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Sieger v. Zak

August 15, 2007

STUART M. SIEGER AND DAVID R. SPENCER, PLAINTIFFS,
v.
LOUIS ZAK AND POWERSYSTEMS INTERNATIONAL, INC., DEFENDANTS.



The opinion of the court was delivered by: Denis R. Hurley, United States District Judge

MEMORANDUM AND ORDER

HURLEY, Senior District Judge

Plaintiffs Stuart M. Sieger and David R. Spencer (collectively, "Plaintiffs"), former shareholders of defendant PowerSystems International, Inc. ("PSI"), filed the present action against PSI and defendant Louis Zak ("Zak") (collectively, "Defendants"), for fraud and breach of fiduciary duty arising out of Zak's purchase of Plaintiffs' shares of PSI. Plaintiffs have moved to remand this case to the Supreme Court of the State of New York, Nassau County, pursuant to 28 U.S.C. § 1447(c), and Defendants have moved to dismiss the Complaint pursuant to Federal Rule of Civil Procedure ("Rule") 12(b)(6). For the reasons that follow, Plaintiffs' motion to remand is granted and Defendants' motion to dismiss is denied.

BACKGROUND

I. The Complaint

The following facts are drawn from the Complaint. Plaintiffs and Zak formed PSI in 1995. At all times relevant to the Complaint, Plaintiffs and Zak were the sole shareholders of PSI, with Zak as the majority shareholder. Zak was also President of PSI.

In 2003, Plaintiffs suggested to Zak that they sell PSI for the benefit of each of the three shareholders. After "persistent urgings by [P]laintiffs" (Compl. ¶ 9), Zak agreed to hire an outside consultant to advise PSI on a number of business issues, including the potential sale of the company. Plaintiffs allege that unbeknownst to them, and in an attempt to convince Plaintiffs to sell their shares of PSI to Zak, Zak sought out and obtained advice directly at odds with Plaintiffs' interests. Plaintiffs further allege that Zak concealed material information from them directly bearing on Plaintiffs' decision to sell their shares. As a result, Zak convinced Plaintiffs to sell their shares to him -- which totaled approximately 33% of PSI -- for a total of $3 million in August 2004. Zak "then immediately embarked upon his plan to sell the company without [P]laintiffs . . . , ultimately obtaining at least $40 million for the sale of his stock in PSI the very next year." (Id. 10.)

The Complaint asserts four causes of action, two against Zak only (breach of fiduciary duty and self-dealing) and two against Zak and PSI (fraud and constructive fraud).

II. Procedural History

Plaintiffs initiated this action in the Supreme Court of the State of New York, Nassau County on December 14, 2005 by filing a "Summons with Notice" pursuant to New York law. Defendants were served with the summons on or about April 7, 2006. On April 27, 2006, Defendants noted their appearance and demanded a copy of the Complaint. The Complaint was served upon counsel for Defendants on June 14, 2006. Defendants removed the case to this Court on July 7, 2006 based upon diversity jurisdiction.

The Complaint alleges, and it is undisputed that, Plaintiffs are citizens of New York, Zak is a citizen of Virginia, and PSI is incorporated in New York with its principal place of business in Virginia. Thus, on its face, diversity jurisdiction is lacking as both Plaintiffs and PSI are citizens of New York. In their Notice of Removal, however, Defendants asserts that "PSI is unrelated to the instant cause of action and thus cannot be relied upon by the Plaintiffs to destroy diversity." (Defs.' Not. of Removal ¶ 13.)

III. The Present Motions

Plaintiffs have moved to remand this case back to state court, arguing that PSI is a proper party to this action and therefore the Court lacks diversity jurisdiction. Defendants oppose Plaintiffs' motion and have also moved to dismiss the Complaint under Rule 12(b)(6). For the reasons that follow, Plaintiffs' ...


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