Zohar CDO 2003-1, Limited et al v. Croscill Home LLC et al

Filing 41

REPORT AND RECOMMENDATIONS- re 4 MOTION to Remand to State Court, 7 MOTION to Transfer, 24 MOTION to Expedite. Please note that when filing Objections pursuant to Federal Rule of Civil Procedure 72(b)(2), briefing consists solely of t he Objections (no longer than ten (10) pages) and the Response to the Objections (no longer than ten (10) pages). No further briefing shall be permitted with respect to objections without leave of the Court. Objections to R&R due by 2/28/2018. Signed by Judge Sherry R. Fallon on 2/14/2018. (lih)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF DELAWARE
ZOHAR CDO 2003-1, LIMITED, ZOHAR )
II 2005-1 LIMITED, and ZOHAR III,
)
LIMITED,
)
)
Plaintiffs,
)
)
V.

)

Civil Action No. 17-1797-JFB-SRF

)
,CROSCILL HOME LLC, f/k/a CROSCILL )
ACQUISITION, LLC, DENALI
)
ACQUISITION LLC, DURA BUYER,
)
)
LLC, GLOBAL AUTOMOTNE
SYSTEMS, LLC, GORHAM PAPER AND )
TISSUE, LLC, IMG HOLDINGS, INC.,
)
JEWEL OF JANE LLC, LVD
)
ACQUISITION, LLC, d/b/a OASIS
)
INTERNATIONAL, RM ACQUISITION, )
LLC, SNELLING HOLDINGS, LLC,
)
STILA STYLES, LLC, and LYNN
)
TILTON,
)
)
Defendants.
)
REPORT AND RECOMMENDATION
I.

INTRODUCTION
Presently before the court in this declaratory judgment action concerning ownership and

control over certain Delaware limited liability companies ("LLCs") and a Delaware corporation
are the following motions: (1) plaintiffs Zahar CDO 2003-1, Ltd. ("Zahar I"), Zahar II 2005-1,
Ltd. ("Zahar II"), and Zahar III, Ltd. 's ("Zahar III") (collectively, the "Z:ohar Funds" or
"Plaintiffs") motion to remand the case to the Delaware Court of Chancery; (2) defendants
Croscill Home LLC, formally known as Croscill Acquisition, LLC ("Croscill"), Denali
Acquisition LLC ("Denali"), Dura Buyer, LLC ("Dura Buyer"), Global Automotive Systems,

LLC ("GAS"), Gorham Paper and Tissue, LLC ("Gorham"), Jewel of Jane LLC ("Jewel of
Jane"), LVD Acquisition, LLC, doing business as Oasis International ("LVD/Oasis"), RM
Acquisition, LLC ("RM"), Snelling Holdings, LLC ("Snelling Holdings"), Stila Styles, LLC
("Stila") (collectively, the "portfolio LLCs"), IMG Holdings, Inc. ("IMG"), and Lynn Tilton's
("Tilton") (collectively, "Defendants") motion to transfer venue or, in the alternative, to stay
proceedings; and (3) Plaintiffs' motion for expedited proceedings. (DJ. 4; D.I. 7; D.I. 24) 1 For
the following reasons, I recommend that the court grant Plaintiffs' motion to remand the case to
the Delaware Court of Chancery, and award costs and attorney's fees incurred as a result of the- .
removal of the case. Therefore, I recommend that the court deny as moot Defendants' motion to
transfer venue, and Plaintiffs' motion for expedited proceedings.
II.

BACKGROUND

A. Parties
The Zohar Funds are Cayman Island exempt companies. (D.1. 1-1 at 203, ,r 10; 204, ,r,r
11-12) Croscill, Denali, Dura Buyer, GAS, Gorham, Jewel of Jane, LVD/Oasis, RM, Snelling
Holdings, and Stila are Delaware limited liability companies. (Id. at 205-208, ,r,r 13-16, 19-23)
IMG is a Delaware corporatioJ?-. (Id. at 207, ,r 18) Tilton is the principal of Patriarch Partners,
LLC and its affiliates, is the sole manager of each of the portfolio LLCs, and is the sole director
ofIMG. (Id. at 208, ,r 24) Zohar I is a member of the following portfolio LLCs: GAS,
LVD/Oasis, RM, and Snelling Holdings. (Id. at 203, ,r 10) Zohar I owns 16.9% of the
outstanding common stock ofIMG. (Id.) Zoh.ar II is a member of the following portfolio LLCs:
Dura Buyer, GAS, Jewel of Jane, LVD/Oasis, RM, and Snelling Holdings. (Id. at 204, ,r 11)

1

All briefing and declarations associated with these motions can be found at D.I. 5; D.I. 6; D.I.
9; D.I. 10; D.I. 13; D.I. 14; D.I. 15; D.I. 16; D.I. 17; D.I. 18; D.I. 19; D.I. 21; D.I. 22; D.I. 24;
D.I. 25; D.I. 26; D.I. 33.
2

Zohar II also owns 68.2% of the outstanding common stock ofIMG. (Id.) Zohar III is a member
of the following portfolio LLCs: Croscill, Denali, Dura Buyer, GAS, Gorham, LVD/Oasis, RM,
Snelling Holdings, and Stila. (Id. at ,r 12) Zohar III owns 14.8% of the outstanding common
stock ofIMG. (Id.)
The Zohar Funds are separate collateralized loan obligation ("CLO") investment vehicles
created by Tilton that issued and sold notes, which entitled noteholders to interest payments over time and return of principal at the maturity date. The notes were sold to investors for cash and
the proceeds were used to purchase a pool of assets to serve as collateral for the funds. (Id. at
208, ,r 54) The Zohar Funds collectively raised over $2.5 billion from the sale of CLOs. 2 (Id.)
Prior to March 2016, the Zohar Funds were managed by affiliates of Patriarch Partners, LLC
("Patriarch Managers"), an investment firm owned by Tilton. 3 (Id. at 209, ,r 26) As collateral
manager, the Patriarch Managers were tasked with managing the loans and other assets of the
Zohar Funds. (Id. at ,r 27) As with most secured transactions, the rights of the Zohar Funds'
noteholders and the obligations of the Zohar Funds are set forth in indentures. (Id. at ,r 27) The
duties, responsibilities, and privileges of the collateral manager were set out in the Collateral
Management Agreements ("CMAs") for each of the Zohar Funds. (Id.) In addition to selling
notes to investors, the Zohar Funds issued preference shares, which are currently owned by an
· entity owned and controlled by Tilton. 4 (Id. at 214, ,r 35)

2

From the sale of notes, Zohar I raised approximately $530 million after launching in November
2003, Zohar II raised approximately $1 billion after launching in January 2005, and Zohar III
raised approximately $1 billion after launching in April 2007. (D.I. 1-1 at 208, ,r 25)
3

