REECON M & E CO., LTD. et al v. REECON NORTH AMERICA, LLC et al
Filing
51
MEMORANDUM OPINION & ORDER remanding civil action 18-631 to the state court FORTHWITH for improper removal and lack of subject-matter jurisdiction as explained therein. Signed by Judge Joy Flowers Conti on 6/20/19. (mh)
IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF PENNSYLVANIA
REECON NORTH AMERICA, LLC,
Plaintiff,
vs.
DU-HOPE INTERNATIONAL GROUP,
REECON M & E CO. LTD.,
Defendants.
REECON M & E CO. LTD., GUOHONG
FU, YAODANG WANG, and DU-HOPE
INTERNATIONAL GROUP,
Plaintiffs,
vs.
REECON NORTH AMERICA, LLC, and
DAVID BRAND,
Defendants.
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2:18-CV-00234-JFC
2:18-CV-00631-JFC
FINDINGS OF FACT AND CONCLUSIONS OF LAW
The court has a nondelegable duty to ensure that it may properly exercise subject-matter
jurisdiction over these related cases. On May 30, 2018, the court issued an order for Reecon
North America, LLC (“Reecon NA”), formerly named Brand Marketing Group, LLC (“BMG”)1
and David Brand (“Brand”) (collectively, the “Brand Parites”) to show cause why Civil Action
No. 18-234 should not be dismissed and Civil Action No. 18-631 remanded to the state court for
lack of subject-matter jurisdiction. The parties engaged in extensive jurisdictional discovery; the
court held an evidentiary hearing on December 18, 2018; Chinese citizens Guohong Fu (“Fu”)
1
BMG changed its name to Reecon North America, LLC on February 11, 2015, but is the same business entity. Ex.
R. To avoid confusion, the entity will be referred to in this opinion as BMG, except where the context requires a
reference to Reecon NA.
and Yaodang Wang (“Wang”), and Chinese corporations Reecon M & E Co., Ltd. (“Reecon
M&E”) and Du-Hope International Group (“Du-Hope”) (collectively, the “Reecon Parties”)
renewed their motion to dismiss for lack of jurisdiction (ECF No. 59)2; and the parties filed posthearing proposed findings of fact and conclusions of law. Also pending are the Brand Parties’
objections to certain evidence (ECF No. 69). The matters are now ripe for disposition.
FINDINGS OF FACT
A.
1.
The Parties
Brand formed BMG as a limited liability company (“LLC”) under Delaware law
on November 15, 2004. Ex. 12 (“LLC Agreement,” attached to Answer and New
Matter).3 BMG’s business was the sale of space heaters under the trade name of
“Thermablaster.”
2.
Brand initially was the sole member of BMG. Brand is a citizen of Pennsylvania.
3.
The LLC Agreement in § 6 provided: “The LLC shall be authorized to issue a
single class of Limited Liability Company Interest (as defined in the Act) (the
“Interest”) including any and all benefits to which the hold of such Interest may be
entitled in this Agreement, together with all obligations of such person to comply
with the terms and provisions of this Agreement.” Ex. 12.
4.
The LLC Agreement contemplated that two or more persons or entities could hold
membership interests in the LLC. Ex. 12 § 8.
5.
The LLC Agreement in § 11 provided: “The Member may assign all or any part
of its Interest at any time (an assignee of such Interest is hereinafter referred to as a
2
3
Unless otherwise noted, all ECF citations are at Civil No. 18-234.
The articles of organization were not provided to the court.
2
“Permitted Transferee”). A Permitted Transferee shall become a substituted Member
automatically upon an assignment.” Ex. 12.
6.
Fu has owned and been managing director of Reecon M&E since 2004. Fu
Deposition at 12, 14. Its business is the manufacture of heaters. Fu is a Chinese
citizen.
7.
Wang is the deputy general manager of Du-Hope. Wang Deposition at 8. Wang
is a Chinese citizen.
8.
Reecon M&E and Du-Hope are Chinese companies.
B.
9.
The Export Agency Arrangement
On March 15, 2009 (before entry into any relationship with the Brand Parties),
Reecon M&E and Du-Hope entered into an “export agency” agreement. Ex. 17. DuHope’s duties as export agent included issuing invoices, packing lists and other
needed documents in exchange for a 3% commission. Id. On behalf of Reecon
M&E, Du-Hope signed the documentation with designated foreign companies. Fu
Deposition at 149.
10.
Brand’s testimony that he did not know Du-Hope’s role was as an export agent
for Reecon M&E is not credible, for several reasons.
a.
Fu testified credibly that at the very beginning of the relationship, he told
Brand that Du-Hope was Reecon M&E’s export agent and gave him a copy of
the export agency agreement. Fu Deposition at 148.
b.
The merger negotiations (described below) were conducted between
Brand and Fu, with no participation by Du-Hope.
c.
Brand testified that he had almost no interactions with Wang. Tr. 72, 142.
3
d.
John Sherman (“Sherman”) testified credibly that Brand was the person
who explained to him that Du-Hope was Reecon M&E’s export agent.
Sherman Deposition at 33, 64. Sherman has known Brand since 2008, served
as a sales representative for BMG, and talked extensively with Brand about all
aspects of BMG’s business. Sherman Deposition at 8-9.
e.
In the complaint in BMG v. Intertek Testing Services NA, Inc.. et al., Civil
Action No. 12-1572 (W.D. Pa.) (the “Intertek lawsuit”), BMG averred that
it“contracted with a Chinese company, Reecon M & E Co. Ltd., (“Reecon”)
and its owner Guohong Fu (“Fu”), to manufacture the heaters for large-scale
distribution.” Ex. 53 (Complaint ¶ 16).
11.
Brand and BMG knew that Fu and Reecon M&E (not Du-Hope) were the real
business contacts for BMG. The court rejects the Brand Parties’ proposed findings of
fact that Du-Hope took the lead in the transactions, and that BMG ordered the heaters
directly from Du-Hope.
12.
Du-Hope’s role as export agent for Reecon M&E did not change throughout the
relevant time period. In September 2016, Brand sent an email to Chen at Du-Hope,
urgently asking him to meet with Fu about moving a shipment time up to avoid a
penalty. Chen responded: “Once again, Du-Hope is just the export agent of Reecon
[M&E]. We are not responsible for any issues like quality and shipment schedule.
Brand responded: “I understand that you are not responsible for quality issues and
late shipments . . . .” Ex. 37.
13.
In summary, the business transactions leading up to the disputes in these cases
were negotiated between Brand on behalf of BMG and Fu on behalf of Reecon M&E.
Du-Hope signed the paperwork in its capacity as the export agent for Reecon M&E.
Fu Deposition at 22-24.
4
C.
14.
The Merger Negotiations
Brand and Fu were first introduced to each other in 2008 or 2009 by John
Neumann (“Neumann”) and John Norman, who worked for Winners Shanghai. Also
at their first meeting was an individual from Du-Hope, the export agent.4 Fu
Deposition at 16-18.
15.
In 2011, BMG began purchasing heaters from Reecon M&E. Fu Deposition at
23.
16.
In 2012, Brand proposed a merger of BMG and Reecon M&E.
17.
On November 15, 2012, Brand sent an email to “Fu Reecon” attaching a cash
flow projection and inquiring whether he could have an attorney begin drafting an
agreement. Ex. 30.
18.
Brand also sent Fu a document entitled “BMG-Reecon Merger Proposal –
Updates 11-15-12.” Ex. 1. In the document, Brand outlined a proposal by which he
would issue 25% of “BMG Company stock”5 to Reecon M&E in exchange for an
investment of $185,129.75 ($50,000 in cash and $135,129.75 in product, of which
$15,129.75 had already been provided) and BMG would change its name to “Reecon
USA, L.L.C.” while keeping the existing corporate structure in the United States.
The stated purpose was: “To join the two companies together and make a more
powerful company in the market place in both the US and China.” Id.
The Brand Parties’ citation of Neumann Deposition 55:9-18 for the proposition that Winners Shanghai introduced
Brand to Du-Hope is misleading. (ECF No. 67 at 6). On the same page of Neumann’s deposition he explained that
he did not know if they introduced Brand to Du-Hope or Reecon M&E. Neumann Deposition at 55:19-23.
5
Brand did not make a legal distinction between the transfer of “stock” and the transfer of membership interests in a
LLC.
4
5
19.
The parties negotiated revisions. One issue was whether the membership interests
should be owned by Fu and Wang as individuals, rather than Reecon M&E, because
China controls all flow of foreign exchange. Ex. 2.
