Opinion
No. 3:03-CV-0310-P
April 22, 2003
MEMORANDUM OPINION AND ORDER
Plaintiff filed on February 12, 2003, a Motion for a Temporary Restraining Order and a Preliminary Injunction. The Court declined to enter an ex parte temporary restraining order, and established an expedited briefing schedule on the Motion for Preliminary Injunction. Defendants filed a Motion to Dismiss on February 21, 2003, urging this Court to dismiss the case for lack of complete diversity and for failure to join a party required under Rule 19. Along with this Motion to Dismiss, Defendants submitted arguments against the issuance of a preliminary injunction. Plaintiffs filed a combined Response to Defendants' Motion and Reply concerning the Motion for Preliminary Injunction on February 27, 2003. Defendants' Reply concerning the Motion to Dismiss was filed on February 28, 2003. Defendants have also requested leave to file a Surreply concerning the Motion for Preliminary Injunction.
The essence of Defendants' Motion to Dismiss is this: the relief requested by Plaintiff cannot but affect the legal interests of a nondiverse nonparty. To clarify whether and how the requested relief could be shaped to avoid prejudicing this nonparty, the Court held a hearing in chambers on March 19, 2003. Afterwards, the Court invited the parties to file supplemental briefs on two issues: first, whether the nonparty's citizenship should be imputed to Defendant Wood Co., Inc. ("Georgia Wood"), and second, how the requested relief might be shaped to avoid prejudice to the nonparty. Defendant filed its supplemental brief on March 26, 2003, Plaintiff filed its opposition brief on March 31, 2003, and Defendant it reply brief on April 3, 2003.
After considering the pleadings, the motions, the briefing, the arguments, and the applicable law, the Court GRANTS the Motion to Dismiss because it lacks jurisdiction over the subject matter of this dispute.
Factual Background
Plaintiff Rigg Insurance Managers, Inc. d/b/a RISC Inc. ("RISC") is engaged in business as a managing general insurance agency and excess surplus lines insurance broker. Compl. ¶ 7. RISC hired Defendant Robin A. Stough in the late summer or early fall of 1997. Id. ¶ 8. On or about October 8, 1997, Mr. Stough executed an Employment Agreement and a Nondisclosure Agreement and Covenant Not to Compete. Id. "Stough worked his way up from [an] initial job title as `Producer' at RISC to President" and eventually became both an officer and a director of the company. Id. ¶ 16.
Mr. Stough avows that he was hired as a senior vice president. See Stough Aff. ¶ 4.
Stough resigned his position at RISC on October 24, 2002, and joined Georgia Wood as president. Id. ¶ 17. Stough allegedly used "intimate knowledge" he acquired during his tenure at RISC "to identify RISC's top performers and the compensation necessary to entice [three of] them to Wood." Id. Plaintiff further alleges that at least one of these former RISC producers has "actively called all of the RISC accounts he formerly serviced" and obtained letters that "effectively transfer" accounts from RISC to Georgia Wood. Id. ¶ 18.
Defendants admit that Stough was hired as president of Georgia Wood but deny that Georgia Wood has an office in Dallas, Texas. Stough Aff. ¶ 2. Rather, an affiliated company — Texas WCI, Inc., d/b/a Wood Company of Texas, Inc. ("Texas Wood") — maintains offices in Dallas and committed the acts about which Plaintiff complains. Id. ¶ 2. In particular, Defendants assert that Stough was also hired as president of Texas Wood, that Texas Wood has hired former RISC employees, and that certain former RISC clients have transferred their business to Texas Wood. Id. ¶¶ 2 5.
Texas Wood's relationship with Georgia Wood is substantial but requires detailed explanation to appreciate. Georgia Wood is a wholly owned subsidiary of McGriff, Seibels Williams, Inc. ("McGriff"), an Alabama corporation with its corporate headquarters in Alabama. Lambert Aff. ¶ 3. McGriff wholly owns another company known as McGriff Seibels of Texas, Inc. (`Texas McGriff'), a Texas corporation with its principal place of business in Houston. Id. Texas Wood is a Texas corporation owned by two shareholders, Peter Barbara and Thomas Ebner, both of whom are residents of Texas. Id. ¶¶ 4 5. Barbara and Ebner are "nominees of Texas McGriff pursuant to Option Agreements" with Texas McGriff and are contractually obliged to immediately transfer their stock in Texas Wood to any person or entity named by Texas McGriff upon demand of Texas McGriff. Id. ¶ 5. The Options Agreement permits Texas McGriff to control the board of directors and shareholder votes of Texas Wood. Id. Texas McGriff and Texas Wood have also entered a Local Recording Agent Appointment and Servicing Agreement. Id.
