Opinions of the United
1995 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


12-21-1995

NYLife Dist., Inc. v. Adherence Grp., Inc., et al.
Precedential or Non-Precedential:

Docket 94-5725




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                  UNITED STATES COURT OF APPEALS
                      FOR THE THIRD CIRCUIT
                           ___________

                           No. 94-5725
                           ___________

          NYLIFE DISTRIBUTORS, INC.

                     vs.

          THE ADHERENCE GROUP, INC;
          JOSEPH GERASOLO;
          PATRICK BLEACH;
          DENNIS SCHNELL;
          DONALD THOMAS;
          RICHARD HESSEN;
          JAMES LYONS;
          ELIZABETH GERASOLO

                     Joseph Gerasolo, Elizabeth Gerasolo, and
                     Patrick Bleach,

                                 Appellants
                           ___________

          Appeal from the United States District Court
                 for the District of New Jersey
                   (D.C. Civ. No. 94-cv-00637)
                           ___________

                              Argued
                         November 29, 1995
      Before:   MANSMANN, SCIRICA and ROTH, Circuit Judges.

                     (Filed December 21, 1995)
                            ___________

William J. Salmond, Esquire
Alan J. Karcher, Esquire (ARGUED)
Karcher, Salmond, Ronan & Rainone
10 Parsonage Road
CN 2908
Edison, NJ 08818

                Counsel for Appellee

Christopher J. Carey, Esquire
Tompkins, McGuire & Wachenfeld
100 Mulberry Street


                                 1
Gateway Four
Newark, NJ 07102




                   2
Raymond A. Connell, Esquire (ARGUED)
Connell, Losquadro & Zerbo
17 State Street
New York, NY 10004

            Counsel for Appellants
                             ___________

                        OPINION OF THE COURT
                             __________


MANSMANN,   Circuit Judge.

            In this case of first impression, we consider whether

the broad discretionary standard set forth in Brillhart v. Excess

Ins. Co. of America, 

(1942), or the more narrow

"exceptional circumstances" test enunciated in Colorado River

Water Conservation Dist. v. United States, 

(1976),

applies to a district court's decision to dismiss an interpleader

action commenced under 28 U.S.C. § 1335 (1993), in favor of

parallel state court proceedings.    Guided by the Supreme Court's

recent decision in Wilton v. Seven Falls Co., ___ U.S. ___, 

(1995), where the Court determined that the Brillhart

standard applies in declaratory judgment actions, we hold that a

motion to dismiss a federal statutory interpleader action during

the pendency of a parallel state court proceeding is addressed to

the sound discretion of the district court.

            Following the commencement of this section 1335

interpleader action, one of the defendant-claimants commenced a

state court action.    After the district court determined that the

requirements of the statute had been met, but before the dispute

to the stake had been adjudicated, this defendant filed a motion,

essentially requesting that the district court defer to the state


                                 3
court action.   Conflating the two-step nature of an interpleader

action, the district court was of the belief that all federal

claims had been eliminated and terminated the case.    Instead, the

court should have exercised its discretion to decide in which

forum, federal or state, the unresolved dispute to the stake

could be better determined.    We will, therefore, vacate the

district court's termination order and remand the case for the

court to make this decision.



                                 I.

          Since its commencement, this case has taken a number of

procedural twists and turns.    We begin by reviewing those aspects

of its history that are relevant to the issues before us.

          On February 15, 1994, NYLife Distributors, Inc., the

averred administrator of the "Mainstay Mutual Fund", filed a

complaint in interpleader in the United States District Court for

the District of New Jersey under 28 U.S.C. § 1335 (1993),0

against The Adherence Group, Inc. ("TAG")0 and several TAG

employees, including Joseph Gerasolo, the company's former



0
          Rule 22 of the Federal Rules of Civil Procedure is also
a provision for interpleader. Fed. R. Civ. P. 22. While both
statutory interpleader under 28 U.S.C. § 1335 (1993), and rule
interpleader allow a person holding property to join in a single
suit two or more persons asserting claims to that property, they
are dissimilar in several ways; most notably, unlike statutory
interpleader which confers subject matter jurisdiction on the
federal courts, rule interpleader is purely procedural. Rule 22
interpleader is not implicated in, nor is it relevant, to this
appeal.
0
          The Adherence Group, Inc. refers to itself in its
briefs as "TAG" and we adopt that designation.

                                 4
President0 and Patrick Bleach, its former Executive Vice

President.    NYLife is a New York corporation; TAG is organized

under the laws of Delaware and has its principal place of

business in New Jersey; Gerasolo is a citizen of New York; and

Bleach is a citizen of New Jersey.

             In its complaint, NYLife asserted that it was subject

to conflicting demands from the defendants for monies it was

holding in Mainstay Mutual Fund accounts opened for TAG employees

in connection with TAG's executive compensation plan.0     Claiming

no interest in the money, NYLife further alleged that it intended

to deposit the money with the court and requested that the

defendants be required to interplead and settle among themselves

their respective rights to the fund.     On February 16, 1994, the

individual defendants' total balance in the Mainstay Mutual Fund,

which amounted to $215,489.50, was deposited in the court's

Registry.

             On March 7, 1994, Gerasolo and Bleach filed an answer

to the interpleader complaint averring, inter alia, that TAG's

claims were barred by certain settlement agreements, and brought

a counterclaim against NYLife, alleging that NYLife's liquidation

0
          Elizabeth Gerasolo, Joseph Gerasolo's wife, was also
joined as a defendant in the interpleader action. For the sake
of convenience, we will refer to Joseph and Elizabeth Gerasolo
collectively as "Gerasolo".
0
      More specifically, NYLife alleged that at about the same
time it received a letter from TAG's attorney advising that
"monies . . . had been improperly diverted from [TAG] to the
[Mainstay Mutual Fund] accounts of the individual defendants . .
." and directing that "no funds be distributed from any of the
accounts of the individual defendants until further notice[]", it
received a request from one of the individual defendants for
money from his Mainstay Mutual Fund account.

                                  5
of their respective Mainstay Mutual Fund accounts was a breach of

contractual and fiduciary duties.   Additionally, Gerasolo and

Bleach filed a cross-motion requesting, inter alia, that NYLife's

interpleader action be dismissed, except for the purpose of

determining the damages they had allegedly sustained as a result

of NYLife's actions.

