Richardson et al v. Schmidt et al

Filing 23

MEMORANDUM OPINION AND ORDER: The court lacks subject matter jurisdiction over this action and grants Plaintiff's Emergency Motion to Remand. Accordingly, the court, pursuant to 28 U.S.C. 1447(c), remands this action to the 134th Judicial District Court, Dallas County, Texas. Further, the court denies Plaintiff's request for costs and attorney's fees. (Ordered by Judge Sam A Lindsay on 12/26/2012) (skt)

IN THE UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF TEXAS
DALLAS DIVISION
COLIN RICHARDSON,
derivatively on behalf of Sun River
Energy, Inc.,
Plaintiff,
v.
SUN RIVER ENERGY, INC.,
Nominal Defendant,
v.
DONAL R. SCHMIDT, et al.,
Defendants.

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Civil Action No. 3:12-CV-05020-L

MEMORANDUM OPINION AND ORDER
Before the court is Plaintiff’s Emergency Motion to Remand, filed December 7, 2012;
Defendant’s Response, filed December 14, 2012; and Plaintiff’s Reply, filed December 12, 2012.
After carefully reviewing the motion, response, reply, record, and applicable law, the court grants
Plaintiff’s Emergency Motion to Remand.
I.

Factual and Procedural Background
On June 7, 2012, Colin Richardson (“Richardson” or “Plaintiff”), derivatively on behalf of

Sun River Energy, Inc., filed this action in the 134th Judicial District Court of Dallas County, Texas.
Plaintiff’s Original Petition did not name James Pennington (“Pennington”) or Maxwell Resources,
Inc., formerly known as Mericol, Inc., doing business as Maxwell Technical Resources
(“Maxwell”). On November 5, 2012, Plaintiff Colin Richardson’s Second Amended Verified
Shareholder Derivative Petition (the “Second Amended Petition”) was filed, and it added Pennington
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and Maxwell as defendants. Pennington was served with the Second Amended Petition on
November 15, 2012.
On December 6, 2012, Pennington removed the state action to this court, contending that
federal question jurisdiction existed. Def.’s Not. of Removal ¶ 6. He asserted that the court has
jurisdiction over the suit because a number of Plaintiff’s claims for relief in the Second Amended
Petition “necessarily depends on the resolution of a substantial question of federal law.” Id. ¶ 3.
Pennington filed a First Amended Notice of Removal on December 14, 2012, which makes
the same assertion, and provides more detail as to why he believes a federal question is present. On
December 7, 2012, Plaintiff moved to remand the case on the basis that this court lacked jurisdiction
over his claims. In addition, Plaintiff requested the court extend the temporary restraining order
issued by the 134th Judicial District Court, which was set to expire on December 10, 2012, at 6:00
p.m. On December 10, 2012, the court extended the temporary restraining order until December 24,
2012, 6:00 p.m., so that it could determine whether it had jurisdiction over this action. The court
also ordered an expedited briefing schedule on Plaintiff’s Emergency Motion to Remand, and the
motion has been fully briefed.
II.

Subject Matter Jurisdiction
A.

The General Standard

A federal court has subject matter jurisdiction over civil cases “arising under the
Constitution, laws, or treaties of the United States,” or over civil cases in which the amount in
controversy exceeds $75,000, exclusive of interest and costs, and in which diversity of citizenship
exists between the parties. 28 U.S.C. §§ 1331, 1332. Federal courts are courts of limited
jurisdiction and must have statutory or constitutional power to adjudicate a claim. See Home

