Opinion
1-23-CV-00107-DAE
11-21-2023
MARLENE A. MALEK, CO-TRUSTEE OF THE FREDERIC V. MALEK GST NON-EXEMPT MARITAL TRUST, DIRECTLY ON BEHALF OF THE TRUST AND DERIVATIVELY ON BEHALF OF HUDSON RIVER PARTNERS I L.P.; AND THAYER LEADER DEVELOPMENT GROUP, INC., Plaintiffs v. RICHARD M. MINICOZZI, WILLIAM MURDY, TIMOTHY TYSON, Defendants
REPORT AND RECOMMENDATION OF THE UNITED STATES MAGISTRATE JUDGE
DUSTIN M. HOWELL, UNITED STATES MAGISTRATE JUDGE
TO: THE HONORABLE DAVID A. EZRA SENIOR UNITED STATES DISTRICT JUDGE
Before the Court is Plaintiff Marlene A. Malek's Motion to Remand, Dkt. 11; and all related briefing. This motion was referred to the undersigned for report and recommendation. After reviewing these filings and the relevant case law, the undersigned recommends granting the motion.
I. BACKGROUND
This case is brought by Plaintiff Marlene A. Malek, as co-trustee of the Frederic V. Malek GST Non-exempt Marital Trust (“Malek Trust”), as a derivative cause of action on behalf of Hudson River Partners, LLP, (“HRP”) and Thayer Leader Development Group, Inc. (“TLDG”), asserting various mismanagement claims against Defendants Richard M. Minicozzi, William Murdy, and Timothy Tyson, who are co-founders and board members of HRP (of which the Malek Trust is 19% owner) and TLDG. Dkt. 1-1, at 1, 5, 8-10, 12, 16.
Minicozzi is a Texas resident, while Murdy and Tyson are Connecticut residents. Id. at 9-10. On the Plaintiffs' side of the controversy, Malek is a Virginia resident, and TLDG is a Texas corporation with its principal place of business in New York. Id. at 9. HRP's citizenship is determined by the citizenship of each of its partners, including Minicozzi, Murdy, Tyson, and Malek.Therefore, for diversity purposes HRP is a citizen of Texas, Connecticut, and Virginia.
The citizenship of a limited partnership is based upon the citizenship of each of its partners. See Carden v. Arkoma Assocs., 494 U.S. 185, 195-96 (1990) (holding that the citizenship of an unincorporated entity or association, such as a partnership, is based upon the citizenship of each of its members).
A. Murdy and Tyson's Notice of Removal
Defendants Murdy and Tyson removed Malek's petition on diversity grounds pursuant to 28 U.S.C. § 1332 arguing this is “an action between citizens of different states despite Malek's errant pleading that suggests otherwise.” Dkt. 1, at 5. The Removal Notice indicates that TLDG and HRP oppose this litigation because it is based on Malek's misunderstanding of TLDG and HRP business and state that Malek's request that she be handed control of TLDG and HRP “would be disastrous.” Id. at 3-4. Murdy and Tyson ask the Court to look beyond the caption and the pleadings and arrange the parties according to their interests, ultimately making TLDG a defendant and dismissing HRP as a dispensable party. Id. at 6.
Murdy and Tyson argue that a non-diverse partnership such as HRP is “dispensable where all the partners, or all general partners, were parties to the litigation and could adequately represent partnership interests.” Id. at 10 (citing Moss v. Princip, 913 F.3d 508, 517 (5th Cir. 2019)). Murdy and Tyson further argue that the parties can adequately represent the partnership, because Minicozzi, Murdy, and Tyson collectively control the actions of the partnership, and Malek has stated that she “will adequately and fairly represent the interests of [HRP] and its stockholders.” Id. at 10. Murdy and Tyson contend that with HRP “removed from the analysis” and TLDG aligned as a defendant, Malek (VA) will be on one side while TLDG (TX), Minicozzi (TX), and Murdy (CT) and Tyson (CT) will be on the other, effectuating complete diversity. Id. at 12.
B. Malek's Motion to Remand
Malek now moves to remand, arguing that HRP is not diverse from “either Plaintiffs or the Defendants ... regardless of whether it is aligned with the Plaintiff or Defendant for diversity analysis purposes.” Dkt. 11, at 1. Malek further argues that Murdy and Tyson's argument that HRP should be dismissed from this action as dispensable party fails because “that is not the applicable standard for excluding a party from the diversity analysis.” Id. at 2. Malek contends that the improper joinder standard applies and that Tyson and Murdy fail to meet it. Id. Malek urges the Court to find that it lacks subject matter jurisdiction over the non-diverse parties in this case, and to remand her cause of action to the Travis County District Court from which it was removed. Id. at 11.
