STUART et al v. CHIN et al
Filing
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ORDER granting 23 Motion for Leave to file a second amended complaint. By December 27, 2011, the parties must SHOW CAUSE, in writing, why this case should not be remanded to the Hamilton Superior Court for lack of subject matter jurisdiction. (See Order) Signed by Magistrate Judge Debra McVicker Lynch on 12/13/2011. (TMA)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF INDIANA
INDIANAPOLIS DIVISION
ROBERT R. STUART and
ROBERT R. STUART, INC.,
Plaintiffs,
v.
TOLA R. CHIN, SR., TOLA R. CHIN, JR.,
MARCIA CHIN, and QINS, INC.,
Defendants.
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) Case No. 1:11-cv-0686-TWP-DML
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Order Granting Motion for Leave to Amend Complaint
This matter is before the court on the motion (Dkt. 23) by plaintiff Robert R. Stuart and
his company Robert Randall Stuart, Inc. (together, “Stuart”) to file a second amended complaint
that adds state law breach of fiduciary duty, tortious interference, and tortious conversion claims
as derivative claims on behalf of Strategic Sourcing, LLC, and that adds Strategic Sourcing, LLC
as a party-plaintiff.1 The proposed second amended complaint makes other changes to the
current complaint, but they are primarily changes in structure rather than substance and are not a
source of the parties’ dispute about whether Stuart should be granted leave to amend.
Stuart was spurred to bring the new derivative claims and add Strategic Sourcing, LLC as
a party in response to a motion to dismiss filed by the current defendants. In that motion
(Dkt. 12), the defendants argue that Stuart’s complaint is deficient because it purports to assert,
1
Although Stuart puts Strategic Sourcing, LLC on the plaintiff side of the caption, it likely
should be on the defendant side. See BI3, Inc. v. Hamor, 2011 WL 5023394 at *11 (N.D. Ill.
Oct. 20, 2011) (citing Smith v. Sperling, 354 U.S. 91 (1957)) (when company’s management is
antagonistic to the individual plaintiff in derivative case, the company should be aligned as a
party defendant). As explained below, placement of the LLC on the plaintiff or defendant side
has no effect on the question presented by the motion.
as direct claims, actions that belong to Strategic Sourcing, LLC and therefore may be asserted, if
at all, only as derivative claims.2 Stuart has responded to that argument by seeking leave to
amend to add derivative claims on behalf of Strategic Sourcing. The defendants oppose leave
because adding Strategic Sourcing as a party destroys the court’s diversity jurisdiction. The
members of Strategic Sourcing are plaintiff Robert R. Stuart and defendant Tola R. Chin, Sr., so
no matter whether Strategic Sourcing is on the plaintiff or defendant side of the caption, it would
share citizenship with a person on the other side and complete diversity is not possible. See
Strawberry v. Curtiss, 7 U.S. (3 Cranch) 267, 2 L.Ed. 435 (1806) (section 1332 diversity
jurisdiction requires complete diversity of all plaintiffs from all defendants); White Pearl
Inversiones S.A. (Uruguay) v. Cemusa, Inc., 647 F.3d 684, 686 (7th Cir. 2011) (citizenship of
limited liability company is the citizenship of each of its members).3
The defendants argue that the court should not permit Stuart to “manipulate” this court’s
jurisdiction by adding a non-diverse party and that under Rule 19 principles, because the case
should not go forward without Strategic Sourcing, the case should be dismissed for nonjoinder.
But as explained below, the defendants cannot prevail on both sides of their argument. They
have not employed the correct analytical framework, and application of the correct legal standard
2
The defendants have filed another motion to dismiss based on lack of personal
jurisdiction (Dkt. 10).
