Bell v. Gateway Energy Services Corporation et al

Filing 57

OPINION AND ORDER: re: 42 MOTION to Dismiss Plaintiffs' Second Amended Complaint. filed by Gateway Energy Services Corporation, 41 MOTION to Dismiss Plaintiffs' Second Amended Complaint. filed by Direct Energy Services, LLC. For the reasons set forth above, defendants' respective motions to dismiss the SAC at ECF Nos. 41 and 42 are GRANTED without prejudice.The Clerk of Court is directed to terminate all open motions and to terminate this action. (Signed by Judge Katherine B. Forrest on 11/29/2017) (js)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
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:
DANIELLE BELL, ERIN HITCHNER, and
:
JONATHAN W. WALKER, individually and on :
behalf of all others similarly situated
:
:
Plaintiffs,
:
:
-v:
:
GATEWAY ENERGY SERVICES
:
CORPORATION and DIRECT ENERGY
:
SERVICES, LLC,
:
:
Defendants.
:
:
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USDC SDNY
DOCUMENT
ELECTRONICALLY FILED
DOC #: _________________
DATE FILED: November 29, 2017

17-cv-3893 (KBF)
OPINION & ORDER

KATHERINE B. FORREST, District Judge:
On May 23, 2017, plaintiffs commenced this purported class action against
two energy providers, Gateway Energy Services Corp. (“Gateway”) and Direct
Energy Services, LLC (“Direct Energy”) (collectively, “defendants”). Plaintiffs1
allege in sum that they were misled into contracting with Gateway for energy
services by certain false promises. This Opinion & Order does not address the
general sufficiency of plaintiffs’ substantive allegations. It is directed instead to the
threshold issue, raised by defendants in their respective motions to dismiss, of
whether this Court has subject matter jurisdiction over plaintiffs’ claims. Because
it is clear that this Court does not, defendants’ motions to dismiss at ECF Nos. 41

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Danielle Bell and Erin Hitchner are the only proper plaintiffs in this action. Jonathan W. Walker’s sole connection
to the case is his marriage to Erin Hitchner—he has not himself contracted with either defendant. Accordingly,
there can be no doubt that he has no standing to participate in this action.

and 42 are accordingly GRANTED on that basis.
I.

DISCUSSION
Two legal principles are dispositive of this motion: first, that in order to join

a defendant in an action, some plaintiff must have a claim against it; and second,
that a federal court must have subject matter jurisdiction over an action in order to
entertain it.
A.

