United States District Court, N.D. New York
January 8, 2004.
PRISCILLA STEELE, et. al., Plaintiffs,
JOHN B. ANDERSON, et. al., Defendants
The opinion of the court was delivered by: THOMAS McAVOY, District Judge
DECISION and ORDER
Plaintiffs commenced the instant shareholders' derivative action in New
York State Supreme Court. Defendants, former officers or directors of
Dunes Hotels and Casinos, Inc., removed the action to this Court,
invoking diversity jurisdiction. Plaintiffs now move to remand to state
court. The burden is on Defendants to establish that removal is proper
and this Court has subject matter jurisdiction. United Food and
Commercial Workers Union. Local 919. AFL-CIO v. Centermark Properties
Meriden Square. Inc., 30 F.3d 298, 301 (2d Cir. 1994); Rothaupt v. Unum
Provident Corp., 2003 WL 21755811, at *2 (N.D.N.Y. 2003) (Mordue, J.).
I. Whether The Non-Diverse Defendants Should Be Disregarded Because the
Claims Against Them Are Barred By The Statute Of Limitations
Defendants first contend that diversity is lacking because there
essentially has been a fraudulent joinder. Defendants argue that the
non-diverse parties should be
disregarded for purposes of determining subject matter jurisdiction
because the statute of limitations has run as to the claims against them.
The statute of limitations in New York for claims of unjust
enrichment, breach of fiduciary duty, corporate waste, and for an
accounting is six years. See N.Y.C.P.L.R. §§ 213(1), (7); Golden
Pacific Bancorp, v. F.D.I.C., 273 F.3d 509, 518 (2d Cir. 2001). As the
Second Circuit has stated:
Under New York law, the limitations period for claims
arising out of a fiduciary relationship does not
commence "until the fiduciary has openly repudiated
his or her obligation or the relationship has been
otherwise terminated." Westchester Religious Inst. v.
Kamerman, 262 A.D.2d 131, 691 N.Y.S.2d 502, 503 (1st
Dep't 1999)); accord 196 Owners Corp. v. Hampton
Mgmt. Co., 227 A.D.2d 296, 642 N.Y.S.2d 316, 316 (1st
Dep't 1996); Bd. of Educ. v. Thompson Const. Corp.,
111 A.D.2d 497, 488 N.Y.S.2d 880, 882 (3d Dep't
1985). In such cases, the "statutory period [is]
tolled between the alleged fiduciary misconduct" and
the date on which the fiduciary relationship is openly
repudiated or otherwise ended, so that any misconduct
alleged before that end date "falls within the
permissible temporal scope." Kamerman, 691 N.Y.S.2d at
503. . . .
The reason for such a tolling rule is that the
beneficiary should be entitled to rely upon a
fiduciary's skill without the necessity of
interrupting a continuous relationship of trust and
confidence by instituting suit.
Golden Pacific Bancorp, 273 F.3d at 519.
Here, according to the Complaint, Defendants are alleged to have
continued in their positions as officers or directors of Dunes through
April 2000. Compl. at ¶¶ 15-24. Officers and directors of a company owe
a fiduciary duty to the company and its minority stockholders. See Blank
v. Blank, 256 A.D.2d 688, 694-95 (3d Dep't 1998); Fedele v. Seybert,
250 A.D.2d 519, 521 (1st Dep't 1998). Because the fiduciary relationship
does not appear to have been openly repudiated or otherwise ended prior
to April 2000, the statute of limitations did not begin to run until that
date. Golden Pacific Bancorp, 273 F.3d at 519;
Kamerman, 691 N.Y.S.2d at 503 ("[S]ince defendants cannot have been said
to have openly repudiated their fiduciary obligations prior to leaving
their positions of trust . . . the statutory period did not begin to run
in defendants' favor until that time."). At the very least, there are
factual issues concerning when the fiduciary relationship was openly
repudiated. See Matter of Barabash, 31 N.Y.2d 76, 80 (1972).
Accordingly, based on the facts as alleged in the Complaint, the instant
claims are timely and the statute of limitations does not provide a basis
for disregarding any of the non-diverse Defendants for purposes of
determining subject matter jurisdiction.