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Builders Ass’n of Miss., Inc. v. City of Madison, 143 F.3d 1006, 1010 (5th Cir. 1998). Absent
jurisdiction conferred by statute or the Constitution, they lack the power to adjudicate claims and
must dismiss an action if subject matter jurisdiction is lacking. Id.; Stockman v. Federal Election
Comm’n, 138 F.3d 144, 151 (5th Cir. 1998) (citing Veldhoen v. United States Coast Guard, 35 F.3d
222, 225 (5th Cir. 1994)). “[S]ubject-matter jurisdiction cannot be created by waiver or consent.”
Howery v. Allstate Ins. Co., 243 F.3d 912, 919 (5th Cir. 2001). A federal court has an independent
duty, at any level of the proceedings, to determine whether it properly has subject matter jurisdiction
over a case. Ruhgras AG v. Marathon Oil Co., 526 U.S. 574, 583 (1999) (“[S]ubject-matter
delineations must be policed by the courts on their own initiative even at the highest level.”);
McDonal v. Abbott Labs., 408 F.3d 177, 182 n.5 (5th Cir. 2005) (“federal court may raise subject
matter jurisdiction sua sponte”).
The general removal statute allows the removal of “any civil action brought in a State court
of which the district courts of the United States have original jurisdiction.” 28 U.S.C. §1441(a). In
other words, “[o]nly state court actions that originally could have been filed in federal court may be
removed to federal court by the defendant.” Caterpillar Inc. v. Williams, 482 U.S. 386, 392 (1987)
(footnote omitted). Accordingly, a case is removable only if federal question or diversity
jurisdiction exists. As Pennington removed this action to this court on the basis of an alleged federal
question pursuant to 28 U.S.C. § 1331, diversity of citizenship and the amount in controversy are
not at issue. The court therefore addresses only whether the allegations of the Second Amended
Petition present a federal question that confers jurisdiction on this court.

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B.

Federal Question

A federal court has subject matter jurisdiction over cases arising under the Constitution,
laws, or treaties of the United States, which is commonly referred to as federal question jurisdiction.
28 U.S.C. § 1331. This provision for federal question jurisdiction is generally invoked by a plaintiff
pleading a cause of action created by federal law. This, however, is not the only manner in which
federal question jurisdiction may arise.
An action that asserts only state law claims may “arise under” federal law if “the vindication
of a right under state law necessarily turn[s] on some construction of federal law.” Franchise Tax
Bd. v. Construction Laborers Vacation Trust, 463 U.S. 1, 9 (1983) (citations omitted). This means
that a federal district court has jurisdiction over a state claim that “necessarily raise[s] a stated
federal issue, actually disputed and substantial, which a federal forum may entertain without
disturbing any congressionally approved balance of federal and state judicial responsibilities.”
Grable & Sons Metal Prods., Inc. v. Darue Eng’g & Mfg., 545 U.S. 308, 314 (2005). Otherwise
stated, as “the presence of a disputed federal issue and the ostensible importance of a federal forum
are never necessarily dispositive,” a federal court is to decline jurisdiction if the exercise of its
jurisdiction is inconsistent “with congressional judgment about the sound division of labor between
state and federal courts governing application of [28 U.S.C.] § 1331.” Id. at 313-14. Under Grable,
federal question jurisdiction exists only when “(1) resolving a federal issue is necessary to the
resolution of the state-law claim; (2) the federal issue is actually disputed; (3) the federal issue is
substantial; and (4) federal jurisdiction will not disturb the balance of federal and state judicial
responsibilities.” Singh v. Morris, LLP, 538 F.3d 334, 338 (5th Cir. 2008). In the final analysis,
when a plaintiff’s pleadings set forth only state law claims, a federal district court has federal

