National Fitness Holdings v. Grandview Corporate Centre
Filing
41
MEMORANDUM DECISION and ORDER denying as moot 28 the Motion to Intervene; denying as moot 32 the Motion to Strike ; denying as moot 33 the Motion for Discovery; denying as moot 36 the Motion to Intervene; denying as moot 7 the Motion for TRO; denying as moot 7 the Motion for Preliminary Injunction; denying as moot 7 the Motion for Declaratory Judgment; granting 11 the Motion to Dismiss for Lack of Jurisdiction. Signed by Judge Ted Stewart on 12/20/12. (ss)
IN THE UNITED STATES COURT FOR THE DISTRICT OF UTAH
NORTHERN DIVISION
NATIONAL FITNESS HOLDINGS, INC., a
Wyoming Corporation,
Plaintiff,
MEMORANDUM DECISION AND
ORDER GRANTING MOTION TO
DISMISS OR STAY ACTION
vs.
GRANDVIEW CORPORATE CENTRE,
LLC, a Utah Limit Liability Company, and
BAILEY N. HALL, an Individual
Case No. 1:12-CV-189 TS
Defendants.
This matter is before the Court on Defendants Grandview Corporate Centre, LLC
(“Grandview”) and Bailey N. Hall’s (“Hall”) Motion to Dismiss or Stay Action. For the reasons
discussed below, the Court will grant the Motion and dismiss the case.
I. BACKGROUND
This case concerns the ownership of the stock of National Financial Systems, Inc.
(“NFS”) and Metronomics, Inc. (“Stock”), as well as the ownership of real property located in
Layton, Utah (“Property”) (collectively the “Assignment”).
1
On June 14, 2012, this Court dismissed a related case involving J. Hoyt Stephenson
(“Stephenson”) because Stephenson was domiciled in Utah and the Court therefore lacked
diversity jurisdiction over the state law claims.1 The Honorable David Sam also held that
Stephenson was domiciled in Utah on September 13, 2012,2 and again, in a separate case, on
September 14, 2012.3
On August 31, 2012, Stephenson incorporated NFS as a Wyoming Corporation of which
Stephenson is the sole shareholder and director. On September 6, 2012, Stephenson transferred
his interest in the Stock to NFS and on September 11, 2012, Stephenson conveyed his interest in
the Property to NFS by quitclaim deed. Also on September 11, 2012, just eleven days after its
incorporation, NFS filed its complaint in this case, asserting that this Court has diversity
jurisdiction to hear Plaintiff’s claims.
Defendants filed their Motion to Dismiss or Stay Action on September 23, 2012, arguing
that this case should either be dismissed (1) because Stephenson manufactured diversity
jurisdiction by improperly assigning the Stock and Property to Plaintiff in violation of 28 U.S.C.
§ 1359 or (2) because Stephenson and his wife are indispensable parties whose joinder would
destroy complete diversity. In the alternative, Defendants argue that the Court should stay this
litigation under the Colorado River doctrine. Plaintiff responds that this Court does have
1
Middleton v. Stephenson, 2012 WL 2224451 at *6 (D. Utah June 14, 2012).
2
Memorandum Decision and Order, Stephenson v. Omni Health & Fitness Club of
Mobile, LLC, No. 1:12-CV-100, (D. Utah Sept. 13, 2012), ECF No. 45.
3
Order on Motion to Remand, Metronomics, Inc. v. Stephenson, No. 1:12-CV-106, (D.
Utah Sept. 14, 2012), ECF No. 19.
2
diversity jurisdiction because the Assignment was made for the proper purpose of insulating
Stephenson from potential personal liability to third parties. Plaintiff also argues that neither
Stephenson nor his wife are indispensable parties and that the Colorado River doctrine does not
apply to this case.
