Opinion
SA-22-CA-274-FB (HJB)
12-27-2022
AULUKISTA, LLC Individually and Derivatively on Behalf of Global Windcrest II, LLC, Plaintiff, v. GLOBAL BUILDING, LLC; CHRISTIAN MEJIA; and GLOBAL WINDCREST II, LLC; Defendants.
REPORT AND RECOMMENDATION OF UNITED STATES MAGISTRATE JUDGE
Henry J. Bemporad United States Magistrate Judge
To the Honorable United States District Judge Fred Biery:
This Report and Recommendation concerns the Motion to Remand to State Court filed by Plaintiff Aulukista, LLC (“Aulukista”). (Docket Entry 32.) Pretrial motions in this case have been referred to the undersigned for consideration. (See Docket Entry 24.) For the reasons set out below, I recommend that Plaintiff's motion (Docket Entry 32) be GRANTED IN PART and DENIED WITHOUT PREJUDICE IN PART.
I. Jurisdiction.
Defendant Global Building, LLC (“Global Building”) removed this case from state court to this Court, alleging diversity jurisdiction pursuant to 28 U.S.C. § 1332. (Docket Entry 1.) I have authority to issue this Report and Recommendation pursuant to 28 U.S.C. § 636(b)(1)(B).
II. Background.
This case presents a relatively straightforward dispute, made complex only because of the corporate structure of the parties to that dispute. The dispute relates to management of a five- story commercial building in Bexar County, Texas. The building is owned by Global Windcrest II, LLC (“GWII”). (Docket Entry 1-1, at 4-5; Docket Entry 7, at 2.) The members of GWII are Plaintiff Aulukista and another limited liability company, Global Windcrest Partners, LLC (“Global Partners”); Aulukista owns 68% of GWII, while Global Partners owns 32%. (Docket Entry 1-1, at 5; Docket Entry 7, at 2.) Defendant Global Building is not a member of GWII, but served as its manager. (Docket Entry 1-1, at 6.) All the members of Aulukista are Alaskan citizens. (Docket Entry 1, at 7.) The members of Global Building are C.W. Tucker Lewis, a citizen of Maine, and Tad Lewis, a citizen of Washington. (Id.) The citizenship of the members Global Partners is unknown: Plaintiff Aulukista believes there are ten members of the LLC, including at least one other LLC and the Exempt Family Trust of C.W. Tucker Lewis (the same Tucker Lewis who is a member of Defendant Global Building) (Docket Entry 32, at 8 & n.12); Defendant Global Building never addresses Global Partners' citizenship in its pleadings.
A management dispute arose between Aulukista and Global Building regarding management of the building. Aulukista, acting as majority member of GWII, issued a resolution removing Global Building as manager, effective March 5, 2022. (Docket Entry 1-1, at 17.) Six days later, Aulukista filed suit in 131st Judicial District Court in Bexar County, naming Global Building as a Defendant, along with Christian Mejia, who worked as the on-site manager for the building; the suit also named GWII as a nominal Defendant. (Docket Entry 1-1, at 1.) The suit sought temporary and permanent injunctive relief prohibiting Defendants from representing themselves as managers of either GWII or the building, and from transferring any GWII funds; it also sought to require Defendants to preserve books, records, and other GWII property, turning them over to Aulukista until a new manager was named. (Docket Entry 1-1, at 12-13.)Aulukista purported to sue both on its own behalf and derivatively, on behalf of GWII. (Id. at 1.)
Aulukista also sought to ban Defendant Mejia from the building, except to retrieve her personal effects. (Id.)
The state district court issued a temporary restraining order on March 14, 2022, and set a hearing on the request for temporary injunction on March 23, 2022. (Docket Entry 1-2.) The day before the hearing, Global Building removed the case to this Court, asserting jurisdiction under 28 U.S.C. §§ 1332(a) and 1441. (Docket Entry 1.)
After the case was removed, Aulukista asked this Court to extend the state temporary restraining order; in its motion, Aulukista questioned whether the Court had jurisdiction over the case under § 1332(a). (See Docket Entry 2, at 1.) The Court called for briefing on the jurisdictional issue. (See Docket Entry 4.) Global Building filed its answer, and the parties submitted their jurisdictional briefing, but immediately afterward they jointly moved to stay proceedings while they attempted to resolve their dispute. (See Docket Entries 7, 8, 9, 10).
The Court granted the stay, but the parties reached an impasse, and the Court lifted the stay and referred the matter to the undersigned. (Docket Entries 11, 21, 24.) Aulukista then filed the instant motion to remand. (Docket Entry 32.) Global Building responded (Docket Entry 34), and Aulukista replied (Docket Entry 35).
