Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-casd-3_07-cv-01383/USCOURTS-casd-3_07-cv-01383-0/pdf.json

Nature of Suit Code: 370
Nature of Suit: Other Fraud
Cause of Action: 28:1332 Diversity-Fraud

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UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF CALIFORNIA

RISKI PRODUCTIONS, INC., a

California corporation,

Plaintiff,

CASE NO. 07cv1383-LAB (CAB)

ORDER DENYING DEFENDANTS’

MOTION TO DISMISS OR STAY

vs.

KAREN CARRADO, an individual, and

KAREN CARRADO as TRUSTEE on

behalf of the K. Carrado Trust,

Defendants.

On July 27, 2007, Plaintiff Riski Productions, Inc. (“Riski”) filed its complaint in this

case raising state-law claims against Defendant Karen Carrado (“Carrado”). The Amended

Complaint invokes this Court’s diversity jurisdiction under 28 U.S.C. § 1332(a)(1). Carrado

filed a motion to dismiss or stay this action (the “Motion”), pointing out an apparently related

action, Carrado v. Riski Prods., case no. 037-2007-00070981-CU-MC-CTL, is pending in

California state superior court. Riski is a California corporation with its principal place of

business in this District. Karen Carrado is a New Jersey resident and trustee of Defendant

K. Carrado Trust.

I. Background

The claims in this action arise from an agreement to sell a nightclub to Riski. The

Amended Complaint alleges Defendant Carrado signed the purchase agreement in her

Case 3:07-cv-01383-LAB-NLS Document 13 Filed 09/29/08 Page 1 of 7
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capacity as President of TAG Enterprises (“TAG”), a corporation. It also alleges alterations

had been made to the building without the required permits and that neither Defendant

Carrado nor TAG disclosed this. It further alleges Riski could not afford to correct the

defects, which interfered with the nightclub’s profitability, and Riski was forced to sell the

nightclub at a loss. Riski seeks $200,000 in damages and rescission of the purchase

agreement.

In support of their Motion, Carrado attaches the Second Amended Complaint for

Declaratory Relief filed in state court on October 3, 2007 (Amin Decl., Ex. F (“State Court

Complaint”).) Carrado points out the state court case has been pending since July 12, 2007

(Defs.’ Mem. at 5:2–6). Riski does not contest Carrado’s contention that the amended State

Court Complaint relates back to the complaint originally filed. Neither party has sought to

file any supplemental briefing showing developments of any importance in the state court

proceeding.

Carrado contends the claims raised in this action should in fact have been raised as

a compulsory counterclaim in the state court action, and the state court action will resolve

all issues raised in the federal action. Carrado also argues the doctrine of Colorado River

Water Conservation Dist. v. United States, 424 U.S. 800, 817–18 (1976) should be applied.

Carrado cites Ritza v. Int’l Longshoremen’s and Warehousemen’s Union, 837 F.2d 365, 369

(9 Cir. 1988) (citing 5 C. Wright & A. Miller, Federal Practice and Procedure § 1360 at th

633–34 (1969)) for the principle that the Court may entertain other pre-answer motions, such

as motions to dismiss because another action is pending, even though such a motion is not

expressly provided for under the Federal Rules of Civil Procedure. She has not identified

any jurisdictional defects in this action nor are any apparent in the pleadings.

II. Discussion

Generally, the pendency of an action in state court is no bar to proceedings

concerning the same matter in federal court. Colorado River, 424 U.S. at 813. Ordinarily,

federal courts have “virtually unflagging obligation . . . to exercise the jurisdiction given

them,” so a stay or dismissal is appropriate only in exceptional circumstances. Id. at 817.

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When those exceptional circumstances exist, however, a stay or even dismissal may be

appropriate. Id. at 818–21. The Court is mindful that the circumstances justifying application

of the Colorado River doctrine are “exceedingly rare.” Smith v. Cent. Ariz. Water Conserv.

Dist., 418 F.3d 1028, 1033 (9 Cir. 2005). th

Although several factors weigh for or against application of the Colorado River

doctrine, Nakash v. Marciano, 882 F.2d 1411, 1415–17 (9 Cir. 1989) (setting forth factors), th

the Court must first determine whether the state and federal actions are parallel. Enfission,

Inc. v. Leaver, 408 F. Supp. 2d 1093, 1096 (W.D.Wash., 2005) (citing Moses H. Cone Mem’l

Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 28 (1983)). The two proceedings need not be

exactly parallel; it is enough if the two are “substantially similar.” Nakash at 1415 (citations

omitted). 

