Soltesz et al v. Ballard-Hirsch

Filing 10

MEMORANDUM. Signed by Judge J. Frederick Motz on 11/15/12. (bmhs, Deputy Clerk)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MARYLAND
______________________________________
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JAMES A. SOLTESZ, et al.,
)
)
Plaintiffs,
)
)
v.
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Civil Case No.
JFM-12-2422
)
SUSAN E. BALLARD-HIRSCH,
)
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Defendant.
)
______________________________________ )

MEMORANDUM
Plaintiff James A. Soltesz (“Soltesz”) filed this action, individually and derivatively on
behalf of Government Services Integrated Process Team, LLC (“GSIPT” or the “company”)
(collectively, the “plaintiffs”), against defendant Susan E. Ballard-Hirsch (“Ballard-Hirsch”) in
the Circuit Court for Prince George’s County. Although plaintiffs’ complaint alleged two counts
of negligence under Maryland law, Ballard-Hirsch removed the case to this court on August 15,
2012 pursuant to 28 U.S.C. § 1441(a), invoking federal jurisdiction under 28 U.S.C. § 1331.
Now pending before this court is plaintiffs’ motion for remand. The issues have been fully
briefed, and the court finds no hearing is necessary. See Local Rule 105.6. For the reasons
stated below, plaintiffs’ motion for remand is granted.
BACKGROUND
GSIPT is a Maryland limited liability company that was formed in 2003 to perform
program management, engineering, architectural planning, and general consulting services for
federal and state governments and private entities. (Compl. ¶ 6.) Soltesz is a minority member
of GSIPT with a 35 percent ownership interest, and Ballard-Hirsch is the majority member with

a 65 percent share. (Id. at ¶ 10.) In addition to being GSIPT’s majority member, Ballard-Hirsch
is its CEO and managing member. (Id. at ¶ 11.) As its managing member, Ballard-Hirsch is
responsible for the company’s day-to-day operations, including the filing of all tax returns. (Id.
at ¶¶ 11-12.)
When GSIPT was formed, it elected to be taxed as a partnership so profits and losses
would be passed through to the company’s members in accordance with their relative percentage
ownership. (Answer to Mot. for Remand (“Remand Answer”), Ex. B at 1; Compl. at ¶ 14.)
Section IV of the company’s operating agreement outlines how the profits, losses, and
distributions are to be made. (Remand Answer at 3.)
In 2008, GSIPT reported significant losses, which resulted in negative capital accounts
for each member at the end of the tax year. (Compl. at ¶ 15.) The original 2008 tax return
allocated losses between the members based on their stated ownership interest—that is, 35
percent for Soltesz and 65 percent for Ballard-Hirsch. (Id.) This original tax return was later
amended because Ballard-Hirsch had personally guaranteed loans to GSIPT in 2008. (Id. at ¶
16.) Her personal guarantee was treated as if she had injected additional cash into the company.
(Id.) Therefore, the losses to the members were recalculated based on their relative tax basis,
giving Ballard-Hirsch a larger negative capital account than Soltesz. (Id. at ¶ 17.) In addition to
her 65 percent ownership, Ballard-Hirsch was specially allocated losses because of her personal
loan guarantee. (Id.) By 2009, GSIPT reported a profit, but Ballard-Hirsch still had a negative
capital account balance that was carried over due to the special allocation of 2008 losses. (Id. at
¶ 19.)
The dispute in this case concerns tax returns prepared by the accounting firm Argy,
Wiltse, and Robinson, P.C. (“Argy”), which Ballard-Hirsch retained on behalf of the company in

