Summary
involving complete assignment of claims arising out of purchase of senior notes and alleged securities fraud
Summary of this case from LNY 5003, LLC v. Zurich Am. Ins. Co.Opinion
CIVIL ACTION NO. 3:03-CV-0952-K
February 10, 2004
MEMORANDUM OPINION AND ORDER
Before the Court is Plaintiffs' Motion to Remand. Having considered the merits of the motion, and for the reasons stated below, the Court determines that the requested relief is warranted. Therefore, the motion is GRANTED.
I. Background
On February 13, 2001, R2 Investments, a Cayman Island Limited Liability Company ("R2"), purchased World Access 13.25% Senior Notes (the "Senior Notes") from Jefferies Company, Inc. ("Jefferies"), an investment broker/dealer. Jefferies acquired the Senior Notes from Smith Barney Asset Management ("SBAM"), and World Access, a nonparty to this suit, was a telecommunications company which has been forced into involuntary bankruptcy.
At the time of the transaction Defendant Cornelius Mack ("Mack") was an officer of SBAM in the high — yield mutual fund group which followed the Senior Notes for SBAM, and Defendant John Bianchi ("Bianchi") was the portfolio manager for SBAM's high — yield mutual fund group. Plaintiffs Amalgamated Gadget, L.P. and NYC 999, LLC ("NYC 999") claim that Defendants Mack and Bianchi (collectively, "Defendants") possessed material, nonpublic information about World Access, and that Defendants orchestrated a securities laundering scheme to fraudulently and illegally place the Senior Notes into the marketplace, despite having knowledge that the Senior Notes were worthless.
Based on these facts, Plaintiffs filed this suit against Defendants in the 193rd Judicial District Court in Dallas County, Texas, on April 3, 2003. Amalgamated Gadget, L.P. is a Texas Limited Partnership, and NYC 999 is a New York Limited Liability Company, while Mack resides in New York and Bianchi in New Jersey. Plaintiffs asserted several causes of action against Defendants, each based on Texas statutory and common law.
Alleging that the real parties in interest in the case are diverse, and that Plaintiffs' Original Petition raises federal claims, Defendants removed the case to this Court. Plaintiffs timely filed their Motion to Remand. Although Defendants filed a Motion to Dismiss in this case, this Court properly considers Plaintiffs' challenges to the Court's subject matter jurisdiction before considering Defendants' challenge to the exercise of personal jurisdiction over Defendants. See Ruhrgas AG v. Marathon Oil Co., 526 U.S. 574, 586-88 (1999).
II. Subject Matter Jurisdiction
Upon the filing of a motion to remand, the removing party bears the burden of demonstrating that federal jurisdiction exists and that removal was proper. See Manguno v. Prudential Prop. Cos. Ins. Co., 276 F.3d 720, 723 (5th Cir. 2002). To determine whether jurisdiction is present for removal, the Court considers the claims in the state court petition as they existed at the time of removal. See id. The Court construes any ambiguities against removal, because the removal statute should be strictly construed in favor of remand. See id. In this case, Plaintiffs argue that remand is proper because the Court does not possess subject matter jurisdiction through either diversity jurisdiction under 28 U.S.C. § 1332 or federal question jurisdiction under 28 U.S.C. § 1331.
A. Diversity Jurisdiction
Defendants argue that diversity jurisdiction exists because the nondiverse plaintiff, NYC 999, "is not a real party in interest in this proceeding," thus requiring this Court to disregard its citizenship. Defendants argue that "NYC 999 has been improperly joined as a plaintiff in this action for the purpose of destroying diversity jurisdiction in order to inconvenience and harass" Defendants.
Defendants' argument is based on an assignment agreement between R2 and NYC 999 dated March 17, 2003. In the assignment, R2 granted and conveyed to NYC 999 "all right, title and interest it has in any and all causes of action arising under Texas state law" against Defendants (emphasis in original). Despite R2's assignment of its entire interest in this case to NYC 999, Defendants claim that R2, not NYC 999, is the real party in interest in this case. Plaintiffs respond that despite the fact that NYC 999 was incorporated shortly before suit was filed, R2's assignment of its entire interest in this case to NYC 999 establishes NYC 999 the real party in interest in the case. The Court agrees.
Defendants rely on Grassi v. Ciba — Geigy, Ltd., 894 F.2d 181 (5th Cir. 1990) to support their argument that NYC 999 is not a real party in interest in this case. In Grassi, the court stated that federal district courts have the authority and the responsibility to examine the motives of a plaintiff who makes a partial assignment of his claim in order to destroy diversity jurisdiction, and to disregard the assignment if defeating removal was the primary factor behind such an assignment. See id. at 185. The rationale behind the rule is that if a plaintiff could defeat diversity jurisdiction simply by assigning a fraction of his interest in the outcome of a suit, a defendant's statutory right to remove a case to federal court would be illusory. See id. Not only is Defendants' reliance on Grassi unavailing, but it actually dictates that this case be remanded.
