Masterson, et al v. Eurofins Air Toxics Inc., et al

Filing 22

ORDER signed by Judge John A. Mendez on 11/26/2014 GRANTING 15 Motion to Remand and DENYING 9 Motion to Dismiss. CASE CLOSED. (cc Sacramento Superior Court) (Donati, J)

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UNITED STATES DISTRICT COURT

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EASTERN DISTRICT OF CALIFORNIA

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RONALD MASTERSON, an
individual; and LINDA
FREEMAN, individually and as
trustee of The Linda Freeman
Trust,

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Plaintiffs,
v.

No.

2:14-cv-02226 JAM-CKD

ORDER GRANTING PLAINTIFFS’
MOTION TO REMAND AND DENYING
DEFENDANT EUROFINS AIR TOXICS,
INC.’S MOTION TO DISMISS

EUROFINS LANCASTER
LABORATORIES, INC., a
Minnesota corporation;
EUROFINS AIR TOXICS, INC., a
California corporation; and
EUROFINS ENVIRONMENT TESTING
US HOLDINGS, INC., a Delaware
corporation; and DOES 1
through 20,

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Defendant.

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This matter is before the Court on Plaintiffs Ronald

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Masterson and Linda Freeman’s (“Plaintiffs”) Motion to Remand the

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matter to state court.

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Eurofins Air Toxics, Inc.’s (“Defendant” or “Air Toxics”) Motion

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to Dismiss.

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Remand is GRANTED and Defendant’s Motion to Dismiss is DENIED AS

Also before the Court is Defendant

For the following reasons, Plaintiffs’ Motion to
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MOOT. 1

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I.

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FACTUAL ALLEGATIONS AND PROCEDURAL BACKGROUND

Plaintiffs Masterson and Freeman are California residents.

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FAC ¶¶ 1-2.

In 1989, Plaintiffs formed Airtox, Inc., which

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became Air Toxics after the closing of the transaction that is

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the subject of this lawsuit.

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is – a California corporation whose business “includes providing

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and performing source emissions and ambient air testing using a

FAC ¶ 10.

This company was – and

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wide range of methods.”

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were the sole shareholders of Air Toxics.

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FAC ¶¶ 4, 10.

Through 2011, Plaintiffs
FAC ¶ 12.

Defendants Eurofins Lancaster Laboratories, Inc. (“Lancaster

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Labs”) and Eurofins Environment Testing US Holdings, Inc.

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(“Eurofins Environmental”) are Minnesota and Delaware

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corporations, respectively.

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Labs and Eurofins Environmental purchased Plaintiffs’ shares in

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Air Toxics, via a written contract (“the Stock Purchase

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Agreement”).

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signed the Stock Purchase Agreement – including Defendant Air

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Toxics.

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FAC ¶ 19.

FAC ¶¶ 3, 5.

In 2012, Lancaster

All parties to the current lawsuit

FAC, Ex. A.

Pursuant to the Agreement, Plaintiffs’ shares were

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transferred to Eurofins Environmental, in exchange for an initial

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payment of approximately $8.7 million and a deferred payment of

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$4 million.

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Toxics attained certain revenue thresholds in 2012 and 2013.

The deferred payment would only be made if Air
FAC

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This motion was determined to be suitable for decision without
oral argument. E.D. Cal. L.R. 230(g). The hearing was
scheduled for November 19, 2014.
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¶ 22.

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and implied covenants in the Stock Purchase Agreement, “Air

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Toxics’ air testing operations revenue and resources were . . .

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diverted to the materials testing, for the purposes of growing

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the materials testing operations.”

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“materials testing operations of Air Toxics was not profitable at

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this time, . . . the air testing operations lost revenue and

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resources,” and the revenue thresholds were not met.

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No deferred payment was made to Plaintiffs.

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The heart of Plaintiffs’ FAC is that, in breach of express

MTR at 3; FAC ¶ 44.

As the

FAC ¶ 44.

FAC ¶ 47.