          On March 17, 1994, TAG filed an answer to NYLife's

complaint, admitting that it and the individual defendants had

subjected NYLife to conflicting claims for Mainstay Mutual Fund

monies.

          Shortly thereafter, on March 23, 1994, TAG and its sole

shareholder, TAG/SCIB Services A.G., commenced an action in the

Superior Court of New Jersey, Middlesex County, against Gerasolo

and Bleach, alleging that they had wrongfully appropriated TAG

assets, including the monies deposited in the Mainstay Mutual

Fund, through fraud, embezzlement and conversion, and against the

Moore Stephens Accounting Firm, TAG's auditor, for failure to

uncover the fraud.   The complaint was later amended on July 20,

1994, to join the law firm of Connell, Losquadro & Zerbo and

unknown "John Doe" fictional defendants for allegedly conspiring

with Gerasolo and Bleach to defraud TAG.

          On May 19, 1994, the district court issued an order

granting NYLife's motion for a judgment in interpleader in the

amount of $215,489.50; dismissing NYLife from the case and from

any future liability for the payment of the money into the court

Registry; ordering that the defendants be enjoined from

instituting any other action against NYLife or its affiliates


                                6
based on NYLife's commencement of the interpleader action;

awarding NYLife its attorneys' fees and costs; and dismissing the

cross-motion for dismissal and counterclaim against NYLife that

Gerasolo and Bleach had filed.

          On June 1, 1994, Gerasolo and Bleach filed an amended

answer to the interpleader complaint, adding cross-claims against

TAG under New Jersey law for breach of contract, violations of

the New Jersey Conscientious Employee Protection Act, 34 N.J.

Stat. Ann. § 19-1 et seq. (1988), and malicious abuse of process.

          Thereafter, the parties engaged in discovery.

          On July 7, 1995, TAG filed a motion asking the district

court to dismiss the cross-claims Gerasolo and Bleach had

asserted against it and to transfer the interpleaded fund to the

Superior Court of New Jersey; in the alternative, TAG asked the

court to retain the fund while the parties litigated their

entitlement to the money in the action TAG had commenced in the

New Jersey state court.

          By order dated October 26, 1994, the district court

granted TAG's motion.     Of the view that its May 19, 1994 order,

which granted NYLife's motion for judgment in interpleader,

denied Gerasolo's and Bleach's cross-motion for dismissal of the

interpleader action and dismissed the counterclaim against

NYLife, had "eliminat[ed]" all federal claims in this case[]",

the court concluded that TAG was requesting that the court invoke

its discretion under 28 U.S.C. § 1367(c) (1993) and decline to

exercise supplemental jurisdiction over Gerasolo's and Bleach's

state law cross-claims.    Citing 28 U.S.C. § 1367(c)(3), which


                                  7
provides that a district court "may decline to exercise

supplemental jurisdiction over a claim . . . if the district

court has dismissed claims over which it has original

jurisdiction[]", the court decided not to exercise its

supplemental jurisdiction over the cross-claims based on its

belief that no federal claims remained in the case.   Accordingly,

in its October 26, 1994 order, the court dismissed the cross-

claims, retained jurisdiction over the interpleaded fund pending

the outcome of the state court litigation (at which time the

party who prevails in the state court may apply to the district

court for a distribution of the fund) and administratively

terminated the case.

          Gerasolo and Bleach bring this appeal from the district

court's October 26, 1994 order, contending that due to the

court's misinterpretation of 28 U.S.C. § 1335, it in effect

improperly "abstained" from this statutory interpleader action.0



                               II.

          The federal interpleader statute, 28 U.S.C. § 1335

(1993), is a remedial device which enables a person holding

property or money to compel two or more persons asserting

mutually exclusive rights to the fund to join and litigate their

0
          The district court's October 26, 1994 order turned on
its interpretation of the federal interpleader statute, 28 U.S.C.
§ 1335, which then formed the basis of the court's application of
the supplemental jurisdiction statute, 28 U.S.C. § 1367(c)(3)
(1993). Accordingly, our review is plenary. See Air Courier
Conference of Am./Int'l Comm. v. United States Postal Serv., 

, 1217, n.3 (3d Cir. 1992) (statutory construction or
interpretation is a legal issue subject to plenary review).


                                8
respective claims in one action.    3A J. Moore & J. Lucas, Moore's

Federal Practice § 22.02[1] (2d ed. 1994).   The benefits of the

device to both the stakeholder and the claimants are substantial.

It relieves the stakeholder from determining at his peril the

merits of competing claims and shields him from the prospect of

multiple liability; it gives the claimant who ultimately prevails

ready access to the disputed fund.   

grants original jurisdiction to the

district courts over interpleader actions and sets forth certain

requirements that must be met before the action may be

maintained.   For example, although the citizenship of the

stakeholder is irrelevant for jurisdictional purposes, the

statute calls for diversity of citizenship between two or more of

the adverse claimants, requires that the amount in controversy,

which is measured by the value of the stake, be $500, and compels

the stakeholder to deposit the money or property at issue in the

court's Registry or, in the alternative, to give a bond payable

to the clerk of courts in the appropriate amount.0   28 U.S.C.

0
          Section 1335 provides:

          § 1335.    Interpleader

               (a) The district courts shall have
          original jurisdiction of any civil action of
          interpleader or in the nature of interpleader
          filed by any person, firm, or corporation,
          association, or society having in his or its
          custody or possession money or property of
          the value of $500 or more, or having issued a
          note, bond, certificate, policy of insurance,
          or other instrument of value or amount of
          $500 or more, or providing for the delivery
          or payment or the loan of money or property


                                9
§ 1335(a).    Additionally, 28 U.S.C. § 2361 (1994) provides for

nationwide service on all claimants in statutory interpleader

actions and allows a district court in a section 1335

interpleader case to enjoin any state or federal proceedings

affecting the stake; 28 U.S.C. § 1397 (1993) provides that

section 1335 interpleader cases may be brought where one or more

of the claimants reside.0

             of such amount or value, or being under any
             obligation written or unwritten to the amount
             of $500 or more, if

                  (1) Two or more adverse claimants, of
             diverse citizenship as defined in section
             1332 of this title, are claiming or may claim
             to be entitled to such money or property, or
             to any one or more of the benefits arising by
             virtue of any note, bond, certificate, policy
             or other instrument, or arising by virtue of
             any such obligation; and if (2) the plaintiff
             has deposited such money or property or has
             paid the amount of or the loan or other value
             of such instrument or the amount due under
             such obligation into the registry of the
             court, there to abide the judgment of the
             court, or has given bond payable to the clerk
             of the court in such amount and with such
             surety as the court or judge may deem proper,
             conditioned upon the compliance by the
             plaintiff with the future order or judgment
             of the court with respect to the subject
             matter of the controversy.