III. Analysis.
Aulukista makes three arguments in support of remand in this case: (1) the parties are not diverse; (2) the amount in controversy does not exceed $75,000; and (3) Defendant Mejia is a citizen of Texas, which prevented removal under the forum-defendant rule set out in 28 U.S.C. § 1441(b)(1). (Docket Entry 32.) Because Aulukista's first argument is well-taken, the Court need not consider the remaining issues at this time.
See note 5, infra.
A defendant may remove a civil action filed in state court to federal court if the district court has original jurisdiction. 28 U.S.C. § 1441(a). The removing party bears the burden of establishing jurisdiction and compliance with the requirements of the removal statute. Shearer v. Sw. Serv. Life. Ins., 516 F.3d 276, 278 (5th Cir. 2008). The Court must resolve all “doubts regarding whether removal jurisdiction is proper . . . against federal jurisdiction.” Acuna v. Brown & Root Inc., 200 F.3d 335, 339 (5th Cir. 2000) (citations omitted). Additionally, the Court must strictly construe removal statutes “against removal and for remand.” Bosky v. Kroger Tex., LP, 288 F.3d 208, 211 (5th Cir. 2002); see generally 28 U.S.C. § 1447(c) (describing remand procedures).
Section 1447(c) provides that, “[i]f at any time before final judgment it appears that the district court lacks subject matter jurisdiction, the case shall be remanded.” In diversity cases, subject matter jurisdiction “requires that all persons on one side of the controversy be citizens of different states than all persons on the other side.” Alphonse v. Arch Bay Hldgs., L.L.C., 618 Fed.Appx. 765, 767 (5th Cir. 2015) (quoting Harvey v. Grey Wolf Drilling Co., 542 F.3d 1077, 1079 (5th Cir. 2008)). For purposes of diversity jurisdiction, “the citizenship of an LLC is determined by the citizenship of all of its members.” Harvey, 542 F.3d at 1080 (collecting cases).
In this case, Aulukista, Global Building, GWII, and Global Partners are all limited liability companies. The citizenship of the members of Aulukista, Global Building, and GWII is not disputed by the parties; the citizenship of the members of Global Partners, however, is unknown. Global Partners is a member of GWII; accordingly, if GWII is a proper party to this lawsuit, then Global Building has failed to carry its burden of showing the citizenship of all parties, as is required for removal. Aulukista argues GWII is a property party. It contends that it has presented not only direct claims for itself, but also derivative claims on behalf of GWII, of which it is majority member.
Indeed, it may well be that Global Partners' presence in the case would destroy diversity, as Mr. Tucker Lewis is a member of Global Building and his family trust is a member of Global Partners. Aulukista raised this issue in its motion to remand (see Docket Entry 32, at 8), but Global Building failed to address it in response to that motion, or anywhere else in its pleadings in this case.
The test to distinguish between derivative and direct claims is well-defined. Mallia v. PaineWebber, Inc., 889 F.Supp. 277, 282 (S.D. Tex. 1995) (collecting cases). In a derivative suit, a shareholder or member sues on behalf of the company for harm done to the company. See id. (citing Lenz v. Associated Inns and Rests. Co. of Am., 833 F.Supp. 362, 380 (S.D.N.Y. 1993)). By contrast, a shareholder or member bringing an individual, direct action “must be injured directly or independently of the corporation [or partnership].” Lenz, 833 F.Supp. at 380; see also Kenworthy v. Hargrove, 855 F.Supp. 101, 106 (E.D. Pa. 1994) (explaining that direct/derivative determination hinges on “whether the primary injury alleged in the complaint is to the partnership or to the individual plaintiffs”).
In opposing remand, Global Building argues that Aulukista's claims are not derivative in nature. (Docket Entry 34, at 6.) But the only assertion it makes in support of this argument is that Aulukista has not alleged any valid claim against any Defendant, and thus Aulukista “has not articulated-to any pleading standard-which claims it purports to bring on behalf of [GWII].” (Id. at 7.) This argument fails. Despite the purported failures to state a valid claim for relief, Global Building was able to answer Aulukista's complaint (Docket Entry 7); it neither moved to dismiss the complaint for failure to state a claim, see FED. R. CIV. P. 12(b)(6), nor sought a more definite statement on the ground that the complaint was “so vague or ambiguous” that it could not “reasonably prepare a response,” FED. R. CIV. P. 12(e). Global Building's failure to make either motion before answering is normally considered a waiver of such arguments, see FED. R. CIV. P. 12(b),(e), and it belies any arguments that no cause of action is asserted in Aulukista's complaint.
