Scruggs Memorandum in Support of motion to dismiss

MEMORANDUM BRIEF IN SUPPORT OF
SCRUGGS DEFENDANTS’ MOTION TO DISMISS OR TO STAY
PENDING RESOLUTION OF STATE COURT ACTION OR
PENDING RESOLUTION OF FEDERAL CRIMINAL ACTION

This matter relates to litigation which originated 15 years ago in Hinds County Circuit Court.
In 2006, Wilson and Scruggs resolved all of their disputes in that and other pending litigation. The
parties entered a comprehensive settlement agreement, with Scruggs paying considerable sums to
Wilson and the parties mutually releasing one another from all claims of any type.

Over a year ago, Wilson filed a Motion for Sanctions in the Hinds County matter. In his
Motion for Sanctions, which is based on the same factual allegations as those pled by Wilson in this
action, Wilson seeks compensatory and punitive damages against several of the Scruggs Defendants.

At this time, Wilson and Scruggs are awaiting a ruling from the Hinds County Circuit Court.
At issue before the Hinds County Court is a fundamental question of law never directly
addressed by the Mississippi Supreme Court. Specifically, the Hinds County Circuit Court is
considering the choice available to a private litigant which has settled a claim but later contends that
the settlement was induced by fraud. The Fifth Circuit (making an Erie guess) has concluded that
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2 a Mississippi court would permit such a litigant either (i) to pay back the money, rescind the
settlement and seek further damages allegedly arising from the previously-settled claim, or (ii) to
confirm the settlement and pursue a separate legal action for damages (if any) arising from the
alleged deceit. Bogy v. Ford Motor Co., 538 F.3d 352, 354-55 (5th Cir. 2008); see also Hearn v.
Advanced Bionics Corporation, 2008 WL 3896431 (S.D. Miss. 2008) (applying Bogy).

In the interests of sound judicial administration and economy and to permit resolution of a
state law question bearing on policy problems of substantial public import, this Court should abstain
from exercising jurisdiction over this action. Instead, this Court should dismiss this action or stay
this matter pending resolution of the Hinds County Circuit Court action.

Currently, federal criminal charges are pending in the Northern District against Judge Bobby
Delaughter with trial set for August. As a review of Wilson’s pleadings, Delaughter plays a central
role in the factual allegations underlying Wilson’s claims. This Court should stay this matter
pending resolution of the criminal charges against Delaughter. Wilson will not suffer any prejudice
during this stay, as Wilson has already received substantial payment for his claims through
settlements and is seeking additional damages allegedly caused by Scruggs’ actions in the parallel
Hinds County matter. On the other hand, due to the central role which Wilson alleges Delaughter
played in the conspiracy, discovery directly from Delaughter will be of critical importance in
determining the truth of Wilson’s claims. Staying this civil matter pending resolution of the criminal
charges against Delaughter best serves the interests of justice.

FACTS
Beginning in 1985, Wilson and Scruggs owned a firm (Asbestos Group, P.A.) for the purpose
of prosecuting asbestos claims on behalf of numerous clients. After several years of operations, they
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1Following execution of the separation agreement, Scruggs (75%) and Alwyn Luckey
(25%) owned Asbestos Group. Charlie Merkel originally represented Luckey in his claims against Scruggs and Wilson.
decided to separate their business interests in 1992 and executed a comprehensive separation
agreement outlining in detail the manner in which they would divide any funds generated from their
mutual asbestos clients. See Agreement (August 7, 1992) (Ex. “A” to Motion to Dismiss or to Stay).
The Agreement provided for Scruggs to continue prosecuting the asbestos claims and to pay Wilson
various percentages of funds collected from certain defendants after deducting overhead and
expenses.1 Despite the Agreement’s clear provisions, a dispute arose about the money due Wilson.

Around the same time, Scruggs learned that Luckey (an owner and employee of Asbestos
Group) had manipulated medical records to improperly qualify asbestos claimants for settlements.
Scruggs fired Luckey. However, Luckey sued Scruggs and Wilson in Hinds County Circuit Court
asserting that he was due money as an owner of Asbestos Group.2 Wilson cross-claimed against
Scruggs, seeking funds allegedly due him under their separation agreement.

