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Rainbow Communications, LLC v. Landover Wireless Corporation

United States District Court, D. Kansas

July 18, 2019

RAINBOW COMMUNICATIONS, LLC, et al., Plaintiffs,
v.
LANDOVER WIRELESS CORPORATION, Defendant.

          MEMORANDUM AND ORDER

          JULIE A. ROBINSON CHIEF UNITED STATES DISTRICT JUDGE.

         Plaintiffs Rainbow Communications, LLC (“Rainbow”) and Landover Eastern Kansas, LLC (“LEK”) (together, “Plaintiffs”), filed this action in the District Court of Brown County, Kansas, against Defendant Landover Wireless Corporation (“Landover”), alleging claims for (1) breach of contract, (2) breach of fiduciary duty, (3) conversion, and (4) unjust enrichment. Landover removed this action pursuant to 28 U.S.C. § 1332, asserting federal subject matter jurisdiction based on diversity. Before the Court is Plaintiffs' Motion to Remand and Request for Attorneys' Fees (Doc. 5). The matter is fully briefed, and the Court is prepared to rule. For the reasons explained in detail below, the Court grants Plaintiffs' motion to remand, but denies the request for attorneys' fees.

         I. Background

         LEK is a Kansas limited liability company, consisting of two members, Rainbow and Landover. Rainbow, a Kansas limited liability company consisting primarily of members who are citizens of Kansas, [1] provides internet, telephone, and digital television services. Landover is a mobile broadband operator incorporated in Delaware with its principal place of business in New York. In September 2010, Landover presented Rainbow an investment opportunity to obtain licenses for Low Power Television (“LPTV”) stations-a class of television stations primarily for local and smaller communities-in Eastern Kansas.

         In September 2010, Rainbow and Landover formed LEK for obtaining rights to the LPTV spectrum in Eastern Kansas. Rainbow, Landover, and LEK entered into the Operating Agreement of Landover Eastern Kansas, LLC (the “Operating Agreement”), which contained a preamble stating the Operating Agreement was “entered into by and among” LEK, Landover, and Rainbow[2] and signature blocks for Landover, Rainbow, and LEK.[3] In accordance with the Operating Agreement, Rainbow paid Landover a total of $1, 300, 000 on behalf of LEK.[4] The Operating Agreement required Landover to: (1) use the funds in accordance with its services, which included securing between 100 and 120 FCC-issued LPTV permits or licenses in LEK's name;[5] (2) hold LEK's funds in trust for LEK's benefit and not commingle these funds with Landover's own money;[6] (3) keep LEK's funds separate from its other funds;[7] and (4) prepare, file, and use its best efforts to prosecute applications for LPTV permits and licenses on behalf of LEK.[8]

         On October 28, 2010, the FCC placed a freeze on new LPTV permit and license applications, which stalled Landover's ability to successfully file LPTV applications with the FCC. Plaintiffs allege that despite the freeze, Landover continually assured Plaintiffs it had a plan to obtain the LPTV licenses. Plaintiffs allege that the freeze on LPTV applications continued, however, and that they determined Landover was unable to help obtain LPTV licenses or permits. Plaintiffs alleges that they requested updates from LEK and that on April 20, 2018, Rainbow requested copies of the LPTV applications Landover uploaded to the FCC. Landover did not respond, and on June 29, 2018, counsel for Rainbow demanded Landover return Plaintiffs' funds and provide accounting records, but Landover refused. Plaintiffs subsequently filed this suit in the District Court of Brown County, Kansas on March 12, 2019.

         Landover removed this case to the United States District Court for the District of Kansas on April 12, 2019.[9] On April 16, 2019, Plaintiffs' counsel emailed Landover, requesting that Landover withdraw its Notice of Removal because no diversity of citizenship exists between LEK and Landover.[10] Landover's counsel responded on April 19, informing Plaintiffs it declined to voluntarily withdraw its Notice of Removal and that Landover planned to raise nominal party and fraudulent joinder arguments to obtain federal diversity jurisdiction.[11]