20.
On December 29, 2012, Fu sent a letter with twelve points. Among other items,
Fu proposed that Reecon M&E’s product investment payment be completed by the
end of July 2013. Ex. 2.
21.
Fu recognized that Brand would own “75% of the share, therefore you can orient
and decide all the normal activities of the new company.” Ex. 2.
22.
During the negotiations, Fu recognized that Brand “as the managing director, can
decide all the operational activities, including the profit allocation, for example, if
you think it’s better to take the profit as new investment.” Ex. 2.
23.
Brand responded by email that typically 25% owners would be responsible for
25% of the federal tax, but “I have agreed to keep the profit and pay 100% of the tax
each year going forward.” Ex. 2.
24.
In an email on December 31, 2012, Brand explained that the draft agreement he
sent to Fu “was written based on the merger talking points that I attached.” Ex. 2.
25.
On January 14, 2013, Brand sent Fu an email entitled “Membership Interest
Purchase Agreement.”6 Ex. 2. In response to questions from Fu, Brand (1) agreed
that major decisions should be discussed and approved by all members; and (2)
explained: “The operating agreement will come later after the transaction is
complete. The operating agreement is between the company and the state of
The effort by counsel for the Brand Parties to characterize the parties’ eventual contract as a “Supply Agreement,”
(ECF No. 67 at 8) is disingenuous. It is clear from the context that the primary purpose for both sides was the
issuance of membership interests to Fu and Wang.
6
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Delaware, and determines how the company will conduct business. One is in place,
but will be revised to include Wang and Fu.” Ex. 2.
26.
On January 20, 2014, Brand sent an email to Jon Sherman (“Sherman”), his sales
representative, stating: “The merger is the same one that has been in progress since
early 2012. As you recall I have a deal with Fu for some cas[h] and prod[uct] in
exchange for stock.” 7 Ex. 5.
27.
On January 22, 2013, Brand sent an email attaching a final draft of “the new
membership purchase agreement,” which included Fu’s requested changes. Ex. 13.
The Membership Agreement is more fully described in part D below. Attached as an
exhibit to the Membership Agreement in the email was an amended operating
agreement, which is described more fully in part E below. Ex. 13.
D.
28.
The Membership Agreement
On January 31, 2013, BMG, Reecon M&E, Fu and Wang formally executed the
Membership Purchase and Supply Agreement (“Membership Agreement”). Ex. 4.
Brand signed the agreement on behalf of BMG. Fu signed on behalf of Reecon
M&E.
29.
As relevant to the jurisdictional issues in dispute, the Membership Agreement
provided that in consideration of a cash investment by Fu and Wang of $50,000 and
an investment of $135,129.75 in product by Reecon M&E, BMG agreed to issue Fu
and Wang each a 12.5% interest in BMG “as of the date hereof, subject to the terms
and conditions stated herein.” Section 1.1(a) provided that on or before the closing,
BMG would adopt an amended operating agreement in the form attached as exhibit A
to the agreement. Section 1.1(b) provided that the issuance of the membership
Brand did not make legal distinctions between a “merger,” “stock” or issuance or transfer of membership interests
in a LLC.
7
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interests would occur “at the Closing.” See also Section 2.3 (“At the Closing, subject
to the terms and conditions hereof, the Company shall sell and transfer the Interests to
each Principal.”). Section 2.1 provided that the closing would take place remotely via
the exchange of documents and signatures within 10 business days following the
satisfaction of the conditions set forth in “Section 5”8, or at such other time and place
as mutually agreed upon orally or in writing.
30.
Section 6.1 set four conditions to closing: (a) payment of the cash purchase price
and delivery as directed by BMG of products in the full amount of the product
purchase price; (b) the representations and warranties in Sections 4 and 5 remained
true; (c) performance of all agreements and conditions for closing; and (d) the
“Operating Agreement substantially in the form attached hereto as Exhibit A shall
have been executed and delivered by the parties thereto including Reecon [M&E].”
31.
In Section 7.1, Reecon M&E appointed BMG as a distributor of Reecon M&E’s
products and granted BMG the exclusive right to distribute and sell products in North
America. “Following the Closing Date,” BMG and Reecon M&E agreed to negotiate
a supply arrangement. Id.
32.
Pursuant to Section 7.2, BMG would change its name to “Reecon USA, LLC” or,
if that name was not available, an alternative name. Each party could hold itself out
to the public as being affiliated with the other. Section 7.3 required commercially
reasonable efforts to cooperate. Section 7.4 contemplated an annual meeting, to be
held in accordance with the amended operating agreement.
33.
Section 8.2(b) gave BMG authority to terminate the Membership Agreement by
written notice if: (i) Reecon M&E, Fu or Wang breached any representation, warranty
8
Section 6 of the Membership Agreement sets forth the conditions to closing. The reference to Section 5 appears to
be a typographical error.
8
or covenant (subject to notice and a 30-day cure period); or (ii) if the Closing did not
occur by December 31, 2013, “by reason of the failure of any condition precedent
under Section 6 hereof (unless the failure results primarily from the Company itself
breaching any representation, warranty, or covenant in this Agreement).”
34.
The Membership Agreement is governed by Delaware law. Section 9.1.
35.
On February 27, 2013, Brand sent Fu an email purporting to attach the “complete
version of the agreement for yours and Wang’s records.” Ex. 4. Exhibit A (Amended
Operating Agreement) and exhibit B (Product Contribution) were not attached to the
“complete version” sent by Brand.
E.
36.
The Amended Operating Agreement
The exhibit attached to the Membership Agreement in Brand’s January 22, 2013
email was captioned Amended and Restated Agreement of Limited Liability
Company (the “Amended Operating Agreement”). Ex. 13.
37.
The document was labeled “EXECUTION VERSION.”
38.
The recitals noted that the Amended Operating Agreement was being amended
“[i]n connection with the admission of 2 new individuals to the Company as
Members on the date hereof.”
39.
Section 3.01 stated “The Members of the Company are the Persons listed on
Annex A.” Annex A reflected that Brand owned 75%, Fu 12.5% and Wang 12.5% of
BMG. Ex. 13.
40.
Section 6.01 provided that Brand was the initial manager of the company, with
exclusive responsibility to manage the business.
41.
The Amended Operating Agreement contained a blank signature page.
42.
Brand specifically instructed Fu and Want to not execute the Amended Operating
Agreement in the January 22, 2013 email, stating: “The attached operating agreement
9
is just for your reference and NOT to be signed at this time. We will sign and file this
after the final transaction of goods.” Ex. 13 (emphasis in original).
43.
The Amended Operating Agreement was never executed by Wang and Fu.
44.
The court rejects Brand’s contention that Fu and Wang “abandoned” the
Amended Operating Agreement (ECF No. 67 at 22).
F.
45.
Course of Dealing
After the Membership Agreement was executed, the Brand Parties treated Fu and
Wang as members of BMG.
46.
Sherman testified credibly that Brand discussed with regularity that Fu and Wang
were owners of BMG. Sherman Deposition at 7-9, 45.
47.
On March 13, 2013, Brand sent Sherman an email stating: “I owe it to Fu and
Wang as their money is now in this.” Ex. 15.
48.
Neumann is self-employed and works to help international companies develop
business. Neumann Deposition at 5. Neumann testified that he developed a mentor
relationship in which Brand confided in him about BMG’s business. Neumann
Deposition at 15-16.
49.
Brand told Neumann that the transaction had happened and Fu and Wang had
actually paid the money and paid the product investment. Neumann Deposition at 2223. At a breakfast meeting in Greenville, S.C., Brand acknowledged Fu’s and
Wang’s ownership in BMG. Neumann Deposition at 26, 32-33.
50.
Neumann testified credibly at his deposition: “I know the reason I am here. It
has to do with ownership. Yes, I was told many times that, yes, there was a deal.
Yes, they were owners.” Neumann Deposition at 37.
51.
Frank Bernard (“Bernard”) worked as a sales representative for BMG from 20142017. Bernard Deposition at 7. Bernard testified that he discussed Fu’s and Wang’s
10
ownership of BMG with Brand half a dozen times. Bernard Deposition at 13.
Bernard explained that he had conversations with Brand about Fu and Wang
providing cash and product investments in the company and that the name was
changed from BMG to Reecon North America LLC as part of the transition to joint
ownership. Bernard Deposition at 10-11. Bernard described an evening with Brand,
Fu and Sherman in Nanjing, China, where Fu bought Johnny Walker Blue to
celebrate the organization as a single entity between Fu and Brand. Bernard
Deposition at 13-14.