Specifically, Patri~ch Partners VIII, LLC was Zohar I's collateral manager; Patriarch Partners
XIV, LLC was Zohar II's collateral manager; and Patriarch Partners XV, LLC was Zohar Ill's
collateral manager. (D.I. 1-1 at 209, ,r 26)
Patriarch affiliate Octaluna, LLC holds Zohar I's preference shares. (D.I. 1-1 at 214, ,r 36)
Patriarch affiliate Octaluna II, LLC holds Zohar II's preference shares. (Id. at ,r 37) Patriarch
affiliate Octaluna III, LLC holds Zohar Ill's preference shares. (Id. at 215, ,r 38)
4

3

Much of the collateral acquired by the Zohar Funds consisted ofloans extended to smallto mid-sized manufacturing companies, with the aim of rehabilitating their businesses and
maximizing profits. (Id. at 216, ,i 41) The Zohar Funds loaned money under various
arrangements. Some involved standard repayment of principal and interest while others included
equity investments in portfolio companies. This equity was acquired either in the same
transaction in which the Zohar Funds extended loans or through subsequent transactions in
which those loans were restructured. (Id.) This ~rrangement of obtaining equity in exchange for
a loan was of paramount importance to the Zohar Funds because it offset losses arising from a
defaulted loan and had a lucrative upside if a portfolio company turned profitable. The entire
consideration for the acquisition of these loans came from funds in the Zohar Funds' accounts.
(Id.) These equity positions were titled and beneficially owned in the Zohar Funds' names and,

thus, constituted part of the collateral under the Zohar Funds' indentures that served as security
for repayment of the noteholders. (Id.)
In the case of the portfolio LLCs at issue in this action, the Zohar Funds extended one or

more loans to each of the portfolio LLCs and simultaneously acquired equity interests. (Id. at ,i
42) In each instance, that equity was in the form of membership interests titled in the name of
the Zohar Funds pursuant to the governing LLC agreement for each portfolio LLC. (Id.) In the
case ofIMG, the Zohar Funds acquired common stock ofIMG in a restructuring of loans
extended to IMG and in a legal settlement with IMG's founders. (Id.)

B. Facts
1. Zohar Funds' Failure to Repay Noteholders and the Replacement of

·collateral Manager

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The Zohar Funds performed poorly under the Patriarch Managers. (Id. at 217, ,r 43) On
November 20, 2015, Zohar !_defaulted on its obligation to repay the noteholders. (Id.) On
March 2, 2016, the Patriarch Managers resigned as collateral managers for the Zohar Funds, and
Alvarez & Marsal Zohar Management ("AMZM"), a Delaware limited liability company, was
appointed as collateral manager for each of the Zohar Funds. (Id. at ,r 44) On January 2, 2017,
Zohar II defaulted on its obligation to repay the noteholders, and MBIA Insurance Corporation
("MBIA") paid approximately $770 million in claims on the outstanding principal and interest
due. (Id. at ,r 45) It is alleged that Zohar III faces imminent default on its obligation to repay
noteholders on April 15, 2019. (Id. at ,r 46)
When the Patriarch Managers resigned as the Zohar Funds' collateral managers, they
were required by the CMAs to turn over collateral manager books and records to the Zohar
Funds and AMZM. When the Patriarch Managers failed to do so, the Zohar Funds filed suit in
Delaware Chancery Court on April 22, 2016 to enforce their contractual rights under the CMAs
and against the Patriarch Managers. See Zahar CDO 2003-1, LLC v. Patriarch Partners, LLC,
No. CV 12247-VCS, 2016 WL 6248461, at *6 (Del. Ch. Oct. 26, 2016), aff'd, 165 A.3d 288
(Del. 2017). After a two-day trial, Vice Chancellor Slights ruled in the Zohar Funds' favor and
ordered Patriarch to turn over twelve categories of documents. Id. at ** 12-18. Enforcement of
this judgment remains ongoing before Vice Chancellor Slights. (D.I. 33, Ex. A at 3)

2. Zohar I Auction Case
On September 12, 2016, Patriarch Partners XV, LLC and Octaluna LLC (together,
"Auction Case Plaintiffs"), two of Tilton's affiliates, filed an action against U.S. Bank National
Association ("U.S. Bank") and MBIA (together, the "Auction Case Defendants") in New York
state court, seeking to enjoin the auction of certain assets which purportedly backed certain

5

defaulted debt issued by Zohar I ("the Auction Case"). (D.I. 1, Ex. B) U.S. Bank was Zohar l's
trustee, and MBIA was one of Zohar I's three creditors (the Auction Case Plaintiffs being the
other two creditors). (Id. at 1 1) Moreover, as the holder of the senior outstanding notes, MBIA
was deemed the "controlling party" under the relevant indenture, and, as such, had the power to
direct U.S. Bank, as it did, to begin a sale process and administer the auction. (Id. at 14) The
Auction Case Plaintiffs asserted in the Auction Case, inter alia, that the Auction Case
Defendants improperly attempted to sell equity interests ultimately owned by Tilton, not the
Zohar Funds. (Id. at 18; D.I. 1 at 12) For example, an August 26, 2016 ''Notice of Public Sale
and Invitation to Bid" issued by U.S. Bank listed collateral purportedly being sold through the
Zohar I Auction, including 757 shares of common stock of Defendant IMG ("IMG auction
shares"). (D.I. 1-1, Ex. C)
On September 13, 2016, U.S. Bank removed the Auction Case to the District Court for
the Southern District of New York ("SDNY") based on the Edge Act, 12 U.S.C. § 632, because
it involved a party, U.S. Bank, "organized under the laws of the United States and ar[ose] out of
'international or foreign banking."' (D.I. 1 at 13) While the Auction Case temporarily delayed
the auction of Zohar I's assets, the SDNY court ultimately rejected the Auction Case Plaintiffs'
attempt to enjoin the auction, and the assets were sold on December 21, 2016. (Id. at 17) MBIA
purported to purchase the auction collateral, including the IMG auction shares, through a credit
bid and, as such, MBIA now claims to own the equity interests in the auction collateral,
including the IMG auction shares. (Id. at 17) On December 27, 2016, the Auction Case
Plaintiffs sought leave to amend their complaint in the Auction Case, to add claims for money
damages resulting from the completed auction and to add Tilton as a plaintiff. (D.I. 1, Ex. H)
On December 30, 2016, the SDNY court denied leave to amend, noting that the Auction Case

6

Plaintiffs' proposal "to now seek damages in addition to injunctive relief ... would alter the
entire case." (Id., Ex. I) On January 20, 2017, the SDNY court dismissed the Auction Case as
"moot," pursuant to Federal Rule of Civil Procedure 41(a)(l)(A)(ii), in light of the completed
auction. (Id., Ex. J)

3. 2016 Chancery Case
On November 29, 2016, Zohar II and Zohar III brought suit in Delaware Chancery Court
against Tilton and three portfolio companies 5 under 8 Del. C. § 225 6 seeking an order confirming
the Zohar Funds' election, by written consent, of new directors to replace Tilton and others from
the boards of the three portfolio companies that they claimed to beneficially own. (D.I. 6, Ex. A)
The Zohar Funds allege that this action was limited to three companies because "Tilton's
continued noncompliance with the books and records case judgment impeded the Zohar Funds
from ascertaining the ownership of other companies." (D.I. 5 at 7) On December 20, 2016,
Tilton asserted counterclaims arguing that she owned not just the equity in the three companies
at issue, but all other portfolio companies as well. (D.I. 33 at 9)
The Chancery Court held a six day trial in the Spring of 2017. On November 30, 2017,
the Chancery Court ruled against Tilton and found in favor of Zohar II and Zohar III on all

