Patel et al v. Patel et al
Filing
22
ORDER granting 14 Motion to Dismiss for Lack of Jurisdiction. Signed by Judge B. Avant Edenfield on 10/6/14. (bcw)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF GEORGIA
SAVANNAH DIVISION
NARENDA C. PATEL, individually and
as assignee of GOPAL INC. and NSP
CORP.,
Plaintiff,
4:14-cv-117
V.
SANMUKH PATEL, BHARTI PATEL,
and JITEN PATEL,
Defendants.
I]1 )I
I. INTRODUCTION
Plaintiff Narendra C. Patel, individually
and as assignee of GOPAL Incorporated
("GOPAL") and N.S.P. Corporation
("NSP"), seeks recovery from Sanmukh
Patel, Bharti Patel, and Jiten Patel
("Defendants") for breach of fiduciary duty,
conversion, breach of contract, money had
and received, and unjust enrichment, and
from Defendant Sanmukh Patel for fraud.
ECF No. 8 at 6-10. Defendants have moved
to dismiss Plaintiff's complaint pursuant to
Fed. R. Civ. P. 12(b)(1) on the ground that
assignment of GOPAL's and NSP's claims
against the Defendants to Plaintiff violates
28 U.S.C. § 1359's proscription against
creation of diversity jurisdiction through
collusive assignments of claims. ECF No.
14-5 at 3.
For the reasons set forth below, the
Court finds that GOPAL's and NSP's
assignment of their claims against
Defendants to Plaintiff violates 28 U.S.C. §
1359 and that Plaintiff has failed to
sufficiently plead his fraud claim.
Therefore, the Court GRANTS Defendants'
motion to dismiss.
II. BACKGROUND
Plaintiff, a California citizen, is a fifty
percent shareholder in GOPAL and NSP and
has been since each corporation was
incorporated. ECF No. 8 at 1, 3. Both
GOPAL and NSP are Georgia domestic
corporations. Id. at 2. Defendants, all
Georgia citizens, were collectively fifty
percent shareholders of GOPAL and NSP.
Id. at 1-3. Additionally, Defendant Sanmukh
Patel was the Chief Executive Officer
("CEO") of both GOPAL and NSP. Id.
During the time that Sanmukh was CEO and
Defendants were all shareholders of GOPAL
and NSP, Plaintiff alleges that Defendants
converted corporate funds for their own
personal use while misleading Plaintiff as to
GOPAL's and NSP's financial statuses. Id.
at 4-6.
On April 4, 2012, Defendants sold their
shares in GOPAL and NSP to Sudhir and
Indu Patel, Rameshchandra and Bhavika
Patel, Alpesh and Kalpu H. Patel, and
Ramkrusbna and Mitali R. Patel
("Purchasing Group"). Id. at 3. On May 21,
2014, GOPAL and NSP assigned to Plaintiff
any claims they may have against
Defendants, id. at 4, and on July 14, 2014,
Plaintiff filed this diversity action. Id. at 1.
III. STANDARD OF REVIEW
"[A] motion to dismiss for lack of
subject matter jurisdiction pursuant to Fed.
R. Civ. P. 12(b)(1) can be based upon either
facial or factual challenge to the complaint."
McElmurray v. Consul. Gov 't of Augusta-
Richmond Cnty., 501 F.3d 1244, 1251 (11th
Cir. 2007) (citing Williamson v. Tucker, 645
F.2d 404, 412 (5th Cir. 1981)). When the
challenge is facial, the usual safeguards of
Fed. R. Civ. P. 12(b)(6) apply; therefore,
"the court must consider the allegations in
the plaintiffs complaint as true."
Id.
(quoting Williamson, 645 F.2d at 412).
However, where the attack is factual,
McElmurray, 501 F.3d at 1251 (quoting
Williamson, 413 F.2d at 413).
Here, Defendants factually attack subject
matter jurisdiction, because they "challenge
the existence of subject matter jurisdiction in
fact, irrespective of the pleadings."
