstrates why, on the basis of critical analysis, resort to the Georgia Courts would not be in order here.