3
Stuart’s proposed amended complaint does not properly allege the citizenship of any of
the parties. For the individuals, the proposed complaint gives their states of “residence,” which
is not the same as their citizenship (Meyerson v. Harrah’s East Chicago Casino, 299 F.3d 616,
617 (7th Cir. 2002)), and for Qins, Inc., the complaint does not provide the state of its principal
place of business (see 28 U.S.C. § 1332(c)(1)). In the usual case, these deficiencies would not
permit the court to determine whether it might possess diversity jurisdiction. Here, however,
because Strategic Sourcing has the same citizenship as its two members, and its two members are
on opposite sides of the caption from each other, then it follows that no matter the states of their
citizenship (but assuming each is a citizen of one of the states), if Strategic Sourcing is a party, it
shares citizenship with someone on the other side of the caption.
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demonstrates that Stuart should be granted leave to amend to add Strategic Sourcing. That, the
court acknowledges, will result in this case’s remand to Hamilton Superior Court, from which
the defendants removed it.
Analysis
A. Section 1447(e) applies and governs the issue before the court.
The defendants posit a confusing patchwork for the court’s analyses of whether a plaintiff
should be permitted to amend his complaint to add a non-diverse party that will destroy the
court’s subject matter jurisdiction. They suggest that Rule 19 governs all questions of party
joinder by an amended complaint. But they also maintain that adding a party can never affect the
court’s subject matter jurisdiction, despite their acknowledgment that 28 U.S.C. § 1447(e)
governs the question before the court. Stuart has it right: Where a case has been properly
removed based on the court’s diversity jurisdiction, 28 U.S.C. § 1447(e), which was added to
section 1447 in 1988, directly governs the question whether the plaintiff should be permitted to
add a non-diverse party:
If after removal the plaintiff seeks to join additional defendants whose joinder
would destroy subject matter jurisdiction, the court may deny joinder, or permit
joinder and remand the action to the State court.
As provided in the statute, the post-removal joinder of a non-diverse defendant does
prevent the district court from continuing to exercise subject matter jurisdiction, and therefore
the court has two choices only: deny joinder of the new party and keep jurisdiction of the case
or allow joinder—destroying diversity—and remand to state court. See Schur v. L.A. Weight
Loss Centers, Inc., 577 F.3d 752, 759 (7th Cir. 2009). “[T]he district court may not permit
joinder of a nondiverse defendant and retain jurisdiction.” Id.
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The court’s selection of one choice over the other is one of discretion to be guided by
“the equities.” Id. The Schur case is the first by the Seventh Circuit to adopt factors for the
district court to consider in exercising that discretion. The court should consider: “(1) the
plaintiff’s motive for seeking joinder, particularly whether the purpose is to defeat federal
jurisdiction; (2) the timeliness of the request to amend; (3) whether the plaintiff will be
significantly injured if joinder is not allowed; and (4) any other relevant equitable consideration.”
Id.
The court will address each factor in turn.
B. Stuart’s Motive for Joining Strategic Sourcing
The first factor—examining whether the plaintiff’s motive for seeking to join the
nondiverse party is to defeat federal jurisdiction—is not exactly the same as the “fraudulent
joinder” inquiry. Schur, 577 F.3d at 763-64. The fraudulent joinder inquiry applies when a case
is initially removed to federal court. It permits a district court to disregard the citizenship of a
non-diverse defendant originally named if the court finds that there is no reasonable possibility
that a plaintiff could succeed on the merits of any claim against the non-diverse defendant. Id.
The doctrine—which does not require any “fraud” by the plaintiff or motive that the plaintiff
named the defendant because it wanted to prevent federal jurisdiction—is very difficult to
establish, and it does not need to be established as part of the court’s section 1447(e) analysis.
Id. Even if a plaintiff’s proposed claims against a non-diverse defendant are plainly viable, the
court may still consider whether the joinder request appears to be designed to defeat federal
jurisdiction. Id. But where the claims appear to lack reasonable basis in fact or law, the motive
to defeat jurisdiction becomes plainer. Id. at 767.
