Court Opinion

ID: 17700
Source: CourtListenerOpinion
Date Created: 2010-04-25 07:07:00+00
Date Added: 2024-06-11T08:42:47.760430
License: Public Domain

Revised June 3, 1999

                      IN THE UNITED STATES COURT OF APPEALS

                                     FOR THE FIFTH CIRCUIT

                                   ________________________

                                         No. 98-50368
                                   ________________________

THE CADLE COMPANY,

                             Plaintiff-Appellant,

-vs-

WHATABURGER OF ALICE, INC.;
M. LOUISE ANDREWS; KATHY A. REESE;
HERBERT E. POUNDS, JR.; GEORGE P.
BRAUN; AND JOE ALVIN ANDREWS, JR.,

                             Defendants-Appellees.

               ____________________________________________

               Appeal from the United States District Court
                     for the Western District of Texas

               ____________________________________________
                                May 7, 1999

Before KING, Chief Judge, STEWART, Circuit Judge, and LITTLE,
District Judge.*

LITTLE, District Judge:

       The Cadle Company (“Cadle”) appeals the district court’s

decision to dismiss its RICO and state law claims under the

“first-to-file” rule.                        Cadle argues that the district court

       *
           District Judge of the Western District of Louisiana, sitting by designation.
should have applied the rule only if it first determined that

the first-filed court’s jurisdiction was proper, and erred by

failing     to   do    so    in     this    case.      Cadle    argues        in   the

alternative that even if the lower court did not err in

applying the rule, it should have transferred the case rather

than dismissed it.           We find that the district court properly

applied the first-to-file rule, but should have transferred

the suit rather than dismissed it.                      The judgment of the

district court is therefore vacated and the case is remanded

to the district court with instructions to transfer the case.

                                   I.   Background

      The following events are gleaned from Cadle’s complaint

in   the    district        court.         Appellee    Whataburger       of    Alice

(“Whataburger”) is a family-owned corporation founded by Joe

Alvin Andrews (“Andrews”) in 1968.                    Whataburger grew into a

successful business and supplied Andrews with funds to invest

in other business ventures.                 One of these ventures, Anshad,

Inc. (“Anshad”), owned apartment buildings in the San Antonio

area.      As part of his dealings with Anshad, Andrews in 1987

guaranteed       a    loan    to     Anshad     from    the    Windsor    Savings

Association (“Windsor”) in the amount of $2,495,000.                      In 1988

Anshad defaulted on its obligation to repay Windsor and

Andrews defaulted on his guarantee.                      Windsor filed suit

                                            2
against Andrews to recover the debt in 1989. Windsor obtained

a judgment against Andrews on 13 June 1991 in the amount of

$1,075,167.47,        plus    post   judgment    interest     (“the    Windsor

judgment”).      That judgment forms the basis for the instant

dispute.

       Windsor went bankrupt and into receivership in or about

1992.    Cadle claims to have acquired the right to collect on

the Windsor judgment from Windsor’s receiver on 23 June 1992.

As we shall see infra, Cadle’s claim of ownership is the

subject of a vigorous debate in the bankruptcy proceedings,

and the parties have attempted to carry on that debate in this

court as well.         The defendants have even based a motion to

dismiss pursuant to Fed. R. App. Proc. 38 on their argument

that    Cadle   does    not    own    the   claims   and   therefore     lacks

standing to argue about its dismissal in this court.                      That

motion is denied. Cadle has suffered an adverse ruling in the

district court, and has standing to appeal.                     See Deposit

Guaranty National Bank v. Roper, 445 U.S. 326, 333 (1980)

(“[A] party aggrieved by a judgment or order of a district

court may exercise the statutory right to appeal therefrom.”).

Moreover, we need not (and as we shall see should not) decide

who    owns   these    claims    in    order    to   answer   the     question

presented by this appeal.             We assume without deciding that

                                        3
Cadle does own the right to collect on the Windsor judgment

for purposes of this appeal only.

