Conk v. Richards & O'Neil, Llp

Decision Date08 December 1999
Docket NumberNo. IP-99-0922-C H/G.,IP-99-0922-C H/G.
Citation77 F.Supp.2d 956
PartiesEdward M. CONK, Plaintiff, v. RICHARDS & O'NEIL, LLP, Floyd Wittlin and Robert Leonard, Defendants.
CourtU.S. District Court — Southern District of Indiana

B. Keith Shake, Henderson Daily Withrow & Devoe, Indianapolis, IN, for Plaintiff.

Brian W. Welch, Amie Peele Carter, McHale Cook & Welch, Indianapolis, IN, for Defendants.


HAMILTON, District Judge.

The central issue in this case is whether the presence of an Indiana citizen as a defendant in this diversity action properly defeats removal from state court or whether removal was proper because the Indiana citizen was fraudulently joined as a defendant. The case also presents issues concerning whether a court may consider factual assertions outside the pleadings in deciding a question of fraudulent joinder, as well as when joinder of arguably separate and independent claims against different defendants may amount to fraudulent joinder.

This case is the latest chapter in serial litigation arising from the sale of Day Dream, Inc., an Indianapolis publishing company, to Cullman Ventures, Inc. (CVI) based in New York. The transaction was structured so that all Day Dream shareholders sold all their shares to CVI. Before the sale, plaintiff Edward M. Conk and members of his family owned a majority of Day Dream shares. Defendant Robert Leonard was the chief financial officer of Day Dream during the relevant time. Defendant Richards & O'Neil, a law firm with its principal office in New York, represented CVI in its purchase of Day Dream stock. Richards & O'Neil provided Conk and the other selling shareholders with an opinion letter signed by defendant Wittlin.

Conk filed this action in the Marion Superior Court in Marion County, Indiana, asserting various claims arising out of the Day Dream sale. Defendants filed a verified petition pursuant to 28 U.S.C. §§ 1441 and 1446 removing the action to this court. Conk has moved to remand this action to the state court. Conk argues that removal was improper because Leonard is a citizen of Indiana. Citizens of the forum state cannot remove cases based on diversity jurisdiction. See 28 U.S.C. § 1441(b). Defendants object to remand. They argue that Conk fraudulently joined or misjoined Leonard as a defendant to defeat removal. In response, Conk has submitted an affidavit containing factual assertions in support of his remand motion. Defendants have moved to strike the affidavit. Defendants have also moved to dismiss Conk's complaint for failure to state a claim upon which relief can be granted.

As explained below, the court finds that Leonard has not been fraudulently joined in this action. In making this decision, the court has considered the challenged affidavit from Conk because Conk is entitled to elaborate on the allegations in the complaint to show that the alleged claims are sufficiently viable to defeat removal.

In essence, the issue here is not whether Conk has stated a claim against Leonard upon which relief can be granted. The question is whether there is any reasonable possibility that a state court might rule against Leonard when all fairly disputable issues of both fact and law are resolved in Conk's favor. See Poulos v. Naas Foods, Inc., 959 F.2d 69, 73 (7th Cir.1992). Thus, even if a state court might ultimately find that Conk has failed to state a claim against Leonard, joinder of the claim against Leonard is not "fraudulent" for purposes of this court's jurisdiction so long as the issue of state law is subject to reasonable argument on both sides. See Batoff v. State Farm Insurance Co., 977 F.2d 848, 853 (3d Cir.1992) (if "intricate analysis of state law" is needed to dismiss claim, the claim may not be disregarded for purposes of diversity jurisdiction). Under this standard, Leonard was not fraudulently joined in this case. In addition, because Conk's claims against Leonard are sufficiently related to his claims against the other defendants, his claims against Leonard were not misjoined. As a result, the entire action must be remanded to state court. Because the court does not have subject matter jurisdiction, the court therefore may not and does not address the defendants' motions to dismiss.


Defendants contend the court can decide the issues of fraudulent joinder, misjoinder, and dismissal without considering evidence from the defendants. For purposes of the pending motions, therefore, the court takes as true the facts alleged by plaintiff Conk in his complaint and in his affidavit. (The court's reasons for denying defendants' motion to strike Conk's affidavit are explained below.) Based on this standard, the following facts and allegations are most relevant to Conk's motion to remand.