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question jurisdiction to entertain the action only if “(1) the state law claims necessarily raise a
federal issue or (2) the state law claims are completely preempted by federal law.” Bernhard v.
Whitney Nat’l Bank, 523 F.3d 546, 551 (5th Cir. 2008).
Whether an action “arises under” federal law and creates federal question jurisdiction over
a case removed from state to federal court, or one originally filed in such court, ordinarily “must be
determined by reference to the ‘well-pleaded complaint.’” Merrell Dow Pharms. Inc. v. Thompson,
478 U.S. 804, 808 (1986) (citation omitted). In other words, the complaint must “raise[] issues of
federal law sufficient to support federal question jurisdiction.” Rodriguez v. Pacificare of Tex., Inc.,
980 F.2d 1014, 1017 (5th Cir. 1993) (citation omitted). This means that “federal jurisdiction exists
only when a federal question is presented on the face of the plaintiff’s properly pleaded complaint.”
Caterpillar, 482 U.S. at 392 (citation omitted). The “well-pleaded complaint rule” puts the plaintiff
in the driver’s seat in that it “makes the plaintiff the master of the claim[s]; he or she may avoid
federal jurisdiction by exclusive reliance on state law.” Id. (footnote omitted).
A recognized and narrow exception to the “well-pleaded complaint” rule is the “artful
pleading” doctrine. Terrebonne Homecare, Inc. v. SMA Health Plan, Inc., 271 F.3d 186, 188 (5th
Cir. 2001). This doctrine stands for the proposition that “a plaintiff may not defeat removal by
omitting to plead necessary federal questions in a complaint.” Franchise Tax Bd., 463 U.S. at 22
(citation omitted). This doctrine allows a federal court to “uphold removal even though no federal
question appears on the face of the plaintiff’s complaint.” Rivet v. Regions Bank of La., 522 U.S.
470, 475 (1998). “[T]he artful pleading doctrine [, however,] applies only where state law is subject
to complete preemption.” Bernhard, 532 F.3d at 551 (citation omitted).

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Any doubts as to the propriety of the removal should be construed strictly in favor of remand.
Manguno v. Prudential Prop. & Cas. Ins. Co., 276 F.3d 720, 723 (5th Cir. 2002). “The burden of
establishing subject matter jurisdiction in federal court rests on the party seeking to invoke it.” St.
Paul Reinsurance v. Greenberg, 134 F.3d 1250, 1253 (5th Cir. 1998) (footnote omitted).
Accordingly, if a case is removed to federal court, the defendant has the burden of establishing
subject matter jurisdiction; if a case is initially filed in federal court, the burden rests with the
plaintiff to establish that the case “arises under” federal law, or that diversity exists and that the
amount in controversy exceeds the jurisdictional threshold.
III.

Discussion
A.

Contentions of the Parties

Richardson’s Second Amended Petition is ninety-seven pages, and he asserts various claims
under state law against Defendants. These claims include: breach of fiduciary duty for failing to
properly oversee and manage; breach of fiduciary duty for providing false and misleading
information; breach of fiduciary duty for failing to maintain internal controls; unjust enrichment and
money had and received; breach of fiduciary duty for abuse of control and shareholder oppression;
breach of fiduciary duty for gross mismanagement, waste of corporate assets; knowing participating
and assistance in breach of fiduciary duty; fraudulent transfers; constructive trust; demand for an
accounting; and requests for declaratory relief. Pl.’s Sec. Amended Pet. 80-93, ¶¶ 220-295. The
factual bases for these claims are set forth in the pages of the Second Amended Petition preceding
his stated claims. Plaintiff also seeks actual, consequential and exemplary damages for the alleged
negligence and wrongful conduct of Defendants. Id. at 93-95, ¶¶ 297-309.

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Pennington, in advancing his argument that Plaintiff’s claims necessarily require the
resolution of a substantive federal question, asserts the following:
Throughout the Second Amended Petition, Plaintiff alleges the Defendants violated
federal securities laws, induced sales of securities by fraudulent conduct, made
[Securities Exchange Commission] SEC filings which contained materially
misleading statements, failed to maintain current SEC Reporting as required by SEC
Rules and Regulations, breached their duties by issuing improper statements and
disclosures to the SEC, failed to comply with applicable laws, rules, and regulations
covering false or misleading financial information, and otherwise seeks to enforce
liabilities or duties created by federal law. For example, Plaintiff makes the
following allegations:
The Board approved transactions involving the issuance of stock, including
freely-tradable stock, in violation of federal securities laws;
Defendants engaged in a scheme to drive down the stock price of Sun River
to enable Individual Defendants to purchase free-trading shares;
The Individual Defendants have concealed and misrepresented material
information to the SEC, other governmental authorities, auditors, shareholders, and
the public;
Defendants conspire[d] to conduct a secret tender offer;
The Director Defendants breached their fiduciary duty of loyalty by allowing
the improper statements to be disseminated in the Company’s SEC filings and other
disclosures, failing to ensure that an adequate system of internal controls [was] in
place, and failing to ensure compliance with applicable laws, rules, and regulations
covering false or misleading financial information.
The above-referenced allegations are artfully pled violations of the [ ]
Williams Act, 82 Stat. 454, codified at 15 U.S.C. §§ 78m(d)-(e) and 78n(d)-(f), §§
13(d), 13(e), and 14(d)-(f) of the Securities Exchange Act of 1934, and Sections 9,
10, 10b(5) and 14 of the Securities and Exchange Act of 1934. Plaintiff attempts to
cast these claims as state law claims, but Plaintiff’s right to relief necessarily depends
on the resolution of a substantial question of federal law (i.e. the federal securities
laws).
First Amended Not. of Removal 2-3, ¶¶ 5, 6 (footnotes omitted). The crux of Pennington’s
argument is that the Second Amended Petition does not contain only a few isolated references to

