2002 Decisions

Opinions of the United

States Court of Appeals

for the Third Circuit

1-4-2002

McMurray v. De Vink

Precedential or Non-Precedential:

Docket 1-1346

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 NON-PRECEDENTIAL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. CLARK; JOHN A. 

 GEORGES; WILLIAM H. GRAY, III; WILLIAM R. HOWELL; LASALLE D. 

LEFFALL, JR.; GEORGE A. LORCH; ALEX J. MANDL; MICHAEL I. SOVERN; 

 WARNER-LAMBERT CO.; AMERICAN HOME PRODUCTS CORP. 

 

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

ELLIOT WALSEY, derivatively on behalf of himself and all others 

 similarly situated 

 

 v. 

LODEWEIJK J.R. DE VINK; ROBERT N. BURT; DONALD C. CLARK; JOHN A. 

 GEORGES; WILLIAM H. GRAY, III; WILLIAM R. HOWELL; LASALLE D. 

LEFFALL, JR.; GEORGE A. LORCH; ALEX J. MANDL; MICHAEL I. SOVERN; 

 AMERICAN HOME PRODUCTS CORP.; WARNER LAMBERT CO. 

 

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

 Elliot Walsey and Russell W. McMurray, Jr., 

 Appellants 

 

 Appeal from the Judgment of the District Court 

 of the District of New Jersey 

 District Judge: Hon. Katharine Sweeney Hayden 

 

 Argued: November 7, 2001 

 Before: BECKER, Chief Judge, McKEE and RENDELL, Circuit Judges 

 (Opinion filed: January 3, 2002) 

 

RICHARD B. BRUALDI, Esq. (Argued) 

THE BRUALDI LAW FIRM 

29 Broadway, Suite 1515 
New 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 staying this diversity 

action in favor of 

concurrent litigation that is proceeding in state court in Delaware. 

Appellants rely upon 

Colorado River Water Conserv. Dist. v. United States, 424 U.S. 800 (1976) 

and its 

progeny in arguing that the district court abused its discretion by 

entering the stay. For 

the reasons that follow, we will reverse. 

 I. Facts 

These consolidated actions arise from an aborted takeover battle between 

Appellees Warner-Lambert Company ("Warner"), and American Home Products 

Corporation ("AHP"). Warner is a Delaware corporation, with its 

principal place of 

business in New Jersey. It manufactures and sells pharmaceuticals worldwide. AHP 

also manufactures pharmaceutical products, and is also 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. The merger agreement 

valued each 

share of Warner stock at $83.55. The combined company was to have 20 

directors, with 

ten coming from Warner and ten from AHP. Warner's CEO was to be CEO of 

the 
combined company. AHP's CEO was to be Chairman for 18 months, and was 

then to 

step aside in favor of Warner's CEO. The merger agreement also contained 

a liquidated 

damage clause or "break-up fee" that required Warner to pay AHP $2 billion 

if Warner 

terminated the agreement. 

The same day the Warner/AHP merger was announced, Pfizer, 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 billion, 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. Unlike the AHP 

agreement, however, 

the Pfizer offer did not contain a provision for the 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 (collectively, "the 

shareholders") are 

shareholders of Warner. On November 10, 1999, McMurray filed a 

shareholder class 

action on behalf of Warner shareholders in the District 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 between Warner and AHP, 

contain the 

same facts and allegations, and rely exclusively upon Delaware law. 

The shareholders' complaint alleges that Warner directors initially 

refused to 

pursue serious merger discussions with Pfizer in violation 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 complaints also claim that 

Warner breached its 

fiduciary duty by agreeing to pay AHP the $2 billion break-up fee. 

In addition to the federal suits, other Warner shareholders 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 derivative action. The 

Delaware suits 
were consolidated into Rosman v. De Vink, C.A. No. 17519-NC. The Delaware 

litigation is based upon the same allegations and requests the same relief 

as the Walsey 

and McMurray actions. 

Warner and AHP filed motions asking the district court to abstain in favor 

of the 

litigation in Delaware state court, or in the alternative, to stay the 

proceedings while the 

Delaware litigation was pending. The district court refused to abstain, 

but issued an 

order "granting a stay and administratively terminating these cases." 

