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LLC v. Sonic Drive-In of Pittsburg, LLC

United States District Court, D. Kansas

July 31, 2017

U4, LLC, Plaintiff,
v.
SONIC DRIVE-IN of PITTSBURG, LLC, JOHN R. MARTIN, and WAYNE McCABE Defendants.

          MEMORANDUM AND ORDER

          ERIC F. MELGREN, UNITED STATES DISTRICT JUDGE

         Sonic Drive-In of Pittsburg, LLC (“Sonic”) was owned by three members: John Martin, Wayne McCabe, and R&L Carpenter Enterprises, Inc. (“R&L”). On April 5, 2016, R&L ostensibly sold its membership interest to U4, LLC (“U4”). U4 now brings this action against Sonic, Martin, and McCabe, asking the Court to enforce its purported purchase of R&L's membership interest. U4 seeks summary judgment on the issue of whether its purchase of R&L's sale of its membership interest was valid (Doc. 16). Sonic, Martin, and McCabe responded with a cross-motion for summary judgment, arguing that the purchase is unenforceable (Doc. 22).

         But alternatively, Sonic, Martin, and McCabe ask the Court to stay these proceedings until a parallel state court action is resolved. They contend that before R&L allegedly sold its membership interest to U4, R&L offered to sell that same interest to Martin and McCabe. Martin and McCabe claim that they accepted R&L's offer, and have sued R&L in state court seeking specific performance. In other words, they want the state court to enforce their alleged purchase of R&L's membership interest. The state court has exclusive jurisdiction over the dispute between Sonic, Martin, McCabe, and R&L.

         And so, this Court is faced with the issue of whether R&L sold its membership interest to U4, while the state court is faced with the issue of whether R&L had already agreed to sale that same interest to Martin and McCabe. As explained in more detail below, this Court cannot completely or efficiently resolve the instant dispute until the state court matter is resolved. For that reason, the Court grants Sonic's, Martin's, and McCabe's motion for stay.

         I. Factual and Procedural Background

         Before April 5, 2016, Sonic was owned by three members: Martin owned 53%, McCabe owned 22%, and R&L owned 25%. Sonic is governed by an operating agreement that restricts the members' right to sell their membership interests to third parties by providing the other members with a right of first refusal.

         On November 3, 2015, R&L's counsel sent Martin and McCabe an email regarding R&L's desire to sell its membership interest in Sonic. R&L offered to sell its membership interest to Martin and McCabe for $747, 978. R&L also offered to sell the real estate upon which Sonic operated for $1, 151, 120. Attached to the email were two separate purchase orders, reflecting each proposed sale.

         From November 11 through November 23, the members exchanged emails regarding R&L's proposal. Martin and McCabe explained that it could not justify the purchase of the real estate for the price of $1, 151, 120. They stated that “[w]e feel that we should have the option to purchase the 25% membership interest without the contingency of the simultaneous purchase of the real estate.” Therefore, Martin and McCabe closed their first response to R&L's offer by stating that they declined the offer to purchase the real estate, but accepted the offer to purchase R&L's membership interest. R&L replied, inviting Martin and McCabe to propose a price for the real estate. The reply did not acknowledge Martin and McCabe's apparent acceptance of the offer to only purchase R&L's membership interests.

         Martin and McCabe responded to R&L's email, proposing a purchase price of $916, 780.13 for the real estate. They again inquired as to whether their “purchase of the 25% membership interest [is] contingent upon the simultaneous purchase of the real estate.” R&L quickly responded, noting that R&L “will insist the sale include both the membership interest and the real estate.” More than a week later, R&L confirmed that it would only sell its membership interests if the real estate also sold. R&L asked for some time to “mull over” Martin and McCabe's counteroffer on the real estate.

         On December 9, R&L gave Martin and McCabe written notice of its intent to sell its 25% membership interest to U4 for $997, 803.66. R&L acknowledged that the proposed sale was subject to Martin and McCabe's right of first refusal, which they had 60 days to exercise. On April 7, 2016, R&L notified Martin and McCabe that it had sold its membership interests in Sonic to U4 for $997, 803.66, and the real estate upon which it operated to Ulmstattd Property Management, L.P., for $922, 000 on April 5. But Martin and McCabe refuse to recognize the ostensible sale. They contend that R&L's sale of its membership interest to U4 was invalid and unenforceable.