5

The three portfolio companies named were FSAR Holdings, Inc., Glenoit Universal Ltd., and
UI Acquisition Holding Co. (D.I. 6, Ex. A) These portfolios companies are not involved in the
present action.
6

"Upon application of any stockholder or director, or any officer whose title to office is
contested, the Court of Chancery may hear and determine the validity of any election,
appointment, removal or resignation of any director or officer of any corporation, and the right of
any person to hold or continue to hold such office, and, in case any such office is claimed by
more than 1 person, may determine the person entitled thereto; and to that end make such order
or decree in any such case as may be just and proper, with power to enforce the production of
any books, papers and records of the corporation relating to the issue." Del. Code Ann. tit. 8, §
225.
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counts of the complaint, determined the Zohar Funds to be the beneficial owners of the equity in
the three portfolio companies, and dismissed Tilton's counterclaim seeking a declaratory
judgment that the Zohar Funds' written consents were invalid. See Zohar II 2005-1, Ltd. v.
FSAR Holdings, Inc., 2017 WL 5956877 (Del. Ch. Ct. Nov. 30, 2017). Specifically, the court
found that "[t]he transactional documents ... clearly show that the Zohar Funds acquired the
[p]ortfolio [c]ompanies' equity," and "these agreements are unambiguous so extrinsic evidence
is neither required nor admissible." Id. 2017 WL 5956877, at *33 n.316.
On December 20, 2017, the Chancery Court granted Tilton's motion for a stay of the
judgment pending an appeal to the Delaware Supreme Court. (D.I. 14, Ex. 5) Tilton's additional
counterclaims are stayed pending outcome of appeal. 7 (D.I. 33, Ex. Aat 9)

4. RICO Case
On January 16, 2017, the Zohar Funds filed an action against Patriarch Partners, LLC,
Patriarch Partners VIII, LLC, Patriarch Partners XIV, LLC, Patriarch Partners XV, LLC,
Octaluna LLC, Octaluna II LLC, Octaluna III LLC, Ark II CLO 2001-1, LLC, Ark Investment
Partners II, L.P ., and Tilton (collectively, the "RICO Defendants") in the Southern District of
New York asserting, inter alia, violations of the federal Racketeer Influenced and Corrupt
Organizations Act, 18 U.S.C. § 1961 et seq. ("RICO") and various state law torts (the "RICO

Case"). (D.I. 1at110) Additionally, the Zohar Funds sought a declaration that certain LLC
agreement amendments and irrevocable proxies executed by Tilton were invalid, and that the
Zohar Funds, not Tilton, own certain equity interests. (Id.) The complaint lists the specific LLC
agreement amendments and proxies that the Zohar Funds seek to have declared invalid,

7

Tilton's remaining counterclaims are for tortious interference of contract, unjust enrichment,
breach of fiduciary duty, injunction and declaratory judgment to enforce gift conditions, and
resulting trust. (D.I. 33, Ex. A at 9-11)
8

including those executed by the eleven portfolio LLCs in the action sub judice. (D.I. 9, Ex. 1 at
,r,r73-74,nn.9, 10)
On March 6, 2017, the RICO Defendants filed a motion to dismiss the complaint
pursuant to Federal Rules of Civil Procedure 12(b)(l) and 12(b)(6). Zohar CDO 2003-1, Ltd., et

al. v. Patriarch Partners, LLC, et al., 17-cv-307-WHP (S.D.N.Y. Mar. 6, 2017), ECF No. 53. In
the motion dismiss, Tilton argued that "there is no basis of federal jurisdiction" over the RICO
Case, including its claims concerning beneficial ownership, "requiring dismissal of th[ e] case in
its entirety." Zohar CDO 2003-1, Ltd., et al. v. Patriarch Partners, LLC, et al., 17-cv-307-WHP
(S.D.N.Y. Mar. 6, 2017), ECF No. 54 at 31.
On November 27, 2017, while the motion to dismiss was still pending before the court,
the RICO Defendants filed an answer, counterclaims, and third-party claims. (D.I. 1, Ex. L) The
RICO Defendants' third-party claims include causes of action against various parties, including
MBIA and U.S. Bank, 8 seeking, inter alia, the rescission of any purported transfer of the IMG
auction shares through the Zohar I Auction, damages resulting from any improper and illegal
purported transfer of equity, including the IMG auction shares, and a declaration that Tilton, not
Zohar I or MBIA, is the ultimate beneficial owner of the portfolio company equity at issue,
including the IMG auction shares. (Id.)
On December 29, 2017, the SDNY court granted the RICO Defendants' motion to
dismiss, and dismissed the Zohar Funds' RICO claims based on the Private Securities Litigation
Reform Act of 1995, and declined supplemental jurisdiction over the remainder of the Zohar

8

All third-party defendants named in the RICO Defendants' third-party claims include: MBIA
Insurance Corporation, MBIA, Inc., AMZM, U.S. Bank, Credit Value Partners, L.P., Halcyon
Capital Management, L.P., Cooperatieve Rabobank U.A., and Yarde Partners, Inc. (D.I. 1, Ex.
L)
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Funds' state law claims. (D.I. 18, Ex. B) As to the RICO Defendants' counterclaims and thirdparty claims, the court directed the parties to submit additional briefing by January 26, 2018,
explaining why the court should retain jurisdiction over the third-party claims and why these
claims qualify as an impleader action under Federal Rule of Civil Procedure 14. (Id. at 35-36)
5. Tilton's State Court Actions

On November 13, 2017, Tilton, Octaluna, LLC, Octaluna II, LLC, Patriarch Partners
VIII, LLC, and Patriarch Partners XIV, LLC filed an action in the Superior Court of Arizona
against Zohar I, Zohar II, and AMZM seeking a declaratory judgment that Tilton is the beneficial
owner of the stock in MD Helicopters, Inc. (D.I. 33, Ex. A at 23) On November 22, 2017,
Tilton and her affiliated entities filed a motion to expedite the declaratory relief proceeding,
which remains pending with the state court. (Id.) The named defendants filed a motion to
dismiss on January 12, 2018 for lack of personal jurisdiction and forum non conveniens, which
remains pending with the court. (Id.)
On November 13, 2017, Tilton, Octaluna III, LLC, and Patriarch Partners XV, LLC filed
an action in California state court against Zohar III and AMZM seeking a declaratory judgment
that Tilton is the beneficial owner of Stila. (Id. at 24) On January 12, 2018, Zohar III and
AMZM filed a motion to dismiss for lack of personal jurisdiction and/arum non conveniens,
which remains pending with the court. (Id.) A hearing on the motion to dismiss, as well as
Tilton's motion for trial preference, is scheduled for March 5, 2018. (Id.)
On November 13, 2017, Tilton, Octaluna, LLC, Octaluna II, LLC, Patriarch Partners
VIII, LLC, Patriarch Partners XIV, LLC, and Patriarch Partners XV, LLC filed an action in
Michigan state court against the Zohar Funds and AMZM seeking a declaratoryjudgment that
Tilton is the beneficial owner of Dura Buyer and GAS. (Id. at 25) Tilton filed a motion to

10

expedite the declaratory relief proceeding on November 22, 2017. (Id.) A hearing on this
motion was scheduled for February 2, 2018. (Id.) On January 12, 2018, the Zohar Funds and
AMZM filed a motion to dismiss for lack of personal jurisdiction and forum non conveniens,
· which is still pending with the court. (Id.)

