Sheridan v. New Vista, L.L.C.

• Decision Date: 30 August 2005
• Docket Number: No. 1:05-CV-428.,1:05-CV-428.
• Citation: 406 F.Supp.2d 789
• Parties: James SHERIDAN, et al., Plaintiffs, v. NEW VISTA, L.L.C., et al., Defendants.
• Court: U.S. District Court — Western District of Michigan

406 F.Supp.2d 789

James SHERIDAN, et al., Plaintiffs, v. NEW VISTA, L.L.C., et al., Defendants.

No. 1:05-CV-428.

United States District Court, W.D. Michigan, Southern Division.

August 30, 2005.

David R. Deary, William Ralph Canada, Jr., Deary Montgomery Defeo & Canada LLP, Dallas, TX, Frederick D. Dilley, Dilley & Haney PC, Grand Rapids, MI, for Plaintiffs.

Allan Garcia, Dewey Ballantine LLP, New York, NY, Kevin M. Zielke, Dykema Gossett PLLC, Detroit, MI, Robert S. Markin, DLA Piper Rudnick Gray Cary US LLP, Donald A. Murday, Chittenden Murday & Novotny LLC, Chicago, IL, Roger S. Kobert, Fischer & Mandell LLP, James D. Wing, Holland & Knight LLP, Miami, FL, John R. Oostema, Smith Haughey Rice & Roegge, PC, Robert L. Dejong, Miller Canfield Paddock & Stone PLC, Susan B. Flakne, Pawlowski Flakne & Reens PLC, Grand Rapids, MI, for Defendants.

OPINION

QUIST, District Judge.

The Court has before it Plaintiffs' motion to remand as well as Defendant Charles Bee's ("Bee") motion to dismiss or remand or in the alternative to dismiss for lack of personal jurisdiction. For the reasons set forth below, the Court will grant Plaintiffs' motion and remand the case.

Background

Plaintiffs filed their original complaint in this case in the Kent County Circuit Court on or about March 14, 2005, and filed their first amended complaint on or about April 20, 2005. In their complaint and first amended complaint, Plaintiffs alleged various state law claims, including, among others, claims for unjust enrichment, breach of fiduciary duty, fraud, negligent misrepresentation, and professional malpractice. The crux of Plaintiffs' claims is that Defendants unlawfully developed and induced Plaintiffs to engage in a foreign currency option ("Strategy") that was designed to produce a substantial profit and/or provide substantial tax savings.

Although not the sole basis for Plaintiffs' claims, a recurrent and important theme repeated throughout the amended complaint is that Defendants knew or should have known that the Internal Revenue Service ("IRS") would take the position that the purported losses generated by the Strategy were not properly allowable for federal and state income tax purposes. For example, in paragraph 114 of the amended complaint relating to IRS Notice 1999-59, entitled "Tax Avoidance Using Distribution of Encumbered Property," Plaintiffs allege:

As a result of Notice 1999-59, the Defendants knew or certainly should have known that the IRS would assert that the purported losses arising from the Tax Strategy were improper and not allowable for tax purposes; however, the Defendants intentionally did not disclose this information to Plaintiffs and, indeed, continued to tell them the exact opposite.

(1st Am.Compl. ¶ 114.) Plaintiffs similarly allege that IRS Notice 2000-44, which was issued after Plaintiffs engaged in the Strategy, "clearly and unequivocally informed accountants and tax attorneys across the country that it believed options strategies like the Tax Strategy were illegal," (id. ¶ 118), and that Defendants ignored the notice and failed to retract or modify their advice about the tax implications of the Strategy, even though they knew or should have known that the IRS would contend that the losses Plaintiffs realized from the Strategy were not properly allowable, (id. ¶¶ 119-21.) Plaintiffs allege that Defendants breached their fiduciary duties to Plaintiffs by, among other things, failing to: (1) "disclose to Plaintiffs that if they filed tax returns claiming capital and/or losses based on the Tax Strategy the IRS would contend they would be liable for penalties and interest"; (2) "advise Plaintiffs that the design of the Foreign Currency Options made no economic or investment sense and had no business purpose or economic substance"; and (3) advise Plaintiffs about the existence and implications of IRS Notices 1999-59 and 2000-44. (Id. ¶ 162(4), (7), and (9)-(13).) Plaintiffs claim that as a result of Defendants' misrepresentations and omissions, they incurred income tax penalties and interest, as well as other damages.

On June 20, 2005, Lincoln Financial Advisors ("Lincoln"), which was first named as a defendant in the first amended complaint, removed the case to this Court, alleging that the Court has jurisdiction pursuant to 28 U.S.C. § 1391 because "the allegations of Plaintiff's [sic] Complaint raise substantial disputed issues of federal tax law and implicate a substantial federal interest in construing tax law." (Notice of Removal ¶ 5) (citing Grable & Sons Metal Prods., Inc. v. Darue Eng'g & Mfg., ___ U.S. ___, 125 S.Ct. 2363, 162 L.Ed.2d 257 (2005).) Lincoln also alleged that Bee was served on June 17, 2005, and had thirty days in which to join in the removal and that Defendant Adrien Dicker ("Dicker") had not yet been served. (Id. ¶ 4.)

