Opinion
CIVIL ACTION No. 02-2435-CM
May 7, 2003.
MEMORANDUM AND ORDER
This matter is before the court on the plaintiffs' Motion to Remand to State Court (Doc. 10). Defendants Milberg Weiss Bershad Hynes Lerach, LLP (hereinafter "Milberg"), and Rare Medium Group, Inc., Glenn S. Meyers, and Jeffrey J. Kaplan (hereinafter collectively referred to as "the Rare Medium defendants") oppose the motion. Plaintiffs have also filed a Motion to Strike the notices of filing state court pleadings as untimely (Doc. 26). Finally, in their separate Response to plaintiffs' Motion to Remand (Doc. 33), the Rare Medium defendants argue that plaintiffs' claims against them and against defendant Joe Zappulla should be severed from those against defendants Milberg and Robert Mitchell. For the reasons set forth below, the court severs plaintiffs' claims against the Rare Medium defendants and defendant Zappulla from those against defendants Milberg and Mitchell, grants plaintiffs' Motion to Remand the case as to defendants Milberg and Mitchell, and denies plaintiffs' Motion to Strike.
At the time defendants filed their Notice of Removal, they stated that, to their knowledge, defendants Zapulla and Mitchell had not been served with the Petition, and, thus, did not join in the removal. Plaintiffs do not dispute they had not served these defendants when the Notice of Removal was filed. 28 U.S.C. § 1441 requires that all served defendants, except nominal defendants, join in or consent to the removal notice within thirty days of service. First Nat'l Bank Trust Co. v. Nicholas, 768 F. Supp. 788, 790 (D.Kan. 1991). The court has no information to contradict defendants' contention that no additional parties have been served. For purposes of this motion, the court assumes that no additional parties have been served, and that, therefore, no additional parties must join in the removal of this action.
I. Background
The court has thoroughly reviewed the facts set forth both in plaintiffs' state court petition and in defendants' Notice of Removal, which give rise to the issues before the court. The court sets out a summary of the relevant factual allegations upon which this court bases its decision.
On July 26, 2002, plaintiffs filed the present case in the District Court of Johnson County, Kansas, Case Number 02-CV-04867, alleging fraud, negligence, breach of fiduciary duty, and violations of the Kansas Consumer Protection Act. These claims arise out of plaintiffs' purchase and retention of stock in Rare Medium, Inc. ("Rare Medium"), and from a subsequent civil action against the Rare Medium defendants, for which plaintiffs engaged defendant Milberg as counsel.
Plaintiffs' petition names several defendants who were allegedly involved at various chronological stages. From March 2000 to April 2001, plaintiffs bought and sold stock in Rare Medium for their personal portfolios and for The Hedge Fund, LLC ("Hedge Fund"), an investment fund managed by plaintiff Loeffelbein and owned, in part, by plaintiffs Loeffelbein and Pham. Rare Medium was a publicly-traded firm specializing in Internet website design and consulting. During all relevant periods, defendant Meyers was the President and Chief Executive Officer of Rare Medium, and defendant Kaplan was the Executive Vice President and Chief Financial Officer of Rare Medium. Plaintiffs allege that defendant Zappulla, doing business as "Wall Street Investor Relations," worked for Rare Medium.
Although plaintiffs state that defendant Mitchell "worked with [plaintiff] Loeffelbein at his home in Bucyrus, Kansas" and helped plaintiff Loeffelbein "in his stock trading and in various other ways," all of plaintiffs' allegations regarding defendant Mitchell pertain to an engagement letter that Mitchell allegedly signed on plaintiff Loeffelbein's behalf. Under the terms of that letter, plaintiff Loeffelbein engaged defendant Milberg as counsel in a suit against the Rare Medium defendants. Plaintiffs set forth no facts and make no assertions that might lead the court to believe that they intend to pursue a claim against defendant Mitchell for any of the events occurring prior to plaintiffs' decision to retain defendant Milberg as counsel.