                  (b) Such an action may be entertained
             although the titles or claims of the
             conflicting claimants do not have a common
             origin, or are not identical, but are adverse
             to and independent of one another.

28 U.S.C. § 1335 (1993).
0
          Section 2361 states:

             § 2361.   Process and procedure



                                  10
          An action commenced under section 1335 typically

involves two steps:    during the first, the district court

determines whether the requirements of the statute have been met

and whether the stakeholder may be relieved from liability;

during the second, it actually adjudicates the defendants'

adverse claims to the interpleaded fund.   New York Ins. Co. v.

Connecticut Dev. Auth., 

, 95 (2d Cir. 1983); 7 C.

Wright, A. Miller & M. Kane, 7 Federal Practice and Procedure

                    In any civil action of interpleader
          or in the nature of interpleader under
          section 1335 of this title, a district court
          may issue its process for all claimants and
          enter its order restraining them from
          instituting or prosecuting any proceeding in
          any State or United States court affecting
          the property, instrument or obligation
          involved in the interpleader action until
          further order of the court. Such process and
          order shall be returnable at such time as the
          court or judge thereof directs, and shall be
          addressed to and served by the United States
          marshals for the respective districts where
          the claimants reside or may be found.

               Such district court shall hear and
          determine the case, and may discharge the
          plaintiff from further liability, make the
          injunction permanent, and make all
          appropriate orders to enforce its judgment.

28 U.S.C.§ 2361 (1994).

          Section 1397 states:

          §   1397.   Interpleader

                    Any   civil action of interpleader or in
          the nature of   interpleader under section 1335
          of this title   may be brought in the judicial district
in which one or more of   the claimants reside.

28 U.S.C. §1397 (1993).


                                 11
§ 1714 (2nd ed. 1986).   The second stage, which proceeds like any

other action, is ultimately resolved by the entry of a judgment

in favor of the claimant who is lawfully entitled to the stake.

See Diamond Shamrock Oil & Gas Corp. v. Commissioner of Revenues,

, 534 (8th Cir. 1970).

          Here the district court completed the first step of

interpleader on May 19, 1994, when it granted NYLife's motion for

a judgment in interpleader and discharged NYLife from liability.

The court did not, however, proceed to section 1335's second step

-- the unresolved dispute between the claimants for the

interpleaded fund, which was, like the first, within the court's

original jurisdiction.   We thus hold that the district court's

conclusion that all federal claims had been dismissed by virtue

of its May 19, 1994 order was in error, and that its October 26,

1994 decision to terminate the case in favor of TAG's pending

state court action on this basis was as well erroneous.   It

necessarily follows and we further conclude that the district

court erred when it also dismissed Gerasolo's cross-claims under

28 U.S.C. § 1367(c)(3) (1993) on October 26, 1994, believing that

all claims over which it had original jurisdiction had been

eliminated from the case.

          Our analysis, however, does not end here.   We turn next

to the legal principles that are implicated by that portion of

TAG's motion which in effect requested that the interpleader

action be dismissed so as to allow the parties to resolve their

dispute over the Mainstay Mutual Fund monies in the New Jersey

state court.


                                12
                                III.

          It is, of course, the general rule that the mere

pendency of a similar action in a state court does not require,

nor even permit, a federal court to refuse to hear or to stay an

action that is properly within its jurisdiction, and that both

state and federal actions should go forward until one of them

results in a judgment that may be asserted as res judicata in the

other, McClellan v. Carland, 

, 281-82 (1910).

Nonetheless, three doctrines of abstention have evolved which

allow the district courts to decline to hear cases over which

they have jurisdiction.0   The parties are in agreement that these

traditional abstention doctrines, which rest on considerations of

proper constitutional adjudication or federal-state relations, do

not apply in this case.

          Over the years, an additional ground for dismissing or

staying a federal action in favor of state court proceedings has

developed; it is aimed at avoiding duplicative litigation and is

premised on considerations which concern the efficient

administration of judicial resources and the comprehensive
0
          The three traditional doctrines of abstention are:
Pullman abstention, which is proper when a state court
determination of a question of state law might moot or change a
federal constitutional issue, Railroad Comm'n of Texas v. Pullman
Co., 

(1941); Burford abstention, which applies when
questions of state law in which the state has expressed a desire
to establish a coherent policy on a matter of substantial public
concern are raised, Burford v. Sun Oil Co., 

(1943);
and Younger abstention, which is appropriate where, absent bad
faith, harassment, or a patently invalid state statute, federal
jurisdiction has been invoked to restrain state criminal
proceedings. Younger v. Harris, 

(1971).


                                 13
disposition of cases.     See Colorado River Water Conservation

Dist. v. United States, 

, 818 (1976).      In our view,

it is this additional category that is raised here.



                                  A.

            Some fifty years ago, in Brillhart v. Excess Ins. Co.,

(1942), the Supreme Court held that the district

courts may decline to hear lawsuits brought under the Federal

Declaratory Judgment Act, 28 U.S.C. § 2201(a), in favor of

pending state actions for reasons of judicial economy, even where

they have jurisdiction.    Wilton v. Seven Falls Co., ___ U.S. ___,

, 2140 (1995).    In Brillhart, the Excess Insurance

Company of America commenced a declaratory judgment in federal

court to determine its rights under a reinsurance agreement with

Central Mutual Insurance Company.      Subsequently, Excess Insurance

was joined in a Missouri state court garnishment proceeding that

had been brought by Dewey Brillhart, the administrator of an

estate, against Central Insurance to collect on a default

judgment.   Brillhart then moved to dismiss the declaratory

judgment action, principally on the ground that the issues Excess

Insurance raised could be decided in the state garnishment

proceeding.   The district court granted Brillhart's motion to

dismiss, apparently to avoid delay, without considering whether

Excess Insurance's declaratory judgment claims could be resolved

in the garnishment proceeding.     The Court of Appeals for the

Eighth Circuit reversed, holding that dismissal of the

declaratory judgment action was an abuse of discretion, and


                                  14
remanded the case to the district court, directing it to proceed

to the merits.

