David K. Young Consulting, LLC v. Arnold
ORDER DENYING 8 Motion to Remand and request for attorney's fees. Signed by Judge David Ezra. (rf)
IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF TEXAS
SAN ANTONIO DIVISION
DAVID K. YOUNG
CRAIG C. ARNOLD,
CV. NO. SA-13-CV-00149-DAE
ORDER DENYING PLAINTIFF’S MOTION TO REMAND
On April 5, 2013, the Court heard the Motion to Remand filed by
Plaintiff David K. Young Consulting (“DKYC” or “Plaintiff”) (doc. # 8). William
H. Ford, Esq., and Veronica S. Wolfe, Esq., appeared at the hearing on behalf of
DKYC; Kyle C. Watson, Esq., and James E. Montgomery, Jr., Esq., appeared at
the hearing on behalf of Defendant Craig Arnold (“Arnold” or “Defendant”). After
reviewing the Motion and the supporting and opposing memoranda, the Court
DENIES Plaintiff’s Motion to Remand.
This lawsuit1 arises from a soured business relationship between
And another before this Court, Cv. No. SA-13-CV-00146-DAE.
DKYC and Arnold. Arnold was the founder of a company called Arnold &
Company, LLC (“A&C”), which he sold to DKYC on March 27, 2012. (“Compl.,”
Doc. # 1 Ex. 1 ¶¶ 11, 13.) As part of the sale, DKYC hired Arnold to continue
operations on its behalf and Arnold signed a Non-Competition Agreement.
(Compl. ¶¶ 17, 18.) The Non-Competition Agreement provides that for two years
following his termination from DKYC, Arnold must refrain from engaging in
business that competes directly or indirectly with DKYC in Michigan or Texas.
(Id. ¶¶ 21, 22.)
On December 28, 2012, DKYC terminated Arnold’s employment.
(Id. ¶ 25.) DKYC alleges that since that date, Arnold has breached the NonCompetition Agreement by “creating an entity that engages in a business that
directly competes with DKYC in Michigan”; “soliciting DKYC’s current clients in
Michigan and Texas as a competitor”; and “soliciting new business from DKYC’s
clients in Michigan and Texas for his own business purposes.” (Id. ¶ 26.)
On January 2, 2013, Arnold filed a complaint in Michigan state court
(“Arnold’s Michigan suit”), asserting causes of action for breach of contract,
conversion, claim and delivery, and seeking a declaratory judgment that the NonCompetition Agreement is unenforceable. (Doc. # 5 Ex. 2 App. 5.) On January
23, 2013, Arnold filed a complaint in Texas state court (“Arnold’s Texas suit”),
asserting causes of action for breach of contract and breach of a promissory note
and seeking a declaratory judgment. (Doc. # 5 Ex. 4 App. 9.) On January 28,
2013, DKYC filed a complaint in Texas state court (“DKYC’s Texas suit”),
seeking enforcement of the Non-Competition Agreement, a temporary restraining
order, and a temporary and permanent injunction. (Compl.) That same day, the
state court entered a Temporary Restraining Order and Order Setting Hearing for
Temporary Injunction in DKYC’s Texas suit. (Doc. # 5 Ex. 5 App. 11.)
On February 6, 2013, Arnold filed a Plea in Abatement in DKYC’s
Texas suit, arguing that the court should abate or dismiss the case because the
issues involved are identical to those presented in Arnold’s Texas suit, which was
filed first. (Doc. # 5 Ex. 5 App. 13.) On February 7, 2013, the court presiding
over DKYC’s Texas suit entered an Extended Temporary Restraining Order agreed
upon by both parties. (Doc. # 5 Ex. 5 App. 14.) On February 22, 2013, the court
entered an agreed Temporary Injunction in that case enjoining the parties from
engaging in certain actions that would cause the other imminent and irreparable
injury. (Doc. # 5 Ex. 6 App. 16.) On February 26, 2013, Arnold’s attorney took
the deposition of DKYC employee Joanne Haddad in Arnold’s Texas suit. (Doc.
# 5 Ex. 6 App. 18, 20.)
On February 27, 2013, Arnold removed DKYC’s Texas suit to this
Court (doc. # 1), filed a Notice of Nonsuit Without Prejudice in his Texas suit
(doc. # 5 Ex. 9 App. 22), and filed a complaint in this Court asserting causes of
action for breach of contract, breach of a promissory note, conversion, and seeking
a declaratory judgment regarding the enforceability of the Non-Competition
Agreement and the scope of the original agreement governing DKYC’s purchase
of A&C (see Arnold & Co., LLC, et al. v. David K. Young Consulting, LLC, Cv.
