Fortis Advisors LLC v. Fishawack Med. Commc'ns Ltd.
| Decision Date | 29 January 2021 |
| Docket Number | Case No.: 20cv607-LAB-AGS |
| Parties | FORTIS ADVISORS LLC, et al., Plaintiffs, v. FISHAWACK MEDICAL COMMUNICATIONS LTD, et al., Defendants. |
| Court | U.S. District Court — Southern District of California |
1) GRANTING MOTION FOR REMAND [Dkt. 12]; AND
2) DENYING MOTIONS TO DISMISS [Dkt. 5, 6]
California-citizen Plaintiffs Delisa Discar and Fortis Advisors LLC filed a complaint in California state court asserting California state law claims against four defendants. Three—Fishawack Medical Communications Ltd., Fishawack Creative Ltd., and Oliver Dennis—aren't California citizens, but the fourth, Carling Communications, Inc., is. With Carling in the case, the Court can't exercise diversity jurisdiction. Nevertheless, Defendants removed the action to this Court under 28 U.S.C. § 1441, contending that the Court should disregard Carling's citizenship because Plaintiffs fraudulently joined Carling to destroy diversity.
The bar to establish fraudulent joinder is a high one: A removing party must show, under settled state law, that there is "no possibility that [the plaintiffs] could demonstrate a viable claim" against the non-diverse defendant. Grancare, LLC v. Thrower, 889 F.3d 543, 548-49 (9th Cir. 2018). Defendants can't establish that a viable claim is impossible by arguing that Plaintiffs' allegations are vague, and they can't show that a conclusion is obvious under settled state law by relying on tenuous analogies, never adopted by California courts, to inapplicable areas of law.
The Court can't assert diversity jurisdiction over a case that includes a potentially viable claim against a non-diverse defendant. Plaintiffs' Motion for Remand, (Dkt. 12), is GRANTED and Defendants' motions to dismiss, (Dkt. 5 and 6), are DENIED WITHOUT PREJUDICE for lack of jurisdiction.
The Court accepts the Complaint's factual allegations as true for the purposes of determining the possibility of a viable claim. Plaintiffs formerly controlled Carling, but agreed to sell it to the Fishawack Defendants, with Discar remaining as Carling's president after the sale. (Dkt. 1-3 ¶¶ 34-39.) As part of the payment, the Fishawack Defendants agreed to pay Plaintiffs an "Earn-out Payment" based on Carling's fee revenue during a one-year period beginning on April 1, 2018 (the "Calculation Period"). (Id. ¶¶ 44-46.) Those Defendants further agreed not to "take any actions in bad faith for the purpose of avoiding or reducing the Earn-out Payment." Id. ¶ 46. Upon acquisition, Carling became a subsidiary of one of the Fishawack entities. (Id. ¶ 17.)
In February 2018, shortly before the Calculation Period began, Discar was placed on indefinite leave from her position as Carling's president. (Id. ¶ 66.) She was terminated in May 2018. (Id. ¶ 70.) During the Calculation Period, Carling's activities were directed away from revenue-generating activities and the company lost over half its accounts. (Id. ¶¶ 50, 70-75.) The accompanying loss of over 35% of Carling's revenue substantially reduced the Earn-out Payment to Plaintiffs. (Id. ¶¶ 75-76, 81-87.)
Plaintiffs allege that the Fishawack Defendants didn't intend, at the time of contracting, to honor their agreement not to "take any actions in bad faith for thepurpose of avoiding or reducing the Earn-out Payment." (Id. ¶ 46.) On this basis, they assert claims for fraud, conversion, and securities fraud against the Fishawack entities and Dennis. Plaintiffs allege that Carling conspired in and aided and abetted the other Defendants' torts through its adverse employment actions and its redirection of its efforts away from the revenue generation that determined Plaintiffs' compensation. (See id. ¶¶ 127-136.)
"When a plaintiff files in state court a civil action over which the federal district courts would have original jurisdiction based on diversity of citizenship, the . . . defendants may remove the action to federal court." Caterpillar Inc. v. Lewis, 519 U.S. 61, 68 (1996); see 28 U.S.C. § 1441. Because the exercise of diversity jurisdiction necessarily involves addressing matters that "intrinsically belong[] to the state courts," the party invoking federal jurisdiction bears the burden of demonstrating that removal was proper. Indianapolis v. Chase Nat'l Bank, 314 U.S. 63, 76 (1941); Gaus v. Miles, Inc., 980 F.2d 564, 566 (9th Cir. 1992). The removal statutes are strictly construed, with doubts about the propriety of removal resolved in favor of remand. Id.