          Reversing the court of appeals and remanding to the

district court for another determination of the motion, the

Supreme Court stated that "[a]lthough the [d]istrict [c]ourt had

jurisdiction . . ., it was under no compulsion to exercise that

, and made clear that the

district courts have the discretion to dismiss a declaratory

judgment action when "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."   

   The Court did not articulate all

of the considerations which should guide a district court's

decision in this regard; it did provide, however, that the court

"should ascertain whether the questions in controversy between

the parties to the federal suit[] . . . can better be settled in

the proceeding pending in state court[]", assess "the scope of

the pending state proceeding and the nature of the defenses open

there[]", and evaluate "whether the claims of all parties in

interest can satisfactorily be adjudicated in that proceeding,

whether necessary parties have been joined, [and] whether such

parties are amenable to process in that proceeding, etc."     

the 1976 Colorado River 

, the Supreme Court revisited the propriety of a district

court's decision to dismiss a federal suit in favor of a

concurrent state court proceeding for reasons of judicial economy


                                   15
and efficiency.   There, the government filed a complaint pursuant

to 28 U.S.C. § 1345 (1993), which grants the district courts

original jurisdiction of all civil actions commenced by the

United States, against some 1,000 non-federal water users for a

declaration of the government's rights to water in certain

Colorado rivers and their tributaries.    Shortly after the federal

suit was commenced, one of the defendants commenced a state

proceeding for the purpose of adjudicating all government claims

to the water, both state and federal.    Several parties in the

federal action then filed a motion to dismiss, asserting that the

district court did not have jurisdiction.    Without deciding the

jurisdictional question, the district court abstained.     On

appeal, the Court of Appeals for the Tenth Circuit reversed,

holding that the district court had jurisdiction and that

abstention was inappropriate.

          Reversing the court of appeals' judgment, the Supreme

Court confirmed that federal courts may, in appropriate

circumstances, defer to state court proceedings for reasons of

wise judicial administration, but, without discussing Brillhart,

announced a very different 

.   Where in

Brillhart the Court warned district courts against "[g]ratuitous
interference with the orderly and comprehensive disposition of a

state court litigation" and directed them to exercise discretion

in deciding whether or not to 

, in

Colorado River the Court referred to the "virtually unflagging

obligation of the federal courts to exercise the jurisdiction

given them[]", and set forth an "exceptional circumstances" test


                                16
of several factors that the district courts should 

.   These factors are whether either court has

assumed jurisdiction over property, the inconvenience of the

federal forum, avoidance of piecemeal litigation, and the order

in which the courts obtained jurisdiction.    

          Two years after its decision in Colorado River, the

Court decided Will v. Calvert Fire Ins. Co., 

(1978),

which concerned an action for an alleged violation of the federal

securities laws commenced in federal court during the pendency of

a related state court case.   Relying on Brillhart, a plurality of

the Court reversed the grant of a petition for a writ of mandamus

ordering the district court to adjudicate the claim.      According

to the plurality, Colorado River had not "undermined[d] the

conclusion of Brillhart that the decision whether to defer to the

concurrent jurisdiction of a state court is, in the last

analysis, a matter committed to the district court's discretion."

  Four Justices, however, joined Justice Brennan's

dissent, which took issue with the plurality's reliance on

Brillhart and its disregard for the Colorado River exceptional

circumstances test.   

  Chief Justice Burger,

although concurring in the judgment, agreed with the dissent that

the Colorado River test was controlling.    

    In his

dissenting opinion, Justice Brennan observed that while Brillhart

concerned an action for a declaratory judgment where federal

jurisdiction is "discretionary", Calvert involved a claim under

the Securities Exchange Act of 1934 over which the federal courts




                                17
have been given "non-discretionary", exclusive jurisdiction.     

          Subsequently, in Moses H. Cone Memorial Hosp. v.

Mercury Constr. Corp., 

(1983), the Court ruled that

the Colorado River exceptional circumstances test, not the

Brillhart discretionary approach, applies to a district court's

decision to stay a diversity of citizenship action brought under

section 4 of the United States Arbitration Act of 1925, 9 U.S.C.

§ 4, seeking an order compelling arbitration, 

and

added two factors to the test -- which forum's substantive law

governs the merits of the litigation and the adequacy of the

state forum to protect the parties' rights.   

  In doing

so, the Court rejected the argument that Calvert had changed the

law, noting that the majority of the Court in Calvert reaffirmed

the Colorado River exceptional circumstances test, 

and

that Calvert was distinguishable, since it involved the issuance

of a writ of mandamus under 28 U.S.C. § 1651, where the movant

must show a clear and indisputable right to the writ, not a

typical appeal.   

          Given these conflicting messages, not surprisingly

circuit conflicts have arisen over the standard which governs a

district court's decision to stay a declaratory judgment action

in favor of parallel state proceedings; several courts, including

our own, have applied the discretionary standard articulated in

Brillhart, e.g., Travelers Ins. Co. v. Louisiana Farm Bureau
Federation, Inc., 

, 778, n.12 (5th Cir. 1993) and

Terra Nova Ins. Co. v. 900 Bar, Inc., 

(3d Cir.


                               18
1989), while other courts applied the relatively narrow

exceptional circumstances test developed in Colorado River. E.g.,

Employers Ins. of Wausau v. Missouri Elec. Works, Inc., 

, 1374, n.3 (8th Cir. 1994).

          Quite recently, the Supreme Court resolved the conflict

in Wilton, ___ U.S. ___, 115 S. Ct. at 2137, holding that the

Brillhart discretionary standard governs a district court's

decision to stay a federal declaratory judgment action during the

pendency of parallel state court proceedings.   There a dispute

between the Hill Group and other parties over the ownership and

operation of oil and gas properties in Winkler County, Texas, was

headed toward litigation.   The Hill Group asked London

Underwriters to provide it with coverage under several insurance

policies in the event it was sued; London Underwriters refused.