No. SA-13-CV-00146-DAE, doc. # 1). On March 5, 2013, Arnold filed a
Stipulated Order of Dismissal Without Prejudice in his Michigan suit. (Doc. # 5
Ex. 9 App. 24.)
On March 13, 2013, DKYC filed a Motion to Remand to State Court,
Motion for Sanctions, and Request for Expedited Ruling. (Doc. # 5.) On March
19, 2013, Arnold filed a Response in Opposition. (Doc. # 6.) On March 21, 2013,
DKYC filed an Amended Motion to Remand (“Motion”), withdrawing its Motion
for Sanctions. (“Mot.,” Doc. # 8.)
Motion to Remand
A defendant may remove a case from state to federal court if the case
could have been filed in federal court originally. Caterpillar Inc. v. Williams, 482
U.S. 386, 392 (1987) (citing 28 U.S.C. § 1441(a)). A removing defendant bears
the burden of establishing by a preponderance of the evidence that the federal court
has subject-matter jurisdiction. De Aguilar v. Boeing Co., 47 F.3d 1404, 1408 (5th
Cir. 1995). The removal statutes are to be construed “strictly against removal and
for remand.” Eastus v. Blue Bell Creameries, L.P., 97 F.3d 100, 106 (5th Cir.
1996); see also Shamrock Oil & Gas Corp. v. Sheets, 313 U.S. 100, 108–09 (1941)
(acknowledging “the Congressional purpose to restrict the jurisdiction of the
federal courts on removal” and the need for “strict construction of such
legislation”). A district court must remand a case if, at any time before final
judgment, it appears the court lacks subject-matter jurisdiction. See 28
U.S.C. § 1447(c); Grupo Dataflux v. Atlas Global Grp., L.P., 541 U.S. 567, 571
(2004); In re 1994 Exxon Chem. Fire, 558 F.3d 378, 392 (5th Cir. 2009).
A defendant may waive its right of removal by taking substantial
action in state court prior to removal. See 14B Charles A. Wright, Arthur R. Miller
& Edward H. Cooper, Federal Practice and Procedure § 3721, p. 105 (4th ed.
2009). However, “[a] waiver of the right to remove must be clear and unequivocal;
the right to removal is not lost by participating in state court proceedings short of
seeking an adjudication on the merits.” Tedford v. Warner-Lambert Co., 327 F.3d
423, 428 (5th Cir. 2003) (citing Beighley v. F.D.I.C., 868 F.2d 776, 782 (5th Cir.
DKYC seeks remand on two grounds. First, DKYC argues that
remand is warranted because the Notice of Removal fails to properly allege
Arnold’s citizenship. (Mot. at 6.) Second, DKYC argues that Arnold has waived
the right to remove by engaging in actions that “evidence a clear intent to invoke
the state court’s jurisdiction.” (Id. at 7.) The Court will address each argument in
Failure to Allege Citizenship
Unless otherwise provided by statute, federal district courts have
jurisdiction over: (1) all civil actions arising under the Constitution, laws, or
treaties of the United States; and (2) civil actions between citizens of different
states, where the matter in controversy exceeds $75,000, exclusive of interests and
costs. See 28 U.S.C. §§ 1331, 1332(a). Arnold asserts that this Court has diversity
jurisdiction pursuant to 28 U.S.C. § 1332(a). The Notice of Removal alleges that
DKYC is a citizen of Texas and Arnold is a resident of Michigan and that there is
thus complete diversity of citizenship between the parties.
DKYC claims that Arnold’s failure to allege citizenship instead of
residency renders the Notice of Removal deficient. It is well-established that an
allegation of residence is insufficient to establish diversity jurisdiction; the party
asserting federal jurisdiction must allege citizenship. Kerney v. Fort Griffin
Fandangle Ass’n., Inc., 624 F.2d 717, 719 (5th Cir. 1980); see also Getty Oil
Corp., a Div. of Texaco, Inc. v. Ins. Co. of N. Am., 841 F.2d 1254, 1259 (5th Cir.
1988) (“We have stated repeatedly that when jurisdiction depends on citizenship,
citizenship must be ‘distinctly and affirmatively alleged.’”) (quoting McGovern v.
