Neary v. Miltronics CV-07-273-JL 2/22/08 P UNITED STATES DISTRICT COURT DISTRICT OF NEW HAMPSHIRE

Cleo B . Neary and Stephen Neary

v. Civil N o . 07-cv-273 Opinion N o .

Miltronics Manufacturing Services, Inc., Anton Neary, Elisabeth Neary and Matthew Near

O R D E R

The plaintiffs, minority shareholders in defendant

Miltronics Manufacturing Services, Inc., a closely held

corporation, seek its judicial dissolution o r , in the

alternative, an injunction against their ouster as its directors

at the hands of its majority shareholder, defendant Anton Neary.

Plaintiffs Cleo B . Neary and Stephen Neary -- who are Anton’s

mother and brother, respectively -- also seek an accounting of

payments the corporation has made for Anton’s benefit, together

with damages equal to those sums. The plaintiffs claim that, in

retaliation for their complaints over Anton’s alleged

mismanagement of the company, he has engaged in a “freeze out”

scheme by removing them from its board of directors and reducing

their compensation as its employees, intending to appropriate its

assets for his own benefit.

The defendants, including Anton and his wife and son -- who

also sit on the Miltronics board -- have moved to dismiss this

action for lack of subject-matter jurisdiction. In the alternative, they ask this court to abstain from exercising

jurisdiction as to the plaintiffs’ claims for equitable relief

under Burford v . Sun Oil Co.,

(1943), which endorses

abstention “to prevent federal courts from bypassing a state

administrative scheme and resolving issues of state law and

policy that are committed in the first instance to expert

administrative resolution.” Pub. Serv. C o . of N.H. v . Patch,

5 , 24 (1st Cir. 1998) (citing New Orleans Pub. Serv., Inc.

v . Council of New Orleans,

(1989)). The

court heard oral argument on the motion on February 2 0 , 2008.

For the reasons explained below, the motion is granted in

part. This court abstains from adjudicating the plaintiffs’

equitable claims, which are dismissed without prejudice. The

remaining claims for damages are stayed until the equitable

claims are resolved in state court.

Applicable Legal Standards

Miltronics is a Vermont corporation, though it maintains its

principal place of business just over the border in Keene, New

Hampshire, where Anton and his wife and son live. Claiming

domicile in Florida, Cleo and Stephen commenced this action

against Miltronics and the other defendants in this court,

invoking its diversity jurisdiction. See

(a)(1).

They therefore bear the burden to show that subject-matter

jurisdiction exists. See, e.g., Johansen v . United States, 506

5 , 68 (1st Cir. 2007). As the parties seeking Burford

abstention, however, the defendants bear the burden of showing

that it is the appropriate course. See Grode v . Mut. Fire,

Marine & Inland Ins. Co.,

(3d Cir. 1993).

Analysis

Like all states, see 16A Fletcher Cyclopedia of Corporations

§ 8034, at 84 (rev. ed. 2003), Vermont provides a statutory

procedure for the judicial dissolution of corporations formed

under its law. See V t . Stat. Ann. tit. 11A, § 14.30. The

statute makes this relief available on a number of grounds,

including those invoked by the plaintiffs here: (1) that “the

directors or those in control of the corporation have acted, are

acting, or will act in a manner that is illegal, oppressive, or

fraudulent,” and (2) that “the corporate assets are being

misapplied or wasted.” Id. §§ 14.30(B), ( D ) . If such grounds

exist, the court may enter a decree dissolving the corporation,

then proceed to “direct the winding up and liquidation of the

corporation’s business affairs” in the manner provided by the

statute. Id. § 14.33. “In the course of such proceedings the

rights of creditors and stockholders are afforded special

protection by way of notice, time for presentation of claims and

opportunity for hearing as the court may direct.” Hall v .

Pilgrim Plywood Corp.,

(Vt. 1967) (discussing

prior version of statute); see also V t . Stat. Ann. tit. 11A, §§

3 14.06-14.09.