Discussion

As noted above, two motions are before the Court: (1) Plaintiffs' motion to remand; and (2) Defendant Bee's motion to remand or dismiss for lack of subject matter jurisdiction or in the alternative motion to dismiss for lack of personal jurisdiction. Bee's motion raises two issues, namely, whether Bee's lack of consent to the removal requires remand and whether Bee is subject to personal jurisdiction in Michigan. Plaintiffs' motion to remand also raises the issue of Bee's lack of consent, but in addition raises the issues of whether Defendant Dicker's lack of consent requires remand and whether this case arises under federal law. Because the Court concludes that the federal issues presented are insufficient to invoke this Court's federal question jurisdiction, the Court need only address the issue of federal question jurisdiction.

As a court of limited jurisdiction, this Court must proceed with caution in deciding that it has subject matter jurisdiction. Musson Theatrical, Inc. v. Federal Express Corp., 89 F.3d 1244, 1252 (6th Cir.1996). "Due regard" must be given to the power reserved to the states under the Constitution to provide for the determination of controversies in their courts. Shamrock Oil & Gas Corp. v. Sheets, 313 U.S. 100, 108-09, 61 S.Ct. 868, 872, 85 L.Ed. 1214 (1941). Removal statutes are thus strictly construed to promote comity and preserve jurisdictional boundaries between state and federal courts. Alexander v. Elec. Data Sys. Corp., 13 F.3d 940, 949 (6th Cir.1994).

The removing party has the burden of establishing subject matter jurisdiction. Van Camp v. AT&T Info. Sys., 963 F.2d 119, 121 (6th Cir.1992) (removing defendant has burden of establishing that case presents a federal question); Gafford v. General Elec. Co., 997 F.2d 150, 155 (6th Cir.1993) (removing defendant has burden of establishing that diversity jurisdiction requirements are met). Any doubt about the removability of the case must be resolved against removal. Her Majesty The Queen v. City of Detroit, 874 F.2d 332, 339 (6th Cir.1989).

"Only state-court actions that originally could have been filed in federal court may be removed to federal court by the defendant." Caterpillar, Inc. v. Williams, 482 U.S. 386, 392, 107 S.Ct. 2425, 2429, 96 L.Ed.2d 318 (1987). Because diversity is absent in this case, Defendants must show that the Court has federal question jurisdiction over Plaintiffs' claims. Id. Whether federal question jurisdiction exists is determined by examining the plaintiff's well-pleaded complaint. Federal question jurisdiction arises where a "well-pleaded complaint establishes either that federal law creates the cause of action or that the plaintiff's right to relief necessarily depends on resolution of a substantial question of federal law." Franchise Tax Bd. v. Constr. Laborers Vacation Trust, 463 U.S. 1, 27-28, 103 S.Ct. 2841, 2856, 77 L.Ed.2d 420 (1983). Under this rule, the plaintiff is the master of his claim and can avoid federal court jurisdiction by relying exclusively on state law. Caterpillar, Inc., 482 U.S. at 392, 107 S.Ct. at 2429. Even if the plaintiff does not allege an express or implied federal claim, the claim will be subject to federal jurisdiction where "`the plaintiff's right to relief necessarily depends on resolution of a substantial question of federal law,' in that `federal law is a necessary element of one of the well-pleaded ... claims.'" Christianson v. Colt Indus. Operating Corp., 486 U.S. 800, 808, 108 S.Ct. 2166, 2173-74, 100 L.Ed.2d 811 (1988) (quoting Franchise Tax Bd., 463 U.S. at 27-28, 13, 103 S.Ct. at 2856, 2848). However, it is not enough that a federal issue is merely present in the state law claim. Merrell Dow Pharm., Inc. v. Thompson, 478 U.S. 804, 813, 106 S.Ct. 3229, 3234, 92 L.Ed.2d 650 (1986); see also Gully v. First Nat'l Bank, 299 U.S. 109, 115, 57 S.Ct. 96, 99, 81 L.Ed. 70 (1936) ("Not every question of federal law emerging in a suit is proof that a federal law is the basis of the suit."). Rather, a state law claim invokes federal question jurisdiction "if a substantial federal question of great federal interest is raised ... and if resolution of that federal question is necessary to the resolution of the state-law claim." Long v. Bando Mfg. of Am., Inc., 201 F.3d 754, 759 (6th Cir.2000) (citing Merrell Dow, 478 U.S. at 808-10 & n. 5, 813-14 & nn. 11-12, 106 S.Ct. at 3232-33 & n. 5, 3234-35 & nn. 11-12). Moreover, the Supreme Court has cautioned that courts should make "principled, pragmatic distinctions" and "careful judgments about the exercise of federal judicial power." Merrell Dow, 478 U.S. at 813-14, 106 S.Ct. at 3234-36.

The Supreme Court revisited the issue of federal question jurisdiction recently in Grable & Sons Metal Products v. Darue Engineering & Manufacturing, ___ U.S. ___, 125 S.Ct. 2363, 162 L.Ed.2d 257 (2005), in order to resolve a circuit split regarding whether Merrell Dow requires a federal cause of action as a condition for exercising federal question jurisdiction. The Court answered no. See id. at 2365. In doing so, the Court staked out the boundaries of federal question...