United States District Court, D. Idaho
MEMORANDUM DECISION AND ORDER RE: PLAINTIFF'S
MOTION TO REMAND (DOCKET NO. 11)
E. Bush, Chief U.S. Magistrate Judge.
before the Court is Plaintiff's Motion to Remand (Dkt.
No. 11). Having carefully considered the record, participated
in oral argument, and otherwise being fully advised, the
Court enters the following Memorandum Decision and Order:
Thomas Mahoney (“Mahoney”) represents the former
stockholders, optionholders, and warrantholders (collectively
the “Securityholders”) of Defendant PakSense,
Inc. (“PakSense”) - PakSense is in the business
of creating “temperature monitoring solution
products” used by manufacturers, distributors, and
retailers to monitor the environmental conditions of
perishable goods throughout the produce supply chain.
See Compl., ¶¶ 8-10 (Dkt. No. 1-2). On
August 2, 2016, Mahoney, PakSense, and Defendants Emerson
Electric Co. (“Emerson”) and Emersub XCI
(“Emersub”)  entered into an Agreement and Plan
of Merger (the “Merger Agreement”), whereby
Emersub merged into PakSense, with PakSense surviving as a
direct and wholly-owned subsidiary of Emerson. See
id. at ¶¶ 11 & 17.
to Mahoney, “[t]his action arises from Defendants'
breach of [the Merger Agreement].” Mem. ISO Mot. to
Remand, p. 1 (Dkt. No. 11-1). Specifically, under the terms
of the Merger Agreement, the Securityholders were to receive
up to $15 million in additional consideration via
“earn-out” payments based on PakSense's
performance in the three years (2017, 2018, and 2019)
following the merger. See Compl., ¶¶ 19-24
(Dkt. No. 1-2). Except, around the time of the
merger (and unbeknownst to the Securityholders who voted to
approve the merger), Emerson was simultaneously in
negotiations to acquire (and ultimately did acquire)
PakSense's direct competitor, Locus Traxx. See
id. at ¶¶ 26-31. The practical effect of
Emerson's acquisition of Locus Traxx - with Emerson
selling both PakSense and Locus Traxx product lines - was a
dilution of PakSense's product sales over time. See
id. at ¶¶ 38-39 (“Emerson Cargo
Solutions sold products from both PakSense[ ]
and Locus Traxx. Emerson Cargo Solutions sold Locus Traxx
product that supplanted or displaced one or more PakSense[ ]
products.”). In turn, despite Emerson's previous
representations that all sales, including those
involving Locus Traxx products, would count toward the
Securityholders' earn-out payment calculations, they did
not, with Emerson sending notice on January 24, 2018 that
PakSense sales did not meet the 80% threshold of forecasted
performance for 2017. See id. at ¶¶ 34,
40-43. Therefore, under the terms of the Merger Agreement,
the Securityholders did not receive the first of the three
possible earn-out payments. See id.
initiated the instant action on August 21, 2018 in Idaho
state court, alleging two claims against each of the three
Defendants (Emerson, Emersub, and PakSense) relating to
alleged duties owed under the Merger Agreement: (1) breach of
contract and (2) breach of the covenant of good faith and
fair dealing. See id. at ¶¶ 52-63. On
September 14, 2018, Defendants removed the action to this
Court, claiming that Mahoney “named PakSense as a
nominal defendant in this suit solely to defeat diversity
jurisdiction  and keep this case out of federal
court.” Not. of Removal, p. 3 (Dkt. No. 1). Defendants
contend that PakSense is not a proper party because it owes
no post-merger obligation to the Securityholders pursuant to
the Merger Agreement, much less a post-merger obligation in
connection with any earn-out payments for the
Securityholders' benefit. See id. at pp. 2,
8-12. Without PakSense, diversity jurisdiction would exist
under 28 U.S.C. § 1332(a)(1) because this action would
then be between citizens of different States, with an amount
in controversy exceeding $75, 000.
takes issue with Defendants' claim that PakSense was
fraudulently joined and likewise moves to remand the action
back to state court. In this respect, Mahoney counters that
“[t]he Complaint alleges actual and viable breach of
contract claims against PakSense” and that the
Securityholders have been damaged by, and are entitled to
seek full recovery for, such breaches. Mem. ISO Mot. to
Remand, p. 2 (Dkt. No. 11-1). With PakSense, there is no
diversity jurisdiction and the action as framed cannot remain
in this Court.
deciding a motion to remand, courts look to whether the case
was properly removed in the first place. See Salveson v.
Western States Bankcard Ass'n, 731 F.2d 1423, 1426
(9th Cir. 1984). “To remove a case from
state court to federal court, a defendant must file in the
federal forum a notice of removal ‘containing a short
and plain statement of the grounds for removal.'”
Dart Cherokee Basin Operating Co., LLC v. Owens, 135
S.Ct. 547, 551 (2014) (quoting 28 U.S.C. § 1446(a)).