Federal courts can't exercise diversity jurisdiction where "a single plaintiff [is] from the same State as a single defendant." Exxon Mobil Corp. v. Allapattah Servs., Inc., 545 U.S. 546, 553 (2005). But a plaintiff can't destroy diversity by fraudulently joining a "sham" defendant. McCabe v. Gen'l Foods Corp., 811 F.2d 1336, 1339 (9th Cir. 1987). The burden of overcoming both the "strong presumption against removal jurisdiction" and the "general presumption against fraudulent joinder" is a heavy one. Hunter v. Philip Morris USA, 582 F.3d 1039, 1046 (9th Cir. 2009).
The Court can find fraudulent joinder here only upon the removing party's showing that there is "no possibility that the plaintiff could demonstrate a viableclaim" against the non-diverse defendant. Grancare, 889 F.3d at 548-49 (9th Cir. 2018).1 That impossibility must be "obvious according to the settled rules of the state." Id. at 549 (quoting McCabe, 811 F.2d at 1339 (9th Cir. 1987)). If the removing party's argument relies on ambiguous or unsettled questions of law, the claim's non-viability isn't obvious, so any such questions must be resolved against the removing party. See id.; see also Macey v. Allstate Property and Cas. Ins. Co., 220 F. Supp. 2d 1116, 1117-18 (N.D. Cal. Sept. 11, 2002) (citing Good v. Prudential, 5 F. Supp. 2d 804, 807 (N.D. Cal. 1998)).
Demonstrating "no possibility that the plaintiff could demonstrate a viable claim" is a higher bar than showing that the complaint fails to state a claim under Fed. R. Civ. P. 12(b)(6). "Arguments [that] go to the sufficiency of the complaint . . . do not establish fraudulent joinder." Grancare, 889 F.3d at 549, 552. Nor does the plaintiff need to respond to such arguments by proposing specific amendments—the burden remains on the removing party to demonstrate that the plaintiff couldn't cure the deficiency by amendment. See id. at 550 () (emphasis added), 552 (setting aside arguments that plaintiff did not plead claims with sufficient particularity because they "go to the sufficiency of the complaint, rather than to the possible viability" of the claims); see also Padilla v. AT&T Corp., 697 F.Supp.2d 1156 (C.D. Cal. 2009).
Defendants, as the removing parties, bear the burden here. They attack Carling's joinder on three bases:
Allegations that would fail to state a claim only because they aren't sufficiently specific can be addressed by amendment, so the first of these three arguments can't establish the impossibility of a viable claim against Carling. See Grancare, 889 F.3d at 552; see also United States v. Corinthian Colleges, 655 F.3d 984, 995 (2011) ().
Because Plaintiffs need only one potentially viable claim against Carling, the Court analyzes the claim for conspiracy to commit fraud. Neither of Defendants' remaining two arguments establish the non-viability of that claim, so Carling is a properly joined defendant whose California citizenship destroys diversity. The Court lacks jurisdiction, so it must remand the case to state court.
A claim for conspiracy to commit fraud requires, first, an underlying fraud, and second, a conspiracy. Defendants argue that a breach of duties memorialized in contract can't constitute fraud. They acknowledge an exception, though: Conduct that breaches the contract but "is also a [breach] of a legal duty" can establish a fraud claim. Id. (quoting Applied Equipment Corp. v. Litton Saudi Arabia Ltd., 7 Cal. 4th 503, 515 (1994)). Defendants haven't shown that theexception doesn't apply here, so the contract doesn't obviously bar Plaintiffs' fraud claim against Carling.
California law requires a contracting party to refrain from misrepresenting, at the time the contract is formed, its intention to perform the duties imposed by that contract. Cal. Civ. Code § 1572(4) (). This duty is statutory and independent of the contract, so it can support a claim for fraud despite the general rule that conduct that breaches a contract can't constitute fraud. See, e.g., Lazar v. Sup. Ct., 12 Cal. 4th 631, 638-39 (1996) ().
Plaintiffs allege that Defendants breached this duty by promising not to "take any actions in bad faith for the purpose of avoiding or reducing the [revenue-based] Earn-Out Payment" while intending to do just that. (See Dkt. 1-3 ¶¶ 82, 41-42, 47-70, 107.) Regardless of whether these allegations...
To continue reading
Request your trial