### 2002 D e c i sion s O p inion s of the U nit e d
S t a t e s C our t of Appe al s for the Thir d C ir c uit

1-4-2002 

# M cM ur r a y v . D e V ink

P r e c e de n t i al or N on-P r e c e de n t i al :

D ock e t 1-1346

F o l lo w thi s a nd a dd it ion al w ork s a t : h tt p://d i g it alc ommon s .l a w

. v i l l a no v a

. e du/thir dc ir c uit_2002

Thi s de c i sion i s br ou gh t t o y ou for f r e e a nd ope n a c c e s s b y the O p inion s of the U nit e d S t a t e s C our t of Appe al s for the Thir d C ir c uit a t V i l l a no v a U niv e r sit y S choo l of L a

w Di g it al R e posit or y

. I t h as be e n a c c e pt e d for inclusion in 2002 D e c i sion s b y a n a uthor i z e d a dmini s tr a t or of V i l l a no v a U niv e r sit y S choo l of L a

w Di g it al R e posit or y

. F or mor e infor m a t ion, p le as e c on t a ct Be n j a min

. C a rl s on@l a

w

. v i l l a no v a

. e du

. 

### R e c omme nde d C it a t ion

" M cM ur r a y v . D e V ink " (2002). 2002 D e cisio n s

. P a pe r 2. h tt p://d i g it alc ommon s .l a

w

. v i l l a no v a

. e du/thir dc ir c uit_2002/2NON-PRECEDENTIAL

UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT

No. 01-1346

RUSSELL W. MCMURRAY, JR., on behalf of himself and all others similarly situated

v.

LODWEIJK J.R. DE VINK; ROBERT N. BURT; DONALD C. CL ARK; JOHN A. GEORGES; WILLIAM H. GRAY, III; WILLIAM R. HOWELL; LASALLE D. LEFFALL, JR.; GEORGE A. LORCH; ALEX J. MANDL; MICHA EL I. SOVERN; WARNER-LAMBERT CO.; AMERICAN HOME PRODUCTS CORP.

(D. C. N. J. No. 99-cv-05253)

ELLIOT WALSEY, derivatively on behalf of himself an d all others similarly situated

v.

LODEWEIJK J.R. DE VINK; ROBERT N. BURT; DONALD C. C LARK; JOHN A. GEORGES; WILLIAM H. GRAY, III; WILLIAM R. HOWELL; LASALLE D. LEFFALL, JR.; GEORGE A. LORCH; ALEX J. MANDL; MICHA EL I. SOVERN; AMERICAN HOME PRODUCTS CORP.; WARNER LAMBER T CO.

(D. C. N. J. No. 99-cv-5499)

Elliot Walsey and Russell W. McMurray , Jr., Ap pellants

Appeal from the Judgment of the District C ourt of the District of New Jersey District Judge: Hon. Katharine Sweeney Hay den

Argued: November 7, 2001

Before: BECKER, Chief Judge, McKEE and RENDELL, Ci rcuit Judges

(Opinion filed: January 3, 2002)

RICHARD B. BRUALDI, Esq. (Argued)
THE BRUALDI LAW FIRM 29 Broadway, Suite 1515New York, NY 10006

DAVID J. MANOGUE SPECTER SPECTER EVANS & MANOGUE, P.C. Koppers Building, 26th Floor 436 Seventh Avenue Pittsburgh, PA 15219 Attorneys for Appellants

DENNIS J. BLOCK, Esq. (Argued)
CADWALADER WICKERSHAM & TAFT 100 Maiden Lane New York, NY 10038

ELIZABETH J. SHER PITNEY, HARDIN, KIPP & SZUCH P.O. Box 1945 Morristown, NJ 07962 Attorneys for Appellees

