Umlic Consolidated v. Spectrum Financial Services Corporation, No. 3:09-cv-184-RJC-DSC.

• Decision Date: 19 October 2009
• Docket Number: No. 3:09-cv-184-RJC-DSC.
• Court: U.S. District Court — Western District of North Carolina
• Parties: UMLIC CONSOLIDATED, INC. and United Mortgage & Loan Investment, LLC f/k/a United Mortgage & Loan Investment Corp., Plaintiffs, v. SPECTRUM FINANCIAL SERVICES CORPORATION f/k/a Southeastern Pension Management, Inc., Defendant.

Page 528

665 F.Supp.2d 528

UMLIC CONSOLIDATED, INC. and United Mortgage & Loan Investment, LLC f/k/a United Mortgage & Loan Investment Corp., Plaintiffs, v. SPECTRUM FINANCIAL SERVICES CORPORATION f/k/a Southeastern Pension Management, Inc., Defendant.

No. 3:09-cv-184-RJC-DSC.

United States District Court, W.D. North Carolina, Charlotte Division.

October 19, 2009.

C. Bailey King, Jr., Robert Reed Marcus, Smith Moore, LLP, Greensboro, NC, for Plaintiffs.

Kevin K. Bell, Robinson, McFadden & Moore, P.C., Columbia, SC, Martin L. White, Charlotte, NC, for Defendant.

ORDER

ROBERT J. CONRAD, JR., Chief Judge.

THIS MATTER is before the Court on Plaintiffs' Motion to Remand (Doc. Nos. 8, 9, 10, 14), Defendant's Brief in Opposition to Plaintiffs' Motion to Remand (Doc. No. 13), and the Magistrate Judge's Memorandum and Recommendation ("M & R") (Doc. No. 16), which recommended granting Plaintiffs' motion. The parties were advised that objections were to be filed in writing within ten (10) days after service of the magistrate judge's decision. (Doc. No. 16 at 9). The time for filing objections has since passed and no objections have been filed by either party in this matter. For the reasons stated below, the Court will grant Plaintiff's motion.

I. STANDARD OF REVIEW

The Federal Magistrate Act provides that a district court "shall make a de novo determination of those portions of the report or specific proposed findings or recommendations to which objection is made." 28 U.S.C. § 636(b)(1)(C); Camby v. Davis, 718 F.2d 198, 198 (4th Cir.1983). "By contrast, in the absence of a timely filed objection, a district court need not conduct a de novo review, but instead must `only satisfy itself that there is no clear error on the face of the record in order to accept the recommendation.'" Diamond v. Colonial Life & Accident Ins. Co., 416 F.3d 310, 315 (4th Cir.2005) (quoting Fed. R.Civ.P. 72 advisory committee's note).

II. CONCLUSION

Accordingly, after a careful review of the record in this case, the Court finds that the Magistrate Judge's findings of fact are supported by the record and his conclusions of law are consistent with and supported by current case law. Thus, the Court hereby accepts the M & R of the Magistrate Judge and adopts it as the final decision of this Court for all purposes relating to this case.

IT IS, THEREFORE, ORDERED that Plaintiffs' Motion to Remand (Doc. No. 8) is GRANTED, and the case is hereby REMANDED to the Superior Court of North Carolina, Mecklenburg County.

MEMORANDUM AND RECOMMENDATION

DAVID S. CAYER, United States Magistrate Judge.

THIS MATTER is before the Court on "Plaintiffs' Motion to Remand" (document # 8) and "Brief in Support of Plaintiffs' Motion to Remand" (document # 10) both filed June 5, 2009; and Defendant's "Brief in Opposition to Plaintiffs' Motion to Remand" (document # 13) filed June 22, 2009. On July 6, 2009, Plaintiffs filed "Reply Brief in Further Support of Plaintiffs' Motion to Remand" (document # 14).

This matter has been referred to the undersigned Magistrate Judge pursuant to 28 U.S.C. § 636(b)(1)(B), and the Motion is ripe for the Court's consideration.

Having fully considered the arguments, the record, and the applicable authority, the undersigned will respectfully recommend that the Plaintiffs' Motion to Remand be granted, as discussed below and Plaintiffs' Motion for Costs and Attorneys' Fees be denied, as discussed below.

I. FACTUAL AND PROCEDURAL BACKGROUND

This is an action for breach of contract, breach of fiduciary duty and negligence based on an administrative services agreement. Concerning the present Motion and accepting the allegations of the Complaint as true, Plaintiff UMLIC Consolidated, Inc. ("UMLIC") is a South Carolina corporation with its principal place of business in Charleston, South Carolina. Plaintiff United Mortgage & Loan Investment, LLC f/k/a United Mortgage & Loan Investment Corporation ("UMLI") is a North Carolina limited liability company with its principal place of business in Charlotte, North Carolina and is a wholly-owned subsidiary of UMLIC. Defendant Spectrum Financial Services Corporation f/k/a Southeastern Pension Management, Inc. ("Spectrum") is a South Carolina corporation with its principal place of business in Columbia, South Carolina.