6. The Removed Action
On November 14, 2017, the Zohar Funds filed the removed action in Delaware Chancery
Court against Defendants, asserting claims under 6 Del. C. § 18-110,9 6 Del. C. § 18-111, 10 and 8
Del. C. § 225 (the "Removed Action"). 11 (D.I. 1-1 at 70-81) The Removed Action seeks an

order validating written consents executed by the Zohar Funds, as equity owners of the portfolio
LLCs and IMG, which remove Tilton as the sole manager or director of those companies and
replace her with Zohar Fund appointees. The Zohar Funds simultaneously filed a motion for
expedited proceedings. (D.I. 1-1 at 88-99) On November 29, 2017, the Zohar Funds filed an

9

6 Del. C. § 18-110 provides that "[u]pon application of any member or manager, the Court of
Chancery may hear and determine the validity of ... election, appointment, removal or
resignation of a manager of a limited liability company, and the right of any person to become or
continue to be a manager of a limited liability company, and, in case the right to serve as a
manager is claimed by more than 1 person, may determine the person or persons entitled to serve
as managers."
10

6 Del. C. § 18-111 provides that "[ a]ny action to interpret, apply or enforce the provisions of a
limited liability company agreement, or the duties, obligations or liabilities of a limited liability
company to the members or managers of the limited liability company, or the duties, obligations
or liabilities among members or managers and of members or managers to the limited liability
company, or the rights or powers of, or restrictions on, the limited liability company, members or
managers, or any provision of this chapter, or any other instrument, document, agreement or
certificate contemplated by any provision of this chapter, may be brought in the Court of
Chancery."
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The Zohar Funds argued at oral argument that they filed the Removed Action in direct
response to Tilton's filing three state court actions on November 13, 2017. The Zohar Funds
"sought to centralize ownership issues to Delaware." (Tr. at 46:1-14)

11

amended complaint. (D.I. 1-1 at 196) The Zohar Funds contend that on December 14, 2017,
Vice Chancellor Slights scheduled an oral argument on the motion to expedite. (D.I. 5 at 17)
On December 14, 2017, Defendants removed the case to this court. (D.I. 1) Also on
December 14, 2017, the Zohar Funds filed the pending motion to expedite. (D.I. 7) On
December 19, 2017, the Zohar Funds filed the pending motion to remand (D.I. 4), and
Defendants filed the pending motion to transfer (D.I. 7). The court heard oral argument on the
pending motions on January 30, 2018.

7. Related Case
On January 12, 2018, Zohar I and Zohar II filed an action against Octaluna, LLC,
Octaluna II, LLC, Patriarch Partners VIII, LLC and Patriarch Partners XIV, LLC ("Related Case
Defendants") in Delaware Chancery Court. (C.A. 18-108-JFB-SRF, D.I. 1, Ex. A) The
complaint seeks declarations that Zohar I and Zohar II are the owners of controlling stock
interests in MD Helicopters, Inc. and Vulcan Engineering Company. (Id.) On January 18, 2018,
the Related Case Defendants removed the action to this court. (C.A. 18-108-JFB-SRF, D.I. 1)
On February 2, 2018, the Related Case Defendants filed a motion to dismiss or stay the related
case pending resolution of the RICO Case and Tilton's Arizona state court action, or, in the.
alternative, to ~ansfer venue to the SDNY. (Id., D.I. 4) On February 7, 2018, Zohar I and Zohar

II filed a motion to remand the case to Delaware Chancery Court. (Id., D .I. 6) As of the date of
this Report and Recommendation, these motions remain pending before the court.

III.

LEGAL STANDARD

A. Remand
To remove a case to federal district court, a party must establish that the district court has ·
original jurisdiction by either a federal question or diversity of citizenship. 28 U.S.C. §§ 1331,

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1332, 1441. "Only state court actions that originally could have been filed in federal court may
be removed to federal court by the defendant." Kline v. Security Guards, Inc., 386 F.3d 246, 252
(3d Cir. 2004) (quoting Caterpillar Inc. v. Williams, 482 U.S. 386,392 (1987)). If the case could
not have been filed originally in federal court, then removal under 28 U.S.C. § 1441 is improper
and remand is appropriate. Id. (citations omitted). "The presence or absence of federal-question
jurisdiction is governed by the well-pleaded complaint rule, which provides that federal
jurisdiction exists only when a federal question is presented on the face of the plaintiff's properly
pleaded complaint." Kline v. Sec. Guards, Inc., 386 F.3d 246,251 (3d Cir. 2004) (internal
citations and quotation marks omitted).
A federal court must remand a removed case "[i]f at any time before final judgment it
appears that the district court lacks subject matter jurisdiction." 28 U.S.C. § 1447(c). The party
seeking removal bears the burden of demonstrating that removal is proper. Steel Valley Auth. v.

Union Switch Signal Div., 809 F.2d 1006, 1010 (3d Cir. 1987); Zaren v. Genesis Energy, L.P.,
195 F. Supp. 2d 598,602 (D. Del. 2002). According to the Third Circuit Court of Appeals, it "is
settled that the removal statutes are to be strictly construed against removal and all doubts should
be resolved in favor ofremand." Steel Valley Auth. v. Union Switch Signal Div., 809 F.2d 1006,
1010 (3d Cir. 1987). In determining whether remand based on improper removal is appropriate,
the court "must focus on the plaintiff's complaint at the time the petition for removal was filed."

Id.; Abels v. State Farm Fire & Cas. Co., 770 F.2d 26, 29 (3d Cir. 1985).