52.
On July 29, 2013, Brand sent a letter on BMG letterhead to the US Consulate in
Shanghai to seek a visa for Fu’s trip to the United States. The letter referred to Fu as
the managing director of Reecon M&E and “also a shareholder of our company.”
Brand signed and printed his name on the letter. Ex. 16.
53.
On February 11, 2015, BMG changed its name to “Reecon North America, LLC”
as contemplated by § 7.2 of the Membership Agreement.
54.
On July 5, 2015, Brand sent Fu an email attaching a “Product Investment
Worksheet.” Ex. 9. The worksheet reflected that based on various shipments in
2014, the Reecon Parties more than satisfied their product investment condition, by
providing $17,518.10 more product than required.
55.
The Reecon Parties satisfied the product investment condition of the Membership
Agreement. It is undisputed that Fu and Wang paid the cash price.
56.
Neither Brand nor BMG ever invoked § 8.2(b) of the Membership Agreement,
which authorized BMG to terminate the Membership Agreement if the conditions
precedent were not met or the closing did not occur by December 31, 2013. See Ex. 4
§ 8.2.
11
G.
57.
Product Problems
At Brand’s direction, products used to satisfy the initial product investment were
sent to Stoll Sales (“Stoll”), Grainger and Northern Tool. Ex. 9; Tr. 50.
58.
The evidence presented at the hearing did not reflect how many of each specific
heater model were provided to each customer.
59.
There is no evidence that Brand ever informed Fu, Wang or Reecon M&E that a
defective product would be retroactively deducted from the initial product investment
in BMG.
60.
On January 10, 2014, Brand sent Fu an email notifying him that heaters provided
to Stoll had an ignition problem and sought a corrective solution. Ex. U. On
February 10, 2014, Brand sent another email stating that Stoll had 120 25K infrared
heaters that Stoll did not feel comfortable selling. Ex. V.
61.
Brand and Fu exchanged numerous emails over the next several months about
possible solutions. Ex. YY. On April 29, 2014, Brand sent an email explaining that
Stoll was not happy with the proposed fix for the 25K heater, and thought that the
32K heater had declined in quality. Ex. YY.
62.
In August 2014, Fu and Brand exchanged more emails about resolving the Stoll
issue with the 120 25K heaters.
63.
It is unclear from the record whether the heaters were actually defective or simply
failed to live up to Stoll’s expectations based on the design. A dual-fuel heater with a
ceramic burner to generate more infrared waves will take longer to ignite. Ex. V.
64.
Eventually, in July 2015, Brand sent 92 heaters from BMG’s warehouse to Stoll.
Tr. 57; Ex. X.
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65.
Some of the products returned from Stoll were used for samples and research;
some were destroyed in the field; and some were sent to a company called Tarantin,
which also rejected them. Tr. 58. No specific accounting was provided.
66.
The record does not reflect what portion of the initial product investment was
comprised of allegedly malfunctioning products.
67.
Brand was aware of the Stoll product defects prior to his creation of the Product
Investment worksheet he sent to Fu on July 5, 2015. Brand did not include a
deduction for defects on that worksheet. Ex. 9.
68.
BMG provided a credit of $4,100 for products returned by Northern Tool,
although there is no evidence that those products were defective. Fu Deposition at
93.
69.
The Brand Parties presented no evidence about product returns from Grainger.
70.
Brand was willing to consider a shipment to Lowe’s for product displays to be
part of the Product Investment. Tr. 66.
71.
In August 2016, Brand was willing to consider the Product Investment to be
complete. Tr. 66. No formal written document was prepared, as contemplated by
exhibit B to the Membership Agreement. Tr. 67-68.
72.
In December 2016, BMG lost all its business with Lowe’s. Tr. 47.
H.
73.
The Cooperation Agreement
On July 9, 2015, BMG, Reecon M&E and Du-Hope entered into a cooperation
agreement (the “Cooperation Agreement”). Ex. 20. The purpose of the Cooperation
Agreement was to extend cooperation on heater sales in North America. The
Cooperation Agreement had a one-year term.
74.
The Cooperation Agreement was entered pursuant to Section 7.1 of the
Membership Agreement, Tr. at 106, which provided for good faith negotiation of a
13
supply agreement “following the Closing Date” of the Membership Agreement. Ex.
4.
75.
As set forth in the Cooperation Agreement, BMG was responsible for marketing
and sales; Du-Hope was responsible for organizing production and shipments; and
Reecon M&E was in charge of product development and manufacturing.
76.
The Cooperation Agreement referenced that BMG owed Du-Hope a total overdue
amount of $61,367.10 for shipments to Grainger and Northern Tool in 2014. BMG
promised to effect the payment by “________” (the date was not filled in). Ex. 20.
I.
77.
Brand’s Revised Documents
On September 10, 2015, the Court of Appeals for the Third Circuit affirmed a
judgment in favor of BMG in the Intertek lawsuit. BMG v. Intertek, 801 F.3d 347 (3d
Cir. 2015).
78.
On November 17, 2015, BMG filed notice that the judgment, in the amount of
$5,360,200.34, had been fully satisfied. (Civil Action No. 12-1572, ECF No. 314).
79.
Sherman testified that he had an ugly conversation with Brand after the Intertek
judgment, in which Brand argued that Fu and Wang should not get their 25%
membership interest in BMG because they never signed the papers. Sherman
questioned Brand, asking, “but you took the money and took the inventory.”
Sherman Dep at 39-40.
80.
On July 4, 2016, Brand caused BMG to adopt a Synthetic Stock Plan, without the
knowledge or approval of Fu or Wang. Ex. 42. Pursuant to that plan, Brand sent
Grant Agreements to Fu and Wang. Ex. 42.
81.
On April 27, 2017, Fu sent an “official request according to the Membership
Interest Purchase and Supply Agreement” for financial information. Brand responded
that the Membership Agreement was only valid if the equity award was signed, and
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demanded that Fu execute the stock purchase agreement Brand had drafted. Fu
responded: “I’m not American citizen, I know only the Membership Interest
Purchase Agreement is valid. Just re-confirm again, that the Grant Agreement
doesn’t affect any original rights and interests of Wang’s and mine.” Ex. 40.
82.
Fu and Wang refused to sign the Grant Agreements. The Synthetic Stock Plan
and Grant Agreements never became effective.
J.
83.
The Civil Actions
On September 6, 2017, Reecon M&E, Fu and Wang sued Brand and BMG
(renamed Reecon NA) in the Allegheny County Court of Common Pleas (the “PA
Action”) for breach of the 2013 Membership Agreement by failing to provide their
membership interests and failing to pay for product; conversion and misappropriation
of the judgment in the Intertek lawsuit; and breach of fiduciary duty. The Reecon
Parties sought an accounting and declaratory relief (ECF No. 18-631, ECF No. 1-1).
84.
The complaint was served on the Brand Parties on October 13, 2017.
85.
The Brand Parties filed an answer and new matter on November 21, 2017. (ECF
No. 18-631, ECF No. 1-6). As their first affirmative defense, the Brand Parties
pleaded that they did not owe Reecon M&E because they purchased the product from
Du-Hope.
86.
Extensive motions practice and discovery occurred in the state court.
87.
The Brand Parties filed a praecipe for a writ to join Du-Hope as an additional
defendant in the PA Action on December 12, 2017. (ECF No. 18-631, ECF No. 1-8).
88.
On January 24, 2018, the Brand Parties filed a motion to discontinue the joinder
of Du-Hope, which was granted over the Reecon Parties’ opposition. (ECF No. 18631, ECF Nos. 1-13, 1-16).
15
89.
On April 23, 2018, Reecon M&E, Fu and Wang filed an amended complaint in
the PA Action, which added Du-Hope as a plaintiff with a claim in the alternative in
anticipation of a defense by the Brand Parties. Specifically, ¶ 50 states, in its entirety:
“To the extent Defendants take the position that Du-Hope, rather than
Reecon M&E, is the seller of product to whom Reecon NA is solely
responsible to pay (which is denied), then in the alternative to the foregoing,
Du-Hope is nonetheless entitled to the recovery for the breaches set forth in
Count II above.”
90.
Count II alleges breach of the 2013 Membership Agreement (to which Du-Hope
is not a party), and recovery for the unpaid invoices. (Civil No. 18-631, ECF 1-26).
