Peter Knop, II v. Charles Mackall, Jr., et al

Filing

OPINION filed [1307797] (Pages: 6) for the Court by Judge Kavanaugh [10-7037]

USCA Case #10-7037

Document #1307797

Filed: 05/13/2011

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued February 10, 2011

Decided May 13, 2011

No. 10-7037
PETER J. KNOP, II, INDIVIDUALLY, AND DERIVATIVELY ON
BEHALF OF AVENIR CORPORATION,
APPELLEE
v.
CHARLES G. MACKALL, JR., ET AL.,
APPELLANTS

Appeal from the United States District Court
for the District of Columbia
(No. 1:09-cv-00279)

Jennifer L. Swize argued the cause for appellants. With
her on the briefs was Michael A. Carvin.
Russell J. Gaspar argued the cause for appellee. With
him on the brief was Andrew K. Wible.
Before: HENDERSON,
Circuit Judges.
Opinion for
KAVANAUGH.

the

GRIFFITH,

Court

filed

and

by

KAVANAUGH,

Circuit

Judge

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KAVANAUGH, Circuit Judge: Peter Knop is a shareholder
in Avenir, a Washington, D.C.-based investment company.
Knop brought a shareholder derivative suit naming Avenir
and its three principal officers, Mackall, Keefe, and Rooney,
as defendants. Knop alleged that Mackall, Keefe, and Rooney
engaged in various forms of financial misconduct as Avenir’s
managers. Because Knop brought a shareholder derivative
suit, he also named the corporation itself, Avenir, as a
defendant.
Knop filed his complaint in the Superior Court of the
District of Columbia. Defendants removed the case to the
U.S. District Court for the District of Columbia. Defendants
asserted that the District Court had jurisdiction because of the
diversity of state citizenship among the parties. See 28 U.S.C.
§ 1441(a). The District Court found removal improper
because of § 1441(b) of Title 28, which allows removal of
diversity cases “only if none of the parties in interest properly
joined and served as defendants is a citizen of the State in
which such action is brought.” This suit was brought in
Washington, D.C., and defendant Avenir’s primary place of
business is in D.C. The District Court thus remanded the case
to the Superior Court. The District Court also awarded Knop
attorney’s fees incurred as a result of the removal and remand
proceedings. See id. § 1447(c).
In this Court, defendants appeal the District Court’s
award of attorney’s fees. (The remand decision itself is
unreviewable under 28 U.S.C. § 1447(d).) Absent unusual
circumstances, a district court may award attorney’s fees
when remanding a removed case only if “the removing party
lacked an objectively reasonable basis for seeking removal.”
Martin v. Franklin Capital Corp., 546 U.S. 132, 141 (2005).
According to defendants, they advanced a reasonable
argument that the corporation in a shareholder derivative

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action is only a nominal defendant and does not count for
purposes of 28 U.S.C. § 1441(b).
We review the District Court’s grant of attorney’s fees
for abuse of discretion. A district court abuses its discretion
in awarding attorney’s fees for an incorrect removal if the
removing party had “an objectively reasonable basis” for
removal. Martin, 546 U.S. at 139, 141. We conclude that
defendants’ argument for removal was at least reasonable, and
we therefore reverse the District Court’s judgment awarding
attorney’s fees to Knop.
* * *
Defendants contend that they had “an objectively
reasonable basis” to remove Knop’s suit against them to
federal court. We need not decide whether defendants’
argument for removal was correct. We need only decide
whether it was reasonable.
The removal satisfied the threshold requirements of the
diversity jurisdiction statute: None of the defendants is a
citizen of plaintiff Knop’s home state, and the amount in
controversy exceeds $75,000. See 28 U.S.C. § 1332(a).
A different federal statute posed the obstacle to
defendants’ removal. Under 28 U.S.C. § 1441(b), diversity
actions may be removed “only if none of the parties in interest
properly joined and served as defendants is a citizen of the
State in which such action is brought.” On its face, that
statute would appear to preclude removal here: Avenir was
joined and served as a defendant in this case, Avenir is a
citizen of Washington, D.C., and this action was brought in
Washington, D.C.