Lawrence, 919 F.2d at 1529 (internal
quotation marks omitted). The issue of fact
is whether GOPAL's and NSP's assignment
of their claims against Defendants to
Plaintiff violates 28 U.S.C. § 1359. Plaintiff
bears "the burden of proving by a
preponderance of the evidence that the trial
court does have subject matter jurisdiction."
See Paterson v. Weinberger, 644 F.2d 521,
523 (5th Cir. 1981).'
the trial court may proceed as it
never could under [Fed. R. Civ. P.]
12(b)(6) or Fed. R. Civ. P. 56.
Because at issue in a factual 1 2(b)( 1)
motion is the trial court's
jurisdiction—its very power to hear
the case—there is substantial
authority that the trial court is free to
weigh the evidence and satisfy itself
as to the existence of its power to
hear the case. In short, no
presumptive truthfulness attaches to
plaintiffs allegations, and the
existence of disputed material facts
will not preclude the trial court from
evaluating for itself the merits of the
jurisdictional claims.
IV. ANALYSIS
The federal diversity jurisdiction statute
requires courts to ensure that parties are not
improperly manufacturing diversity
jurisdiction. Mississippi ex rel. Hood v. AU
Optronics Corp., 134 S. Ct. 736, 745 (2014).
The Supreme Court has held that a plaintiff
may not "create diversity by collusively
assigning his interest in an action" to
another. Id. (citing Kramer v. Caribbean
Mills, Inc. (Kramer II), 394 U.S. 823, 82530 (1969)).
Lawrence v. Dunbar, 919 F.2d 1525, 1529
(11th Cir. 1990) (per curiain) (quoting
Williamson, 645 F.2d at 412-13) (internal
quotation omitted).
The mere fact of an assignment does not
prevent an assignee from invoking diversity
jurisdiction. "[U]nder [28 U.S.C. § 1359],
any assignee can sue in federal court so long
as he was not improperly or collusively
made a party in order to invoke federal
Thus, when assessing a Rule 12(b)(1)
motion, the Court may dismiss the
complaint on any of three distinct bases:
"'(1) the complaint alone; (2) the complaint
supplemented by undisputed facts evidenced
in the record; or (3) the complaint
supplemented by undisputed facts plus the
courts resolution of disputed facts."
'The decisions of the United States Court of Appeals
for the Fifth Circuit entered prior to the close of
business on September 30, 1981 are binding
precedent in the Eleventh Circuit. Banner v. City of
Prichard, Ala., 661 F.2d 1206, 1209 (11th dr. 1981).
2
jurisdiction."
Caribbean Mills, Inc. v.
Kramer (Kramer I), 392 F.2d 387, 389 (5th
Cir. 1968), aff'd 394 U.S. 823 (1969). Thus,
Section 1359 does not close the door to
federal court on bona fide assignees
regardless of whether the assignor could
have brought the same suit. Id
claims [between closely related entities], a
presumption of collusion is triggered." Id.
Nonetheless, "[t]he scars of others . . . teach
us caution." St. Jerome, Letter 54, quoted in
Bartlett's Familiar Quotations 115 (Geoffrey
O'Brien ed., 18th ed. 2012). Conscious of
the schism between circuits regarding
treatment of these suspect assignments, and
duty-bound "to inquire into the
circumstances and conditions surrounding
the assignment," Dickson v. Tattnall Cnty.
Hosp. Auth., 316 F. Supp. 531, 534 (S.D.
Ga. 1970), the Court examines the
assignment here carefully.
Situations, like the one here, in which
the transfer is between closely related
parties—e.g., a corporation and a
shareholder—"are highly suspect" and "are
subject to even more exacting scrutiny" than
are ordinary assignments. E.g., McCulloch
v. Velez, 364 F.3d 1, 6 (1st Cir. 2004); see
also 13F Charles Alan Wright, Arthur R.