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The defendants have argued that in order for Stuart to bring derivative claims, Strategic
Sourcing must be a party to this case, and they have urged the court to dismiss Stuart’s current
complaint on the grounds that Stuart’s claims are in fact derivative in nature and cannot survive
in any forum unless they are brought as derivative claims. (See Dkt. 13, at p. 1). Stuart’s request
for leave to add Strategic Sourcing as a party is therefore on the opposite end of the spectrum
from the situation the fraudulent joinder doctrine addresses. There is no suggestion that the
fiduciary duty-related tort claims that Stuart seeks now to bring derivatively have no possibility
of success on the merits. Rather, there is a strong argument (as made by the defendants in their
motion to dismiss) that the claims cannot succeed on the merits without Strategic Sourcing in the
case.4 It just so happens that Strategic Sourcing’s presence deprives the court of diversity
jurisdiction.
Stuart’s motive weighs in favor of granting leave to amend.
C. Timeliness of Stuart’s Motion for Leave to Amend
Stuart filed his complaint in state court on May 3, 2011, a forum in which Strategic
Sourcing’s and the defendants’ citizenship are irrelevant except insofar as citizenship may bear
on personal jurisdiction. The defendants removed the action on May 20, 2011, and on May 24,
2011, moved to dismiss the case on the grounds that Stuart’s claims were derivative in nature but
he had not brought them derivatively. Stuart moved for leave to amend on July 11, 2011, about
seven weeks later. The court has not yet held an initial pretrial conference nor entered a case
4
The defendants have argued: “Plaintiffs’ Amended Complaint must be dismissed for
failure to state a claim upon which relief must be granted because applicable Nevada law does
not recognize a direct action by a member of an LLC for the harm alleged here. Further,
although Nev. R. Stat. § 86.483-86.489, inclusive permits a member of an LLC to bring a
derivative action, Plaintiffs have not only failed to do so, but have also failed to comply with presuit and pleading requirements.” Dkt. 13 at p. 1. The defendants have reserved the right,
however, to challenge the legal sufficiency of the amended claims.
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management plan. Stuart acted promptly enough, and the court does not find that he was
dilatory.
D. Injury to Stuart if Joinder Is Not Allowed
The defendants have made Stuart’s argument for him on the question whether he will be
injured if not permitted to name Strategic Sourcing as a party. See Ross v. Bernhard, 396 U.S.
531, 538-39 (1970) (noting general rule that the corporate entity is a necessary party to a
derivative action and “without it the case cannot proceed”). According to the defendants,
applicable Nevada law would not permit direct claims. (See Dkt. 13 at pp. 3-5). If they are right,
then the viability of Stuart’s claims may be dependent on Strategic Sourcing’s presence as a
party and Stuart would be adversely affected if joinder is not allowed. 5
The court disagrees with the defendants’ suggestion that this factor—whether Stuart
would be injured if joinder is not allowed—requires an analysis under Rule 19 and that only if
the court finds that Strategic Sourcing is “indispensable” (in the old Rule 19 vernacular) may the
court decide that Stuart would be injured if joinder is not allowed. The thrust of the defendants’
argument that Strategic Sourcing is not a Rule 19(b) party is that another court—a Nevada state
court in which defendant Tola R. Chin, Sr. has brought suit against Stuart and named Strategic
Sourcing as a party—could hear and decide Stuart’s claims instead of an Indiana court. The
defendants remain steadfast, however, that Stuart has no claims without Strategic Sourcing as a
5
To be clear, this court does not purport to resolve whether Nevada law (the law under
which Strategic Sourcing was formed) would permit Stuart’s claims to be brought only
derivatively or whether he could bring them in a direct action, as Indiana courts allow in certain
circumstances. See Yessenow v. Hudson, 2009 WL 1543495 at *4-5 (N.D. Ind. June 2, 2009).
The court’s acknowledgment of the defendants’ argument for purposes of deciding this motion
should in no way be considered a determination of the issue, “law of the case,” or the basis of an
estoppel.
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party, and they cite no authority to support their suggestion that the “injury” factor under section
1447(e) requires a showing of “indispensability.”
