Unpublished Disposition, 895 F.2d 1417 (9th Cir. 1988)

MEMORANDUM^* 

McDonald's Corporation (McDonald's) appeals the district court's order dismissing its complaint¹  for failure to state a claim upon which relief can be granted under Federal Rule of Civil Procedure 12(b) (6). We reverse on grounds of abstention, and remand for entry of a stay order pending completion of the state lawsuit.

FACTS

McDonald's and Villa Canterbury Corporation (Villa) entered into an agreement whereby McDonald's leased a restaurant location from Villa in the Barstow Station shopping complex in Barstow, California. Article 16 of the agreement contained an option to purchase Barstow Station at its fair market value. Should McDonald's choose to exercise the option, and a conflict develop over the fair market value, the relevant part of Article 16 provided for each party to select and compensate an appraiser. If the ensuing appraisals of Barstow Station's fair market value differed by more than fifteen percent, Article 16 provided for the appointment of a third neutral appraiser.

In 1986, McDonald's notified Villa it would exercise its option to purchase Barstow Station. However, the parties could not agree on a purchase price, and McDonald's and Villa each appointed an appraiser. The appraisals differed dramatically. McDonald's appraiser valued Barstow Station at $2,000,000 while Villa's appraiser valued it at $4,600,000. This difference reflected McDonald's appraiser viewing Barstow Station as encumbered by McDonald's unexpired lease on the restaurant location, while Villa's appraiser viewed Barstow Station as unencumbered by that lease.

Because the appraisals differed by more than fifteen percent of the property's fair market value, and a third appraiser could not be chosen by the method outlined in Article 16,²  Villa filed a petition for designation and appointment of a third neutral appraiser in the Superior Court of the State of California for the County of San Bernardino pursuant to part of California's arbitration statute, section 1281.6 of the California Civil Procedure Code (West 1982).³  The Superior Court granted the petition and both McDonald's and Villa submitted lists of proposed arbitrators to the Superior Court. Because one arbitrator's name appeared on both lists, the parties stipulated to his appointment, and the Superior Court so ordered on July 28, 1987.

Before McDonald's supplied a list of proposed arbitrators, however, it asserted before the Superior Court that Article 16 is not an agreement subject to the arbitration provisions of sections 1280 to 1294.2 of the California Civil Procedure Code (West 1982). Villa, in turn, petitioned the Superior Court to order arbitration "as provided in the agreement ... and by law." Exh. F at 5. On August 20, 1987, the Superior Court ordered arbitration. McDonald's petitioned the Fourth Appellate District of the California Court of Appeals for a writ of mandamus, which was denied on September 30, 1987.

McDonald's filed for declaratory relief in federal district court on October 16, 1987, claiming judicial intervention was necessary to decide whether the third appraiser should view Barstow Station as encumbered by McDonald's lease. Villa moved to dismiss, arguing, among other things, that Article 16 definitively shows the parties had agreed to submit any controversy over the value of Barstow Station to a final binding determination by a panel of appraisers.⁴ 

On December 31, 1987, the district court entered an order granting Villa's motion to dismiss, finding the facts analogous to Summit Indus. Equip., Inc. v. Koll/Wells Bay Area, 186 Cal. App. 3d 309, 230 Cal. Rptr. 565 (1986), where an appraisal method was contested and arbitration was required. McDonald's timely appealed to this court on January 29, 1988.

On June 3, 1988, on Villa's motion to enforce compliance with existing orders in state court, the Superior Court of California ordered McDonald's to comply with its previous orders of July 28, 1987, and August 20, 1987:

[C]ounsel for the parties, and each of them, shall proceed with the arbitration pursuant to this Court's Order Compelling Arbitration and expeditiously obtain a time and place for the arbitration hearing from the Neutral Arbitrator appointed by this Court pursuant to a Stipulation of the parties, unless stayed by order of a court of competent jurisdiction.

No stay has been issued by any court.

DISCUSSION

This court reviews the district court's abstention order for abuse of discretion. Nakash v. Marciano, 882 F. 2 1411, 1413 (9th Cir. 1989).

Villa argued to the district court that it should abstain from ruling on this case, based on the doctrine of Colorado River Water Conservation Dist. v. United States, 424 U.S. 800 (1976). District Court Record, Defendant's Motion to Dismiss at 13-16. However, the district court did not discuss whether it should abstain in its decision to dismiss McDonald's complaint.