A. Plaintiffs' Purchase and Retention of Rare Medium Stock
Rare Medium was established in the mid-1990s as a website design and consulting firm. By 1996, Rare Medium was publicly traded and listed on the NASDAQ exchange. At the end of 1999, Rare Medium reported revenue increases from $5.8 million the year before to $36.7 million. Plaintiffs allege that defendants Meyers and Kaplan knew this report was false when they issued it.
In March and April of 2000, when Rare Medium stock was trading at $90 per share, plaintiff Loeffelbein began trading Rare Medium stock for his personal accounts and for the Hedge Fund. Rare Medium's stock value decreased through August 2000, from about $90 to $9 per share, and plaintiff Loeffelbein continued to increase his position in the stock. Plaintiffs allege that, in reliance upon statements made by the Rare Medium defendants in an October 2000 conference call, plaintiff Loeffelbein increased his own position and that of the Hedge Fund to approximately 280,000 shares each. By mid-February 2001, plaintiffs' combined holdings totaled approximately one million shares of common stock.
Defendant Zappulla allegedly advised plaintiff Loeffelbein to hold his shares for six to nine more months, even though he knew Rare Medium was losing money and downsizing. In May 2001, Rare Medium announced a merger with Motient Corp ("Motient"). Plaintiffs allege that this merger was "obviously so grossly unfair to the common shareholders that the announcement set off a securities class action lawyer feeding frenzy." By late the next day, at least one class action lawsuit had been filed against Rare Medium.
B. Plaintiffs' Engagement of Milberg to Sue the Rare Medium Defendants
Plaintiffs believe themselves to be the largest group of non-institutional shareholders of Rare Medium stock. On May 14, 2001, the day Rare Medium announced the Motient merger, plaintiff Loeffelbein contacted defendant Milberg. Plaintiffs allege that plaintiff Loeffelbein asked defendant Milberg, and defendant Milberg agreed, to represent plaintiff Loeffelbein and his wife in a fraud action against Rare Medium. In response, defendant Milberg mailed to plaintiff Loeffelbein a certification in support of a federal securities fraud complaint, which plaintiff Loeffelbein executed and returned on May 17, 2001.
Although the allegations of plaintiffs' petition state that defendant Milberg represented both plaintiff Loeffelbein and his wife, plaintiff Loeffelbein's wife does not appear to be a party to this action.
Plaintiffs allege that defendant Milberg advised plaintiff Loeffelbein against selling any Rare Medium stock because it would be difficult, if not impossible, to recover any damages if he sold his stock position. Plaintiffs state that plaintiff Loeffelbein relied on defendant Milberg's advice and retained his Rare Medium stock. Within a week of the Motient merger announcement, Rare Medium's stock fell from $1.75 to 85¢ per share.
Plaintiffs allege that defendant Milberg's representations that it was willing to pursue fraud claims on plaintiff Loeffelbeins' behalf were false and self-serving, in that those representations were intended to position defendant Milberg as the lead counsel for a class action lawsuit that other investors had already filed. Plaintiffs state that defendant Milberg intentionally misled plaintiff Loeffelbein into believing it intended to pursue fraud claims when, in fact, it only planned to pursue breach of fiduciary duty claims.
At some point prior to May 31, 2001, while plaintiff Loeffelbein was on vacation, an attorney working for defendant Milberg spoke by telephone to defendant Mitchell. Plaintiffs allege that, during this phone call, defendant Mitchell told the attorney that plaintiff Loeffelbein and his wife had authorized defendant Mitchell to retain Milberg on their behalf, with the purpose of pursuing a breach of fiduciary duty claim in the pending class-action lawsuit against Rare Medium on their behalf. On May 31, 2001, defendant Milberg sent an engagement letter to plaintiff Loeffelbein's home to be executed by defendant Mitchell. Plaintiffs allege that defendant Mitchell had no authority to act on plaintiff Loeffelbein's behalf.