Grassi clearly acknowledged that the Supreme Court recognizes the difference between partial and complete assignments, and explicitly stated that Provident Savings Life Assur. Soc. of New York v. Ford, 114 U.S. 635 (1885) was live precedent. See Grassi, 894 F.2d 184-85. In Provident, the Court held that an assignment of an entire cause of action, made to prevent its removal to federal court, prevents a federal court from assuming jurisdiction over the case. See Provident, 114 U.S. at 641. The Court's holding in Provident, which dealt with a complete assignment, contrasts with its holding in Kramer v. Carribean Mills, Inc., 394 U.S. 823 (1963), where the Court disregarded a partial assignment which was made in order to create diversity. Despite disregarding the partial assignment in Kramer, however, the Supreme Court stated that where the transfer of a claim is absolute, and the transferor retains no interest in the subject matter, then the transfer is not "improperly or collusively made", regardless of the transferor's intent. Id. at 828 n. 9.
Predictably, Defendants argue that the assignment at issue in this case was not a complete assignment. As stated above, the language of the assignment states that R2 conveys to NYC 999 "all right, title and interest it has in any and all causes of action arising under Texas state law" (emphasis in orginal). In the assignment, R2 explicitly retains any other "right, title, and interest" it has with respect to another lawsuit, currently proceeding in the United States District Court for the Southern District of New York, and with respect to the transaction that is the bases for the underlying suits. Defendants argue that by only transferring the causes of action at issue in this case to NYC 999, R2's assignment was partial.
Provident states that an assignment of a complete cause of action is a complete assignment. See 114 U.S. at 641. In Ivanhoe Leasing Corp. v. Texaco, Inc., 791 F. Supp. 665 (S.D. Tex. 1992), the court held that a transfer which destroyed diversity was a complete assignment, sufficient to prevent removal of the case to federal court. Although Ivanhoe dealt with the complete transfer of a piece of real property, and not an assignment of a claim, the court stated that the same rationale applied to both. Ivanhoe followed Grassi in reaffirming that the Supreme Court has neither reexamined nor overturned its holding that a federal district court may not consider the motives underlying a complete assignment. Ivanhoe, recognizing Grassi and its holdings, held that based on the facts of the case, Grassi did not apply because the assignment at issue was complete, not partial. See id. at 668.
This case bears many similarities to Ivanhoe. First, Ivanhoe Leasing Corporation, the plaintiff in that case, obtained the property at issue from Southern Casing of Louisiana, Inc. and Starfire Corporation a week after Texaco. had brought a declaratory judgment against Southern Casing and Starfire, and less than three months before Ivanhoe filed suit against Texaco. Ivanhoe's President was Nathan Levy, who was the Secretary of Southern Casing, and Ivanhoe's only assets were the real property at issue and a bank account. In fact, the money Ivanhoe used to purchase the real property at issue came directly from Southern Casing and Starfire. In Ivanhoe, as here, the defendants argued that Grassi mandated that diversity was present, while the plaintiff argued that it called for the a remand.
In this case, NYC 999 was created eight days before it filed suit against Defendants. Additionally, Robert McCormick is the Vice President of both NYC 999 and R2. Defendants do not dispute that R2 transferred its entire interest in the claims before this Court to NYC 999. Defendants' only argument is that because R2 maintained an interest in other litigation related to the underlying dispute, the assignment was incomplete. Regardless of what other claims R2 may have to assert against other parties in other courts, R2's entire interest in each of the claims asserted in the present case has been transferred to NYC 999. This is all that Provident requires.
Case law clearly reflects the practical differences between partial and complete assignments. In Ivanhoe, the plaintiffs recovery against the defendant would be complete, as the plaintiff would not have to share its recovery with any other parties. In this significant respect, Ivanhoe contrasts greatly with the cases where courts have determined partial assignments to exist, such as Kramer and Grassi.
In Kramer, a corporation transferred its entire interest in the contract made the basis of the suit to Mr. Kramer for nominal consideration, who in turn promised to pay the corporation 95% of the recovery as a "bonus." See Kramer, 394 U.S. at 324. In essence, then, the corporation in Kramer had maintained a 95% interest in the litigation, and Mr. Kramer would have to share his recovery from the defendant. In Grassi, the plaintiffs transferred 2% of their claim in the case to a corporation. See Grassi, 894 F.2d at 182. Therefore, the plaintiffs would only have been able to receive 98% of their recovery against the defendant. Similarly, cases applying Grassi have dealt with similar facts. See, e.g., Smilgin v. New York Life Ins. Co., 854 F. Supp. 454, 466 (S.D. Tex. 1994) (the plaintiff assigned 1% of claim to nondiverse plaintiff, meaning that he would only be able to receive 99% of any recovery) ;JMTR Enterprises, L.L.C. v. Duchin, 42 F. Supp.2d 87, 92 (D. Mass. 1999) (the plaintiffs assigned 25% of their claim to a nondiverse plaintiff corporation, meaning that they would only be able to receive 75% of any recovery). Whereas in these cases the nondiverse assignee plaintiffs asserted only a portion of the relevant claims against the defendants, NYC 999 asserts 100% of R2's claims in this case against Defendants, and would receive 100% of any recovery against Defendants.