91.
Upon the filing of the amended complaint in the PA Action, the Brand Parties
filed a Notice of Removal at Civil No. 18-631, arguing that the addition of Du-Hope
as a party created, for the first time, an ability to remove under federal question
jurisdiction pursuant to a treaty, the United Nations Convention on the International
Sale of Goods (“CISG”), available at
https://www.uncitral.org/pdf/english/texts/sales/cisg/V1056997-CISG-e-book.pdf.
(Civil No. 18-631, ECF No. 1). The Brand Parties argue that the case could not be
removed sooner because Du-Hope is the seller of goods who triggers federal question
jurisdiction under the CISG. Id. The Brand Parties acknowledge that they cannot
remove the PA Action based on diversity jurisdiction because they are citizens of
Pennsylvania. Id.
92.
On February 23, 2018, BMG (renamed Reecon NA) filed Civil Action No. 18234 in federal court, naming Du-Hope and Reecon M&E as defendants. The Brand
Parties assert subject-matter jurisdiction under both federal question and diversity of
citizenship.
93.
Count 1 of the amended complaint in Civil No. 18-234 (ECF No. 13) asserts
breach of the Cooperation Agreement by Du-Hope. Count 2 asserts breach of implied
16
warranty of merchantability against Du-Hope. Count 3 asserts breach of implied
warranty of fitness for a particular purpose against Du-Hope. Count 4 asserts breach
of the Membership Agreement by Reecon M&E. Count 5 asserts breach of an
express warranty set forth in the Membership Agreement by Reecon M&E. Count 6
asserts breach of implied warranty of merchantability against Reecon M&E. Count 7
asserts breach of implied warranty of fitness for a particular purpose against Reecon
M&E. Count 8 asserts tortious interference with contractual and business relations
against both defendants. Count 9 asserts tortious interference with prospective
business relations against both defendants. Count 10 asserts negligence by Reecon
M&E.
CONCLUSIONS OF LAW
A.
Admissibility of Evidence
1. The Brand Parties object to: (1) lay opinion testimony regarding the operation of export
agents in China (Bernard Deposition at 15-16; Sherman Deposition at 32-33); (2) thirdparty conclusions about the contractual relationships as hearsay (Neumann Deposition at
37; Bernard Deposition at 10-11; Sherman Deposition at 16-17); and (3) the
circumstances of Du-Hope’s joinder in the state court action.
2. The court will exclude the testimony regarding the general operation of export agents in
China as irrelevant. Federal Rule of Evidence 401. These cases involve the specific
issues whether (a) Du-Hope was acting as Reecon M&E’s export agent in its dealings
with BMG and (b) Brand knew about that relationship; not the broader role of export
agents in China.
3. The court will admit the testimony about how Brand characterized his contractual
relationship with the Reecon Parties. One of the key issues in dispute is whether Fu and
17
Wang became members of BMG. Brand’s contemporaneous statements to his sales team
are relevant to impeach his testimony in court and at his depositions. The statements at
issue are not hearsay because they were made by Brand and are being offered against him
by an opposing party. Federal Rule of Evidence 801(d)(2)(A), (C).
4. Even if they did constitute hearsay, the residual exception in Federal Rule of Evidence
807 would apply. Brand had reasonable notice and a fair opportunity to meet this
evidence and the witnesses are neutral and best-situated to provide probative testimony
on this issue. Fed. R. Evid. 807(a)(1-4), (b).
5. In Adelman v. Peter, No. CV L-08-6, 2012 WL 13055150 (S.D. Tex. Feb. 3, 2012)
(construing Delaware law), the court held that the conduct of the parties subsequent to
signing an LLC agreement could be considered to determine whether a party became a
member of an LLC. Id. at *5 (citing Carbine v. Xalapa Farm Ltd. P’ship, 980 F. Supp.
860, 864 (E.D. La. 1997) (considering extrinsic evidence where it was ambiguous
whether execution of other instruments was necessary to transfer partnership interest),
and 611 LLC v. U.S. Lubes, No. CCB-05-3417, 2006 WL 2038615 *5-6 (D. Md. Jul. 18,
2006) (considering post-execution evidence referring to parties as members of LLC)).
6. The court will give the testimony the weight it deserves, recognizing that Neumann,
Bernard and Sherman did not review the relevant contractual documents.
7. The court’s order specifically precluded the parties from objecting to the other side’s
proposed findings of fact and conclusions of law. Minute Entry of February 7, 2019.
The Brand Parties recognized this prohibition (ECF No 69 at 6) (“Reecon NA is
cognizant that this filing is not the place to argue the merits of the Proposed Findings”),
but nevertheless presented objections and argument to proposed findings about the state
court proceedings. The court denies these objections as improper.
18
8. The court notes that it can take judicial notice of the docket filings of the state court and
this court. Smierciak v. City of Pittsburgh Police Dep't, No. 2:18-CV-00734-MJH, 2018
WL 6790312, at *2 n.3 (W.D. Pa. Dec. 26, 2018) (by its very nature, the accuracy and
authenticity of the docket cannot reasonably be questioned) (collecting decisions).
9. The Brand Parties’ objections (ECF No. 69) are granted in part and denied in part.
B. Subject-Matter Jurisdiction
i.
General Principles of Subject-Matter Jurisdiction
10. A challenge to the court’s subject-matter jurisdiction may be either a facial challenge or
factual challenge. A facial challenge concerns an alleged pleading deficiency, whereas a
factual challenge “concerns the actual failure of a plaintiff’s claims to comport factually
with the jurisdictional prerequisites.” CNA v. United States, 535 F.3d 132, 139 (3d Cir.
2008). In deciding a factual challenge, the court does not accord any presumption of truth
to the plaintiff’s allegations. Id.
11. These cases involve factual challenges to jurisdiction and the parties conducted
substantial jurisdictional discovery.
12. In a case initially filed in federal court, the plaintiff bears the burden of proving subjectmatter jurisdiction. Id.
13. The burden to demonstrate removal jurisdiction rests with the removing party. SamuelBassett v. KIA Motors Am., Inc., 357 F.3d 392, 396 (3d Cir. 2004).
14. The removal statutes are strictly construed with all doubts resolved in favor of remand.
Boyer v. Snap-On Tools Corp., 913 F.2d 108, 111 (3d Cir. 1990).
15. A removing party must establish both: (1) that this court has subject-matter jurisdiction;
and (2) that it complied with all statutory removal procedures. Wright v. Thomas, No.
1:13-CV-804, 2013 WL 6279203, at *1 (M.D. Pa. Oct. 24, 2013), report and
recommendation adopted, No. 1:13-CV-0804, 2013 WL 6281117 (M.D. Pa. Dec. 4,
19
2013) (“Congress has prescribed both substantive requirements for removal and set time
lines and procedures for the exercise of removal jurisdiction”); see A.S. ex rel. Miller v.
SmithKline Beecham Corp., 769 F.3d 204, 211 (3d Cir. 2014) (refusing to expand
removal statute and noting that removal time limits are intended to prevent the waste of
resources involved in restarting a case in a second court after significant proceedings took
place in the first court).
16. In both Civil Action Nos. 18-234 and 18-631, the Brand Parties have the burden to
demonstrate subject-matter jurisdiction.
ii.
Timeliness of Removal of Civil Action No. 18-631
17. “The notice of removal of a civil action or proceeding shall be filed within 30 days after
the receipt by the defendant, through service or otherwise, of a copy of the initial
pleading setting forth the claim for relief upon which such [removal] action or proceeding
is based.” 28 U.S.C. § 1446.
18. The Reecon Parties argue that the removal of Civil Action No. 18-631 was untimely
sought. They contend that pursuant to Pennsylvania Rule of Civil Procedure 2252,
regardless whether a party is joined by writ or complaint it becomes subject to every
claim as if it had been originally named. The Reecon Parties reason that the 30-day
removal clock began to run on December 12, 2017, when the Brand Parties filed their
writ for joinder of Du-Hope because the Brand Parties previously pleaded in their answer
that Du-Hope was the actual seller of the goods and their theory of federal question
jurisdiction under the CISG was triggered at that time.
19. Alternatively, because Brand knew that the real contracting party was Reecon M&E (also
a Chinese entity), the PA Action arguably could have been removed upon its initial filing
under the Brand Parties’ theory of CISG jurisdiction.
20
20. The Brand Parties contend that removal was not proper until Du-Hope filed a claim in the
amended state court complaint.
