Opinion
00 Civ. 5444 (JSM)
January 22, 2001
Jeffrey L. Liddle, Liddle Robinson, L.L.P., New York, New York, For Plaintiff.
Howard J. Rubin, Davis Gilbert L.L.P, New York, NY, For Defendants.
MEMORANDUM OPINION AND ORDER
Trevor Yoder ("Plaintiff") brings this action against Novo Mediagroup, Inc., The MacManus Group, Inc., B COM3 Group, Inc., and Andrew Sievers (collectively "Defendants") alleging breach of an employment contract, promissory estoppel, violations of the New York Labor Law, quantum meruit, and defamation. The case is presently before the Court on Plaintiff's motion for an order pursuant to 28 U.S.C. § 1447(c) remanding the case to the Supreme Court of the State of New York. For the reasons set forth below, Plaintiff's motion is granted and the case is remanded to state court.
BACKGROUND
According to the complaint, on or about June 12, 1996, Plaintiff was hired by Blue Marble Advanced Communications Group, Ltd. ("Blue Marble") and The MacManus Group, Inc. ("MacManus") as the Chief Operating Officer ("COO") and the Chief Financial officer ("CFO") of Blue Marble. (Compl. ¶ 12.) Blue Marble was a wholly owned subsidiary of MacManus from approximately June 12, 1996 to July 29, 1999. (Compl. ¶ 6.) The following departments of Blue Marble reported to Plaintiff: Finance, Human Resources, Office Services, Corporate Information Technology, Research Development, and Mergers and Acquisitions. (Compl. ¶ 12.) Plaintiff's direct supervisor, David Yakir ("Yakir"), was the President and Chief Executive Officer ("CEO") of Blue Marble, a member of the MacManus Operations Committee, and a member of the MacManus Board of Directors. (Compl. ¶ 14, 23.) Roy J. Bostock ("Bostock") was the Chairman and CEO of MacManus and Craig D. Brown ("Brown") was the CFO and COO of MacManus. (Compl. ¶ 17,18.) Bostock and Brown were also the only two members of the Blue Marble Board of Directors. (Compl. ¶ 60.)
On October 11, 1996, Brown sent Yakir an operating proposal for Blue Marble outlining an employment agreement with Yakir and authorizing Yakir to enter into employment agreements on behalf of Blue Marble and MacManus with members of the Blue Marble team, including Plaintiff. (Compl. ¶ 19.) Shortly thereafter, Yakir orally entered into an employment agreement with Plaintiff that clarified the terms of his employment. (Compl. ¶ 20.) Several years later, in February 1999, MacManus once again authorized Yakir to enter into a new employment contract with Plaintiff on behalf of Blue Marble and MacManus. (Compl. ¶ ¶ 23-24.)
According to the complaint, during Plaintiff's employment with Blue Marble and MacManus: (1) Blue Marble controlled no capital other than a petty cash bank account; (2) operating and capital expenditures above $5,000 were paid by MacManus after a voucher was submitted by Blue Marble and approved by MacManus; (3) any funds earned by Blue Marble went directly to MacManus; (4) MacManus required Blue Marble to use only vendors approved by MacManus; (5) MacManus required Blue Marble to submit its capital budgets for review and approval by MacManus on a quarterly basis; (6) financial and accounting policies for Blue Marble were dictated or reviewed by MacManus; (7) Brown and Bostock participated in or made decisions concerning significant Blue Marble employment issues, including hirings, terminations, and the promulgation of employment policies including hiring freezes; (8) Blue Marble's Board of Directors consisted of Brown and Bostock, and they conducted no meetings; (9) Blue Marble did not maintain its own corporate financial and labor records, but rather such records were maintained by MacManus; (10) MacManus, through Brown and Bostock, exercised general operational control of Blue Marble, deciding how Blue Marble should proceed on a given issue; and (11) Blue Marble did not pay dividends to MacManus on the Blue Marble stock owned by MacManus. (Compl. ¶ 60.)
On or about June 24, 1999, Bostock told Yakir that MacManus was considering buying Novo Interactive, merging it with Blue Marble, and retaining a majority interest in the merged company. (Compl. ¶ 27.) A series of negotiations occurred between Blue Marble and Novo Interactive that ultimately resulted in a merger between the two companies. (Compl. ¶ ¶ 28-51.) However, a month before the merger was completed, Brown and Bostock terminated Plaintiff's employment over the objections of Yakir for alleged insubordination during the merger process. (Compl. ¶ ¶ 49-51.)