         II. Discussion

         A. Motion for Remand

         Federal district courts are required to remand a case “[i]f at any time before final judgment it appears the district court lacks subject matter jurisdiction.”[12] To avoid remand, the removing party must establish federal jurisdiction by a preponderance of the evidence.[13]Because federal courts are courts of limited jurisdiction, courts strictly construe federal removal statutes with a presumption against federal jurisdiction.[14] Courts must follow the inflexible and without exception presumption against federal jurisdiction by denying jurisdiction in all cases where federal jurisdiction does not affirmatively appear in the record.[15] Moreover, courts must resolve doubtful cases in favor of remand.[16]

         Remand is generally improper if the defendant appropriately removed a case to federal court that the plaintiff could have originally filed in federal court.[17] Federal courts are courts of limited jurisdiction, and as such, they must have a statutory or constitutional basis to exercise jurisdiction over any controversy.[18] Landover removed this case to federal court under 28 U.S.C. § 1332(a), asserting federal jurisdiction based on diversity.

         1. Diversity Jurisdiction

         To establish diversity jurisdiction, the party asserting jurisdiction, in this instance the defendant, must allege facts essential to show jurisdiction-namely that Plaintiffs and Defendant are citizens of different states and that the amount in controversy is greater than $75, 000.[19]Because the defendant is alleging federal jurisdiction, it has the burden of providing facts supporting jurisdiction by a preponderance of the evidence.[20]

         The parties do not dispute that the amount in controversy requirement is met. For purposes of diversity jurisdiction, Defendant Landover is a citizen of both its state of incorporation-Delaware-and its principal place of business-New York.[21] Courts determine a limited liability company's citizenship for jurisdictional purposes by the citizenship of its members.[22] Landover's Notice of Removal does not allege facts pertaining to either Plaintiff LEK's or Plaintiff Rainbow's membership.[23] Based on the record, however, Rainbow is at least a citizen of Kansas, and LEK-with members Rainbow and Landover-is a citizen of at least Kansas, New York, and Delaware.[24] Thus, as Landover and LEK do not have diversity of citizenship, Landover's Notice of Removal does not establish the existence of diversity jurisdiction.[25]

         Accordingly, Plaintiffs maintain that the case should be remanded because the Court lacks subject matter jurisdiction over the case as there is no diversity of citizenship between the parties. Landover argues, however, that federal diversity jurisdiction is appropriate because LEK is a nominal party or alternatively, a fraudulently joined party. As explained below, the Court finds that based on the record LEK is neither a nominal party nor fraudulently joined and accordingly, remands this case to the District Court of Brown County, Kansas.

         2. Nominal Party Status

         Landover first argues that LEK is a nominal party, which prevents it from destroying diversity jurisdiction. The Tenth Circuit has explained that in evaluating diversity of citizenship, courts disregard nominal parties and consider only the citizenship of the real parties in interest.[26]That is, courts maintain jurisdiction when the real parties in interest have diverse citizenship, even when there is a non-diverse nominal party with no real interest in the controversy.[27] A federal court sitting in diversity must look to state law to determine whether a plaintiff is the real party in interest.[28] Under Kansas law, a real party in interest possesses the right sought to be enforced.[29]

         On the face of the Complaint and the Operating Agreement, LEK has enforceable, substantive rights against Landover. Under the Kansas Revised Limited Liability Company Act (“KRLLCA”), a limited liability company may enforce its members' obligation to perform services under its operating agreement when a member fails to contribute its contractually obligated services.[30] As a member may be liable to the limited liability company to contribute cash, property, or services, [31] a limited liability company may recover the agreed value of services when one of its members fails to contribute the required services.[32]

         As identified by the preamble of the Operating Agreement, LEK, Landover, and Rainbow all entered into the Operating Agreement.[33] The body of the Operating Agreement further specifies the multiple rights and obligations for the benefit of LEK, and Plaintiffs allege that Landover, one of LEK's members, breached the following contractual obligations owed to LEK:

[1] failing to provide the contracted services of obtaining 100-120 construction permits or licenses for LPTV channels in the name of LEK; [2] failing to prepare, file, and use its best efforts to prosecute the necessary applications for construction permits for four LPTV channels; [3] failing to hold all funds in trust for the benefit of LEK and commingling these funds; and [4] failing to deposit LEK's funds in a separate bank account belonging to LEK.[34]

         The Complaint further alleges that as a member of LEK, Landover owed fiduciary duties to LEK, including the duty to act for the benefit of LEK, and that LEK placed its confidence in Landover to successfully obtain LPTV permits, as laid out in the Operating Agreement.[35]Therefore, on the basis of the Complaint, LEK has the substantive right to enforce Landover's obligations under the Operating Agreement and the fiduciary duties it is owed, making it a real party in interest.