MEMORANDUM OPINION

McKEE, Circuit Judge. Appellants Russell McMurray, Jr. and Elliot Walsey appeal an order by the District Court for the District of New Jersey stayi ng this diversity action in favor of concurrent litigation that is proceeding in state c ourt in Delaware. Appellants rely upon Colorado River Water Conserv. Dist. v. United State s, 424 U.S. 800 (1976) and its progeny in arguing that the district court abused i ts discretion by entering the stay. For the reasons that follow, we will reverse.
I. Facts These consolidated actions arise from an aborted ta keover battle between Appellees Warner-Lambert Company ("Warner"), and Am erican Home Products Corporation ("AHP"). Warner is a Delaware corpora tion, with its principal place of business in New Jersey. It manufactures and sells pharmaceuticals worldwide. AHP also manufactures pharmaceutical products, and is a lso a Delaware corporation with its principal place of business in New Jersey. On November 4, 1999, Warner announced an agreement to merge with AHP. The merger was valued at approximately $70 billion. Th e merger agreement valued each share of Warner stock at $83.55. The combined comp any was to have 20 directors, with ten coming from Warner and ten from AHP. Warner's CEO was to be CEO of thecombined company. AHP's CEO was to be Chairman fo r 18 months, and was

then to step aside in favor of Warner's CEO. The merger ag reement also contained a liquidated damage clause or "break-up fee" that required Warne r to pay AHP $2 billion if Warner terminated the agreement. The same day the Warner/AHP merger was announced, P fizer, Inc. another major manufacturer of pharmaceutical products, disclosed a bid for an "unfriendly" takeover of Warner. Pfizer's offer to Warner was for $82.4 bil lion, and valued Warner stock at $96.40 per share, or $17.85 more per share than AHP 's offer. Pfizer's offer was therefore more favorable to Warner shareholders. U nlike the AHP agreement, however, the Pfizer offer did not contain a provision for th e Warner CEO or Warner directors to have a position in the company that would have been formed by the merger. The Warner/AHP merger agreement lead to a flurry of lawsuits, including the one before us. Russell McMurray and Elliot Walsey (col lectively, "the shareholders") are shareholders of Warner. On November 10, 1999, McMu rray filed a shareholder class action on behalf of Warner shareholders in the Dist rict Court for the District of New Jersey against Warner and AHP. Shortly thereafter, on November 23, 1999, Walsey filed a corporate derivative suit against Warner and AHP in the same court. The
two complaints both arise from the merger agreement bet ween Warner and AHP, contain the same facts and allegations, and rely exclusively up on Delaware law. The shareholders' complaint alleges that Warner dir ectors initially refused to pursue serious merger discussions with Pfizer in vi olation of their fiduciary obligation to Warner's shareholders. The alleged breach is based upon their reluctance to pursue Pfizer's substantially higher offer. According to the averments, Pfizer attempted merger discussions with Warner on three previous occasions , but the Warner directors simply refused to entertain the possibility. The complai nts also claim that Warner breached its fiduciary duty by agreeing to pay AHP the $2 billio n break-up fee. In addition to the federal suits, other Warner shar eholders also began filing suits against Warner in state court in Delaware. To date , over 30 shareholder class action suits are pending in the Delaware courts as well as one d erivative action. The Delaware suitswere consolidated into Rosman v. De Vink, C.A. No. 17519-NC. The Delaware

litigation is based upon the same allegations and r equests the same relief as the Walsey and McMurray actions. Warner and AHP filed motions asking the district co urt to abstain in favor of the litigation in Delaware state court, or in the alter native, to stay the proceedings while the Delaware litigation was pending. The district cour t refused to abstain, but issued an order "granting a stay and administratively termina ting these cases." McMurray and Walsey filed a motion for reconsideration, which th e district court denied. This appeal followed. II. Discussion A. Jurisdiction Preliminarily, Warner and AHP argue that the distri ct court's stay was not a final order under 28 U.S.C.  1291, and that we therefore have no jurisdiction. However, that issue has already been resolved by the Supreme Cour t. In Moses H. Cone Memorial Hosp. v Mercury Construction, Corp. 460 U.S. 1 (198 3), the district court stayed federal litigation in favor of parallel proceedings in stat e court, and the propriety of that stay was challenged on appeal. In analyzing the jurisdictio nal issue, the Supreme Court concluded that "a stay of the federal suit pending resolution of the state suit meant that there would be no further litigation in the federal forum; the state court's judgment on the issue would be res judicata." 460 U.S. at 10. The Court held that the stay was therefore equivalent to a dismissal because the defendant was "effectively out of [federal] court." Id. at 10, 13. We have previously held that the pertinent jurisdic tional inquiry under
Moses H. Cone is whether the district court has surrendered its jurisdiction to the state court such that the stay will have res judicata effect in subs equent litigation in
state court. See Spring City Corp. v. Am. Buildings Co., 193 F.3d 16 5, 171 (3d Cir. 1999). If it has that effect, the order staying the federal litigation is final and appealable. Id. Here, the issues raised in the Delaware litigation will be res judicata for purposes of the federal adjudication. The defendants in the state and federal suits are the same, and plaintiffs Walsey and McMurray are represented in t he Delaware shareholder action.Warner Br. at 6. Thus, a decision on the merits in state court will have