Following a three-week trial in Winkler County, a jury verdict in

excess of $100 million was entered against the Hill Group.    After

the Hill Group gave London Underwriters notice of the verdict,

the insurer filed an action under the Declaratory Judgment Act,

28 U.S.C. § 2201(a) (1988 ed., Supp. V), in federal court,

seeking a declaration that the policies did not cover the Hill

Group's liability.   This action was voluntarily dismissed, but

later refiled when the Hill Group sued London Underwriters on the

insurance policies in a state court.   The Hill Group then moved

to dismiss or, in the alternative, to stay London Underwriters'

declaratory judgment action.   Observing that the state lawsuit

encompassed the coverage issues raised in the declaratory

judgment action and concluding that a stay was warranted in order


                                19
to avoid piecemeal litigation, the district court issued a stay;

noting that "'[a] district court has broad discretion to grant

(or decline to grant) declaratory judgment[]'", the Court of

Appeals for the Fifth Circuit affirmed.   

            The Supreme Court also affirmed.   Its decision was

premised on "[d]istinct features of the Declaratory Judgment

Act," which in the Court's view, "justify a standard vesting

district courts with greater discretion in declaratory judgment

actions than that permitted under the `exceptional circumstances'

test of Colorado River and Moses H. Cone."     

  After

noting the statute's "textual commitment to discretion" wherein a

court "may declare the rights and other legal relations of any

interested party seeking such a declaration," 28 U.S.C. §2201(a),

and the "breadth of leeway [it has] always understood [the Act]

to suggest", the Court concluded that "[b]y the Declaratory

Judgment Act, Congress sought to place a remedial arrow in the

district court's quiver"; it created "an opportunity, rather than

a duty, to grant a new form of relief to qualifying litigants."

   Accordingly, the Court held that "[c]onsistent with

the nonobligatory nature of the remedy, a district court is

authorized, in the sound exercise of its discretion, to stay or

to dismiss an action seeking a declaratory judgment before trial

or after all arguments have drawn to a close."     

   The Court further held that the district courts are

vested with discretion to make these determinations in the first

instance and that their decisions should be reviewed under the

abuse of discretion standard.   

                                 20
          We turn now to the standard that governs a district

court's decision to dismiss or stay an interpleader action

commenced under 28 U.S.C. § 1335 (1993), due to the pendency of

concurrent state court proceedings.



                                B.

          At the outset, we observe that district courts have

traditionally assumed that they possess broad equitable

discretion to decline jurisdiction over a statutory interpleader

lawsuit where in their view there is a pending state proceeding

that obviates the need for the federal action.   In B. J. Van

Ingen & Co. v. Connolly, 

(3d Cir. 1955), for

example, when we affirmed the district court's dismissal of an

interpleader action, we agreed that "in all the circumstances

there was insufficient equity in the [plaintiff's] present

complaint to make it incumbent upon a federal court to interfere

by way of interpleader with what the state court [was] doing."

  We also observed that the district court had

"properly considered and given weight" to the plaintiff's

position in deciding that "[the plaintiff] might equitably be

left to have its responsibility and duty with references to the

fund in question decided in the comprehensive New Jersey suit."

  See also American Airlines, Inc. v. Block, 

, 14 (2d Cir. 1990) ("[I]t is well recognized that interpleader

is an equitable remedy, and a federal court may abstain from

deciding an interpleader action if another action could

adequately redress the threat that the stakeholder might be held


                                21
doubly liable."); Koehring Co. v. Hyde Const. Co., 

,

1202 (7th Cir. 1970) ("[A] federal district court [has] the

discretion to dismiss an action in statutory interpleader on

grounds of equity and comity, when the interests of the

stakeholder and all claimants will be adequately protected in a

pending state court proceeding[]".); Humble Oil & Refining Co. v.

Copeland, 

, 368 (4th Cir. 1968) ("The genesis of

interpleader is equity, and we perceive no reason why it should

be denied the remedial flexibility of a chancellor's decree.

Thus, the district court can stay its proceedings [and] permit

the parties to litigate ownership of the royalties in [state

court] . . . ."); Equitable Assur. Soc. v. Porter-Englehart, 

, 83 (1st Cir. 1989) (agreeing that the federal courts may

in their discretion dismiss or stay statutory interpleader

actions in favor of ongoing state proceedings); Hickok v. Gulf

Oil Co., 

(6th Cir. 1959) (same).   Contra Boston Old

Colony Ins. Co. v. Balbin, 

(5th Cir. 1979) (holding

that a district court may not abstain from an interpleader action

where important state public policy and "unusual circumstances"

are not present).

          Our review has not produced nor have the parties

suggested any cases which analyze the scope of a district court's

discretion under 28 U.S.C. § 1335 (1993) to defer to state

proceedings in light of the Supreme Court decisions we have
discussed.   We believe our threshold inquiry is whether the

exceptional circumstances test set forth in Colorado River
Conservation Dist. v. United States, 

(1976), must


                                22
invariably be applied whenever a district court with jurisdiction

considers a request to defer to a state court action.   In our

view, it need not.   We read the Supreme Court's decisions,

beginning with Brillhart v. Excess Ins. Co., 

(1942),

and ending with Wilton v. Seven Falls Co., ___ U.S. ___, 115 S.

Ct. 2137 (1995), to instruct that the exceptional circumstances

test is not universal and will yield in cases where the statute

which grants a district court the authority to decide a matter

"justif[ies] [as does the Declaratory Judgment Act] a standard

vesting district courts with greater discretion . . . than that

permitted under the `exceptional circumstances' test of Colorado

River and Moses H. Cone."   See Wilton, ___ U.S. ___, 115 S. Ct.

at 2140.

           Accordingly, we look to the interpleader statute to

determine which standard -- the discretionary approach taken in

Brillhart or the exceptional circumstances test set forth in

Colorado River -- governs a district court's decision to dismiss

a federal interpleader action in favor of pending state

proceedings.   We initially observe that historically and under

the statute, interpleader is a suit in equity.   Sanders v. Armour
Fertilizer Works, 

, 199 (1934); 4 J. Pomeroy, A

Treatise on Equity Jurisprudence § 1320 (5th ed. 1941).0   A

0
          The first federal Interpleader Act was passed in 1917.
Act of Feb. 22, 1917, ch. 113, 39 Stat. 929 (1917) (repealed
1926). The present provisions at 28 U.S.C. § 1335 (1993) and 28
U.S.C. § 2361 (1994) are bottomed on the Act as amended in 1936.
3A J. Moore & J. Lucas, Moore's Federal Practice, § 22.06 (2d ed.
1994). In the 1936 Act, the district courts were given original
jurisdiction "[o]f suits in equity begun by bills of interpleader
or bills in the nature of bills of interpleader . . . ." Act of

                                23
federal interpleader court, therefore, by the nature of its

jurisdiction proceeds with broad discretion.   Meredith v. City of

Winter Haven, 

, 235 (1943).   ("[A]n appeal to the

equity jurisdiction conferred on [the] federal courts is an

appeal to the sound discretion which guides the determinations of

courts of equity.").   Hecht Co. v. Bowles, 

, 329

(1944) ("The essence of equity jurisdiction has been the power of

the chancellor to do equity and to mould each decree to the

necessities of the particular case.   Flexibility rather than

rigidity has distinguished it.").