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Supreme Court precedent makes clear, moreover, that
Avenir was correctly aligned as a defendant rather than a
plaintiff in this case. The Court has held that the corporation
in a shareholder derivative suit should be aligned as a
defendant when the corporation is under the control of
officers who are the target of the derivative suit. See Koster v.
(American) Lumbermens Mut. Casualty Co., 330 U.S. 518,
523 (1947). The rationale is that the corporation’s actions
will be hostile to the plaintiff’s suit because the corporation is
controlled by the defendant officers. See Smith v. Sperling,
354 U.S. 91, 96-97 (1957).
Defendants argue, however, that (i) Avenir is only a
nominal defendant because it would not be liable to pay a
resulting judgment and (ii) a nominal defendant is not counted
for jurisdictional purposes under § 1441(b). Therefore,
according to defendants, § 1441(b) did not bar them from
removing this case.
Defendants’ initial point – that the corporation in a
shareholder derivative suit is only a nominal defendant – is
premised on the unusual nature of shareholder derivative
suits. In such cases, a corporation’s shareholders bring suit
against the corporation’s officers. The shareholders are suing
on behalf of the corporation, alleging that the officers have
committed some wrong in their management of the
corporation. If the suit is successful, any recovery goes to the
corporation, not to the shareholders. See Koster, 330 U.S at
522-23. Because the corporation is not liable to pay any
judgment, defendants argue that the corporation in a
shareholder derivative suit is only a nominal defendant.
Defendants contend, furthermore, that the presence of a
nominal party does not defeat federal jurisdiction based on
diversity. Defendants point to a series of Supreme Court

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precedents that suggest as much. See Lincoln Prop. Co. v.
Roche, 546 U.S. 81, 92-93 (2005) (diversity jurisdiction not
affected if “a party was named to satisfy state pleading rules,
or was joined only as designated performer of a ministerial
act, or otherwise had no control of, impact on, or stake in the
controversy”) (citations omitted); Navarro Sav. Ass’n v. Lee,
446 U.S. 458, 461 (1980) (“a federal court must disregard
nominal or formal parties and rest jurisdiction only upon the
citizenship of real parties to the controversy”); Salem Trust
Co. v. Mfrs.’ Fin. Co., 264 U.S. 182, 189-90 (1924)
(“Jurisdiction cannot be defeated by joining formal . . .
parties.”); see also District of Columbia ex rel. American
Combustion, Inc. v. Transamerica Ins. Co., 797 F.2d 1041,
1047-48 (D.C. Cir. 1986) (“The common-sense conclusion is
that the District of Columbia is a nominal party and that the
suit is between private parties whose citizenship will
determine diversity.”).
Defendants’ theory, in short, is that Avenir is only a
nominal defendant and that nominal defendants do not count
for purposes of evaluating a removal under 28 U.S.C.
§ 1441(b).
According to Knop, however, a party that is
indispensable under the joinder rules – and here it is
undisputed that the corporation in a shareholder derivative
suit is indispensible under the joinder rules – is by definition
not a nominal party and must be considered when assessing
the propriety of removal under 28 U.S.C. § 1441(b).
The Supreme Court and this Court have not yet decided
whether a corporation in a shareholder derivative suit is only a
nominal party for purposes of 28 U.S.C. § 1441(b). Cf.
Navarro Sav. Ass’n, 446 U.S. at 462 n.9; American
Combustion, 797 F.2d at 1047-48. Defendants’ asserted basis

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for removal – that Avenir is only a nominal defendant and
therefore should not count for § 1441(b) purposes – has at
least some logical and precedential force behind it. Indeed,
the argument is sufficiently persuasive that it has convinced
one federal district court. See Beck v. CKD Praha Holding,
A.S., 999 F. Supp. 652, 655 (D. Md. 1998).1 And another
federal district court concluded that the argument is at least
reasonable and therefore not a basis for a fee award. See
Gamrex, Inc. v. Schultz, No. 10-00380, 2010 WL 3943910 (D.
Haw. Sept. 9, 2010). Under those circumstances, regardless
of whether defendants’ argument for removal was correct, we
cannot say that defendants “lacked an objectively reasonable
basis for seeking removal.” Martin, 546 U.S. at 141.
We reverse the District Court’s judgment awarding
attorney’s fees to Knop.
So ordered.

1

To be sure, a few courts have gone the other way on the
merits. See Gamrex, Inc. v. Schultz, No. 10-00380, 2010 WL
3943910 (D. Haw. Sept. 9, 2010); Khoury v. Oppenheimer, 540 F.
Supp. 737 (D. Del. 1982); cf. also Gabriel v. Preble, 396 F.3d 10
(1st Cir. 2005) (corporate defendant in shareholder derivative suit
counts for purposes of diversity jurisdiction).

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