McCulloch v. Malave-Velez

• Decision Date: 29 July 2005
• Docket Number: Civil No. 01-2440 (JAG).
• Citation: 380 F.Supp.2d 46
• Court: U.S. District Court — District of Puerto Rico
• Parties: Kenneth McCULLOCH, et al.<SMALL><SUP>1</SUP></SMALL>, Plaintiff(s) v. Norberto MALAVE-VELEZ, et al., Defendant(s).

380 F.Supp.2d 46

Kenneth McCULLOCH, et al.¹, Plaintiff(s) v. Norberto MALAVE-VELEZ, et al., Defendant(s).

Civil No. 01-2440 (JAG).

United States District Court, D. Puerto Rico.

July 29, 2005.

Fernando L. Gallardo, Woods and Woods, Kenneth J. McCulloch, San Juan, PR, for Plaintiffs.

Robert Millan, San Juan, PR, for Defendants.

OPINION AND ORDER

GARCIA-GREGORY, District Judge.

On April 5, 2004, the Court of Appeals for the First Circuit vacated and remanded our decision to dismiss the present complaint for want of jurisdiction.² The Court of Appeals ruled that this Court should have afforded plaintiff Kenneth McCulloch ("Mr.McCulloch") an opportunity to state his position as to the propriety of the assignment of rights issue before sua sponte deciding on it. After affording the parties an opportunity³ to develop the record, the Court is now in the position to revisit the issues. Pending before the Court is Mr. McCulloch's "Declaration Presenting Evidence Relevant to Propriety of Assignment" ("McCulloch's Declaration")(Docket No. 121).

FACTUAL AND PROCEDURAL BACKGROUND

Plaintiff McCulloch, a citizen of the State of New York, is the president and sole shareholder of Mandorico, Inc. ("Mandorico") and Tip Top Donuts, Inc. ("Tip Top"). Mandorico and Tip Top are incorporated under the laws of Puerto Rico. Defendants are all citizens of Puerto Rico. On June 20, 1996, Mandorico and Tip Top entered into a lease agreement with the Puerto Rico Industrial Development Corporation ("PRIDCO") for the premises where Mandorico's business is located. On May 7, 1997, Mr. McCulloch, acting as president of Mandorico and Tip Top (collectively, "sellers"), entered into a purchase and sale agreement ("PSA") with defendants ("purchasers"), whereby defendants purchased a business dedicated to the manufacture and sale of baked goods, pastries, and donuts, among other things. (Docket No. 121-2). The sellers also agreed to assign, and the purchasers agreed to assume, the existing PRIDCO lease.

The PSA required the purchasers to make installment payments and granted the sellers the right to retrieve the business and the equipment if the purchasers defaulted and failed to remedy it within a specified cure period. Mr. McCulloch alleges in the complaint that defendants incurred an uncured default sometime around May, 2001.

On September 11, 2001, Mr. McCulloch, as president and sole shareholder of Mandorico, decided that Mandorico should transfer its rights under the PSA and its collection of monies claim against defendants to McCulloch in his individual capacity. On October 23, 2001, Mr. McCulloch filed in this Court a collection of monies suit against defendants, premising federal jurisdiction on 28 U.S.C. § 1332 (diversity jurisdiction). After several procedural events, on February 27, 2003, this Court dismissed the complaint without prejudice, and decided sua sponte, that the assignment of rights was an improper attempt to create federal jurisdiction. The Court granted defendants' Motion to Dismiss for lack of subject matter jurisdiction finding that, absent a valid assignment of rights or proof that Mandorico was dissolved, Mandorico became an indispensable party to the action which destroyed diversity jurisdiction.

In due course, Mr. McCulloch appealed our decision. As stated before, the Court of Appeals decided that this Court should have given McCulloch an opportunity to defend the bonafides of the assignment before disregarding it as improper. On remand, this Court ordered Mr. McCulloch to submit relevant evidence that would assist the Court in deciding the issue. (Docket No. 114). Mr. McCulloch embraced this opportunity to file a twenty-four (24) page statement to convince the Court that the September 11, 2001 assignment was not collusive and that he had a legitimate business reason for the transfer of rights.

With a fully developed record, the Court is now in the position to consider the dismissal arguments, to wit: 1) whether Mandorico's assignment of rights to McCulloch was improper or collusive under 28 U.S.C. § 1359, 2) whether Mandorico and Tip Top are indispensable parties to this action, and 3) whether McCulloch's claims meet the required jurisdictional amount. Because subject matter jurisdiction is challenged, the Court must employ a Fed.R.Civ.P. 12(b)(1) standard.

STANDARD OF REVIEW

Pursuant to Fed.R.Civ.P. Rule 12(b)(1) a defendant may move to dismiss an action for lack of subject matter jurisdiction. As courts of limited jurisdiction, federal courts have the duty of narrowly construing jurisdictional grants. See e.g., Alicea-Rivera v. SIMED, 12 F.Supp.2d 243, 245 (D.P.R.1998). Since federal courts have limited jurisdiction, the party asserting jurisdiction has the burden of demonstrating the existence of federal jurisdiction. See Murphy v. United States, 45 F.3d 520, 522 (1st Cir.1995); Droz Serrano v. Caribbean Records Inc., 270 F.Supp.2d 217 (D.P.R.2003).