The Hinds County litigation was contentious, involving numerous lawyers for the various
parties over the years. In 2001, when the Hinds County Court rejected Wilson’s effort to recover
attorney fees earned by Scruggs in the tobacco litigation under a constructive trust theory, Wilson
sued Scruggs in the federal court for the Eastern District of Texas (Wilson v. Scruggs et al.,
5:01cv114). Shortly afterward, Luckey moved to intervene in the Texas action, seeking recovery
against Scruggs under the same theory. Ultimately, the federal court in Texas transferred the matter
to the Southern District of Mississippi (Wilson v. Scruggs et al., 3:02cv525LN).
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3Charlie Merkel entered his appearance as counsel for Wilson in the Hinds County action
in October 2005, following completion of the Luckey v. Scruggs litigation.
4

In March 2005, Luckey and Scruggs severed Luckey’s claims against Scruggs and submitted
them for binding arbitration to Magistrate Judge Jerry Davis in the Northern District (1:05cv89JAD).
Luckey and Scruggs finally adjudicated Luckey’s claims in the summer of 2005. Meanwhile, the
Southern District stayed resolution of Wilson’s federal claims pending completion of the stillpending
Hinds County action. Wilson v. Scruggs, 371 F. Supp. 2d 837 (S.D. Miss. 2005).

By 2006, Wilson and Scruggs were the only parties remaining in the Hinds County matter,
as the proceeding before Judge Davis in the Northern District had resolved all of Luckey’s claims.3
At the brink of trial in August, Wilson and Scruggs settled, memorializing the terms in a detailed
Confidential Settlement Agreement and Mutual Release, which included an arbitration provision.
This settlement resolved all claims between Wilson and Scruggs, with Scruggs paying a considerable
sum to Wilson to buy global peace between them. The parties agreed to final judgments of dismissal
with prejudice in the federal litigation in the Southern District and in the Hinds County litigation.
See Final Judgment of Dismissal with Prejudice, Dkt. No. 757 (3:02cv525) (September 7, 2006); and
Final Judgment (September 8, 2006) (Ex. “B” to Motion to Dismiss or to Stay).

Joey Langston, who had served as one of Scruggs’ counsel in the Luckey and Wilson
litigations, pled guilty in January 2007 to conspiracy to corruptly influence Judge Bobby Delaughter,
who was presiding over the Hinds County matter at its conclusion. In April 2007, Wilson filed a
Motion for Sanctions in the Hinds County action, seeking default judgment, compensatory and
punitive damages in the amounts sought by Wilson in the original Hinds County action and attorney
fees and costs incurred in the Hinds County action. See Motion for Sanctions (without exhibits)
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(April 22, 2008) (Ex. “C” to Motion to Dismiss or to Stay). Wilson did not rescind the settlement
agreement and never returned the considerable sums Scruggs paid pursuant to the Settlement
Agreement. The parties have argued and currently await a ruling from the Hinds County Court.

In January 2009, Wilson sued Scruggs in this Court. In his Amended Complaint, Wilson
seeks compensatory damages (for asbestos fees that he originally sought in the Hinds County action
and for tobacco fees under his constructive trust theory originally pursued in the Southern District
action), punitive damages and attorney fees and costs. The facts and allegations underlying the
Amended Complaint are the same as those stated in support of Wilson’s Motion for Sanctions.

In February, a federal felony indictment against Judge Bobby Delaughter was unsealed in the
Northern District (3:09cr002GHD-SAA-2). These criminal charges arise out of the same events and
circumstances which provide the factual basis for averments in Wilson’s Amended Complaint.
Delaughter has entered a plea of not guilty to these charges, and trial is set for August 17.

ARGUMENT
As a general rule, federal district courts have an obligation to exercise their jurisdiction.
Colorado River Water Conservation District v. U.S., 424 U.S. 800, 813 (1976). However, in certain
exceptional circumstances, to best serve the interests of sound judicial administration (Colorado
River abstention) or to permit resolution of a state law issue of significant import (Thibodaux
abstention), federal courts should dismiss or stay federal proceedings in deference to pending state
court matters. Id. at 814-18. This action presents one of those circumstances.

A. Colorado River Abstention
Federal courts have identified several factors to consider in determining the propriety of
abstention (either by dismissal or by stay) in the interest of judicial administration:
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1) assumption by either court of jurisdiction over ares, 2) relative inconvenience of the forums, 3)
avoidance of piecemeal litigation, 4) the order in
which jurisdiction was obtained by the concurrent
forums, 5) to what extent federal law provides the
rules of decision on the merits, and 6) the adequacy of
the state proceedings in protecting the rights of the
party invoking federal jurisdiction.
See Stewart v. Western Heritage Insurance Co., 438 F.3d 488, 491-92 (5th Cir. 2006). Courts must
not apply these factors mechanically but carefully balance them on a case-by-case basis. Moses H.
Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 16 (1983). Review of these
factors strongly favors abstention in this case, either by dismissal or by stay of these proceedings
pending resolution of the Hinds County action.

