The Richard And Sheila J. McKnight 2000 Family Tust, Richard McKnight Trustee
Filing
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ORDER Denying 177 , 178 , and 179 Motions to Dismiss. Signed by Chief Judge Robert C. Jones on 7/23/12. (Copies have been distributed pursuant to the NEF - EDS)
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UNITED STATES DISTRICT COURT
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DISTRICT OF NEVADA
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THE RICHARD AND SHEILA J. MCKNIGHT
2000 FAMILY TRUST et al.,
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Plaintiffs,
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vs.
WILLIAM J. BARKETT et al.,
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Defendants.
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2:10-cv-01617-RCJ-GWF
ORDER
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This case arises out of the same facts as the USA Commercial case. Pending before the
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Court are motions to dismiss two separate Complaints in Intervention and a Counterclaim for
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lack of subject matter jurisdiction. For the reasons given herein, the Court denies the motions.
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I.
FACTS AND PROCEDURAL HISTORY
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Plaintiff Richard McKnight,1 as trustee for The Richard & Sheila J. McKnight 2000
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Family Trust (“the McKnight Trust”) provided $100,000 out of the total of $4.5 million that
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various direct lenders loaned to Defendant Castaic III Partners, LLC (“Castaic III”) through USA
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Commercial Mortgage Co. (“USA Commercial”). (Compl. ¶ 5, Sept. 21, 2010, ECF No. 1). The
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McKnight Trust has received no interest payments on the loan since August 2006. (Id. ¶ 9).
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Plaintiff sued Defendants Castaic III and William J. Barkett in this Court on two claims:
(1) Breach of Guaranty (Barkett only); and (2) Declaratory Judgment. The Court denied a
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Richard McKnight is a apparently both a beneficiary and the trustee of the McKnight
Trust and one of the McKnight Trust’s attorneys in this action.
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motion to reconsider transfer of the case from the Hon. Gloria M. Navarro to this Court,
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dismissed the second cause of action for declaratory judgment, granted offensive summary
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judgment on the first cause of action for breach of guaranty, and permitted 260 other direct
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lenders to intervene as Plaintiffs and to add claims against Castaic Partners, LLC (“Castaic” or
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“Tapia Ranch”) and Castaic II Partners, LLC (“Castaic II”). Defendants appealed the judgment
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against them as to breach of guaranty, but the Court of Appeals dismissed the appeal for lack of
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finality.
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Each group of intervenors has filed its own complaint in intervention. Intervenor
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Plaintiffs Thomas J. Kapp and Cynthia S. Roher, as trustees of the T&C Kapp Family Trust (the
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“Kapp Intervenors” or “Kapp”) filed a Complaint in Intervention (the “Kapp CI”) against
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Barkett and Castaic II for breach of contract, breach of guaranty, and declaratory judgment. (See
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Kapp CI, May 12, 2011, ECF No. 34). A second group of intervenors (the “Rasmussen
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Intervenors”) have filed a complaint in intervention (the “Rasmussen CI”) against Barkett,
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Castaic, Castaic II, and Castaic III for breach of contract, breach of guaranty, and declaratory
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judgment. (See Rasmussen CI, Aug. 8, 2011, ECF No. 61). The Rasmussen CI alleges the
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amount each Rasmussen Intervenor loaned the Castaic entities. (See id. ¶¶ 5, 67–69). A third
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group of intervenors, DACA-Castaic, LLC and Debt Acquisition Co. of America V, LLC
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(“DACA V,” collectively, the “DACA Intervenors” or “DACA”), withdrew its motion to
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intervene.
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The Court granted a motion to dismiss the Kapp CI in part, dismissing the declaratory
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judgment claim but refusing to dismiss the breach of contract and breach of guaranty claims for
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lack of standing. Defendants argued that Kapp Intervenors had transferred their interests in the
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relevant loans to DACA-Castaic, LLC and thus no longer had standing to sue for breach of
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contract or breach of guaranty. The Kapp Intervenors responded that they had only transferred
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the deeds of trust, not the beneficial interest. The Court invited summary judgment motions on
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the issue but refused to dismiss because the Kapp CI was sufficiently pled. The Court
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completely denied a motion to dismiss the Rasmussen CI, noting that the claim for declaratory
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relief thereunder was different from the declaratory relief claims in the Complaint and the Kapp
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CI that the Court had dismissed. The Court struck Defendants’ “crossclaim,” which was in
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reality a third-party complaint and/or a counterclaim, directing Defendants to refile the pleading
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properly, which they did. (See Countercl. and Third-Party Compl., ECF Nos. 156, 157).
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Defendants countersued several Compass entities, the two DACA entities, and direct lenders for:
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(1) breach of contract; (2) declaratory judgment; (3) interference with prospective economic
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advantage; (4) usury; (5) breach of fiduciary duty (two Compass entities only); (6) unjust
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enrichment; and (7) slander of title.
