United States District Court, D. Kansas
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 ...