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2009. (Id. at ¶ 18.) Soltesz alleges that for 2009 tax purposes, “GSIPT’s positive income
amount should have been used to offset [Ballard-Hirsch’s] negative capital account balance to
zero; this is referred to as the ‘minimum gain chargeback.’” (Id. at ¶ 20.) According to Soltesz,
“[o]nce income is allocated to each member to bring their respective capital accounts to zero, the
remaining income should have been allocated based on [each member’s] stated ownership
percentage.” (Id.) Argy did not, however, allocate the income from 2009 to offset BallardHirsch’s negative capital account balance. (Id. at ¶ 21.) Instead, at Ballard-Hirsch’s direction,
“the income for 2009 was allocated in proportion to the members’ interests as identified in the
operating agreement.” (Remand Answer, Ex. B at 2.) Soltesz alleges that Ballard-Hirsch’s
“method of distributing income resulted in [Soltesz] over-reporting his income for his individual
2009 tax return and having an increased tax liability.” (Compl. at ¶ 22.)
Ballard-Hirsch and Soltesz take their respective positions based on differing
interpretations of the company’s operating agreement. According to Ballard-Hirsch, Section IV,
paragraph 3.b. explains “minimum gain chargeback” as it applies to the entity of GSIPT only.
(Remand Answer, Ex. B at 4; see also id., Ex. B, Attachment A at 8-11.) Ballard-Hirsch
contends there is no equivalent provision in the operating agreement that addresses “partner
minimum gain chargeback.” (Id.) In a December 6, 2010 memorandum to Ballard-Hirsch, Argy
explained that it was not required under the operating agreement to restore the members’
negative capital account balances. (Remand Answer, Ex. B at 2.) Argy noted that although the
operating agreement contains a “partnership minimum gain chargeback provision,” it does not
“contain a partner minimum gain chargeback provision.” (Id. (emphasis added).) Accordingly,
Argy concluded that the 2009 allocations of income “were made in accordance with the
operating agreement.” (Id.) Soltesz disagrees, alleging that the operating agreement “clearly

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provides for a minimum gain chargeback and states that it is done before any other allocations.”
(Compl. at ¶ 35; see also id., Ex. 1 at 1.)
On July 3, 2012, plaintiffs filed this lawsuit in the Circuit Court for Prince George’s
County, alleging that Ballard-Hirsch negligently filed improper tax returns on behalf of GSIPT.
Specifically, plaintiffs contend that Ballard-Hirsch breached her duty to accurately complete all
tax records on behalf of the company “when she failed to direct Argy to accurately reflect the
minimum gain chargeback amount” on the company’s 2009 tax returns. (Compl. at ¶¶ 43-44;
50-51.)
ANALYSIS
I.

Legal Standard
Removal of a state court action to a federal court is authorized by 28 U.S.C. § 1441(a),

which provides that “any civil action brought in a State court of which the district courts of the
United States have original jurisdiction, may be removed by the defendant … to the district court
of the United States for the district and division embracing the place where such action is
pending.” 28 U.S.C. § 1441(a). It is well recognized that the burden of establishing federal
subject matter jurisdiction “is placed upon the party seeking removal.” Mulcahey v. Columbia
Organic Chemicals Co., 29 F.3d 148, 151 (4th Cir. 1994) (citing Wilson v. Republic Iron & Steel
Co., 257 U.S. 92, 97 (1921)). Courts must strictly construe removal jurisdiction because of the
significant federalism concerns that are implicated when removing proceedings originally filed
in state courts. Id. (citing Shamrock Oil & Gas Corp. v. Sheets, 313 U.S. 100, 108-09 (1941)).
Indeed, if federal jurisdiction over a cause of action is doubtful, a remand to state court is
necessary. Id.

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There is no allegation of diversity of citizenship in the present case. Therefore removal is
proper only if this court could have originally exercised “federal question” jurisdiction over
plaintiffs’ complaint. Federal question jurisdiction exists over all civil actions that “arise under
the Constitution, laws, or treaties of the United States.” 28 U.S.C. § 1331. In determining
whether a complaint satisfies § 1331, courts apply the well-pleaded complaint rule, “look[ing] no
further than the plaintiff’s [properly pleaded] complaint in determining whether a lawsuit raises
issues of federal law capable of creating federal-question jurisdiction.” Pinney v. Nokia, Inc.,
402 F.3d 430, 442 (4th Cir. 2005) (internal quotations omitted). Under this standard, the “vast
majority” of complaints that present a removable federal question are those in which “federal law
creates the cause of action.” Merrell Dow Pharmaceuticals Inc. v. Thompson, 478 U.S. 804, 808
(1986). “In cases where federal law creates the cause of action, the courts of the United States
unquestionably have federal subject matter jurisdiction,” and removal from state to federal court
is proper. Mulcahey, 29 F.3d at 151 (emphasis in original) (citing Merrell Dow, 478 U.S. at
808). In the present case, however, it is undisputed that state law—not federal law—creates
plaintiffs’ causes of action. But this does not end the inquiry.
It is well established that “federal question jurisdiction is not limited to cases where
federal law creates the cause of action.” Ormet Corp. v. Ohio Power Co., 98 F.3d 799, 806 (4th
Cir. 1996). When, as here, “state law creates the cause of action, … federal jurisdiction depends
on whether the plaintiff’s demand ‘necessarily depends on resolution of a substantial question of
federal law.’” Mulcahey, 29 F.3d at 151 (emphasis in original) (quoting Franchise Tax Bd. v.
Construction Laborers Vacation Trust, 463 U.S. 1, 28 (1983)). This type of federal jurisdiction
is reserved for a “small class of cases,” Ormet Corp., 98 F.3d at 806, existing only “‘where the