Miller & Edward H. Cooper, Federal
Practice and Procedure § 3639, at 409-10
(3d ed. 2009) ("In the context of transactions
between . . . companies and their
shareholders, the cases make it clear that
assignments that create diversity of
citizenship may be given heightened
scrutiny by the court and must be justified
by legitimate business purposes.").
Although a number circuits have employed a
presumption of impropriety in these
situations, see Nat'l Fitness Holdings, Inc. v.
Grand View Corporate Centre, LLC, 749
F.3d 1202, 1208 n.2 (10th Cir. 2014) (citing
cases), the Eleventh Circuit has joined the
Seventh Circuit in declining to adopt such a
presumption. Ambrosia Coal & Constr. Co.
v. Pages Morales, 482 F.3d 1309, 1314
(11th Cir. 2007) (citing Herzog Contracting
Corp. v. McGowen Corp., 976 F.2d 1062,
1067 (7th Cir. 1992)).
The Eleventh Circuit, as well as other
circuits, have set out the following useful
factors applicable to the Court's inquiry
here: (1) what the nature of assignee's
connection to the assigned claim was before
assignment—e.g., whether assignee is a real
party in interest; (2) whether, but for the
assignment, assignee could have brought its
claim in federal court; (3) whether assignee
provided meaningful consideration for the
assignment; (4) whether assignor retained
any interest in the assigned claim; and (5)
whether a legitimate business purpose
motivated the assignment. See Nat'l Fitness
Holdings, Inc., 749 F.3d at 1205-06;
Ambrosia Coal & Constr. Co., 482 F.3d at
1315-16; Land Holdings (St. Thomas) Ltd. v.
Mega Holdings, Inc., 283 F.3d 616, 619 (3d
Cir. 2002); Harrell & Sumner Contracting
Co. v. Peabody Petersen Co., 546 F.2d
1227, 1229 (5th Cir. 1977); see generally
Wright et al., supra, § 3639, at 393-410.
However, "no single [factor] will be
dispositive." Airlines Reporting Corp. v. S &
N Travel, Inc., 58 F.3d 857, 863 (2d Cir.
1995).
As such, there is no binding precedent
from "the Supreme Court or the Eleventh
Circuit [holding] that where diversity
jurisdiction is premised on the assignment of
3
I.
For the reasons set forth below, the
Court finds that GOPAL's and NSP's
assignment of claims to Plaintiff was
collusive in violation of 28 U.S.C. § 1359.
contractual obligations owed to corporations
are properly derivative actions.
There are, however, exceptions to these
general rules. For instance, a shareholder
may proceed individually in a direct action
if the "shareholder alleges a 'special injury'
that would allow a personal cause of action."
Phoenix Airline Servs., Inc. v. Metro
Airlines, Inc., 397 S.E.2d 699, 701 (Ga.
1990). Adopting the rationale of the
Supreme Court of Delaware, the Supreme
Court of Georgia has concluded that because
recovery in "individual. . . actions goes to
the suing shareholders, not their
corporation[,] . . . the plaintiff must allege
more than an injury resulting from a wrong
to the corporation." Id. at 702 (quoting
Kramer v. W. Pac. Indus., 546 A.2d 348,
351 (Del. 1988)).
A. Plaintiff is Not the Real Party in
Interest
Plaintiff, in his individual capacity and
as assignee of GOPAL and NSP's rights,
brings claims for breach of fiduciary duty,
conversion of corporate funds, breach of
contract, money had and received, and
unjust enrichment. ECF No. 8 at 6-12. In
the context of corporate litigation, "[s]tate
law determines whether a cause of action is
direct or derivative." Hantz v. Belyew, 194
F. App'x 897, 900 (11th Cir. 2006).
GOPAL and NSP are both Georgia
corporations. ECF No. 8 at 2. Therefore,
the law of Georgia determines whether a
claim regarding injuries to GOPAL and NSP
is derivative or direct. Hantz, 194 F. App'x
at 900 ("Georgia applies the law of the state
of incorporation to derivative actions.").