21. Neither party cited federal case law directly on-point to this unusual procedural situation
and the court located no decisions addressing the impact of Pennsylvania Rule 2252 on
removal to federal court in its independent research.
22. Because the court concludes that it lacks subject-matter jurisdiction, for the reasons set
forth below, it does not need to resolve whether the removal was timely sought.
iii.
Removal based on an affirmative defense or counterclaim
23. In Civil Action No. 18-631, the Brand Parties affirmatively represented to the court in
their notice of removal that they could not remove the PA Action based on the claims in
the original complaint. (Civil No. 18-631, ECF No. 1 ¶ 5) (the Amended Complaint was
the first time it could be ascertained that the PA Action was removable).
24. As their first affirmative defense to the original complaint in the PA Action, the Brand
Parties pleaded that they did not owe Reecon M&E because they purchased the product
from Du-Hope.
25. The parties engaged in procedural sparring over the Brand Parties’ writ to join Du-Hope
as an additional defendant, which was later withdrawn.
26. In the amended complaint in the PA Action, the Reecon Parties pleaded a one-sentence,
alternative theory on behalf of Du-Hope. (Civil No. 18-631, ECF No. 1-26; Finding of
Fact 88) (“To the extent Defendants take the position that Du-Hope, rather than
Reecon M&E, is the seller of product to whom Reecon NA is solely responsible to pay
(which is denied), then in the alternative to the foregoing, Du-Hope is nonetheless
entitled to the recovery for the breaches set forth in Count II above”) (emphasis added).
27. The Brand Parties rely solely on this averment as the basis for removal jurisdiction.
21
28. The averment is in the nature of a preemptive response to the Brand Parties’ previouslyasserted affirmative defense (which the Reecon Parties denied), and in anticipation of the
Brand Parties’ counterclaims.9
29. Removal is not proper where a federal law theory is only raised as an anticipated defense
or counterclaim, rather than on the face of a well-pleaded complaint. As explained in
Loren v. Morgan Stanley, No. CIVA 06-2132 DRD, 2006 WL 2023180, at *3 (D.N.J.
July 18, 2006):
It has been long held that anticipating a federal defense in a suit asserting a nonfederal claim is barred by the well-pleaded complaint rule. See Rivet v. Regions Bank
of La., 522 U.S. 470, 475 (1998) ([“a case may not be removed to federal court on the
basis of a federal defense, ... even if the defense is anticipated in the plaintiff's
complaint”]). In Wiener v. Wampanoag Aquinnah Shellfish Hatchery Corp., 223
F.Supp.2d 346, 348 (D. Mass. 2002), the Court addressed a similar issue of whether
the federal court was the proper forum to resolve the parties' dispute when the
questions of federal law were anticipated in the complaint but not put in issue directly
until raised by the defense and counterclaim. That case concerned an action brought
against a Native American tribe in state court for injunctive and declaratory relief. The
Court held that anticipation of federal claims in the tribe's answer and counterclaims
did not present a “well-pleaded complaint,” as required to confer federal jurisdiction
over [a] claim and permit removal, since vindication of the tribe's rights under state
law did not necessarily turn on construction of federal law. Id.
30. In Home Depot U. S. A., Inc. v. Jackson, No. 17-1471, 2019 WL 2257158, at *4 (U.S.
May 28, 2019), the United States Supreme Court recently held that the removal statute
does not permit removal based on counterclaims at all, because counterclaims are
“irrelevant to whether the district court had original jurisdiction over the civil action.”
The Supreme Court explained that “original jurisdiction” is defined by the complaint. Id.
31. The CISG theory based on sales of goods to Du-Hope was not introduced into the PA
Action by the Reecon Parties. As pleaded in the Amended Complaint, the Reecon Parties
referred to Du-Hope as a seller of goods only “to the extent [the Brand Parties] take the
9
The Brand Parties did, in fact, file counterclaims against Du-Hope in the PA Action.
ECF No. 1).
22
(Civil No. 18-631,
position” as an affirmative defense/counterclaim. The Reecon Parties did not advocate
this theory and it is not a necessary basis for their right to relief – to the contrary, the
Reecon Parties pleaded that this theory “is denied.” See Christianson v. Colt Indus.
Operating Corp., 486 U.S. 800, 808 (1988) (federal-question jurisdiction exists only
where a well-pleaded complaint establishes either that federal law creates the cause of
action or the plaintiff's right to relief necessarily depends on resolution of a substantial
question of federal law in that federal law is a necessary element of one of the wellpleaded claims).
32. This one-sentence anticipatory averment in the Amended Complaint is arguably not a
proper ground for removal, particularly in light of the strict construction that must be
given to the removal statute, with all doubts resolved in favor of remand. Boyer, 913
F.2d at 111. In any event, as described below, federal question jurisdiction is not present
in this situation.
iv.
Federal Question Jurisdiction
33. The Brand Parties assert that both civil actions present a federal question because they
implicate the CISG, a treaty which governs contracts for the sale of goods between
parties from signatory nations. There is no dispute that there are contracts between
United States and Chinese entities, and both nations (the United States and China) are
signatories to the CISG. The key question is whether the contracts at issue are for a sale
of goods within the scope of the CISG.
34. Courts have universally concluded that the CISG does not apply to distributorship
contracts. Amco Ukrservice v. Am. Meter Co., 312 F. Supp.2d 681, 686 (E.D. Pa. 2004)
(collecting decisions). In Amco, the court held that the CISG did not apply to contracts
setting up a relationship to manufacture and install gas meters in Ukraine, and rejected
the buyer’s argument that it was trying to enforce an obligation to sell goods. Id. at 687.
23
In Helen Kaminski Pty. Ltd. v. Marketing Australian Products, Inc., 1997 WL 414137
(S.D.N.Y. July 23, 1997), the court held that the CISG did not govern the parties'
agreement setting the terms for distributing fashion accessories. Accord Adonia Holding
GMBH v. Adonia Organics LLC, No. 14-1223, 2014 WL 7178389 *3 (D. Ariz. 2014)
(“all courts that have considered the question have either held or suggested that the CISG
does not govern distributorship agreements, which entail much more than the simple sale
of goods”).
35. The Membership Agreement and Cooperation Agreement at issue here describe
distributorship arrangements held to be outside the scope of the CISG. The Membership
Agreement specifically defines BMG as the “distributor” of Reecon M&E’s products.
Ex. 4 at ¶ 7.1. Neither agreement identifies specific goods or specific prices and
quantities; instead, the agreements set up the framework for the parties’ relationship by
which Fu and Wang became members of BMG and the parties assigned roles for the
supply of heaters to the North American market.
36. The claims in Civil Action Nos. 18-234 and 18-631 allege fundamental breaches of the
Membership Agreement and Cooperation Agreements. The disputes in these cases are
not simple buyer-seller disagreements. Instead, the claims go to the fundamental
structure and implementation of the parties’ distribution relationship. See Amco, 312 F.
Supp.2d at 687 (rejecting “an artificial and untenable distinction between the relationship
and supply provisions of a distributorship”).
37. The Brand Parties argue that Amco and its progeny do not apply when contracts for the
sale of goods exist. (ECF No. 67 at 14-16). The Brand Parties point to the annual
purchase orders and claim for unpaid invoices as the basis for jurisdiction, contending
that the “history of discrete sales between the parties distinguishes this case from Amco
and its progeny.” ECF No. 67 at 14-16.
24
38. The court disagrees.
39. The fact that goods were ordered and shipped pursuant to a distributorship agreement
does not bring that arrangement within the scope of the CISG. In Amco, the court
rejected application of the CISG even though product orders were submitted and a
shipment of gas meters was on its way to Ukraine. 312 F. Supp.2d at 685.
40. In Perfumerias Unidas, S.A. v. Coty Prestige Travel Retail & Exp., LLC, No. 06-CIV23116, 2007 WL 9709776, at *6 (S.D. Fla. Aug. 7, 2007), the court held: “I conclude
that Perfumerias' allegation that it placed, and Coty filed, a specific order for the sale of
goods in August 2006 and/or other orders which were fulfilled does not bring the
underlying alleged April 23, 2006 distribution agreement within the scope of the CISG.”
41. The Perfumerias decision relied on Amco and explained:
The court in Amco-Ukrservice faced a similar set of facts to the ones presented
here-including the existence of individual orders for goods placed pursuant to
the underlying distribution agreement and that court concluded that the
distribution agreement did not fall within the scope of the CISG. Likewise, the
court in Multi-Juice [Multi-Juice, S.A. v. Snapple Beverage Corp., 2006 WL
1519981 (S.D.N.Y. June 1, 2006)] concluded that the delivery of individual
shipments of goods did not bring the framework distributor agreement within
the scope of CISG.