Plaintiff Edward Conk owned common stock in Day Dream. Cplt. ¶ 1. On April 11, 1997, Conk and the other shareholders sold their Day Dream stock to CVI for approximately $29 million. Cplt. ¶ 4; Conk Aff. ¶ 4. This sale was memorialized in a Stock Purchase Agreement between the Day Dream shareholders and CVI. At all relevant times, defendant Leonard was the chief financial officer of Day Dream. Cplt. ¶ 2. Leonard's duties included preparing Day Dream's tax returns, accounting for inventory, accounting for accounts receivable, and otherwise directing and overseeing that all Day Dream accounting procedures were done properly according to generally accepted accounting principles. Cplt. ¶ 18.

Conk alleges that Leonard had additional duties in connection with the sale of Day Dream to CVI, "including, but not limited to, preparing and/or reviewing all financial statements, accounting documents and tax papers (the `Accounting Records') provided by Day Dream to CVI, and further communicating with CVI as to the accounting procedures used by Day Dream." Cplt. ¶ 19.

After the stock sale closed, CVI filed claims against Conk and the other sellers alleging problems and misrepresentations related to the accounting records prepared by Leonard. Cplt. ¶ 26. CVI pursued its claims in arbitration. Conk and other former shareholders attempted to avoid the arbitration proceeding by filing an earlier state court action. That action was also removed to this district, where Judge McKinney dismissed it. See Conk v. Cullman Ventures, Inc., 191 F.3d 455, 1999 WL 527895 (7th Cir.1999) (unpublished order affirming dismissal).1

Conk alleges that Leonard had represented to him that "the Accounting Records were properly prepared and that all other duties required of him as President of Day Dream in relation to the March CVI sale were done with the appropriate degree of skill." Cplt. ¶ 23. Because Conk was in Texas at the time of the sale and had not been a member of Day Dream's Board of Directors for several months, Conk asserts that he "particularly relied upon Leonard's representations." Conk Aff. ¶¶ 8, 10.

Before CVI bought all Day Dream shares, Leonard held options to purchase Day Dream shares. As part of the CVI deal, Conk and the other selling shareholders entered into a side agreement with Leonard in which Leonard agreed to surrender these options in exchange for a $1.6 million cash payment. Cplt. ¶ 22. Conk maintains that Leonard received the payment as a result of the stock sale. Conk Aff. ¶ 16. In addition to other compensatory damages, Conk seeks return of the $1.6 million payment and refund of the money paid to Leonard for his professional services.

Defendant Richards & O'Neil is a law firm that served as legal counsel to CVI in its purchase of Day Dream stock. See Cplt. ¶ 5 & Ex. A. Richards & O'Neil provided to Conk and the other selling shareholders an opinion letter signed by Wittlin assuring that the Stock Purchase Agreement was valid and enforceable against CVI. Cplt. ¶¶ 6-9 & Ex. A. A key provision of the Stock Purchase Agreement was a clause "capping sellers' liability for misrepresentation or breach of representations or warranties concerning Day Dream's financial condition to a three million dollar amount set aside from the purchase price of the company." Cplt. ¶ 10. After the sale, however, when CVI asserted claims against Conk and other shareholders in arbitration, CVI and Richards & O'Neil persuaded the arbitrator that this provision was not enforceable to cap the selling shareholders' liability. Conk alleges that Richards & O'Neil and Wittlin breached their duties to him (a) by failing to disclose the substantial risk that this cap provision would be held invalid as to certain liabilities and (b) by "attempting to establish on behalf of CVI that those provisions were invalid." Cplt. ¶ 13. Additional facts are noted as necessary below, always treating Conk's version of events as true for purposes of the pending motions.


In general, a defendant in a civil action brought in a state court may remove the action to a district court of the United States if the district court would have original jurisdiction over the action. 28 U.S.C. § 1441(a). Defendants here argue that the court has original jurisdiction under 28 U.S.C. § 1332, which provides that a civil action must involve a matter in controversy exceeding $75,000, exclusive of costs and interest, and must be between citizens of different states. The requirements for the amount in controversy and complete diversity of citizenship are both satisfied here. Plaintiff Conk is a citizen of Texas. Defendant Leonard is a citizen of Indiana, and Wittlin is a citizen of New York. Richards & O'Neil is a limited liability partnership organized under the laws of New York and has its principal place of business in New York. All Richards & O'Neil partners are citizens of New York, Connecticut, or New Jersey. See Carden v. Arkoma Associates, 494 U.S. 185, 192-96, 110 S.Ct. 1015, 108 L.Ed.2d 157 (1990) (limited partnership is treated as citizen of all states of which any partner is a citizen).

The United States Constitution provides for diversity...

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