          Cadle         claims           that        the        defendants              (Andrews’              wife,

daughter, lawyer, accountant, and son, respectively) conspired

with Andrews in the execution of two fraudulent transfers

intended to insulate Andrews from collection of the Windsor

judgment.             First, Cadle claims that Andrews and Whataburger,

co-plaintiffs in a suit against Whataburger’s franchisor,

structured the settlement agreement that resulted from the

litigation to shield the proceeds from ownership by Andrews:1

Whataburger received the entire amount of the $16,450,000

settlement, while Andrews received nothing.                                                      Whataburger,

flush with cash from the settlement, distributed sizeable

bonus payments to all of its shareholders but Andrews, even

though he owned 23.7% of Whataburger’s stock.                                                   Cadle claims

that the settlement should have filtered to the shareholders

on a pro rata basis.                        Andrews should have received his share

of the stockholder bonus.                                 If so, Andrews would have had

assets that Cadle could have seized to satisfy the Windsor

judgment.

          Second, Cadle alleges that the defendants helped Andrews

release 15,000 shares of Whataburger stock that Andrews had

          1
            Andrews and Whataburger had agreed to sell their restaurants in Bexar County, Texas and the exclusive
right to operate the chain in the area for 10.5 million dollars. The franchisor challenged the sale, which caused the deal
to fall through.

                                                           4
pledged to secure a debt he was repaying to Laredo National

Bank.             Had the debt been paid in full, the 15,000 pledged

shares would have been returned to Andrews.                                              Cadle then could

have seized those shares in partial satisfaction of the

Windsor debt.                   Whataburger, however, bought the debt from the

bank,           which        included           the      pledge         of     the      stock.            Andrews

defaulted, and Whataburger foreclosed on the pledged stock on

4 February 1994.                        Andrews, therefore, remained without any

assets that Cadle could seize to satisfy the Windsor judgment.

                                       II.       Procedural History

          On 14 June 1994, Andrews filed for Chapter 7 bankruptcy

in     the          United         States         Bankruptcy            Court         for      the      Southern

District of Texas, Laredo Division.                                              Cadle filed several

claims in those proceedings seeking to recover on the Windsor

judgment.2 On 10 April 1996, bankruptcy Judge Richard Schmidt

dismissed               Cadle’s          second          amended          complaint            for      lack        of

standing because he found that the bankruptcy trustee, rather

than           Cadle,         actually            owned         the      claims          that       Cadle         was

attempting to assert.                               See In re Joe Alvin Andrews, No.

94-21308,               slip       op.      (Apr.        10,      1996).            Undaunted            by     this

          2
               The record in this case does not include that complaint, so we cannot set forth allegations with any more
specificity.

                                                            5
setback,   Cadle    filed     a    third    amended    complaint   in   the

bankruptcy court on 24 November 1997.

     Apparently unwilling to leave matters in the hands of the

bankruptcy court, Cadle filed the instant complaint in the

United States District Court for the Western District of

Texas, San Antonio Division, on 23 December 1997.                   Cadle

claims that the defendants violated RICO §§ 1962(b), (c), and

(d) by engaging in a pattern of wrongful conduct involving

bankruptcy fraud, mail fraud, wire fraud, and securities fraud

(1) to acquire an interest in and to maintain control over the

affairs of Whataburger and Andrews’ financial empire and (2)

fraudulently to transfer and otherwise maintain custodianship

over Andrews’ assets. Cadle also alleges that the defendants’

conduct constitutes tortious interference with Cadle’s right

to enforce its judgment against Andrews in violation of Texas

state   law.       Finally,       Cadle    alleges    that   Whataburger’s

corporate form should be pierced and set aside because Andrews

and the individual defendants operate the company as an

extension of themselves in furtherance of their fraudulent

scheme.

