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Hartwig Transit, Inc., et al v. Rbs Citizens

August 18, 2011


The opinion of the court was delivered by: Judge James B. Zagel


Plaintiffs have filed concurrent actions in state and federal courts. Plaintiffs' action in this court alleges that Defendants violated federal statutes when they attempted to defraud or mislead Plaintiffs in connection with certain complex financing transactions involving synthetic fixed rate financing. Defendants move to dismiss Plaintiffs' complaint, or in the alternative, to stay the proceedings pending the outcome of a parallel state court action. For the following reasons, Defendants' motion to stay is granted.


On May 8, 2008, Plaintiffs filed suit against Defendants alleging fraud under Illinois law in connection with a complex financial transaction agreement. The state court has since dismissed Plaintiffs' complaint twice. Currently pending in state court is Plaintiffs' fourth amended complaint.

This federal case centers on the same set of facts as the state court proceedings: alleged fraud in connection with an interest rate swap deal whereby the Bank agreed to make payments to the Defendants based upon a floating rate obligation and the Defendants agreed to make payments to the Bank based upon a fixed rate obligation.

Defendants ask that I dismiss Plaintiffs' complaint, or in the alternative, stay the federal court proceedings until the pending state action is resolved. Because I am granting Defendants' motion for stay, I do not reach the merits of the motion to dismiss.


Pursuant to the Colorado River Doctrine, "a federal court may stay or dismiss a suit when there is a concurrent state proceeding and the stay or dismissal would promote 'wise judicial administration.'" AXA Corp. Solutions v. Underwriters Reins. Corp., 347 F.3d 272, 278 (7th Cir. 2003) (quoting Colorado River Water Conservation Dist. v. United States, 424 U.S. 800, 818 (1976)). The general rule is 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," and "the virtually unflagging obligation of the federal courts to exercise the jurisdiction given them." Colorado River, 424 U.S. at 817. The doctrine of abstention may be justified only in exceptional circumstances. Id. at 813. Two questions must be answered when deciding whether to abstain under Colorado River.

First, a court must determine whether the state action is parallel to the federal action. Clark v. Lacy, 376 F.3d 682, 685 (7th Cir. 2004). "Suits are parallel if 'substantially the same parties are litigating substantially the same issues simultaneously in two fora.'" AAR Int'l, Inc. v. Nimelias Enters., 250 F.3d 510, 518 (7th Cir. 2001) (quoting Schneider Nat'l Carriers, Inc. v. Carr, 903 F.2d 1154, 1156 (7th Cir. 1990). Abstention is only appropriate where "there is a substantial likelihood that the [state-court] litigation will dispose of all claims presented in the federal case." TruServ Corp. v. Flegles, Inc., 419 F.3d 584, 592 (7th Cir. 2005).

Second, the Court must conduct a balancing test to determine whether "exceptional circumstances" exist to justify Colorado River abstention.

A. These Cases Are Parallel. "Suits need not be identical to be parallel." AAR, 250 F.3d at 578. Proceedings are parallel "when substantially the same parties are contemporaneously litigating the same issue in another forum." Tyrer v. City of S. Beloit, 456 F.3d 744, 752 (7th Cir. 2006) (internal quotation marks omitted). Instead, the relevant question is whether there is a substantial likelihood that the state litigation will dispose of all the claims presented in the federal case. Id.

Here, the state and federal proceedings involve substantially the same parties -- Hartwig Transit, North Star Trust and RBS Citizens National.*fn1 The issues being litigated are substantially the same as well. In state court, Plaintiffs seek relief under theories of constructive fraud, common law fraud, and fraud in the inducement. In federal court, the Plaintiffs assert claims under Section 4 of the Commodity Exchange Act, 7 U.S.C. §6b, and the Bank Holding Company Act, 7 U.S.C. § 6o, alleging that Defendants engaged in fraudulent and deceptive conduct in connection with certain fixed rate financing.

The elements of constructive fraud and common law fraud are almost identical requiring (1) a false representation of fact; (2) known or believed to be false by the person making it or that it was made with reckless disregard for the truth of it; (3) made with the intention to induce the other party to act; (4) the other party's reliance upon the misrepresentation; and (5) damages. Chabraja v. Avis Rent A Car Systems, Inc., 549 N.E.2d 872, 874 (Ill. App. Ct. 1989). Unlike a claim for common law fraud, a claim for constructive fraud does not require proof of actual dishonesty or intent to deceive, though it does require a showing of a fiduciary duty to establish liability. Prodomos v. Everen Securities, Inc., 793 N.E.2d 151, 158 (Ill. App. Ct. 2003).

A claim for relief under 7 U.S.C. § 6b is based on the principles of common law fraud where the relevant inquiry is whether a plaintiff actually relied upon the defendant's representations. Indosuez Carr Futures, Inc. v. Commodity Futures Trading Commission, 27 F.3d 1260, 1264-65 (7th Cir. 1994). The Plaintiffs do not specify whether their claim for relief under § 6o is made pursuant to § 6o(1)(A) or § 6o(1)(B), but is of no moment. The Seventh Circuit has held that relief under § 6o(1)(A) is substantially similar to common law fraud and fraud in the inducement. Commodity Trend Service, Inc. v. Commodity Futures Trading Com'n, 233 F.3d 981, 993 (7th Cir. 2000) ("Section 6 o(1)(A) and Regulation 4.41(a)(1) requires scienter and do no more than prohibit common law fraud in commodities transactions.") Likewise, claims of constructive fraud are substantially similar to those brought pursuant to § 6o (1)(B). Just as with claims of constructive fraud, scienter is not required for recovery under § 6o(1)(B), though there ...

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