Direct Energy Must Be Dismissed

The first principle recited above—that in order to join a defendant in an
action, some plaintiff must have a claim against it—requires dismissal of Direct
Energy, a New Jersey Corporation. No plaintiff has asserted that he or she directly
contracted for services with Direct Energy, or that he or she was injured by actions
of Direct Energy. The alleged injurious misrepresentations were all made by its
affiliated entity, Gateway. To get around this plain deficiency, plaintiffs assert that
Direct Energy acquired Gateway in 2011, and that Gateway has served as an “alter
ego” of Direct Energy since that time. (See Second Amend. Compl. (“SAC”) ¶¶ 9, 2335, ECF No. 27.) It is unclear whether plaintiffs’ invocation of the alter ego doctrine
is meant to demonstrate that (1) Gateway is an “agent” of Direct Energy;
(2) Gateway is some sort of “shell” entity; or (3) that this Court should “pierce the
corporate veil” and hold Direct Energy liable for Gateway’s alleged misconduct
following judgment. But in any event, it is clear to this Court that Gateway’s
allegations in the SAC are missing a key component necessary to keep Direct
Energy in this case.
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Plaintiffs have alleged that Gateway and Direct Energy are separate
corporate entities, with separate places of incorporation and separate principle
places of business. (SAC ¶¶ 7,8.) Plaintiffs also allege that Direct Energy
“dominates” Gateway (Id. ¶ 24), that Gateway “does not maintain separate
corporate books and records” (Id. ¶ 25), that Gateway’s finances are “inextricable”
from those of Direct Energy (Id. ¶ 26), that Gateway does not have its own directors,
corporate officers or employees (Id. ¶ 28), that Direct Energy’s officers and
employees purchase natural gas and/or electricity on behalf of Gateway’s customers
(Id. ¶ 30), and that Direct Energy sets the variable rates for Gateway’s customers by
“integrating both companies’ customers into one pricing model and considering
them as a whole…” (Id. ¶ 32). But Gateway has completely failed to allege that
Direct Energy’s control “was used to commit wrong, fraud, or the breach of a legal
duty, or a dishonest and unjust act.” Freeman v. Complex Computing Co., Inc., 119
F.3d 1044, 1053 (2d Cir. 1997) (quoting Elec. Switching Indus., Inc. v. Faradyne
Elecs. Corp., 833 F.2d 418, 424 (2d Cir. 1987));
It is true that “[c]ourts will pierce the corporate veil to prevent fraud or
achieve equity by imposing a corporate obligation upon a parent.” New York State
Elec. and Gas Corp. v. FirstEnergy Corp., 766 F.3d 212, 229 (2d Cir. 2014) (citations
omitted). “’But to successfully pierce the veil, a plaintiff must show both
domination of the corporation and that ‘such domination was used to commit a
fraud or wrong against the plaintiff which resulted in plaintiff’s injury.’” Id.
(quoting Matter of Morris v. New York State Dept. of Taxation and Fin.., 82 N.Y. 2d
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135, 141 (1993)); see also Wm Passalacqua Builders, Inc. v. Resnick Developers S.,
Inc., 933 F.2d 131, 138 (2d Cir. 1991) (holding that the “three-factor rule” for
piercing the corporate veil—which includes proof that “control has been used to
commit fraud or other wrong”—is indistinguishable from an alter ego theory and
does not lead to different results).
Here, plaintiffs’ principle allegations of wrongdoing relate to alleged
misstatements by Gateway, the contracting entity. Plaintiff Bell received mailings
from Gateway in 2011 and again in 2014, setting forth terms and conditions that
she claims were false and misleading. (SAC ¶ 41-44.) Hitchner similarly alleges
that she received misleading solicitations from Gateway—the first of which she
received prior to Direct Energy’s acquisition of Gateway. (Id. ¶ 51.) These
allegations create an important distinction between Gateway and Direct Energy’s
customers. There is no allegation in this case that: (1) Direct Energy was the
contracting entity; (2) Direct Energy made any of the alleged misrepresentations;
(3) Direct Energy directed Gateway to make the alleged misrepresentations; or (4)
Direct Energy somehow used its domination and control of Gateway to make or
facilitate the misrepresentations.2
In short, the allegations that Direct Energy dominates Gateway or even sets
consumer prices fall short of asserting that Direct Energy injured these plaintiffs in
any way. And clear precedent in this circuit holds that plaintiffs may not bring

As to the final two points, the fact that Gateway is alleged to have made the misrepresentations
prior to being acquired by Direct Energy is a strong indication that Direct Energy was not directing
or facilitating the misconduct at issue here. (See SAC ¶ 51.)
2

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class actions against non-injurious defendants, even when they are affiliates of one
another. See Mahon v. Ticor Title Ins. Co., 683 F.3d 59, 63 (2d Cir. 2012). Because
the plaintiffs here—who contracted only with Gateway—have no direct claim
against Direct Energy, and because they have no standing to assert any claims that
might exist on behalf of Direct Energy’s other (non-Gateway) customers, the Court
concludes that Direct Energy must be dismissed as a defendant from this case.
B.