         Landover argues, however, that LEK is a nominal party to the breach of contract and breach of fiduciary duty claims based on the Operating Agreement because, unlike Rainbow and Landover, LEK did not sign the Operating Agreement.[36] Under the KRLLCA, however, a limited liability company is “not required to execute its operating agreement.”[37] Moreover, like any member or manager, “[a] limited liability company is bound by its operating agreement whether or not the limited liability company executes the operating agreement.”[38]

         Landover cites Trover v. 419 OCR, Inc.-a derivative action under Illinois law where defendants sought to enforce an arbitration provision found in operating agreements-to support its argument that LEK's lack of signature precludes it from enforcing the operating agreement.[39]In Trover, the Illinois appellate court found that defendants could not enforce the arbitration provisions found in the operating agreements against the limited liability companies because under the facts of the case and Illinois law, the limited liability companies were not a party to the operating agreements at all.[40] The limited liability companies at issue in Trover did not sign the operating agreements, but unlike LEK they were also not listed on the signatory pages of the extensive operating agreements.[41] Further, there was no indication that the limited liability companies entered into the operating agreements.[42] Moreover, unlike the KRLLCA, the Illinois Limited Liability Company Act in effect when Trover was decided did not bind a limited liability company or allow it to enforce its operating agreement in the absence of the limited liability company manifesting assent to the operating agreement.[43] Therefore, the Court finds that the alleged lack of LEK's signature on the operating agreement does not establish that LEK is a nominal party.

         Additionally, Landover argues that under the Kansas statutory definition of an operating agreement, a limited liability company is not a party to its operating agreement as a matter of law.[44] Landover relies on Elf Atochem N. Am., Inc. v. Jaffari, a Delaware Supreme Court case interpreting the Delaware Limited Liability Company Act.[45] In Elf Atchoem, an LLC member brought claims on behalf of the LLC against another LLC member.[46] The Delaware Supreme Court wrote that “it is the members who are the real parties in interest” and “[t]he LLC is simply their joint business vehicle.”[47] The Court is not persuaded by the Delaware court's dicta. Contrary to Landover's argument, the Delaware court held that the limited liability company was bound by an agreement regarding its governance and operation, even though the company itself did not execute the agreement.[48] Similarly here, LEK is bound to the Operating Agreement even in the absence of a signature.[49] Therefore, the Court finds that Kansas law does not preclude LEK from being a party to its operating agreement and enforcing its rights under the agreement as a real party in interest.

         Further, to the extent Landover relies on Raymond Loubier Irrevocable Trust v. Loubier-a Second Circuit opinion ruling that a trust, in two different capacities and on both sides of the caption defeats diversity[50]-the Court finds it clearly distinguishable. Unlike the trust at issue in Raymond, which could “only sue and be sued in the name of its trustees, ”[51] LEK is a separate legal entity from its members and has the right to sue on its own behalf.[52]

         Similarly, Landover's reliance on the legal principle of looking beyond the pleadings of the case-as espoused when realigning parties-is unpersuasive.[53] Specifically, Landover argues that, looking beyond the pleadings of the case, “the presence of the same person, in two different capacities, on both sides of the caption, does not defeat diversity.”[54] Although Landover and Rainbow are members of LEK, Landover, Rainbow, and LEK are all separate legal entities-none of which appear on both sides of the caption.[55] Accordingly, the Court declines to extend the principle behind party realignment to find that LEK is a nominal party.