Although this suit arose out of occurrences that normally would invoke the diversity jurisdiction of this Court, diversity jurisdiction is determined by the citizenship of the parties at the time of the removal, not by analyzing the basis of the claims in the suit. See Smith v. Morrison Ins. Agency, Inc., 864 F. Supp. 22, 24 (S.D. Tex. 1994) (holding that although claims between nondiverse plaintiffs and insurance company were based on actions of diverse tortfeasor, tortfeasor's assignment of claims to nondiverse plaintiffs destroyed diversity). When Plaintiffs filed this suit, NYC 999 possessed R2's entire interest in the claims asserted in Plaintiffs' Original Petition. That a dispute between Defendants and R2 led to the litigation is of no consequence, as the complete assignment of the claims to a nondiverse plaintiff destroyed diversity.
Once it is determined that the assignment was a complete assignment, the Court's inquiry ends, and the Court does not examine whether the assignment was "improperly or collusively made." Kramer, 394 U.S. at 828 n. 9. As with Ivanhoe, the transferor retains no interest in this case, despite close ties to the transferee. Because the transfer of the claims in this case was a complete transfer of an entire cause of action, and R2 maintains no interest in this litigation, the Court cannot look into the reasons behind the transfer. Therefore, Defendants have failed to meet their burden of demonstrating that removal was proper, as NYC 999 is a real party in interest in this litigation. Accordingly, the Court does not have diversity jurisdiction over this case under § 1332.
B. Federal Question Jurisdiction
Defendants also assert that the Court has federal question jurisdiction over this case under 28 U.S.C. § 1331. While two of the causes of action Plaintiffs claim in their Original Petition filed in state court invoke the Texas Securities Act, Tex. Rev. Civ. Stat. Ann. art. 581 et seq., Defendants argue that those claims actually arise under federal securities law. Specifically, Defendants allege that "the causes of action asserted in the Petition, although styled as claims under Texas statutory and common law, seek to enforce liabilities and duties under the Securities Exchange Act of 1934."
The well — pleaded complaint rule governs whether a defendant can remove a case due to the existence of a federal question. See Terrebonne Homecare, Inc. v. SMA Health Plan, Inc., 271 F.3d 186, 188 (5th Cir. 2001). Under this rule, federal question jurisdiction exists only when a federal question is presented on the face of plaintiff's properly pleaded complaint. See id. An exception to the rule is the artful pleading doctrine, which prevents a plaintiff from defeating removal by failing to plead necessary federal questions. See id. However, the artful pleading doctrine does not apply unless federal law completely preempts the field. See id.
The only federal statutes which completely preempt state law are the Labor Management Relations Act, the Employee Retirement Security Act, and the National Bank Act. See Beneficial Nat. Bank v. Anderson, 123 S.Ct. 558, 559-60 (2003). Therefore, Plaintiffs' causes of action based on the Texas Securities Act are not completely preempted by federal law, and the artful pleading rule does not apply.
Without complete preemption, Plaintiff remains the master of his complaint, and while it might have been able to allege a federal cause of action in its Original Petition in state court, it elected not to. See Terrebonne Homecare, Inc., 271 F.3d at 189. Accordingly, this Court lacks federal question jurisdiction over this matter.
III. Conclusion
For the reasons stated above, Plaintiffs' Motion to Remand is hereby GRANTED. The Court ORDERS that this case be remanded to the 193rd Judicial District Court of Dallas County, Texas. The clerk shall mail a certified copy of this Memorandum Opinion and Order to the District Clerk of Dallas County, Texas.
Pursuant to 28 U.S.C. § 1447(c), Plaintiffs have requested that the Court order Defendants to pay Plaintiffs' costs and attorney fees involved in filing its motion. An award of costs and attorney's fees, however, is not automatic upon a determination of improper removal. Valdes v. Wal — Mart Stores, Inc., 199 F.3d 290, 292-93 (5th Cir. 2000). Rather, the decision is left to the discretion of the district court after a consideration of the merits of the defendants case at the time of removal. See id. After reviewing the facts concerning the removal and remand of this matter, the Court concludes that an award of costs and attorney's fees is unwarranted.
It if further ORDERED that Defendants' Motions to Dismiss and Transfer are DENIED as moot without prejudice; Defendants' Motion for Protective Order filed on June 23, 2003, Motion to Quash filed on June 25, 2003, Motion for Leave to File Sur — reply filed on July 15, 2003, and Motion to Extend Time filed on December 18, 2003 are DENIED as moot; Plaintiffs' Motions to Extend Time filed on June 26, 2003, July 3, 2003, and November 18, 2003, and Plaintiffs' Motion to Compel filed October 2, 2003 are DENIED as moot; and non — party Jefferies Company, Inc.'s Motion for Protective Order is DENIED as moot.
SO ORDERED.