Env. Rem. Holding v. Talisman Capital Opportunity

• Decision Date: 13 April 2000
• Docket Number: Civil Action No. 00-N-0679.
• Citation: 106 F.Supp.2d 1088
• Parties: ENVIRONMENTAL REMEDIATION HOLDING CORPORATION, derivatively by through Kevin Bartley, et al., Plaintiffs, v. TALISMAN CAPITAL OPPORTUNITY FUND, L.P., et al., Defendants.
• Court: U.S. District Court — District of Colorado

106 F.Supp.2d 1088

ENVIRONMENTAL REMEDIATION HOLDING CORPORATION, derivatively by through Kevin Bartley, et al., Plaintiffs, v. TALISMAN CAPITAL OPPORTUNITY FUND, L.P., et al., Defendants.

Civil Action No. 00-N-0679.

United States District Court, D. Colorado.

April 13, 2000.

Luke Brennan, Luke A. Brennan, LLC, Grand Junction,CO, Daniel W. Packard, Packard & Packard, Beaumont, TX, for plaintiffs.

Rodger L. Wilson, Wilson & Fennelly, LLC, Denver, CO, Andrew R. Lee, New Orleans, LA, for defendants.

ORDER GRANTING PLAINTIFFS' MOTION TO REMAND

SCHLATTER, United States Magistrate Judge.

I. INTRODUCTION

This case was filed in state district court in Denver, Colorado, and was removed to federal court by defendants. Plaintiffs have filed a Motion to Remand. In their motion, plaintiffs challenge the assertions by the defendants that this case arises under the laws of the United States or involves a federal question.

Pursuant to the provisions of 28 U.S.C. § 636(b)(1)(A) and (B), District Court Judge Edward W. Nottingham has referred all motions to me for recommendations or rulings, depending upon whether the motions request dispositive or non-dispositive relief. A motion to remand does not request relief which is dispositive in nature, and a ruling upon a motion to remand does not determine the ultimate disposition of the claims of the parties. Therefore, I resolve plaintiffs' Motion to Remand by Order, and not by recommendation.

The burden is upon the defendants to demonstrate the propriety of removal to this court. Defendants have failed to carry their burden, and plaintiffs' Motion to Remand will be Granted. The case will be remanded to the state District Court for Denver, Colorado.

Plaintiffs obtained an ex parte Order from the state court which granted their request for the appointment of a receiver. After defendants removed to this court, and after a telephone conference of April 7, 2000, I entered Orders which stayed any activities by the receiver, and stayed any major activities by defendant Tirman until after the question of jurisdiction was resolved. Because I find that the federal court lacks jurisdiction, I will vacate the Order which stayed all receivership and corporate activities.

II. FACTS

A. Summary of Events.

Plaintiffs are minority shareholders in Environmental Remediation Holding Corporation ("ERHC"). In their Complaint, they recite the following series of events, which I summarize here.

ERHC is an oil and gas company which was created for the purpose of exploring and exploiting mineral resources. In 1997, ERHC entered into an agreement with the Democratic Republic of Sao Tome Principe ("Sao Tome"), an island which is southwest of Equatorial Guinea and Cameroon. Under the agreement, ERHC was obligated to pay "at least $5 million" for which, in return, it would be permitted to explore and exploit mineral resources within the maritime boundaries of Sao Tome. This agreement with Sao Tome is essentially the sole asset of ERHC.

ERHC paid approximately $1 million of the $5 million, and found itself in need of additional funds. Some groups of investors, who are now a part of the plaintiffs in this action, formed several limited liability companies ("the LLC's") for the purpose of raising more money. Collectively, these LLC's agreed to pay $3 million in exchange for 51 percent of ERHC's voting capital stock, and in exchange for the right to appoint three of the seven members of ERHC's Board of Directors ("the Board"). The $3 million was to be paid in installments, with a first installment of approximately $1 million. The first installment was paid. However, the LLC's had difficulty raising the additional funds, and began looking for other investors.

Some members of the Board entered into discussions and negotiations with Geoffrey Tirman, one of the defendants. Ultimately, four members of the Board, in a meeting which did not include, or perhaps excluded, the three members who were designated by the LLC's, voted to accept an offer from Tirman. The agreement with Tirman provided that in exchange for his payment of $1 million in cash and a working $4 million line of credit, Tirman would receive sufficient shares of stock to make him the majority shareholder with 76.43 percent of the outstanding stock.

Plaintiffs assert in their Complaint that the meeting which resulted in the approval of the acquisition by Tirman was illegitimate, and that Tirman acquired his interest in ERHC through fraud. Plaintiffs allege that since acquiring his majority control of ERHC, "Tirman has engaged in a conscious and premeditated scheme to weaken ERHC's financial condition in order to position himself to acquire ERHC's asset [the agreement with Sao Tome] for himself." Complaint at ¶ 58. They list a litany of events which, according to them, demonstrates that Tirman has "intentionally thrown ERHC into insolvency and has sabotaged its sole asset for his own personal gain." Id. at ¶ 30.