On June 1, 2001, defendant Milberg filed a class action complaint against Rare Medium and its officers alleging breach of fiduciary duty (but not alleging fraud) in the Chancery Court of New Castle County, Delaware. Plaintiffs state that defendant Milberg lacked authority to name plaintiff Loeffelbein as a plaintiff in that complaint. Around August 15, 2001, Rare Medium's stock value dropped to nearly 25¢, and plaintiff Loeffelbein contacted defendant Milberg to ascertain the status of the fraud case. Plaintiffs allege that plaintiff Loeffelbein first learned that he was the named plaintiff in a breach of fiduciary duty class-action suit during this phone call. Upon learning that defendant Milberg was unwilling to assist plaintiff Loeffelbein in a fraud action, the plaintiffs liquidated their Rare Medium stock at an average price of 22¢ per share.
In April 2002, Rare Medium announced that it had settled the class-action case against it. Plaintiffs allege that the settlement did not significantly benefit the common stockholders, but that defendant Milberg received a payment of approximately $1.1 million in attorney fees.
II. Analysis
A civil action is removable only if a plaintiff could have originally brought the action in federal court. 28 U.S.C. § 1441(a). The court is required to remand "if at any time before final judgment it appears that the district court lacks subject matter jurisdiction." 28 U.S.C. § 1447(c). Because federal courts are courts of limited jurisdiction, the law imposes a presumption against federal jurisdiction, Frederick Warinner v. Lundgren, 962 F. Supp. 1580, 1582 (D.Kan. 1997) (citing Basso v. Utah Power Light Co., 495 F.2d 906, 909 (10th Cir. 1974)), and requires a court to deny its jurisdiction in all cases where such jurisdiction does not affirmatively appear in the record. Ins. Corp. of Ireland, Ltd. v. Compagnie des Bauxites de Guinee, 456 U.S. 694, 702 (1982). The burden is on the party requesting removal to demonstrate that the court has jurisdiction. Laughlin v. Kmart Corp., 50 F.3d 871, 873 (10th Cir. 1995). Moreover, in establishing diversity jurisdiction, "[b]oth the requisite amount in controversy and the existence of diversity must be affirmatively established on the face of either the petition or the removal notice." Id. The court must resolve any doubts concerning removability in favor of remand. J.W. Petroleum, Inc. v. Lange, 787 F. Supp. 975, 977 (D.Kan. 1992).
A. Fraudulent Joinder
The only basis upon which defendants claim that this court has jurisdiction is that Robert Mitchell, the only non-diverse defendant, was fraudulently joined in order to avoid diversity jurisdiction. Because it is undisputed that defendant Mitchell is a Kansas resident whose inclusion in this case would destroy diversity subject matter jurisdiction, the court begins by focusing on the fraudulent joinder issue to determine whether remand is necessary. Crow v. State Indus., No. Civ. A. 01-2555-GTV, 2003 WL 1053945, at *3 (D.Kan. Feb. 27, 2003) (citing Triggs v. John Crump Toyota, Inc., 154 F.3d 1284, 1287 (11th Cir. 1998) ("Fraudulent joinder is a judicially created doctrine that provides an exception to the requirement of complete diversity.")). The court finds that defendant Mitchell has not been improperly or fraudulently joined.
It is also undisputed that plaintiffs have met the $75,000 amount in controversy required by 28 U.S.C. § 1442.
It has long been held that the right of removal cannot be defeated by "a fraudulent joinder of a resident defendant having no real connection with the controversy." Wilson v. Republic Iron Steel Co., 257 U.S. 92, 97 (1921). "Fraudulent joinder is a term of art, it does not reflect on the integrity of plaintiff or counsel, but rather exists regardless of the plaintiff's motives when the circumstances do not offer any other justifiable reason for joining the defendant." Barger v. Bristol-Myers Squibb Co., No. Civ. A. 93-2485-JWL, 1994 WL 69508, at *3 (D.Kan. Feb. 25, 1994) (citing Chilton Private Bank v. Norsec-Cook, Inc., 99 B.R. 402, 403 (N.D. Ill. 1989)).
