Arden-Mayfair, Inc. v. Louart Corp.

• Decision Date: 19 July 1977
• Docket Number: Civ. A. No. 77-93.
• Citation: 434 F. Supp. 580
• Parties: ARDEN-MAYFAIR, INC., Bernard Briskin, Philip L. Carret, Eugene Gelson, Thomas L. Karsten, F. Bruce Krysiak, Chester I. Lappen, Charles N. Mathewson, George A. Rhoten, Frederick A. Schnell, Ralph J. Shapiro and Curtis H. Palmer, Plaintiffs, v. LOUART CORP., Marshall I. Kass, Henry L. Melczer, Harry F. Frazer, Estella B. Frazer, Elizabeth B. Elliott Ashley, Robert E. Hutter, Adelene M. Hutter, Thomas E. Londergan, Charlotte M. Park, Edith E. Pepper, Robert G. Potter, Jr., Pauline B. Potter, Frances L. Salzenberg, Mary T. Walls, Defendants.
• Court: U.S. District Court — District of Delaware

434 F. Supp. 580

ARDEN-MAYFAIR, INC., Bernard Briskin, Philip L. Carret, Eugene Gelson, Thomas L. Karsten, F. Bruce Krysiak, Chester I. Lappen, Charles N. Mathewson, George A. Rhoten, Frederick A. Schnell, Ralph J. Shapiro and Curtis H. Palmer, Plaintiffs, v. LOUART CORP., Marshall I. Kass, Henry L. Melczer, Harry F. Frazer, Estella B. Frazer, Elizabeth B. Elliott Ashley, Robert E. Hutter, Adelene M. Hutter, Thomas E. Londergan, Charlotte M. Park, Edith E. Pepper, Robert G. Potter, Jr., Pauline B. Potter, Frances L. Salzenberg, Mary T. Walls, Defendants.

Civ. A. No. 77-93.

United States District Court, D. Delaware.

July 19, 1977.

Joseph A. Rosenthal, of Morris & Rosenthal, Wilmington, Del. (Daniel A. Weber, of Mitchell, Silberberg & Knupp, Los Angeles, Cal., of counsel), for plaintiff, Arden-Mayfair, Inc. Bruce M. Stargatt, Jack B. Jacobs and Richard A. Levine, of Young, Conaway, Stargatt & Taylor, Wilmington, Del. (James F. Crafts, Jr., Robert P. Feyer and Keith A. Hunsaker, Jr., of Orrick, Herrington, Rowley & Sutcliffe, San Francisco, Cal., of counsel), for defendants.

CALEB M. WRIGHT, Senior District Judge.

I. INTRODUCTION

This declaratory judgment action was originally filed in state court and removed to this Court pursuant to 28 U.S.C. §§ 1441 and 1446 by petition filed on March 15, 1977. Presently before the Court is plaintiff's Motion to Remand.¹ Remand is sought on the grounds that this Court lacks jurisdiction because the action does not present a federal question and that the removal was defective because of the failure of some defendants to join in the removal petition. The Court concludes that it does not have federal question jurisdiction of this case, and in light of this conclusion, it is unnecessary to discuss the failure of some defendants to join in the removal petition.

II. BACKGROUND

Plaintiff, Arden-Mayfair, a Delaware corporation, brought this action in state court naming as defendants (1) Louart Corporation, a California corporation, and a substantial shareholder of Arden-Mayfair, Marshall I. Kass, and Henry L. Melczer, Louart's President and Vice-President (collectively "the Louart defendants"); (2) each of Arden-Mayfair's incumbent directors; (3) nine named Delaware resident Arden-Mayfair shareholders; and (4) John Doe 1 to John Doe 12,00 intended to represent individually and as class action representatives Arden-Mayfair shareholders.

The underlying controversy in this case is a direct result of recent California legislation which became effective January 1, 1977, expanding applicability of the California General Corporation Law ("G.C.L."). Section 2115 of the G.C.L. makes corporations not incorporated in California, which have no "outstanding securities listed on any national securities exchange", subject to certain provisions of the G.C.L. governing internal corporate affairs if:

"... the average of the property factor, the payroll factor and the sales factor (as defined in Sections 25129, 25132 and 25134 of the Revenue and Taxation Code) with respect to it is more than 50 percent during its latest full income year and if more than one-half of its outstanding voting securities are held of record by persons having addresses in this state California." § 2115(a).

Any corporation which satisfies the above tests is required by § 301(a) of the G.C.L. to conduct annual election of the entire board of directors, and under § 708(a) thereof to permit cumulative voting with respect to the election of directors.²

Arden-Mayfair is a Delaware corporation. Under its Certificate of Incorporation and by-laws, it prohibits cumulative voting. It maintains a staggered board of directors whereby three directors are elected annually for terms of three years. These provisions are conceded by the Louart defendants to be valid under the General Corporation Law of Delaware. Thus, should Arden-Mayfair satisfy the tests set forth in § 2115 of the G.C.L., the requirements of the California law would be in direct conflict with certain aspects of Arden-Mayfair's current internal corporate structure as sanctioned by Delaware law.