On August 21, 2014, Plaintiffs filed the FAC in Sacramento

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County Superior Court.

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matter to this Court.

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of action: (1) fraud (misrepresentation); (2) fraud (promise

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made); (3) breach of contract; (4) breach of the covenant of good

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faith and fair dealing; (5) accounting.

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fourth and fifth causes of action are brought against Defendant

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Air Toxics.

Soon thereafter, Defendants removed the
The FAC includes the following five causes

Of these, only the

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II.
A.

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OPINION

Legal Standard: Motion to Remand and Fraudulent
Joinder

Generally, a state civil action is removable to federal

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court only if it might have been brought originally in federal

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court.

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construe[s] the removal statute against removal jurisdiction.”

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Gaus v. Miles, Inc., 980 F.2d 564, 566 (9th Cir. 1992) (citing

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Boggs v. Lewis, 863 F.2d 662, 663 (9th Cir. 1988); Takeda v.

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Northwestern National Life Insurance Co., 765 F.2d 815, 818 (9th

See 28 U.S.C. § 1441.

The Ninth Circuit “strictly

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Cir. 1985)).

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there is any doubt as to the right of removal in the first

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instance.”

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F.2d 1062, 1064 (9th Cir. 1979)).

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against removal jurisdiction means that the defendant always has

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the burden of establishing that removal is proper.”

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Nishimoto v. Federman-Bachrach & Associates, 903 F.2d 709, 712 n.

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3 (9th Cir. 1990); Emrich v. Touche Ross & Co., 846 F.2d 1190,

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1195 (9th Cir. 1988)).

Thus, “[f]ederal jurisdiction must be rejected if
Id. (citing Libhart v. Santa Monica Dairy Co., 592
“The ‘strong presumption’
Id. (citing

To establish diversity jurisdiction, the

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defendant must show that complete diversity exists among the

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parties and that the amount in controversy exceeds $75,000.

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U.S.C. § 1332.

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Complete diversity does not exist unless all plaintiffs are

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citizens of different states than all defendants. Morris v.

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Princess Cruises, Inc., 236 F. 3d 1061, 1067 (9th Cir. 2001)

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(citing Caterpillar v. Lewis, 519 U.S. 61, 68 (1996));

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Strawbridge v. Curtiss, 7 U.S. 267, 267 (1806).

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“Strawbridge” drawbridge” closes – and federal jurisdiction will

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not lie – in an action in which any plaintiff shares the same

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citizenship as any defendant.

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complete diversity does not exist: Plaintiffs Masterson and

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Freeman are citizens of California, as is Defendant Air Toxics.

This so-called

On the face of Plaintiffs’ FAC,

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However, an exception to the complete diversity requirement

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exists when the removing party can show that the plaintiffs have

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“fraudulently joined” the non-diverse defendant, for the purpose

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of thwarting removal to federal court.

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Cruises, Inc., 236 F.3d 1061, 1067 (9th Cir. 2001).

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Circuit has noted that “[j]oinder of a non-diverse defendant is
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Morris v. Princess
The Ninth

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deemed fraudulent, and the defendant's presence in the lawsuit is

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ignored for purposes of determining diversity, if the plaintiff

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fails to state a cause of action against a resident defendant,

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and the failure is obvious according to the settled rules of the

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state.”

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fraudulent joinder is a heavy one.”

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707 F.2d 201, 205 (5th Cir. 1983); see also, Morris, 236 F.3d at

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1068 (finding fraudulent joinder only where it was “abundantly

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obvious that [the plaintiff] could not possibly prevail” on her

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Morris, 236 F.3d at 1067.

The “burden of proving a
Green v. Amerada Hess Corp.,

claim against the non-diverse defendant).

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Here, unless Plaintiffs have failed to state a cause of

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action against Defendant Air Toxics, and that “failure is obvious

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according to the settled rules of the state,” complete diversity

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does not exist and Plaintiffs’ motion to remand must be granted.

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In the FAC, Plaintiffs allege two causes of action against

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Defendant Air Toxics: (1) breach of the implied covenant of good

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faith and fair dealing; and (2) an accounting.

