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SmartBank v. The Public Park and Recreation Board of Washington County

United States District Court, S.D. Alabama, Southern Division

October 24, 2018

SMARTBANK, a Tennessee banking Corporation, successor by merger to Capstone Bank, Plaintiff,
THE PUBLIC PARK AND RECREATION BOARD OF WASHINGTON COUNTY, an Alabama non-profit corporation also known as Washington County Parks and Recreation Board, et al., Defendants.



         This action is before the Court on the motion to abstain and dismiss (Doc. 27), and separate supporting memorandum (Doc. 28), filed by Defendant the Public Park and Recreation Board of Washington County, a/k/a Washington County Parks and Recreation Board (the “Board”).[1] The motion was referred to the undersigned Magistrate Judge for appropriate action under 28 U.S.C. § 636(a)-(b), Federal Rule of Civil Procedure 72, and S.D. Ala. GenLR 72(a). See S.D. Ala. GenLR 72(b); (8/7/2018 electronic reference). Plaintiff SmartBank timely filed a response (Doc. 33) in opposition to the motion, and the Board timely filed a reply (Doc. 34) to the response. SmartBank and the Board have also filed supplemental briefs (Docs. 38, 41) in response to the undersigned's order inviting them to do so (Doc. 36). The motion is now under submission. (See id.). Upon consideration, the undersigned finds that the Board's motion to abstain and dismiss (Doc. 27) is due to be GRANTED in part and DENIED in part.

         I. Background

         SmartBank initiated this action by filing a complaint (Docs. 1, 2) with the Court on May 31, 2018. According to SmartBank's allegations, Defendant Laura Taylor served as Revenue Commissioner of Washington County, Alabama, from 1991 until her retirement in 2015. (Doc. 1, ¶ 9). Both during and after her tenure as Revenue Commissioner, Laura Taylor also served as Secretary-Treasurer of the Board, a non-profit entity that provides funding for parks, recreation facilities, and other services for Washington County citizens. (Id., ¶ 10). The Board maintained a checking account at SmartBank (“the Board Account”), and checks drawn from that account requiring the signature of at least one authorized signer, of which Laura Taylor was one of three. (Id., ¶¶ 10-11). Between February 2013 and October 2015, SmartBank mailed monthly statements for the Board Account to the post office box of the Washington County Revenue Commissioner, the address designated in the account agreement. (Id., ¶ 13). After Laura Taylor's retirement as Revenue Commissioner in October 2015, SmartBank mailed the account statements to her home address. (Id.).

         In 2013, SmartBank extended a loan of $34, 000.00 to the Board (the “Board Loan”), which was subsequently renewed with additional borrowed funds multiple times. (Id., ¶ 27). The last renewal and additional advance occurred on June 26, 2017, in the amount of $42, 391.43, with interest accruing at the rate of 4.00% per annum. (Id.). Loan proceeds were deposited into the Board Account, and loan payments were debited automatically from the Board Account. (Id., ¶ 31).

         In April 2018, Laura Taylor was charged with four counts of possession of a forged instrument for checks drawn from the Board Account. (Id., ¶ 14). That same month, two Board members notified SmartBank that Laura Taylor had engaged in unauthorized transactions and had misappropriated Board funds. (Id., ¶ 18). After reviewing records of the Board Account, the Board determined that between February 2013 and March 2018, Laura Taylor misappropriated over $103, 000.00 in account funds through various means, including disbursement of checks to unauthorized payees. (Id. at 6, ¶ 20). The Board also claims that Laura Taylor obtained the Board Loan through fraudulent means, including by providing SmartBank forged Board minutes and resolutions purportedly authorizing the loan, and by forging the signature of the Chairman of the Board. (Id., ¶¶ 30, 32). On April 30, 2018, the Board's attorney sent a letter to SmartBank's counsel identifying checks totaling $51, 125.49 that the Board believed to be unauthorized, and demanding that SmartBank re-credit that amount to the Board Account. (Id., ¶ 23). The letter also demanded that SmartBank re-credit the Board Account for $106, 680.74 in payments made on the Board Loan. (Id., ¶ 33; Doc. 2-2).