Since February 27, 2002, Texas McGriff's management powers over Texas Wood have been exercised by Georgia Wood. Id. ¶ 6. All income generated by Texas Wood goes to Georgia Wood. Id. All Texas Wood employees are paid by McGriff, the Alabama parent, which is in turn reimbursed by Georgia Wood. Id. ¶ 5. From January 2, 2003, through March 17, 2003, Texas Wood and Georgia Wood shared a president, Defendant Robin Stough. Id. ¶ 6. On March 17, 2003, Peter Barbara (the part owner of Texas Wood) was appointed president of the company. Id. Defendants contend that Georgia Wood "continues to exercise the type of control that any parent corporation does over a subsidiary, and Mr. Stough continues to be actively involved in the business operations of Texas Wood." Id.
Defendants attribute these complicated structural arrangements to the requirements of Texas insurance law, which treats Texas insurance companies and agencies differently than out-of-state companies doing business in Texas. Id. ¶ 7. As a functional matter, Defendants assert, Georgia Wood acts as the corporate parent of Texas Wood. Id.
The Complaint asserts numerous claims against Stough, including breach of contract, conversion, misappropriation of trade secrets, unfair competition, breach of fiduciary and confidential relations, tortious interference with a contract and prospective business relations, and civil conspiracy. Compl. ¶¶ 21, 30, 23, 26-27, 38, 34-35, 41. Plaintiff lodges allegations of misappropriation of trade secrets, unfair competition, tortious interference with contract and prospective business relations, and civil conspiracy against Georgia Wood as well. Id. ¶¶ 23, 26-27, 33 35, 41.
According to Defendants, several of the claims against Stough and Georgia Wood properly describe conduct of Texas Wood. For example, one of the tortious interference claims is premised on Defendants' hiring of RISC employees and assigning them to compete directly with RISC in violation of their contractual obligations to RISC. Defendants contend that it was Texas Wood (not Georgia Wood) that hired RISC employees. The misappropriation claim is based on the theory that these former RISC employees will inevitably disclose to Stough or Georgia Wood proprietary information learned at RISC. Again, Defendants contend, the former RISC employees would be divulging secrets, if at all, to Texas Wood as well as Stough and Georgia Wood. Finally, the unfair competition claim is based in part on Defendants' soliciting of RISC clients, specifically Ref Chem and Pizza Properties. Defendants aver that those former RISC clients transferred their business to Texas Wood. See generally Stough Aff. ¶ 2.
By this suit, Plaintiff seeks to impose a constructive trust upon revenues "derived from Defendants' illegal activities or the use of trade secrets or other confidential information improperly taken from RISC. . ." Compl. ¶ 43. Plaintiff also seeks actual damages, injunctive relief, punitive damages, attorneys' fees, pre- and post-judgment interest, and costs. Id. at 17-18. Plaintiff begs this Court to preliminarily enjoin "Defendant Stough and all persons acting with him (including, but not limited to any officer, employee, agent or other representative of [Georgia] Wood)" from
1. soliciting any business from any client or customer whom Stough, or any former employee who is currently working for [Georgia] Wood, serviced while at RISC or any other customer or client of RISC whose name became known to Stough, or any former employee of RISC who is currently working for [Georgia] Wood, while in the employ of RISC;
2. accepting any business from said clients whom either Stough or [Georgia] Wood has solicited at any time in the past for the purpose of doing business with [Georgia] Wood;
3. using, disclosing, or transmitting for any purpose (including but not limited to the solicitation of said clients), any information contained in the records of RISC, including but not limited to the names, addresses, and financial information of said clients;
4. requiring Stough and [Georgia] Wood to immediately return to RISC all originals, copies, or other reproductions, in any form whatsoever, of any record of RISC, and to purge or destroy any computerized record of RISC that is within Stough or [Georgia] Wood's possession, custody, or control; and
5. contacting any person who is employed by RISC as a producer for the purpose of soliciting that person to become employed by Stough or [Georgia] Wood.