           Hence, one of two related questions we face is whether

under section 1335, the district courts retain their traditional

equitable discretion when deciding whether to hear a statutory

interpleader case or defer to a state court; and the other is

whether the district courts have a "virtually unflagging

obligation" to exercise their section 1335 jurisdiction.   In this

regard, we find the Supreme Court's decision in Weinberger v.

Romeo-Barcelo, 

(1982), instructive.   There, the

Court considered whether, under the Federal Water Pollution

Control Act, as amended, 33 U.S.C. § 1251 et seq. (1976 ed. and
Supp. IV), the district courts must enjoin violations of the Act

or whether they retain the broad discretion that equity

jurisdiction provides them in deciding issues of injunctive

relief.   To decide the issue, the Court looked to the overall

structure and language, purpose and legislative history of the

Jan. 20, 1936, ch. 13, 49 Stat. 1096 (1936) (current version at
28 U.S.C. § 1335(a)).


                                24
Act to determine whether Congress clearly intended to alter

traditional equity practices, stating:
          `[T]he comprehensiveness of [the district
          court's] equitable jurisdiction is not to be
          denied or limited in the absence of a clear
          and valid legislative command. Unless a
          statute in so many words, or by a necessary
          and inescapable inference, restricts the
          court's jurisdiction in equity, the full
          scope of that jurisdiction is to be
          recognized and applied. The great principles
          of equity, securing complete justice, should
          not be yielded to light inferences or
          doubtful construction.'

(quoting Porter v. Warner Holding Co., 

,

398 (1946)).

          The Court cautioned, however, that "[of] course,

Congress may intervene and guide or control the exercise of the

courts' discretion, but we do not lightly assume that Congress

has intended to depart from established principles."   

.

          Ultimately, the Court found nothing in the Clean Waters

Act's language, structure, purpose or legislative history

evidencing Congress' intent to deny the courts their traditional

equitable discretion in deciding matters of equitable relief. 

  Compare 

(holding that the phrase
"shall be granted" in section 925 of the Emergency Price Control

Act of 1942, 50 U.S.C. § 901 et seq., does not mean that

injunctions for violations of the Act are mandatory; "if Congress

had intended to make such a drastic departure from the tradition

of equity practice, an unequivocal statement of its purpose would

have been made.") with TVA v. Hill, 

(1978) (holding

that the plain language and purpose of the Endangered Species


                                25
Acts, 16 U.S.C. 1531 et seq., contains a flat ban on the

destruction of critical habitats, thereby foreclosing the

exercise of the usual discretion possessed by a court of equity

and requiring a district court to enjoin violations of the Act).

           Against this backdrop, we turn to the text and

structure, purpose and legislative history of section 1335 to

determine the parameters of the district courts' discretion to

decline jurisdiction and defer to state court proceedings for the

sake of judicial administration and efficiency, looking

specifically for any indication that Congress sought to limit a

federal interpleader court's broad equitable discretion in such

matters.

           Starting with the statute's language and structure, we

find that the text of section 1335, when considered with 28

U.S.C. § 2361 (1994), is inconclusive.    Section 1335(b) of the

interpleader statute provides that an action over which the

district courts are granted original jurisdiction under section

1335(a) "may be entertained", even where the titles to or claims

of the conflicting claimants are adverse and independent of one

another.   28 U.S.C. § 1335(b) (emphasis added).   Although section

1335(b) is cast in discretionary terms, its permissive tone may

relate solely to Congress' decision to abolish in the

interpleader statute certain "historical limitations" that had

been imposed on interpleader actions.    See 3A J. Moore & J.
Lucas, Moore's Federal Practice §    22.11 (2d ed. 1994) (The four

historical requisites to a strict bill of interpleader were "same

debt, common origin, disinterested shareholder and the absence of


                                26
independent liability. . . .").        Section 2361, which authorizes

the district courts to issue nationwide process and enjoin other

actions affecting the stake, arguably suggests that a court may

not decline to hear the case, stating that "[the] district court

shall hear and determine the case, and may discharge the

plaintiff from further liability, make the injunction permanent,

and make all appropriate orders to enforce its judgment."       28

U.S.C. § 2361 (emphasis added).    We have not found any clues in

other portions of section 13350 or section 2361 or in relevant

legislative history to elucidate this language and its meaning.

It does not seem likely, however, that at the same time Congress

by way of section 2361 gave the district courts the considerable
0
          In support of their argument that the exceptional
circumstances test set forth in Colorado River Water Conservation
Dist. v. United States, 

(1976), should guide a
district court's decision to dismiss a federal interpleader
action in favor of pending state proceedings, Gerasolo and Bleach
rely heavily on section 1335(a), which states in pertinent part
that "[t]he district courts shall have original jurisdiction of
any civil action of interpleader or in the nature of
interpleader. . . ." 28 U.S.C. § 1335(a) (1993) (emphasis
added). In our view, section 1335(a) represents Congress'
decision to grant jurisdiction to the district courts in
interpleader actions; it is not, as Gerasolo and Bleach urge, a
directive on Congress' part that the district courts exercise
that jurisdiction.

          We note that Congress typically uses the language we
see in 28 U.S.C. § 1335(a) when granting jurisdiction to the
district courts. See, e.g., 28 U.S.C. § 1331 (1993) ("The
district courts shall have original jurisdiction of all civil
actions arising under the Constitution, laws or treaties of the
United States."); 

("The district courts shall have
original jurisdiction of all civil actions where the matter in
controversy exceeds the sum or value of $50,000 . . . and is
between -- (1) citizens of different States . . . . "); 

district courts shall have original jurisdiction of all
civil actions . . . commenced by the United States. . . .").