II. STANDARD OF REVIEW
Defendant has moved to dismiss the Amended Complaint under Federal Rule of Civil
Procedure 12(b)(1). Challenges under Rule 12(b)(1) take one of two forms: (1) facial attacks
“challeng[ing] the sufficiency of the complaint, requiring the district court to accept the
allegations in the complaint as true,” and (2) factual attacks, “challeng[ing] the facts upon which
subject matter jurisdiction depends.”4 When there is a factual attack, “the court must look
beyond the complaint and has wide discretion to allow documentary and even testimonial
evidence under Rule 12(b)(1).”5 Where, as here, resolving the jurisdictional claim does not
require resolving an aspect of the substantive merits claim, a motion to dismiss is not converted
into a motion under Rule 12(b)(6) or Rule 56.6
4
Paper, Allied-Indus., Chem. & Energy Workers Int’l Union v. Cont’l Carbon Co., 428
F.3d 1285, 1292 (10th Cir. 2005).
5
Id. (citing Wheeler v. Hurdman, 825 F.2d 257, 259 n.5 (10th Cir. 1987)).
6
See id. (citing Holt v. United States, 46 F.3d 1000, 1003 (10th Cir. 1995)).
3
III. DISCUSSION
A.
STEPHENSON’S DOMICILE
As an initial matter, the Court notes that absent the Assignment, the Court would not have
subject matter jurisdiction to hear this case because Stephenson is a citizen of Utah, not
Wyoming.
“[D]iversity of citizenship is assessed at the time the action is filed.”7 It is a longstanding
rule that the “‘principles of res judicata apply to questions of jurisdiction as well as to other
issues.’”8 “In particular, dismissals for lack of jurisdiction ‘preclude relitigation of the issues
determined in ruling on the jurisdiction question.’”9
The three other cases involving Stephenson, mentioned above, were filed on March 31,
2011, April 13, 2012, and May 7, 2012. In each of those cases, the court determined that
Stephenson was domiciled in Utah and therefore the court did not have jurisdiction to hear the
case. Stephenson has not alleged facts that would show a change in domicile from the dates of
the filing of the three prior cases to the date of the filing of the instant matter, September 11,
2012. The principles of res judicata therefore preclude relitigation of Stephenson’s domicile.
7
Freeport-McMoRan, Inc. v. K N Energy, Inc., 498 U.S. 426, 428 (1991).
8
Park Lake Res. Ltd. Liab. v. U.S. Dep’t of Agric., 378 F.3d 1132, 1136 (10th Cir. 2004)
(quoting Am. Surety Co. v. Baldwin, 287 U.S. 156, 166 (1932)).
9
Id. (quoting Matosantos Comm. Corp. v. Applebee’s Int’l Inc., 245 F.3d 1203, 1209
(10th Cir. 2001)).
4
B.
MANUFACTURED DIVERSITY
Plaintiff argues that this Court has diversity jurisdiction pursuant to 28 U.S.C. § 1332(a),
because Plaintiff is a Wyoming corporation while Defendants are domiciled in Utah. Defendants
respond that this Court does not have subject matter jurisdiction in this case because diversity
jurisdiction was manufactured in violation of 28 U.S.C. § 1359.
Pursuant to Section 1359, “[a] district court shall not have jurisdiction of a civil action in
which any party, by assignment or otherwise, has been improperly or collusively made or joined
to invoke the jurisdiction of such court.”10 Assignments between related corporate entities, or
between a corporation and its directors and officers, are presumptively ineffective to create
diversity jurisdiction.11 “[A]s with other challenges to jurisdiction, a party charged with creating
jurisdiction by collusion bears the burden of demonstrating that jurisdiction is proper.”12
District courts look to the following factors to determine whether an assignment is
legitimate or pretextual:
(1) whether and to what extent the assignee has a preexisting financial interest, (2)
whether adequate consideration exchanged hands, (3) whether the underlying
10
28 U.S.C. § 1359.
11
Canton Indus. Corp. v. Mi-Jack Prods., Inc., 944 F. Supp 853, 857 (D. Utah 1996)
(“Assignments ‘between parent companies and subsidiaries’ are ‘presumptively ineffective to
create diversity jurisdiction.’”) (quoting Nike Inc. v. Comercial Iberica de Exclusivas Deportivas,
20 F.3d 987, 991 (9th Cir. 1994)); see Dweck v. Japan CBM Corp., 877 F.2d 790, 792 (9th Cir.
1989) (“[A]ssignments between parent and subsidiary corporations are presumptively ineffective
to create diversity jurisdiction.”) (internal quotation marks omitted).
