Hurst v. FutureSelect Portfolio Management, Inc. et al

Filing 36

ORDER by Judge Samuel Conti granting 11 Motion to Remand (sclc2, COURT STAFF) (Filed on 12/16/2011)

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IN THE UNITED STATES DISTRICT COURT

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FOR THE NORTHERN DISTRICT OF CALIFORNIA

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STEPHEN S. HURST,
Plaintiff,

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v.

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For the Northern District of California

United States District Court

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FUTURESELECT PORTFOLIO MANAGEMENT,
INC., a Delaware Corporation;
FUTURESELECT PRIME ADVISOR II LLC;
a Delaware Limited Liability
Company; ALDARRA FUND SPC, a Grand
Cayman Islands Segregated
Portfolio Company, RONALD C. WARD,
an individual; and DOES 1-50,
inclusive,

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Defendants.

) Case No. 11-3364 SC
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) ORDER GRANTING PLAINTIFF'S
) MOTION TO REMAND
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I.

INTRODUCTION
Before the Court is a Motion to Remand filed by Plaintiff

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Stephen S. Hurst ("Plaintiff" or "Hurst").

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Defendants FutureSelect Portfolio Management, Inc.

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("FutureSelect"), FutureSelect Prime Advisor II LLC ("Prime Advisor

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LLC"), Aldarra Fund SPC ("Aldarra"), and Ronald C. Ward ("Ward")

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(collectively, "Defendants") filed an Opposition.

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("Opp'n).

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For the following reasons, Plaintiff's Motion is GRANTED.

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Plaintiff submitted a Reply.

ECF No. 11 ("Mot.").

ECF No. 21.

ECF No. 26. ("Reply").

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II.

BACKGROUND
This action arises from Plaintiff's efforts to recover

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$600,000 he allegedly lost due to the "ponzi scheme" run by Bernard

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Madoff.

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No. 1 ("Not. of Removal") Ex. A ("FAC") ¶ 2.1

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Prime Advisor LLC is a hedge fund; Aldarra is the parent entity of

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Prime Advisor LLC; FutureSelect is an investment firm that serves

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as the fund manager of Aldarra and Prime Advisor LLC; and Ward is

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the CEO and owner of FutureSelect and a resident if Washington.

United States District Court

For the Northern District of California

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Plaintiff is a resident of Foster City, California.

ECF

He alleges that:

FAC ¶¶ 4-5.
Plaintiff alleges that in early 2008 his financial advisor,

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KSM Capital Advisors ("KSM"), approached him about the prospect of

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investing in Aldarra.

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Offering Memorandum and advertising materials that described

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Aldarra and the various hedge funds, including Prime Advisor LLC,

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that were part of Aldarra's portfolio.

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that, in reliance on the offering memorandum and advertising

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materials, he invested $600,000 of his retirement savings in Prime

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Advisor LLC.

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Advisor LLC was simply a "feeder fund" that invested its assets --

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through a variety of intermediaries -- with Bernard L. Madoff

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Investment Securities, Inc. ("BLMIS").

Id. ¶ 9.

Id. ¶ 13.

KSM provided him with Aldarra's

Id.

Plaintiff alleges

He alleges that, unbeknownst to him, Prime

Id. ¶ 14.

Plaintiff did not know that his funds had been invested in

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BLMIS until FutureSelect informed him of this fact in December

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2008, when BLMIS was publicly revealed to be a fraudulent "ponzi

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Exhibit A to the Notice of Removal contains both Plaintiff's
original complaint and his First Amended Complaint ("FAC"), as both
were filed in state court.

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that the Aldarra Offering Memorandum was materially false and

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misleading because, inter alia, it described Prime Advisor LLC's

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objective as "low volatility" and "provid[ing] consistent, risk-

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adjusted returns," and it stated that Prime Advisor LLC had earned

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an average annual rate of return of 11.65 percent since January

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1998.

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advertising materials he received were prepared by Defendants and

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contained false statements describing Prime Advisor LLC/Aldarra as

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United States District Court

scheme."

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For the Northern District of California

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a "Low Volatility, Bond Alternative" and representing that it had

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earned an average annual return of 11.42 percent since inception.

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Id. ¶¶ 12, 14.

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Id. ¶ 16.

In light of this revelation, Plaintiff alleges

Id. ¶¶ 10-11, 14.

Plaintiff also alleges that the

Plaintiff filed this action on December 13, 2010 in the

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Superior Court of California, County of San Mateo.

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Ex. A ("Compl.").

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following four state law causes of action: (1) fraud against all

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Defendants; (2) negligent misrepresentation against all Defendants;

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(3) violation of California Corporations Code Section 25401 against

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Aldarra and Prime Advisor LLC; and (4) control person liability

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under California Corporations Code Section 25504 against Ward,

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Aldarra, and FutureSelect.