                                  27
tool of nationwide process, retained their equitable power to

order injunctive relief, and even granted them injunctive

authority over state courts, thereby exempting statutory

interpleader actions from the proscriptions of the Anti-

Injunction Act, 28 U.S.C. § 2283 (1994), it intended to narrow,

if not eliminate, the district courts' discretion in deciding

whether the issues raised in an interpleader action may be better

resolved in a state court.     We thus see section 2361 as a source

of authority for the district courts, not as a command to the

courts to exercise jurisdiction.       We therefore resolve any

ambiguities in sections 1335 and 2361 with regard to the district

courts' capacity to decline jurisdiction in favor of that

interpretation which preserves the courts' equitable discretion.

See 

.

           As to the purpose of section 1335, it has long been

recognized that the interpleader statute is remedial, aimed at

assisting a party who fears the vexation of defending multiple

claims to a fund or property under his control by providing him

the opportunity to satisfy his obligation in a single proceeding.

See State Farm Fire & Casualty Co. v. Tashire, 

, 533
(1967).   Indeed, the trend over the years has been directed

toward increasing the availability of interpleader and relaxing

historical, technical restraints on the device.       For example, the

first interpleader statute, passed in 1917, limited the district

courts' jurisdiction to strict bills of interpleader brought by

an insurance company or a fraternal beneficiary society, Act of

Feb. 22, 1917, ch. 113, 39 Stat. 929 (1917) (repealed 1926); by


                                  28
1936, statutory interpleader was, as it still is, available to

"any person, firm, corporation, association, or society. . . ."

Act of Jan. 20, 1936, ch. 13, 49 Stat. 1096 (1936) (current

version at 28 U.S.C. § 1335(a)).      Moreover, since initially

enacted, statutory interpleader has been greatly broadened to

include within its purview disputes concerning a wide range of

obligations and competing claims.      

at 28

U.S.C. § 1335(a),(b)).0   See Zechariah Chaffee, Jr., The Federal

Interpleader Act of 1936: I. and II., 45 Yale L.J. 963, 1161

(1936).   This expansion of the remedy leads us to conclude that

by the interpleader statute, Congress was more interested in

providing an opportunity to litigants to resolve disputes, than

in creating a duty in the district courts to exercise the

jurisdiction given them therein.




0
          A Senate Report summarized the modifications made to
the statute by the Act of 1936 as follows:

                Bills in the nature of interpleader are
           included;
                The class of parties entitled to use of
           the remedy is broadened;
                The scope of interpleader is extended
           over other subjects than insurance;
                The titles or claims supporting the
           action are extended;
                The venue is made more convenient for
           claimants;
                A bond is permitted as an alternative
           deposit;
                Privity among claimants is abolished;
                Interpleader is allowed defensively in
           actions at law.

S. Rep. No. 558, 74th Cong., 1st Sess. 1 (1935).

                                 29
          Finally, although the statute's scant legislative

history does not shed light on the question we are deciding, it

does not reveal any evidence of intent on Congress' part to limit

or otherwise alter traditional equity practice in section 1335

cases or to make the interpleader remedy obligatory.

          We thus hold that the discretionary standard enunciated

in Brillhart governs a district court's decision to dismiss an

action commenced under the interpleader statute during the

pendency of parallel state court proceedings.



                                 IV.

          In Wilton v. Seven Falls Co., ___ U.S. ___, 

(1995), the Court held that the decision to entertain a

declaratory judgment action in view of a pending parallel state

action is committed to the district courts in the first instance

because "facts bearing on the usefulness of the . . . remedy, and

the fitness of the case for resolution, are particularly within

their grasp."    

  We believe that the same holds true

in interpleader cases brought under 28 U.S.C. §1335 (1993). Thus,

this case must be remanded to the district court for it to

exercise its sound discretion in deciding whether to dismiss this

action in favor of the proceeding pending in the Superior Court

of New Jersey.

          On remand, the district court should determine, as a

threshold matter, whether the state court action is indeed

"parallel"; that is, whether it encompasses the competing claims

to the Mainstay Mutual Fund monies that are raised here.     Since


                                  30
the very basis for deference is the avoidance of needless

duplicative litigation, the absence of a parallel state

proceeding, as we have defined it in this context, would counsel

against, if not proscribe, dismissal.    Thereafter, in considering

TAG's motion, the district court should bear in mind that neither

the mere pendency of a parallel state court action nor the mere

presence of state law issues in this case would support

dismissal; the court must remain cognizant of the purpose of the

interpleader statute, ultimately determining where the competing

claims that expose the stakeholder to multiple lawsuits and

liability "can better be settled."    See Brillhart v. Excess Ins.

Co., 

, 495 (1942).   In this regard, the court should

evaluate which forum will protect the stakeholder more

effectively while providing the claimants with the more

efficient, convenient, and expeditious vehicle to settle their

dispute to the fund.   We would also expect the district court to

evaluate the conduct of the parties in litigating both the

federal and state actions to ensure that procedural fencing,

forum shopping or gamesmanship is not rewarded.    We do not intend

the considerations we have enunciated to be comprehensive, and

leave it to the district court to consider any other factors it

finds relevant.

          Finally, as the Court noted in Wilton, "where the basis
for declining to proceed is the pendency of a state proceeding, a

stay will often be the preferable course, insofar as it assures

that the federal action can proceed without risk of a time bar if

the state case, for any reason, fails to resolve the


                                 31
controversy".   

n.2.    Accordingly, the district court

should also consider whether a stay of this action, rather than a

dismissal, is appropriate, in the event it decides that the

parties are to resolve the issues raised in this action in the

state court.

                                V.

          For the foregoing reasons, we will vacate the district

court's October 26, 1994 order and remand the case to the

district court for further proceedings on the Adherence Group's

July 7, 1994 motion which requested that the court defer to the

New Jersey state court proceeding as to the interpleaded claims

and dismiss the cross-claims brought against it by Gerasolo and

Bleach.




                                32
                   NYlife v. The Adherence Group



                           No. 94-5725



----------------------------------------------------------------



ROTH, Circuit Judge:

          I agree with the majority's conclusion that the

district court improperly terminated the interpleader

proceedings, mistakenly believing that all federal claims had

been dismissed.   Unlike the majority, however, I am of the

opinion that, after concluding that jurisdiction was proper under

28 U.S.C. § 1335 and dismissing the stakeholder from future

liability, the district court was obligated to adjudicate the

remainder of the interpleader proceeding.   I therefore

respectfully dissent.

