Kytken Family Ltd. v. Schaefer

• Decision Date: 28 March 2006
• Docket Number: No. Civ.A. G-05-563.,Civ.A. G-05-563.
• Citation: 431 F.Supp.2d 696
• Parties: HYTKEN FAMILY LIMITED, Plaintiff, v. Frank SCHAEFER, Frank Schaefer Construction, Inc., Schaefer Family Trust, and Galveston Shores, L.P., Defendants.
• Court: U.S. District Court — Southern District of Texas

431 F.Supp.2d 696

HYTKEN FAMILY LIMITED, Plaintiff, v. Frank SCHAEFER, Frank Schaefer Construction, Inc., Schaefer Family Trust, and Galveston Shores, L.P., Defendants.

No. Civ.A. G-05-563.

United States District Court, S.D. Texas, Galveston Division.

March 28, 2006.

Anthony G. Buzbee, Attorney at Law, Galveston, TX, for Hytken Family Limited.

Douglas W. Poole, Anthony P. Brown, McLeod Alexander et al, Galveston, TX, for Frank Schaefer, Frank Schaefer Construction, Inc., Galveston Shores, L.P., Schaefer Family Trust.

ORDER GRANTING DEFENDANTS' MOTION TO DISMISS PURSUANT TO FED. R. CIV. P. 12(B)(1) FOR LACK OF SUBJECT MATTER JURISDICTION

KENT, District Judge.

This case arises out of a dispute concerning real property in Galveston County, Texas. Plaintiff Hytken Family Limited ("HFL") filed suit in this Court on October 20, 2005, against Frank Schaefer, Frank Schaefer Construction, Inc., Schaefer Family Trust, and Galveston Shores, L.P. (collectively "Defendants"). Now before the Court are the equally well prepared Defendants' Motion to Dismiss Pursuant to FED. R. Cw. P. 12(b)(1) for Lack of Subject Matter Jurisdiction, and Response thereto. For the reasons stated below, Defendants' Motion is GRANTED, and HFL's claims are hereby DISMISSED WITHOUT PREJUDICE.

I. Background

This dispute arises out of a failed real estate transaction concerning certain land in Galveston County, and the ownership rights thereto. The facts surrounding the transaction are heavily contested, but essentially boil down to this: in the spring of 2004, Kent Hytken and Defendants entered into negotiations concerning the acquisition of certain land in Galveston County, Texas by means of a joint venture. HFL claims that the negotiations were extensive, and that Kent Hytken and Defendants worked to memorialize the agreement in writing, that an oral agreement was reached, but nothing was ever signed. The drafts of the written agreement contemplate an entity referred to as the Hytken Family Limited Partnership ("HFLP"), which would be managed by Robert M. Hytken, Kent Hytken's 91-year-old father. HFL claims that Defendants breached an oral agreement with Kent Hytken regarding the transaction, and alternatively claims that Defendants made fraudulent misrepresentations to Kent Hytken. HFL obtained the right to pursue these claims by means of an assignment, as explained more fully below. Originally, Robert M. Hytken brought suit against Frank Schaefer, Noleen Schaefer, and the Schaefer Family Trust ("Schaefer Defendants") in the 56th Judicial District Court of Galveston County. Robert Hytken brought suit even though it was Kent Hytken who conducted the negotiations with Defendants. There is no indication in the briefs and exhibits that Robert Hytken had anything to do with the negotiations other than being named as manager of the contemplated joint venture. In his state court petition, Robert Hytken made claims for breach of contract, promissory estoppel and detrimental reliance, fraud, and economic duress. The Schaefer Defendants filed a counterclaim seeking a declaration that they owned the property free and clear of Hytken's claims.

Then, on October 19, 2005, the day before this lawsuit was initiated in this Court, HFL was incorporated as a Nevada corporation. As stated before, the exhibits submitted by the Parties reveal that HFL was originally contemplated as a limited partnership rather than a corporation, and that it would be managed by Robert Hytken. HFL uses as its business address the address of the Nevada attorney who performed the incorporation of HFL. HFL's only shareholders are Robert Hytken and Jordan Hytken, Kent Hytken's 21-year-old son. Jordan Hytken is the President and Secretary of HFL, but he has not been involved with the management of HFL beyond the organizational meeting and initial shareholder meeting and the co-decision with his father as to which counsel to retain for the purposes of this lawsuit. Robert Hytken is the Treasurer of HFL. Kent Hytken is HFL's designated corporate representative for the purposes of this lawsuit, and he paid the necessary fees for HFL's incorporation. Other than being the plaintiff in this lawsuit, HFL has conducted no other business activities.

On October 20, 2005, Robert Hytken individually and on behalf on "Hytken's Partnership 1 LLC" assigned "all of his rights, claims, title, interest and choses in action in the 96 acres of Galveston Beach Land that involves Source One Capital to Hytken Family Limited." On that same day, HFL filed suit in this Court. On October 25, 2005, Hytken nonsuited his State Court action. On November 18, 2005, Defendants moved to stay this cause of action to allow the state court to resolve the Schaefer Defendants' counterclaim, which they argue is still pending before the state court. That Motion was denied by this Court on February 6, 2006. On November 29, 2005, the State Court signed an order of nonsuit and dismissed the state court action without prejudice. On February 1, 2006, Defendants filed this Motion to Dismiss for Lack of Subject Matter Jurisdiction, arguing that diversity jurisdiction had been improperly and collusively manufactured to invoke the jurisdiction of this Court.