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removed the case to federal court on the basis of diversity

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jurisdiction.

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Not. of Removal

He filed the FAC on June 16, 2011, asserting the

See FAC.

On July 7, 2011, Defendants

Not. of Removal ¶ 6.

In his Motion, Plaintiff argues that removal was improper

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because Prime Advisor LLC is actually a California citizen, and

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because Defendants did not properly plead the citizenship of Prime

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Advisor LLC and Aldarra.

Mot. at 1.

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In response, Defendants argue

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that removal was proper because Prime Advisor LLC was fraudulently

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joined.

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argument is time-barred and that Prime Advisor LLC was properly

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joined.

Plaintiff replies that Defendants' fraudulent joinder

Plaintiff also seeks attorney's fees.

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III. LEGAL STANDARD
Any civil action brought in a state court may be removed to

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this Court if there is complete diversity of citizenship and where

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the amount in controversy exceeds $75,000.

28 U.S.C. §§ 1332,

United States District Court

For the Northern District of California

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1441.

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subject matter jurisdiction or for any defect in the removal

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procedure.

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33421 SI, 1995 WL 705142, at *2 (N.D. Cal. Nov. 15, 1995).

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general rule, the court must strictly construe the removal statute,

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"and any doubt about the right of removal requires resolution in

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favor of remand."

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1241, 1244 (9th Cir 2009).

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that the defendant always has the burden of establishing that

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removal is proper."

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The Court may remand an action to state court for lack of

See 28 U.S.C. § 1447(c); Tengler v. Spare, No. C-95As a

Moore-Thomas v. Alaska Airlines, Inc., 553 F3d
"The presumption against removal means

Id. (internal quotations omitted).

A defendant may remove a case lacking complete diversity and

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seek to persuade the district court that any non-diverse defendant

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was fraudulently joined.

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1336, 1339 (9th Cir. 1987).

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cause of action against a resident defendant, and the failure is

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obvious according to the settled rules of the state, the joinder of

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the resident defendant is fraudulent."

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fraudulent joinder by clear and convincing evidence, and there is a

McCabe v. Gen. Foods Corp., 811 F.2d
"If the plaintiff fails to state a

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Id.

A defendant must prove

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general presumption against fraudulent joinder.

Hamilton

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Materials, Inc. v. Dow Chem. Corp., 494 F.3d 1203, 1206 (9th Cir.

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2007).

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IV.

DISCUSSION
A.

Remand

Defendants removed this action, alleging in the Notice of

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Removal that complete diversity of citizenship exists.

Defendants

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alleged that Prime Advisor LLC is a Delaware LLC with its principal

United States District Court

For the Northern District of California

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place of business in Washington; FutureSelect is a Delaware

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corporation with its principal place of business in Washington,

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Aldarra is a segregated portfolio company organized under the laws

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of Grand Cayman Islands with its principal place of business in

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Washington, and Ward is a citizen of Washington.

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U.S.C. § 1332(c)(1), which states that "a corporation shall be

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deemed to be a citizen of any State by which it has been

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incorporated and of the State where it has its principal place of

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business," Defendants alleged that Prime Advisor LLC and

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FutureSelect are citizens of Delaware and Washington, and that

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Aldarra is a citizen of Grand Cayman Islands and Washington.

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Relying on 28

Plaintiff, in his moving papers, argues that Defendants erred

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by treating Aldarra and Prime Advisor LLC as though they were

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corporations for citizenship purposes when in fact they are not.

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Plaintiff argues that for purposes of diversity jurisdiction, all

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artificial entities other than corporations are citizens of the

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states of which their members are citizens.

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Carden v. Arkoma Assoc., 494 U.S. 185, 189 (1990)).

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Mot. at 5 (citing
He thus argues

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that the Notice of Removal is procedurally defective because

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Defendants did not plead the citizenship of the members of Aldarra

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or Prime Advisor LLC.

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complete diversity does not exist in this case because Plaintiff, a

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California resident, is a member of Prime Advisor LLC, which

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renders Prime Advisor LLC a citizen of California for diversity

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purposes.

More fundamentally, Plaintiff argues that

Under clearly established Ninth Circuit law, "an LLC is a

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United States District Court

citizen of every state of which its owners/members are citizens."

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For the Northern District of California

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Johnson v. Columbia Props. Anchorage, LP, 437 F.3d 894, 899 (9th

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Cir. 2006).

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citizenship of Prime Advisor LLC is properly determined by the

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citizenship of its members.2

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that under this rule Prime Advisor LLC is a California citizen.

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Nevertheless, Defendants argue that Prime Advisor LLC's citizenship

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should be disregarded under the fraudulent joinder doctrine.