Plaintiff first filed suit in this Court on March 27, 2000, for breach of his employment contract, claiming diversity jurisdiction pursuant to 28 U.S.C. § 1332. At all times relevant to this action, Plaintiff has been a citizen of New York. Defendant Novo Mediagroup, Inc. is a citizen of California, Defendant B COM3 Group, Inc. ("B COM3") is a citizen of Illinois, and Defendant Andrew Sievers is a citizen of New Jersey. (Compl. ¶ ¶ 2, 4, 5.) Plaintiff reports that the complaint in the first action did not name MacManus, a citizen of New York, because Plaintiff believed MacManus no longer existed as a legal entity independent of B COM3 because of a series of mergers that occurred after his termination. (Grenert Aff. ¶ 3.) Plaintiff later learned that MacManus still exists as a wholly owned subsidiary of B COM3. (Grenert Aff., Ex. A.) Believing that MacManus could be a necessary party to the action and desiring to add MacManus as a defendant, Plaintiff voluntarily dismissed the original action on June 19, 2000, because MacManus has its principal place of business in New York and thus destroys diversity jurisdiction.
On June 20, 2000, Plaintiff filed an action in the Supreme Court for the State of New York, County of New York, naming MacManus as an additional defendant. On July 21, 2000, Defendants filed a notice of removal pursuant to 28 U.S.C. § 1441 (a), alleging that diversity jurisdiction does exist because MacManus was fraudulently joined solely to destroy federal jurisdiction. Defendants also filed a motion to dismiss the complaint. On September 5, 2000, Plaintiff filed a motion to remand the case to state court for lack of subject matter jurisdiction. Because Defendants have not met the heavy burden associated with proving fraudulent joinder in this Circuit, Plaintiff's motion for remand is granted.
DISCUSSION
Defendants carry a heavy burden in proving that federal subject matter jurisdiction exists because a party has been fraudulently joined. See Carson v. Kentucky Fried Chicken of Cal., 96 Civ. 8519, 1997 WL 615240, at *2 (S.D.N.Y. Oct. 3, 1997).
In order to show that naming a non-diverse defendant is a `fraudulent joinder' effected to defeat diversity, the defendant must demonstrate, by clear and convincing evidence, either that there has been outright fraud committed in the plaintiff's pleadings, or that there is no possibility, based on the pleadings, that a plaintiff can state a cause of action against the non-diverse defendant in state court. The defendant seeking removal bears a heavy burden of proving fraudulent joiner, and all factual and legal issues must be resolved in favor of the plaintiff.
Pampillonia v. RJR Nabisco, Inc., 138 F.3d 459, 461 (2d Cir. 1998).
Defendants rely on Carson v. Kentucky Fried Chicken of California, 96 Civ. 8519, 1997 WL 615240 (S.D.N.Y. Oct. 3, 1997), in which the court found fraudulent intent to join based on the timing of the attempted joinder. See id. at *3. However, this case is distinguishable from Carson. After the Carson plaintiff filed in state court, the defendant properly removed the case to federal court based on the diversity of the parties. The Carson plaintiff then attempted to join a non-diverse party and remand the case to state court. See id. at *2. The court in Carson was skeptical of the joinder because it found that the plaintiff could have discovered the identity of the non-diverse defendant at the inception of the claim. See id. at *3. Here, the action was originally brought in federal court, and then voluntarily dismissed and re-filed in state court when Plaintiff learned that MacManus still existed as a legal entity separate from B COM3. Defendants assert that Plaintiff could have made this discovery before the initial filing and thus contend that the reasoning in Carson is applicable. However, the Carson plaintiff merely had to determine who owned a piece of property in the Bronx, whereas Plaintiff had to determine the existence of an entity that has participated in at least three mergers in the previous five years. Furthermore, the fact that Plaintiff first filed in federal court indicates that there was no attempt to forum shop in this case. Thus, fraudulent intent to join cannot be inferred in this case based on the timing of the addition of MacManus as a defendant.
Defendants also read Carson as requiring Plaintiff to prove that the non-diverse defendant is a necessary party in order to succeed on the motion to remand. They argue that MacManus is not a necessary party to this action and thus there is no basis for remanding the case to state court. However, the court in Carson merely strengthened its finding of fraudulent intent to join by noting the plaintiff's lack of an explanation for the necessity of joining the non-diverse defendant in that case. See id. Carson did not require that the party to be joined was a necessary party under Federal Rule of Civil Procedure 19. Furthermore, other courts have found that "joinder may be permitted even if the diversity-destroying party is not indispensable." Roland v. Marriott Int'l Corp., No. 94 Civ. 7720, 1995 WL 358631, at *2 (S.D.N.Y. June 15, 1995); see also Reyes v. Nat'l Car Rental Fin. LP, No. 99 Civ. 10058, 2000 WL 769205, at *1 (S.D.N.Y. June 13, 2000).