II. Motion to Dismiss for Lack of Subject Matter Jurisdiction

District courts are powerless to exercise jurisdiction in excess of the limited jurisdiction statutorily conferred upon them by Congress. See Margin v. Sea-Land Servs., Inc., 812 F.2d 973, 976 (5th Cir. 1987). A case is properly dismissed for lack of subject matter jurisdiction when a court lacks the statutory or constitutional power to adjudicate the case. See Strain v. Harrelson Rubber Co., 742 F.2d 888, 889 (5th Cir.1984). If the defendant subsequently challenges the plaintiff's stated basis for jurisdiction, the plaintiff bears the burden of establishing that jurisdiction exists. See Harvey Const. Co. v. Robertson-Ceco Corp., 10 F.3d 300, 303 (5th Cir.1994); Margin, 812 F.2d at 976. A court's consideration of such jurisdictional disputes should, however, focus only on discerning "some discreet jurisdiction requisite," as indicated by the facts alleged in the plaintiffs complaint; the inquiry should not address the merits of the plaintiffs claim. Green v. Ferrell, 664 F.2d 1292, 1294 (5th Cir.1982).

III. Diversity Jurisdiction and the Anti-Assignment Provisions of 28 U.S.C. § 1359

A case can be properly brought in federal court when the parties are citizens of different states and the amount in controversy exceeds $75,000. 28 U.S.C. § 1332. The diversity statute has long been interpreted to mandate a rule of "complete diversity," meaning that the diversity statute "applies only to cases in which the citizenship of each plaintiff is diverse form the citizenship of each defendant." Caterpillar, Inc. v. Lewis, 519 U.S. 61, 68, 117 S.Ct. 467, 136 L.Ed.2d 437 (citing Strawbridge v. Curtiss, 7 U.S. (3 Cranch) 267, 2 L.Ed. 435 (1806)). Generally, the plaintiffs complaint must allege facts showing that complete diversity exists. See, e.g., Getty Oil Corp., v. Ins. Co. of N. Am., 841 F.2d 1254, 1258-59 (5th Cir.1988).¹

In this case, HFL's Complaint does allege facts showing that complete diversity exists: HFL is a Nevada corporation and Defendants are all California or Texas citizens.² However, Defendants argue that diversity jurisdiction does not exist because it was improperly manufactured in violation of 28 U.S.C. § 1359, which provides that "[a] district court shall not have jurisdiction of a civil action in which any party, by assignment or otherwise, has been improperly or collusively made or joined to invoke the jurisdiction of such court." The purpose of this statutory provision is to "prevent the litigation of claims in federal court by suitors who by sham, pretense, or other fiction would acquire spurious status that would allow them to invoke the limited jurisdiction of federal courts." Nolan v. Boeing Co., 919 F.2d 1058, 1067 (5th Cir.1990). See also Kramer v. Caribbean Mills, Inc., 394 U.S. 823, 828-29, 89 S.Ct. 1487, 1490, 23 L.Ed.2d 9 (1969). Application of § 1359 has "generally been restricted to circumstances involving assignment of interests from nondiverse to diverse parties to collusively create diversity jurisdiction." Delgado v. Shell Oil Co., 231 F.3d 165, 178 (5th Cir. 2000).

In determining whether diversity jurisdiction has been created in an improper or collusive manner, the Court must consider the totality of the circumstances. Since the Supreme Court's decision in Kramer, courts across the country have considered the following factors: (1) whether there was nominal or no consideration involved in the assignment; (2) whether the assignee had any previous connection to the assigned claim; (3) whether there was a legitimate business reason for the assignment; (4) whether the timing of the assignment suggests it was merely an effort to secure federal diversity jurisdiction; (5) whether the assignor exercises any control over the conduct of the litigation; and (6) whether the assignor retains any interest in the action such as receiving a portion of the assignee's recovery. See Long & Foster Real Estate, Inc. v. NRT Mid-Atlantic, Inc., 357 F.Supp.2d 911, 922-23 (E.D.Va.2005) (collecting cases). See also 14 CHARLES ALAN WRIGHT, ARTHUR R. MILLER & EDWARD H. COOPER, FEDERAL PRACTICE AND PROCEDURE § 3639 (3d ed.1998).

III. Analysis

Defendants argue that the assignment of claims to HFL was collusive and improperly made in violation of 28 U.S.C. § 1359. A careful analysis of the aforementioned factors compels the conclusion that the assignment to HFL in this case was performed for the sole purpose of manufacturing federal diversity jurisdiction in violation of § 1359. See Harrell and Sumner Contracting Co., Inc. v. Peabody Petersen Company, 546 F.2d 1227, 1229 (5th Cir.1977).

A. Consideration

The first factor is whether there was nominal or no consideration involved in the assignment. S...