a preclusive effect on the stayed federal case, putting the shar eholders "effectively out of [federal] court." See Moses H. Cone, 460 U.S. at 10. The st ay is therefore a final order that is reviewable under  1291. B. The Stay The shareholders contend that the district court ap plied the wrong legal standard in granting the stay. They insist that the abstent ion that resulted from the district court's order is inconsistent with Colorado River and its p rogeny, and that the stay was, therefore, an abuse of discretion. Colorado River involved the application of the McCa rran Amendment, 43
U.S.C.  666, which waives the federal government's soverei gn immunity in water rights cases and permits the United States to be joined in state suits involving those rights. The United States had filed suit in federal district co urt seeking a declaration of certain water rights. Shortly thereafter, one of the defendants in that declaratory action brought an action against the United States in state court in an effort to adjudicate both state and federal claims pursuant to the provisions of the Mc Carran Amendment. Several of the defendants in the federal action then attempted to dismiss the federal suit arguing that the federal court lacked jurisdiction under the McCarra n Amendment. The district court never decided the jurisdictional issue, but did abs tain in favor of the ongoing state actions. The Supreme Court granted certiorari in an appeal from that abstention "to consider whether the McCarran Amendment terminated jurisdiction of federal

courts to adjudicate federal water rights and whether, if tha t jurisdiction was not terminated, the District Court's dismissal was nevertheless appropr iate." Colorado River, 424 U.S. at 806. The Supreme Court affirmed largely because of the f ederal policy reflected in the McCarran Amendment. "The clear federal policy evin ced by that legislation is the avoidance of piecemeal adjudication of water rights in a river system. This policy is akin to that underlying the rule requiring that jurisdic tion be yielded to the court first acquiring control of property." Id. at 819. The Co urt reasoned that the policy againstpiecemeal litigation reflected Congress' assessment that state courts and

state administrators had more expertise in adjudicating w ater rights than federal courts. See Moses H. Cone, 460 U.S. at 16. The Court considered four factors in determining if abstention was warranted: 1) which forum first assumed jurisdiction over the pro perty at issue, 2) the inconvenience of the federal forum, 3) the desirability of avoiding piecemeal litigation, and 4) the order in which jurisdiction was obtained in the concurrent f orums. Colorado River, 424 U.S. at 818. In doing so, however, the Court stressed that "no one factor is necessarily determinative." Rather, the combination of these fa ctors must be balanced against "the obligation to exercise jurisdiction . . .". Id. On ce the balancing is completed, "[o]nly the clearest of justifications will warrant dismissal [ in favor of the
concurrent state litigation]." Id. at 818-19. In Moses H. Cone, supra, the Court identified two a dditional factors that must be considered. These additional considerations requir e the trial court to weigh: which forum's law provides the rule of decision, and the adequacy of the state proceeding in protecting the parties' rights. Moses H. Cone, 460 U.S. at 23, 26. Here, the district court correctly noted that Color ado River states that a court may abstain only in extremely limited circumstances. H owever, the court then proceeded to make a distinction between abstaining and granting a stay. See A-1, Letter Opinion dated October 26, 2000 at 2. The court concluded that ou r discussion of Colorado River in Ryan v. Johnson, 115 F.3d 193 (3d Cir. 1997) furnis hed the most recent pronouncement on the law of abstention. However, the court then relied upon several factors enunciated in Tabas v. Mullane, 608 F. Supp. 759, 763 (D.N.J. 1985) in holding that a stay was appropriate here even though it also held that abst ention was not. See Letter Op. at 2. Compared with other forms of abstention, like Pullm an, where a court is required to dismiss the case, the Supreme Court expressly le ft open the question whether a federal court should dismiss or stay its proceedings when o rdering abstention because of duplicative state court litigation. In Moses H. Co ne, the Court stated: [w]e have no occasion . . . to decide whe ther a dismissal or stay should ordinarily be th e preferred course ofaction when a district court properly fin ds that

Colorado River counsels in favor of defer ring to a parallel state-court suit. We can say, however, t hat a stay is as much a refusal to exercise federal jurisdiction as a dismissal. When a district court decides to dismiss or stay under Colorado River, it presumably concludes that the parallel state-court litigation will be an adequate vehicle for the compl ete and prompt resolution of the issues between the part ies.

