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Court allows simultaneous state and federal actions based on same facts as long as it is not “parallel”


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jray

By Jeremy Ray

In this case, a dispute arose between Summit Contracting Group, Inc. (Summit), a commercial general contractor who was contracted to construct an assisted living facility, and Ashland Heights, LP (Ashland), owner of the facility. 

Summit and Ashland entered into a construction contract. The contract provided that Summit would serve as general contractor for the project in exchange for an initial lump sum and incremental progress payments. Payments were to be made when Summit reached the monthly project completion milestones. Ashland was contractually required to withhold five percent from any progress payment as “retainage” until 50 percent of the project was completed. Tennessee retainage laws provide that the retained amount must be deposited into a separate interest bearing escrow account with a third-party. The contract also provided that Summit was entitled to interest for untimely payments, and costs and attorneys’ fees in the event that litigation arose from the contractual relationship.

Breach of the contract
Summit believed that Ashland did not deposit the retainage into an interest bearing escrow account with a third-party as required by the Tennessee retainage laws. As a result, Summit demanded that Ashland provide details concerning the third-party escrow account it was required to create. Summit informed Ashland that Summit would seek payment of the statutory penalty of $300 per day that Ashland was in violation if the mandated escrow account had not been created with the total retainage. Ashland provided some evidence that it had deposited the total retainage amount into the required account. Summit, however, did not find Ashland’s assurances sufficient and raised other issues relating to various non-payment and untimely payments.

Bringing claims in state and federal court 
Summit filed a lawsuit for breach of contract and claims under Tennessee’s retainage laws and Summit sought a mechanic’s lien against the real property. Specifically, Summit filed a mechanic’s lien against Ashland in state court and, later that same day, filed an action for breach of contract in federal court. Ashland argued that the federal court case should be dismissed without prejudice given the prior pending state court lawsuit based on the same facts. The U.S. Supreme Court has explained that, despite the obligation of the federal courts to exercise the jurisdiction given to them, considerations of judicial economy and federal-state courtesy may justify a federal court abstaining in situations involving the contemporaneous, or “parallel,” exercise of jurisdiction by state and federal courts. 

The Sixth Circuit Court of Appeals has stressed that underlying this doctrine are considerations of wise judicial administration, conservation of judicial resources, and the comprehensive disposition of litigation. The District Court in this case recognized that the Sixth Circuit had never directly considered and resolved the question of whether a state court lien foreclosure action was “clearly parallel” to a separate action in federal court seeking contract damages. The court, however, found that the issue had been resolved by two other circuit courts, the Fourth Circuit and the Eighth Circuit. Both the Fourth Circuit and the Eighth Circuit found that a state court lien foreclosure action and a federal court breach of contract action were not “parallel” given that the separate actions involved different issues with different requisites of proof.

In this case, the District Court found that the state court lien action raises issues not raised in the subsequently filed federal court breach of contract action despite recognizing that the amount of damages sought by Summit in the two actions may overlap. The federal court contract action raises issues outside the ambit of those presented in the state court lien action. The enforcement of the mechanic’s lien under state law was not dependent on questions concerning the breach of contract. Those issues could only be resolved through the federal court breach of contract action. Summit had not asserted its breach of contract claims in the state court lien action. Additionally, the federal court breach of contract action was not in any way tied to the state court lien action and permits recovery of damages which are plainly not recoverable in the state court lien action.

Lack of complete resolution
Finding there was substantial doubt that resolution of the state court lien action would result in a complete resolution of the issues between the parties, the court held that the issues in the separate state court and federal court actions cannot be considered “parallel,” and allowed the federal case to proceed. The District Court’s recognition that the state court action would not result in complete resolution between the parties resulted in the denial of Ashland’s motion to dismiss. This case illustrates that claims may be brought simultaneously in state court and federal court, despite being based on the same underlying facts, if those actions involve different legal issues and are not otherwise “parallel.”



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