American Airlines, Inc., 511 F.2d 653, 654 (5th Cir. 1975)). Arnold points out that
the Civil Cover Sheet filed with the Notice of Removal states that he is a citizen of
another state. However, the Civil Cover Sheet also states that it neither “replace[s]
nor supplement[s] the filing and service of pleadings . . . except as provided by
local rules of court.” (Doc. # 1 Ex. 3.) No local rule permits a party to allege
necessary elements of diversity jurisdiction on the Civil Cover Sheet. See Local
Rule CV-3(a). Arnold also argues that DKYC’s statement in its Complaint that
Arnold is “an individual who is a non-resident in Texas and whose usual place of
business is located at 1145 W. Long Lake Road, Suite 301, Bloomfield Hills,
Michigan 48302” suffices to establish diversity jurisdiction. (Doc. # 6 at 2
(quoting Compl. ¶ 2).) The Court disagrees. Citizenship must be “distinctly and
affirmatively alleged.” McGovern, 511 F.2d at 654 (quoting 2A Moore’s Federal
Practice § 8.10); see also Getty Oil, 841 F.2d at 1259 (“[T]he basis upon which
jurisdiction depends must be alleged affirmatively and distinctly and cannot be
established . . . by mere inference.”).
Thus, the Notice of Removal fails to properly allege the basis for
diversity jurisdiction. However, this Court has discretion to permit Arnold to cure
the defect by filing an amended Notice of Removal. See 28 U.S.C. § 1653
(“Defective allegations of jurisdiction may be amended . . . in the trial or appellate
courts.”); Nadler v. Am. Motors Sales Corp., 764 F.2d 409, 413 (5th Cir. 1985).
The Fifth Circuit has stated that “leave to amend [pursuant to § 1653] is to be
granted liberally unless the movant has acted in bad faith or with a dilatory motive,
granting the motion would cause prejudice, or amendment would be futile.”
Jebaco, Inc. v. Harrah’s Operating Co., Inc., 587 F.3d 314, 322 (5th Cir. 2009).
Here, where it seems apparent that the parties are in fact citizens of different states,
the Court concludes that Arnold should be permitted to amend the Notice of
Removal to properly reflect his citizenship. See Milstead Supply Co. v. Cas. Ins.
Co., 797 F. Supp. 569, 574 (W.D. Tex. 1992) (removing defendant allowed to
amend its petition for removal where it had expressed, “albeit imperfectly, a
general allegation of diversity jurisdiction”).
Waiver of Right of Removal
Next, DKYC argues that Arnold has waived his right of removal.
DKYC points to four actions taken by Arnold that “demonstrate a clear intent to
seek affirmative relief and proceed in state court”: (1) filing a petition in Texas
state court; (2) filing a Plea in Abatement; (3) deposing a witness; and (4)
obtaining a temporary injunction. (Doc. # 8 at 6–7.)
There is no support for DKYC’s argument that a defendant may waive
the right of removal by deposing a witness or obtaining a temporary injunction. It
is well-established that waiver must be “clear and indicate a specific, positive
intent to proceed in state court.” Jacko v. Thorn Americas, Inc., 121 F. Supp. 2d
574, 576 (E.D. Tex. 2000); see also Tedford, 327 F.3d at 428 (waiver must be
“clear and unequivocal”). In order to determine whether a defendant’s actions
indicate a clear and unequivocal intent to proceed in state court, courts have looked
to “whether the actions were taken by the defendant in state court for the purpose
of preserving the status quo, or [whether] they manifest[ed] an intent to litigate the
merits of the claim.” Jacko, 121 F. Supp. 2d at 576. A temporary injunction is
designed to preserve the status quo; obtaining one does not demonstrate an
unequivocal intent to proceed in state court. The deposition, on the other hand,
was certainly taken in anticipation of litigation. However, deposing a witness is
equally consistent with an intent to proceed in federal court as it is with an intent to
proceed in state court.
Moreover, in order to waive the right of removal, a defendant must
take some action that amounts to “seeking an adjudication on the merits.” Tedford,
327 F.3d 423. “[A]ctions which are preliminary and nonconclusive in character
and which do not actually submit the merits of a claim for binding decision do not
waive defendant’s right to remove.” Gore v. Stenson, 616 F. Supp. 895, 897 (S.D.