Plaintiff argues that his claims are direct and
that he is therefore the real party in interest.
Alternatively, in the context of a closely
held corporation, "a direct action may
nevertheless be proper . . . where the
circumstances show that the reasons for the
general rule requiring a derivative suit do
not apply." McWhorter, 720 S.E.2d at 275
(emphasis omitted) (quoting Work, 639 at
Those reasons for requiring a
577).
derivative suit are:
But, in Georgia, "the general rule is that
allegations of misappropriation of corporate
assets and breach of fiduciary duty can only
be pursued in a shareholder derivative suit
brought on behalf of the corporation,
[because] the injury is to the corporation and
its shareholders collectively." Southland
Propane, Inc. v. McWhorter, 720 S.E.2d
270, 275 (Ga. Ct. App. 2011). Similarly,
because "a shareholders' derivative suit is
brought on behalf of the corporation for
harm done to it," Sw. Heath & Wellness,
L.L. C. v. Work, 639 S.E.2d 570, 576 (Ga. Ct.
App. 2006), claims alleging breach of
"(1) to prevent multiple suits by
shareholders; (2) to protect corporate
creditors by ensuring that the
recovery goes to the corporation; (3)
to protect the interest of all the
shareholders by ensuring that the
recovery goes to the corporation,
rather than allowing recovery by one
or a few shareholders to the
prejudice of others; and (4) to
adequately compensate injured
4
I
shareholders by increasing their
share values."
Id (quoting Work, 639 S.E.2d at 577).
For the following reasons, the Court
finds that Plaintiff's claims are derivative.
Therefore, GOPAL and NSP, not Plaintiff,
are the real parties in interest on Plaintiff's
claims alleging breach of fiduciary duty,
conversion, breach of contract, money had
and received, and unjust enrichment.
1.
Plaintiff Has Not
Alleged a Special
Injury
Plaintiff argues, essentially, that he is the
only remaining shareholder to whom the
Defendants owed fiduciary duties and,
therefore, he has suffered a separate and
distinct injury. This argument misconstrues
the concept of corporate fiduciary duties.
As a preliminary matter, as former
officers and managing shareholders of
GOPAL and NSF, Defendants owed
fiduciary duties not only to Plaintiff as a
shareholder, but also to GOPAL and NSP.
See Quinn v. Cardiovascular Physicians,
P.C., 326 S.E.2d 460, 463 (Ga. 1985) ("It is
settled law that corporate officers and
directors occupy a fiduciary relationship to
the corporation and its shareholders. . .
Thus, any breach of fiduciary duty as to
Plaintiff was also a breach of fiduciary duty
as to GOPAL and NSP.
Further, Georgia courts have interpreted
the "special injury" exception to require "an
injury different from and more than the
William
wrong to the corporation."
Goldberg & Co., Inc. v. Cohen, 466 S.E.2d
872, 881 (Ga. Ct. App. 1995) (emphasis
added). Thus, "[t]o gain the right to sue
directly, the shareholder must be injured
directly-independently of the corporation's
injury." Id. at 882 (emphasis omitted).
In considering the distinction between
direct and derivative claims in the context of
a suit under the Uniform Limited
Partnership Act, the Court of Appeals of
Georgia explained "[t]he distinction between
derivative and individual actions rests upon
the party being directly injured by the
alleged wrongdoing." Hendry v. Wells, 650
S.E.2d 338, 347 (Ga. Ct. App. 2007)
(quotation omitted). "[I}n other words, the
question turns on 'the nature of the injury
alleged and the entity which sustains the
harm." Id. (quoting Lenz v. Associated Inns
& Restaurants Co. ofAm., 833 F. Supp. 362,
380 (S.D.N.Y. 1993)). Elaborating on
Kramer v. Western Pacific Industries, Inc.,
546 A.2d 348 (Del. 1988), on which the
Supreme Court of Georgia relied for the
"special injury" exception, the Supreme
Court of Delaware explained that "a court
should look to the nature of the wrong and
to whom the relief should go" in
determining whether a claim is direct or
derivative. Tooley v. Donaldson, LuJJdn &
Jenrette, Inc., 845 A,2d 1031, 1039 (Del.