         Litigation followed. First, on June 29, 2016, U4 filed the instant action in this Court. In its complaint, U4 names Sonic, Martin, and McCabe as defendants.[1] U4 alleges that when R&L informed Martin and McCabe of its intent to sell its interest to U4 on December 9, 2015, they failed to exercise their right of first refusal. Therefore, U4 contends that its purchase of R&L's membership interest is valid and enforceable. Accordingly, U4 seeks a judgment from this Court declaring that U4 owns a 25% membership interest in the Sonic and is entitled to all the rights and privileges that accompany such interest. U4 also seeks damages to compensate for profits that it was entitled to, but has not received, since April 5, 2016.

         After U4 initiated this action, Sonic, Martin, and McCabe sued R&L and Roger Carpenter[2] in the District Court of Crawford County, Kansas. In that state court action, which was filed on October 13, 2016, Sonic, Martin, and McCabe allege that they exercised their right of first refusal by accepting R&L's offer to sell its interest for $747, 978 in November 2016. According to Sonic, Martin, and McCabe, they agreed to purchased R&L's membership interest in November 2015, before R&L purportedly sold that same interest to U4 the following April. For that reason, Martin and McCabe refuse to recognize U4's supposed purchase of R&L's membership interest. In that state court action, Sonic, Martin, and McCabe seek specific performance; that is, they seek enforcement of their asserted purchase of the 25% membership interest in November 2015. On May 11, 2017, the Crawford County District Court issued a brief memorandum and order denying R&L's motion for summary judgment in that case. The court determined that there were questions of fact surrounding the correspondence between the parties regarding the sale of R&L's membership interests.

         In the instant case, U4 has moved for summary judgment. In its motion, U4 argues that the uncontroverted facts demonstrate that neither Martin nor McCabe exercised their right of first refusal when R&L notified them of its intent to sell to U4 on December 9, 2015. Thus, U4 contends that it legally purchased R&L's membership interest on April 5, 2016. Sonic, Martin, and McCabe have filed a cross-motion for summary judgment, arguing that R&L failed to comply with the operating agreement when it sought to sell its interest to U4. Alternatively, they argue that this Court should stay this action pending the outcome of the state proceedings.

         II. Discussion

         The Court begins with Sonic's motion for stay, because if a stay is indeed appropriate, then there is nothing more for the Court to do at this time. Sonic[3] argues that the standard announced in Brillhart v. Excess Ins. Co.[4] applies in this case. Brillhart gives a federal court the discretion to withhold its exercise of jurisdiction over an action for a declaratory judgment.[5] The Brillhart doctrine is often invoked “[w]hen the issue of contemporaneous state and federal parallel proceedings is raised in a federal declaratory judgment action.”[6] Brillhart applies where declaratory relief is the sole remedy sought.[7] On the other hand, when a plaintiff seeks both declaratory and coercive relief, the Court applies the Colorado River doctrine, rather than Brillhart.[8] Like Brillhart, Colorado River allows a district court to dismiss or stay a federal action in deference to parallel state court proceedings.[9] Although often considered an abstention doctrine, “Colorado River is not truly an abstention doctrine because it ‘springs from the desire for judicial economy, rather than from constitutional concerns about federal-state comity.' ”[10]With that in mind, Colorado River is “considerably more limited” than traditional abstention doctrines.[11] Under Colorado River, the Court may only decline to exercise jurisdiction “in ‘exceptional' circumstances.”[12] In its complaint, U4 seeks declaratory relief: specifically, it seeks a declaration that it is the rightful owner of a 25% membership interest in Sonic. But U4 also seeks damages to compensate for lost profits. Because it seeks damages in addition to a declaratory judgment, U4 argues that Colorado River, and not Brillhart, applies. Sonic disagrees, arguing that damages are not “coercive relief.”

         The issue of whether Brillhart or Colorado River applies to claims for both declaratory and non-declaratory relief has given rise to a circuit split. The Fifth Circuit has adopted a bright-line rule: Brillhart applies only when declaratory relief is the sole remedy sought. In New England Insurance Company v. Barnett, [13] the Fifth Circuit held that Brillhart did not apply in a declaratory judgment action that included a counterclaim for damages, because that action contained claims for both declarative and coercive relief.[14] On the other hand, the Seventh and Ninth Circuits have adopted a different approach. Those circuits allow the district court to apply Brillhart where the claim for non-declaratory relief depends on the claim for declaratory relief.[15]Sonic asks the Court to adopt the approach of the Seventh and Ninth Circuits, and apply Brillhart because “U4's breach of contract claim can only be viable if it first prevails on its declaratory judgment claim.”