Carrado argues California law requires Riski to raise its claims by cross-complaint and

failure to do so would bar it from doing so in any other action. Cal. Code Civ. Proc. §

426.30(a). See also § 426.10(c) (defining “related cause of action”). If this were the case,

adjudication of the claims in state court would necessarily resolve the claims in this Court,

and the Court’s inquiry into whether the cases were “substantially similar” would be an easy

one. See Casablanca Resorts, LLC v. Backus, 2007 WL 951946, slip op. at *1 (D.Nev.,

March 28, 2007) (applying Nakash and finding that claims arising from the transaction or

occurrence that formed the subject matter of the claim in state court, which constituted

compulsory counterclaims under state law, were “substantially similar” to those asserted in

the pending federal action). Because the State Court Complaint seeks only declaratory relief

against Riski, however, under Cal. Code Civ. Proc § 426.60(c) Riski’s claims, though related,

need not have been raised in a cross-claim. Russo v. Scrambler Motorcycles, 56 Cal.App.3d

112, 117, 127 Cal.Rptr. 913 (1976).

While the theories of recovery are not the same, a review of the Amended Complaint

and the State Court Complaint reveals some overlap in the factual and legal issues

presented. Here, Riski alleges Defendant Carrado fraudulently induced it to purchase the

/ / /

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nightclub, failing to inform it of permitting problems and thus deceiving it regarding the value

of the nightclub. Here, too, Riski seeks rescission of the purchase agreement. 

In the state court action, Carrado charges Riski Productions with failing to make timely

payments. (State Court Complaint, ¶ 9.) Carrado seeks declaratory relief preventing Riski

Productions from prosecuting claims against her and finding her not liable for the permitting

problems which are the subject of the litigation in this Court. (Id., ¶ 10 and 6:22–7:16.)

Carrado also argues she was not a party to the Purchase Agreement and seeks a

declaration so stating. (Id., ¶ 18 and 6:23–26.) In addition, the parties are attempting to

litigate their respective rights and duties under the purchase agreement. (Id., ¶ 24.) In other

words, confirmation of the purchase agreement’s enforceability is a central object of that

litigation.

The parties are identical, and the permitting issue is closely related to that in the State

Court Complaint. The State Court Complaint alleges the parties agreed that Riski would sell

the nightclub to a third party and for that third party to make payments to the K. Carrado

Trust. (State Court Complaint, ¶ 9.) Furthermore, in this case Riski seeks rescission of the

purchase agreement which effectively litigates the purchase agreement’s enforceability. 

The State Court Complaint asks for a declaration that Defendant Carrado is not liable

for acts stated in the arbitration demand. (State Court Complaint at 7:1–14.) The arbitration

demand, attached as an exhibit to the Motion describes the nature of the claims to be

arbitrated as follows:

The dispute involves a failure to disclose material facts related to the

purchase and sale of a business, including an interest in real property.

Claimant, Buyer, purchased a bar business that included an out-door patio

bar from Respondent, Seller. Claimant allege[ ]s that Seller did not disclose

the fact that the patio bar was not permitted prior to purchase. Since

purchase, Claimant has suffered significant damages as a result.

(Decl. of Karen Carrado in Supp. of Motion, Ex. C (Arbitration Demand).) The respondents

are identified as Karen Carrado in her individual capacity and on behalf of TAG. (Id.) Thus,

the state court action seeks a declaration that Carrado is not liable for failing to disclose the

permitting problems, which is the issue here. Thus far, the cases are similar.

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The standard for issuance of a stay under Colorado River is, however, exceptionally

high, even if the Court is merely staying rather than dismissing the action. Moses H. Cone,

460 U.S. at 27–28. A stay should be granted only if the Court “concludes that the parallel

state-court litigation will be an adequate vehicle for the complete and prompt resolution of

the issues between the parties.” Id. at 28. “[T]he decision to invoke Colorado River

necessarily contemplates that the federal court will have nothing further to do in resolving

any substantive part of the case, whether it stays or dismisses.” Id. (citation omitted). The

Court must have “full confidence” the state court action will end the litigation; “the existence

of a substantial doubt as to whether the state proceedings will resolve the federal action

precludes the granting of a stay.” Intel Corp. v. Advanced Micro Devices, Inc., 12 F.3d 908,

913 (9th Cir.1993) (citing Gulfstream Aerospace Corp. v. Mayacamas Corp., 485 U.S. 271,

277 (1988)).