The statute further empowers the court to issue injunctions,

appoint a receiver or custodian, or take other action to preserve

the corporation’s assets until the petition for dissolution can

be heard. V t . Stat. Ann. tit. 11A, § 14.31(c). Venue over

dissolution proceedings, when they are commenced by shareholders,

“lies in the county where the corporation’s principal office (or,

if none in this state, its registered office) is or was last

located.” Id. § 14.31(a).

Based on the existence of similar state-law procedures,

“every federal court that has addressed the issue of dissolving

state corporations has either abstained or noted that abstention

would be appropriate, assuming jurisdiction existed.” Friedman

v . Revenue Mgmt. of N.Y., Inc.,

, 671 (2d Cir. 1994);

see also, e.g., Caudill v . Eubanks Farms, Inc.,

(6th Cir. 2002); Ives v . Advanced Broadband Solutions, Inc., N o .

2003-0848,

, at *5 (D. Md. Jan. 2 3 , 2004); Kimmel

v . Wirtz, N o . 91-117,

, at *6 (N.D. Ill. Dec. 1 9 ,

1991); In re English Seafood (USA), Inc.,

(D. Del. 1990); Codos v . Nat’l Diagnostic Corp.,

5 ,

78 (E.D.N.Y. 1989); Alkire v . Interstate Theatres Corp.,

(D. Mass. 1974). 1 These courts have generally

1 Because this court concludes, like a number of these other courts have, that it should abstain from exercising jurisdiction over the plaintiffs’ claims for dissolution and other equitable

4 concluded that “federal courts should abstain from interfering

with the development and administration of the complex statutory

schemes that states have devised to regulate corporations created

under their laws.” English Seafood,

(citing

Alkire,

); see also, e.g., Caudill,

; Friedman, 38 F.3d at 671; 16A Fletcher Cyclopedia of

Corporations § 8099, at 174 (rev. ed. 2003).

Many of these courts have relied on Burford in support of

this conclusion, see, e.g., Caudill,

,

Friedman, 38 F.3d at 671; Ives,

, at *3-*5, while

others have not, at least explicitly, see, e.g., English Seafood,

; Alkire,

. It is

perhaps open to question whether state corporation statutes in

general, and their judicial dissolution procedures in particular,

truly represent the kind of “‘administrative processes for the

determination of complex, policy-laden, state-law issues’”

usually deemed essential to Burford abstention. Sevigny v .

Employers Ins. of Wasau,

4 , 29 (1st Cir. 2005) (quoting

Fragoso v . Lopez,

(1st Cir. 1993)). But the

relief, it need not decide whether it has subject-matter jurisdiction over those claims in the first instance. Federal courts are free “to choose among threshold grounds for denying audience to a case on the merits.” Ruhrgas AG v . Marathon Oil Co.,

(1999); see also Spargo v . N.Y. State Comm’n on Judicial Conduct,

5 , 74 (2d Cir. 2003) (deciding to abstain from exercising jurisdiction without reaching question of whether it existed).

5 court need not resolve that question here because, even if the

circumstances of this case do not support Burford abstention,

they nevertheless support abstention on other grounds.

“[A]bstention doctrines are not a closed-end collection of

exceptions” to the exercise of the subject-matter jurisdiction

conferred upon the federal courts by Congress.

at 3 0 . One

such exception, reflected in the uniform case law just cited, is

that federal courts abstain from hearing claims for the

dissolution of state corporations. In a case decided prior to

Burford, in fact, the Supreme Court held that a federal district

court should not have maintained a receivership over a failed

Pennsylvania bank in the face of that state’s “complete,

comprehensive and economical scheme for liquidation by the

[state] Secretary of Banking of such a [bank].” Pennsylvania v .

Williams,

(1935). The Court held that, under

these circumstances, the district court should have declined to

exercise jurisdiction, observing that “[i]t has long been

accepted practice for the federal courts to relinquish their

jurisdiction in favor of the state courts, where its exercise

would involve control of or interference with the internal

affairs of a domestic corporation of the state.”