II. LEGAL STANDARD
A defendant may remove any civil action from state court to a district court of the United States that has original jurisdiction. 28 U.S.C. § 1441(a). District courts have original jurisdiction over all civil actions that are between citizens of different states and involve an amount in controversy in excess of $75,000, exclusive of interest and costs. 28 U.S.C. § 1332(a). Diversity jurisdiction “requires complete diversity-if any plaintiff is a citizen of the same State as any defendant, then diversity jurisdiction does not exist.” Flagg v. Stryker Corp., 819 F.3d 132, 136 (5th Cir. 2016) (citing Strawbridge v. Curtiss, 7 U.S. (3 Cranch) 267 (1806)).
The party seeking removal “bears the burden of establishing that federal jurisdiction exists and that removal was proper.” Manguno v. Prudential Prop. & Cas. Ins. Co., 276 F.3d 720, 723 (5th Cir. 2002). The removal statute must “be strictly construed, and any doubt about the propriety of removal must be resolved in favor of remand.” Gasch v. Hartford Accident & Indem. Co., 491 F.3d 278, 281-82 (5th Cir. 2007); see also Hood ex rel. Mississippi v. JP Morgan Chase & Co., 737 F.3d 78, 84 (5th Cir. 2013) (“Any ambiguities are construed against removal and in favor of remand to state court.”). A district court is required to remand the case to state court if, at any time before final judgment, it determines that it lacks subject matter jurisdiction. 28 U.S.C. § 1447(c).
When a properly joined defendant is a resident of the same state as the plaintiff, removal is improper. 28 U.S.C. § 1441(b)(2). However, “the improper joinder doctrine constitutes a narrow exception to the rule of complete diversity.” Cuevas v. BAC Home Loans Servicing, LP, 648 F.3d 242, 249 (5th Cir. 2011). To establish improper joinder, the removing party has the “heavy” burden, id., to demonstrate either: “(1) actual fraud in the pleading of jurisdictional facts, or (2) inability of the plaintiff to establish a cause of action against the non-diverse party in state court.” Smallwood v. Ill. Cent. R.R. Co., 385 F.3d 568, 573 (5th Cir. 2004).
III. DISCUSSION
A. Murdy and Tyson's Urged Application of FRCP 21
Murdy and Tyson ask this Court to “realign in its diversity analysis .. [HRP] with the Defendants who control it. From there ... [the Court should] use its power under Rule 21 to dismiss Hudson River as a Rule 19(b) dispensable party.” Dkt. 12, at 21. First, Malek responds that HRP “is not a dispensable party in any event . [because] [t]he claims in this action are brought on [HRP]'s behalf; the harm alleged is harm to [HRP]; and any relief will directly inure to [HRP].” Dkt. 11, at 2. Malek further argues that “[n]ot all of [HRP]'s partners are parties to this action, making the partnership's presence in this case all the more indispensable.” Id. As to the suggestion that the Court sua sponte dismiss HRP under Rule 21, Malek states that “Defendants cite no precedent-and Plaintiff is aware of none-that has done what Defendants ask the Court to do here: exclude a party from the diversity analysis at the threshold removal stage based on the inapposite standards for an ‘indispensable' party under Rule 19(b).” Id. at 6.
The undersigned agrees with Malek that the Rule 21 sua sponte dismissal of a party as dispensable under Rule 19(b) at this stage of the case is unsupported by the relevant caselaw.The undersigned will not recommend the sua sponte dismissal of HRP merely to establish the Court's diversity jurisdiction.
The case relied on by Murdy and Tyson for their argument that HRP is dispensable and should be dismissed for the purposes of the Court's diversity analysis is Moss v. Princip, 913 F.3d 508 (5th Cir. 2019). However, Moss did not involve a remand motion in response to a removal notice, as here. In Moss the defendants removed to federal court and “[n]o one challenged removal.” Id. at 512-13. Only after the federal-court jury found the defendants liable for damages did the defendants who had originally removed the action then move to dismiss for lack of subject-matter jurisdiction, claiming that the inclusion of the parties' partnership as a defendant created a lack of complete diversity. Id. at 513. In that context, the court granted the plaintiffs' Rule 21 motion to dismiss the partnership as a dispensable non-diverse party, against whom the plaintiffs did not seek relief or entry of judgment. Id.