     The defendants moved to dismiss, arguing again that Cadle

does not own the claims and that the pending bankruptcy matter

required the court to dismiss the case under the first-to-file

rule. Both parties devote their attention to the ownership of

                                      6
the claims.   As to the pending bankruptcy proceedings, Cadle

stated simply that the first-to-file rule should not apply

because   “[t]he   bankruptcy   court   .   .   .   does   not   have

jurisdiction to entertain the RICO claims[.]”

     The district court, in its ruling of 16 March 1998,

relied upon the first-to-file rule.     See Cadle v. Whataburger

of Alice, Inc., No. 97-1502, slip op. (W.D. Tex. Mar. 16,

1998). In doing so, the court decided that the issues pending

before the bankruptcy court substantially overlapped those

raised by the suit before it.       See id. at 3.    The fact that

the attorney and accountant are named as defendants in the

district court suit but not in the bankruptcy complaint does

not, in the district court’s opinion, render the cases so

dissimilar as to warrant action at the district court level.

See id.    The court did not specifically address Cadle’s

objection that the bankruptcy court lacked subject matter

jurisdiction over its claims, but closed with a comment on the

propriety of addressing any substantive issues in the case:

     There   are    proper   appellate    procedures   a
     dissatisfied litigant can employ. This Court does
     not sit as a super appellate court to review orders
     of bankruptcy courts in other districts, and will
     not be employed in a collateral attack on a
     decision of a sister court.     This is one of the
     very abuses the first-to-file rule is designed to
     prevent, and is an illustration of why the
     principle of comity is so vital to our judicial
     system.

                                7
Id. at 3-4.    The district court decided to dismiss the case

rather than transfer it to the Laredo proceedings because the

“plaintiff waited too long there to add Pounds and Braun as

defendants.”     Id.   at     3     n.2.      Cadle   filed   this   appeal

challenging the district court’s order of dismissal.

      Meanwhile, back in the bankruptcy court, proceedings

continued apace.   The bankruptcy court, on 9 June 1998, again

decided that Cadle did not own the claims and therefore lacked

standing to bring the motion.                On 12 November 1998, the

bankruptcy court entered a take nothing judgment against Cadle

on all of its claims.       Cadle appealed that judgment, as well

as Judge Schmidt’s earlier ruling, to the Laredo district

court.

                              II.    Analysis

      Cadle argues here that the district court should not have

applied the first-to-file rule because the bankruptcy court in

the first-filed suit never had jurisdiction over the claims.

The   first-to-file    rule    is    a     discretionary   doctrine,    see

Kerotest Mfg. Co. v. C-O-Two Fire Equip. Co., 342 U.S. 180,

183-84 (1952) (“Necessarily, an ample degree of discretion,

appropriate for disciplined and experienced judges, must be

left to the lower courts.”), the application of which we

normally review for abuse of that discretion.                  See Sutter

                                      8
Corp. v. P&P Indus., Inc., 125 F.3d 914, 917 (5th Cir.1997).

Cadle, however, does not raise issues of application, such as

the district court’s findings that the issues raised by the

cases substantially overlap and that such a finding is not

precluded by the lack of complete identity of parties between

the cases.    Cadle instead questions the contours of the rule

itself.    This is a purely legal matter that we review de novo.

See id.

     A.      Contours of the First-To-File Rule

     Under the first-to-file rule, when related cases are

pending before two federal courts, the court in which the case

was last filed may refuse to hear it if the issues raised by

the cases substantially overlap.          See Save Power Ltd. v.

Syntek Fin. Corp., 121 F.3d 947, 950 (5th Cir. 1997); West

Gulf Maritime Ass’n v. ILA Deep Sea Local 24, 751 F.2d 721,

728 (5th Cir. 1985).      The rule rests on principles of comity

and sound judicial administration.        See Save Power, 121 F.3d

at 950; West Gulf, 751 F.2d at 728.        “The concern manifestly

is to avoid    the waste of duplication, to avoid rulings which

may trench upon the authority of sister courts, and to avoid

piecemeal    resolution   of   issues   that    call   for   a   uniform

result.”    West Gulf, 751 F.2d at 729.        The defendants, rather

than undertake a comprehensive response to Cadle’s argument,

have gone to tremendous length arguing yet again that Cadle

                                  9
does not even own the claims it is attempting to assert, and

therefore that Cadle lacks standing.             The only proper subject

for our attention at this point, however, is the district

court’s decision to dismiss Cadle’s claims under the first-to-

file    rule     and   to   leave     Cadle’s    jurisdiction      and     the

defendants’ standing arguments for the bankruptcy court.