Pl.'s Mot. at 3.
Defendants' Motion to Dismiss
In the supplemental briefing, Defendants give two reasons for dismissing this case. They first contend that this Court lacks jurisdiction over the subject matter. Defs.' Mot. ¶¶ 1-3. Specifically, they urge this Court to impute to Georgia Wood the Texas citizenship of Texas Wood under the rule announced by Freeman v. Northwest Acceptance Corp., 754 F.2d 553, 558 (5th Cir. 1985). Defs.' Supp. at 7-8. Defendants alternatively argue that the case should be dismissed because Texas Wood is an indispensable party. Defs.' Mot. ¶ 3; Defs.' Supp. at 10-13. Customarily, a federal court resolves doubts about its jurisdiction before proceeding to other issues. Ruhrgas AG v. Marathon Oil Co., 526 U.S. 574, 578 (1999).
The Motion to Dismiss also posits that the case should be dismissed because Plaintiff has not sued the real party in interest. Defendants appear to abandon their reliance on Rule 17 in the supplemental briefing. They are right to do so. Rule 17 does not require a plaintiff to sue the right party; it merely requires that a claim be asserted by the real party in interest. See 6A CHARLES ALAN WRIGHT ET AL., FEDERAL PRACTICE AND PROCEDURE § 1543 at 334 (2d ed. 1990).
Subject-Matter Jurisdiction Legal Standard — Generally
A complaint must be dismissed if the Court lacks jurisdiction over the subject matter of the plaintiffs claim. FED. R. CIV. P. 12(b)(1), 12(h)(3). More importantly, the burden of establishing subject-matter jurisdiction rests on the plaintiff as the party invoking jurisdiction. Kokkonen v. Guardian Life Ins. Co., 511 U.S. 375, 377 (1991). A district court may decide a rule 12(b)(1)motion to dismiss "on any one of three separate bases: (1) the complaint alone; (2) the complaint supplemented by undisputed facts evidenced in the record; or (3) the complaint supplemented by undisputed facts plus the court's resolution of disputed facts Barrera-Montenegro v. United States, 74 F.3d 657, 659 (5th Cir. 1996) ( quoting Williamson v. Tucker, 645 F.2d 404, 413 (5th Cir. 1981)). The Fifth Circuit distinguishes between a "facial" attack and a "factual" attack upon a complaint under Rule 12(b)(1). See Patterson v. Weinberger, 644 F.2d 521, 523 (5th Cir. 1981). If a defendant files a 12(b)(1) motion, the attack is presumptively facial and the Court need look only to the sufficiency of the allegations in the complaint, which are presumed to be true. See id. If, however, the defendant supports the motion with affidavits, testimony, or other evidentiary materials, then the attack is factual and the burden shifts to the plaintiff to prove subject-matter jurisdiction by a preponderance of the evidence by also submitting facts through some evidentiary method. See id. Regardless, a motion to dismiss for lack of subject-matter jurisdiction should be granted only if it appears certain that the plaintiff cannot prove any set of facts in support of his or her claim that would entitle him or her to relief. Home Builders Ass'n of Miss., Inc. v. City of Madison, Miss., 143 F.3d 1006, 1010 (5th Cir. 1998).
A court of the United States has jurisdiction over the subject matter of a dispute if it "arises under" the Constitution, laws or treatises of the United States. O'Quinn v. Manuel, 773 F.2d 605, 607 (5th Cir. 1985); 28 U.S.C. § 1331. No one argues that a "federal question" gives the Court jurisdiction in this case. Jurisdiction also lies where the matter in controversy is between citizens of different states and the amount in controversy exceeds a minimum set by Congress. Turton v. Turton, 644 F.2d 344, 347 (5th Cir. 1981); 28 U.S.C. § 1332. Under Strawbridge v. Curtiss, 7 U.S. (3 Cranch) 267 (1806), this diversity of citizenship must be complete, that is, no defendant may be a citizen of the same state as any plaintiff No one contends that the amount in controversy fails to exceed the jurisdictional minimum. Rather, Defendant argues that complete diversity is lacking.