2004). That is, in order to sustain a direct
claim "[t]he stockholder must demonstrate
that the duty breached was owed to the
stockholder and that he or she can prevail
without showing an injury to the
corporation." Id. (emphasis added). This
explication of the distinction between direct
and derivative claims comports with
Georgia's requirement for an injury
independent of the corporation's injury. See
William Goldberg & Co., Inc., 466 S.E.2d at
881-82.
Here, Plaintiff has failed to show that
Defendants' alleged breach of fiduciary
duties caused him any specific harm
independent of the harm GOPAL and NSP
suffered. Instead, he argues only that he has
suffered ham, different than GOPAL, NSP,
and other shareholders because he was the
only shareholder at the time of the alleged
misconduct. However, in such situations
only a derivative action is allowed because,
the Plaintiff's "claims are founded upon
injuries which are no different from that
suffered by the corporation" and Plaintiff
cannot prevail without also showing an
injury to GOPAL and NSP. See Grace
Bros., Ltd. v. Fancy Indus., Inc., 450 S.E.2d
814, 817 & n.9 (Ga. 1994).
Therefore, the Court finds that Plaintiff
has not suffered a "special injury" sufficient
to confer standing for a direct action.
2.
The Closely Held
Corporation
Exception is
Inapplicable Here
In the context of a closely held
corporation, a shareholder may proceed in a
direct action even where the "special injury"
exception is inapplicable. See Thomas v.
Dickson, 301 S.E.2d 49, 50-51 (Ga. 1983).
In order for this closely held corporation
exception to apply, "the circumstances
[must] show that the reasons for the general
rule requiring a derivative suit do not
apply." McWhorter, 720 S.E.2d at 275
(emphasis omitted) (quoting Work, 639
S.E.2d at 577).
Here, Plaintiff has not presented any
argument as to why the reasons for requiring
a derivative suit here do not apply.
However, a review of the circumstances
show that the general rule requiring a
derivative suit do indeed apply here.
Allowing Plaintiff to proceed directly
against Defendants would prejudice
GOPAL's and NSP's other shareholders.
While GOPAL and NSP have assigned their
claims against the Defendants to Plaintiff,
there is nothing in the record indicating the
Purchasing Group has similarly assigned or
otherwise surrendered their interest in any
recovery that might be had from the
Defendants. Thus, if Plaintiff were to
proceed directly against Defendants, he
would potentially recover funds owed to the
corporation and would concomitantly
deprive the Purchasing Group of the
opportunity for any increase in value of their
shares that would come with a corporate
recovery. Cf Work, 639 S.E.2d at 577
(concluding that the closely held corporation
exception did not apply where two
shareholders were not parties to the
litigation and there was no showing that
those shareholders surrendered their interest
in the proceedings). Therefore, the
circumstances here show that the reasons for
requiring a derivative action apply. Plaintiff
may not proceed in a direct action under the
closely held corporation exception.
The Court finds that because Plaintiff
has not alleged a "special injury" sufficient
to confer standing to proceed in a direct
action against the Defendants and because
the closely held corporation exception does
not apply, Plaintiff's assigned claims can
proceed only as a derivative action;
therefore, GOPAL and NSP are the real
parties in interest. See Kilburn v. Young,
536 S.E.2d 769, 771-72 (Ga. Ct. App. 2000)
("Because the right of action for corporation
wrongs is in the corporation, the plaintiff
shareholder in a derivative suit is at best a
nominal plaintiff, and the corporation is the
real party in interest.").
