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Mahoney v. Emerson Electric Co.

United States District Court, D. Idaho

May 24, 2019

THOMAS MAHONEY, as representative, Plaintiff,


          Ronald E. Bush, Chief U.S. Magistrate Judge.

         Pending 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:


         Plaintiff 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”) [1] 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.

         According 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).[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[3] 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.

         Mahoney 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 [4] 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.

         Mahoney 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.


         A. Legal Standard

         In 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 Cir. 1992)).

         “The 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. 2018).

         Here, 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).

         In 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. 2011).

         In sum, 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 ...

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