In any event Aulukista's complaint is fairly read to include not only direct claims against Defendants, but derivative ones made on GWII's behalf. The state court petition alleges breaches of an operating agreement which created GWII, as well as breaches of Global Building's duties to GWII. (See Docket Entry 1-1, at 8.) The petition seeks relief that would affect GWII directly, asking the court among other things to prohibit Global Building from representing itself as a manager of GWII, to prohibit it from transferring any GWII funds, and to require it to preserve GWII's books, records, and other property. (Id. at 12-13.) Finally, in asking for immediate relief, the petition makes clear that it seeks to prevent imminent damage not just to Plaintiffs generally, but specifically to “the business and operational integrity of GWII.” (Id. at 11-12.)
In its jurisdictional briefing before the District Court, Global Building argued that the petition made only direct claims, because (1) Aulukista drafted the resolution to remove Global Building and was the only member to vote on it; and (2) the agreement alleged to be violated was the same agreement that created GWII, and GWII could not sue to enforce that agreement. (Docket Entry 9, at 9-10.) Global Building cited no authority in support of these novel arguments, but, in any event, it did not renew them in response to the motion to remand.
The determination of whether a claim is derivative or direct turns on the nature of the claim, not its label. Recruiting Force, LLC v. Mainthia Tech. Inc., A-19-CV-1045-RP, 2020 WL 1698826, at *3 (W.D. Tex. Apr. 8, 2020). “It is not the characterization of a suit as direct or derivative that matters, but instead what matters is the precise relief the plaintiff is requesting, and through what claims.” Id. In this case, Aulukista seeks to enforce GWII's rights and asks for preservation of GWII's money, books, records, and other property. Whatever label is affixed to these claims, they are clearly derivative in nature-they are made at least in part to preserve the rights and interests of GWII, as opposed to Aulukista alone. GWII is thus a proper Plaintiff in this case.
Global Partners is a member of GWII; because Global Partners is also an LLC, its citizenship is determined by the citizenship of all its members. Accordingly, a showing of the citizenship of the members of Global Partners was necessary for Global Building to remove this case. Harvey, 542 F.3d at 1080; Settlement Funding, LLC v. Rapid Settlements, Ltd., 851 F.3d 530, 536 (5th Cir. 2017) (to establish diversity of citizenship, party “must specifically allege the citizenship of every member of every LLC”). Global Building has failed to make the required showing, despite numerous opportunities to do so. Accordingly, Aulukista's motion to remand should be granted.
Conceivably, the District Court could permit Global Building to correct the jurisdictional defect in its pleadings by amendment or by providing additional evidence. Cf. MidCap Media Finance, L.L.C. v. Pathway Data, Inc., 929 F.3d 310, 315 (5th Cir. 2019) (remanding case to district court so that membership of LLC could be addressed by amended pleadings). If Global Building does show the diversity of parties in the case, the Court may again refer the case to the undersigned for consideration of Aulukista's other arguments for remand.
IV. Conclusion and Recommendation.
Based on the foregoing, I recommend that Plaintiff's Motion to Remand to State Court (Docket Entry 32) be GRANTED IN PART and DENIED WITHOUT PREJUDICE IN PART. The motion should be GRANTED as to the argument that diversity of citizenship has not been shown; it should be DENIED WITHOUT PREJUDICE as to the other arguments presented.
V. Instructions for Service and Notice of Right to Object.
The United States District Clerk shall serve a copy of this Report and Recommendation on all parties by either (1) electronic transmittal to all parties represented by attorneys registered as a “filing user” with the clerk of court, or (2) by mailing a copy to those not registered by certified mail, return receipt requested. Written objections to this Report and Recommendation must be filed within fourteen (14) days after being served with a copy of same, unless this time period is modified by the district court. 28 U.S.C. § 636(b)(1); FED. R. CIV. P. 72(b). The party shall file the objections with the clerk of the court, and serve the objections on all other parties. A party filing objections must specifically identify those findings, conclusions or recommendations to which objections are being made and the basis for such objections; the district court need not consider frivolous, conclusive or general objections. A party's failure to file written objections to the proposed findings, conclusions and recommendations contained in this report shall bar the party from a de novo determination by the district court. Thomas v. Arn, 474 U.S. 140, 149-52 (1985); Acuna, 200 F.3d 335. Additionally, failure to file timely written objections to the proposed findings, conclusions and recommendations contained in this Report and Recommendation shall bar the aggrieved party, except upon grounds of plain error, from attacking on appeal the unobjected-to proposed factual findings and legal conclusions accepted by the district court. Douglass v. United Servs. Auto. Ass'n, 79 F.3d 1415, 1428-29 (5th Cir. 1996) (en banc).