         The Tenth Circuit has not yet addressed this circuit split head on. But it has favorably cited the Fifth Circuit in noting that “[i]f the plaintiff only requests a declaration of its rights, not coercive relief, the suit is a declaratory judgment for the purposes of determining whether the district court has broad discretion under Brillhart to refuse to entertain the suit.”[16] Furthermore, this Court has favorably cited Barnett in the past, and believes that the Tenth Circuit would continue to follow the Fifth Circuit on this issue.[17] Accordingly, the Court will adopt the Fifth Circuit's approach, as opposed to that of the Second and Ninth Circuit. Because U4 seeks damages in addition to a declaratory judgment, Brillhart does not apply here.[18] Rather, the Court will apply Colorado River in considering Sonic's motion for stay.

         A. The Colorado River Factors

         The Colorado River doctrine serves “to avoid duplicative litigation.”[19]Colorado River concerns itself with efficiency and economy. Its goal is to ‘preserve judicial resources.' ”[20]Under Colorado River, only exceptional circumstances warrant a stay or dismissal of the federal action.[21] The parties agree that in this case, the state and federal proceedings are parallel.[22]Faced with parallel proceedings, the Court must determine whether deference to the state court is appropriate under the particular circumstances.[23]

         Colorado River identified four nonexclusive factors that the Court should consider in deciding whether to exercise jurisdiction.[24] These factors are: (1) simultaneous jurisdiction over a single res; (2) the inconvenience of the federal forum; (3) the desirability of avoiding piecemeal litigation; and (4) the order in which the courts obtained jurisdiction.[25] Subsequently, courts have identified additional factors for the Court to consider: (5) whether federal law provides the rule of decision on the merits; and (6) the adequacy of the state court action to protect the federal plaintiff's rights.[26]

         1. Simultaneous Jurisdiction Over a Single Res

         In this case, U4 is seeking to recover 25% of Sonic's profits since April 5, 2016. On January 30, 2017, this Court issued a preliminary injunction, the terms of which had been previously agreed on by the parties. In that injunction, the Court ordered that Sonic deposit the disputed profits-those tied to the 25% membership interest at issue-into a trust account “until further order of the Court.” In the state court action, Sonic alleges that Martin and McCabe exercised their right of first refusal, and therefore, are the rightful owners of the 25% membership interest previously owned by R&L. Accordingly, under Sonic's theory, R&L's subsequent sale to U4 was invalid. Sonic seeks specific performance in the form of enforcement of its right to first refusal. If Martin and McCabe prevail in state court, they would be entitled to the share of Sonic's profits since April 5, 2016, that previously would have gone to R&L.

         Under the above facts, this factor weighs against staying the case. Where there are parallel state and federal actions, and the state court has already assumed jurisdiction over a res, the first factor will weigh in favor of a stay.[27] But in this case, the opposite is true. A quarter of Sonic's profits, since April 5, 2016, are at issue. This Court has ordered that those profits be held in trust in order to “maintain the status quo during this litigation.” A resolution of the state court action would necessarily result in an additional, and possibly conflicting, order regarding the disposition of property over which this Court has already assumed jurisdiction. For that reason, this factor weighs against staying the present action.

         2. The Inconvenience of the Federal Forum

         If the federal forum is less convenient than the state forum, then this factor balances in favor of a stay.[28] The second factor focuses on the physical proximity of the parties, evidence, and witnesses to the federal forum.[29] Most of the witnesses and parties are located in and around Crawford County. And so, the parties, evidence, and witnesses are physically closer to the state court in Pittsburg than the federal court in Wichita. With that in mind, this factor technically weighs in favor of staying the federal case. But the Court is not greatly moved by this factor. Both parties are represented by Wichita law firms, and the parties will be not be greatly troubled if they are required to make the relatively short trip from Pittsburg to Wichita in order to try their case.

         3. The Desirability of Avoiding ...


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