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vindication of a right under state law necessarily turn[s] on some construction of federal law,’”
Merrell Dow, 478 U.S. at 808 (quoting Franchise Tax Bd., 463 U.S. at 9).
The Supreme Court has cautioned, however, that “in exploring the outer reaches of §
1331, determinations about federal jurisdiction require sensitive judgments about congressional
intent, judicial power, and the federal system.” Merrell Dow, 478 U.S. at 810. Indeed, “the
mere presence of a federal issue does not automatically confer federal question jurisdiction.” Id.
at 814. Accordingly, “this second pathway into federal court is reserved for the rarest of cases,
and should not be permitted as a matter of course.” Varco v. Tyco Electronics Corp., No. RDB08-1215, 2009 WL 728571, at *3 (D. Md. March 16, 2009) (citing Empire Healthchoice
Assurance, Inc. v. McVeigh, 547 U.S. 677, 699 (2006)).
What is clear from the considerations outlined above is that there is no “single, precise,
all-embracing test for jurisdiction over federal issues embedded in state-law claims between
nondiverse parties.” Grable & Sons Metal Prods., Inc. v. Darue Eng’g & Mfg., 545 U.S. 308,
314 (2005). Nevertheless, the Supreme Court has summarized the relevant inquiry as follows:
“does a state-law claim necessarily raise a stated federal issue, actually disputed and substantial,
which a federal forum may entertain without disturbing any congressionally approved balance of
federal and state judicial responsibilities.” Id.
II.

Discussion
Plaintiffs’ two-count complaint alleging negligence under Maryland law does not present

a set of circumstances that create federal jurisdiction under 28 U.S.C. § 1331. Plaintiffs argue
that removal to this court was improper because the two common law causes of action arise
under Maryland law and their resolution does not necessarily involve a substantial federal
question. (See Mot. for Remand at 5.) Ballard-Hirsch responds that removal was appropriate

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because the underlying issues in the negligence causes of action require the interpretation of the
Internal Revenue Code and the Treasury Regulations. (See Remand Answer at 1.) Specifically,
Ballard-Hirsch argues that to address plaintiffs’ negligence claims, a court must necessarily
analyze the meaning and application of two tax law principles: “partner minimum gain
chargeback” and “entity minimum gain chargeback.” (Id. at 3.) Because I agree with plaintiffs,
this case is remanded to the Circuit Court for Prince George’s County.
Plaintiffs’ complaint does not necessarily raise a substantial federal question. The Fourth
Circuit has recognized that a “plaintiff’s right to relief necessarily depends on a question of
federal law when ‘it appears that some … disputed question of federal law is a necessary element
of one of the well-pleaded state claims.’” Pinney, 402 F.3d at 442 (quoting Franchise Tax Bd.,
463 U.S. at 13). “If a plaintiff can establish, without resolution of an issue of federal law, all of
the essential elements of his state law claim, then the claim does not necessarily depend on a
question of federal law.” Id. (citations omitted). After a careful examination of plaintiffs’ claims
in the present case, it is clear that plaintiffs can establish the elements of each negligence cause
of action without the resolution of an issue of federal law.
For a plaintiff to prevail on a claim of negligence in Maryland, he or she must prove the
existence of: “(a) a duty owed by the defendant to the plaintiff; (b) a breach of that duty; and (c)
injury proximately resulting from that breach.” Barclay v. Briscoe, 47 A.3d 560, 574 (Md.
2012). Here, plaintiffs allege that Ballard-Hirsch had a duty to accurately complete all tax
records on behalf of the company and that she breached this duty when she failed to direct Argy
to accurately reflect the minimum gain chargeback amount on the company’s 2009 tax returns.
This breach, plaintiffs claim, resulted in an unnecessary and unjust increase in Soltesz’s tax
liability and created a risk that GSIPT would breach federal law by filing improper tax returns.