         II. Analysis

         A. Brillhart-Wilton Abstention

The Declaratory Judgment Act is “an enabling Act, which confers a discretion on courts rather than an absolute right upon the litigant.” Wilton[ v. Seven Falls Co.], 515 U.S. [277, ] 287, 115 S.Ct. 2137[, 132 L.Ed.2d 214 (1995)] (citations omitted). It only gives the federal courts competence to make a declaration of rights; it does not impose a duty to do so. Brillhart v. Excess Ins. Co. of America, 316 U.S. 491, 494, 62 S.Ct. 1173, 86 L.Ed. 1620 (1942). In fact, …the Supreme Court has expressed that “it would be uneconomical as well as vexatious for a federal court to proceed in a declaratory judgment suit where another suit is pending in a state court presenting the same issues, not governed by federal law, between the same parties.” Id. at 495, 62 S.Ct. 1173. The Supreme Court has warned that “[g]ratuitous interference with the orderly and comprehensive disposition of a state court litigation should be avoided.” Id. This warning should be heeded.

Ameritas Variable Life Ins. Co. v. Roach, 411 F.3d 1328, 1330 (11th Cir. 2005) (per curiam).

         The Board's present motion seeks dismissal of Counts 1 through 3 of SmartBank's 11-count complaint under this discretionary authority to abstain from exercising jurisdiction over a declaratory judgment action in favor of ongoing parallel state court litigation (sometimes called Brillhart-Wilton or Wilton-Brillhart, abstention, after the two Supreme Court cases from which the doctrine derives). Counts 1 and 2 assert causes of action against the Board under the federal Declaratory Judgment Act, 28 U.S.C. § 2201 et seq. Count 1 seeks a declaratory judgment that SmartBank has no obligation to re-credit the Board Account for the statements for the Board Account and report unauthorized transactions perpetrated by Laura Taylor to SmartBank precludes any recovery by the Board for losses allegedly incurred due to the illegal activity of Laura Taylor concerning the Board Account.” (Doc. 1, ¶ 25). Count 2 seeks a declaratory judgment that the Board is not entitled to retain any of the Board Loan proceeds because the loan was fraudulently obtained by Laura Taylor, and that SmartBank is not obliged to re-credit to the Board Account any payments made on the Board Loan because it was given notice of those allegedly unauthorized transactions through its checking account statements but failed to report them. (Id., ¶ 35). Count 3 asserts what appears to be a breach-of-contract claim for monetary damages against Laura Taylor for the amount currently owed on the Board Loan, plus attorney fees, asserting that she is liable for these amounts because her signature on the note for the 2017 loan renewal is genuine. (Id., ¶¶ 37 - 40).[2]

         The parallel state court litigation to which the Board asks this Court to defer was commenced by the Board on June 20, 2018, in the Circuit Court of Washington County, Alabama (Case No. CV-2018-900051), against SmartBank, Laura Taylor, and two SmartBank employees who are not parties to this action (hereinafter, “the Washington County Action”). (See Doc. 28-4). The complaint in the Washington County Action alleges the following 9 state law causes of action:

• Counts 1, 2, and 3 - Negligence, breach of fiduciary duty, and conversion, respectively, against all Washington County Action defendants, each count seeking compensatory damages for the deduction of payments on the Board Loan from the Board Account.
• Counts 4 and 5 - Negligence and breach of fiduciary duty, respectively, against all Washington County Action defendants, each count seeking compensatory damages for SmartBank's payment on the Board Account checks fraudulently issued by Laura Taylor.
• Count 6 - Conversion against Laura Taylor, based on the fraudulently issued checks.
• Counts 7 and 8 - Felony tort and violation of the Alabama Consumer Identity Protection Act, respectively, against Laura Taylor.
• Count 9 - Declaratory judgment against SmartBank, seeking a declaration that the Board Loan note is null and void, and that the Board does not owe SmartBank the balance left owing on the loan, due to Taylor's obtaining the loan by forging the Board Chairman's signature.

         Initially, leaving aside whether it is appropriate for the Board to seek dismissal of a claim that is not directed against it, dismissal of Count 3 under Brillhart-Wilton abstention would be inappropriate because that count does not assert a claim under the Declaratory Judgment Act. Rather, it asserts a state law breach-of-contract claim against Laura Taylor for monetary damages. As the Board has not argued any other rationale for dismissing Count 3, the undersigned finds that the Board's motion to dismiss is due to be DENIED as to Count 3. The undersigned now turns to the declaratory judgment claims directed against the Board in Counts 1 and 2.

         B. Ameritas Factors

         Guided by the[] general principles expressed by the Supreme Court[ in Brillhart and Wilton], as well as the same considerations of federalism, efficiency, and comity that traditionally inform a federal court's discretionary decision whether to abstain from exercising jurisdiction over state-law claims in the face of parallel litigation in the state courts, [the Eleventh Circuit Court of Appeals has] provide[d] the following factors for consideration to aid district courts in balancing state and federal interests.

(1) the strength of the state's interest in having the issues raised in the federal declaratory action decided ...

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