Wolf et al v. Altitude Costa LLC et al

Filing 34

MEMORANDUM AND ORDER "For the foregoing reasons, this Court dismisses the Wolfs' petition to compel arbitration for want of subject matter jurisdiction.SO ORDERED."Signed by Judge William G. Young on 11/14/2018.(EES)

UNITED STATES DISTRICT COURT
DISTRICT OF PUERTO RICO
___________________________________
)
)
)
Petitioners,
)
)
v.
)
)
ALTITUDE COSTA LLC
)
and ALTITUDE WEST LLC,
)
jointly d/b/a ALTITUDE
)
TRAMPOLINE PARK; ALLAN S.
)
JONES; and LUKE D. JONES,
)
)
Respondents.
)
___________________________________)
JAMES S. WOLF and
MARY-ANN WOLF,

CIVIL ACTION
NO. 18-01422-WGY

YOUNG, D.J. 1

November 14, 2018
MEMORANDUM & ORDER

I.

INTRODUCTION
This case presents the novel question whether a federal

court has diversity jurisdiction over a limited liability
company (“LLC”) member’s suit against the LLC about the scope of
the member’s rights when the member also requests a declaratory
judgment that he is an LLC member.

This Court holds that an LLC

member cannot gin up jurisdiction by requesting such a
declaratory judgment where both the member and the LLC agree
that the member is, in fact, a member.

As a consequence,

pursuant to its order of September 24, 2018, ECF No. 15, this

1

Of the District of Massachusetts, sitting by designation.

Court dismisses this case for want of subject matter
jurisdiction.
A.

Factual Allegations

In summarizing the facts, this Court treats the petition’s
well-pleaded facts as true, draws all reasonable inferences in
the petitioners’ favor, and considers the petition’s exhibits,
but disregards the petition’s conclusory allegations.

See

United States ex rel. Duxbury v. Ortho Biotech Prods., L.P., 579
F.3d 13, 28 (1st Cir. 2009); Viqueira v. First Bank, 140 F.3d
12, 16 (1st Cir. 1998); Aversa v. United States, 99 F.3d 1200,
1210 (1st Cir. 1996).
James S. Wolf (“Mr. Wolf”) is an Ohio-based investor in
various domestic and international businesses.
No. 1.

Pet. ¶ 1, ECF

In early 2015, Mr. Wolf, his brother-in-law Allan S.

Jones (“Mr. Jones”), and Luke D. Jones formed Altitude Costa,
LLC (“Costa”) in order to start a trampoline park business in
Puerto Rico.

Pet. ¶¶ 5-6, 11-14, 105.

That August, Mr. Wolf

executed a subscription agreement to purchase 20,750 Class A LLC
units in Costa.

Pet. ¶¶ 43-47 & Ex. I.

Soon after making the investment, in spring 2016, Mr. Wolf
noticed “some irregularities” in Costa’s operations.

Pet. ¶ 64.

Costa also restricted Mr. Wolf’s access to its information.
Pet. ¶ 64.

Although Mr. Wolf received a distribution of Costa’s

profits for the fourth quarter of 2015 and the first quarter of

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2016, Mr. Wolf did not receive further distributions
notwithstanding his repeated requests.

See Pet. ¶¶ 58, 60, 69.

Mr. Wolf’s attempts to help manage Costa appear to have
frustrated the two other founding LLC members.

In May 2016, Mr.

Jones emailed Mr. Wolf to demand that Mr. Wolf “act like a
normal investor” in Costa and its subsidiary, Altitude Costa
West, LLC (“West”).

Pet. ¶ 76.

Mr. Wolf alleges that that

summer one of Costa’s managers threatened him and prevented him
from accessing Costa property, at the Joneses’ behest.
Pet. ¶ 78.
Mr. Wolf received an email on July 28, 2016 from Mr. Jones
stating that Mr. Wolf was “out of compliance” and that the
“agreement are [sic] rescinded.”

Pet. ¶ 83.

Mr. Wolf’s

attorney contacted Mr. Jones the next day and asserted that Mr.
Wolf was a member of Costa and demanded Costa pay Mr. Wolf owed
distributions.

Pet. ¶ 84.

Mr. Jones reaffirmed that he had

rescinded “the ‘proposed’ Subscription and Operating Agreement”
on July 30, 2016.

Pet. ¶ 85.

On August 1, 2016, Mr. Wolf’s

attorney responded to Mr. Jones that the Subscription Agreement
was fully signed -- and thus effective -- and again requested
Mr. Wolf’s distributions.

Pet. ¶ 86.

Although Mr. Wolf’s

attorney offered to discuss the dispute in his August 1
communication, the petition reveals no response from Costa or
the Joneses.

Pet. ¶ 86.

While the petition alleges that Mr.

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Wolf’s attorney and Mr. Wolf’s wife, Mary-Ann Wolf, followed up
with Costa and the Joneses, the petition does not describe any
response from them.
Dissatisfied with Costa and the Joneses’ silence, Mr. Wolf
notified Costa, West, Mr. Jones, and Luke D. Jones
(collectively, the “Respondents”) on June 13, 2018 that he
intended to invoke the subscription agreement’s arbitration
clause to resolve the dispute.