.

Williams provides a compelling -- and controlling -- reason,

independent of the Burford doctrine, for federal courts to

abstain from hearing claims for dissolution and analogous relief

6 against state corporations. Indeed, courts have recognized

additional concerns, not necessarily tied to those supporting

Burford abstention, for declining to exercise jurisdiction over

dissolution suits. These concerns include “the possibility of

federal dissolution actions . . . being commenced in a number of

different districts in which a particular [state] corporation was

subject to service, thereby placing an onerous burden on the

corporation,” as well as the more formal notion that

[c]orporations are creatures of the Legislature. It is from this body that they derive their life, as well as the terms and conditions of their existence. It is appropriate, therefore, that the terms and conditions of their existence be determined by that body.

Alkire,

; see also English Seafood,

-89; Codos,

8 . Thus, regardless of

whether the plaintiffs’ equitable claims here meet the stringent

requirements for Burford abstention, see generally Fragoso,

, abstention is nevertheless appropriate to avoid

infringing on Vermont’s important interests in overseeing the

continued existence of corporations created under its laws. See

Harrison v . CBCH Realty, Inc., N o . 92-434,

, at *3

(N.D.N.Y. Aug. 1 3 , 1992) (abstaining from exercising jurisdiction

over action to dissolve corporations while acknowledging that

“this case does not fall within any of the accepted abstention

doctrine categories,” including Burford).

These interests are implicated not only by the plaintiffs’

7 request to dissolve Miltronics, but also by their claims for an

accounting and an injunction against their removal from its

board. After all, the Supreme Court in Williams cautioned

against the exercise of federal jurisdiction whenever “it would

involve control of or interference with the internal affairs of a

domestic corporation of the state.”

. Few

actions would exert greater “control of or interference with”

Miltronics’s internal affairs than forcing the production of its

corporate records or dictating the composition of its board of

directors. This court will therefore abstain from hearing not

only plaintiffs’ dissolution claims, but their other claims for

equitable relief as well. See Feiwus v . Genpar, Inc.,

(E.D.N.Y. 1999) (abstaining from hearing

requests to dissolve corporation, appoint receiver, compel buy-

out of minority shareholder, compel accounting, and void results

of shareholders’ meetings); Ives,

, at *5

(abstaining from hearing claims for dissolution and accounting).

As the defendants acknowledge, this reasoning does not

extend to plaintiffs’ claims for damages based on Anton’s

allegedly directing the corporation to make payments for his

benefit. The Supreme Court has instructed that, under its

precedents, “federal courts have the power to dismiss or remand

cases based on abstention principles only where the relief being

sought is equitable or otherwise discretionary.” Quackenbush v .

8 Allstate Ins. Co.,

(1996). But in “damages

actions,” the Court has “only permitted a federal court to

withhold action until the state proceedings have concluded; that

i s , . . . to enter a stay.”

(internal quotation marks

and citation omitted). This distinction reflects the origin of

abstention principles in “the discretion historically enjoyed by

courts of equity,” as opposed to courts at law.

(internal quotation marks omitted).

Thus, the proper course in an action that presents claims

for both equitable relief and damages is to dismiss the former

and stay the latter, pending adjudication of the equitable claims

at the state level (assuming, of course, that abstention is

otherwise appropriate). See

. This was the tack taken

by the court in Feiwus, which dismissed the plaintiff’s claims

for dissolution, an accounting, and other equitable remedies

against a corporation, but stayed his damages claims, pending

resolution of the equitable claims in state court.

.

