For Want of a Penny: Business Divorce Case Almost Makes it Into Federal Court
April 29, 2019
“I will not seek or accept an award in excess of $74,999.99, inclusive of punitive damages, attorney’s fees and the fair value of any injunctive relief.”
With that statement, in Paddison v Paddison, Civil Action No. 19-2109 [U.S. Dist. Ct. E.D. La. Apr. 16, 2019], one of two brothers in a business divorce showdown over their jointly owned LLC just barely managed to defeat the other brother’s effort to litigate the case in federal court based on diversity jurisdiction, which requires an amount in controversy in excess of $75,000.
OK, math sticklers, I confess, I should have entitled this post, For Want of Two Pennies. It just didn’t sound as good.
This blog previously has featured several posts (here, here, here, and here) highlighting the barriers to litigating business divorce cases in federal court where subject matter jurisdiction is limited to (1) claims arising under federal law or (2) where there is complete diversity of citizenship between the adverse litigants and the amount in controversy exceeds $75,000.
Rare is the business divorce case involving federal claims or disputants who are citizens of different states. Getting into federal court based on diversity is even more of a challenge in business divorce cases involving an LLC or a partnership whose citizenship, unlike corporations, is determined not by the state of formation or principal place of business but by the citizenship of all its members or partners. And if that’s not enough of a hurdle, some if not all federal courts apply the Burford absention doctrine to dismiss lawsuits seeking judicial dissolution of a business entity even when the prerequisites for federal jurisdiction otherwise are satisfied.
Paddison
The convoluted fact pattern and legal issues in Paddison would serve nicely as a civil procedure exam for first-year law students.
The Paddison brothers Richard and David are the sole members of Paddison Scenic Properties (PSP), an Idaho limited liability company with its principal place of business in Lousiana where Richard lived at the time of its formation and where David still lives. PSP owns real property in Idaho, and its only business is to own and administer that property.
In early October 2018, Richard filed a complaint against David and PSP in Idaho state court seeking dissolution of PSP. In his complaint, Richard represented he is a Louisiana resident.
David counter-volleyed with a suit against Richard in Lousiana state court seeking injunctive relief against Richard and also naming PSP as a defendant. In March 2019, Richard removed David’s suit to Louisiana federal court, representing that he was now a citizen of Idaho and invoking the federal court’s diversity jurisdiction. He also represented that PSP was dissolved on December 31, 2018, pursuant to the expiration date in its operating agreement, and therefore its citizenship did not factor into the diversity calculus.
David next moved to remand the Lousiana case to state court on the grounds that diversity jurisdiction did not exist based on (1) Richard’s representation in the Idaho suit that he resided in Louisiana, (2) even assuming Richard was an Idaho citizen, diversity was destroyed because PSP was a citizen of both Idaho and Louisiana, and (3) the amount in controversy in David’s injunction action did not exceed $75,000.
Richard was able to beat back the first two grounds for remand to state court, but not the third:
Richard’s Citizenship. Richard’s affidavit accompanying his notice of removal averred that in 2018 he moved with all his household belongings from Louisiana to Idaho where he now permanently resides, is registered to vote, and has his driver’s license. He also averred that his Louisiana home which he still owns is rented out. The court found that these allegations, which David did not rebut, satisfied Richard’s burden of showing his Idaho domicile and therefore citizenship diverse from David’s.
PSP’s Citizenship. The next potential barrier to diversity jurisdiction stemmed from plaintiff David’s (citizen of Louisana) naming of PSP (citizen of both Louisiana and Idaho by virtue of its members’ citizenship) as a defendant. Richard argued that the court should disregard PSP’s citizenship because PSP terminated at the end of 2018 under the terms of its operating agreement and, whether or not it still existed, PSP is a “nominal” party to the lawsuit, i.e., was not a “real party in interest.”
Richard lost the first argument — the Idaho secretary of state’s website still listed PSP as an active, existing limited liability company — but won the second. The court agreed that PSP’s citizenship should not be considered for diversity purposes because David’s state court petition “does not seek relief from PSP,” PSP was joined “solely for the purpose of performing ministerial duties,” and PSP “is not a real party in interest to the controversy.”
Amount in Controversy. Here’s where Richard ran into trouble. As the removing party, it was Richard’s burden to show that the amount in controversy exceeded $75,000. David’s lawsuit did not seek damages, but only to enjoin Richard from selling or mortgaging PSP’s real estate. “In actions seeking declaratory or injunctive relief,” the court explained, “the amount in controversy is measured by the value of the object of the litigation.” It then found that neither David’s petition nor Richard’s affidavit sufficiently established whether the value of PSP’s property exceeded $75,000.
The coup de grâce, however, was David’s proffered “stipulation” that he “will not seek or accept an award in excess of $74,999.99, inclusive of punitive damages, attorney’s fees, and the fair value of any injunctive relief.” On that basis, and conditioned upon David filing in affidavit form a statement renouncing any recovery over $75,000, the court remanded the suit to the Louisiana state court.
Lessons for the rest of us? First, venue fights of this sort tend to be as much about psyops and inconveniencing the other side as they are about the quality or speed of adjudication in the competing venues. They also can be quite an expensive and time-consuming way to litigate without ever reaching the merits. The relative costs and benefits must be considered and discussed with clients before opening a second, competing litigation front.
Second, counsel must look down the chessboard when filing a business divorce suit in federal court based on diversity. In Paddison, David almost blew his chance to defeat removal by naming PSP as a party defendant. Was PSP really a necessary party to the injunction he sought? As for Richard, by not offering sufficient evidence of the value of PSP’s realty, he blew his chance to defeat remand.