Riski argues the state action would not resolve all issues in the federal action (Opp’n

to Motion, at 5:8–13, 7:3–8:16), which may be true. Without actually examining and

resolving the claims at issue here, it is impossible to say whether the state court will grant

or deny Carrado’s request for declaratory relief. The state court may grant her request for

a declaration that she cannot be liable for failing to disclose the permitting problems. It may

well deny her request, however, without necessarily finding her liable. 

The state court could, for instance, agree with Carrado that she was not a party to

either the purchase agreement and partial payment agreement (State Court Complaint, ¶ 18)

and on that basis conclude she, in her individual capacity, was not party to any “actual

controversy” with Riski regarding her rights and duties under the two agreements. (Id.,

¶¶ 24–26.) See Cal. Code Civ. Proc. § 1060 (authorizing actions for declaratory relief in

cases of “actual controversy” between parties based on written agreements). “The ‘actual

controversy’ requirement concerns the existence of present controversy relating to the legal

rights and duties of the respective parties pursuant to contract, statute or order.” Brownfield

v. Daniel Freeman Marina Hosp. 208 Cal.App.3d 405, 410, 256 Cal.Rptr. 240 (1989)

(citations omitted). Or, the state court could find the controversy between Carrado and Riski

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is merely anticipated in the future and not a present, live controversy. Id. It may also deny

relief if it finds she lacks evidence to show she is not liable without passing on the question

of whether Riski has adequate evidence to show she is liable. In other words, a denial of

declaratory relief would not necessarily resolve the federal case.

In Intel, the Ninth Circuit confronted a similar situation. There, concurrent state court

proceedings would have resolved all the issues only if the state court confirmed an

arbitration award and if the state court’s decision had collateral estoppel effect in federal

court. 12 F.3d at 913. If, however, the state court had overturned the arbitration award,

further proceedings would be necessary in federal court. Id. The court therefore found

“substantial doubt” precluded a Colorado River stay. Id. If, as is the case here, the state

court’s decision may — but need not — resolve the federal action, a Colorado River stay is

inappropriate. City and County of San Francisco v. United States, 930 F. Supp. 1348, 1352

n.2 (N.D.Cal. 1996) (“[I]f the state court action will moot the federal action only if one of many

possible resolutions are reached by the state court, a federal court may not stay the case

before it.”) (citing Intel).

While Carrado persuasively argues that conducting related state and federal litigation

simultaneously is not the best or most efficient use of judicial resources, and maintenance

of concurrent actions could result in conflicting results, these problems alone are an

inadequate basis on which to grant a stay under Colorado River. 

In AmerisourceBergen Corp. v. Roden, 495 F.3d 1143, 1151 n.13, 1154 (9 Cir.

th

2007), the Circuit reversed a district court’s abstention where issues in federal and state

courts were not coextensive, but any federal court decision might have conflicted with state

court proceedings. Judge Ferguson’s concurrence also analyzed the dismissal under

Colorado River. Id. at 1154–56. Though he opined that, “where a nearly identical case is

already pending in state court and there is clearly no federal question before the federal

court, the latter forum should be permitted to stay its proceeding pending the outcome of the

state suit,” he nevertheless agreed that application of the Colorado River doctrine would

have been impermissible. The Supreme Court’s holding in Gulfstream points out a federal

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court will often appropriately deny a stay or dismissal under Colorado River until the propriety

of a stay or dismissal becomes clearer. 485 U.S. at 277–78 (explaining that denial of motion

for stay or dismissal under Colorado River was “inherently tentative” because a district court

may conclude it “should await further developments” such as the state case’s expansion or

its movement at a faster pace). 

The Court therefore concludes a stay is unavailable. However, “given both the nature

of the factors to be considered under Colorado River and the natural tendency of courts to

attempt to eliminate matters that need not be decided from their dockets, a district court

usually will expect to revisit and reassess an order denying a stay in light of events occurring

in the normal course of litigation.” Gulfstream, 485 U.S. at 278. If, in light of developments

in state court, either of the parties believe application of the Colorado River doctrine

becomes appropriate during the pendency of the action here, they may then move again for

a stay or dismissal.

III. Conclusion and Order

For these reasons, the Motion is DENIED WITHOUT PREJUDICE.

IT IS SO ORDERED.

DATED: September 29, 2008

HONORABLE LARRY ALAN BURNS

United States District Judge

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