B. Transfer of Venue
Section 1404(a) of Title 28 of the United States Code grants district courts the authority
to transfer venue "[ f]or the convenience of parties and witnesses, in the interests of justice ... to
any other district or division where it might have been brought." 28 U.S.C. § 1404(a). Much has

13

...

been written about the legal standard for motions to transfer under 28 U.S.C. § 1404(a). See,
e.g., In re Link_A_Media Devices Corp., 662 F.3d 1221 (Fed. Cir. 2011); Jumara v. State Farm
Ins. Co., 55 F.3d 873 (3d Cir. 1995); Helicos Biosciences Corp. v. Illumina, Inc., 858 F. Supp. 2d
367 (D. Del. 2012).
Referring specifically to the analytical framework described in Helicos, the court starts
with the premise that a defendant's state of incorporation has always been "a predictable,
legitimate venue for bringing suit" and that "a plaintiff, as the injured party, generally ha[s] been
'accorded [the] privilege ofbringing an action where he chooses."' 858 F. Supp. 2d at 371
(quoting Norwood v. Kirkpatrick, 349 U.S. 29, 31 (1955)). Indeed, the Third Circuit in Jumara
reminds the reader that "[t]he burden of establishing the need for transfer ... rests with the
movant" and that, "in ruling on defendants' motion, the plaintiffs choice of venue should not be
lightly disturbed." 55 F.3d at 879 (citation omitted).
The Third Circuit goes on to recognize that,
[i]n ruling on§ 1404(a) motions, courts have not limited their consideration to the three
enumerated factors in§ 1404(a) (convenience of parties, convenience of witnesses, or
interests of justice), and, indeed, commentators have called on the courts to "consider all
relevant factors to determine whether on balance the litigation would more conveniently
proceed and the interests of justice be better served by transfer to a different forum."
Id. (citation omitted). The Court then describes some of the "many variants of the

private and public interests protected by the language of§ 1404(a)." Id.
The private interests have included: plaintiffs forum of preference as
manifested in the original choice; the defendant's preference; whether
the claim arose elsewhere; the convenience of the parties as indicated
by their relative physical and financial condition; the convenience of
the witnesses - but only to the extent that the witnesses may actually
be unavailable for trial in one of the fora; and the location of books
and records (similarly limited to the extent that the files could not be
produced in the alternative forum).

14

The public interests have included: the enforceability of the judgment;
practical considerations that could make the trial easy, expeditious, or
inexpensive; the relative administrative difficulty in the two fora
resulting from court congestion; the local interest in deciding local
controversies at home; the public policies of the fora; and the
familiarity of the trial judge with the applicable state law in diversity
cases.

Id. (citations omitted).

IV.

DISCUSSION

A. Motion to Remand
Before this court addresses the motions to transfer venue and expedite proceedings, the
court must determine whether it has jurisdiction to do so. See Minker v. HSB Indus. Risk

Insurers, 2000 WL 291542, at *2 (D. Del Mar. 14, 2000). The Zohar Funds assert that this
ccmrt lacks subject matter jurisdiction and, therefore, should remand the case to Delaware
Chancery Court. (D.I. 5 at 13) In turning to the jurisdictional analysis, for the reasons set forth
below, the court recommends that Plaintiffs' motion to remand be granted.
Defendants removed this case pursuant to the federal removal statute, 28 U.S.C. § 1441.
Defendants' primary basis for removal of the case is federal question jurisdiction under 28
U.S.C. § 1331 ("The district courts shall have original jurisdiction of all civil actions arising
under the Constitution, laws, or treaties of the United States."). Defendants argue that this action
arises under the laws of the United States and presents a federal question because commencing
this action in Delaware Chancery Court was the Zohar Funds' attempt to "artfully escape federal
jurisdiction by seeking a defensive declaratory judgment in anticipation ofTilton's affirmative
federal claims under the Edge Act." (D.I. 1 at ,r 19) These alleged "affirmative federal claims"
concern "the damages Tilton and her affiliated entities suffered at the hands of Zohar I, U.S.
Bank, and MBIA resulting from the improper and illegal purported transfer of the IMG auction

15

shares (as well as significant additional equity in other portfolio companies) to MBIA through
the Zohar I Auction."· (Id.)
Generally, federal question jurisdiction turns on theface of the plaintiffs well-pleaded
complaint. See Franchise Tax Bd. ofState of Cal. v. Constr. Laborers Vacation Trust for S. Cal.,
463 U.S. 1, 9-10 (1983). "Plaintiffs claim must present a federal question 'unaided by anything
alleged in anticipation of avoidance of defenses which it is thought the defendant may
'

interpose."' Skelly Oil Co. v. Phillips Petroleum Co., 339 U.S. 667,672 (1950). However,
application of the well-pleaded complaint rule is particularly difficult in declaratory judgment
actions. 12 The Supreme Court has found that a narrow exception to this rule exists in the context
of certain "coercive" actions for declaratory judgment. Medtronic, Inc. v. Mirowski Family
Ventures, LLC, 134 S. Ct. 843, 848 (2014). In such instances, courts look not only to the

declaratory plaintiffs complaint, but also to the "character of the threatened action" that the
declaratory defendant "could bring" in considering federal question jurisdiction. Id. "That is to
say, they ask whether 'a coercive action' brought by 'the declaratory judgment defendant ...
would necessarily present a federal question."' Id. (quoting Franchise Tax, 463 U.S. at 19).
"In many actions for declaratory judgment, the realistic position of the parties is
reversed." Public Service Commission of Utah v. Wycoff Co., 344 U.S. 237,248 (1952). When

12

The Zohar Funds argue that in order for the coercive action doctrine to apply, the suit must be
only a declaratory judgment action, and the complaint in the Removed Action "does not seek
solely declaratory relief." (D.I. 5 at 15) That is, the Zohar Funds argue that the complaint seeks
"coercive relief' beyond a declaratory judgment. The Zohar Funds seek coercive relief in
"removing Tilton as manager of the portfolio companies at issue and installing Plaintiffs'
appointees into office." Id. The court assumes the "coercive relief' the Zohar Funds attempt to
argue refers to additional claims for relief, such as for equitable or injunctive relief, or money
damages in addition to a declaration from the court. The court does not need to address the
Zohar Funds' argument because application of the coercive action doctrine to the facts of the
case in issue does not affect the recommendation that the case return to Delaware Chancery
Court.
16

determining jurisdiction, the court must examine the structure of the suit by conceptually
realigning the declaratory judgment claims and parties, as they would appear in a coercive suit.
If the coercive suit could not be brought in federal court, there is no federal court jurisdiction in

the related declaratory judgment action. But, "[w ]here the complaint in an action for declaratory
judgment seeks in essence to assert a defense to an impending or threatened state court action, it
is the character of the threatened action, and not of the defense, which will determine whether
there is federal-question jurisdiction in the District Court." Id. A common application of this
doctrine occurs in suits between patent holders and alleged patent infringers. See, e.g.,

Medtronic Inc., 134 S. Ct. at 843. In such suits, an alleged infringer may file an action seeking a
declaratory judgment that he is not violating any patents, or that the patents at issue are invalid.
Because this declaratory judgment is meant to defend against an eventual claim against the
declaratory judgment plaintiff for patent infringement, federal courts have consistently
recognized jurisdiction on the theory that an infringement suit by the defendant would clearly
raise a federal question. See Franchise Tax, 463 U.S. at 27 n.19.
The U.S. Supreme Court first considered the coercive action doctrine in Wycoff,
ultimately concluding there was no basis to support a declaratory judgment action filed in federal
court in defense of heading off impending or threatened state court litigation. Wycoff, 344 U.S.
at 249. The court ruled that if the defendant in a declaratory judgment action threatens to assert a
cause of action that does not itself involve a claim under federal law, it is doubtful if a federal
court may entertain an action for declaratory judgment establishing a defense to the threatened
claim. Id. at 248. In Wycoff, the plaintiff, an entity engaged in transportation of films and
newsreels in Utah, brought a declaratory judgment action in federal court against the Utah Public
Service Commission seeking a declaration that such transportation constituted interstate