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federal law but contains more than fifty allegations that “directly relate to violations of federal
securities laws and rules and regulations under the Securities Act of 1933 and the Securities
Exchange Act of 1934.” Def’s. Resp. to Mot. to Remand 2.
Richardson acknowledges that there are a “few” references to federal securities laws in the
Second Amended Petition; however, he contends that such references are included to “provide some
additional basis for his state-law claims, but [they] are by no means essential to the resolution of the
claims.” Pl.’s Emergency Mot. to Remand 4. The court agrees. A fair reading of the Second
Amended Petition shows that no federal question is presented. In light of the court’s previously set
forth standards and its painstaking review of the Second Amended Petition, the court finds it
unnecessary to engage in a protracted esoteric and erudite analysis regarding the nonexistence of
a federal question.
B.

Analysis

The court has pored over the Second Amended Petition, and the claims asserted fall within
the realm of state law claims. Contrary to Pennington’s assertions, the federal securities laws do not
create the claims alleged by Richardson. The claims arise under state law, and the allegations
pertaining to alleged violations of federal securities laws merely provide the factual bases for
Richardson’s state law claims. Although there are some incidental or loose references that might
support a factual basis for violations of federal securities laws, such references are quite beside the
point. It is not necessary for Richardson to prove a violation of federal securities laws for him to
prevail on any of his various state law claims. Further, the court need not interpret or apply federal
securities laws for Plaintiff to prevail on his claims. The references to federal violations are merely
illustrative of the alleged conduct committed by Defendants that supports Plaintiff’s state law

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claims. As aptly stated by Chief Judge Fitzwater, “conduct that violates federal law [and] serves as
a basis for a state-law claim does not make a federal right an essential element of that [state-law]
claim.” Fathergill v. Rouleaw, 2003 WL 21467570 at *1 (N.D. Tex. June 23, 2003) (citing Howery,
243 F.3d at 918). Accordingly, no substantial federal question is implicated, and the resolution of
a federal issue is not necessary to resolution of any state law claims asserted by Plaintiff.
Further, references to the federal securities laws are irrelevant because a plaintiff is the
master of his claim. Caterpillar, 482 U.S. at 392. “A plaintiff with a choice between federal and
state law claims may elect to proceed in state court on the exclusive basis of state law, thus defeating
the defendant’s opportunity to remove, but taking the risk that his federal claims will one day be
precluded.” Carpenter v. Wichita Falls Indep. Sch. Dist., 44 F.3d 362, 366 (5th Cir. 1995). In this
case, Richardson has elected to proceed on his state law claims, notwithstanding that federal claims
could exist. Richardson does not advance his claims as violations of federal securities laws.
Pennington recasts Plaintiff’s theories of recovery as federal claims; however, “[j]urisdiction may
not be sustained on a theory that the plaintiff has not advanced.” Merrell, 478 U.S. at 809 n.6
(citation omitted).
The court finds unavailing Pennington’s argument that many of Plaintiff’s allegations are
“securities fraud claims dressed in state-law clothing.” Def’s. Resp. to Mot. to Remand 17.
Pennington thus contends that Richardson has artfully pleaded federal claims as state law claims to
avoid removal. The fundamental flaw in this argument is that the “artful pleading” doctrine applies
only where “state law is subject to complete preemption.” Bernhard, 532 F.3 at 551 (citations
omitted). Pennington has provided the court with no authority that violations of federal securities
laws completely preempt Richardson’s state law claims. Further, nothing indicates that Congress