Some of the events upon which plaintiffs rely in order to demonstrate Tirman's bad faith are listed in their First Claim for Relief, which alleges Breach of Fiduciary Duty. Plaintiffs list the following "bullet points:"

♥ Intentionally creating a financial crisis for ERHC;

♥ Intentionally causing ERHC's insolvency ♥ Managing ERHC while under an irreconcilable conflict of interest;

♥ Refusing to attempt to obtain adequate financing to fund corporate operations;

♥ Directing ERHC without legal authority;

♥ Intentionally disseminating false information to the shareholders about ERHC's assets;

♥ Intentionally damaging ERHC's sole asset by publicly making disparaging and insulting comments about the government and people of [Sao Tome];

♥ Refusing to cooperate with the government of [Sao Tome] in resolving its border dispute;

♥ Refusing to pursue development of the asset;

♥ Committing violations of federal securities law;

♥ Submitting false information on ERHC's public filings;

♥ Refusing to negotiate in good faith with [Sao Tome, a junior partner], ERHC's creditors, Nigeria, etc.

♥ Engaging in false and/or misleading accounting practices.

Complaint at ¶ 78, emphasis added.

B. Claims of Plaintiffs.

Based upon all of the events which are asserted in the Complaint, plaintiffs have asserted the following seven claims in their Complaint, all denominated as state law claims: (1) Breach of Fiduciary Duty; (2) Unjust Enrichment; (3) Recission; (4) Accounting; (5) Common Law Fraud and Deceit; (6) Conspiracy to defraud; and (7) Gross Negligence. Notably, although plaintiffs mention federal securities law among their bullet points (at the emphasized bullet point above), and recite in several other parts of the Complaint certain alleged violations of securities law by Tirman, plaintiffs state no claim for any relief under federal securities law, or any federal law.

C. Alleged Grounds for Removal.

In the Notice of Removal, defendants assert that federal jurisdiction is proper for the following reason:

The complaint explicitly alleges that defendants have engaged in "Violations of Federal Securities Law." (See Complaint, ¶¶ 68, 69, p. 20.) Thus, plaintiffs' claims arise under the Securities and Exchange Act of 1934, 15 U.S.C. § 78a et seq.

Notice of Rem. at ¶ 7, emphasis added. Defendants rely upon 28 U.S.C. § 1331. That section states:

The district courts shall have original jurisdiction of all civil action arising under the Constitution, laws or treaties of the United States.

28 U.S.C. § 1331.

D. Summary of Securities Allegations.

Paragraphs 58 through 73 of the Complaint contain textual descriptions of all of the events which are summarized in the bullet points of paragraph 78, which have been provided above. Defendants rely upon paragraphs 68 and 69 of the Complaint to support their argument that this case is one which arises under federal securities law. Together, the 16 paragraphs, including paragraphs 68 and 69, fall beneath a heading which states, "Tirman's Egregious Conduct." Complaint at p. 14. The 16 paragraphs constitute a listing of the facts, events or circumstances which plaintiffs allege give rise to their state-law claims for relief.

In paragraph 68, plaintiffs state that "Tirman continues to violate federal securities law." Plaintiffs include several examples of ways in which Tirman has allegedly done this, such as his inclusion of false statements in public filings, his refusal to file certain SEC reports, and his manipulation of the stock of ERHC for his own benefit. Complaint at ¶ 68.

Paragraph 69 consists of two brief sentences. It states nothing more than that "[b]ecause of Tirman the SEC is currently investigating ERHC. The mere existence of this investigation further damages relationships with [Sao Tome] and others." Complaint at ¶ 69.

III. PRINCIPLES OF LAW

The issue to be resolved is whether this case was properly removed from state to federal court. "Removal statues are to be strictly construed... and all doubts are to be resolved against removal." Fajen v. Foundation Reserve Insur. Co., 683 F.2d 331, 333 (10th Cir.1982) (internal citations omitted). Federal district courts must strictly construe their removal jurisdiction. See Shamrock Oil & Gas Corp. v. Sheets, 313 U.S. 100, 108, 61 S.Ct. 868, 872, 85 L.Ed. 1214 (1941) (by enacting the removal statutes, Congress intended to "restrict the jurisdiction of the federal courts on removal" and therefore, the removal statutes are subject to "strict construction"). The party attempting to remove the case to federal court bears the burden of affirmatively establishing that subject matter jurisdiction exists. Wilson v. Republic Iron & Steel Co., 257 U.S. 92, 97-98, 42 S.Ct. 35, 37-38, 66 L.Ed. 144 (1921).

The Tenth Circuit Court has held that in order to support removal jurisdiction, "the required federal right or immunity must be an essential element of the plaintiff's cause of action, and the federal controversy must be disclosed upon the face of the...