McMurray and 

Walsey filed a motion for reconsideration, which the district court 

denied. This appeal 

followed. 

 II. Discussion 

 A. Jurisdiction 

Preliminarily, Warner and AHP argue that the district 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 Court. In Moses H. Cone 

Memorial 

Hosp. v Mercury Construction, Corp. 460 U.S. 1 (1983), the district court 

stayed federal 

litigation in favor of parallel proceedings in state court, and the 

propriety of that stay was 

challenged on appeal. In analyzing the jurisdictional 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 jurisdictional 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 subsequent litigation in 

state court. See 

Spring City Corp. v. Am. Buildings Co., 193 F.3d 165, 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 the 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 shareholders "effectively 

out of [federal] 

court." See Moses H. Cone, 460 U.S. at 10. The stay is therefore a final 

order that is 

reviewable under  1291. 

 B. The Stay 

The shareholders contend that the district court applied the wrong legal 

standard 

in granting the stay. They insist that the abstention that resulted from 

the district court's 

order is inconsistent with Colorado River and its progeny, and that the 

stay was, 

therefore, an abuse of discretion. 

Colorado River involved the application of the McCarran Amendment, 43 

U.S.C. 

 666, which waives the federal government's sovereign 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 court 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 McCarran 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 McCarran Amendment. The 

district court 

never decided the jurisdictional issue, but did abstain 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 that jurisdiction was not 

terminated, the 

District Court's dismissal was nevertheless appropriate." Colorado River, 

424 U.S. at 

806. 

The Supreme Court affirmed largely because of the federal policy reflected 

in the 

McCarran Amendment. "The clear federal policy evinced 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 jurisdiction be yielded to the 

court first 

acquiring control of property." Id. at 819. The Court reasoned that the 

policy against 
piecemeal litigation reflected Congress' assessment that state courts and 

state 

administrators had more expertise in adjudicating water 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 property 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 forums. 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 factors must be balanced 

against "the 

obligation to exercise jurisdiction . . .". Id. Once 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 additional factors that 

must be 

considered. These additional considerations require 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 Colorado River states that a 

court may 

abstain only in extremely limited circumstances. However, 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 our discussion of 

Colorado River in 

Ryan v. Johnson, 115 F.3d 193 (3d Cir. 1997) furnished 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 abstention was not. See 

Letter Op. at 2. 

Compared with other forms of abstention, like Pullman, where a court is 

required 

to dismiss the case, the Supreme Court expressly left open the question 

whether a federal 

court should dismiss or stay its proceedings when ordering abstention 

because of 

duplicative state court litigation. In Moses H. Cone, the Court stated: 

 [w]e have no occasion . . . to decide whether a 

 dismissal or stay should ordinarily be the preferred course of 
 action when a district court properly finds that 

 Colorado River counsels in favor of deferring to a parallel 

 state-court suit. We can say, however, that 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 complete and prompt 

 resolution of the issues between the parties. 

 

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 establish 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 therefore reject any 

suggestion that Tabas 

furnishes an analytical framework for a stay distinct from Colorado River. 

It is well established in this Circuit that Colorado 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, Corp. v. Callison, 844 

F.2d 133, 137 (3d 

Cir. 1988) (same); Western Auto Supply Co. v. Anderson, 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 statutorily 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 obligation" to exercise 

jurisdiction); 

see Kentucky W. Virginia Gas Co. v. Penn. Public Utility 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 congressional legislation 

evincing an 

intent to circumscribe the plaintiff's right to choose 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 favor of abstention. 

See Ryan, 115 

F.3d at 199. Ryan was a negligence suit involving state tort law. We 

stated that "[t]he 
presence of garden-variety state law issues has not, in this circuit, been 

considered 

sufficient evidence of a congressional policy to consolidate multiple 

lawsuits for unified 

resolution in the state courts." Id. at 198. We also 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 Federal court having 

jurisdiction . . . ." 

