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CU Capital Market Solutions, LLC v. Olden Lane Securities, LLC

United States District Court, D. Kansas

June 26, 2019

OLDEN LANE SECURITIES, LLC, et al., Defendants.


          Daniel D. Crabtree, United States District Judge.

         This matter comes before the court on plaintiffs CU Capital Market Solutions, LLC (“CU Capital”) and Lewis N. Lester's Motion to Amend Complaint (Doc. 40). Defendants Olden Lane Securities, LLC; Olden Lane Advisors, LLC; Olden Lane, LLC; and Jeremy Christopher Colvin have filed a Response (Doc. 41). And, plaintiffs have filed a Reply (Doc. 42). For the reasons explained below, the court denies plaintiffs' motion. But, if plaintiffs choose to proceed in this case, the court provides the parties additional time to address plaintiffs' argument-first made in their Reply-that the court properly may exercise diversity jurisdiction if the court drops plaintiff CU Capital and the Olden Lane defendants under Federal Rule of Civil Procedure 21.

         I. Facts

         CU Capital is a limited liability company providing consulting services to federally insured state credit unions and federally chartered credit unions. Olden Lane Securities, LLC, is an SEC-registered investment advisor. CU Capital offers securities through Olden Lane Securities, LLC, to secure secondary capital for its client credit unions. As part of their business relationship with one another, CU Capital and Olden Lane Securities, LLC, have entered into several agreements, including a Mutual Non-Disclosure and Confidentiality Letter Agreement; an Office of Supervisory Jurisdiction (“OSJ”) Branch Office Agreement; and an Agreement of Portfolio Consultancy and Sub-Supervision Services. Docs. 14-1, 14-2, 14-4. CU Capital contends that it has shared confidential and proprietary information with Olden Lane Securities, LLC, and the agreements govern that information. And, at something of a high level, CU Capital contends that Olden Lane Securities, LLC, has breached these agreements and misused CU Capital's confidential and propriety information to form a competing venture.

         On November 6, 2018, CU Capital filed its original Complaint (Doc. 1) against Olden Lane Securities, LLC; Olden Lane Advisors, LLC; and Olden Lane, LLC (collectively, the “Olden Lane defendants”). Olden Lane, LLC, is the sole owner of both Olden Lane Securities, LLC, and Olden Lane Advisors, LLC. CU Capital's original Complaint asserted eight state law causes of action against defendants, including breach of contract; tortious interference; misappropriation of trade secrets under the Kansas Uniform Trade Secret Act (“KUTSA”), Kan. Stat. Ann. §§ 60-3320-3330; unjust enrichment; and conversion. Id. (Compl. ¶¶ 119-86). Also, CU Capital sought temporary and permanent injunctive relief. Id. (Compl. ¶¶ 187-202).

         On December 5, 2018, CU Capital filed an Amended Complaint (Doc. 14). The Amended Complaint added Lewis N. Lester, Sr.-CU Capital's CEO-as a plaintiff. Id. (Am. Compl. ¶ 2). And, it added Jeremy Christopher Colvin-the managing director at the OSJ branch office-as a defendant. Id. (Am. Compl. ¶ 7). The Amended Complaint asserted a new state law breach of contract claim against Mr. Colvin and a second state law tortious interference claim against the Olden Lane defendants. Id. (Am. Compl. ¶¶ 150-54).

         On March 7, 2019, plaintiffs filed a Motion for Temporary Restraining Order and Preliminary Injunction. Doc. 22. Before the court proceeded on plaintiffs' motion, it issued an Order to Show Cause because plaintiffs had not pleaded facts sufficient to support diversity jurisdiction. Doc. 27. Plaintiffs' Amended Complaint named four LLCs as parties. And, a limited liability company “takes the citizenship of all its members.” Siloam Springs Hotel, L.L.C. v. Century Sur. Co., 781 F.3d 1233, 1234 (10th Cir. 2015). The governing standard requires complete diversity of citizenship-i.e., plaintiffs must allege that no LLC member on plaintiffs' side of the case caption is a citizen of the same state as any individual or entity named on the defendants' side of the caption. See Middleton v. Stephenson, 749 F.3d 1197, 1200 (10th Cir. 2014). But, plaintiffs' Amended Complaint contained no information about the membership of any LLC.