The Court refused to stay the judgment against Defendants in favor of Plaintiff but noted
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that it would await summary judgment motions as to whether certain Intervenor Plaintiffs still
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owned the beneficial interest in the loans or had transferred them to DACA-Castaic, LLC or
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other parties. DACA asked the Court to grant it summary judgment on thirteen issues under its
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Counterclaim (as to Defendants’ Third-party Complaint) for declaratory relief. The Court
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granted the motion in part, ruling that any direct lender who had transferred his or her beneficial
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interest in a Castaic loan to DACA had also transferred his or her interest in the respective deed
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of trust or guaranty and could no longer sue on the note or Barkett’s guaranty thereof, because
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the interest in the guaranty followed the interest in the note automatically under California law.
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The Court noted that it remained a question of fact which direct lenders had effected such
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transfers. The evidence adduced at the time showed only a transfer of Castaic Partners, LLC’s
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beneficial interest in the Castaic loans to DACA-Castaic, LLC, but did not indicate any previous
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transfer from any direct lenders to Castaic Partners, LLC. The Court also noted that no party
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disputed that the Castaic loans were in default but that it would not attempt to calculate the total
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amount due on each loan at the pre-trial stage. The Court also ruled that the notes were neither
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usurious nor subject to offset. The Court ruled that the Castaic deeds of trust were enforceable
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under their terms and that the pending foreclosures in California under the 2007 notices of
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default were proper. The Court also noted that an action against Barkett for breach of guaranty
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would not violate the one-action rule even after foreclosure, because Barkett was not the target
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of any foreclosure, though Plaintiffs could only collect on a guaranty to the extent of any
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deficiency remaining after a foreclosure sale. The Court also ruled that the Purchase Agreement,
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under which DACA-Castaic, LLC purported to obtain the beneficial interests in the loans from
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Castaic Partners, LLC, was in compliance with the 51% rule under Chapter 645B, and that
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DACA-Castaic, LLC’s decision to foreclose was valid. The Court declined to rule on the
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priority of a lien against the properties held by DACA V, because DACA V and DACA-Castaic
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were not adversaries in the present case.
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Kapp Intervenors also moved for summary judgment on four points. The Court refused
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to rule that Barkett was liable to Kapp Intervenors on the guaranty because it was not clear that
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the Kapp Intervenors retained the beneficial interest in the loans. The Court again noted that no
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party denied the Castaic loans were in default. The Court then ruled that Barkett was liable to
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the Kapp Intervenors on the Castaic II Guaranty, but the Court added that Barkett could obtain
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relief under Rule 60(b) if he could later show that the Kapp Intervenors had transferred their
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interest in the Castaic II note. The Court ruled that it would not attempt to calculate the total
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amount due on the Castaic II loan at the pre-trial stage. Next, the Court ruled that the Castaic
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notes were to be interpreted by their terms under Nevada law, that Nevada had no usury law, and
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that the borrower under the notes had waived any right of offset. Finally, the Court declined to
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rule whether any direct lenders were liable for the wrongdoing of loan servicers.
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Defendants have filed three similar motions. They ask the Court to dismiss the Kapp CI,
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the Rasmussen CI, and DACA’s Counterclaim for lack of subject matter jurisdiction.
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II.
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LEGAL STANDARDS
Federal courts are courts of limited jurisdiction, possessing only those powers granted by
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the Constitution and statute. See United States v. Marks, 530 F.3d 799, 810 (9th Cir. 2008)
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(citing Kokkonen v. Guardian Life Ins. Co. of Am., 511 U.S. 375, 377 (1994)). The party
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asserting federal jurisdiction bears the burden of overcoming the presumption against it.
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Kokkonen, 511 U.S. at 377. Federal Rule of Civil Procedure 12(b)(1) provides an affirmative
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defense for lack of subject matter jurisdiction. Fed.R.Civ.P. 12(b)(1). Additionally, a court may
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raise the question of subject matter jurisdiction sua sponte at any time during an action. United
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States v. Moreno-Morillo, 334 F.3d 819, 830 (9th Cir. 2003). Regardless of who raises the issue,
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“when a federal court concludes that it lacks subject-matter jurisdiction, the court must dismiss
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the complaint in its entirety.” Arbaugh v. Y & H Corp., 546 U.S. 500, 514 (2006) (citing 16 J.
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Moore et al., Moore’s Federal Practice § 106.66[1], pp. 106-88 to 106-89 (3d ed. 2005)).
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A.