Here, Plaintiff is suing Sanmukh Patel,
former GOPAL and NSP CEO and
shareholder, as well as the other former
GOPAL and NSP active shareholders. ECF
No. 8 at 3. Plaintiff seeks recovery of
corporate money that he alleges Defendants
converted while they were in a position of
active control of GOPAL and NSP. Id. at 46.
B. But For the Assignment,
Plaintiff Could Not Have
Brought These Claims in
Federal Court
In light of the fact that Defendants are no
longer shareholders and are no longer in
active control of (3OPAL and NSP, it is
clear that Plaintiffs, GOPAL's, and NSP's
interests—i.e., recovery of converted
corporate funds—are aligned here.
Therefore, after joining GOPAL and NSP
initially as defendants, GOPAL and NSP
would be realigned as plaintiffs in this
derivative action. Because GOPAL and
NSP both are Georgia corporations and
Defendants all are Georgia citizens, Id. at 12, this alignment of interests would destroy
diversity and divest federal courts of
jurisdiction over Plaintiff's derivative
action. See Triggs v. John Crump Toyota,
Inc., 154 F.3d 1284, 1287 (11th Cir. 1998)
("Diversity jurisdiction requires complete
diversity; every plaintiff must be diverse
from every defendant.").
Having established that Plaintiff's
assigned claims are derivative in nature, it is
clear that but for GOPAL's and NSP's
assignment, Plaintiff could not have brought
these claims in federal court.
"There is no question that a corporation
is an indispensable party in a derivative
action. brought by one of its shareholders."
Libby v. Urbanek, 707 F.2d 1222, 1224
(11th Cir. 1983). The corporation properly
is first aligned as a defendant, thus ensuring
the corporation's presence. Id. However,
once joined, the corporation is then
realigned according to a practical
determination of the parties' real interests.
Id. Such a determination is to be "resolved
by the pleadings and the nature of the
dispute." Id. (quoting Smith v. Sperling,
354 U.S. 91, 97 (1957)). Only where
corporate management actively "is
'antagonistic' to the plaintiff shareholder"
should the corporation remain a defendant.
See Id. Where corporate management's and
the shareholder plaintiffs interests are not
actively adverse, however, the corporation
properly is realigned as a plaintiff. Id.
Therefore, but for the assignment,
Plaintiff could not have brought this action
in federal court.
C. The Consideration Exchanged
for GOPAL and NSP's
Assignment Was Illusory
"Having decided that absent an
assignment this action would have to be
dismissed," the Court turns to the question
of whether GOPAL's and NSP's
7
assignments were bona fide absolute
assignments. See Harrell & Sumner
Contracting Co., 546 F.2d at 1229; see also
Ambrosia Coal & Constr. Co., 482 F.3d at
131.
contractus rule, ECF No. 21 at 3, or basic
common law contract principles,
forbearance to sue on a claim is not
sufficient consideration "when the claim is
wholly invalid or worthless."
See
Michaelian v. State Comp. Ins. Fund, 58
Cal. Rptr. 2d 133, 145 (Cal. Ct. App. 1996);
Restatement (Second) of Contracts § 74(1)
(1981) ("Forbearance to assert or the
surrender of a claim or defense which
proves to be invalid is not consideration...
.").
Plaintiff argues that his promise not to
sue GOPAL and NSF constitutes sufficient
consideration, because, he "had a legal right
to sue GOPAL and NSP... but gave up that
right. . . ." ECF No. 21 at 3. However, as
explained above, Plaintiff has no legal
claims against GOPAL or NSP to surrender.
Rather, his derivative claims are properly
brought against Defendants for their alleged
malfeasance as shareholders and officers of
GOPAL and NSF. Because Defendants no
longer are active shareholders or officers of
GOPAL and NSF, GOPAL and NSP merely
would initially be joined as nominal
defendants in Plaintiffs derivative claims.
When realigned according to interests,
Plaintiff would not have a claim against
GOPAL or NSP. Instead, Plaintiff would be
the nominal plaintiff pursuing claims on
behalf of the real plaintiffs in interest,
GOPAL and NSF.
