Kentucky Retirement Systems v. BHEP GP I, LLC et al

Filing 38

MEMORANDUM OPINION AND ORDER: (1) 35 Motion for Attorney Fees is GRANTED. (2) Pla shall submit evidence detailing the fees and costs w/in 30 days of entry of this Order. (3) If Dfts have objections file those w/in 15 days of Pla's filing. Signed by Judge William O. Bertelsman on 1/22/2020. (SCD)cc: COR

IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF KENTUCKY
CENTRAL DIVISION AT FRANKFURT

CIVIL ACTION NO. 3:18-cv-27 (WOB)
KENTUCKY RETIREMENT SYSTEMS

VS.

PLAINTIFF

MEMORANDUM OPINION AND ORDER

BAY HILLS CAPITAL MANAGEMENT, ET AL.

DEFENDANTS

This case is before the Court on Plaintiff’s Motion for
Attorney Fees (Doc. 35). This Court remanded the case on August
22, 2019, finding that there was no diversity jurisdiction and
that there was no substantial question of federal law presented.
Plaintiff now argues that the Court should award it fees and costs
associated with Defendants’ removal efforts because there was no
objectively reasonable basis for removing the suit to federal court
and removal was a delay tactic intended to bog down the proceedings
in

Kentucky

so

that

Defendants

could

litigate

a

suit

they

preemptively filed in Delaware.
For the reasons stated below, the Court agrees with Plaintiff
and GRANTS the Motion for Attorney Fees.
I.

Factual and Procedural Background

This case started toward litigation when Plaintiff notified
Defendants of its intent to relieve them of their administrative

responsibilities due to alleged improper actions and material
breaches of the parties’ partnership agreements. (Doc. 1-2, ¶¶
130-143). The partnership agreements had a sixty-day notice-tocure period during which Defendants could attempt to cure alleged
defects. (Id. ¶ 128). Rather than attempt to cure, Defendants chose
to

sue

Plaintiff

in

the

Delaware

Chancery

Court

seeking

a

declaration that they had done nothing wrong. (Id. ¶ 129).
After

the

cure

period

expired,

Plaintiff

filed

suit

in

Franklin County Kentucky and soon after filed a motion for a
preliminary injunction. Defendants removed this action on the eve
of the preliminary injunction hearing. Plaintiff then filed a
timely Motion to Remand in June 2018, along with a Motion to
Expedite Briefing and Consideration of that motion (Docs. 4, 5).
On August 22, 2019, this Court granted Plaintiff’s Motion to
Remand, finding that there was no basis for either federal question
or diversity jurisdiction. (Doc. 34). Plaintiff now argues that
Defendants’ attempt to remove the Franklin County action had no
objectively reasonable support in law and was an attempt to stall
the

Franklin

County

action

so

that

Defendants’

pre-emptive

Delaware suit could proceed. Plaintiff asks the Court to award it
fees and costs associated with the removal.
II.

Analysis

District courts have considerable discretion in determining
whether to award attorney’s fees under Section 1447(c). A district
Kentucky Retirement Systems v. Bay Hills Capital Mgmt., et al.
OPINION AND ORDER
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court can award attorney’s fees if either of two criteria is met.
First, the district court can award attorney’s fees where the
removing party “lacked an objectively reasonable basis for seeking
removal.” Martin v. Franklin Capitol Corp., 546 U.S. 132, 141
(2005). Second, the district court can award attorney’s fees if it
concludes that “unusual circumstances” pertaining to the removal
justify a fee award even though there may have been an objectively
reasonable basis for seeking removal. Id. This test recognizes the
desire to deter removals sought for the purpose of prolonging
litigation

and

imposing

costs

on

the

opposing

party,

while

upholding Congress’ basic decision to afford a defendant a right
to remove as a general matter. Id.
A. Defendants Lacked an Objectively Reasonable Basis
Removing Based on Federal Question Jurisdiction
In

arguing

Defendants

that

asserted

federal

that

question

Plaintiff’s

jurisdiction

claims

for

existed,

depended

upon

a

resolution of a substantial question of federal law. In support of
that contention, Defendants insist that there must be a substantial
question because Plaintiff submitted additional authority on the
issue during briefing and the Court devoted several pages to
analyzing the issue in its Order on the motion to remand.
While the Court thoroughly addressed the issue in its Order,
the length of its analysis does not render Defendants’ position
reasonable. The Court’s reasoning can in fact be easily summarized.

Kentucky Retirement Systems v. Bay Hills Capital Mgmt., et al.
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The Sixth Circuit’s decision in Mikulski v. Centerior Energy Corp.,
501

F.3d

555

(6th

Cir.

2007),

identified

four

factors

for

determining whether there is a substantial question of federal
law. Id. at 570. Those factors include (1) whether the case
involves a federal agency; (2) whether the federal question is
important; (3) whether a decision on the federal question will
resolve the case; and (4) whether a decision as to the federal
question will control numerous other cases. Id.
Plaintiff argues that there is no substantial question of
federal law because this case involves claims for breach of
contract and fiduciary duty and merely mentions that Defendants’
conduct amounted to a violation of the Investor Advisory Act
(“IAA”), which the parties had incorporated into the contracts as
the

requisite

standard

of

care.

(Doc.

35-1,

at

6-9).

