ML Servicing Co. v. Greenberg Traurig, LLP

• Decision Date: 02 August 2011
• Docket Number: No. CV11-0832-PHX DGC,CV11-0832-PHX DGC
• Parties: ML Servicing Co., Inc., an Arizona corporation; and ML Liquidating Trust, Plaintiffs, v. Greenberg Traurig, LLP, a New York limited liability partnership; Robert S. Kant and Ellen P. Kant, husband and wife; John and Jane Does 1-30; Black Corporations 1- 30; White Partnerships 1-30; and Gray Trusts 1-30, Defendants.
• Court: U.S. District Court — District of Arizona

ML Servicing Co., Inc., an Arizona corporation and ML Liquidating Trust, Plaintiffs, v. Greenberg Traurig, LLP a New York limited liability partnership Robert S. Kant and Ellen P. Kant, husband and wife John and Jane Does 1-30; Black Corporations 1- 30; White Partnerships 1-30; and Gray Trusts 1-30, Defendants.

No. CV11-0832-PHX DGC

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF ARIZONA

Dated: August 2, 2011

ORDER

Defendants Robert and Ellen Kant ("Kant Defendants") move to dismiss on grounds of fraudulent joinder. Doc. 10. Plaintiffs oppose the motion (Doc. 13), and the Kant Defendants have filed a reply (Doc. 16). Plaintiffs also filed a motion to remand the case to Maricopa County Superior Court. Doc. 14. All Defendants oppose (Doc. 17), and Plaintiffs have filed a reply (Doc. 23). For the reasons that follow, the Court will grant Plaintiffs' motion for remand and decline to rule on the Kant Defendants' motion to dismiss.¹

I. Background.

The relevant allegations in the complaint (Doc. 1-1) are summarized as follows.Defendants Greenberg Traurig, LLP ("GT") and Robert Kant were securities counsel for Mortgages, Ltd. ("ML") during the period leading up to ML's bankruptcy.² GT and Kant prepared at least eleven Private Offering Memoranda ("POM") for ML to use in connection with its efforts to procure funds from investors. Doc. 1-1 ¶ 50. In June of 2008, some of ML's creditors forced ML into an involuntary bankruptcy proceeding. Id. at ¶ 161.

On May 20, 2009, the Bankruptcy Court confirmed ML's Chapter 11 reorganization plan ("Plan"). The Plan allows the liquidating trust to pursue ML's claims against professionals such as Defendants. Id. at 1 4. On January 10, 2010, the Securities and Exchange Commission "entered an Order Instituting Administrative Proceedings Pursuant to § 15(b) of the Securities Exchange Act of 1934, Making Findings, and Revoking Broker-Dealer Registration" ("SEC Order") against ML. Id. at ¶ 183. Plaintiffs and GT on its own behalf and on behalf of its affiliates executed a tolling agreement ("Agreement") which tolled all applicable statutes of limitations. Id. at ¶ 14.

Almost one year after the parties signed the Agreement, Plaintiffs commenced this action against Defendants in Maricopa County Superior Court, alleging legal malpractice and breach of fiduciary duty. Id. On April 25, 2011, Defendants removed the case to this Court on two independent grounds: (1) bankruptcy jurisdiction under 28 U.S.C. § 1334(b) because the case is "related to" the ongoing bankruptcy proceeding;³ and (2) diversity jurisdiction under 28 U.S.C. § 1332. Doc. 1. On May 26, 2011, Plaintiffs filed the motion to remand for lack of subject matter jurisdiction. Doc. 14.

II. Removal and Remand Principles.

Pursuant to 28 U.S.C. § 1441(a), a civil case brought in state court over which the federal district courts have original jurisdiction may be removed to the federal court inthe district where the action is pending. The statute is to be strictly construed against removal jurisdiction. See Syngenta Crop Protection, Inc. v. Henson, 537 U.S. 28, 32 (2002); Shamrock Oil & Gas Corp. v. Sheets, 313 U.S. 100, 108 (1941). This "strong presumption" against removal "means that the defendant always has the burden of establishing that removal is proper." Gaus v. Miles, Inc., 980 F.2d 564, 566 (9th Cir. 1992). Federal jurisdiction must be rejected, and the case remanded to state court, "if there is any doubt as to the right of removal in the first instance." Id.; see 28 U.S.C. § 1447(c). Moreover, the burden of showing jurisdiction exists is allocated to the party asserting jurisdiction. Indus. Tectonics, Inc. v. Aero Alloy, 912 F.2d 1090, 1092 (9th Cir. 1990) (citing McNutt v. Gen. Motors Acceptance Corp., 298 U.S. 178, 189 (1936)). The Court is "free to hear evidence regarding jurisdiction and to rule on that issue prior to trial, resolving factual disputes where necessary." Augustine v. United States, 704 F.2d 1074, 1077 (9th Cir. 1983); see Roberts v. Corrothers, 812 F.2d 1173, 1177 (9th Cir. 1987).