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B.

Analysis

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Plaintiffs argue that they have sufficiently stated a cause

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of action for breach of the implied covenant of good faith and

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fair dealing against Defendant Air Toxics because Air Toxics was

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a party to the Stock Purchase Agreement.

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responds that Air Toxics does not owe Plaintiffs an implied duty

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of good faith and fair dealing because Air Toxics has no

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underlying contractual obligation to Plaintiffs.

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Defendant also argues that Plaintiffs cannot claim a breach of

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the implied covenant of good faith and fair dealing by Air

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Toxics, because the Stock Purchase Agreement expressly includes a
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MTR at 6.

Defendant

Opp. at 6.

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“good faith and fair dealing” provision only as to Defendants

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Lancaster Labs and Eurofins Environmental.

Opp. at 7.

Under Delaware law, 2 “an implied covenant of good faith and

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fair dealing is engrafted upon every contract.”

Wilgus v. Salt

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Pond Inv. Co., 498 A.2d 151, 159 (Del. Ch. 1985).

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adjudicating an implied covenant claim, courts ask “whether it is

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clear from what was expressly agreed upon that the parties who

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negotiated the express terms of the contract would have agreed to

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proscribe the act later complained of as a breach of the implied

In

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covenant of good faith – had they thought to negotiate with

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respect to that matter.”

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LLC, 67 A.3d 400, 418 (Del. 2013).

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implied covenant, the plaintiff “must allege a specific implied

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contractual obligation, a breach of that obligation by the

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defendant, and resulting damage to the plaintiff.”

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SPJS Holdings, L.L.C., 971 A.2d 872, 888 (Del. Ch. 2009).

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Gerber v. Enter. Products Holdings,
To allege a breach of the

Kuroda v.

The parties’ central dispute revolves around Defendant Air

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Toxics’ unique relation to the Stock Purchase Agreement: Air

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Toxics was a party to the Agreement, but was not identified as

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either a selling or buying party.

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was the subject matter of the Stock Purchase Agreement, as the

Rather, Defendant Air Toxics

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The Stock Purchase Agreement contains a Delaware choice of law
provision. FAC., Ex. A at 10.3. The parties do not appear to
dispute that Delaware law governs Plaintiffs’ claim for breach of
the implied covenant of good faith and fair dealing. See Opp. at
4; Reply at 3 (citing Delaware law). Because there is a
reasonable basis for the parties’ choice of law, the Court will
apply Delaware law in evaluating the substantive claims against
Defendant Air Toxics. Consul Ltd. v. Solide Enterprises, Inc.,
802 F.2d 1143, 1147 (9th Cir. 1986).
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company that was being sold by Plaintiffs and bought by

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Defendants Lancaster Labs and Eurofins Environmental.

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of whether the “subject company” of a stock purchase agreement,

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where the company is also a party to that agreement, can be sued

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for breach of the implied covenant of good faith and fair dealing

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appears to be an issue of first impression under Delaware law.

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Neither party cites a case directly on point, and the Court

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remains cognizant of the fact that the joinder is not

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“fraudulent” unless Plaintiffs’ failure to state a claim against

The issue

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Defendant is “obvious according to the settled rules” of

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Delaware.

Morris, 236 F.3d at 1067.

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Although no Delaware court has reached the precise issue,

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several have indicated that all parties to a contract are bound

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by the implied covenant.

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880 (Del.Ch.1986) (noting that “[m]odern contract law has

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generally recognized an implied covenant to the effect that each

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party to a contract will act in good faith towards the other”)

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(emphasis added); Daystar Const. Mgmt., Inc. v. Mitchell, 2006 WL

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2053649, at *6 (Del. Super. July 12, 2006) (noting that the

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implied covenant of good faith and fair dealing “applies to all

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parties to a contract”).

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signing the Stock Purchase Agreement, Airtox, Inc. – as the

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predecessor to Air Toxics - was a party to the Agreement.