         Plaintiffs' Response to Order to Show Cause (Doc. 30) represented that CU Capital was a citizen of Kansas and Georgia. Doc. 30 at 2. Specifically, plaintiffs asserted that three members comprised CU Capital with the following domiciles: Robert Colvin (Kansas); Lewis N. Lester (Georgia); and William T. Mullally (Georgia). On the other side of the caption, plaintiffs' Response alleged that the three limited liability companies-Olden Lane Securities, LLC; Olden Lane Advisors, LLC; and Olden Lane, LLC-were citizens of Delaware and New Jersey. Plaintiffs also alleged that Mr. Colvin-the individual defendant-was domiciled in New Jersey.

         Defendants then filed a Response (Doc. 31). They attached affidavits and exhibits purporting to show a lack of diversity between the parties. That is, defendants asserted that plaintiffs had failed to disclose two more CU Capital members: Jefferson Financial Federal Credit Union (“Jefferson Credit Union”) and SunState Federal Credit Union (“SunState Credit Union”). Id. at 2-3; Doc. 31-1. And, defendants asserted, Olden Lane, LLC's membership included citizens domiciled in Florida.

         On March 20, 2019, the court conducted a hearing trying to determine whether the court had subject matter jurisdiction over the case. During this hearing, plaintiffs contended that the two credit unions were “lower-tier” members of CU Capital. In later briefing, plaintiffs asserted that characterization misstated the credit unions' position in the company; instead, plaintiffs later characterized the credit unions as “unitholders” in CU Capital. Doc. 38 at 2 n.1. Defendants disputed plaintiffs' recharacterization and argued that the federally chartered corporations' membership in CU Capital precluded diversity of citizenship. Also, defendants argued, if the court applied the localization exception-i.e., a doctrine where a federally chartered entity takes the domicile of the state where its activities are localized-the parties still would not be completely diverse. Specifically, defendants asserted that SunState Credit Union is a Florida citizen under the localization exception. And, Olden Lane, LLC's general counsel testified that Olden Lane, LLC, partially is owned by two limited partnerships: Niagara Credit Income Fund AI, LP, and Niagara Credit Income Fund QP, LP (“Niagara Funds”). According to the general counsel, the two Niagara Funds, in turn, include limited partners domiciled in Florida. And so, even if the localization exception applied to SunState Credit Union, the court still would lack diversity jurisdiction.

         After the hearing, the parties filed another round of briefing on subject matter jurisdiction. Docs. 38, 39. Then, on April 4, 2019, plaintiffs filed a Motion to Amend Complaint. Doc. 40. Plaintiffs' motion sought to file a Second Amended Complaint, which would include two previously unasserted federal claims under the Defend Trade Secrets Act (“DTSA”), 18 U.S.C. §§ 1831-39, and the Computer Fraud and Abuse Act (“CFAA”), 18 U.S.C. § 1030. Defendants filed a Response, arguing that the court could not grant plaintiffs' motion because, in effect, it would confer subject matter jurisdiction on the court retroactively. Doc. 41. Plaintiffs' Reply contended that amendment was proper, and, for the first time, also argued that the court could drop both plaintiff CU Capital and the Olden Lane defendants to save diversity jurisdiction between Mr. Lester and Mr. Colvin. Doc. 42 at 3-4.