Pet. ¶ 106.

With no response on

June 27, 2018, the Wolfs filed a petition to compel arbitration
in this Court.
B.

Pet. ¶ 107.

Procedural History

The Respondents opposed the petition on September 12, 2018.
Opp’n, ECF No. 12.

At a teleconference hearing on September 24,

2018, this Court sua sponte noted the potential absence of
subject matter jurisdiction because the pleadings did not reveal
the LLC members’ citizenships.

Min. Order, ECF No. 15.

It

therefore ordered Costa and West to supply the names and
addresses of their members.

Id.

Instead of providing this

information, however, the Respondents averred, on October 4,
2018, that Mr. Wolf is a member of Costa and asserted that an
LLC member cannot bring a diversity action against the LLC.
Mot. Resp. Order Docket No. 15 ¶ 3, ECF No. 16 (citing Liu v. 88
Harborview Realty, LLC, 5 F. Supp. 3d 443, 450-51 (S.D.N.Y.
2014)).

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On October 4, 2018, this Court, observing that the
Respondents’ motion raised further jurisdictional concerns,
again ordered the Respondents to provide the LLC membership
lists.

Order, ECF No. 17.

The Respondents complied with the

Court’s new order that same day and stated, among other things,
that Mr. Wolf was a member of Costa, but not of West.
Submitting LLC Membership Lists 1-2, ECF No. 19.

Mot.

Subsequently,

on October 15, 2018, the Wolfs filed a motion in compliance with
this Court’s order in which they argued that Mr. Wolf’s
citizenship could not be attributed to Costa because Costa did
not recognize him as a member when Mr. Wolf filed his petition.
Mot. Compliance Ct. Order 4, ECF No. 22.
II.

ANALYSIS
This Court lacks subject matter jurisdiction over this

petition to compel arbitration.

Section 4 of chapter 29 of the

United States Code permits a party to petition to enforce an
arbitration agreement in any district court that would have
subject matter jurisdiction over the underlying controversy that
the petitioner seeks arbitrated.

See Vaden v. Discover Bank,

556 U.S. 49, 62–63 (2009) (citing Moses H. Cone Mem’l Hosp. v.
Mercury Constr. Corp., 460 U.S. 1, 25 n.32 (1983)).

“The party

asserting jurisdiction has the burden of demonstrating the
existence of federal jurisdiction.”

Fabrica de Muebles J.J.

Alvarez, Incorporado v. Inversiones Mendoza, Inc., 682 F.3d 26,

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32 (1st Cir. 2012) (citing Viqueira, 140 F.3d at 16).

Here, the

Wolfs present for arbitration state law claims for a declaratory
judgment and damages.

Pet. 24-25.

Accordingly, they identify

only one basis for this Court to have subject matter
jurisdiction: diversity of citizenship.

Pet. ¶ 9 (citing 28

U.S.C. § 1332(a)(1)).
Section 1332(a)(1) provides that this Court “shall have
original jurisdiction over all civil actions where the matter in
controversy exceeds the sum or value of $75,000, exclusive of
interests and costs, and is between citizens of different
states.”

Where, as here, multiple plaintiffs sue multiple

defendants, “the presence of but one nondiverse party divests
the district court of original jurisdiction over the entire
action.”

See DCC Operating, Inc. v. Siaca (In re Olympic Mills

Corp.), 477 F.3d 1, 6 (1st Cir. 2007) (citing Strawbridge v.
Curtiss, 7 U.S. (3 Cranch) 267, 267 (1806)).
citizenship of all its members.

An LLC shares the

D.B. Zwirn Special

Opportunities Fund, L.P. v. Mehrotra, 661 F.3d 124, 125 (1st
Cir. 2011) (per curiam) (quoting Pramco, LLC ex rel. CFSC
Consortium, LLC v. San Juan Bay Marina, Inc., 435 F.3d 51, 54
(1st Cir. 2006)).

“Thus, in general, a plaintiff who is a

member of an LLC cannot bring a diversity action against the
LLC.”

Liu, 5 F. Supp. 3d at 450-51 (citing Keith v. Black

Diamond Advisors, Inc., 48 F. Supp. 2d 326, 330 (S.D.N.Y. 1999);

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Skaaning v. Sorensen, CV. No. 09–00364 DAE–KSC, 2009 WL 3763056,
at *3 (D. Haw. Nov. 10, 2009)).
Because the Wolfs and the Respondents agree that Mr. Wolf
is a member of Costa, this Court lacks diversity jurisdiction.
The Wolfs attempt to distinguish their case from the mine-run of
lawsuits lodged by LLC members against the LLC on the ground
that they seek a declaratory judgment from an arbitrator that
Mr. Wolf is in fact a member of Costa.
Order 3.

Mot. Compliance Ct.