       Cadle essentially argues that the first-to-file rule

should include a precondition that requires the district court

to find proper jurisdiction in the first-filed court before

applying the rule at all.           Although Cadle does not say so, it

has imported this notion from the doctrine of collateral

estoppel,      which   “applies     to   bar    litigation    of   an    issue

previously      decided     in   another   proceeding    by    a   court    of

competent jurisdiction . . . .”            Copeland v. Merrill Lynch &

Co., Inc., 47 F.3d 1415, 1421 (5th Cir. 1995).                      Cadle’s

argument misses the mark for at least two reasons.

            1.     The Relationship Between the               First-To-File
                   Rule and Collateral Estoppel

       First, Cadle’s implicit comparison to the doctrine of

collateral estoppel is inapposite.              The comparison does have

some surface appeal in light of our statement in another case

that the first-filed court takes priority “[b]y virtue of its

prior jurisdiction over the common subject matter . . . .”

Mann Mfg. Inc. v. Hortex, Inc., 439 F.2d 403, 408 (5th Cir.

                                      10
1971).           But it makes no sense to read this statement to

establish a jurisdictional precondition for the first-to-file

rule similar to that required for the doctrine of collateral

estoppel. Although both doctrines rest on notions of judicial

economy and consistency in judgments, they address these

issues at different times. Collateral estoppel is a backward-

looking doctrine.                    Courts apply it to avoid relitigation of,

and      inconsistency                with,        issues         already          decided           by     other

courts.          See Parklane Hosiery Co. v. Shore, 439 U.S. 322, 326

(1979).            We examine the prior court’s jurisdiction before

applying the doctrine of collateral estoppel because we should

only bind the present litigants with a past ruling if that

ruling was rendered by a court of competent jurisdiction. See

18 Charles Alan Wright & Arthur R. Miller, Federal Practice

and Procedure § 4428 (1981) (“[A] judgment entered by a court

lacking subject matter jurisdiction is ‘void’ and is not

entitled to res judicata effect.”).3

         The first-to-file rule, by contrast, is essentially a

forward-looking doctrine.                            Courts use this rule to maximize

          3
            The quoted passage discusses the subject matter jurisdiction of the decision-rendering court in the context
of closely related doctrine of res judicata. The importance of the decision-rendering court’s jurisdiction is now
apparently very rarely brought into issue. “Today, it is safe to conclude that most federal court judgments are res
judicata notwithstanding a lack of subject matter jurisdiction.” 18 Charles Alan Wright & Arthur R. Miller, Federal
Practice and Procedure § 4428 (1981). No such clear statement as to the importance of the decision-rendering court’s
subject matter jurisdiction seems to exist in the context of collateral estoppel. The fact that the decision-rendering
court in this case was a bankruptcy court may further complicate the issue. See Copeland v. Merrill Lynch & Co., Inc.,
47 F.3d 1415, 1422 (5th Cir. 1995) (noting live question as to whether or not the jurisdiction of a decision-rendering
bankruptcy court must be “core” in order to satisfy the “competent jurisdiction” component of collateral estoppel).

                                                         11
judicial economy and minimize embarrassing inconsistencies by

prophylactically refusing to hear a case raising issues that

might substantially duplicate those raised by a case pending

in another court.           Because the second-filed court is not

binding the litigants before it to a ruling of the first,

there is no reason to examine the jurisdiction of the first-

filed court.     Such a requirement would actually undercut the

values of economy, consistency, and comity that the rule is

designed to maximize: the jurisdictional ruling of the second-

filed court would either conflict with a ruling already made,

rehash an issue already decided, or trench on a sister court’s

treatment of the issue before it has been reached there.