The plaintiffs argue that, because this court must likewise

stay, rather than dismiss, their claim for damages, “reasons of

fairness and judicial economy” counsel in favor of also

exercising jurisdiction over their equitable claims, which “all

involve the same conduct and courses of action.” This argument,

however, proves too much. If the specter of having to litigate

9 issues common to legal and equitable claims at both the state and

federal level were reason enough for a federal court to hear the

equitable claims notwithstanding abstention principles, then the

“abstain and stay” approach expressly endorsed by the Supreme

Court would be available only in theory, because nearly all

actions joining legal and equitable claims will involve some

commonality. As its Quackenbush decision suggests, the Court

simply gives the “principles of federalism and comity” animating

its abstention doctrines more weight than concerns of fairness

and judicial economy that might ordinarily counsel against re-

litigation of the same issues in different courts.2

(internal quotation marks omitted). To honor the important

principles of federalism and comity underlying the federal

judiciary’s traditional refusal to meddle in affairs of corporate

governance, this court must abstain from hearing the plaintiffs’

equitable claims, even if that means they must return here to

litigate their claims for damages after resolving their equitable

2 To the extent that Quackenbush reflects any concern with the potentially duplicative effort of returning to federal court to try claims for damages following the resolution of intertwined equitable claims in state court, it suggests that such concerns can be addressed “in certain narrow circumstances, under the common-law doctrine of forum non conveniens,” by dismissing the entire action in favor of state court adjudication.

. But the plaintiffs do not suggest that this course is appropriate here -- indeed, they argue for the opposite approach, that the entire case should remain in this court -- so this court need not consider the application of the forum non conveniens doctrine in this context.

10 claims in state court.3 See Feiwus,

(abstaining from jurisdiction over equitable claims against

corporation despite intertwined claims for damages).

The plaintiffs also allege that “Miltronics is truly a

Vermont corporation in name only,” with its offices and the

majority of its employees, customers, and creditors located in

New Hampshire. As the plaintiffs explained at oral argument, a

Vermont state court hearing their equitable claims will therefore

lack the power to subpoena a number of potential witnesses, and

the corporation’s creditors and other interested parties will

have to travel out-of-state to attend the dissolution

proceedings. Abstention doctrines, however, have developed not

out of a concern for the convenience of the parties and

witnesses, but out of a respect, inherent in the federalist

system, for state prerogatives in certain areas of governance.

See Quackenbush,

-17. As just explained, the former

must give way to the latter when they conflict. Id. at 728.

This court’s decision to abstain from hearing the plaintiff’s

equitable claims, then, does not reflect a judgment that they

should be heard in a Vermont court instead of a New Hampshire

court, but that they should not be heard in a federal court,

3 The plaintiffs, of course, can avoid these duplicative efforts by voluntarily dismissing their damages claims in this court without prejudice so they may refile them in state court along with their equitable claims.

11 whether in New Hampshire or elsewhere.4 In fact, the decision

would be the same even if Miltronics actually were a New

Hampshire corporation incorporated under New Hampshire law.

Finally, the inconvenience to witnesses in traveling to

Vermont from New Hampshire (or the similar inconvenience to the

parties and their counsel in compelling witnesses to make the

trip) is minimal, given the close proximity of the two states.5

Even if the practical difficulties resulting from abstention

could justify eschewing that course in a particular case, then,

this would not appear to be the one.

Conclusion

For the foregoing reasons, the defendants’ motion to dismiss

(document n o . 7 ) is GRANTED insofar as it requests that this

court abstain from hearing the plaintiffs’ claims for equitable

relief (counts 1 , 2 , and 5 ) , which are dismissed without

prejudice. The plaintiffs’ claims for damages (counts 3 and 4 )

are stayed pending the final adjudication of their equitable

claims in state court. The clerk shall administratively close

the case during the stay.

4 Indeed, this court expresses no opinion on where the plaintiffs should re-file their equitable claims. 5 New Hampshire and Vermont “lie like wedges,/Thick end to thin end and thin end to thick end,/And are a figure of the way the strong of mind and strong of arm should fit together . . . .” Robert Frost, “New Hampshire,” in Collected Poems, Prose and Plays 155-56 (Richard Poirier & Mark Richardson, eds., 1995).

12 SO ORDERED.

______________

;eph N. Laplante lited States District Judge

February 2 2 , 2008

cc: Michael C . Harvell, Esq. Zara K. Morgan, Esq. Potter Stewart, Jr., Esq.

13