1. Res at issue
The Hinds County Court has not assumed jurisdiction over any property to the exclusion of
this Court. This factor either has no relevance or supports the exercise of jurisdiction. See Stewart,
438 F.3d at 492 (discussing conflicting Fifth Circuit opinions on this factor).
2. Inconvenience of Forums
The Hinds County action and this action are not pending in the same geographic location.
Neither Wilson nor Scruggs claims to or currently lives in the Northern District. The various legal
counsel are located in both the Northern and Southern Districts. This factor is neutral.
3. Avoidance of Piecemeal Litigation
At this time, the manner and extent that resolution of the Hinds County action will impact
resolution of this federal action remains unclear. However, abstention will certainly prevent
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piecemeal litigation, the underlying goal of Colorado River abstention. This factor weighs strongly
in favor of abstention.

Wilson has asked the state court to award additional damages initially sought in that
litigation. He has not rescinded the settlement agreement, and he has not returned the settlement
funds, as required by the Fifth Circuit in its Erie guess in Bogy. At this time, the Hinds County
Court is considering the Bogy analysis. The state court may ultimately require Wilson to choose
between returning his settlement funds (as a prerequisite to obtaining additional damages in that
action) or pursuing an independent action for damages. The state court may award some type of
compensatory damages in favor of Wilson as a result of Scruggs’ alleged misconduct. The state
court may refuse to award any damages, either because Wilson is not entitled to any additional
damages or because Wilson has not rejected the settlement agreement and returned the consideration
paid by Scruggs in 2006. Resolution of Wilson’s Motion for Sanctions will answer these questions.

In 2005, Judge Lee was faced with a similar dilemma in the federal action between Wilson
and Scruggs pending in the Southern District. Rather than permit piecemeal resolution of the claims
presented by Wilson in both state and federal court and “placing the cart before the horse”, Judge
Lee stayed the federal action pending resolution of the state court action. Wilson v. Scruggs, 371 F.
Supp. 2d at 844. The same reasoning applies to the current matters pending in Hinds County Circuit
Court and before this Court. Abstention (through either a dismissal or a stay) permits the logical
completion of the state court action before this federal action proceeds and prevents the proverbial
cart from getting before the horse.
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4. Order Jurisdiction Obtained
This factor strongly supports abstention. The pertinent comparison is the relevant progress
of the two actions. Here, the Hinds County action (filed in 1994) rests on the verge of resolution (for
the second time), as the state court considers Wilson’s Motion for Sanctions (filed in April 2008).
By comparison, this federal action has not proceeded beyond the filing of the Complaint (January
2009) and an Amended Complaint (April 2009). Under these circumstances, abstention is
appropriate. Murphy v. Uncle Ben’s, Inc., 168 F.3d 734, 738 (5th Cir. 1999). Finally, even if this
Court exercises jurisdiction, the Confidential Settlement Agreement between Wilson and Scruggs
contains an arbitration provision which will likely require arbitration of certain claims stated in
Wilson’s Amended Complaint.

5. Extent Federal Law Applies
Wilson invokes the jurisdiction of this Court under both diversity of citizenship and federal
question. He asserts claims based on common law fraud, Civil RICO (18 U.S.C. § 1862(c)) and
federal civil rights statutes (42 U.S.C. § 1983). Despite the references to these federal statutes, the
crux of Wilson’s claims arise from his common law fraud allegations – – – the same allegations raised
before the Hinds County Circuit Court and currently pending for resolution. However, while the
underlying state law fraud claim predominates, Wilson has asserted certain federal claims dependent
on resolution of the fraud claim. This factor is neutral or weighs in favor of exercising jurisdiction.

6. Adequacy of State Proceedings
Wilson first sought relief from the Hinds County Circuit Court when he filed his Motion for
Sanctions in April 2008, more than nine months before filing his Complaint in this Court. Wilson
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must necessarily believe that his interests are adequately protected in the Hinds County action. This
factor does not weigh in favor of exercising jurisdiction. See, e.g., Stewart, 438 F.3d at 493.

7. Conclusion
The circumstances of this case require abstention in the interest of judicial administration and
economy. Several factors weigh strongly in support of abstention, while others are neutral. The
factors which favor exercising jurisdiction do not outweigh the countervailing considerations. This
Court should dismiss this matter or stay it until completion of the Hinds County action.