A non-diverse defendant is fraudulently joined when no cause of action is pleaded against him or her, when the cause of action pleaded is defective as a matter of law, or when the pleaded cause of action does not exist in fact. Roe v. Gen. Am. Life Ins. Co., 712 F.2d 450, 452 (10th Cir. 1983). Fraudulent joinder is also present when the plaintiff has no good-faith intention to prosecute the action against the non-diverse defendant or to seek a joint judgment against him or her. Barger, 1994 WL 69508, at *3 (citing Abels v. State Farm Fire Cas. Co., 770 F.2d 26, 29 (3d Cir. 1985)). If there is a possibility, however, that a state court would recognize the cause of action pleaded against the non-diverse defendant, then joinder is proper and remand is required. Id. (citing Coker v. Amoco Oil Co., 709 F.2d 1433, 1440-41 (11th Cir. 1983)).
The removing party must show that joinder is fraudulent and does so only if it offers proof which compels the conclusion that the joinder was without right or made in bad faith. Id. (citing Frontier Airlines, Inc. v. United Air Lines, Inc., 758 F. Supp. 1399, 1405 (D.Colo. 1989)).
As the allegation against defendant Mitchell exists presently in plaintiffs' petition, plaintiffs may fail to state a claim. Plaintiffs' petition is not a picture of clarity; the factual allegations against each defendant are obviously separate, but the counts of the petition generically lump all defendants together under claims of fraud, breach of fiduciary duty, and negligence. The ways in which each of these defendants may have committed these acts are widely varied. Plaintiffs allege that the Rare Medium defendants perpetrated a securities fraud over several months, while defendant Milberg is accused of misrepresenting its intent to pursue certain claims against Rare Medium. Plaintiffs make no such distinction in the counts of the petition.
However, defendants have not persuaded the court that there is no possibility that the petition could be amended to cure any defect. "Moreover, any doubts arising from defective or inartful pleading should be resolved in favor of retention of state court jurisdiction." Barger, 1994 WL 69508, at *4. This standard is more exacting than that for dismissing a claim under Fed.R.Civ.P. 12(b)(6). To prove a fraudulent joinder allegation, the removing party must not only prove the failure to state a claim upon which relief may be granted, but must also "'demonstrate that there is no possibility that [plaintiff] would be able to establish a cause of action against the joined party in state court.'" Crow, 2003 WL 1053945, at *3 (quoting Montano v. Allstate Indemnity, 211 F.3d 1278, 2000 WL 525592, at **1-2 (10th Cir. 2000) (unpublished opinion)).
Plaintiffs' petition states causes of action against Mitchell for negligence, fraud, and breach of fiduciary duty. The petition is not completely clear on the facts supporting any of these claims, but the deficiencies for each count bear one thing in common: plaintiffs have not alleged facts regarding any duty defendant Mitchell owed to plaintiffs or the breach of that duty. However, plaintiffs could amend their petition, consistent with the facts as currently plead, to allege that such a duty exists. Additionally, plaintiffs have asserted a claim for fraud, but have alleged facts that, if amended to include each element under Kansas law, are consistent with a claim for fraud by silence. At defendants' suggestion, the court has considered plaintiffs' failure to label their claim as one of fraud by silence; however, "consistent with [the court's] obligation to construe complaints liberally, 'the complaint need not identify a legal theory, and specifying an incorrect theory is not fatal.'" Mid Am. Title Co. v. Kirk, 991 F.2d 417, 421 (7th Cir. 1993) (citations omitted).
On the contrary, the court finds it likely that plaintiffs could amend the petition to cure any deficiencies and state a cause of action against defendant Mitchell. The court finds that defendants have not met their heavy burden of proving that there is no possibility plaintiffs will be able to establish a cause of action against defendant Mitchell.