III. "Related To" Bankruptcy Jurisdiction.

Federal courts have original jurisdiction over cases "related to" bankruptcy proceedings. 28 U.S.C. § 1334(b). Bankruptcy "related to" jurisdiction is not limitless, Celotex Corp. v. Edwards, 514 U.S. 300, 308 (1995), and the "Ninth Circuit has adopted the 'Pacor test' for determining the scope of 'related to' jurisdiction" generally. In re Pegasus Gold Corp., 394 F.3d 1189, 1193 (9th Cir. 2005) (internal citation omitted). Under the Pacor test, federal courts have "related to" jurisdiction over any proceeding where "the outcome could conceivably have any effect on the estate being administered in bankruptcy." Id. (citing Pacor, Inc. v. Higgins, 743 F.2d 984, 994 (3rd Cir. 1984)).

The Ninth Circuit has stated, however, that bankruptcy jurisdiction after a reorganization plan has been approved (i.e., post-confirmation jurisdiction) is necessarily more limited than pre-confirmation jurisdiction, and has adopted the Third Circuit's "close nexus" test for determining whether post-confirmation "related to" jurisdictionexists. Pegasus, 394 at 1194. The Third Circuit concluded that "matters affecting the 'interpretation, implementation, consummation, execution, or administration of the confirmed plan will typically have the requisite close nexus.'" Id. (quoting In re Resorts Int'l, Inc., 372 F.3d 154, 167 (3rd Cir. 2004)). Bankruptcy courts generally do not retain "related to" jurisdiction over claims that "could have existed entirely apart from the bankruptcy proceeding and did not necessarily depend upon resolution of a substantial question of bankruptcy law." In re Ray, 624 F.l3d 1124, 1135 (9th Cir. 2010).

Although a bankruptcy plan has already been confirmed here, rendering this a post-confirmation action, Defendants argue that Pacor's "any effect" test should be used instead of the narrower "close nexus" test adopted by the Ninth Circuit in Pegasus. Doc. 17 at 8. Defendants assert that Pegasus is not analogous to this case and suggest that the "close nexus" test does not apply to "post-confirmation cases involving liquidating plans." Doc. 17 at 10 n.3. This argument is unpersuasive because the bankruptcy plan in Pegasus created a liquidating trust just as the plan in this case. 394 F.3d at 1194. Absent case law suggesting otherwise, the Court will apply the "close nexus" test in determining whether post-confirmation "related to" bankruptcy jurisdiction exists here.

Defendants argue in the alternative that "related to" jurisdiction exists because "recovery for actions pursued by [Plaintiff] ML Liquidating Trust is placed in a Liquidation Fund and used to pay creditors under the Plan," Doc. 17 at 11, but the Ninth Circuit has rejected a similar argument as overbroad. Pegasus, 394 F.3d at 1194 n.1 ("[W]e are not persuaded by the Appellees' argument that jurisdiction lies because the action could conceivably increase the recovery to the creditors. As the other circuits have noted, such a rationale could endlessly stretch a bankruptcy court's jurisdiction." (citation omitted)). Defendants have not shown that this case is different, or that the Court would be required to interpret the bankruptcy plan in order to resolve Plaintiffs' claims, see id. at 1194 (holding that "related to" jurisdiction existed where resolution of claims involvedinterpretation of the bankruptcy plan). In light of the presumption against removal, Defendants have not shown that Plaintiffs' claims satisfy the "close nexus" test necessary for "related to" jurisdiction to be found in this case.

IV. Diversity Jurisdiction.

A federal court's diversity jurisdiction extends to "all civil actions where the matter in controversy exceeds . . . $75,000 . . . and is between . . . [c]itizens of different states. 28 U.S.C. § 1332(a)(1). Plaintiffs argue that diversity does not exist here. It is undisputed that ML Servicing Co., Inc. and ML Liquidating Trust's ("Trust") trustee are both citizens of Arizona (Doc. 1 ¶¶ 5-6), that at least one beneficiary of the Trust is a citizen of New York (Doc. 14-3), that GT is a citizen of New York (Doc. 1 ¶ 7), and that the Kant Defendants are citizens of Arizona (Doc. 1 ¶ 9). The Court will address the two parties at issue, namely the Trust Plaintiff and the Kant Defendants.

A. Citizenship of Trust.

In cases where entities rather than individuals are litigants, diversity jurisdiction depends on the form of the entity. Johnson v. Columbia Props. Anchorage, LP, 437 F.3d 894, 899 (9th Cir. 2006). In Navarro Sav. Ass'n v. Lee, the Supreme Court held that a business trust's trustees - who had legal title, managed assets, and controlled litigation -were the real parties to the controversy and could invoke diversity jurisdiction on the basis of their own citizenship without regard to the citizenship of the trust's beneficiaries. 446 U.S. 458, 465-66 (1980). Ten years later, the Supreme Court stated that it has "never held that an artificial entity, suing or being sued in its own name, can invoke the diversity jurisdiction of the federal courts based on the citizenship of some but not all of its members." Carden v. Arkoma Assocs., 494 U.S. 185 (1990). In clarifying Navarro, Justice Scalia explained that "Navarro had nothing to do with the citizenship of the 'trust,' since it was a suit by the trustees in their own names." Id. at 192-93. On the issue of whether a trust has the citizenship of only its trustees or of both its trustees and its beneficiaries, the circuits are split. Carden did not define which entities qualify as"members" for the jurisdictional analysis.

In this circuit, however, Johnson held that "[a] trust has the citizenship of its trustee or trustees." 437 F.3d at 899. Despite this unambiguous language, Plaintiffs contend that the Ninth Circuit has not addressed the issue squarely and that Johnson is not controlling because it did not consider the citizenship of the trust's...