Background
Arsenis v. M&T Bank is a tale of two cases. The bank brought an action against Ms. Arsenis to foreclosure on a mortgage loan in New Jersey Superior Court. Through a combination of defenses and counterclaims in the foreclosure action, Ms. Arsenis argued that the bank had violated the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), the Real Estate Settlement Procedures Act (RESPA), and the Fair Debt Collection Practices Act (FDCPA). Specifically, the various violations allegedly centered around whether the bank had improperly failed to convert a loan modification trial plan into a permanent modification. While the foreclosure action proceeded in state court, Ms. Arsenis brought a separate claim against the bank in federal district court—alleging the same violations of the CARES Act, RESPA, and FDCPA.
The bank filed a motion to dismiss the federal complaint, claiming that there was substantial overlap between the federal claims and those already pending in the foreclosure action. As such, the bank argued, the district court should decline jurisdiction under the abstention doctrine set forth by the United States Supreme Court in Colorado River Water Conservation District v. United States. The district court granted the bank’s motion to dismiss, finding that the cases were sufficiently parallel to justify abstention under the Colorado River “extraordinary circumstance” standard. Ms. Arsenis appealed, bringing the case to the Third Circuit Court of Appeals.
Court’s Analysis and Decision
Quoting the Colorado River opinion itself, the Third Circuit prefaced its opinion by positing that “[f]ederal courts have a ‘virtually unflagging obligation … to exercise the jurisdiction given them,’ and therefore abstention ‘is the exception, not the rule.” When both a federal court and a state court have concurrent jurisdiction over substantially similar matters, the federal court can only decline to exercise its jurisdiction in “exceptional circumstances, where the order to the parties to repair to the state court would clearly serve an important countervailing interest.”
Determining whether abstention is proper under Colorado River requires a two-part test. First, the court must determine whether the actions are substantially parallel, such that they raise “nearly identical allegations and issues.” If the actions are parallel, then the court must examine six factors to determine abstention, “with the balance heavily weighted in favor of the exercise of jurisdiction”: “(1) which court first assumed jurisdiction over the property; (2) the inconvenience of the federal forum; (3) the desirability of avoiding piecemeal litigation; (4) the order in which jurisdiction was obtained; (5) whether federal or state law controls; and (6) whether the state court will adequately protect the interests of the parties.”
While Ms. Arsenis attempted to argue that the state and federal actions were not parallel, the Third Circuit quickly found that argument unavailing. Both actions arose out of the foreclosure and hinged on the alleged failure to convert the trial loan modification into a permanent modification. The court then turned to each of the six analysis factors.
The first and fourth factors, each related to the timing of when each court first exercised jurisdiction, weighed in favor of abstention. The state court had not only been overseeing the foreclosure action prior to the federal filing, but the state action was, in fact, already well underway before the federal court’s involvement.
Both the second and fifth factors were ultimately neutral, neither weighing in favor of or against abstention. The state and federal courts were in close proximity to each other, such that inconvenience under the second factor was a non-issue. Regarding the fifth factor, federal law controlled the alleged violations of the CARES Act, RESPA, and FDCPA, while state law controlled the underlying foreclosure component. With both federal and state laws being implicated, the relevant factor was neutral.
The third factor, “the desirability of avoiding piecemeal litigation,” may be less intuitive than the other factors. Courts cannot assume any preference for avoiding piecemeal litigation but must instead look for any evidence of a federal policy that explicitly or implicitly desires to avoid piecemeal litigation within the subject area at issue. In Colorado River, SCOTUS found that a federal law allowing state courts to exercise jurisdiction over the United States in water rights cases was evidence of a federal policy against piecemeal litigation in such cases, with a preference towards a unified proceeding in state court. Conversely, in Moses H. Cone Memorial Hospital v. Mercury Construction Corp., SCOTUS found that the Federal Arbitration Act expressly requires piecemeal litigation in some instances. Tying these two extremes together, the Third Circuit previously found that the third factor only favors abstention when “there is evidence of a strong federal policy that all claims should be tried in the state courts.” Both RESPA and FDCPA allow for concurrent jurisdiction in federal and state courts, while Congress did not provide for a private cause of action under the CARES Act at all, let alone express any preference for such an action to be litigated in state courts. As such, the third factor did not favor abstention.
Lastly, to determine the sixth factor—whether the state court will adequately protect the interests of the parties—the Third Circuit relied primarily on the key issue common to both actions. Whether the bank had improperly failed to modify the loan would likely determine the outcome in both actions. As that question was largely akin to a breach of contract analysis, both courts were adequate to protect the parties’ interests, and the factor did not favor abstention. In reaching this conclusion, the Third Circuit noted that the sixth factor is normally relevant only when it would weigh against abstention.
Weighing each of the factors at hand, the Third Circuit found that they did not rise to the “exceptional circumstances” level sufficient to overcome the presumption heavily in favor of exercising federal jurisdiction. As such, the case was remanded back to the District Court.
After reaching its conclusion and remanding the case, the Third Circuit addressed the elephant in the room: while the federal appeal was pending, the state court had already granted summary judgment in favor of the bank. The court recognized that, as a general rule, concurrent state and federal cases only both proceed until one reaches a judgment, at which point the other case may be barred by res judicata or collateral estoppel. Both parties submitted supplemental briefing to the Third Circuit, requesting an opinion on whether the federal claims were now precluded. However, the court refused to address the issue, instead ruling that it was for the district court to address on remand.
Key Takeaway
Arsenis highlights just how strongly federal courts favor exercising concurrent jurisdiction with a related case pending in state court. Even where separate cases in state and federal courts hinge on the same issues, implicate the same laws, and where a decision in one case is likely to preclude further action in the other, federal courts are likely to still exercise jurisdiction. Litigators looking to dismiss a federal claim on abstention grounds face a high burden and should generally be prepared to argue in concurrent cases until one reaches a resolution.