In determining the citizenship of a natural person, the courts look to the State in which he is domiciled. See Newman-Green, Inc. v. Alfonzo-Lorrain, 490 U.S. 826, 828 (1989). A person is domiciled where he or she has established a fixed habitation or abode, intending to remain there permanently or indefinitely. Coury v. Prot, 85 F.3d 244, 250 (5th Cir. 1996). By statute, a corporation is deemed to be a citizen of any State in which it has been incorporated and of the State where it has its principal place of business. 28 U.S.C. § 1332 (c)(1).
Strictly Speaking, the Named Parties are Diverse
The following facts are undisputed. First, Plaintiff is a Texas corporation with its principal place of business in Dallas. Compl. ¶ 1. Second, Defendant Stough is a resident of Georgia. Id. ¶ 2. Third, Defendant Georgia Wood is a Delaware corporation having its principal place of business in Norcross, Georgia. Lambert Aff. ¶ 3. Indulging reasonable inferences on the question of Defendant Stough's domicile, the Court finds that these facts, on their own, would establish subject matter jurisdiction.
The Freeman Principle
Though strict adherence to the letter of the statute would permit federal jurisdiction based on diversity, courts "are not required to ignore . . . reality" or allow themselves "`to be blinded or deceived by mere forms of law,'" as when corporate fictions disguise the fact that a dispute is, in actuality, local in character. See Freeman v. Northwest Acceptance Corp., 754 F.2d 553, 557 (5th Cir. 1985) (quoting Chicago, Milwaukee, St. Paul Ry. Co. v. Minneapolis Civic Comm. Assoc., 247 U.S. 490, 501 (1974)). Defendants therefore urge the Court to apply a Fifth Circuit doctrine — the so-called "attribution rule" — to find that Georgia Wood is also a citizen of Texas. This judicially created rule permits courts to impute the citizenship of an unnamed subsidiary to the defendant parent corporation in cases where the plaintiff seeks to hold the defendant parent liable for the wrongful acts of the unnamed subsidiary. See Def.'s Supp. at 7-8 (citing Kuehne Nagel v. Geosource, Inc., 874 F.2d 283, 291 (5th Cir. 1989); Panalpina Welttransport GmBH v. Geosource, Inc., 764 F.2d 352, 354-55 (5th Cir. 1985); Freeman, 754 F.2d at 558). The rule applies where it helps to effectuate "the congressional purpose of denying a federal forum to actions wholly local in character." Freeman, 754 F.2d at 558-59.
In Freeman, the plaintiffs (apparently citizens of Colorado) alleged that an unjoined subsidiary (also a citizen of Colorado) was the alter ego of the defendant parent (an Oregon corporation with its principal place of business in Oregon). Id. at 556. The plaintiffs sued the parent corporation for conversion, although the subsidiary's "direct responsibility for the conduct complained of [was] undisputed." Id. at 557. The court determined that the parent and the subsidiary "operated as a consolidated corporation in Colorado. Although each retained its own articles of incorporation and its own accounts, those accounts were kept in the same office by the same employees, who may have worn two hats but who received their salaries from one payroll." Id. The Fifth Circuit concluded that the parent, "as a constituent of an effectively consolidated corporation with Colorado citizenship should itself be deemed a Colorado citizen in suits arising from the actions of the consolidated entity." Id. Imputing the citizenship of the unjoined subsidiary to the defendant parent, the court doubted its jurisdiction over the subject matter.
Similarly, in Polanco v. H.B. Fuller Co., 941 F. Supp. 1512, 1516-17 (D. Minn. 1996), the plaintiff (a citizen of Guatemala) sued the defendant parent corporation for the acts of its subsidiary (a Guatemalan corporation). The plaintiff did not allege that the parent was the alter ego of the sub, but the facts showed that the subsidiary was wholly owned by a Panamanian corporation, which in turn was 95% owned by the defendant parent. Adopting the Fifth Circuit's attribution rule, the court imputed the citizenship of the Guatemalan subsidiary to the defendant parent and dismissed for lack of subject-matter jurisdiction. See 28 U.S.C. § 1332 (a)(4). See also Bonar, Inc. v. Schottland, 631 F. Supp. 990, 997 (E.D. Pa. 1986) (named defendant was wholly owned by unjoined, nondiverse corporation; suit was based on actions of officers of parent who also ran subsidiary; Freeman provided alternative basis for dismissing for lack of complete diversity).