They posit that any jurisdictional doubts are

misplaced, then, for federal courts “measure[] all challenges to
subject matter jurisdiction premised upon diversity of
citizenship against the state of facts that existed at the time
of filing.”

See Grupo Dataflux v. Atlas Glob. Grp., L.P., 541

U.S. 567, 571 (2004).

The Wolfs insist that, at the time of

filing, Mr. Wolf was not a member of Costa.

Mot. Compliance Ct.

Order 4.
The Wolfs’ own petition, however, belies their position.
In multiple paragraphs, the petition alleges that Mr. Wolf was a
member of Costa.
98, 111.

See Pet. ¶¶ 24, 40, 47, 55, 56, 57, 67, 71,

In particular, the petition points out instances where

Mr. Jones allegedly told Mr. Wolf that he was not a member and
Mr. Wolf’s counsel corrected him.

Pet. ¶¶ 83-86.

Not only does

the petition allege that Mr. Wolf is a member, but also it
references an attached subscription agreement purporting to

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provide Mr. Wolf with membership rights in Costa, including the
right to arbitrate claims against the LLC.

Pet. Ex. I.

The Wolfs attempt to analogize their plight to the
plaintiffs’ in Symes v. Harris, 472 F.3d 754 (10th Cir. 2006),
but their analogy is misplaced.

There, foreign nationals sued a

Colorado LLC and demanded a declaratory judgment deeming them
LLC members.

Id. at 757.

Because that remedy would have

defeated alienage jurisdiction, the district court ruled that it
lacked subject matter jurisdiction over the case.

Id. at 758.

The Tenth Circuit reversed, holding that the district court
erred by considering its jurisdiction after providing the
plaintiffs’ relief as opposed to its jurisdiction at the suit’s
onset.

Id. at 759.

The Tenth Circuit’s reasoning in Symes accords with this
Court’s analysis here.

This Court does not lack jurisdiction

over this action because of the remedy that this Court or an
arbitrator might impose, but because the petition alleges that
Mr. Wolf is a member of Costa and Costa does not deny that
allegation.

Compare Pet. ¶ 1 & Ex. I with Mot. Submitting LLC

Membership Lists 1-2.

True, the petition avers that, in 2016,

Mr. Jones stated that the Subscription Agreement was rescinded.
Pet. ¶ 83.

But it also asserts that Mr. Wolf corrected

Mr. Jones and does not allege anything about Mr. Jones’s state
of mind at the time of filing.

Pet. ¶¶ 84-86.

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What’s more,

unlike the Symes plaintiffs, Mr. Wolf provided documentary
evidence of his LLC membership, asserts that he received
membership distributions from the LLC, and claims that the LLC
identified him as a member in emails.

Pet. Ex. I, ¶¶ 67, 71.

Considering that the Wolfs bear the burden of demonstrating
subject matter jurisdiction, these conflicting allegations are
not saved by the conclusory allegation that Mr. Wolf is not an
LLC member.

See Fabrica de Muebles, 682 F.3d at 32; Duxbury,

579 F.3d at 28.
A contrary result would open the floodgates to federal
court for LLC members.

In any suit where a plaintiff LLC member

alleged that an otherwise diverse LLC failed to respect the
plaintiff’s rights, the plaintiff could add a declaratory
judgment count and request that the court confirm the
plaintiff’s membership.

Where an LLC member and the LLC dispute

the contours of the LLC member’s rights, those questions ought
not be decided in a federal forum.

See Ahmed v. Khanijow, No.

11-11887, 2011 WL 3566621, at *1 (E.D. Mich. Aug. 15, 2011)
(reasoning that diversity jurisdiction was absent because the
plaintiff “pleaded that he is a member of [the LLC], and the
Court, for this motion, accepts that allegation as true”).

In

contrast, where an LLC outright denies any membership
relationship with a plaintiff, those cases may be brought under

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alienage or diversity jurisdiction.

See Symes, 472 F.3d at 758.

As Justice Ginsburg observed in Vaden:
Artful dodges by a [petitioner for arbitration]
should not divert [courts] from recognizing the actual
dimensions of that controversy. The text of [section
4 of Chapter 29 of the United States Code] instructs
federal courts to determine whether they would have
jurisdiction over “a suit arising out of the
controversy between the parties”; it does not give § 4
petitioners license to recharacterize an existing
controversy, or manufacture a new controversy, in an
effort to obtain a federal court’s aid in compelling
arbitration.
556 U.S. at 68.

Notwithstanding the Wolfs’ characterization,

this Court rules that the actual controversy here is not whether
Mr. Wolf is a member but whether Costa has fulfilled its
obligations to him in that capacity.

As such, this Court lacks

subject matter jurisdiction over the arbitration petition’s
underlying controversy and the petition itself.
III. CONCLUSION
For the foregoing reasons, this Court dismisses the Wolfs’
petition to compel arbitration for want of subject matter
jurisdiction.
SO ORDERED.
/s/ William G. Young
WILLIAM G. YOUNG
DISTRICT JUDGE

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