Next, the court examines defendants' assertions that plaintiffs' failure to serve discovery upon defendant Mitchell is evidence of plaintiffs' lack of intent to pursue a claim against him. The court finds that this evidence alone is not sufficient to show fraudulent joinder. See Barger, 1994 WL 69508, at *4 (plaintiff's failure to answer interrogatories regarding the defendant who was allegedly fraudulently joined was not sufficient to show intent not to pursue that defendant in the civil action). The court finds that defendants have not met their burden to show either that plaintiff does not intend to pursue a claim against defendant Mitchell or that they will never be able to state such a claim as a matter of law. Thus, the court determines that defendant Mitchell was not fraudulently joined and is neither an improper nor nominal party to this lawsuit.
B. Severance of Claims Against Rare Medium Defendants
The Rare Medium defendants have urged the court to sever plaintiffs' claims against them from the claims against defendants Mitchell and Milberg. Rule 21 of the Federal Rules of Civil Procedure allows district courts discretion to sever any claim against a party and proceed with the claim or claims separately. Rule 21 is a mechanism for correcting either the misjoinder or non-joinder of parties or claims. Its text is silent, however, as to what constitutes misjoinder or non-joinder. Nevertheless, the cases make it clear that misjoinder of parties arises when the claims and parties fail to satisfy any of the conditions of permissive joinder under Rule 20(a). See Am. Fidelity Fire Ins. Co. v. Construcciones Werl, Inc., 407 F. Supp. 164, 190 (D.V.I. 1975). Thus, Rule 21 applies when the claims asserted do not arise out of the same transaction or occurrence or do not present some common question of law or fact.
Under Rule 21, the court can also sever unrelated claims and afford them separate treatment when to do so would be in the interest of some of the parties. Id. This broad power stems from the last sentence of Rule 21 which clearly authorizes the court to sever and proceed separately with the misjoined claims. Rule 20, the rule addressing permissive joinder, does not require precise congruence of all factual and legal issues. Joinder may be permissible even if there is only one question of law or fact common to the parties. Mesa Computer Util., Inc. v. Western Union Computer Util., Inc., 67 F.R.D. 634, 637 (D.Del. 1975).
"Any claim against a party may be severed and proceeded with separately." Fed.R.Civ.P. 21.
The court finds that there is no question of law or fact that is common to plaintiffs' claims against the Rare Medium defendants and the other defendants to this action. While plaintiffs do not distinguish between each of the defendants in the individual counts of the petition, the counts clearly arise from two different sets of facts. The claims against the Rare Medium defendants for fraud, negligence, and breach of fiduciary duty clearly arise from allegations of securities fraud. Conversely, the allegations against defendants Mitchell and Milberg for fraud, negligence and breach of fiduciary duty clearly arise from the circumstances surrounding defendant Milberg's engagement to sue Rare Medium on plaintiffs' behalf. These claims are related only in a tangential sense; if plaintiffs did not believe they had securities fraud claims against the Rare Medium defendants, they would not have attempted to engage defendant Milberg. However, plaintiffs' cause of action against the Rare Medium defendants existed before defendant Milberg became involved. The claims against the Rare Medium defendants are not inextricably linked to those against defendants Mitchell and Milberg. Severing the claims against the Rare Medium defendants from the claims against defendants Mitchell and Milberg will not limit any party's possibility of securing complete relief. See Trail Realty, Inc. v. Beckett, 462 F.2d 396, 399-400 (10th Cir. 1972).
The court will, therefore, sever plaintiffs' claims against the Rare Medium defendants from those against defendants Milberg and Mitchell. Because defendant Mitchell was not fraudulently joined, he remains a non-diverse party properly in this lawsuit. Therefore, the court remands plaintiffs' case against defendants Milberg and Mitchell to the District Court of Johnson County, Kansas for further proceedings. However, since the requirements of 28 U.S.C. § 1332 are met as to the Rare Medium defendants, and because joinder of the claims against the Rare Medium defendants and the other defendants to this action was inappropriate, the court finds that diversity jurisdiction exists and will retain jurisdiction over the claims against the Rare Medium defendants.