Id. at *5; accord Adonia, 2014 WL 7178389 at *3 (rejecting application of CISG even
though the distributorship agreement involved purchases of goods).10
42. Perhaps the most factually analogous case is Viva Vino Import Corp. v. Farnese Vini
S.r.l., No. 99–6384, 2000 WL 1224903, at *1–2 (E.D. Pa. Aug. 29, 2000), in which the
court held that the CISG did not govern an exclusive distributorship agreement, an
agreement granting the plaintiff a 25% interest in the defendant company, or a sales
commission agreement because none of the contracts were for a sale of particular goods
None of these decisions supports Brand’s creative effort to invoke the CISG by the backdoor, by alleging breaches
of individual purchase orders and asserting supplemental jurisdiction over the more fundamental breaches of the
distribution arrangement or the transfer of membership interests in the limited liability company. (See ECF No. 67
at 19).
10
25
or had specific price and quantity terms. In its analysis, the court noted that wine was
shipped F.O.B. Italy under the arrangement. Id. at *2.
43. The decisions cited by the Brand Parties are readily distinguishable. Roser Techs., Inc. v.
Carl Schreiber GmbH, No. 11CV302, 2013 WL 4852314, at *1 (W.D. Pa. Sept. 10,
2013), involved a straight-forward order for the manufacture and sale of copper mold
plates and subject-matter jurisdiction was not in dispute. See Shantou Real Lingerie Mfg.
Co. v. Native Grp. Int'l, Ltd., No. 14CV10246-FM, 2016 WL 4532911, at *1 (S.D.N.Y.
Aug. 23, 2016) (same); Zhejiang Shaoxing Yongli Printing & Dyeing Co. v. Microflock
Textile Grp. Corp., No. 0622608CV-O'SULLIVAN, 2008 WL 2098062, at *1 (S.D. Fla.
May 19, 2008), amended, No. 0622608CIVOSULLIVAN, 2008 WL 11333554 (S.D. Fla.
July 23, 2008) (same). Gruppo Essenziero Italiano, S.p.A. v. Aromi D'Italia, Inc., No.
CIV. CCB-08-65, 2011 WL 3207555, at *1 (D. Md. July 27, 2011), did involve an
exclusive distributor agreement, but the only disputes at issue involved non-payment of
invoices and subject-matter jurisdiction was not disputed. By stark contrast, the disputes
in this case involve the fundamental relationships among the parties.
44. The Brand Parties’ proposed findings cite ¶¶ 206-229 of the Amended Complaint in Civil
No. 18-234 as the basis for federal question jurisdiction (see ECF No. 67 at 19). Those
paragraphs relate to the tortious interference claims.
45. The CISG does not apply to tort claims, including claims of tortious interference with
business relations. Viva Vino, 2000 WL 1224903, at *1. Federal question jurisdiction
cannot be based on counts 8, 9 or 10 of the Amended Complaint in Civil No. 18-234.
46. The CISG does not apply to distributorship arrangements, even where products were
exchanged.
47. The court does not have federal question jurisdiction over Civil Action No. 18-234 or
Civil Action No. 18-631.
26
v.
Diversity of Citizenship Jurisdiction
48. Civil Action No. 18-631 cannot be removed on the basis of diversity of citizenship
because the removing parties are citizens of Pennsylvania. 28 U.S.C. § 1441(b)(2).
49. Jurisdiction for Civil Action No. 18-234 purports to be proper under 28 U.S.C. § 1332,
which requires complete diversity of citizenship.
50. Citizenship of a LLC is determined by the citizenship of each of its members. Zambelli
Fireworks Mfg. Co. v. Wood, 592 F.3d 412, 420 (3d Cir. 2010).
51. Diversity jurisdiction in Civil Action No. 18-234 depends upon whether Fu and Wang
became members of BMG. If so, a plaintiff and defendant would both be Chinese
citizens.
52. Because the Brand Parties’ attorney drafted the Membership Agreement and Operating
Agreement, Brand Deposition at 18, any ambiguities are construed against the Brand
Parties. Twin City Fire Ins. Co. v. Delaware Racing Ass’n, 840 A.2d 624, 630 (Del.
2003).
53. The Membership Agreement is to be construed under Delaware law. Ex. 4 ¶ 9.1.
54. The basic policy of the Delaware LLC Act is to provide members with freedom of
contract and broad discretion in drafting an LLC agreement and to furnish default
provisions when the members' agreement is silent. Elf Atochem N. Am., Inc. v. Jaffari,
727 A.2d 286, 291 (Del. 1999).
55. Delaware law defines a “Limited liability company agreement” as “any agreement
(whether referred to as a limited liability company agreement, operating agreement or
otherwise), written, oral or implied, of the member or members as to the affairs of a
limited liability company and the conduct of its business.” 6 Del. C. § 18-101(7).
27
56. A member is bound by the limited liability company agreement whether or not the
member executes the limited liability company agreement. Id. A limited liability
company is not required to execute its limited liability company agreement. Id.
57. A limited liability company agreement may provide rights to any person, including a
person who is not a party to the limited liability company agreement, to the extent set
forth therein. Id.
58. A written limited liability company agreement or another written agreement or writing:
a. May provide that a person shall be admitted as a member of a limited liability
company, or shall become an assignee of a limited liability company interest or
other rights or powers of a member to the extent assigned:
1. If such person (or a representative authorized by such person orally, in
writing or by other action such as payment for a limited liability company
interest) executes the limited liability company agreement or any other
writing evidencing the intent of such person to become a member or
assignee; or
2. Without such execution, if such person (or a representative authorized
by such person orally, in writing or by other action such as payment for a
limited liability company interest) complies with the conditions for
becoming a member or assignee as set forth in the limited liability
company agreement or any other writing; and
b. Shall not be unenforceable by reason of its not having been signed by a person
being admitted as a member or becoming an assignee as provided in paragraph
(7)a. of this section, or by reason of its having been signed by a representative as
provided in this chapter.
Id. (emphasis added).
59. Delaware law defines the term “Member” as “a person who is admitted to a limited
liability company as a member as provided in § 18-301 of this title.” 6 Del. C. § 18101(11).
60. Under 6 Delaware Code § 18-301(b)(1), after the initial formation of a LLC, a person
who is not an assignee is admitted as a member of an LLC as follows:
(1) In the case of a person who is not an assignee of a limited liability company
interest, including a person acquiring a limited liability company interest directly
from the limited liability company and a person to be admitted as a member of the
limited liability company without acquiring a limited liability company interest in
28
the limited liability company at the time provided in and upon compliance
with the limited liability company agreement or, if the limited liability
company agreement does not so provide, upon the consent of all members and
when the person's admission is reflected in the records of the limited liability
company.
61. In Adelman, 2012 WL 13055150, at *5 (addressing a similar membership dispute under
Delaware law), the court explained:
Under the Delaware LLC statute, an operating agreement, sometimes known as
a limited liability company agreement, is an agreement “of the member or
members as to the affairs of a limited liability company and the conduct of its
business.” Del. C. Ann. tit. 6, § 18-101(7). Operating agreements “[m]ay
provide that a person shall be admitted as a member of a limited liability
company ... [i]f such person ... executes the ... agreement.” tit. 6 § 18-101
(7)(a)(1). It is the policy of Delaware to give “maximum effect ... to the
enforceability of limited liability company agreements.” tit. 6 § 18-1101(b);
see also Achaian, Inc. v. Leemon Family LLC, 25 A.3d 800, 803-805 (Del. Ch.
2011) (discussing Delaware LLC policy). Accordingly, the Delaware Supreme
Court has noted that such agreements effectively constitute the entire
agreement among existing members with respect to the admission of new
members to the limited liability company.
62. In 611 LLC, 2006 WL 2038615, the court faced the same task confronting this court,
namely, determining whether parties became members of a Delaware LLC for purposes
of removal and diversity jurisdiction. The court first reviewed the important legal
principles, including the burden on the removing party, the federalism concerns
implicated by removal jurisdiction, the need to construe strictly the removal statute and
the duty to remand cases where federal jurisdiction is in doubt. Id. at *2. The court
closely scrutinized the terms of the parties’ agreements and considered extrinsic evidence
to determine whether a membership interest, rather than a mere assignment of financial
interests, was transferred. The court concluded that even though the new member failed
to seek formal confirmation of its status, it advanced a reasonable basis for membership
in the LLC. The court rejected defendants' inconsistent, if not inequitable, position to the
contrary, “[e]specially considering the defendants' burden of demonstrating subject
matter jurisdiction” and remanded the case to the state court. Id. at *6.