By letter dated December 30, 1976, Louart Corporation notified Arden-Mayfair of the impending effectiveness of the above described changes in the G.C.L. and stated its position that Arden-Mayfair satisfied the tests set forth in § 2115 and that it was therefore required to comply with the requirements of the California law in the conduct of its 1977 annual meeting. Apparently in response, Arden-Mayfair filed this declaratory judgment action in the Court of Chancery of the State of Delaware in and for New Castle County "to set at rest the conflicting claims and contentions of the parties." (Complaint ¶ 20). The Louart defendants removed the case to this Court by petition filed March 15, 1977, claiming jurisdiction under 28 U.S.C. § 1331(a). Arden-Mayfair has moved to remand on the ground that federal jurisdiction is lacking under that provision, in that the case is not one which "arises under the Constitution, laws, or treaties of the United States".

III. FEDERAL QUESTION

The removal statute provides, inter alia:

"Except as otherwise expressly provided by Act of Congress, any civil action brought in a State court of which the district courts of the United States have original jurisdiction, may be removed by the defendant or the defendants, to the district court of the United States ...." 28 U.S.C. § 1441(a).

"Any civil action of which the district courts have original jurisdiction founded on a claim or right arising under the Constitution, treaties or laws of the United States shall be removable without regard to the citizenship or residence of the parties." 28 U.S.C. § 1441(b).

"Thus, in order to remove a civil action from the state court pursuant to this statute, the District Court of the United States must have original jurisdiction of the action." Coulston v. Int'l Brotherhood of Teamsters, etc., 423 F.Supp. 882, 883 (E.D. Pa.1976). The Louart defendants in their removal petition, Docket Item No. 1, at ¶ 5, and in their briefs and oral argument rely exclusively on 28 U.S.C. § 1331(a) as providing this Court with original jurisdiction. That section provides:

"The district courts shall have original jurisdiction of all civil actions wherein the matter in controversy exceeds the sum or value of $10,000, exclusive of interest and costs, and arises under the Constitution, laws, or treaties of the United States."

The value of the amount in controversy appears to exceed the jurisdictional minimum and the focus of the Court's inquiry is whether or not this case "arises under the Constitution ... of the United States."

There are several well established tests which must be considered in determining whether a given case arises under federal law.

A right or immunity created by the Constitution or laws of the United States must be an element, and an essential one, of the plaintiff's cause of action. The right or immunity must be such that it will be supported if the Constitution or laws of the United States are given one construction or effect, and defeated if they receive another. A genuine and present controversy not merely a possible or conjectural one, must exist with reference thereto, and the controversy must be disclosed upon the face of the complaint, unaided by the answer or the petition for removal. Indeed, the complaint itself will not avail as a basis of jurisdiction insofar as it goes beyond a statement of the plaintiff's cause of action and anticipates or replies to a probable defense. Gully v. First Nat'l Bank, 299 U.S. 109, 112-113, 57 S.Ct. 96, 97, 81 L.Ed. 70 (1936) (citations omitted).³

This last test, limiting inquiry to the "well-pleaded" portions of the complaint, i. e., those portions which are necessary to plaintiffs' claim and do not anticipate or reply to a defense,⁴ is "deceptively simple", since its application "necessarily introduces into the process of determining jurisdiction the question of what is well-pleaded — and with it, a host of procedural rules and distinctions." Mishkin, The Federal "Question" in the District Courts, 53 Colum.L.Rev. 157, 176 (1953). "The rule has been heavily criticized for making the existence of federal jurisdiction depend on technicalities that are irrelevant to the interests underlying federal jurisdiction and for requiring adherence to pleading niceties rejected for civil practice." Goldberg, The Influence of Procedural Rules of Federal Jurisdiction, 28 Stan.L.Rev. 397, 410-411 (1976) (citations omitted).

As difficult and complex as the application of this test is to a traditional lawsuit, it is far more so in a declaratory judgment action. Skelly Oil Co. v. Phillips Petroleum Co., 339 U.S. 667, 70 S.Ct. 876, 94 L.Ed. 1194 (1950) was a declaratory judgment action in which the plaintiff sought a declaration that certain contracts it had with defendant were still in effect and binding. The continued validity of the contracts turned on whether or not plaintiff had received a certificate of public convenience and necessity from the Federal Power Commission under The Natural Gas Act, 15 U.S.C. § 717f(c). Justice Frankfurter, observing that the Declaratory Judgment Act is procedural only, in that it enlarges the range of remedies but does not extend jurisdiction, ruled that the jurisdictional issue "must be determined without regard to the procedural possibilities made available by the Declaratory Judgment Act." Bills v. Shaw, Hooker & Co., 398 F.Supp. 161, 163 n. 4 (N.D.Cal. 1975). See, Potomac Passengers Ass'n v. Chesapeake & Ohio Railway Co., 171 U.S. App.D.C. 359, 520 F.2d 91, 96-97 (1975). Since the federal issue would have arisen only by way of defense had the suit been a coercive action for damages or enforcement of the contracts, the Court held that the case did not "arise under" federal law, saying:

"To sanction suits for declaratory relief as within the jurisdiction of the District Courts merely because,

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