Under Colorado River, a court may abstain in the interests of " 'wise judicial administration.' " Colorado River, 424 U.S. at 817 (quoting Kerotest Mfg. Co. v. C-O-Two Fire Equip. Co., 342 U.S. 180, 183 (1952)). For purposes of wise judicial administration, abstention⁵  is appropriate where " 'exceptional circumstances ... indicate that concurrent jurisdiction by state and federal courts is likely to cause piecemeal litigation, waste of judicial resources, inconvenience to the parties, and conflicting results.' " Midkiff v. Tom, 702 F.2d 788, 801 (9th Cir. 1983) (quoting Tovar v. Billmeyer, 609 F.2d 1291, 1293 (9th Cir. 1979)). There are limited circumstances in which Colorado River abstention applies, id. at 801, because federal courts have a "virtually unflagging obligation ... to exercise the jurisdiction given them." Colorado River, 424 U.S. at 817. However, we have recognized recently that the idea of an "unflagging obligation" "somewhat overstates the law because in certain circumstances, a federal court may stay its proceedings in deference to pending state proceedings." Nakash, 882 F.2d at 1415.

We examine several factors to decide if abstention is appropriate in the interests of wise judicial administration: (1) whether either court has assumed jurisdiction over a res; (2) the relative convenience of the forums; (3) the desirability of avoiding piecemeal litigation; (4) the order in which the forums obtained jurisdiction; (5) whether state or federal law controls; and (6) whether the state proceeding is adequate to protect the parties' rights. Id. We have also considered whether a second action in federal court is an attempt to forum shop or avoid adverse rulings by the state court. Id. at 6004. "These factors are to be applied in a pragmatic and flexible way, as part of a balancing process rather than as a 'mechanical checklist.' " American Int'l Underwriters, (Philippines), Inc. v. Continental Ins. Co., 843 F.2d 1253, 1257 (9th Cir. 1988) (quoting Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 16 (1983)).

The relevant factors support a stay of this case.⁶  First, " [p]iecemeal litigation occurs when different tribunals consider the same issue, thereby duplicating efforts and possibly reaching different results." American Int'l Underwriters, 843 F.2d at 1258. At the time the complaint was filed in federal court, the Superior Court of California had already decided that Article 16 is an agreement to arbitrate the controversy regarding fair market value, and the Fourth Appellate District of California had upheld that decision.

The Superior Court, when presented with the same controversy now before us, ordered that it be arbitrated. The district court's decision duplicated the state's effort and wasted judicial resources.

McDonald's argued before the district court that " [t]he present dispute between the parties concerns the legal construction to be given to language utilized by them in the Agreement, issues which have neither been placed before the appraiser, nor before any other court." However, this statement is belied by the Superior Court record.⁷  It is enough that the proceedings be "substantially similar," which they are. Nakash, 882 F.2d at 1416.

Second, the state court obtained jurisdiction over this matter, and the state appeals court denied the writ of mandamus, before a complaint was even filed in the district court. The state courts already have expended a substantial effort in this matter. Third, state law controls the outcome of this diversity case, and the district court used that law to decide the case on its merits. Fourth, McDonald's has not suggested any reason why the state court cannot adequately protect its rights. McDonald's admits it may petition to vacate the arbitrators' award in state court if it disagrees with their appraisal. District Court Record, Opposition to Motion to Dismiss at 14. See Cal.Civ.Proc.Code Sec. 1285 (West 1982).

Finally, but not least important, is our conclusion that McDonald's refiling of its action in federal court is simply forum shopping in an attempt to avoid the adverse state court ruling that McDonald's must arbitrate. This factor weighs strongly in favor of abstention. Nakash, 882 F.2d at 1417. We have no interest in encouraging McDonald's attempt. See id. We take judicial notice that on June 3, 1988, after this case was appealed to this court, the Superior Court ordered McDonald's to comply with its previous orders.

We conclude that abstention for purposes of wise judicial administration is appropriate in this case. The district court should have abstained rather than decided the case on its merits. When there is abstention under Colorado River, a court must stay the action rather than dismiss it. Attwood v. Mendocino Coast Dist. Hosp., 886 F.2d 241, 243 (9th Cir. 1989).

McDonald's shall bear the costs on appeal.

REVERSED and REMANDED with instructions to enter an order staying further proceedings pending completion of the state lawsuit.