Instead, the Court will proceed to the improper joinder analysis that governs this Court's diversity analysis as to HRP and determine whether HRP has been improperly joined such that this case falls within this narrow exception to the rule of complete diversity.
Murdy and Tyson state that the Court should alternatively find that “Hudson River was improperly joined, because once realigned, there are no claims stated against the partnership and its presence would serve only to defeat diversity jurisdiction.” Dkt. 12, at 21. Murdy and Tyson further state that if the Court declines their suggested sua sponte dismissal of HRP pursuant to Rule 21(b) after finding that HRP is dispensable under Rule 19(a), Tyson and Murdy will “will accept and prevail under [the improper joinder standard]” instead. Id. at 7.
B. Improper Joinder
The parties agree that as captioned, with Malek (VA), HRP (VA, TX, CT), and TLDG (TX) on one side and Minicozzi (TX), Tyson (CT), and Murdy (CT) on the other, there is no complete diversity of citizenship in this case as required for removal. Malek's position is that because there is no diversity between the parties this Court lacks subject matter jurisdiction, removal was improper, and this case should be remanded to Travis County District Court. Dkt. 11, at 3-4. Murdy and Tyson dispute HRP's alignment in the case and argue that HRP was improperly joined. Dkt. 12, at 7.
When a properly joined defendant is a resident of the same state as the plaintiff, removal is improper. 28 U.S.C. § 1441(b)(2). However, “the improper joinder doctrine constitutes a narrow exception to the rule of complete diversity.” Cuevas, 648 F.3d at 249. To establish improper joinder, as Murdy and Tyson are attempting to do here, they must demonstrate either: “(1) actual fraud in the pleading of jurisdictional facts, or (2) inability of the plaintiff to establish a cause of action against the non-diverse party in state court.” Smallwood, 385 F.3d at 573. Until Murdy and Tyson make such a showing, “the court does not have the authority to do more” and “must remand to the state court.” Id. at 576.
Defendants claiming improper joinder based on a plaintiff's inability to establish a cause of action against the non-diverse party bear a heavy burden of showing there is no possibility of recovery by the plaintiff against the in-state defendant, i.e., that there is no reasonable basis for predicting that state law would allow recovery against the in-state defendant. Travis v. Irby, 326 F.3d 644, 649 (5th Cir. 2003); Smallwood, 385 F.3d at 576. A “reasonable basis” means more than a mere a hypothetical basis. Griggs v. State Farm Lloyds, 181 F.3d 694, 701 (5th Cir. 1999) (“whether the plaintiff has stated a valid state law cause of action depends upon and is tied to the factual fit between the plaintiffs' allegations and the pleaded theory of recovery”).
To determine whether a plaintiff has a “reasonable basis for recovery under state law,” the court may “conduct a Rule 12(b)(6)-type analysis.” Smallwood, 385 F.3d at 573; Anderson v. Georgia Gulf Lake Charles, 342 F. App'x. 911, 915 (5th Cir. 2009). When conducting a Rule 12(b)(6)-type analysis, the Court must determine whether the plaintiff has pleaded “enough facts to state a claim to relief that is plausible on its face.” Int'l Energy Ventures Mgmt. L.L.C. v. United Energy Grp., Ltd., 818 F.3d 193, 200 (5th Cir. 2016) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). A claim is facially plausible when the plaintiff pleads facts that allow the Court to “draw the reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). The Court must accept all well-pleaded facts as true and must draw all reasonable inferences in favor of the plaintiff. Lormand v. U.S. Unwired, Inc., 565 F.3d 228, 239 (5th Cir. 2009).
Rather than claim that there has been “actual fraud in the pleading of jurisdictional facts,” Murdy and Tyson argue that Malek cannot establish a cause of action against HRP. Dkt. 12, at 19. Murdy and Tyson's argument requires them to first re-urge alignment of HRP with them on the Defendants' side of the dispute since improper joinder under 28 U.S.C. § 1441(b)(2) quieries the propriety of a joined defendant. See 28 U.S.C. § 1441(b)(2). Accordingly, Murdy and Tyson's improper joinder argument is that once “the parties are properly aligned,” so that Malek is on one side and HRP is on the other with Murdy and Tyson, diversity does not exist because HRP takes on Malek's Virginia citizenship. Dkt. 12, at 7. Once HRP is hypothetically aligned with HRP, Murdy and Tyson argue that Malek has “stated no claims against [HRP].” Id. at 20. Specifically, Murdy and Tyson argue that Malek's claims for breach of fiduciary duty, aiding and abetting breach of fiduciary duty unjust enrichment, tortious interference against Minicozzi, Murdy, and Tyson, don't implicate HRP, and thus fail as to HRP. Id. at 20. Murdy and Tyson further state “[t]here are no allegations that Hudson River has been enriched” and “no allegations that Hudson River has interfered with any business.” Id. Without “claims or relief alleged against HRP itself,” HRP has been allegedly improperly joined. Id.