E. Other Equitable Considerations
The strongest argument in the defendants’ favor for denying Stuart leave to amend is his
decision not to file a substantive response to the current defendants’ challenge to this court’s
personal jurisdiction over them. The defendants moved to dismiss for lack of personal
jurisdiction in May (Dkt. 10), and Stuart advised the court he wanted to take discovery to test the
defendants’ factual assertions regarding their lack of contacts with the state of Indiana and thus
needed more time to respond to the defendants’ motion. The court granted Stuart more time, but
instead of taking discovery and then filing a response to the defendants’ motion, Stuart chose to
seek to amend his complaint. That maneuver, if successful, will send this case back to state
court. The defendants assert that Stuart’s decision not to respond to the motion to dismiss in this
court means that he has conceded that Indiana courts do not have personal jurisdiction. And, if
that is so, then according to the defendants, it makes no sense to permit Stuart leave to amend,
which would result in remand to a state court that Stuart “concedes” lacks personal jurisdiction
over the current defendants.
Although Stuart may ultimately have to concede the personal jurisdiction argument, the
strategy of seeking leave to amend rather than responding on the merits to the defendants’
motion to dismiss for lack of personal jurisdiction is not technically a concession. Stuart’s
strategy was risky, because the court could have chosen to address the merits of the personal
jurisdiction issue before permitting the filing of Stuart’s amended complaint. But the filing of an
amended complaint typically moots an earlier-filed motion to dismiss directed to the prior
complaint. The defendants’ argument is built on the premise that the proposed amended
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complaint does not cure or even address the defect raised in their Rule 12(b)(2) argument. That
may be so, but the court cannot be expected to compare line by line an earlier complaint against
an amended complaint and determine which portions of an earlier Rule 12 motion are still viable
and applicable to the amended complaint. That is the defendants’ task after the amended
complaint is on file (and after the case has been remanded to state court). It may be largely a
“copy and paste” proposition, but it requires a new motion to dismiss directed to the operative
complaint in the case.
This equitable consideration in the defendants’ favor—Stuart’s delay on the personal
jurisdiction issue—is not sufficient, however, to override the other factors favoring leave to
amend. The defendants’ strategy created the very situation they now complain about. The
arguments they have made to this court—personal jurisdiction arguments, Rule 19 arguments,
failure to state direct claims arguments—all could have been raised in state court and determined
on their merits. The defendants made the strategic decision to remove, waiting to assert those
arguments in federal court, and they were within their rights to do so. But Stuart’s request to add
Strategic Sourcing in response to the defendants’ argument that he is without a remedy in its
absence appears to the court a logical consequence of that argument, and not gamesmanship”
and the “crafty application of three dimensional chess” as the defendants label it.
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Conclusion
For the foregoing reasons, the court GRANTS the plaintiffs’ motion for leave to amend their
complaint (Dkt. 23). The amended complaint, at Dkt. 23-1, shall be docketed.
Further, by December 27, 2011, the parties must SHOW CAUSE, in writing, why this case
should not be remanded to the Hamilton Superior Court for lack of subject matter jurisdiction.
So ORDERED.
12/13/2011
Date: ____________________
____________________________________
Debra McVicker Lynch
United States Magistrate Judge
Southern District of Indiana
Distribution:
Monica Renee Brownewell Smith
BARNES & THORNBURG LLP
monica.brownewell@btlaw.com
Andrew J. Detherage
BARNES & THORNBURG LLP
andy.detherage@btlaw.com
Robert A. Garelick
COHEN GARELICK & GLAZIER
bgarelick@cgglawfirm.com
M. Edward Krause III
COHEN GARELICK & GLAZIER
ekrause@cgglawfirm.com
Joshua Thornton Robertson
COHEN GARELICK & GLAZIER
jrobertson@cgglawfirm.com
Eric B. Zimbelman
PEEL BRIMLEY, LLP
ezimbelman@peelbrimley.com
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