In light of this rule, Defendants concede that the

Defendants also apparently concede

Specifically, Defendants contend that the fraudulent joinder

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doctrine applies because Plaintiff has mistakenly sued Prime

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Advisor LLC when, in fact, Plaintiff has no relationship with Prime

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Advisor LLC.

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confusing Prime Advisor LLC with a portfolio of shares in which

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Aldarra invested, which is named "Prime Advisor Segregated

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Portfolio Shares."

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Plaintiff cannot state a claim against Prime Advisor LLC, rendering

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Opp'n at 1.

Id.

Defendants believe that Plaintiff is

Due to this mistake, Defendants contend,

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Defendants still maintain, however, that the citizenship of
Aldarra, a segregated portfolio company, is determined under the
rule that applies to corporations. Because the citizenship of
Aldarra is irrelevant to the Court's decision, the Court does not
address which rule of citizenship applies to segregated portfolio
companies.

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the joinder of Prime Advisor LLC fraudulent.

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denies any confusion and asserts that he owns shares of Prime

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Advisor LLC.

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their position.

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Plaintiff vigorously

Both sides submit documentary evidence in support of

Whatever the merits of Defendants' fraudulent joinder

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argument, the Court need not reach it.

Because Defendants did not

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allege fraudulent joinder in their Notice of Removal, and the time

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period for amending the Notice has passed, the claim is time-

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barred.

Under 28 U.S.C. § 1446(b), a defendant must file a notice

United States District Court

For the Northern District of California

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of removal within thirty days of receiving a "paper from which it

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may first be ascertained that the case is removable."

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thirty day period has expired, "the removal petition cannot be . .

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. amended to add allegations of substance."

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Fulton Ins. Co., 418 F.2d 316, 317 (9th Cir. 1969).

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fraudulent joinder constitute a substantive basis for removal that

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must be raised before the thirty-day removal deadline expires.

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Awasthi v. Infosys Techs., Ltd., No. C-10-0783 JCS, 2010 U.S. Dist.

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LEXIS 57824, at *12 (N.D. Cal. May 21, 2010) ("the Defendants'

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arguments in opposition to the present remand motion regarding

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fraudulent joinder are beyond the thirty day time limit and will

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not be considered by this Court"); Dean Witter Reynolds, Inc. v.

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Swett & Crawford, No. C-92-3841-JPV, 1992 U.S. Dist. LEXIS 20093,

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at *2-3 (N.D. Cal. Dec. 23, 1992) (holding fraudulent joinder claim

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was time-barred when raised in opposition to motion to remand after

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30-day removal period).

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After the

Barrow Dev. Co. v.
Allegations of

Here, Defendants allege that they first learned the case was
removable when they received Plaintiff's FAC on June 16, 2011.

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Not. of Removal ¶¶ 1-2.

They did not raise the issue of fraudulent

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joinder until their Opposition, which was filed on August 22, 2011,

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well after the expiration of the thirty-day removal period.
For the foregoing reasons, the Court finds that Defendants

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diversity exists.

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defendant always has the burden of establishing that removal is

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proper").

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Remand.

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United States District Court

have failed to meet their burden of establishing that complete

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For the Northern District of California

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B.

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Title 28 U.S.C. § 1447(c) provides, in relevant part, that

See Moore-Thomas, 553 F.3d at 1244 ("the

Accordingly, the Court GRANTS Plaintiff's Motion to

Attorney's Fees

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"[a]n order remanding the case may require payment of just costs

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and any actual expenses, including attorney fees, incurred as a

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result of the removal."

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U.S.C. § 1447(c) to award attorney's fees if the removing party

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lacked an objectively reasonable basis for the removal.

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Franklin Capital Corp., 546 U.S. 132, 136 (2005).

A district court is permitted under 28

Martin v.

Plaintiff argues that Defendants lacked an objectively

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reasonable basis for removal because they overlooked the Ninth

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Circuit's holding in Johnson that the citizenship of a limited

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liability company is determined by the citizenship of its members.

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Despite their oversight, however, it is conceivable that Defendants

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may have prevailed had they properly alleged fraudulent joinder in

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the Notice of Removal.

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that Defendants' conduct was objectively unreasonable.
Plaintiff's request for attorney's fees is therefore DENIED.

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The Court cannot conclude on this record

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V.

CONCLUSION

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For the reasons stated above, Plaintiff Stephen S. Hurst's

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Motion to Remand this case to the Superior Court of California,

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County of San Mateo, is GRANTED.

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attorney's fees is DENIED.

Plaintiff's request for

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IT IS SO ORDERED.

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United States District Court

For the Northern District of California

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Dated: December 16, 2011
UNITED STATES DISTRICT JUDGE

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