29
63. Brand formed BMG under Delaware law on November 15, 2004, with himself as the sole
member. Ex. 12. The initial LLC Agreement §§ 6,8 authorized BMG to issue a single
class of membership interests and anticipated there could be multiple members. Id.11
64. The Membership Agreement is a writing evidencing the intent for Fu and Wang to
become members of BMG. 6 Del. C. § 18-101(7).
65. The Membership Agreement provided that Fu and Wang would each receive a 12.5%
membership interest in BMG. Fu and Wang were not mere assignees of a financial
interest.
66. Fu and Wang satisfied all the preconditions to closure of the Membership Agreement that
were within their control by paying the cash price and causing the product investment to
be made. Ex. 4, 9. The Brand Parties failed to meet their burden to demonstrate that
Reecon M&E did not satisfy the Product Investment condition because the products were
defective.
67. It was not essential that the Amended Operating Agreement be executed because Fu and
Wang complied with all their preconditions for becoming members of BMG. 6 Del. C. §
18-101(7)(a)(2).
68. The Membership Agreement § 1.1(a) imposed the duty to adopt the Amended Operating
Agreement on BMG.
69. Brand treated Fu and Wang as members of BMG after execution of the Membership
Agreement.
70. The court rejects the Brand Parties’ theory that the investment made by Fu and Wang was
merely “consideration for the right to become members upon certain conditions precedent
Section 11 of the LLC Agreement authorized a member to assign “all or any part of its interest at any time” with
the tranferree becoming a substituted member “automatically.” In Achaian, Inc. v. Leemon Family LLC, 25 A.3d
800, 807 (Del. Ch. 2011), the court construed a similar provision (“Member may transfer all or any portion of its
interest in [Omniglow] to any Person at any time”) as providing for a transfer of a member’s entire ownership
interest, including voting rights, rather than a mere assignment of the member’s economic interest in the LLC.
11
30
being met.” ECF No. 67 at 44. See ECF No. 67 at 22 (“it was an agreement that Mr. Fu
and Mr. Wang’s percentage interest, if any vested, would be determined at a later time.”)
It is wholly unreasonable to believe that Fu and Wang agreed to invest or cause to be
invested over $185,000 in cash and product while the Brand Parties retained an
unrestricted option to decide whether or not to give them any membership interest at all.
71. Brand argues that because Fu and Wang signed the Membership Agreement without an
executed Amended Operating Agreement, their “percentage interest” in Section 1.1(b)
became “undefined.” ECF 67 at 22. The Brand Parties reason that the parties never
reached a meeting of the minds on their percentage interest, and therefore Fu and Wang
received nothing. The court rejects this argument as frivolous. The negotiations, the text
of the Membership Agreement, and the execution version of the Amended Operating
Agreement clearly specify that Fu and Wang would each receive a 12.5% membership
interest.
72. The court rejects the Brand Parties’ theory that Fu and Wang did not want to finalize the
agreement because they wanted to avoid tax consequences. ECF No. 67 at 44. The plain
text of the Membership Agreement, which Fu and Wang executed, provided each of them
with 12.5% interest in the company. Fu and Wang fulfilled all the conditions to
membership within their control.
73. It was Brand’s responsibility, as the majority owner and sole manager of BMG, to cause
the Amended Operating Agreement to be finalized. Ex. 4 § 1.1(a). Fu and Wang had no
ability to do so.
74. Brand did not consider the Amended Operating Agreement to be an essential part of the
Membership Agreement because he did not attach it to the “complete version” of the
Membership Agreement he emailed on February 22, 2013 (Ex. 4).
31
75. The Amended Operating Agreement independently demonstrates the intent for Fu and
Wang to become members of BMG.
76. The “Execution Version” of the Amended Operating Agreement emailed by Brand to Fu
and Wang on January 22, 2013, recited that it was being amended “[i]n connection with
the admission of 2 new individuals to the Company as Members on the date hereof.” Ex.
13. Annex A identified Fu and Wang as the new members. Ex. 13.
77. The language of the initial BMG LLC Agreement provided that additional membership
interests could be issued by BMG or Brand could transfer some of his membership
interests, which was to occur “automatically.”12
78. Fu’s and Wang’s signatures on the Amended Operating Agreement were not necessary to
effectuate membership. The introductory paragraph of the Amended Operating
Agreement stated that it shall be binding on the members “regardless of whether or not
the Person has executed this Agreement or any amendment thereto.” Ex. 13.
79. Under Delaware law, an LLC operating agreement: “Shall not be unenforceable by
reason of its not having been signed by a person being admitted as a member.” 6 Del. C.
§ 18-101(7)(b). An operating agreement need not even be in writing. Id.
80. In Adelman, the court concluded an operating agreement which listed the members and
their percent interests, standing alone, established that they were members of the LLC.
2012 WL 13055150 at * 5.
81. The Brand Parties advance several arguments why Fu and Wang never became members
under the Membership Agreement: (1) there was no closing; (2) there was no finalized
Amended Operating Agreement; (3) they never satisfied the product precondition
12
Compare, e.g., the original LLC Agreement with the Execution Version of the restated Operating Agreement sent
to Fu and Wang on January 22, 2013 (Ex. 13 Art. X) (setting forth procedures for future transfers of membership
interests).
32
because the goods were defective; and (4) they did not act like owners. None of these
arguments is convincing.
82. Neither Brand nor BMG ever invoked § 8.2(b) of the Membership Agreement, which
authorized BMG to terminate the Agreement if the conditions precedent were not met or
the closing did not occur by December 31, 2013. See Ex. 4 § 8.2.
a. The Closing
83. The Membership Agreement provided that the closing would take place remotely within
10 business days following satisfaction of the conditions, or such other time and place as
mutually agreed. Ex. 4 § 2.1.
84. Brand acknowledged Fu’s and Wang’s membership interests in BMG to numerous
persons, including Sherman, Neumann, Bernard, and the United States consulate (Ex.
16).
85. Brand and BMG ratified the closing of the Membership Agreement by changing the
company’s name from BMG to Reecon NA and submitting the product investment
worksheet showing that Reecon M&E contributed $17,518 more in product than required
(Ex. 9). See Fidanque v. Am. Maracaibo Co., 33 Del. Ch. 262, 280 (1952) (“stockholder
ratification of the agreement for the exchange of stock cured any defect which may have
existed in this transaction. It is therefore a legal and binding agreement.”)
86. Brand and BMG recognized the closing of the Membership Agreement by entering into
the Cooperation Agreement (Ex. 20) to formalize a supply arrangement pursuant to § 7.1
of the Membership Agreement, which provided that the supply arrangement would be
negotiated “[f]ollowing the closing date.” Ex. 4.
87. Prior to July 2016, neither Brand nor BMG ever notified Fu or Wang that the
Membership Agreement was not in force.
33
88. In sum, the lack of a formalized closing did not prevent Fu and Wang from becoming
members of the LLC.
b. The Amended Operating Agreement
89. The court explained above why the Amended Operating Agreement is sufficient to
recognize Fu’s and Wang’s membership interests in BMG under Delaware law even
though it was not signed.
90. Brand and BMG are also estopped from arguing that the Amended Operating Agreement
never became effective because Fu and Wang did not execute it.
91. The Pennsylvania Supreme Court explained the doctrine of promissory estoppel in
Crouse v. Cyclops Industries, 745 A.2d 606, 610 (2000), as follows:
In order to maintain an action in promissory estoppel, the aggrieved party must
show that 1) the promisor made a promise that he should have reasonably
expected to induce action or forbearance on the part of the promisee; 2) the
promisee actually took action or refrained from taking action in reliance on the
promise; and 3) injustice can be avoided only by enforcing the promise. Id. As
promissory estoppel is invoked in order to avoid injustice, it permits an
equitable remedy to a contract dispute.
92. Brand made a specific promise when he instructed Fu and Want to not execute the
Amended Operating Agreement in the January 22, 2013 email, stating: “The attached
operating agreement is just for your reference and NOT to be signed at this time. We will
sign and file this after the final transaction of goods.” Ex. 13. In response to questions
from Fu, Brand explained: “The operating agreement will come later after the transaction
is complete. The operating agreement is between the company and the state of
Delaware.” Ex. 2.