As the Polanco court noted, the Fifth Circuit has not limited its application of the Freeman principle to cases where the named defendant is distinct from the unjoined parent or subsidiary in name only. 941 F. Supp. at 1517. In Kuehne Nagel (AG Co.) v. Geosource, Inc., 874 F.2d 283, 286 (5th Cir. 1989), a West German corporation attempted to hold a Texas corporation responsible for the acts of a Cayman Islands corporation. Though the Texas corporation held only a 50% ownership position in the Cayman Islands corporation, the plaintiff alleged that former was responsible for the latter's breach of contract as its "alter ego." Id. at 285 286. The plaintiff also alleged that the Texas corporation fraudulently induced it to contract with the Caymans corporation. Id. at 286. Citing the Freeman principle, the Fifth Circuit affirmed the district court's finding that the Texas corporation assumed the citizenship of the Caymans corporation. Id. at 291. The court then explained that it did not matter that the plaintiff had made separate claims against the Texas corporation based on its own acts:
This conclusion is not undermined by the fact the [plaintiff's] other claim against [the Texas defendant] for fraudulent inducement is predicated on [its] own conduct and [the Texas corporation] does not assume [the Cayman corporation's] alien residence for this claim. Complete diversity must exist between each plaintiff and defendant on all claims.Id. (citing Freeman, 754 F.2d at 555).
Imputing the Citizenship of Texas Wood to Georgia Wood
Applying Freeman to the case at hand, the Court considers (1) the relationship between the named defendant and the related, unjoined corporation and (2) whether the plaintiff is attempting to hold the named defendant responsible for the acts of the unnamed corporation. Freeman, 754 F.2d at 557. Though Plaintiff argues that Texas Wood "is not directly responsible for" but is merely "a beneficiary of" the conduct complained of, the Court finds that at least some of the "offending conduct" is attributable to Texas Wood. See Pl.'s Opp. at 5. Plaintiff does not contradict statements in the Stough Affidavit to the effect that Georgia Wood has no offices in Texas, that Texas Wood hired away RISC employees, and that certain former RISC clients have transferred their business to Texas Wood rather than Georgia Wood. It therefore appears that several of the allegations lodged against Georgia Wood — tortious interference with former RISC employees' contractual obligations to RISC, misappropriation of trade secrets, and unfair competition — are based at least in part on conduct of Texas Wood.
As for the relationship between Georgia Wood and Texas Wood, the Court begins by noting that the facts of this case present a matter of first impression: none of the cases relying on Freeman have considered its application to a defendant that holds no equity in but effectively controls an affiliate whose acts (at least partly) form the basis of the suit. See Freeman, 754 F.2d at 556 (two companies all but formally consolidated); Kuehne Nagel, 874 F.2d at 285 (partly owned sub); Bonar, 631 F. Supp. at 992 (defendant wholly owned by unnamed parent); Polanco, 941 F. Supp. 1514 -1515 (grandparent of sub 95% owned by 100%-owned sub). See also Schwartz v. Electronic Data Sys., Inc., 913 F.2d 279 (6th Cir. 1990) (Merritt, C.J., dissenting) (wholly owned sub). But see Panalpina, 764 F.2d at 354 (facts reveal only that subsidiary was alleged to be alter ego of parent; ownership can be inferred from Kuehne Nagel, which deals with the same parties). It is undisputed that Georgia Wood holds no ownership interest in Texas Wood. However, by contract Georgia Wood exercises management powers over Texas Wood. It has control over the board of directors and the voting rights of the Texas Wood shareholders. Those shareholders are contractually obligated to transfer ownership of their stock to another party on demand. Georgia Wood receives all net income generated by Texas Wood and indirectly pays the employees of Texas Wood. As Defendants put it, "[Georgia] Wood continues to exercise the type of control that any parent corporation does over a subsidiary." Defs.' Supp. at 5.