Murdy and Tyson's argument for realignment is that HRP (and TLDG) oppose Malek's suit, so the partnerships are adverse to Malek and thus should be aligned as Defendants. Dkt. 12, at 8-9. The positions attributed to TLDG and HRP are evidenced in the record by a declaration from Tyson that he, Murdy, and Minicozzi are part of a majority of the Board of Directors and his statement that “the majority of the [TLG] Board of Directors is opposed to Malek's demands and the allegations in this lawsuit because they are premised on erroneous information and the lawsuit is damaging to [TLDG]'s interest.” Dkt. 1-1, at 3. Tyson states that “[f]or the same reasons [HRP] is also opposed to Malek's demands and this litigation.” Id.; see also Dkt. 1-2, at 2-3 (Declaration of Murdy stating the same). The urged realignment, while necessary for Murdy and Tyson's improper joinder argument, does not address the intractable problem that no matter which side of the caption HRP is positioned, complete diversity does not exist owing to HRP's common citizenship with Malek on one side and Tyson and Murdy on the other.
Murdy and Tyson concede that for Malek to make claims against HRP does not “make much sense” because, essentially, claims against the partnership are really claims against those who control the actions of the partnership. Id. at 19. Practically speaking, however, it would not have made much sense for Malek to assert claims against HRP because Malek brings claims on behalf of HRP for injury caused to HRP by Defendants. See, e.g., Dkts. 12, at 11 (Murdy and Tyson referencing the “derivative nature” of Malek's claims); 1-3, at 15 (Malek's petition describing Minicozzi's actions to the “detriment of [HRP]”). Murdy and Tyson's argument that the Court should rewrite Malek's petition such that HRP is aligned with Defendants, and that once realigned, Malek has stated no claims against HRP, is illogical.
Even if the Court did re-align HRP with Defendants such that arguments concerning the insufficiency of Malek's claims against HRP might be cogent, Murdy and Tyson's improper joinder argument still fails. Murdy and Tyson have not provided any arguments as to whether Malek does not have a “reasonable basis for recovery under state law” by doing “a Rule 12(b)(6) type analysis” of Malek's petition, as required for the improper joinder framework. Smallwood, 385 F.3d at 573. In arguing that HRP should be aligned with Defendants and then that HRP has been improperly joined as a defendant because Malek has not made claims implicating HRP, Murdy and Tyson have not met the heavy burden on defendants claiming improper joinder. Because Murdy and Tyson have not met their burden, they have failed to show the existence of an exception to the requirement of complete diversity. Accordingly, the Court lacks subject matter jurisdiction and Malek's motion to remand, Dkt. 11, should be granted. This action should be remanded to the Travis County District Court from which it originated.
IV. RECOMMENDATION
In accordance with the foregoing discussion, the undersigned RECOMMENDS that the District Court GRANT Malek's Motion to Remand, Dkt. 11.
V. WARNINGS
The parties may file objections to this Report and Recommendation. A party filing objections must specifically identify those findings or recommendations to which objections are being made. The District Court need not consider frivolous, conclusive, or general objections. See Battle v. United States Parole Comm'n, 834 F.2d 419, 421 (5th Cir. 1987). A party's failure to file written objections to the proposed findings and recommendations contained in this Report within fourteen days after the party is served with a copy of the Report shall bar that party from de novo review by the District Court of the proposed findings and recommendations in the Report and, except upon grounds of plain error, shall bar the party from appellate review of unobjected-to proposed factual findings and legal conclusions accepted by the District Court. See 28 U.S.C. § 636(b)(1)(C); Thomas v. Arn, 474 U.S. 140, 150-53 (1985); Douglass v. United Servs. Auto. Ass'n, 79 F.3d 1415, 1428-29 (5th Cir. 1996) (en banc).