         II. Legal Standard

         Plaintiffs have invoked the court's subject matter jurisdiction under the federal diversity statute, 28 U.S.C. § 1332. Under that statute, federal jurisdiction is proper where “the matter in controversy exceeds the sum or value of $75, 000 . . . and is between . . . citizens of different states.” 28 U.S.C. § 1332(a)(1). For diversity jurisdiction purposes, a limited liability company “takes the citizenship of all its members.” Siloam Springs Hotel, L.L.C., 781 F.3d at 1234. In contrast, a corporation is “domiciled where it is incorporated and where it has its ‘principal place of business[.]'” Newsome v. Gallacher, 722 F.3d 1257, 1267 (10th Cir. 2013) (quoting 28 U.S.C. § 1332(c)(1)). For individuals, “a person is a citizen of a state if the person is domiciled in that state.” Middleton, 749 F.3d at 1200 (citation omitted). “And a person acquires domicile in a state when the person resides there and intends to remain there indefinitely.” Id. (citations omitted).

         The court maintains “‘an independent obligation to determine whether subject-matter jurisdiction exists, even in the absence of a challenge from any party.'” Spring Creek Expl. & Prod. Co., LLC v. Hess Bakken Inv., II, LLC, 887 F.3d 1003, 1013 (10th Cir. 2018) (quoting Arbaugh v. Y&H Corp., 546 U.S. 500, 514 (2006)). Plaintiffs bear the burden of establishing that federal jurisdiction exists. Kinney v. Blue Dot Servs. of Kan., 505 Fed.Appx. 812, 814 (10th Cir. 2012).

         Federal of Civil Procedure 12(b)(1) “allows a court to dismiss a complaint for lack of subject matter jurisdiction.” Pueblo of Jemez v. United States, 790 F.3d 1143, 1151 (10th Cir. 2015) (citing Becker v. Ute Indian Tribe, 770 F.3d 944, 946 (10th Cir. 2014)). Rule 12(b)(1) motions constitute either “(1) a facial attack on the sufficiency of the complaint's allegations [of] subject matter jurisdiction; or (2) a challenge to the actual facts upon which subject matter is based.” Ruiz v. McDonnell, 299 F.3d 1173, 1180 (10th Cir. 2002).

         When a defendant makes a facial attack to subject matter jurisdiction, the court considers the complaint's pleaded facts as true. Holt v. United States, 46 F.3d 1000, 1002 (10th Cir. 1995) (citation omitted). But, when the defendant presents a factual attack, the court “may not presume the truthfulness of the complaint's factual allegations.” Id. at 1003. Instead, the court has “wide discretion to allow affidavits, other documents, and [conduct] a limited evidentiary hearing to resolve disputed jurisdictional facts under Rule 12(b)(1).” Id. And, when analyzing a factual attack, the court's “reference to evidence outside the pleadings does not convert the motion to a Rule 56 motion.” Id.

         In this case, the question raised by the court's Show Cause Order amounted, in effect, to a facial attack on the Amended Complaint-i.e., the court questioned the sufficiency of the Amended Complaint's jurisdictional allegations because it failed to identify the members of each limited liability company and the domiciles of the individual parties. In response to the Show Cause Order, defendants then mounted a factual attack, challenging the factual underpinnings of diversity jurisdiction-i.e., defendants asserted, as a matter of fact, that the parties were not completely diverse. This persuaded the court to conduct an evidentiary hearing with the parties on March 20, 2019. Consistent with Circuit precedent, the court considers the affidavits and exhibits provided by the parties without converting to summary judgment analysis.

         III. Discussion

         The court addresses four questions in this Order. First, the court evaluates whether Jefferson Credit Union and SunState Credit Union are members of the LLC that is CU Capital. Second, concluding that the credit unions are members, the court then considers the effect of their membership on the subject matter jurisdiction analysis. Third, the court assesses whether it can grant plaintiffs' Motion for Leave to Amend to assert a Second Amended Complaint. Fourth, the court considers whether to address plaintiffs' arguments under Fed.R.Civ.P. 21, presented in their Reply for the first time.

         A. Are Jefferson Credit Union and SunState Credit Union ...

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