Id. (quoting Colorado River, 424 U.S. at 817) (internal 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 stay. 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 federal court's 

obligation to exercise 

jurisdiction. See Spring City, 193 F.3d at 172. We also explicitly 

stated that "Ryan 

represents the applicable law under Third Circuit and Supreme Court 

precedent" 

regarding abstention. Id. 

We perceive no distinction between the circumstances here, and the 

circumstances 

that were insufficient to justify abstention in Ryan. In fact, only the 

fourth Colorado 

River factor--the order in which jurisdiction was obtained--weighs in 

favor of abstention 

here. That factor does not turn upon "which complaint 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 expedited schedule. 

 . . . [T]he plaintiffs in the Delaware Litigation moved with 

 expedition. Court conferences were held; voluminous 

 documents were requested and produced; interrogatories 

 propounded, objected to and answered; and some twenty 

 depositions were taken. The Court of Chancery 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/Moses H. Cone factors and 

the absence 

of a federal policy against piecemeal litigation that was so important to 

our inquiry in 

Ryan. 

There has been no assumption of jurisdiction over property here so that is 

not 

relevant to our analysis. The federal district court is situated in 

Newark, New Jersey. That 

forum is not inconvenient as both Warner and AHP have their principle 

place of business 

in New Jersey. Moreover, New Jersey and Delaware are 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 resultant travel as 

imposing such a 

hardship that a federal court in New Jersey would be inconvenient for 

purposes of 

Colorado River. In addition, there is no credible allegation that this 

litigation involves 

anything more than garden-variety state corporate law issues. 

Appellees seize upon the fact that the issues here are controlled by 

Delaware law, 

and they remind us of the expertise of Delaware courts in resolving issues 

of corporate 

law and shareholders' rights. We share the appellees' high regard for the 

courts and 

jurists of Delaware, and we are well aware of the unique 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 militates against 

abstention, the 

converse cannot be said; abstention cannot be justified 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 important where, as here, 

the federal 

forum is adequate to protect the parties' rights. It is a far more 

important consideration 

when the state court is an inadequate forum to protect 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]bstention would be an 

extreme and 
inappropriate response. But a stay meets the proper concerns raised by 

the defendants, 

and the motion for that relief is granted." A-3. However, as we stated 

above, here there 

is no distinction between abstaining from adjudicating the federal 

litigation on the one 

hand, and staying it on the other. We therefore hold 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 JUDGE
 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. CLARK; JOHN A. 

 GEORGES; WILLIAM H. GRAY, III; WILLIAM R. HOWELL; LASALLE D. 

LEFFALL, JR.; GEORGE A. LORCH; ALEX J. MANDL; MICHAEL I. SOVERN; 

 WARNER-LAMBERT CO.; AMERICAN HOME PRODUCTS CORP. 

 

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

ELLIOT WALSEY, derivatively on behalf of himself and all others 

 similarly situated 

 

 v. 

LODEWEIJK J.R. DE VINK; ROBERT N. BURT; DONALD C. CLARK; JOHN A. 

 GEORGES; WILLIAM H. GRAY, III; WILLIAM R. HOWELL; LASALLE D. 

LEFFALL, JR.; GEORGE A. LORCH; ALEX J. MANDL; MICHAEL I. SOVERN; 

 AMERICAN HOME PRODUCTS CORP.; WARNER LAMBERT CO. 

 

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

 Elliot Walsey and Russell W. McMurray, Jr., 

 Appellants 

 

 Appeal from the Judgment of the District Court 

 of the District of New Jersey 

 District Judge: Hon. Katharine Sweeney Hayden 

 

 Argued: November 7, 2001 

 Before: BECKER, Chief Judge, McKEE and RENDELL, Circuit Judges 

 JUDGMENT 

 This cause came to be considered on appeal from the United States 

District Court 

for the District of New Jersey, and was argued on November 7, 2001. 

 On consideration whereon, it is now ORDERED AND ADJUDGED by this 

Court 
that the order of the stay entered by the District Court is hereby 

vacated, and the matter is 

remanded to that court for further proceedings consistent with the 

attached opinion. 

 ATTEST: 

 CLERK 

DATED January 3, 2002