          The majority opinion concludes that the broad

discretionary standard enunciated by the Supreme Court in

Brillhart v. Excess Ins. Co. of Am., 

(1942), should

be applied in this case.   I disagree.   Having completed the first

stage of this interpleader proceeding, the district court was

obligated to entertain the second stage of the proceeding,

abstaining in favor of parallel state court proceedings only if

exceptional circumstances required.   Thus, I would hold that the

appropriate standard to apply in this case is the "exceptional

circumstances" test established by the Supreme Court in Colorado




                                                                  33
River Water Conservation Dist. v. United States, 

(1976).

           I believe that the majority misinterprets the recent

Supreme Court decision in Wilton v. Seven Falls Co., ___ U.S.

___, 

(1995).    In my opinion, Wilton restricts the

application of Brillhart's discretionary standard to actions

brought under the Declaratory Judgment Act or similar statutes

giving district courts express discretionary jurisdiction.      

  Beyond the declaratory judgment context and in the

absence of express language granting jurisdictional discretion,

however, federal courts have a "virtually unflagging obligation .

. . to exercise the jurisdiction given them" by Congress.     Id.;

Colorado 

.    Because this case clearly

falls outside of the declaratory judgment context and because

there is no statutory indication that there is a discretionary

character to the second stage of an interpleader proceeding,

Brillhart's broad discretionary standard should not be applied in

this case.

             In Wilton, the Court acknowledged that the suggestion

"that Brillhart might have application beyond the context of
declaratory judgments was rejected by the Court in Moses H. Cone

Memorial Hosp. v. Mercury Constr. Corp., 

, 

, 

(1983)."    

.   The

Declaratory Judgment Act "has been understood to confer on

federal courts unique and substantial discretion," 

because it provides that a court "may declare the rights
and other legal relations of any interested party seeking [a]


                                                                      34
declaration."   28 U.S.C. § 2201(a) (1988 ed., Supp. V) (emphasis

added).   It is clear from the language of the Act that Congress

intended federal courts to have discretion when deciding whether

to hear actions involving declaratory relief.

           Section 1335, however, contains no language indicating

that Congress intended courts to have such jurisdictional

discretion when adjudicating interpleader proceedings.     On the

contrary, section 1335(a) provides that "[t]he district courts

shall have original jurisdiction of any civil action of

interpleader . . . ."0   28 U.S.C. § 1335(a).   Section 1335 was

intended to allow more parties to bring interpleader actions in

federal courts by broadening the availability and the nature of

relief.   Congress therefore minimized diversity requirements,

lowered the required amount in controversy, and provided for

nationwide service of process.   28 U.S.C. §§ 1335(a) & 2361; see

3A MOORE'S FEDERAL PRACTICE ¶ 22.11 (1995).     Nothing in prior

Supreme Court decisions allows this court to carve out a

discretionary niche based on the equitable nature of interpleader

relief where Congress has clearly expressed its desire to provide

a federal forum for diverse litigants.   "'[I]t was never a

doctrine of equity that a federal court should exercise its

judicial discretion to dismiss a suit merely because a State

court could entertain it.'"   Colorado 

0
          While I agree with the majority's characterization of
section 1335(b), I believe that the word "shall" in section
1335(a) cannot be ignored merely because its use by Congress is
"typical," as suggested by the majority opinion. Op. at 27,
n.10.

                                                                    35
(quoting Alabama Pub. Serv. Comm'n v. Southern Ry. Co., 

(1951)).

          Abstention in favor of the state court proceeding is

particularly disconcerting in this case because the federal

proceeding was well underway.   Indeed, as discussed in the

majority opinion, the first stage of the proceeding had been

entirely completed:   the complaint was filed and answered, the

court found that the jurisdictional requirements had been met and

dismissed NYLife Distributors from the case and from any future

liability.   The only thing remaining for the court to do was to

resolve the dispute between the claimants for the interpleaded

fund.

          The federal court clearly had priority over this case.

Moses H. 

("[P]riority should not be measured

exclusively by which complaint was filed first, but rather in

terms of how much progress has been made in the two actions").

"It has been held . . . that the court first assuming

jurisdiction over property may exercise that jurisdiction to the

exclusion of other courts[.]"   Colorado 

,

96 S.Ct. at 1246-47 (citing Donovan v. City of Dallas, 

, 412 (1964); Princess Lida v. Thompson, 

, 466

(1939); United States v. Bank of New York & Trust Co., 

, 477 (1936)).   Thus, because the federal proceedings were

clearly "prior" to the state action, dismissing the federal

claims seems all the more like an unjust abdication of the

court's duty to exercise jurisdiction granted.




                                                                   36
            I dissent from the majority's opinion because it

effectively reads diversity jurisdiction out of the interpleader

statute whenever a similar action is pending in a state court. As

with jurisdiction granted under the diversity statute, once a

case is properly commenced in a federal court, the case should

stay there unless there is a recognized reason for abstention or

transfer.    I am disturbed by what I construe as the judicial

destruction of a congressionally created federal remedy.     In my

opinion, allowing courts broad authority to decide when to

abstain from exercising jurisdiction clearly granted by Congress

is an inappropriate exercise of judicial authority.

            I would apply the more narrow Colorado River test here

in order to adequately uphold federal jurisdiction and the

purposes of the law.0   If Congress desires federal courts to have

broad discretion to abstain from resolving disputes brought under

the interpleader statute, then Congress, not this court, should

make its desire clear by clarifying the language of the statute.

0
          I believe that this court may apply the exceptional
circumstances test without remanding the issue to the district
court given the adequacy of the record in this case. The Supreme
Court has articulated a non-exclusive list of factors relevant to
a determination of whether exceptional circumstances exist. That
list includes: "the assumption by either court of jurisdiction
over a res, the relative convenience of the fora, avoidance of
piecemeal litigation, the order in which jurisdiction was
obtained by the concurrent fora, whether and to what extent
federal law provides the rules of decision on the merits, and the
adequacy of state proceedings." 

.
Balancing these factors "heavily weighted in favor of the
exercise of jurisdiction," Moses H. Cone Memorial Hosp. v.
Mercury Constr. Corp., 

, 16 (1983), I would hold that
the district court improperly abstained and should have exercised
its jurisdiction by completing the adjudication properly
commenced in federal court.


                                                                     37