In December 1998, UMLIC established the UMLIC Consolidated, Inc. and Affiliated Employers Employee Stock Ownership Plan and Trust, Plan #002 ("the Plan") for the benefit of UMLI employees. The Plan was an employee stock ownership plan ("ESOP") under which UMLIC made annual contributions to a Trust in order to fund retirement benefits for eligible employees of UMLI who elected to participate in the Plan. The contributions were invested primarily in shares of UMLIC stock.

On June 6, 1999, UMLI and Spectrum entered into an administrative services agreement in which UMLI appointed Spectrum as its agent to provide assistance in connection with the administration of the Plan, including the determination of the proper allocation of contributions to the Plan in accordance with its terms and the calculation of the amount of each participants' benefit.

On November 30, 2003, UMLIC entered into a Stock Redemption Agreement with the ESOP in which it agreed to redeem the 5,000 shares of common stock held by the ESOP in exchange for cash. The redemption was completed on June 22, 2004. On September 1, 2004, the ESOP was merged into UMLI's 401(k) Plan and UMLIC ceased to be the sponsor of the ESOP.

In late 2006, the Internal Revenue Service ("IRS") conducted an examination of the ESOP for the plan years ending December 31, 2003 and September 1, 2004. During the course of the IRS's examination, it was discovered that shares of stock had been allocated to the ESOP participants in a manner inconsistent with the ESOP's express terms and in violation of ERISA and the income tax laws for the plan years ending December 31, 2003 and September 1, 2004. As a result, the IRS threatened to revoke the ESOP's qualified status as a tax-exempt stock bonus plan retroactively to the plan year beginning January 1, 1998.

In order to correct these errors, UMLIC and UMLI hired counsel in February 2008. In order to correct the improper allocation and to avoid the retroactive disqualification of the Plan's tax-exempt status, UMLI entered into a Closing Agreement with the IRS that required it to contribute an additional 137.91 shares of UMLIC stock at a cost of $286,785.43 and to pay compound interest in the amount of $63,829.21 in order to true-up the allocations to reflect an allocation based upon each employee's annual compensation. In addition, UMLI was fined a non-deductible penalty of $15,500.00 by the IRS and incurred attorneys' fees in excess of $40,000.00. Based on the affidavit of Scott Hoehn, Vice President and Controller of UMLI, because UMLIC would have incurred significant income tax liability if the ESOP's tax exempt status was retroactively disqualified, UMLIC paid the above amounts.

On March 19, 2009, UMLIC and UMLI filed a Complaint against Spectrum in the Superior Court of North Carolina, Mecklenburg County, alleging that Spectrum breached its contractual obligation to UMLI, breached its fiduciary duty and breached its duty to exercise reasonable care by failing to administer the Plan in accordance with its express terms and causing UMLI and UMLIC to suffer losses in excess of $400,000.00 for the costs it incurred in connection with the correction of Spectrum's errors in connection with the administration of the Plan.

On May 5, 2009, Spectrum removed the state court case to the United States District Court for the Western District of North Carolina, alleging diversity jurisdiction under 28 U.S.C. § 1332(a). Spectrum alleged that removal was proper pursuant to 28 U.S.C. § 1441(a) because the action is a civil action wherein: (i) complete diversity of citizenship exists as between Plaintiffs on the one side and Defendant on the other; and (ii) the amount in controversy exceeds $75,000.000, exclusive of interest and costs. Spectrum acknowledged that in its Complaint UMLIC alleged that it is a South Carolina corporation, which would defeat complete diversity because Spectrum is also a South Carolina corporation. However, Spectrum stated that based on the Plan document and the IRS Closing Agreement, both of which Plaintiffs attached to their Complaint, the following facts are true: (1) the UMLIC Consolidated, Inc. entity that established the Plan was incorporated in North Carolina on December 7, 1998 (Exhibit A to Complaint at p. 1); and (2) UMLIC Consolidated, Inc. was reorganized as UMLI on June 22, 2004 (Exhibit C to Complaint at p. 2, ¶ 1). Accordingly, Spectrum argued that for purposes of diversity jurisdiction, both Plaintiffs referenced in the Complaint had been reorganized into Plaintiff UMLI, a North Carolina corporation. Spectrum did acknowledge in a footnote that the South Carolina Secretary of State records identified a second UMLIC Consolidated, Inc. but that this could not be the Plaintiff because the Plan was established in December 1998, five years before the South Carolina corporation came into existence. On June 5, 2009, the Plaintiffs filed a Motion to Remand, alleging a lack of complete diversity between the Plaintiffs and the Defendant, which has been fully briefed as set forth above and is now ripe for determination.

II. DISCUSSION OF CLAIMS

A case falls within the federal district court's diversity jurisdiction only if the amount in issue exceeds $75,000.00 and diversity of citizenship among the parties is complete—that is, only if no plaintiff and defendant are citizens of the same State. See 28 U.S.C. § 1332; Wisconsin Dep't. of Corrections v. Schacht, 524 U.S. 381, 388, 118 S.Ct. 2047, 141 L.Ed.2d 364 (1998); Carden v. Arkoma Assoc., 494 U.S. 185, 187, 110 S.Ct. 1015, 108 L.Ed.2d 157 (1990); Strawbridge v. Curtiss, 3 Cranch 267, 2 L.Ed. 435 (1806). If any plaintiff and...