Federal jurisdiction is proper where the
assignment is a bona fide absolute transfer
of a claim, regardless of the motives of the
assignment. See Ambrosia Coal & Constr.
Co., 482 F.3d at 1315; see also Kramer II,
394 U.S. at 828 n.9 (finding that where the
transfer is absolute, "transfer is not
improperly or collusively made, regardless
of the transferor's motive." (internal
quotation marks omitted)).
Plaintiff argues that the assignment here
was an absolute transfer, focusing on the
fact that neither GOPAL nor NSP has
retained any interest in the assigned claim.
See ECF Nos. 15 at 3; 21 at 2. However, in
doing so, Plaintiff focuses on but one factor
courts look to in considering whether a
transfer is collusive or not. In addition to
considering whether the assignee is the real
party in interest and whether the assignor
retains any interest in the assigned claim, the
Supreme Court and the Eleventh Circuit also
have "examined the consideration
exchanged for the assigned claim." See
Ambrosia Coal & Constr. Co., 482 F.3d at
1315.
Here, GOPAL and NSP have assigned
their claims to Plaintiff in exchange for his
promise not to file a lawsuit against them
"unless the sums taken by [Defendants]
cannot be recovered from [Defendants]."
ECF No. 8 at 55, 58. Regardless of whether
the Court applies California law, as Plaintiff
argues it should under Georgia's lexi
Therefore, because Plaintiff did not have
a claim against GOPAL or NSF, his
forbearance to sue GOPAL and NSP cannot
provide sufficient consideration for
GOPAL's and NSP's assignment of their
claims against Defendants.
8
D. Plaintiff Has Failed to
Show that the Assignments
Were For a Legitimate
Business Purpose
Even under the heightened scrutiny for
transactions between a corporation and a
shareholder, a legitimate business purpose
can justify an assignment that creates
diversity of citizenship. Wright et al., supra,
§ 3639, at 410 & n.32; see cf Ambrosia
Coal & Constr. Co., 482 F.3d at 1316
(upholding an assignment of a claim where
assignee was real party in interest, it existed
for a purpose aside from prosecuting
assigned claims, and consideration for
assignment allowed provided assignee a
reduction in tax liability—a legitimate
business purpose). Plaintiff has failed to
show a legitimate purpose here.
GOPAL's and NSP's CEO, Shilash
Patel, stated that GOPAL and NSP made the
assignments here so that Plaintiff "could
recover money rightfully owed to him for
the Defendants' wrongful acts . . . in
exchange for Plaintiff agreeing not to sue
the corporations because GOPAL and NSP
were aware that Plaintiff could file suit
against the corporations for his losses
incurred if he chose to do so." ECF No. 153 at 2-3 (Affidavit of Shilash Pate!).
Perhaps foretelling the weakness of Shilash
Patel's assertion, Plaintiff has referred to the
business purpose not as a legitimate
purpose, but merely as a "stated business
purpose." ECF 21 No. at 6.
To be sure, as Plaintiff argues, the
"business purpose is clearly identified in the
affidavit." Id. However, it is equally clear
that Plaintiff has sought "to have a firm
anchor in nonsense [rather] than to put out
on the troubled seas of thought." See John
Kenneth Galbraith, The Affluent Society
131 (4th prtg. 1998). When parsed in light of
the discussion above, the Court finds that
while the purpose is clear, it is far from
legitimate. At bottom, GOPAL and NSP
have assigned all of the recovery owed to
them to a fifty percent shareholder in
exchange for that shareholder's promise not
to bring a suit against them that the
shareholder could not have properly brought
in the first place. Thus, GOPAL and NSP
have surrendered what is rightfully theirs in
exchange for absolutely nothing and called it
business.
Accordingly, the Court finds that
Plaintiff has failed to offer a legitimate
business purpose for GOPAL's and NSP's
assignment of their claims to him.