Moses H. Cone, 460 U.S. at 28. Thus, the District Court erred in concluding that, by staying the case, it was not abstaining. The stay that was entered is nothing more than the procedural mechanism for abstaining in favor of the concurrent state litigation. We reject any notion that Tabas could properly esta blish a separate test for abstention. The relevant inquiry must be guided by Colorado River and its progeny, not Tabas, or principles extrapolated from it. We ther efore reject any suggestion that Tabas furnishes an analytical framework for a stay distin ct from Colorado River. It is well established in this Circuit that Colorad o River governs motions
to dismiss on grounds of abstention. See, e.g., Ryan, 115 F.3d at 196 (applying Colorado River to the motion to dismiss); Ingersoll-Rand, Co rp. v. Callison, 844 F.2d 133, 137 (3d Cir. 1988) (same); Western Auto Supply Co. v. Ander son, 610 F.2d 1126, 1127 (3d Cir. 1979) (same). We have consistently emphasized the narrowness of Colorado River, and stressed that a federal court is usually statutoril y obligated to exercise the jurisdiction that Congress has bestowed. See Western Auto, 610 F.2d at 1127 (citing Colorado River and Calvert Fire as emphasizing a court's "unflagging o bligation" to exercise jurisdiction); see Kentucky W. Virginia Gas Co. v. Penn. Public Ut ility Comm'n, 791 F.2d 1111, 1118 (3d Cir. 1986) (noting in dicta that the movant did not meet the Colorado River standards as there had been no showing of any congr essional legislation evincing an intent to circumscribe the plaintiff's right to cho ose the federal forum). In Ryan, we reversed a district court's decision to abstain and dismiss an action in favor of state litigation largely because there was no clear congressional policy against piecemeal litigation that would have counseled in f avor of abstention. See Ryan, 115 F.3d at 199. Ryan was a negligence suit involving state tort law. We stated that "[t]hepresence of garden-variety state law issues has not , in this circuit, been

considered sufficient evidence of a congressional policy to co nsolidate multiple lawsuits for unified resolution in the state courts." Id. at 198. We a lso cautioned that if the presence of concurrent litigation itself becomes the threshold test for meeting Colorado River's piecemeal litigation factor, then "the test becomes so broad that it swallows up the century-old principle . . . that the pendency of an action in the state court is no bar to proceedings concerning the same matter in the Feder al court having jurisdiction . . . ." Id. (quoting Colorado River, 424 U.S. at 817) (inte rnal quotations omitted). That is precisely the situation here. We reaffirmed Ryan, supra, in Spring City Corp. In Spring City, we concluded that no "exceptional circumstances" warranted a sta y. Our decision focused in large part upon the narrowness of the Colorado River doctrine as exemplified by its requirement of a clear federal policy against piecemeal litigation . We again noted that such a policy is a prime consideration in any attempt to overcome a fe deral court's obligation to exercise jurisdiction. See Spring City, 193 F.3d at 172. W e also explicitly stated that "Ryan represents the applicable law under Third Circuit a nd Supreme Court precedent" regarding abstention. Id. We perceive no distinction between the circumstance s here, and the circumstances that were insufficient to justify abstention in Rya n. In fact, only the fourth Colorado River factor--the order in which jurisdiction was o btained--weighs in favor of abstention here. That factor does not turn upon "which compla int is filed first, but rather [on]. . . how much progress has been made in the two actions. " Moses H. Cone, 460 U.S. at 21. We are advised without contradiction that the Delaware Litigation proceeded on an e xpedited schedule. . . . [T]he plaintiffs in the Delaware Li tigation moved with expedition. Court conferences were held; voluminous documents were requested and produced; in terrogatories propounded, objected to and answered; and some twenty depositions were taken. The Court of Chan cery ruled upon multiple discovery and scheduling issues. Indeed, discovery in the Delaware Litigation is largely, if not altogether, complete.Warner Br. at 7. This does not weigh heavily in the balance however, given