         3. Fraudulently Joined Party

         Landover alternatively argues that LEK is a fraudulently joined party, thus precluding LEK's shared citizenship with Landover from defeating diversity jurisdiction. Fraudulent joinder is a difficult-to-establish exception to complete diversity that prevents remand.[56] The presence of a fraudulently joined defendant does not defeat complete diversity as courts do not consider the citizenship of fraudulently joined parties when evaluating diversity.[57] Instead, under the fraudulent joinder doctrine, federal district courts disregard “for jurisdictional purposes, the citizenship of certain nondiverse defendants, assume jurisdiction over a case, dismiss the nondiverse defendants, and thereby retain jurisdiction.”[58] As the party seeking federal jurisdiction, the removing party bears the heavy burden of proving a party was fraudulently joined to defeat jurisdiction by demonstrating either “(1) actual fraud in the pleading of jurisdictional facts, or, (2) inability of the plaintiff to establish a cause of action against the non-diverse party in state court.”[59] The standard for fraudulent joinder “is more exacting than that for dismissing a claim under Fed.R.Civ.P. 12(b)(6).”[60] All factual and legal issues must be resolved in favor of the plaintiff.[61] The removing party must establish fraudulent joinder by clear and convincing evidence.[62] “[T]he factual issues ‘must be capable of summary determination and be proven with complete certainty.'”[63] Further, when any one claim against the non-diverse defendant is possibly viable, remand is required.[64]

         The parties initially dispute whether fraudulent joinder should extend to plaintiffs[65] as the Tenth Circuit has not decided this issue. For purposes of deciding this motion, the court will assume, without deciding, that this circuit would extend the fraudulent joinder doctrine to plaintiffs. The Court finds, however, that Landover fails to demonstrate that LEK has no possibility of establishing a cause of action against it.

         Landover argues that LEK is a fraudulently joined party because the statute of limitations bars LEK from any possibility of recovery on the claims asserted. Conversely, Plaintiffs assert a statute of limitations argument is not an appropriate basis for finding fraudulent joinder. While the removing party may use the statute of limitations argument to establish fraudulent joinder when the statute of limitations is easily determined, courts reject the argument when the issue is factually ambiguous.[66] Here, the Court cannot determine with complete certainty whether the statute of limitations bars Landover's liability to LEK.[67]

         Plaintiffs allege that Landover breached at least four duties under the operating agreement: (1) failure to hold funds in trust for LEK and not comingle funds; (2) failure to deposit funds in a separate account for LEK; (3) failure to obtain permits and licenses; and (4) failure to prosecute permit and license applications with the FCC. Under Kansas law, the five-year statute of limitations on a breach of contract claim accrues when breach occurs, and a plaintiff's knowledge of the breach is irrelevant.[68] The Court finds it is unclear when the breach of contract occurred. With respect to the breach of contract for not obtaining permits or licenses for LPTV channel's in LEK's name and not preparing, filing, or using its its best efforts to prosecute applications for LPTV permits and licenses on behalf of LEK, Landover contends that the contract would have been breached upon the FCC's notice providing for a freeze on LPTV applications on October 28, 2010. Plaintiffs allege in their Complaint, however, that Landover assured Plaintiffs it had a plan to obtain the LPTV licenses in accordance with the Operating Agreement and continued to assure them that it was making progress on its contracted services until at least March 29, 2016.[69] Plaintiffs further allege it was not until April 19, 2018 that “it became clear that Landover would not be able to meet its contractual obligation to seek LPTV licenses.”[70] Accordingly, the Court cannot decide with complete certainty when the breach of contract occurred, and thus whether LEK's breach of contract claims are precluded by the statute of limitations.

         As to the breach of fiduciary duty claims, the statute of limitations under Kansas law is two years, beginning to accrue when the injury became reasonably ascertainable.[71] With respect to the breach of fiduciary duty claims arising out of Landover not obtaining the licenses or permits, as discussed above, the Court again cannot decide with complete certainty when the alleged breach occurred. Moreover, resolving any issue in favor of Plaintiffs, Plaintiffs assert it did not become clear until April 19, 2018 that Landover could not meet its obligations related to obtaining licenses or permits. Therefore, as the Court finds there is at least uncertainty as to whether the statute of limitations precludes both LEK's breach of fiduciary duty and breach of contract claims, Landover fails to meet its heavy burden of establishing that LEK has no possibly viable cause of action against Landover in Kansas state court.

         For the above reasons, Landover does not establish by a preponderance of the evidence that the Court has federal jurisdiction over the case. In consideration of the guiding principle that any doubtful case must be resolved in favor of remand, the Court finds that the case should be remanded to the District Court of Brown County, Kansas.

         B. Request for ...


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