Tex. 1984). Accordingly, the Fifth Circuit has found no waiver where a defendant
moved to transfer venue, moved for entry of a confidentiality order, moved to
consolidate, and filed special exceptions, because none of those actions “submitted
the cause to adjudication on the merits.” Tedford, 327 F.3d at 428. There is no
question that deposing a witness or obtaining a temporary injunction does not
amount to seeking an adjudication on the merits.
Arnold’s Plea in Abatement (“Plea”) is most akin to the type of action
that may constitute a waiver of the right of removal. The Plea sought to abate
DKYC’s Texas suit because it arose from the same nucleus of operative facts as
Arnold’s first-filed Texas suit. (Doc. # 5 Ex. 5 App. 13.) However, had the Plea
been granted, it would not have absolutely defeated DKYC’s claims or disposed of
them on the merits. Furthermore, Arnold did not proceed to a hearing on the Plea,
choosing to remove the case to this Court before the date set for the hearing. See
Jacko, 121 F. Supp. 2d at 576 (noting that “further intent [to proceed in state court]
is manifested when the defendant attends the hearing and asks the state judge to
rule on the motion”).
None of the cases cited by DKYC persuade the Court that Arnold’s
participation in the state court proceedings was sufficient to waive his right to
removal. In each case, the defendant engaged in more substantial or prolonged
action than Arnold did here. See Brown v. Demco Inc., 792 F.2d 478, 481 (5th
Cir. 1986) (noting in dictum that defendant may have waived the right of removal
by defending action in state court for four years, filing “answers, amended
answers, motions of various kinds, third party demands, cross claims, amended
cross claims, and participated in discovery and depositions”); Garcia v. SSP
Partners, No. C-06-385, 2006 WL 2850066, at *6–7 (S.D. Tex. Oct. 3, 2006)
(finding of waiver where the defendant filed motions to compel arbitration,
transfer, and consolidate, and made representations regarding the suit’s
continuation in the state court at the consolidation hearing that the state court relied
upon); Jacko, 121 F. Supp. 2d at 576–77 (waiver where defendant filed a motion
for summary judgment and argued it at a hearing); Zbranek v. Hofheinz, 727 F.
Supp. 324, 325 (E.D. Tex. 1989) (waiver where defendant sought an injunction,
summary judgment and an order requiring plaintiffs to replead, and in any event
removal was untimely).
Finally, the Court finds unpersuasive DKYC’s argument that Arnold
waived his right to litigate this action in federal court by choosing to file his own
lawsuit in Texas state court. The action currently before this Court was not
commenced in state court by Arnold; it was commenced by DKYC. The fact that
Arnold “first availed himself [of] the state court’s jurisdiction” (doc. # 8 at 7) by
filing a different suit does not indicate a specific, positive intent to proceed with
this action in state court. Furthermore, conduct in another case, however related
the two cases may be, does not implicate the concerns underlying the waiver
doctrine. After all, waiver is meant to prevent a defendant from “using removal as
an insurance policy against unfavorable treatment in state court.” Hingst v.
Providian Nat’l Bank, 124 F. Supp. 2d 449, 452 (S.D. Tex. 2000) (citing Rosenthal
v. Coates, 148 U.S. 142, 147 (1892) (“[A] defendant cannot . . . experiment on his
case in the state court, and upon an adverse decision then transfer it to the federal
court.”)). Accordingly, “[a] defendant’s conduct in a prior lawsuit has no bearing
on the removability of a later suit.” Hingst, 124 F. Supp. 2d at 452 (holding that
defendant did not waive its right to removal by participating in a related lawsuit
that previously existed in state court); Pittman v. Mem’l Herman Healthcare, 124
F. Supp. 2d 446, 449 (S.D. Tex. 2000) (holding that defendant did not waive
removal by prosecuting an interpleader action involving the same parties and
issues in state court). The Court thus concludes that Arnold has taken no action
that would constitute a waiver of his right to removal.
For the foregoing reasons, the Court ORDERS that Defendant be
permitted to amend the Notice of Removal to properly reflect his citizenship. The
Court DENIES Plaintiff’s Motion to Remand and request for attorney’s fees
pursuant to 28 U.S.C. § 1447(c). (Doc. # 8.)
IT IS SO ORDERED.
DATED: San Antonio, Texas, April 8, 2013.
David Alan Ezra
Senior United States District Judge
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