17

commerce. Id. at 239. However, the Supreme Court could see no purpose to the declaratory
judgment action other than to guard against a potential state court suit by the Public Service
Commission to hinder the transportation entity from operating under its certificate from the
Interstate Commerce Commission. Questioning whether a justiciable controversy even existed,
the Supreme Court focused on the character of the threatened action by the declaratory judgment
defendant. Id. at 248. A declaratory judgment action has the practical effect of reversing the
alignment of a plaintiff and defendant in a suit. Id. Thus, when the declaratory judgment
plaintiff seeks, in essence, to assert a defense to an impending or threatened state court action, it
is the character of the threatened action, the "coercive action," and not of the declaratory
complaint, which will determine if federal question jurisdiction exists. Id. In other words, a
federal court will not "seize" litigation from state court merely because one, normally a
. defendant, goes to federal court to begin his federal law defense before litigation begins in state
court under state law. Id.
In the instant case, Defendants argue for application of the coercive action doctrine to a

state declaratory judgment action removed to federal court. The U.S. Supreme Court declined to
extend the coercive action doctrine in such a case. See Franchise Tax, 463 U.S. at 28. In
Franchise Tax, a state tax board filed a state court declaratory judgment action against a labor

union trust for money damages due to the trust's alleged failure to pay certain tax levies of a
nominai amount and for a declaration that state statutes authorizing the lax levies were not
.preempted by the Employment Retirement Security Act of 1974 ("ERIS A") as asserted by the
defendant trust. Id. at 5-7. The Supreme Court followed the "well-pleaded complaint rule"
emphasizing that it "has been settled law that a case may not be removed to federal court on the
basis of a federal defense, including the defense of preemption, even if the defense is anticipated

18

in the plaintiffs complaint and even if both parties admit that the defense is the only question
truly at issue." Id. at 14. The Court ruled that settled law did not change just because the
removed case was a declaratory judgment action and the question of federal law was a necessary
element of the declaratory judgment claim. Id. The Court held that the suit by state tax
authorities to enforce its levies and to declare the levies notwithstanding ERISA, was neither a
creature ofERISA itself nor a suit turning on a question of federal law. Id. at 25-27. Relying
upon the limitations of federal court jurisdiction pronounced in Skelly Oil, the Court held that
federal courts do not have jurisdiction, originally or upon removal, of a state declaratory
judgment action that presents a federal question which would be barred by Skelly Oil if the
plaintiff had sought a federal declaratory judgment. Id. at 19. Thus, it remains the case that the
only relevant inquiry is whether the declaratory judgment action sets forth claims arising under
federal law.
Although the Court of Appeals for the Third Circuit has never directly addressed the
coercive action doctrine, 13 it has favorably cited another circuit's interpretation of the coercive
action doctrine. See Honeywell Int'! Inc. v. Int'! Union, United Auto., Aerospace & Agric.
Implement Workers ofAm., 502 Fed. Appx. 201 at n.4 (3d Cir. 2012) (citing Stuart Weitzman,
LLC v. Microcomputer Res., Inc., 542 F .3d 859, 863 (11th Cir. 2008) ("Federal question

13

1

In La Chemise Lacoste v. Alligator Co., Inc., an opinion pre-dating Franchise Tax, the court
appeared to reject the doctrine. 506 F.2d 339, 342-45 (3d Cir. 1974), cert. denied, 421 U.S. 937
(1975) (holding that Wycoff does not apply to removal cases because the declaratory proceeding
in Wycoff originated in federal court and given the "congressional policy of severe abridgment"
of the right of removal). However, after Franchise Tax, it is at best questionable whether that
aspect of Lacoste is still good law. See City ofPittsburgh v. UPMC, 2013 WL 4010990, at *4
(W.D. Pa. Aug. 6, 2013) ("Since this court is bound by the subsequent decision of the Supreme
Court in Franchise Tax, the court concludes that, although Lacoste has never been explicitly
overruled, the holding in Franchise Tax implicitly calls its holding into question."); see also Nw.
Cent. Pipeline Corp. v. Mesa Petroleum Co., 576 F. Supp. 1495, 1501 (D. Del. 1983) ("It is
unclear after Franchise Tax whether that aspect of Lacoste is still good law.").
19

jurisdiction exists in a declaratory judgment action if the plaintiff has alleged facts in a wellpleaded complaint which demonstrate that the defendant could file a coercive action arising
under federal law.") (emphasis in original)); see also Metropolitan Life Ins. Co. v. Price, 501
F.3d 271,277 n. 4 (3d Cir. 2007) (noting that, in "the declaratory judgment context, '[f]ederal
courts have regularly taken original jurisdiction over ... suits in which, if the declaratory
- judgment defendant brought a coercive action to enforce its rights, that suit would necessarily
present a federal question."') (alterations in original) (quoting Franchise Tax, 463 U.S. at 19):
Following the well-pleaded complaint rule and first looking at the face of the Zohar
Funds' complaint, the Zohar Funds' claims do not arise under federal law, and arise purely under
Delaware law._ Specifically, the complaint brings causes of action pursuant to 6 Del. C. §§ 18110, 18-111, and 8 Del. C. § 225. (D.I. 1-1 at 274-286) Because the "law that creates the cause
of action" is state law, this court does not have jurisdiction to sustain removal. Franchise Tax,
463 U.S. at 13. The parties do not dispute this. Rather, Defendants argue that the coercive
action doctrine applies in this instance, and that the court must instead look to the "character of
the threatened action" that Defendants "could bring" in determining whether this court has
federal question jurisdiction. See Medtronic, 134 S. Ct. at 848. Defendants argue that the Zohar
Funds filed this action in state court in order to "artfully escape federal jurisdiction" for the
coercive action claims Defendants could- and did- bring against Zohar I, U.S. Bank, and
MBIA for the damages Tilton and her affiliated entities suffered as a result of the "improper and
illegal purported transfer of the IMG auction shares to MBIA through the Zohar I Auction and
related claims." (D.I. 1 at ,i 19) Defendants argue that Tilton has claims arising out of the Zohar
I Auction against U.S. Bank and, therefore, the Edge Act provides the court jurisdiction in the

20

-•

present action. 14 Defendants claim that Tilton "threatened" to bring this coercive action, and on
December 27, 2016 sought leave to amend the Auction Case complaint to add claims for money
damages resulting from the completed auction and to add Tilton as a plaintiff. (D.I. 1, Ex. H)
The SDNY court denied leave to amend, and dismissed the case. (Id., Exs. I, J) Thus, according
to Defendants, the Zohar Funds were aware that "Tilton's federal claims remained, waiting to be
filed elsewhere." (D.I. 17 at 11)
There is no precedent for Defendants' argument that a federal court must retain federal
question jurisdiction of a removed declaratory judgment action in which it is alleged that the
federal question is intentionally sidestepped through the plaintiffs "artful pleading." In the case
at bar, it is undisputed that the declaratory judgment action avers claims over the ownership and
control of Delaware business entities under Delaware law. At oral argument, Defendants argued
that the Zohar Funds purposely "peeled away" U.S. Bank from this case in order to avoid federal
jurisdiction pursuant to the Edge Act. (Tr. at 33:9-15) However, the Zohar Funds do not have a
claim against U.S. Bank, nor do they have a basis to initiate the Removed Action in federal
court. This action relates to the ownership and control of the portfolio Delaware LLCs, which
the Zohar Funds and Tilton have often litigated in state forums. For example, the Zohar Funds
first filed the 2016 Chancery Case over the ownership and control of three portfolio companies.
In response, Tilton asserted counterclaims that she owned the equity not only to those three
companies, but to all other portfolio companies as well. (D.I. 33 at 9) And, prior to the Zohar
Funds' initiating this Removed Action, Tilton filed three state court actions in Arizona,