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At its core, this is a dispute about the interpretation of GSIPT’s operating agreement—it
does not necessarily involve the meaning or application of tax law principles. According to
plaintiffs, the operating agreement “clearly provides for a minimum gain chargeback and states
that it is done before any other allocations.” (Compl. at ¶ 35.) Ballard-Hirsch contends,
however, that the operating agreement explains minimum gain chargeback as it applies to the
entity of GSIPT only and that there is no equivalent provision that addresses “partner” minimum
gain chargeback. (Remand Answer, Ex. B at 4.) If plaintiffs’ interpretation is correct, they will
seek to prove Ballard-Hirsch’s breach of duty through her failure to comply with the company’s
operating agreement. Plaintiffs will thus be able to establish all of the essential elements of their
negligence causes of action without the resolution of any federal issues. See Pinney, 402 F.3d at
442. On the other hand, it is only if Ballard-Hirsch’s interpretation of the operating agreement is
accepted that the parties might dispute the correct tax treatment of GSIPT’s 2009 profits in light
of the operating agreement, the Internal Revenue Code, and the Treasury Regulations. See 26
U.S.C. § 704(a);1 id. at § 704(b).2 This is simply not a case in which “‘the vindication of a right
under state law necessarily turn[s] on some construction of federal law.’” Merrell Dow, 478
U.S. at 808 (emphasis added) (quoting Franchise Tax Bd., 463 U.S. at 9). The need to interpret
or construe federal tax law may never arise in this litigation. Accordingly, plaintiffs’ complaint

1

26 U.S.C. § 704(a) provides: “A partner’s distributive share of income, gain, loss, deduction, or
credit shall, except as otherwise provided in this chapter, be determined by partnership
agreement.”
2
26 U.S.C. § 704(b) provides:
A partner’s distributive share of income, gain, loss deduction, or credit (or item
thereof) shall be determined in accordance with the partner’s interest in the
partnership … if: (1) the partnership agreement does not provide as to the
partner’s distributive share of income, gain, loss, deduction or credit (or item
thereof), or (2) the allocation to a partner under the agreement of income, gain,
loss, deduction, or credit (or item thereof) does not have substantial economic
effect.
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does not necessarily raise a substantial federal question sufficient to invoke this court’s § 1331
subject matter jurisdiction.
Even if plaintiffs’ well-pleaded complaint raised a disputed and substantial question of
federal law, the exercise of federal jurisdiction is still “subject to a possible veto” in light of “an
assessment of any disruptive portent in exercising federal jurisdiction.” Grable, 545 U.S. at 31314. In construing Merrell Dow, the Supreme Court in Grable observed that a “general rule of
exercising federal jurisdiction over state [tort] claims resting on federal mislabeling and other
statutory violations would thus have heralded a potentially enormous shift of traditionally state
cases into federal courts.” Id. at 319. Here, exercising federal jurisdiction over a professional
negligence claim resting on the violation of the Internal Revenue Code has the potential of
upsetting the federal-state balance of judicial responsibilities by sweeping countless state-law
claims into federal court. See, e.g., Singh v. Duane Morris LLP, 538 F.3d 334, 340 (5th Cir.
2008) (noting that exercising federal jurisdiction over state-law legal malpractice claims
involving trademark suits would “upend the balance between federal and state judicial
responsibilities”). Thus, even if contested issues of federal law were necessarily raised in
plaintiffs’ complaint, I would nevertheless grant plaintiffs’ motion for remand because the
exercise of jurisdiction over this type of lawsuit would disrupt the “congressionally approved
balance of federal and state judicial responsibilities.” Grable, 545 U.S. at 314. This case simply
does not “justify resort to the experience, solicitude, and hope of uniformity that a federal forum
offers on federal issues.” Id. at 312.

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CONCLUSION
For the foregoing reasons, plaintiffs’ motion for remand is GRANTED. A separate Order
follows.

Date: November 15, 2012

/s/
J. Frederick Motz
United States District Judge

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