our consideration of all of the other Colorado River/Mo ses H. Cone factors and the absence of a federal policy against piecemeal litigation th at was so important to our inquiry in Ryan. There has been no assumption of jurisdiction over p roperty here so that is
not relevant to our analysis. The federal district cour t is situated in Newark, New Jersey. That forum is not inconvenient as both Warner and AHP ha ve their principle place of business in New Jersey. Moreover, New Jersey and Delaware a re neighboring states. Even if we were to assume that the participants must travel to New Jersey from the most distant part of Delaware, we would be hard put to define the res ultant travel as imposing such a hardship that a federal court in New Jersey would b e inconvenient for purposes of Colorado River. In addition, there is no credible a llegation that this litigation involves anything more than garden-variety state corporate l aw issues. Appellees seize upon the fact that the issues here are controlled by Delaware law, and they remind us of the expertise of Delaware cou rts in resolving issues of corporate law and shareholders' rights. We share the appelle es' high regard for the courts and jurists of Delaware, and we are well aware of the u nique stature of corporate law in Delaware. However, that is not a sufficient reason for a federal court to refrain from exercising its jurisdiction. Moreover, "while the presence of federal issues mil itates against abstention, the converse cannot be said; abstention cannot be justi fied merely because a case arises entirely under state law." Ryan, 115 F.3d at 199; see also Spring City, 193 F.3d at 172. Furthermore, application of state law is not as imp ortant where, as here, the federal forum is adequate to protect the parties' rights. I t is a far more important consideration when the state court is an inadequate forum to prot ect the rights of the litigants. See Ryan, 115 F.3d at 200; Spring City, 193 F.3d at 172

. Given the parameters of Colorado River and Ryan, it is clear that the district court abused its discretion in staying this litigation. It is ironic that the district court explained the "alternative" relief here by stating: "[a]bsten tion would be an extreme andinappropriate response. But a stay meets the prope r concerns raised by

the defendants, and the motion for that relief is granted." A-3. H owever, as we stated above, here there is no distinction between abstaining from adjudicat ing the federal litigation on the one hand, and staying it on the other. We therefore ho ld that the district court abused its discretion by entering the stay.
III. CONCLUSION For the reasons set forth above, we will vacate the district court's order and remand for further proceedings on the merits.

TO THE COURT: Please file the foregoing opinion. By the Court,

CIRCUIT JUDGEUNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

No. 01-1346

RUSSELL W. MCMURRAY, JR., on behalf of himself and all others similarly situated

v.

LODWEIJK J.R. DE VINK; ROBERT N. BURT; DONALD C. CL ARK; JOHN A. GEORGES; WILLIAM H. GRAY, III; WILLIAM R. HOWELL; LASALLE D. LEFFALL, JR.; GEORGE A. LORCH; ALEX J. MANDL; MICHA EL I. SOVERN; WARNER-LAMBERT CO.; AMERICAN HOME PRODUCTS CORP.

(D. C. N. J. No. 99-cv-05253)

ELLIOT WALSEY, derivatively on behalf of himself an d all others similarly situated

v.

LODEWEIJK J.R. DE VINK; ROBERT N. BURT; DONALD C. C LARK; JOHN A. GEORGES; WILLIAM H. GRAY, III; WILLIAM R. HOWELL; LASALLE D. LEFFALL, JR.; GEORGE A. LORCH; ALEX J. MANDL; MICHA EL I. SOVERN; AMERICAN HOME PRODUCTS CORP.; WARNER LAMBER T CO.

(D. C. N. J. No. 99-cv-5499)

Elliot Walsey and Russell W. McMurray , Jr., Ap pellants

Appeal from the Judgment of the District C ourt of the District of New Jersey District Judge: Hon. Katharine Sweeney Hay den

Argued: November 7, 2001

Before: BECKER, Chief Judge, McKEE and RENDELL, Ci rcuit Judges

JUDGMENT

This cause came to be considered on appeal fro m the United States District Court for the District of New Jersey, and was argued on N ovember 7, 2001. On consideration whereon, it is now ORDERED AN D ADJUDGED by this
Courtthat the order of the stay entered by the District Court is hereby

vacated, and the matter is remanded to that court for further proceedings cons istent with the attached opinion.
ATTEST:

CLERK

DATED January 3, 2002