The Court Lacks Subject Matter Jurisdiction as to Gateway

With Direct Energy dismissed from the case, the Court next turns to the
question of whether it has subject matter jurisdiction over the claims against the
one remaining defendant—Gateway. The Court concludes that it does not. This
Court, like all federal courts, is one of limited jurisdiction. It cannot hear a case
unless it has subject matter jurisdiction over the claims asserted, and plaintiffs bear
the burden on that issue. See Lujan v. Defenders of Wildlife, 504 U.S. 555, 561
(1992). Further, plaintiffs must carry their burden with respect to subject matter
jurisdiction by a preponderance of the evidence. Id. When a factual challenge to
the court’s jurisdiction has been raised, “the court may resolve [any] disputed
jurisdictional fact issues by referring to evidence outside of the pleadings.” Zappia
Middle East Constr. Co. v. Emirate of Abu Dhabi, 215 F.3d 247, 253 (2d Cir. 2000).
Plaintiffs assert the Class Action Fairness Act (“CAFA”), 28 U.S.C. § 1332(d),
as the sole basis for jurisdiction. (SAC ¶ 10.) CAFA provides for federal jurisdiction
over class actions when (1) the proposed class contains at least 100 members, (2) the
amount in controversy exceeds $5 million, and (3) minimal diversity exists between
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the parties (that is, where any member of the potential class is from a different
state from any defendant). 28 U.S.C. § 1332(d); see also Purdue Pharma L.P. v.
Kentucky, 704 F.3d 208, 213 (2d Cir. 2013).
There are three exceptions to CAFA’s allowance for minimal diversity, one of
which is discretionary (28 U.S.C. § 1332(d)(3)), and two of which are mandatory (28
U.S.C. § 1332(d)(4)(A)-(B)). At issue here are the mandatory exclusions, which are
triggered, respectively, when: (1) greater than two-thirds of all proposed plaintiffs
and at least one defendant (from whom “significant relief” is sought and whose
“alleged conduct forms a significant basis” for the claims at issue) are citizens of the
State in which the action was filed and “principal injuries resulting from the alleged
conduct” occurred in that State (28 U.S.C. § 1332(d)(4)(A)); and (2) greater than
two-thirds of all proposed plaintiffs and the “primary defendants” are citizens of the
State in which the action was filed (28 U.S.C. § 1332(d)(4)(B)). The facts plainly
demonstrate the applicability of both mandatory exclusionary provisions here.
As an initial matter, Direct Energy’s contracting customers are irrelevant for
purposes of this analysis for at least two reasons. First, as previously held, Direct
Energy is dismissed as a defendant in this case. Therefore, any customers that
purchase energy directly from Direct Energy, with no involvement from Gateway,
clearly fall outside the proposed plaintiff class that remains. Second, even if this
Court were to hold that Direct Energy should remain as a defendant in this case, it
would be only with respect to customers that purchased energy through Gateway.
None of the named plaintiffs contracted directly with Direct Energy, and there is no
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allegation that any of Direct Energy’s independent, non-Gateway customers were
similarly wronged. Accordingly, Direct Energy customers that have no business
relationship with Gateway are clearly not part of the proposed plaintiff class here,
regardless of the Court’s decision to dismiss Direct Energy.
As to CAFA’s mandatory exclusionary rules, this case was filed in New York.
Although Hitchner purchases electricity from Gateway in New Jersey, and Bell
purchases natural gas from Gateway in New York, the uncontroverted analysis of
Daniel Wood makes clear that more than two-thirds of the proposed plaintiff class
(customers of Gateway) are resident in New York State, the same state in which
this action was filed. (See Revised Decl. of Daniel Wood (“Revised Wood Decl.”),
ECF No. 55-1; see also Revised Wood Decl. Letter at 2, ECF No. 55.) Because
Gateway is resident in New York, and because the “principal injuries resulting from
the alleged conduct” occurred in New York, CAFA’s exclusion set forth in 28 U.S.C.
§ 1332(d)(4)(A) applies, even if Direct Energy were to remain a defendant in this
case.
Similarly, the Court concludes that CAFA’s exclusion set forth in 28 U.S.C. §
1332(d)(4)(B) applies. As previously noted, it is clear from the SAC that Gateway is
the “primary defendant” in this case. All of the plaintiffs contracted directly with
Gateway, and Gateway is alleged to have made the actionable misrepresentations
(some predating the acquisition by Direct Energy). Because greater than two-thirds
of all proposed plaintiffs and Gateway are citizens of New York, which is the state
this action was filed, 28 U.S.C. § 1332(d)(4)(B) applies and this Court has no
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jurisdiction to hear the action.
Without CAFA, this Court lacks subject matter jurisdiction over plaintiffs’
claims, and this case must be dismissed.
II.

CONCLUSION
For the reasons set forth above, defendants’ respective motions to dismiss the

SAC at ECF Nos. 41 and 42 are GRANTED without prejudice.
The Clerk of Court is directed to terminate all open motions and to terminate
this action.
SO ORDERED.
Dated:

New York, New York
November 29, 2017
____________________________________
KATHERINE B. FORREST
United States District Judge

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