B. Thibodaux Abstention
Abstention is appropriate where federal courts face difficult questions of state law “bearing
on policy problems of substantial import . . .”. Louisiana Power & Light Co. v. City of Thibodaux,
360 U.S. 25 (1959). The state law question “need not be determinative of state policy”, as “it is
enough that exercise of federal review of the question in a case and in similar cases would be
disruptive of state efforts to establish a coherent policy with respect to a matter of substantial public
concern.” Colorado River, 424 U.S. 814-15. Here, this Court should permit the state court to
address the issue presented by Wilson’s Motion for Sanctions and analyzed in Bogy: under
Mississippi law, what procedural options are available to a litigant which has previously settled a
claim by agreement but later believes that the settlement was fraudulently induced? Will a
Mississippi court follow general contract rescission law, as set forth in Turner v. Wakefield, 481
So.2d 846, 848 (Miss. 1985), consistent with the Fifth Circuit’s Erie guess in Bogy? As the factual
circumstances underlying the Motion for Sanctions present an opportunity for Mississippi courts to
resolve this matter of substantial public concern in the realm of judicial administration, this Court
should abstain, either by dismissing or staying the federal action.
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C. Stay Pending Completion of Federal Criminal Action
This Court has the inherent power to control its docket, including the power to stay
proceedings to achieve “economy of time and effort for itself, for counsel, and for litigants”. Landis
v. N. Am. Co., 299 U.S. 248, 254, 57 S.Ct. 163, 81 L.Ed. 153 (1936). The Court’s wide discretion
over the course of litigation includes authority to control the scope and pace of discovery, In re Ramu
Corp., 903 F.2d 312, 318 (5th Cir.1990), and authority to stay a civil proceeding pending resolution
of a criminal proceeding to best serve the interests of justice, United States v. Little Al, 712 F.2d 133,
135 (5th Cir.1983) (explaining “special circumstances” must exist for court to stay proceedings).

However, this power is not unbounded. Wedgeworth v. Fibreboard Corp., 706 F.2d 541, 545
(5th Cir.1983). This Court should weigh the competing interests when exercising its discretion.
Landis, 299 U.S. at 254-55, 57 S.Ct. 163; Little Al, 712 F.2d at 135; Campbell v. Eastland, 307 F.2d
478, 487 (5th Cir.1962). Many courts consider the following factors in determining whether “special
circumstances” warrant a stay when related civil and criminal matters are pending: (1) the extent to
which the issues in the criminal case overlap with the issues presented in the civil case; (2) the status
of the case, including whether the criminal defendant has been indicted; (3) the private interests of
the plaintiff in proceeding expeditiously weighed against the prejudice to plaintiff caused by the
delay; (4) the private interests of and burden on the defendants; (5) the interests of the courts; and
(6) the public interest. Dominguez v. Hartford Financial Services Group, Inc., 530 F. Supp. 2d 902
(S.D. Tex. 2008). The Scruggs Defendants have the burden of demonstrating a stay is warranted.
Wedgeworth, 706 F.2d at 545. These factors clearly favor a stay of this civil matter pending
completion of Judge Bobby Delaughter’s trial in August.
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The issues presented in the criminal case certainly overlap with this action, as the factual
allegations are not merely tightly interwoven but based on identical contentions. Judge Delaughter
is the central figure in the conspiracy alleged by Wilson.

The criminal matter has progressed beyond an investigation. Delaughter has been indicted,
and his trial is set for August.

Though Wilson (like all typical plaintiffs) wants his day in court, he will suffer no prejudice
from a delay pending resolution of these criminal charges. Wilson has previously obtained
considerable relief from Scruggs through his initial settlement, and he has pending before the Hinds
County Circuit Court another request for damages. In addition, Wilson has obtained relief from Joey
Langston in the form of restitution paid as a result of the criminal prosecution of Langston in the
Northern District arising out of these same factual allegations. See Motion for Downward Departure,
¶6 (November 12, 2008) (Ex. “D” to Motion to Dismiss or to Stay).

From the Scruggs Defendants’ perspective, resolution of the criminal charges against Judge
Delaughter before proceeding with this civil action will permit them to obtain discovery into facts
at the center of Wilson’s allegations. Otherwise, their discovery into the primary allegations will be
thwarted and will interfere with Delaughter’s defense of the criminal charges against him.

This Court’s interests and the public’s interests will be served by permitting final resolution
of the criminal action (which concerns matters of great public concern) without any conflict from
the purely private concerns at issue in Wilson’s Amended Complaint.
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CONCLUSION
For these reasons, this Court should dismiss this action. In the alternative, this Court should
stay this action pending resolution of the Hinds County Circuit Court matter or pending resolution
of the federal criminal action against Judge Delaughter.