Diversity Jurisdiction
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“The district courts shall have original jurisdiction of all civil actions where the matter in
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controversy exceeds the sum or value of $75,000, exclusive of interest and costs, and is between
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. . . citizens of different States.” 28 U.S.C. § 1332(a), (a)(1). Under the diversity statute, all
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Plaintiffs must be diverse from all Defendants. See Strawbridge v. Curtiss, 7 U.S. 267, 267
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(1806).
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B.
Bankruptcy Jurisdiction
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“[T]he district courts shall have original but not exclusive jurisdiction of all civil
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proceedings arising under title 11, or arising in or related to cases under title 11.” 28 U.S.C.
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§ 1334(b).
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Proceedings “related to” the bankruptcy include (1) causes of action owned by the
debtor which become property of the estate pursuant to 11 U.S.C. § 541, and (2) suits
between third parties which have an effect on the bankruptcy estate . . . . The first
type of “related to” proceeding involves a claim like the state-law breach of contract
action at issue in Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S.
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50, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982).
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Vacation Vill., Inc. v. Clark Cnty., Nev., 497 F.3d 902, 911 (9th Cir. 2007) (quoting Celotex
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Corp. v. Edwards, 514 U.S. 300, 307 (1995)). Section 541 makes part of the estate, inter alia,
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“all legal or equitable interests of the debtor in property as of the commencement of the case.” 11
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U.S.C. § 541(a)(1). “[P]ending causes of action qualify as ‘property of the estate’ in bankruptcy
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under 11 U.S.C. § 541(a)(1)—including causes of action sounding in tort, such as personal
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injury, for which the ultimate amount of recovery is uncertain.” Ileto v. Glock, Inc., 565 F.3d
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1126, 1148 n.1 (9th Cir. 2009). Furthermore, “‘[T]he district court in which the bankruptcy case
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is commenced obtains exclusive in rem jurisdiction over all of the property in the estate.’ A
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chose in action is property of the bankruptcy estate pursuant to 11 U.S.C. § 541(a)(1). For this
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reason, only bankruptcy trustees, debtors-in-possession, or bankruptcy court authorized entities
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have standing to sue on behalf of the estate.” McGuire v. United States, 550 F.3d 903, 914 (9th
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Cir. 2008) (citations omitted).
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III.
ANALYSIS
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A.
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Defendants ask the Court to dismiss the Kapp CI for lack of diversity. Barkett is a
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California citizen. There is therefore not complete diversity if any Plaintiff is a California
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citizen. Defendants argue that at least some direct lenders are California citizens. The question
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as to the Kapp CI is whether any of the Kapp Intervenors are California citizens. The Kapp CI
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lists only Thomas J. Kapp and Cynthia S. Roher, as trustees for the T&C Kapp Family Trust, as
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Intervenor Plaintiffs. The Kapp CI avers that both Plaintiffs are Nevada citizens. Defendants
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point to no evidence to the contrary. The Court will therefore deny the motion.
Motion No. 177
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B.
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Defendants ask the Court to dismiss the Rasmussen CI for lack of diversity. Defendants
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Motion No. 178
note that the asserted basis for jurisdiction over the Rasmussen CI is related-to jurisdiction under
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28 U.S.C. § 1334(b) and supplemental jurisdiction under § 1367, likely because there were
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several non-diverse intervenors. Defendants note that no Defendant is in bankruptcy, and that
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the Rasmussen Intervenors attempt to support jurisdiction under the Asset Resolution, LLC
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bankruptcy, but that no claims in the Rasmussen CI arise out of or are related to the Asset
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Resolution bankruptcy as those terms are used in the Bankruptcy Code. Defendants also argue
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for mandatory abstention under § 1334(c)(2) and equitable abstention.
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Rasmussen Intervenors have the burden of showing federal jurisdiction once the issue is
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raised. They argue that the Court already denied a similar motion to dismiss for lack of
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jurisdiction in a July 26, 2011 order (the “Order”). In the Order, the Court addressed
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Defendants’ motion to dismiss. Defendants argued that the Court should dismiss for lack of
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personal jurisdiction, improper venue, and failure to state a claim, and that the Court should
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abstain under Colo. River Water Conservation Dist. v. United States, 424 U.S. 800 (1976). See
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Order 9:17–20, July 26, 2011, ECF No. 48). The Court rejected these arguments, (see id. 9–12),
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but never addressed any alleged lack of subject matter jurisdiction. The Court did not even
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imply bankruptcy jurisdiction, except to note as part of its abstention analysis that the present
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case was “‘related-to’ Article III cases that have been pending in this Court for several years.”
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(See id. 11:21–22). The issue of subject matter jurisdiction was not before the Court, and the
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Court’s statement that the case was related to other Article III cases was not meant to imply that
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the case was “related to” any bankruptcy case under the meaning of § 1334(b), but only that it
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arose out of some of the same facts as the USA Commercial case and others, which are Article
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III cases, not bankruptcy cases. Defendants may raise the issue of subject matter jurisdiction at
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any time, and it is the Rasmussen Intervenors, who assert federal jurisdiction, who have the
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burden of showing it.