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intended to preempt completely the field of state law claims regarding securities transactions and
breach of fiduciary duty. Accordingly, the “artful pleading” doctrine does not come into play and
cannot be used as a basis for this court to exercise jurisdiction.
In sum, the use of limited references to violations of federal securities laws or rules in the
Second Amended Petition is simply too slender a reed to establish federal question jurisdiction in
this case. For the reasons herein stated, the court determines that this action does not arise under
the Constitution or laws of the United States, that consideration of a federal issue is not necessary
to resolve Richardson’s state law claims, that there is no substantial federal issue presented by the
Second Amended Petition, and that the doctrine of complete preemption does not apply to Plaintiff’s
state law claims.
C.

The Parties’ Briefing

The court determines that issue of federal jurisdiction was overbriefed by the parties.
Arguments were advanced and authorities cited by both sides that were not addressed by the court
in this decision. Any argument or authority not referenced in this decision merely means that it was
not necessary for the court to consider such argument or authority to render its decision.
IV.

Plaintiff’s Request for Attorney’s Fees and Court Costs
Plaintiff seeks attorney’s fees and costs incurred for obtaining a remand of this action to state

court pursuant to 28 U.S.C. § 1447(c). Section 1447(c) provides that “[a]n 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). There is no “automatic entitlement to an award of
attorney’s fees.” Valdes v. Wal-Mart Stores, Inc., 199 F.3d 290, 292 (5th Cir. 2000). Bad faith is
not “a prerequisite to awarding attorney fees and costs.” Id. (citation omitted). “Absent unusual

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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.” Martin v. Franklin Capital Corp., 546 U.S. 132, 141
(2005) (citations omitted). In this regard, the court must decide “whether the defendant had
objectively reasonable grounds to believe the removal was legally proper” at the time of removal,
“irrespective of the fact that it might ultimately be determined that removal was improper.” Valdes,
199 F.3d at 293.
Richardson contends that Pennington did not have a good-faith basis for removing this
action. Pl.’s Emergency Motion to Remand 2. Plaintiff further asserts that the evidence is
overwhelming that the removal was tactical and intended to give Defendants an avenue to obtain
their goal—the seizure of corporate assets. Id. Even if Pennington had improper motives in
removing the case, however, the court is not to consider the motive of the removing defendant.
Valdes, 199 F.3d at 292-93. As stated, the question is whether Pennington had objectively
reasonable grounds to believe that removal was appropriate.
Defendants cites several cases that he contends support a right of removal under
circumstances similar to those present in this case. See Def.’s Resp. to Mot. to Remand 19-20
(citing Landers v. Morgan Asset Mgmt., Inc., 2009 WL 962689, at *6 (W.D. Tenn. Mar. 31, 2009),
and Gobble v. Hellman, 2002 WL 34430286, at *3 (N.D. Ohio Mar. 26, 2002)). Although these
cases are not from the Fifth Circuit or district courts within the Fifth Circuit, they provided an
objective basis for Pennington to remove a case similar to the present one to federal court, even
though this court believes the better view is that expressed in this opinion and by other judges of the

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Northern District of Texas. The court therefore will deny Richardson’s request for costs and
attorney’s fees.
V.

Conclusion
For the reasons herein stated, the court lacks subject matter jurisdiction over this action and

grants Plaintiff’s Emergency Motion to Remand. Accordingly, the court, pursuant to 28 U.S.C. §
1447(c), remands this action to the 134th Judicial District Court, Dallas County, Texas. The clerk
of court shall effect this remand in accordance with the usual procedure. Further, the court denies
Plaintiff’s request for costs and attorney’s fees.
It is so ordered this 26th day of December, 2012.

_________________________________
Sam A. Lindsay
United States District Judge

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