Keith v. Black Diamond Advisors, Inc.

• Citation: 48 F.Supp.2d 326
• Decision Date: 08 March 1999
• Docket Number: No. 98 CIV. 3937(SAS).,98 CIV. 3937(SAS).
• Parties: Marvin KEITH, Plaintiff, v. BLACK DIAMOND ADVISORS, INC., Pace Holdings, LLC, Steven Deckoff, and James Walker III, Defendants.
• Court: U.S. District Court — Southern District of New York

48 F.Supp.2d 326

Marvin KEITH, Plaintiff, v. BLACK DIAMOND ADVISORS, INC., Pace Holdings, LLC, Steven Deckoff, and James Walker III, Defendants.

No. 98 CIV. 3937(SAS).

United States District Court, S.D. New York.

March 8, 1999.

Deborah Deitsch-Perez, Bickel & Brewer, New York City, for Plaintiff.

Joseph Aronauer, Morgenthau, Greenes, Goldfarb & Aronauer, New York City, for Defendants.

OPINION AND ORDER

SCHEINDLIN, District Judge.

Marvin Keith ("Keith" or "Plaintiff') brings this multi-count action against defendants Black Diamond Advisors, Inc. ("Black Diamond"), Pace Holdings, LLC ("Pace"), Steven Deckoff, and James Walker III (collectively, "defendants"), claiming breach of contract, fraud, tortious interference with economic prospects, conspiracy, breach of fiduciary duty, intentional infliction of emotional distress, and violations of federal securities laws under Sections 10(b) and 29(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. §§ 78j(b) and 78cc(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5. Keith asserts that this Court has subject matter jurisdiction based on (a) complete diversity of citizenship between the parties and an amount in controversy greater than $75,000, pursuant to 28 U.S.C. § 1332; (b) a federal question arising under §§ 10(b) and 29(b) of the Securities Exchange Act of 1934, pursuant to 28 U.S.C. § 1331; and (c) supplemental jurisdiction for the remaining pendent state law claims, pursuant to 28 U.S.C. § 1367(a).

Defendants now move to dismiss the Complaint for lack of subject matter jurisdiction, on the grounds that (1) the citizenship of the parties is not completely diverse; (2) the federal securities laws and regulations do not apply to this dispute; and (3) in the absence of jurisdiction pursuant to 28 U.S.C. §§ 1331 and 1332, the pendent state law claims should be dismissed for lack of supplemental jurisdiction pursuant to 28 § 1367(a).

I. Facts

Plaintiff, together with a small group of investors, formed Eagle Capital Mortgage, Ltd. ("Eagle, Ltd.") as a vehicle for doing business as a sub-prime mortgage lender, and Eagle Capital Corp. ("Eagle Corp.") as the general partner to run the business (collectively, "Eagle"). Complaint ("Cplt.") ¶ 12. As Eagle's promoter, Keith built the company from its infancy to ultimate profitability through his efforts in developing a marketing plan, managing the corporate affairs of the Board of Directors, and obtaining financing. Id. at ¶ 14. Keith alleges that Black Diamond, a venture capital firm, approached him in 1997, offering its expertise and connections to assist Eagle in achieving even greater success. Id. at ¶ 15. Black Diamond made numerous statements, both written and oral, in offering its services. In reliance upon these representations, Keith agreed to join in the formation of Pace with Black Diamond and Philip Milton ("Milton"), one of the original investors in Eagle. Keith (whose Eagle interests were held by Hanover Trust, a Texas trust company) and Milton transferred their interests in Eagle to Pace as their initial contributions to the venture; each received a 25% interest in Pace. Id. at ¶ 18. To earn its 50% under the Pace Holding Operating Agreement ("Agreement"), Black Diamond contributed $150,000 in cash and made certain promises about obtaining additional financing and helping to make Eagle profitable. Id. at ¶ 19.

Keith alleges that once the Agreement was signed, Black Diamond used its majority interest in Pace and cash-rich position to "squeeze [him] out of Eagle." Id. at ¶ 32. Keith asserts, inter alia, that Defendants (1) manipulated him into releasing them for "all of their prior misconduct," id. at ¶ 36; (2) planned to trigger a capital call which would dilute Keith's interests, id. at ¶ 38; and (3) wrongfully appointed three Black Diamond representatives as new Eagle directors, which stripped Keith of control of the Board of Pace. Id. at ¶ 41. The newly enlarged board eliminated Keith's salary and health insurance coverage. Id. at ¶ 44.

Keith further alleges that Pace manipulated him into assigning to Pace his option to purchase co-venturer Dyson's interests in Eagle, when Keith's purchase of those interests would have given him more leverage in his negotiations with Pace. See Cplt. at ¶ 23. Additionally, Keith claims that Defendants pressured him into settling litigation against Weyand, another former coventurer in Eagle, instituted for breach of fiduciary duty in connection with Eagle, rather then pursuing a likely cash judgment. See Cplt. at ¶ 26. Keith alleges that Pace "plainly was trying to entice [him] into contributing the ... Eagle interests he received from the Weyand settlement to Pace." Cplt. at ¶ 46. Finally, according to Keith, Pace's unwillingness to negotiate anti-dilution and pro-distribution amendments to the Agreement in Keith's favor, despite numerous promises to the contrary, evidences Defendants' bad faith and generally oppressive conduct. See Cplt. at ¶¶ 48-49.