14

The Edge Act provides for federal subject matter jurisdiction over suits to which "any
corporation organized under the laws of the United States shall be a party" that arise out of
"transactions involving international or foreign banking ... or out of other international or foreign
financial operations" of such corporation. 12 U.S.C. § 632.
21

California, and Michigan over the ownership and control of four portfolio companies, three of
which are at issue here. Therefore, the Zohar Funds did not "artfully plead" their claims in order
to avoid federal court jurisdiction. 15 The court finds no legal authority to justify a
recommendation that federal question jurisdiction exists due to a potential defense that may
involve a potential third-party subject to a federal statute, the Edge Act, despite the fact that the
transactions forming the basis of the state law claims, on the face of the complaint, do not tum on
a question of federal law.
Moreover, the coercive action doctrine does not confer federal question jurisdiction for
any and all claims that may relate to a declaratory judgment action. Rather, when there is a
declaratory judgment action, it is to be closely related to a viable federal coercive claim. 16 Here,
the court finds that there is no nexus between the Zohar Funds' declaratory judgment action and
Defendants' alleged coercive action claims. According to Defendants, because a portion of the
IMG auction shares were voted to replace Tilton as· IMG's director by written consent, this
means any claim related to ownership or control of IMG must be a preemptive strike against

15

The court finds Defendants' contention that the Zohar Funds' claims were "artful[ly]
plead[ ed]" ... "to keep this case away from a federal court in New York" (D.I. J 7 at 12-13)
ironic, considering Defendants initiated their own state court actions regarding the ownership of
the portfolio companies, three of which are at issue here. Judge Pauley addressed this in his
December 29, 2017 opinion dismissing the Zohar Funds' RICO Case claims. See Zahar CDO
2003-1, Ltd. v. Patriarch Partners, LLC, No. 17CV3.07, 2017 WL 6628609, at *14 (S.D.N.Y.
Dec. 29, 2017) ("Also ... worth noting is the irony behind [d]efendants' contention that Zohar has
engaged in 'gamesmanship' ... That they would stymie the Zohar's efforts to litigate these
corporate control cases elsewhere, yet at the same time file their own claims in far-flung state
forums, underscores this [c]ourt's determination that absent a valid RICO claim, the remaining
common law claims should be resolved by state court~.").
16

The parties refer to this notion as the "mirror image rule." (D .I. 5 at 15; D .I. 17 at 9-18; D .I.
25 at 3-8) Becausethe Supreme Court cases discussed herein (see Wycoff, 344 U.S. 237;
Franchise Tax, 463 U.S. 1; and Medtronic, 134 S. Ct. 843) do not use this terminology in
determining the coercive action underlying the declaratory judgment suit at issue, the court
declines to use such terminology.

22

their alleged Auction Case claims. The facts here, and the Supreme Court cases on which
Defendants rely, do not support such an argument. U.S. Bank is not a party to this action, and
Tilton and the Zohar Funds were not named parties in the Auction Case. (D.I. 1, Ex. B) Despite
the foregoing, Defendants argue that federal question jurisdiction exists because "the cases
instruct that the relevant question is the nature of the 'coercive action' or 'suit' available to the
declaratory judgment defendant, not the claims available against the declaratory judgment
plaintiff or any other specific party." (D.I. 17 at 14) (emphasis in original) In support of this
argument, Defendants cite to Franchise Tax and Medtronic. 17 (Id.) However, neither Franchise

Tax nor Medtronic make such an expansive holding, and the coercive actions that the declaratory
judgment defendants "could have brought" were against the declaratory judgment plaintiffs.
Even if the court found some nexus between Defendants' Auction Case claims against
U.S. Bank and the Zohar Funds' filing of this action, the court cannot hold, as Defendants
contend, that this suit necessarily anticipated the "federal" causes of action raised in Defendants'
third-party claims filed in the RICO Case. See Nw. Cent. Pipeline, 576 F. Supp. at 1503. First,
while the Auction Case Plaintiffs sought leave to amend the Auction Case complaint in order to
add Tilton as a plaintiff and raise claims for damages, the SDNY denied this request and
dismissed the action eleven months before the Zohar Funds brought this Removed Action.

17

Defendants also cite to a Second Circuit case as additional support of their argument that the
relevant question is the nature of the "coercive action" available to the declaratory judgment
defendant, not the claims available against the declaratory judgment plaintiff or any other
specific party. See Garanti Finansal Kiralama A.S. v. Aqua Marine & Trading Inc., 697 F.3d 59
(2d Cir. 2012). However, in Garanti, the court held that "a complaint seeking a declaratory
judgment is to be tested, for purposes of the well-pleaded complaint rule, as if the party whose
adverse action the declaratory judgment plaintiff apprehends had initiated a lawsuit against the
declaratory judgment plaintiff." Id. at 68. As in Franchise Tax and Medtronic, the court
determined it had federal jurisdiction because the "hypothetical coercive suit" the declaratory
judgment defendant could bring against the declaratory judgment plaintiff was under federal
admiralty law. Id. at 71 (emphasis added).
23

Second, prior to the filing of this complaint, Tilton and her affiliates brought their own state
cour:t claims regarding the ownership of four portfolio companies, one of which - MD
Helicopters, Inc. - was listed on the auction notice, in addition to IMG, in the Auction Case, yet
U.S. Bank is not a named party. 18 (D.I. 1, Ex.Eat 5) Finally, Defendants did not originally
raise the alleged Auction Case claims in the Zohar Funds' RICO Case; they moved to dismiss the
action. Only after the Zohar Funds filed the complaint in this Removed Action, and while
Defendfil!.ts' motion to dismiss was still pending, did the RICO Defendants file their answer,
counterclaims, and third-party claims relating to their alleged Auction Case damages. (D.I. 1,
Ex. L) This was contrary to the RICO Defendants' original position wherein they challenged the
SDNY court's subject matter jurisdiction, and contrary to traditional procedure under the Federal
Rules of Civil Procedure. 19 Thus, the court does not find that the Zohar Funds initiated this suit
in anticipation of Defendants' "threatened" federal causes of action.
The court finds it telling that, before filing the purported coercive action Edge Act thirdparty claims against the Zohar Funds in the SDNY, Defendants argued lack of subject matter
jurisdiction of the RICO Case in the SDNY court, the very venue where Defendants now seek to
transfer this action. While the pending motions in this Removed Action were still sub judice, the
. SDNY issued an opinion dismissing the Zohar Funds' RICO Case claims. In the opinion, Judge

Pauley declined to exercise supplemental jurisdiction over the Zohar Funds' remaining state law

18

At oral argument, Defendants argued that they "are not suggesting that there is Edge Act
jurisdiction there [in Tilton's Arizona state court action], and the reason that U.S. Bank is not in
that case is because those are the very claims that [Defendants] anticipated filing in the Federal
Court in the Southern District [ofNew York]." (Tr. at 37:7-11)
19

Federal Rule of Civil Procedure 12(a)(4) provides that the filing of a motion under Rule 12
tolls the time to respond to a complaint until fourteen days after the motion is decided. Fed. R.
Civ. P. 12(a)(4).