12
Bradbury v. Dennis, 310 F.2d 73, 74 (10th Cir. 1962), cert. denied, 372 U.S. 928
(1963).
5
motivation of the assignment involved a sufficiently compelling business purpose
that the assignment would have been made absent the purpose of gaining a federal
forum, (4) whether the timing of the assignment supports an inference that the
assignment was not entered into to create diversity, (5) whether the assignor has
transferred all interest in the litigation, and (6) whether the assignee is financing
the litigation.13
Considering these factors, the Court finds that the Assignment was improperly made for
the purpose of manufacturing diversity jurisdiction. As to the first factor, Plaintiff, the assignee,
could have had no preexisting financial interest because Plaintiff came into existence only eleven
days before the Assignment. Under the second factor, Plaintiff has not stated what, if any,
consideration exchanged hands. As Plaintiff is the sole shareholder and director of NFS,
however, any consideration that NFS paid to Stephenson likely would have been paid either by
Stephenson himself or a company controlled by him. Under the third factor, Plaintiff states that
Stephenson created NFS to “insulate himself from the potential personal liability to third parties
created by the improper actions of Hall.”14 Although this is a conceivable business purpose, the
Court does not find Plaintiff’s statement credible in light of the fourth factor—timing. Not only
was NFS incorporated less than three months after this Court’s decision finding that Stephenson
was domiciled in Utah, NFS also filed its Complaint in this case only eleven days after its
incorporation and on the very same day that the Assignment was complete. Finally, as to the
fifth and sixth factors, Stephenson failed to transfer all his interest in the litigation to NFS
because, as the sole shareholder of NFS, Stephenson retains the same interest in this litigation
13
Canton, 944 F. Supp at 857 (quoting W. Farm Credit Bank v. Hamakua Sugar Co., Inc.,
841 F. Supp. 976, 982 (D. Haw. 1994)).
14
Docket No. 27 at 11.
6
that he had before he made the Assignment. Similarly, as NFS’s sole shareholder, Stephenson is
likely financing the litigation before the Court and he has not presented evidence to the contrary.
Having considered each of the above factors, the Court finds that the Assignment was
improperly made in an attempt to create diversity jurisdiction in contravention of 28 U.S.C. §
1359. The Court therefore lacks subject matter jurisdiction to hear this case. It follows that the
Court is without jurisdiction to consider the parties’ remaining arguments.
IV. CONCLUSION
It is therefore ORDERED
that Defendant’s Motion to Dismiss or Stay Action (Docket No. 11) is GRANTED. It is
further
ORDERED that Plaintiff’s Motion for Speedy Declaratory Judgment, Temporary
Restraining Order and/or Preliminary Injunction (Docket No. 7) is DENIED as moot. It is further
ORDERED that National Financial Systems Management, Inc.’s Motion to Intervene
(Docket No. 28) is DENIED as moot. It is further
ORDERED that Plaintiff’s Motion to Strike or Deny NFSM’s Motion to Intervene for
Failure to File a Memorandum of Supporting Authorities (Docket No. 32) is DENIED as moot.
It is further
ORDERED that Defendants’ Motion for Preliminary Discovery Re Stephenson’s
Domicile (Docket No. 33) is DENIED as moot. It is further
ORDERED that National Financial Systems Management, Inc.’s Motion to Intervene
(Corrected) (Docket No. 36) is DENIED as moot. It is further
7
ORDERED that the hearing set in this case for January 28, 2013, is STRICKEN.
The Clerk of the Court is directed to close this case forthwith.
DATED December 20, 2012.
BY THE COURT:
_____________________________________
TED STEWART
United States District Judge
8
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