C. Failure to Comply with District of Kansas Rule 81.2
Plaintiffs also argue that the court should strike defendants' Notices of Filing of the State Court Records and the Affidavit of Todd Deaton and remand this case because defendants failed to comply with the provisions of D. Kan. R. 81.2. That rule provides:
Within 20 days after filing the notice of removal, the removing party shall procure and file with the clerk of this court a copy of all records and proceedings had in the state court. The court may remand any case sought to be removed to this court because of failure to comply with the provisions of this subsection.
D. Kan. R. 81.2. Defendants filed a copy of the state court record outside the 20-day time limitation, and did not comply with the local rule. The court has discretion to remand the case based solely upon the failure to comply with local rules. See Federated Rural Elec. Ins. Co. v. Mohave Elec. Co-op., 1992 WL 309524, at *1 (D.Kan. Sept. 9, 1992) (remanding solely for failure to comply with this local rule). The decision to remand is discretionary. See Nat'l Inspection Repairs, Inc. v. George S. May Int'l Co., 202 F. Supp.2d 1238 (D.Kan. 2002). The court concludes that defendants' delay did not hinder the court's determination of this motion, and the record is now before the court. In fact, defendant Milberg has set forth uncontroverted statements that the state court record was not available to defendants until October 25, 2002, because of delays in the Johnson County District Court Clerk's office. Because the failure to comply with D. Kan. R. 81.2 was not due to any lack of diligence on defendants' part, and because the decision to remand under D. Kan. R. 81.2 addresses the sound discretion of the court, the court declines to remand the case on this ground.
Plaintiffs also argue that the court should strike defendants' First and Second Supplemental Notices of Filing of State Court Records and portions of the Affidavit of Todd Deaton. The court "may order stricken from any pleading any insufficient defense or any redundant, immaterial, impertinent or scandalous matter." Fed.R.Civ.P. 12(f). "The purpose of Rule 12(f) is to minimize delay, prejudice, and confusion by narrowing the issues for discovery and trial. Although motions to strike are generally disfavored, the decision to grant a motion to strike is within the discretion of the court. When allegations in a complaint are entirely collateral and immaterial to the underlying claims, they should be stricken." Geer v. Cox, 242 F. Supp.2d 1009, 1025 (D.Kan. 2003) (citations omitted). Rule 12(f) does not apply in this case. Motions to strike apply to pleadings, not motions and notices. See Pilgrim v. Trustees of Tufts College, 118 F.3d 864, 868 (1st Cir. 1997). Pleadings are limited to those set forth in Fed.R.Civ.P. 7(a). Scherer v. GE Capital Corp., No. Civ. A. 99-2172-GTV, 2000 WL 303145, at *3 (D.Kan. Mar. 21, 2000).
Even if Rule 12(f) applied, the court determines that defendants' Notices and the Affidavit of Todd Deaton do not contain an insufficient defense or any "redundant, immaterial, impertinent or scandalous matter" as contemplated by Rule 12(f). The court therefore denies plaintiffs' Motion to Strike.
IT IS THEREFORE ORDERED that the plaintiffs' claims against the Rare Medium defendants are severed from plaintiffs' claims against defendants Milberg and Mitchell.
IT IS FURTHER ORDERED that plaintiffs' Motion to Remand (Doc. 10) is granted in part and denied in part. The Motion is granted to the extent that it seeks remand of the claims against defendants Mitchell and Milberg, and denied to the extent it seeks remand of the claims against the Rare Medium defendants. The case is remanded to the District Court of Johnson County, Kansas as to defendants Mitchell and Milberg only.
Finally, IT IS FURTHER ORDERED that Plaintiff's Motion to Strike (Doc. 26) is denied.