Plaintiff argues that there is a possibility that he has causes of action against MacManus for breach of employment contract, promissory estoppel, violation of the New York Labor Law and quantum meruit under two theories: (1) MacManus and Blue Marble were a single employer subject to joint liability for their employment-related acts; and (2) Blue Marble was a mere instrumentality or alter ego of MacManus. In essence, Plaintiff theorizes that MacManus made the decision to fire him.
The single employer doctrine allows two entities to be regarded as a single employer subject to joint liability if they have interrelated operations, common management, centralized control of labor relations, and common ownership. See Murray v. Miner, 74 F.3d 402, 404 (2d Cir. 1996). The doctrine is generally used by courts in the context of collective bargaining disputes and employment discrimination cases. See id. Although it is not clear whether the single employer doctrine applies to common law claims of employees, the possibility remains that the doctrine will be available in this case. See id. Defendants argue that Plaintiff's admission in the complaint that the Blue Marble human resources department reported to Plaintiff indicates that he, not MacManus, was in control of labor relations at Blue Marble. However, the complaint also alleges that MacManus controlled the timing of hiring freezes at Blue Marble, and that MacManus directed the CEO of Blue Marble to enter into employment contracts with key Blue Marble employees. Although Brown and Bostock could have been wearing their Blue Marble Board of Director hats when they fired Plaintiff, the complaint alleges that the Blue Marble Board never held any meetings during the time that Plaintiff was employed there. The complaint also specifically alleges that MacManus exercised substantial control over Blue Marble's finances, suggesting a possibility of interrelated operations. The overlapping roles of Yakir, Brown, and Bostock on the Boards of the Blue Marble and MacManus also support the possibility of a finding of common management of the two companies. The fact that Bostock and Brown were the only members of the Blue Marble Board strengthens the allegations of common management and interrelated operations of Blue Marble and MacManus. Thus, taking all of the Plaintiffs allegations as true, Defendants have not demonstrated by clear and convincing evidence that it is impossible for Plaintiff to state a cause of action against MacManus using the single employer doctrine.
A possibility also exists that MacManus could be liable under an alter ego theory. In order to prevail under this theory, Plaintiff must show that MacManus and Blue Marble were a single economic entity and that an overall element of unfairness would occur if the corporate veil between the two was not pierced. See Fletcher v. Atex, Inc., 68 F.3d 1451, 1457 (2d Cir. 1995) (applying Delaware law). Among the factors to be considered in determining whether a subsidiary and parent function as a single economic entity are:
New York choice of law principles look to the law of the state of incorporation in determining when to disregard the corporate structure. See Fletcher v. Atex, Inc., 68 F.3d 1451, 1458 (2d Cir. 1995). Because MacManus is incorporated in Delaware, the alter ego issue will likely be evaluated using Delaware law.
[W]hether the corporation was adequately capitalized for the corporate undertaking; whether the corporation was solvent; whether dividends were paid, corporate records kept, officers and directors functioned properly, and other corporate formalities were observed; whether the dominant shareholder siphoned corporate funds; and whether, in general, the corporation simply functioned as a facade for the dominant shareholder.
Id. at 1458 (citations omitted).
Although Plaintiff will face a significant challenge persuading a court to pierce the corporate veil between the two companies, there is a possibility, based on the allegations in the complaint, that a court could find that Blue Marble and MacManus functioned as a single economic entity. See id. For instance, the alleged failure of Blue Marble to pay dividends, the allegation that Blue Marble's revenue went directly to MacManus, and the lack of Blue Marble board meetings point to the possibility that corporate formalities were not observed. Defendants attempt to refute this assertion by offering one set of redacted Blue Marble Board Meeting minutes signed by Brown and Bostock. (Rubin Decl. Ex. 2.) These minutes are dated one month after Plaintiff was terminated, and are the only evidence offered that Brown and Bostock actually functioned as a formal board of directors for Blue Marble. The complaint further alleges that Blue Marble only maintained a petty cash account and that it did not maintain its own corporate records. Thus it appears that there is a possibility that Plaintiff will be able to prove that Blue Marble and MacManus functioned as a single economic entity.
Defendants have thus not carried their burden of proving that there is no possibility that Plaintiff could demonstrate that Blue Marble was an alter ego of MacManus. Consequently, Defendants have not carried their burden of proving that MacManus was fraudulently joined.
CONCLUSION
For the reasons set forth above, Plaintiff's motion to remand this case to the Supreme Court of the State of New York, County of New York, is granted.
SO ORDERED.