Plaintiff picks up on this statement, calling it "telling." Pl.'s Opp. at 3 n. 3. No alter ego theory is alleged, Plaintiffs contend. Rather, "[f]ar from the alter ego situation portrayed in [ Freeman,] Defendants' own affidavit rebuts any idea that an alter ego situation exists. Defendants carefully state that [Georgia] Wood's control over Texas [Wood] is merely that of `any parent . . . over a subsidiary.' Similarly, [Georgia] Wood and Texas [Wood] are merely, `in the same corporate family.'" Id. (quoting Defs.' Supp. at 5 Lambert Aff. ¶ 7).
The Court acknowledges that this case does not involve any allegation of the alter ego. Nor even is this a traditional parent-subsidiary relationship characterized by ownership as well as control. Nonetheless, the Court believes that Georgia Wood should assume the citizenship of Texas Wood with respect to suits brought by Texas plaintiffs to hold Georgia Wood responsible for the acts of Texas Wood. This dispute is largely local in character and assuming jurisdiction would require the Court to ignore the fact that Texas Wood is not merely the beneficiary of Defendants' allegedly wrongful actions but the entity "directly responsib[le]" for certain of the complained-of actions. Freeman, 754 F.2d at 557. See also Kuehne Nagel, 874 F.2d at 291 (applying Freeman despite allegations based on acts of parent itself). Imputing the Texas citizenship to Georgia Wood "furthers the intent of [C]ongress `to minimize and reduce the caseload of federal courts based on diversity' by providing in 28 U.S.C. § 1332 (c) for multiple corporate citizenship" Freeman, 754 F.2d at 558 (citing Delalande, Inc. v. Fine, 545 F. Supp. 268, 271 (S.D.N.Y. 1982). See generally S. Rep. No. 1830, 85th Cong., 2d Sess., reprinted in 1958 U.S.C.C.A.N. 3099, 3101-02.
Denying diversity jurisdiction in this case is consistent with the State's insurance regulations. If Georgia Wood had chosen to operate in Texas as an out-of-state seller of insurance, it would have been required to comply with a regulatory scheme generally considered to be more demanding than the one imposed on Texas companies. Assuming those more onerous burdens, Georgia Wood would not likewise assume the responsibilities of Texas citizenship. And in a suit by a Texas plaintiff based on acts of the Texas office, diversity jurisdiction would lie because the Texas office would be a Georgia citizen. See Toms v. Country Quality Meats, Inc., 610 F.2d 313 (5th Cir. 1980). Here, the choice was made to abide by the purportedly less demanding regulations applicable to Texas corporations selling insurance in Texas. One consequence of this choice is that the parent must assume the responsibilities of Texas citizenship. To ignore this arrangement and consider (for diversity purposes) only the statutory citizenship of the parent would be to absolve the parent of responsibilities imposed by Texas' regulatory scheme. If Georgia Wood were to seek relief from a Texas defendant on behalf of Texas Wood, it would not be proper to ignore the citizenship of the real party in interest Texas Wood and permit Georgia Wood to avoid litigation in Texas state court. See Onyx Waste Servs., Inc. v. Mogan, 203 F. Supp.2d 777 (E.D. Mich. 2002) (dismissing under Rule 19(b) but noting the impropriety of allowing Wisconsin corporation to sue Michigan defendant in Michigan on behalf of a Michigan subsidiary). Likewise, it is not appropriate to ignore the Texas citizenship of Texas Wood in a case against Georgia Wood based on the actions of Texas Wood.
The Court imputes the Texas citizenship of Texas Wood to Defendant Georgia Wood. Complete diversity is therefore lacking, and this Court cannot exercise jurisdiction over the subject matter of this dispute. It being unnecessary to reach the Rule 19 issue, the Court declines to address the merits of Defendants' claim that the Court cannot in equity and good conscience proceed without Texas Wood.
Conclusion
Given the degree of control exercised by Georgia Wood over Texas Wood and the fact that Plaintiff seeks to hold Georgia Wood responsible for the actions of Texas Wood, the Court applies the Freeman principle to impute the Texas citizenship of Texas Wood to Defendant Georgia Wood. Because Plaintiff is also a Texas citizen, complete diversity is lacking. This Court cannot exercise jurisdiction over the subject matter of this suit. Defendants' Motion to Dismiss under Rule 12(b)(1) is therefore GRANTED. All other relief requested is DENIED as MOOT.