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In order to be “related to” a bankruptcy case such that federal jurisdiction is
independently supported under § 1334(b), the present case must have some conceivable effect on
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a bankruptcy estate. That is, it must seek an award against the estate, it must consist of a claim
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owned by the estate, or it must otherwise conceivably effect the administration of the estate. The
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Rasmussen Intervenors make no argument concerning how they believe the present case does
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any of these things. First, Asset Resolution is not a party to this proceeding and does not appear
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to be a necessary party. Second, the Rasmussen Intervenors do not allege that their claims are
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owned by and brought on behalf of Asset Resolution. Only the Trustee may bring such claims,
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because the Asset Resolution bankruptcy has been converted to Chapter 7. The Rasmussen
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Intervenors argue that the present case is “related to” the Asset Resolution bankruptcy because
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Asset Resolution was for a time the servicer of the Castaic Loans. More importantly, the
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Rasmussen Intervenors note that Asset Resolution’s bankruptcy owns the fractional interests in
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each of the three Castaic loans that it obtained from Compass USA SPE, LLC. They note that
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the Court approved the appointment of a new loan servicer (Cross) and approved Cross’ sale of
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certain direct lenders’ Castaic loans to DACA-Castaic, LLC pursuant to a majority vote of the
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direct lenders. Asset Resolution, however, still owns its fractional interests in the Castaic loans,
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because the 51% rule does not permit the majority interest to transfer a minority interest’s
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ownership itself, but only governs administration of the loans. Because the present action will
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determine whether the Castaic entities breached a contract to which Asset Resolution is also a
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party, whether Barkett breached a guaranty to which Asset Resolution is a party, and will result
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in declarations concerning the validity of these documents, the Court finds that the outcome of
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the present case could have a conceivable effect on the bankruptcy estate and will not dismiss for
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failure to satisfy § 1334(b).
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Because there is bankruptcy jurisdiction, Intervenors need not rely on supplemental
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jurisdiction under § 1367 based upon the existence of diversity jurisdiction as between Plaintiffs
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and Defendants when the Complaint was filed. They could not rely on such an argument, in any
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case. Such a maneuver, i.e., the later joinder of non-diverse parties in a case based purely upon
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diversity, is specifically prevented by the supplemental jurisdiction statute, lest the joinder and
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intervention rules obviate the complete diversity requirement. See 28 U.S.C. § 1367(b).
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Defendants also argue that the Court must abstain under § 1334(c)(2). In related-to cases
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based upon state-law claims, a Court must abstain upon motion where the only basis for federal
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jurisdiction is § 1334(b) and where an action has been commenced in state court. 28 U.S.C. §
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1334(c)(2). As noted, supra, the Rasmussen CI is based purely upon § 1334(b) and § 1367, but
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§ 1367 is not an appropriate basis for supplemental jurisdiction over the Rasmussen CI because
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the Complaint is based purely upon § 1332, and the Rasmussen CI would not independently
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qualify for § 1332 jurisdiction. See § 1367(b). There is jurisdiction over the Rasmussen CI under
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§ 1334(b), but because that is the sole basis for jurisdiction over the purely state-law claims in
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the Rasmussen CI, the Court must abstain under § 1334(c)(2) if there is a pending state court
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action. Defendants note that they initiated a state court action in the Los Angeles County
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Superior Court against many direct lenders and others concerning the Castaic loans, but that the
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California court has stayed the case out of deference to this Court. Defendants appear to be
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correct. The Court will not abstain. The California case is stayed pending the present case and
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its existence does not require mandatory abstention. Nor will the Court abstain equitably. The
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Court will not, if it can prevent it, permit these interrelated cases to be determined piecemeal in
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various courts.
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C.
Motion No. 179
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Defendants ask the Court to dismiss DACA’s Counterclaim for the same reasons it asks
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the Court to dismiss the Rassmussen CI. The motions are substantively identical in relevant part.
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The Counterclaim requests many declarations concerning the Castaic loans. These declarations
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could have a conceivable effect on Asset Resolution’s bankruptcy estate. There is therefore §
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1334(b) jurisdiction, and the Court will not abstain.
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CONCLUSION
IT IS HEREBY ORDERED that the Motion to Dismiss Kapp CI (ECF No. 177), the
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Motion to Dismiss Rasmussen CI (ECF No. 178), and the Motion to Dismiss Counterclaim (ECF
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No. 179) are DENIED.
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IT IS SO ORDERED.
Dated this 23rd day of July, 2012.
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_____________________________________
ROBERT C. JONES
United States District Judge
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