And

determining whether Defendants violated that standard of care is
a fact-bound and situation-specific issue that the Supreme Court
has said is insufficient to establish federal “arising under”
jurisdiction.
Even though Plaintiff was not bringing a claim under the IAA,
Defendants maintain that the courts would have to interpret and
apply the federal statute in order to resolve the case. (Doc. 36,
at 7-8). The Court disagrees.
There is no substantial question of federal law because the
Complaint did nothing more than mention that Defendants’ conduct
Kentucky Retirement Systems v. Bay Hills Capital Mgmt., et al.
OPINION AND ORDER
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may have amounted to a violation of the IAA. And it mentioned the
IAA only because the parties incorporated compliance with the IAA
into the relevant contracts as a standard of care. Moreover,
determining whether Defendants’ conduct violated the IAA would be
a fact-intensive inquiry that would not require a court to answer
a pure question of federal law that would govern other cases. See
Empire Healthchoice Assur., Inc. v. McVeigh, 547 U.S. 677, 700
(2006) (finding no substantial question where dispute did not
present a nearly pure issue of law that would govern other cases).
Further, answering the federal question would not resolve the
case. Plaintiff cited Defendants’ alleged breach of the IAA as one
of four possible reasons for removing Defendants from their role
as

administrators.

And

it

is

well

established

that

a

claim

supported by alternative theories in a complaint cannot arise under
federal law unless resolving the issue of federal law is essential
to

each

Operating

of

those

Corp.,

theories.
486

U.S.

See

Christianson

800,

810

v.

(1988);

Colt

Indus.

Merrell

Dow

Pharmaceuticals Inc. v. Thompson, 478 U.S. 804, 813 (1986) (“The
mere presence of a federal issue in a state cause of action does
not

automatically

confer

federal

question

jurisdiction.”);

Warthman v. Genoa Twp. Bd. of Trs., 549 F.3d 1055, 1064 (6th Cir.
2008) (noting that a reference to a federal law should be read in
context to ascertain whether the reference states a federal cause
of action or simply supports an element of a state claim).
Kentucky Retirement Systems v. Bay Hills Capital Mgmt., et al.
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Because Defendants failed to show that any one of the above
factors weighs in favor of concluding that there is a federal
question, they could not have possessed an objectively reasonable
belief that there existed a substantial question of federal law.
B. Defendants Lacked an Objectively Reasonable
Removing Based on Diversity Jurisdiction
Defendants

argue

that

removal

was

Basis

reasonable

for

because

Plaintiff held itself out as a “corporate resident” of Kentucky
and not as an arm of the state, implying that there were reasonable
grounds for removing based on diversity jurisdiction. (Doc. 36, at
5-7). Defendants’ position that there was diversity jurisdiction
is premised on a twenty-five-year-old case where the Kentucky
Retirement System failed to protest removal to federal court and
the court did not address the issue and remand the case under its
own volition. (See Doc. 36 Ex. 1).
In light of more recent precedent from the Kentucky Supreme
Court, Defendants’ argument lacks merit. In 2013, the Kentucky
Supreme Court concluded that it is “abundantly clear that the
Kentucky Retirement System is an arm, branch, or alter ego of the
state.” Commonwealth v. Kentucky Ret. Sys., 396 S.W.3d 833, 837
(Ky. 2013). And the Supreme Court has held that if a political
subdivision or state agency is simply the arm or alter ego of the
State, then the agency cannot be deemed a citizen of the state for

Kentucky Retirement Systems v. Bay Hills Capital Mgmt., et al.
OPINION AND ORDER
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diversity purposes. Moor v. Alameda Cnty., 411 U.S. 693, 717-18
(1973).
While Defendants further insist that Plaintiff held itself
out

as

a

“corporate

resident

of

Kentucky”

in

its

verified

Complaint, it did no such thing. Plaintiff merely alleged that it
was a resident of Franklin County for venue purposes and never
once referred to itself as a “corporate resident.” (Compl. [1-2]
¶¶ 4, 17). Defendants’ arguments concerning diversity jurisdiction
are thus objectively unreasonable.
C. There Were Unusual Circumstances Surrounding Defendants’
Removal Efforts
Finally, though removal was timely, unusual circumstances
surrounded it. Removing for the purpose of prolonging litigation
and imposing costs on the opposing party qualifies as an unusual
circumstance that justifies the award of fees. Forever Recovery,
Inc. v. Township of Pennfield, 606 F. App’x 279, 284 (6th Cir.
2015).
When Defendants received notice to cure from Plaintiff, they
promptly

filed

a

preemptory

lawsuit

in

Delaware

before

the

expiration of the sixty-day cure period. When Plaintiff filed suit
in Kentucky and moved for a preliminary injunction, Defendants
filed their notice of removal on the eve of the preliminary
injunction hearing. Defendants’ actions consequently give rise to

Kentucky Retirement Systems v. Bay Hills Capital Mgmt., et al.
OPINION AND ORDER
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a reasonable inference that removal was a delay tactic intended to
stymie Plaintiff’s Kentucky lawsuit.
III. Conclusion
Based on the above, Defendants had no objectively reasonable
belief that removal was proper. And even if Defendants possessed
a reasonable belief, there were unusual circumstances that permit
an inference that Defendants attempted to remove the case as a
delay tactic. Plaintiff should thus be awarded costs and fees
associated with Defendants’ removal efforts. Accordingly, it is
ORDERED that:
(1)Plaintiff’s Motion for Attorney Fees (Doc. 35) be GRANTED,
(2)Plaintiff shall submit evidence detailing the fees and
costs associated with Defendants’ removal efforts within
THIRTY DAYS of entry of this Order,
(3)If Defendants have objections to Plaintiff’s summary of
fees and costs that they file those objections within
FIFTEEN DAYS of Plaintiff’s filing.
This 22nd day of January 2020.

Kentucky Retirement Systems v. Bay Hills Capital Mgmt., et al.
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