E. Plaintiff's Fraud Claim
In addition to the derivative claims,
Plaintiff also asserts a fraud claim against
Defendant Sanmukh Patel. ECF No. 8 at 7.
Specifically, Plaintiff alleges that Sanmukh
made various false representations to him
regarding GOPAL's and NSP's profitability
in order to conceal his conversion of
corporate funds. See Id
Plaintiff has argued that even if the
assignment violated 28 U.S.C. § 1359,
"dismissal of his individual claims would be
improper." ECF No. 21 at 8. In their
Answers, Defendants assert Plaintiff has
failed to state a claim upon which relief can
be granted. ECF Nos. 11 at 1; 12 at 1; 13 at
1. Though neither party has briefed the
Court on Plaintiffs fraud claim, the Court
finds that Plaintiff has failed to satisfy the
S
particularity requirements of Fed. R. Civ. P.
9(b).
Further, Plaintiff has failed to show that
the claim assignment was a bona fide
absolute transfer. First, Plaintiff's
forbearance from suit was not sufficient
consideration because Plaintiff had no legal
claim against GOPAL and NSP to surrender.
Second, Plaintiff has failed to show that
GOPAL and NSP assigned their claims to
Plaintiff for a legitimate business purpose.
The Eleventh Circuit has held that
"pursuant to Rule 9(b), a plaintiff must
allege: '(1) the precise statements,
documents, or misrepresentations made; (2)
the time, place, and person responsible for
the statement; (3) the content and manner in
which these statements misled the Plaintiffs;
and (4) what the defendants gained by the
alleged fraud." Am. Dental Assn v. Cigna
Corp., 605 F.3d 1283, 1291 (11th Cir. 2010)
(quoting Brooks v. Blue Cross & Blue Shield
of Fla., Inc., 116 F.3d 1364, 1380-81 (11th
Cir. 1997)).
Therefore, the Court
GRANTS
Defendant's motion to dismiss Plaintiff's
claims for breach of fiduciary duty,
conversion of corporate funds, breach of
contract, money had and received, and
unjust enrichment. Plaintiff has asked that
the Court allow leave to refile the assigned
claims with GOPAL and NSP added as
defendants should the Court dismiss the
assigned claim. The Court will not do so.
As explained above, after realignment
according the parties' real interests, the
Court still will lack jurisdiction over the
derivative action. Accordingly, the Clerk is
directed to DISMISS Plaintiff's breach of
fiduciary duty, conversion, and breach of
contract claims WITH PREJUDICE.
Here, Plaintiff has not alleged the
specific times and places of Defendant
Sanmukh Patel's misrepresentations.
Therefore, he has failed to state a claim
under Rule 9(b)'s heightened pleading
standards.
V. CONCLUSION
For the above reasons, the Court finds
that GOPAL's and NSP's assignment of
their claims arising out of Defendant's
alleged conversion of corporate funds to
Plaintiff violated 28 U.S.C. § 1359's
proscription against collusive assignments.
The Court will, however, allow Plaintiff
leave to refile his individual fraud claim
against Defendant Sanmukh Patel if he can
satisfy Fed. R. Civ. P. 9(b)'s heightened
pleading requirements. Therefore, the Clerk
is directed to DISMISS Plaintiffs fraud
claim WITHOUT PREJUDICE.
Plaintiff is not the real party in interest
here. Rather, Plaintiff's claims are
derivative in nature and therefore GOPAL
and NSP are the real parties in interest.
Because Plaintiffs claims against
Defendants are derivative and GOPAL's,
NSP's, and Plaintiff's interests align,
Plaintiff could not have brought these claims
in federal court but for the assignment, since
realignment of the parties' interests would
destroy diversity.
This
day of October 2014.
B. AVANT EDENFIELDAUDGE
UNITED STATES DI*ICT COURT
SOUTHERN DISTRICT OF GEORGIA
10
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