Because the doctrines approach the problem of inconsistent

rulings and judicial economy from different perspectives,

different procedures are required for proper operation of the

rules.     As such, the district court properly declined to

accept     Cadle’s     suggestion      to     apply   a   jurisdictional

requirement to the first-to-file rule.

            2.     Why the Jurisdiction of the First-Filed Court
                   Might Matter

     In light of this distinction between collateral estoppel

and the first-to-file rule, it comes as no surprise that Cadle

has not presented any persuasive case law to support its

analogy.     The     only   support    that   Cadle   provides   for   its

                                      12
argument comes from a case decided by a district court in the

Third Circuit, Jefferson Ward Stores, Inc. v. Doody Co., 560
F. Supp. 35 (E.D. Pa. 1983).    Jefferson Ward had contracted

with Doody to renovate its stores; after several rounds of

complaints by Jefferson Ward, Doody filed an action in the

Southern District of Ohio seeking a declaration that it had

not breached their contract.   Jefferson Ward then filed suit

in the Eastern District of Pennsylvania against Doody for

breach of contract and negligence.   The “dispositive” factor

in the court’s decision to keep the case rather than dismiss

it in favor of the first-filed court was “a serious question

as to that court’s jurisdiction.”     Jefferson Ward, 560 F.

Supp. at 36.    The court supported its decision with the

following statement, which provides the sole basis for Cadle’s

argument in its brief:   “It is not the first case filed which

has precedence, but ‘the court first obtaining jurisdiction of

the parties and the issues’ which should proceed with the

litigation.”   Jefferson Ward, 560 F. Supp. at 37 (quoting

Omni-Exploration, Inc. v. McGookey, 520 F. Supp. 36, 37 (E.D.

Pa. 1981)).    This excerpt would seem to lend support to

Cadle’s view that the first-to-file rule requires the second-

filed court to consider the jurisdiction of the first.

     Jefferson Ward’s analysis of the first-to-file rule,

however, is unpersuasive.   The court’s decision to consider

                               13
the jurisdiction of the first-filed court sprang from Columbia

Pictures Industries., Inc. v. Schneider, 435 F. Supp. 762

(S.D.N.Y. 1977).4                    That case presents a much clearer picture

of how the jurisdiction of the first-filed court fits into the

rule and indicates that Jefferson Ward failed to place the

relevance of the first-filed court’s jurisdiction in the

proper context.                    The defendants in Columbia had threatened

antitrust litigation against Columbia; Columbia responded by

filing an action in the Southern District of New York seeking

a declaration that it had not violated any antitrust laws.

See id. at 745-46.                    The defendants filed their antitrust suit

in     the       Central          District            of      California             six       days       later.

Columbia moved the New York court to enjoin the defendants

from pursuing their claim in California.                                           Id.

         The New York court declined to issue the injunction,

finding           that        although             it      was        the       first-filed               court,

exceptional circumstances militated against exercising its

priority under the rule.                             Id. at 747.                Among other factors

(not relevant in this case), the court considered the effect

that a potential dispute about its personal jurisdiction over

Columbia would have on the value of judicial economy so

central to the first-to-file rule.

         4
           Omni Exploration, quoted by Jefferson Ward above, also relied on Columbia Pictures in its analysis. See Omni
Exploration, 520 F. Supp. at 37-38.

                                                         14
     There is a substantial question . . . whether
     [personal] jurisdiction exists under the New York
     long arm statute against these defendants, all of
     whom reside in California. The possibility of an
     erroneous determination of personal jurisdiction in
     New York followed by lengthy proceedings thereafter
     over which we were ultimately found to lack
     jurisdiction, and the desirability of avoiding
     decisions unnecessary to ultimate resolution of the
     merits by a federal court strongly suggest that
     California is a more appropriate forum.