93. Brand’s promise was reasonably expected to induce forbearance by Fu and Wang; and
they refrained from signing the Amended Operating Agreement in reliance on Brand’s
promise. Brand broke his promise by not executing the Amended Operating Agreement
on behalf of BMG when Fu and Wang satisfied all the preconditions to membership set
34
forth in the Membership Agreement; and injustice can be avoided only by enforcing the
promise, i.e., by regarding the Amended Operating Agreement as executed.
94. Brand and BMG cannot rely on the lack of Fu’s and Wang’s signatures to defeat their
membership interests, when Brand, the sole manager of BMG, specifically instructed
them not to sign it. Apalucci v. Agora Syndicate, Inc., 145 F.3d 630, 634 (3d Cir. 1998)
(“As a general rule, when one party to a contract unilaterally prevents the performance of
a condition upon which his own liability depends, the culpable party may not then
capitalize on that failure”).
c. The Product Contribution
95. The court found, as a factual matter, that sufficient product was contributed to satisfy this
precondition to membership.
96. Even under Brand Parties’ theory of the case, Fu and Wang caused the product
investment to be completed, albeit not until 2016 with a shipment of displays for Lowe’s.
Tr. 66-67.
97. As explained above, the Brand Parties failed to meet their burden to prove by a
preponderance of the evidence that this precondition was not fulfilled because the
products were defective. Brand prepared his Product Investment Worksheet on July 5,
2015 (Ex. 9), long after he was aware of the problems with Stoll. The Product
Investment Worksheet contains no reduction or offset for allegedly defective products.
98. The Brand Parties argue that the $61,367.10 payment referenced in the Cooperation
Agreement means that the initial Product Investment was not satisfied. The court rejects
this argument. The Cooperation Agreement contains no language with respect to a
failure to meet the initial Product Investment. By executing the Cooperation Agreement,
BMG agreed that payment for those shipments was overdue.
35
99. It is not reasonable to conclude that the 2013 Membership Agreement failed for lack of
consideration due to product problems that arose years later.
d. Acting as Owners
100.
As a final argument, the Brand Parties argue that Fu and Wang did not act as
owners because they did not pay taxes, contribute their personal funds to BMG, etc.
101.
Fu’s and Wang’s actions were consistent with their position as minority members
of the LLC and their agreement with Brand.
102.
It was not surprising that Fu and Wang did not seek profit distributions or pay
taxes. In the initial negotiations, Brand “agreed to keep the profit and pay 100% of the
tax each year going forward.” Ex. 2.
103.
Brand had full control over the operations and preparation of financial documents
for BMG.
104.
When an issue implicating their membership rights arose, Fu and Wang asserted
their rights under the Membership Agreement and rejected Brand’s attempt to have them
accept a Synthetic Stock Agreement and Grant Agreements.
e. Duty of good faith and fair dealing
105.
Under Delaware law, every contract has an implied duty of good faith and fair
dealing. In Price v. State Farm Mut. Auto. Ins. Co., No. CIV.A. N11C-07069RRC, 2013
WL 1213292, at *13 (Del. Super. Ct. Mar. 15, 2013), aff'd, 77 A.3d 272 (Del. 2013), the
court explained:
The implied duty of good faith and fair dealing attaches to every Delaware
contract, including insurance contracts. The duty of good faith and fair dealing
has been defined as “the obligation to preserve the spirit of the bargain rather
than the letter, the adherence to substance rather than form.
106.
Delaware’s LLC law imposes a specific duty of good faith on members and
managers of LLCs: “To the extent that, at law or in equity, a member or manager or
36
other person has duties (including fiduciary duties) to a limited liability company or to
another member or manager or to another person that is a party to or is otherwise bound
by a limited liability company agreement, the member's or manager's or other person's
duties may be expanded or restricted or eliminated by provisions in the limited liability
company agreement; provided, that the limited liability company agreement may not
eliminate the implied contractual covenant of good faith and fair dealing.” 6 Del. C. §
18-1101(c).
107.
Neither Brand nor BMG acted in good faith or dealt fairly with Fu and Wang. To
the contrary, BMG through its sole manager, Brand, accepted their cash and the product
contributions, changed BMG’s name to take advantage of the Reecon brand, and held Fu
and Wang out as members for several years. It was not until after the substantial Intertek
judgment that Brand and BMG attempted to disavow Fu’s and Wang’s membership
interests.
108.
Under principles of equity, BMG and Brand are estopped from arguing that Fu
and Wang were not members of BMG.
f. Summary of conclusions with respect to diversity jurisdiction
109.
Fu and Wang, Chinese citizens, are members of BMG.
110.
BMG (now named Reecon North America, LLC) is considered to be a citizen of
Pennsylvania and China.
111.
Because plaintiff and defendants are citizens of China, this court lacks diversity of
citizenship jurisdiction over Civil No. 18-234.
C.
112.
Request for Costs and Counsel Fees
The Reecon Parties seek an award of the costs and expenses, including counsel
fees, they incurred as a result of the improper removal pursuant to 28 U.S.C. § 1447(c).
37
113.
Section 1447(c) provides, in relevant part: “An order remanding the case may
require payment of just costs and any actual expenses, including attorney fees, incurred
as a result of the removal. 28 U.S.C. § 1447(c).
114.
The Supreme Court explained that “an award of fees under § 1447(c) is left to the
district court's discretion, with no heavy congressional thumb on either side of the
scales.” Martin v. Franklin Capital Corp., 546 U.S. 132, 139 (2005). “The appropriate
test for awarding fees under § 1447(c) should recognize the desire to deter removals
sought for the purpose of prolonging litigation and imposing costs on the opposing party,
while not undermining Congress' basic decision to afford defendants a right to remove as
a general matter, when the statutory criteria are satisfied.” Id. at 140.
115.
“Absent unusual circumstances, courts may award attorney's fees under § 1447(c)
only where the removing party lacked an objectively reasonable basis for seeking
removal. Conversely, when an objectively reasonable basis exists, fees should be
denied.” Id.
116.
In 611, LLC, the court rejected a similar request for costs and fees because the
motion to remand raised a novel and complex question and there was no evidence of bad
faith in the removal. 2006 WL 2038615 at *6 n.14 (citing Nat'l Ass'n of State Farm
Agents, 201 F.Supp.2d at 531 n. 12).
117.
This case presents a close question for the award of fees under § 1447(c). The
Brand Parties presented an objectively reasonable basis for seeking removal, given the
paperwork in Du-Hope’s name as the export agent and the CISG theory asserted, albeit
an erroneous theory.
118.
After reflection, the court exercises its discretion to decline to impose fees under §
1447(c).
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119.
Pursuant to § 9.10 of the Membership Agreement, the prevailing party is entitled
to recover all fees, costs and expenses, including counsel fees. Because the instant
decision concerns jurisdiction, rather than the merits, the court does not decide whether
the Reecon Parties are entitled to recover under this provision.
Conclusion
In accordance with the foregoing, Civil Action No. 18-631 will be REMANDED
forthwith to the state court forthwith and Civil Action No. 18-234 will be DISMISSED for lack
of subject-matter jurisdiction.
An appropriate order follows.
June 20, 2019.
/s/ Joy Flowers Conti
Joy Flowers Conti
Senior United States District Judge
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IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF PENNSYLVANIA
REECON NORTH AMERICA, LLC,
Plaintiff,
vs.
DU-HOPE INTERNATIONAL GROUP,
REECON M & E CO. LTD.,
Defendants.
REECON M & E CO. LTD., GUOHONG
FU, YAODANG WANG, and DU-HOPE
INTERNATIONAL GROUP,
Plaintiffs,
vs.
REECON NORTH AMERICA, LLC, and
DAVID BRAND,
Defendants.
)
)
)
)
)
)
)
)
)
2:18-CV-00234-JFC
)
)
)
)
)
)
)
)
)
)
)
)
2:18-CV-00631-JFC
ORDER OF COURT
And now this 20th day of June, 2019, in accordance with the foregoing Findings of Fact
and Conclusions of Law, Civil Action No. 18-631 is REMANDED to the state court
FORTHWITH and Civil Action No. 18-234 is DISMISSED for lack of subject-matter
jurisdiction and marked closed.
/s/ Joy Flowers Conti
Joy Flowers Conti
Senior United States District Judge
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