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Agreement expressly defines “Party” as including “all of the

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[persons or entities] executing this Agreement.”

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57.

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on the issue, and in light of the foregoing indications that all

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parties to an agreement are bound by the implied covenant, the

See Katz v. Oak Indus., 508 A.2d 873,

There can be no dispute that, by
The

FAC, Ex. A at

In the absence of more clear guidance from Delaware courts

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law clearly favors Plaintiffs’ argument that Defendant Air Toxics

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was not “fraudulently joined” to this lawsuit.

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Defendant’s argument that Air Toxics cannot be held liable

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for breach of the implied covenant because it “owed Plaintiffs no

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duties under the Stock Purchase Agreement” is both circular and

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unsupported by the Agreement itself.

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argument necessarily assumes as true its ultimate conclusion, the

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text of the Agreement belies its basic premise: that Air Toxics

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owes no contractual duties to Plaintiffs.

Beyond the fact that this

Immediately preceding

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the substantive terms of the Agreement, the contract states that

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“the Parties agree as follows: . . .”

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is inarguably a “Party” to the contract.

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contract that follow are necessarily binding on Air Toxics.

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Moreover, in relevant part, the Agreement states that “the Buying

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Parties [Lancaster Labs and Eurofins Environmental] covenant and

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agree that . . . [t]hey will cause [Air Toxics] to conduct the

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Business in the Ordinary Course of Business[.]”

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reading of this covenant is that, along with the Buying Parties,

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Air Toxics is also contractually obligated to conduct its

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“Business in the Ordinary Course of Business,” (i.e., maintain

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its focus on emissions and air testing).

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provisions, it cannot be said that Defendant Air Toxics has no

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contractual duties under the Stock Purchase Agreement.

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As noted above, Air Toxics
Thus, the terms of the

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In light of these

Similarly, Defendant’s reliance on the Stock Purchase

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Agreement’s express inclusion of a “good faith and fair dealing”

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provision as to Lancaster Labs and Eurofins Environmental is

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misplaced.

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that the Court cannot imply a covenant of good faith and fair

Opp. to MTR at 8.

Defendant appears to be arguing
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dealing with regard to Air Toxics, because the parties

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consciously chose not to name Air Toxics in the expressly-

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included provision.

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to cite authority for its proposition that the inclusion of a

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“good faith and fair dealing” provision as to certain parties to

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a contract precludes the applicability of the implied covenant to

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remaining parties unnamed in the express provision. Opp. to MTR

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at 8.

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implied covenant only applies where a contract lacks specific

Opp. to MTR at 8.

However, Defendant fails

Rather, the case cited by Defendant merely holds that “the

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language governing an issue[.]”

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Blackstone Capital Partners V L.P., 963 A.2d 746, 770 (Del. Ch.)

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aff'd, 976 A.2d 170 (Del. 2009).

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presence of another “good faith and fair dealing” provision that

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would preclude the applicability of the implied covenant, but the

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presence of express language relating to the specific breach the

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defendant is accused of committing: i.e., diverting resources

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from emissions and air testing to materials testing.

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Agreement contains no such express language, and the express

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“good faith and fair dealing” provision as to the other

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Defendants is immaterial to the Court’s analysis.

Alliance Data Sys. Corp. v.
In other words, it is not the

Here, the

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The Court concludes that Plaintiffs fourth cause of action –

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for breach of the implied covenant of good faith and fair dealing

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– does not fail to state a claim by a degree that is “obvious

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according to the settled rules” of Delaware law.

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F.3d at 1067.

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claim against Defendant Air Toxics, the Court need not address

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//

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//

Morris, 236

As Plaintiffs have stated at least one viable

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the parties’ arguments regarding Plaintiffs’ fifth cause of

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action for an accounting.

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III.

ORDER

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For the reasons set forth above, the Court GRANTS

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Plaintiffs’ Motion to Remand and DENIES AS MOOT Defendant’s

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Motion to Dismiss.

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IT IS SO ORDERED.
Dated: November 26, 2014

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