Columbia Pictures, 435 F. Supp. at 748. The mere existence of

such questions suggested “that considerations of judicial

economy require the case to be litigated first in California.”

Id. at 750.    Subsequent case law, uncited by Cadle, casts the

Jefferson     Ward    and    Columbia     Pictures         decisions      in   the

appropriate light.       While the likelihood of a jurisdictional

dispute in the first-filed court may be a factor to consider

in applying the rule, resolving the dispute in favor of that

court’s   jurisdiction       is   never       a    condition       precedent    to

applying it.       See Berisford Capital Corp. v. Central States,

Southeast and Southwest Areas Pension Fund, 677 F. Supp. 220

(S.D.N.Y.     1988)    (“I   would      not       conclude    in    the    ‘sound

discretion’ allotted to me in this matter that [jurisdictional

uncertainty in the first filed court], standing virtually

alone, should be so compelling as to cause me to depart from

the well established and salutary first-filed rule.”); Brower

v. Flint Ink Corp., 865 F. Supp. 564, 570 (N.D. Iowa 1994)

(noting     that     Berisford    “rejected          the     suggestion        that

                                     15
jurisdictional     uncertainties    standing    alone   should   be   so

compelling as to cause the court to depart from the ‘first

filed rule.’”); Firstier Bank, N.A. v. G-2 Farms, No. 95-3118,

1996 WL 539217, at *4 (D. Neb. Mar. 11, 1996) (noting that a

jurisdictional dispute is only one factor to consider).

            3.    The District Court Properly Applied the First-
                  To-File Rule

      In   sum,   Cadle’s   view   of   the   first-to-file    rule   is

supported by neither the policies behind the rule nor the

cases that apply it.        While the jurisdictional certainty of

the first-filed court might be a proper factor for a district

court to weigh in maximizing judicial economy, Cadle does not

allege that the court below erred in this respect.            Nor could

it:   the district court in this case was the second-filed

court, and under Fifth Circuit precedent that balancing act is

reserved only for the first-filed court. “Once the likelihood

of a substantial overlap between the two suits ha[s] been

demonstrated, it [is] was no longer up to the [second filed

court] to resolve the question of whether both should be

allowed to proceed.”        Mann, 439 F.2d at 407.       The district

court correctly refused to act as a “super appellate court” by

entertaining either Cadle’s jurisdiction or the defendants’

standing arguments, and properly limited its inquiry to the

potential overlap between the two cases.          By so limiting its

                                   16
analysis, the district court indeed avoided trenching on the

authority of its sister court, one of “the very abuses the

first-to-file rule is designed to prevent.”                 Cadle, No. 97-

1502, slip op. at 4.

       B.     Transfer or Dismiss?

       Cadle argues in the alternative that the district court

should have transferred the case back to the Laredo division

rather than dismiss it entirely.            We agree.      “[T]he ‘first to

file rule’ not only determines which court may decide the

merits of substantially similar issues, but also establishes

which court may decide whether the second suit filed must be

dismissed, stayed or transferred and consolidated.”                   Sutter

Corp., 125 F.3d at 920.         As noted above, “[t]he Fifth Circuit

adheres to the general rule, that the court in which an action

is first filed is the appropriate court to determine whether

subsequently     filed    cases    involving     substantially        similar

issues should proceed.”         Save Power, 121 F.3d at 948.           Thus,

once    the    district   court        found   that   the    issues    might

substantially overlap, the proper course of action was for the

court to transfer the case to the Laredo court to determine

which   case    should,    in    the    interests     of    sound   judicial

administration and judicial economy, proceed.                 The district

court erred by dismissing the suit.

                                       17
     MOTIONS DENIED.      The judgment of the district court is

VACATED, and the case is REMANDED to the district court with

instructions   to    transfer   the    case   to   the   United   States

Bankruptcy Court for the Southern District of Texas, Laredo

Division,    for    further   proceedings     consistent    with    this

opinion.    Each party shall bear its own costs.

                                  18