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Lcap Advisors, LLC, et al v. Penrith Group

April 11, 2011


The opinion of the court was delivered by: Andrew J. Guilford United States District Judge


Plaintiffs LCAP Advisors ("LCAP"), Anand Narayanan ("Narayanan"), and Sanjay Raghavan ("Raghavan") (together, "Plaintiffs") filed this lawsuit in state court seeking relief under state law, and they included as defendants California citizens Carl Meiswinkel ("Meiswinkel") and P360 Inc. ("P360"), who would defeat federal diversity jurisdiction. See 28 U.S.C. § 1332. Regardless, Defendants Penrith Group ("Penrith"), Meiswinkel, and P360 (together, "Defendants"), removed the case to federal court, arguing that Meiswinkel and P360 are merely sham defendants that must be disregarded, thus permitting diversity jurisdiction. This argument, that the plaintiff fraudulently joined the only non-diverse party, is increasingly being made in federal courts. See E. Farish Percy, Making a Federal Case of It: Removing Civil Cases to Federal Court Based on Fraudulent Joinder, 91 Iowa L. Rev. 189, 191 (2005) ("The fraudulent joinder doctrine has played an increasingly frequent and critical role in determining whether many civil cases will be litigated in state court or federal court."); see also id. at 192 ("[L]itigants continually wage forum selection battles in hundreds of cases that are removed to federal courts each year based on allegations of fraudulent joinder."). But as the prevalence of this argument grows, so does its misuse.

Attorneys pleading cases in California courts often seek to broadly join defendants involved in the transaction or occurrence. This may or may not be a good strategy. Weil & Brown, Cal. Prac. Guide: Civ. Pro. Before Trial (Rutter 2009), ¶ 2:206. But even a bad strategy is not necessarily a sham.

As noted, Defendants removed the case to this Court on the basis of diversity jurisdiction, asserting that defendants Meiswinkel and P360 are merely sham defendants and should not be joined. After removal, this Court issued an Order to Show Cause ("OSC") as to why this case should not be remanded for lack of jurisdiction. Defendants filed a response ("Response") to the OSC, and Plaintiffs filed an opposition to the Response ("Opp'n").

After reviewing the arguments and papers submitted, the Court finds that federal jurisdiction does not exist over this matter. This case is REMANDED to Orange County Superior Court.


The following factual overview is taken primarily from Plaintiffs' Complaint. Plaintiffs Narayanan and Raghavan have developed various proprietary computer models for pricing and risk assessment of loan pools. (Complaint ¶ 10.) Defendant Meiswinkel was the president and a former owner of Defendant Penrith Group. (Response at 2:3-5.) Defendant P360 is a separate corporation that was formed by Meiswinkel to conduct future business ventures. (Response at 2:1-3.)

In March 2010, Plaintiffs and Defendants entered into an agreement where Plaintiffs would use their computer models to perform portfolio risk assessment for Defendants. (Id. ¶ 14.) Specifically, Defendants would obtain portfolio data from their Defendants' clients, and Plaintiffs would use their computer models to perform price and risk assessment on these portfolios. (Id. ¶ 15.)

Defendants agreed to pay Plaintiffs approximately two-thirds of the total billings by Defendants to Defendants' clients. (Id. ¶ 16.) Defendants initially paid Plaintiffs for their services, but Defendants stopped paying beginning in September 2010. (Id.) Based on these factual allegations and others, Plaintiffs' bring claims against Defendants for breach of contract and for services rendered. Since all of Plaintiff's claims arise under California law and Plaintiff is a California citizen, federal jurisdiction is defeated here only by including Meiswinkel or P360 as a defendant, as they are the only California defendants. As noted, Defendants removed, asserting that Meiswinkel and P360 are merely sham defendants that should not be joined.


While Defendants acknowledge that Meiswinkel and P360 are California citizens, Defendants argue that federal diversity jurisdiction is proper in this case because: (1) Meiswinkel and P360 are sham defendants and should not be considered in establishing diversity; (2) the remaining defendant is not a California citizen; and (3) the amount in controversy exceeds $75,000. The Court finds that Defendants have failed to establish that Meiswinkel and P360 are sham defendants and therefore holds that federal jurisdiction is improper.

Federal courts have original jurisdiction of all civil actions where the matter in controversy exceeds $75,000, exclusive of interest and costs, and is between citizens of different states. 28 U.S.C. § 1332. Proper jurisdiction under Section 1332 requires complete diversity, so each plaintiff must be diverse from each defendant. Exxon Mobil Corp. v. Allapattah Servs., Inc., 545 U.S. 546, 553 (2005) (citing Strawbridge v. Curtiss, 7 U.S. 267, 267 (1806); Owen Equipment & Erection Co. v. Kroger, 437 U.S. 365, 375 (1978)). To protect the jurisdiction of state courts, removal jurisdiction should be strictly construed in favor of remand. Harris v. Bankers Life and Cas. Co., 425 F.3d 689, 698 (9th Cir. 2005) (citing Shamrock Oil & Gas Corp. v. Sheets, 313 U.S. 100, 108-09 (1941)). "Federal jurisdiction must be rejected if there is any doubt as to the right of removal." Gaus v. Miles, 980 F.2d 564, 566 (9th Cir. 1992) (internal citation omitted)."Th[is] 'strong presumption' against removal jurisdiction means that the defendant always has the burden of establishing that removal is proper." Id. (citations omitted).

But removal is proper despite the presence of a non-diverse defendant where that defendant is a fraudulently joined or sham defendant. See Caterpillar, Inc. v. Lewis, 519 U.S. 61, 68 (1996); Padilla v. AT&T Corp., 697 F. Supp. 2d 1156, 1160 (C.D. Cal. 2009). In the Ninth Circuit, a non-diverse defendant is deemed a sham defendant if, after all disputed questions of fact and all ambiguities in the controlling state law are resolved in the plaintiff's favor, the plaintiff could not possibly recover against the party whose joinder is questioned. Kruso v. Int'l Tel. & Tel. Corp., 872 F.2d 1416, 1426 (9th Cir. 1989). The failure to state a claim against the non-diverse defendant must be "obvious according to the well-settled rules of the state." United Computer Sys. v. AT&T Corp., 298 F.3d 756, 761 (9th Cir. 2002). Here, Defendants have failed to meet their burden of establishing that Meiswinkel and P360 are sham defendants, particularly in light of the "strong presumption against removal jurisdiction." Gaus, 980 F.2d at 566.

As noted, Plaintiffs assert claims against Meiswinkel and P360 breach of contract and for services rendered. Defendants argue that liability against Meiswinkel and P360 are precluded as a matter of law. Specifically, Defendants argue that "Plaintiffs allege in bare conclusory terms the existence of a contract between Plaintiffs and all defendants. However, the invoices attached to the Complaint . . . make clear that ...

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