II. WHETHER THE INDIVIDUAL SHAREHOLDERS ARE NOT PROPER PLAINTIFFS
AND, THUS, SHOULD BE DISREGARDED FOR PURPOSES OF DETERMINING DIVERSITY
Defendants next contend that the individual Plaintiff shareholders are
"nominal" parties and, therefore, should not be considered for purposes
of determining diversity jurisdiction. The claimed basis for this is that
the individual Plaintiffs failed to make a legitimate demand upon the
board to have the corporation proceed against its former directors.
According to Defendants, the demand process was a sham because the
controlling shareholder of Plaintiff General Financial Services,
Inc.,*fn1 Steven Miller, manipulated the Dunes's board of directors's
voting process to manufacture a refusal by the board to proceed against
the former directors. Specifically, Miller apparently was in a position
to control the board's decision whether to proceed against the former
did nothing. As the Eastern District of California Court found in
connection with the prior lawsuit:
It is undisputed that GFS, which is wholly owned by
Steven Miller, controls in excess of 92% of eligible
voting stock in Dunes and is able to decide all
matters at shareholder meetings. Miller is Chairman of
the board, can elect and dismiss other directors and
has been, at times, the sole director of Dunes. The
Dunes' board's refusal to initiate this suit was
effected without representation from its Chairman and
controlling shareholder. There can be no doubt that
Miller approves of the Board's decision, put the
matter into a posture where the board would render
such a decision, and has permitted the decision to
stand even though he could easily overturn it. The
entire course of events smacks of manipulation. Boulia
Aff. at Ex. D, p. 7.
Without question, Miller's motives appear to be less than pure. While it
appears that Miller may have intentionally became uninvolved in this
matter to permit the refusal to initiate suit to stand,*fn2
offer no legal basis for deeming Plaintiffs' demand on the board
ineffectual or illegitimate. Whether a demand was a necessary condition
precedent to this litigation and, if so, whether that condition has been
met, go more to the substantive merits of the underlying litigation than
the Court's jurisdiction over this claim. In practical terms, if
sustained, Defendants' argument in this regard would result in the
dismissal of this action on the merits; not on jurisdictional grounds. Of
course, the Court is not in a position to entertain the merits of an
action over which it has no subject matter jurisdiction. The Complaint
alleges that Plaintiffs made a demand on the board and the demand was
refused. It, thus, cannot be said that there is no possibility, based on
the pleadings, that Plaintiffs can state a
cause of action against the non-diverse defendant in state court. See
Whitakerv. Am. Telecasting. Inc., 261 F.3d 196
, 207 (2d Cir. 2001)
(discussing fraudulent joinder).
III. Whether Dunes Has A Principal Place of Business In California
Finally, Defendants argue that Plaintiffs pleadings only state that
Dunes is a domestic corporation incorporated in the State of New York;
not that it has a principal place of business in California.*fn3
Defendants are judicially estopped from claiming that Dunes does not have
a principal place of business in California. See New Hampshire v. Maine,
532 U.S. 742, 749-51 (2001) (discussing application of judicial
estoppel); Mulvaney Mechanical. Inc. v. Sheet Metal Workers Int'l Ass'n.
Local 38, 288 F.3d 491, 504-05 (same), vacated on other grounds, 123
S.Ct. 1572 (2003); Mitchell v. Washinqtonville Cent. Sch. Dist.,
190 F.3d 1, 6 (2d Cir. 1999) (holding that a party may be estopped from
asserting a position if "(1) the party . . . took an inconsistent
position in a prior proceeding and (2) that position was adopted by the
first tribunal in some manner, such as by rendering a favorable
judgment."). In the prior litigation in California, Defendants
represented that "Dunes is domiciled in Davis, California." Boulia Aff.
at Ex. E, p. 9. This factual representation was adopted by the Eastern
District of California. Id. at Ex. D. Accordingly, Defendants may not now
deny this fact.*fn4 Because Dunes is domiciled in California as are some
of the Defendants, diversity jurisdiction is lacking.
IV. Defendants' Motion to Dismiss
Certain Defendants also have moved to dismiss on the grounds of lack of
personal jurisdiction. Because the Court does not have subject matter
jurisdiction, it may not entertain this other motion.
For the foregoing reasons, Plaintiffs motion to remand is GRANTED.
Defendants' motion to dismiss for lack of personal jurisdiction is DENIED
because the Court does not have subject matter jurisdiction to entertain
IT IS SO ORDERED.