II. Standards of Review

A. Standard of Review under 12(b)(1)

In considering a motion to dismiss for lack of subject matter jurisdiction, a court must accept as true all material factual allegations in the complaint and refrain from drawing inferences in favor of the party contesting jurisdiction. See Atlantic Mut. Ins. Co. v. Balfour Maclaine International Ltd., 968 F.2d 196, 198 (2d Cir. 1992). "On a motion under Rule 12(b)(1) challenging the district court's subject matter jurisdiction, the court may resolve disputed jurisdictional fact issues by reference to evidence outside the pleadings, such as affidavits." Antares Aircraft v. Federal Republic of Nigeria, 948 F.2d 90, 96 (2d Cir.1991), vacated on other grounds, 505 U.S. 1215, 112 S.Ct. 3020, 120 L.Ed.2d 892 (1992). Thus the standard used to evaluate a Rule 12(b)(1) claim is akin to that for summary judgment under Fed R.Civ.P. 56(e) ("Rule 56(e)"). See Kamen v. American Tel. & Tel. Co., 791 F.2d 1006, 1011 (2d Cir.1986).

B. Standard of Review under 12(b)(6)

Dismissal of a complaint pursuant to Fed.R.Civ.P. 12(b)(6) is proper "only where it appears beyond doubt that the Plaintiff can prove no set of facts in support of the claim which would entitle him to relief." Scotto v. Almenas, 143 F.3d 105, 109-10 (2d Cir.1998) (quoting Branham v. Meachum, 77 F.3d 626, 628 (2d Cir.1996)) (internal quotation omitted). "The task of the court in ruling on a Rule 12(b)(6) motion `is merely to assess the legal feasibility of the complaint, not to assay the weight of the evidence which might be offered in support thereof.'" Cooper v. Parsky, 140 F.3d 433, 440 (2d Cir.1998) (quoting Ryder Energy Distribution Corp. v. Merrill Lynch Commodities, Inc., 748 F.2d 774, 779 (2d Cir.1984)). Thus, in deciding such a motion, the court must accept as true all material facts alleged in the nonmovant's favor. See Thomas v. City of New York, 143 F.3d 31, 36 (2d Cir.1998).

III. DISCUSSION

A. Complete Diversity of Citizenship Between the Parties

In order to properly invoke diversity jurisdiction, Keith must allege facts demonstrating that the citizenship of the parties is completely diverse. See Strawbridge v. Curtiss, 7 U.S. (3 Cranch) 267, 2 L.Ed. 435 (1806); Advani Enterprises, Inc. v. Underwriters at Lloyds, 140 F.3d 157 (2d Cir.1998). Although the statute establishing diversity jurisdiction provides that a corporation shall be deemed to be a citizen of the states in which it is incorporated and in which it has its principal place of business, 28 U.S.C. § 1332(c), it is silent with regard to unincorporated entities. The courts have long held, however, that partnerships, joint ventures, joint stock companies, voluntary associations, labor unions and other such entities are not citizens at all and therefore a court must look to the citizenship of each partner or member of the entity. See, e.g., Carden v. Arkoma Associates, 494 U.S. 185, 189, 195-96, 110 S.Ct. 1015, 108 L.Ed.2d 157 (1990). In Carden, the Supreme Court "adhered to its oft-repeated rule that diversity jurisdiction in a suit by or against the entity depends on the citizenship of `all the members.'" Id. at 196-97, 110 S.Ct. 1015 (quoting Chapman v. Barney, 129 U.S. 677, 682, 9 S.Ct. 426, 32 L.Ed. 800 (1889)).

The question here is whether Pace, a limited liability company ("LLC") (in contrast with the limited liability partnership in Carden), should be treated as a corporation or as an unincorporated entity. Keith argues that an LLC should be treated as a corporation because it is possessed of a "juridical personality" similar to that of a corporation. He relies on the Carden Court's approval of corporate treatment of the sociedad en comandita, an unincorporated entity created under Puerto Rican civil law that was at issue in Puerto Rico v. Russell & Co., 288 U.S. 476, 53 S.Ct. 447, 77 L.Ed. 903 (1933). In Russell, the Court reasoned that because the sociedad's juridical personality was treated as complete by the law of Puerto Rico, it merited the same treatment for purposes of federal jurisdiction.

Keith argues, by analogy, that a New York LLC possesses sufficient characteristics of a New York corporation, including, for example, the power to make contracts, own property, conduct business, and sue or be sued in its own name. Therefore, he argues, it should be considered to have a juridical personality comparable to that of a corporation for diversity purposes, notwithstanding that it is never formally incorporated.

I disagree. In Steelworkers v. R.H. Bouligny, Inc., 382 U.S. 145, 86 S.Ct. 272, 15 L.Ed.2d 217 (1965), the Supreme Court limited Russell's treatment of the sociedad en comandita to the specific facts of the case. Further, in Carden, the Court noted that in Bouligny it had rejected the test proposed by Plaintiff — analyzing an entity's characteristics to determine its status. Keith's detailed analysis of the New York LLC statute, his assertion that the statute creates...