When deciding whether to dismiss a complaint for lack of subject matter jurisdiction, the Court "may consider whatever evidence has been submitted, such as ... depositions and exhibits." See Aversa v. United States, 99 F.3d 1200, 1210 (1st Cir.1996). When federal jurisdiction is premised on the diversity statute, courts must determine whether complete diversity exists among all plaintiffs and all defendants. Casas Office Machines v. Mita Copystar America, Inc., 42 F.3d 668, 673 (1st Cir.1994).

Motions brought under Rule 12(b)(1) are subject to the same standard of review for Rule 12(b)(6) motions. Negron-Gaztambide v. Hernandez-Torres, 35 F.3d 25, 27 (1st Cir.1994); see Torres Maysonet v. Drillex, S.E., 229 F.Supp.2d 105, 107 (D.P.R.2002). Under Rule 12(b)(6) dismissal is proper "only if it clearly appears, according to the facts alleged, that the plaintiff cannot recover on any viable theory." Gonzalez-Morales v. Hernandez-Arencibia, 221 F.3d 45, 48 (1st Cir.2000)(quoting Correa-Martinez v. Arrillaga-Belendez, 903 F.2d 49, 52 (1st Cir.1990)). Under Rule 12(b)(1) dismissal would be proper if the facts alleged reveal a jurisdictional defect not otherwise remediable.

DISCUSSION

A. Propriety of Assignment

The issue of the propriety of the transfer of rights is a matter governed by 28 U.S.C. § 1359.⁴ Congress enacted § 1359, and its predecessors, "to prevent parties from manufacturing diversity jurisdiction in order to channel garden-variety litigation from the local courts into a federal forum." McCulloch, 364 F.3d at 5 (citing Kramer v. Caribbean Mills, Inc., 394 U.S. 823, 829-29, 89 S.Ct. 1487, 23 L.Ed.2d 9 (1969)); see also Toste Farm Corp. v. Hadbury, Inc., 70 F.3d 640, 643 (1st Cir.1995)(§ 1359 prevents parties from bringing a vast quantity of ordinary contract and tort litigation into the federal courts).

Transfers or assignments that have the effect of creating federal jurisdiction raise a red flag and, thus, need to be examined with care. McCulloch, 364 F.3d at 6 (citing Prudential Oil Corp. v. Phillips Petroleum Co., 546 F.2d 469, 474 (2nd Cir. 1976)). Courts have held that transfers between affiliated corporations "are presumptively ineffective to create diversity jurisdiction." Dweck v. Japan CBM Corp., 877 F.2d 790, 792 (9th Cir.1989); Simpson v. Alaska State Comm'n for Human Rights, 608 F.2d 1171, 1174 (9th Cir.1979); Airlines Reporting Corp. v. S and N Travel, 58 F.3d 857, 862 (2d Cir.1995); Nike, Inc. v. Comercial Iberica de Exclusivas Deportivas, S.A., 20 F.3d 987, 991-93 (9th Cir.1994); Prudential Oil Corp. v. Phillips Petroleum Co., 546 F.2d 469, 475 (2d Cir.1976); Toste Farm, 70 F.3d at 643-644 (1st Cir.1995). This presumption has been extended to assignments between related parties (e.g., assignment between a parent company and a subsidiary or assignments between corporations and their officers and directors). Blythe Indus., Inc. v. Puerto Rico Aqueduct & Sewer Auth., 573 F.Supp. 563, 564 (D.P.R.1983); Syms v. Castleton Indus., Inc., 470 F.2d 1078, 1079 (5th Cir.1972). These types of assignment are considered to be highly suspect and subject to even more exacting scrutiny. McCulloch, 364 F.3d at 6. The presumption, however, is rebuttable and, in the context of a business transaction, a party may assert a legitimate business reason which justifies the transfer. See Dweck, 877 F.2d at 792. In the best of circumstances, rebutting the presumption that attaches to an assignment between related parties is likely to be difficult. McCulloch, 364 F.3d at 6.

Thus, in order to survive a dismissal for want of jurisdiction in the present case, McCulloch must show that the September 11, 2001 assignment was valid and not an attempt to create jurisdiction where none existed. The Court must then determine whether there were good faith and legally supportable reasons for Mr. McCulloch to assign Mandorico's legal claims to himself.

1. The proffered legitimate business reason

In his Declaration, Mr. McCulloch narrated a tall tale of a business relationship that went bust. Mr. Thomas Keeper, the villain of this story, was the lessee of approximately 30 donut stands owned by Mandorico. Mr. Keeper was supposed to pay all the bills for the stands as well as monthly net payments to Mr. McCulloch. Mr. Keeper never made any payments, to anyone. Furthermore, Mr. Keeper allegedly used the Mandorico name to order supplies and materials, and never paid for them. On or about February, 1997, Mr. Keeper fled to Canada. Afterwards, Mr. McCulloch secured a warrant for his arrest for embezzlement and a judgment of more than $619,000. (Docket No. 121 ¶¶ 4-7).

Nevertheless, Mr. McCulloch suffered the consequences of Mr. Keeper's malfeasance. The creditors were swarming him. Suits were filed, and later settled, against him and Mandorico. Consequently, Mr. McCulloch states that he honestly believed, and still believes, that there are companies that will sue Mandorico or place a lien on property or assets owned by Mandorico to recover for obligations incurred by Mr....