“Federal courts are courts of limited
jurisdiction.” Kokkonen v. Guardian Life Ins. Co.
of Am., 511 U.S. 375, 377 (1994). “They possess
only that power authorized by Constitution and statute, which
is not to be expanded by judicial decree.” Id.
“It is to be presumed that a cause lies outside this
limited jurisdiction and the burden of establishing the
contrary rests upon the party asserting jurisdiction.”
Id. “Consistent with the limited jurisdiction
of federal courts, the removal statute is strictly construed
against removal jurisdiction.” Audo v. Ford Motor
Co., 2018 WL 3323244, *1 (S.D. Cal. 2018) (citing
Gaus v. Miles, 980 F.2d 564, 566 (9th
strong presumption against removal jurisdiction means that
the defendant always has the burden of establishing that
removal is proper.” Gaus, 980 F.2d at 566.
“Federal jurisdiction must be rejected if there is any
doubt as to the right of removal in the first
instance.” Id. Thus, “[i]f a district
court determines at any time that less than a preponderance
of the evidence supports the right of removal, it must remand
the action to the state court.” Hansen v. Grp.
Health Coop., 902 F.3d 1051, 1057 (9th Cir.
Defendants assert diversity jurisdiction under 28 U.S.C.
§ 1332 as the basis for the Court's subject matter
jurisdiction. See supra. For a federal court to
exercise diversity jurisdiction, there must be
“complete diversity” between the parties.
See 28 U.S.C. § 1332(a); Strawbridge v.
Curtiss, 7 U.S. 267, 267 (1806). Accordingly, diversity
jurisdiction does not exist if any defendant is of the same
citizenship as any plaintiff. See Caterpillar Inc. v.
Lewis, 519 U.S. 61, 68 (1996). Further, removal on
diversity grounds is improper if any defendant is a citizen
of the forum state. See 28 U.S.C. § 1441(b)(2).
“[O]ne exception to the requirement of complete
diversity is where a non-diverse defendant has been
‘fraudulently joined.'” Morris v.
Princess Cruises, Inc., 236 F.3d 1061, 1067
(9th Cir. 2001). “Joinder of a non-diverse
defendant is deemed fraudulent, and the defendant's
presence in the lawsuit is ignored for purposes of
determining diversity, ‘if the plaintiff fails to state
a cause of action against a resident defendant and the
failure is obvious according to the settled rules of the
state.'” Id. (quoting McCabe v.
General Foods Corp., 811 F.2d 1336, 1339 (9th
Cir. 1987)); see also GranCare, LLC v. Thrower, 889
F.3d 543, 548 (9th Cir. 2018) (“Fraudulent
joinder is established . . . if a defendant shows that an
individual joined in the action cannot be liable on any
theory. But if there is a possibility that a state
court would find that the complaint states a cause of action
against any of the resident defendants, the federal court
must find that the joinder was proper and remand the case to
the state court.”) (emphasis in original).
assessing removability, courts typically look only to the
plaintiff's pleadings. See Ritchey v. Upjohn Drug
Co., 139 F.3d 1313, 1318 (9th Cir. 1998). But
where fraudulent joinder is claimed, “[t]he defendant
seeking removal to the federal court is entitled to present
the facts showing the joinder to be fraudulent.”
McCabe, 811 F.2d at 1339. The defendant's burden
of proof is high: “[f]raudulent joinder must be proven
by clear and convincing evidence.” Hamilton
Materials, Inc. v. Dow Chemical Corp., 494 F.3d 1203,
1206 (9th Cir. 2007). “The district court .
. . must resolve all disputed questions of fact in favor of
the plaintiff.” Good v. Prudential Ins. Co. of
Am., 5 F.Supp.2d 804, 807 (N.D. Cal. 1998). “In
addition, ‘the defendant must establish that plaintiff
could not amend his complaint to add additional allegations
correcting any deficiencies . . . . [I]f a defendant simply
argues that plaintiff has not pled sufficient facts to state
a claim, the heavy burden of showing fraudulent joinder has
not been met.'” Cogswell v. Ford Motor
Co., 2019 WL 410475, *2 (S.D. Cal. 2019) (quoting
Martinez v. Michaels, 2015 WL 4337059 (C.D. Cal.
2015)). Therefore, only “if, after all disputed
questions of fact and all ambiguities in the controlling
state law are resolved in the plaintiffs favor, the plaintiff
could not possibly recover against the party whose joinder is
questioned, ” can a non-diverse defendant be deemed a
“sham defendant.” Nasrawi v. Buck
Consultants, LLC, 776 F.Supp.2d 1166, 1169-70 (E.D. Cal.
here, if the facts alleged in Mahoney's Complaint taken
as true and drawing all inferences in Mahoney's favor can
possibly state a claim under applicable state law against
PakSense, there is no fraudulent joinder and the case must be
remanded to state court. See, e.g., Knutson v.
Allis-Chalmers Corp.,358 F.Supp.2d 983, 993 (D. Nev.
2005) (“[A] plaintiff need only have ...