24

claims, reasoning that those claims were more appropriately addressed in Delaware Chancery
Court. The court stated:
[T]he simple fact that Zohar filed an action in Delaware Chancery Court similar
to the one here does not militate in favor of this [c]ourt' s exercise of supplemental
jurisdiction. If anything, permitting the state law claims here to proceed in a
Delaware state court would uphold values of comity and fairness. The Delaware
Chancery Court seems best positioned to adjudicate the remaining state law
claims since an action predating this case - the November 2016 [Chancery Case]
- already raised issues pertaining to Zohar's ownership and control over three
portfolio companies, and the latest November 2017 Delaware Action [this
Removed Action] implicates purported control of eleven of the portfolio
companies ... The Delaware court is an ideal forum to resolve those equity-related
questions because Defendants filed counterclaims in the November 2016
Delaware Action concerning the equity ownership of several other companies including companies that are the subject of Plaintiffs' [Removed Action]
complaint and Defendants' new state-court complaints in three other states ...
There is substantial overlap between the factual and legal questions invoked' by
each of the parties' claims in the November 2016 and November 201 7 Delaware
Actions. And all such claims are pending before the same judge in Delaware
Chancery Court, who is eminently qualified to resolve them. 20

Zahar CDO 2003-1, Ltd. v. Patriarch Partners, LLC, No. 17CV307, 2017 WL 6628609, at *14
(S.D.N.Y. Dec. 29, 2017). In addition to dismissing the Zohar Funds' claims, the SDNY court
questioned whether it has an independent basis for federal jurisdiction over Defendants' thirdparty complaint, which asserted RICO and the Edge Act as grounds for jurisdiction. Id. at *15.
But because the court dismissed the RICO claim, it ruled that Defendants may not rely on the
RICO statute to create an independent jurisdictional basis for their own claims. As to the Edge
Act, the court found Defendants' reliance "unavailing" because, under the well-pleaded

20

At oral argument, Defendants argued that this holding may have been based on Judge Pauley's
"erroneous impression" that this Removed Action "was still pending in Delaware Chancery
Court," although it had been removed. (Tr. at 49:7-17) However, the court finds that Judge
Pauley's holding is relevant even though the Removed Action was no longer pending in
Delaware Chancery Court. Even if the Delaware Chancery Court only had one case before it the 2016 Chancery Case- that action relates to the equity as to all the portfolio companies due to
Tilton's asserted counterclaims.
25

complaint rule, "federal question jurisdiction exists only if plaintiff's statement of his own cause
of action shows that it is based on federal law ... 'a defendant may not evade this rule by raising a
federal question in its responsive pleadings."' Id. at * 16 (internal citations omitted). As a result,
Judge Pauley directed Defendants "to explain why th[ e] [c]ourt should exercise jurisdiction over
the [t]hird [p]arty [c]omplaint and why the claims therein qualify for an impleader action under
Federal Rule of Civil Procedure 14." Id. at *16. As of the date of this Report and
Recommendation,' this issue remains pending in the SDNY.
Because the Zohar Funds' complaint does not raise a federal question on its face, the
complaint was not "artfully pled" to avoid federal jurisdiction, and Defendants do not have a
coercive action against the Zohar Funds that invokes federal question jurisdiction, I recommend
that this case be remanded to Delaware Chancery Court.
1. Plaintiffs' Request for Fees

Pursuant to 28 U.S.C. § 1447(c), "[a]n order remanding the case may require payment of
just costs and any actual expenses, including attorney fees, incurred as a result of the removal."
When removal of an action is improper, the plaintiff may be. entitled to recover attorney's fees,
costs, and expenses associated with opposing removal, regardless of whether the action was
'removed in bad faith. See Mints v. Educational Testing Serv., 99 F.3d 1253, 1259 (3d Cir.
1996). However, an award of fees is appropriate only when "the removing party lacked an
objectively reasonable basis for seeking removal." Martin v. Franklin Capital Corp., 546 U.S.
132, 141 (2005). "[A] district court has broad discretion and may be flexible in determining
whether to require the payment of fees under section 1447(c)." Mints, 99 F.3d at 1260.
Having considered the record presently before the court and the parties' submissions, the
court concludes that Defendants' notice of removal is objectively unreasonable. Specifically,

26

Defendants' notice of removal is based solely on its third-party claims against U.S. Bank, who is
not a party in this case, stemming from an unrelated action where Plaintiffs were not a party. No
authority cited by Defendants supports the expansive interpretation of the coercive action
doctrine that federal subject matter jurisdiction can,be established as a result of any claim a
decl¥atory judgment defendant may have, even if it is not against the declaratory judgment
plaintiff. Consequently, the court recommends granting Plaintiffs' request for fees.
On or before February 28, 2018, Plaintiffs are to provide the court and opposing counsel
with an accounting of attorneys' fees and costs, limited to expenses incurred as the result of the
removal. Plaintiffs are to attach a form of Order for the relief requested. Defendants may file a
response, if any, on or before March 14, 2018.

B. Motion to Transfer
Having concluded that remand is warranted, I recommend that the court deny as moot
Defendants' motion to transfer venue. (D.I. 7)

C. Motion to Expedite Proceedings
Having concluded that remand is warranted, I recommend that the court deny as moot
Plaintiffs' motion to expedite the proceedings. (D.I. 24)
V.

CONCLUSION

For the foregoing reasons, I recommend the court grant Plaintiffs' motion to remand and
request for fees, and deny as moot Defendants' motion to transfer and Plaintiffs' motion to
expedite proceedings. (D.I. 4; D.I. 7; D.I. 24)
This Report and Recommendation is filed pursuant to 28 U.S.C. § 636(b)(l)(B), Fed. R.
Civ. P. 72(b)(l), and D. Del. LR 72.1. The parties may serve and file specific written objections
within fourteen (14) days after being served with a copy of this Report and Recommendation. Fed.

27

R. Civ. P. 72(b)(2). The objection and responses to the objections are limited to ten (10) pages
each. The failure of a party to object to legal conclusions may result in the loss of the right to de
novo review in the District Court. See Sincavage v. Barnhart, 171 F. App'x 924,925 n.1 (3d Cir.
2006); Henderson v. Carlson, 812 F.2d 874, 878-79 (3d Cir. 1987).
The parties are directed to the court's Standing Order For Objections Filed Under Fed. R.
Civ. P. 72, dated October 9, 2013, a copy of which is available on the court's website,
http://www.ded.uscourts.gov.

Dated: February tl_, 2018

28