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Carlin Equities Corp. v. Offman

August 21, 2007

CARLIN EQUITIES CORP., CARLIN FINANCIAL GROUP, INC., RONALD SHEAR AND JEREMY FROMMER, PLAINTIFFS,
v.
MAYER OFFMAN, DEFENDANT.



The opinion of the court was delivered by: Sidney H. Stein, U.S. District Judge

OPINION & ORDER

Plaintiffs -- Carlin Equities Corp. ("Carlin"), Carlin Financial Group, Inc. ("CFGI"), Ronald Shear and Jeremy Frommer (collectively "the Carlin Parties") -- bring this action against Mayer Offman -- a former Carlin shareholder -- pursuant to the Declaratory Judgment Act, 28 U.S.C. § 2201, to obtain a declaration that the sale of CFGI's brokerage business did not violate Offman's rights under the federal securities laws and various provisions of state law. Offman has moved to dismiss the complaint pursuant to Fed. R. Civ. P. 12(b)(1) for lack of subject matter jurisdiction and, in the alternative, to dismiss or stay the action pursuant to the doctrine of abstention. Offman's motion is denied. The Court has subject matter jurisdiction over this action pursuant to Kidder, Peabody & Co. v. Maxus Energy Corp., 925 F.2d 556 (2d Cir. 1991): an "actual controversy" exists because defendant's statement that he would not bring a federal securities litigation in the future is not binding on him. In addition, the abstention principles relied on by Offman to seek dismissal or a stay of this action do not carry the day.

I. BACKGROUND

Carlin and CFGI are affiliated companies operating in the securities industry. (Aff. of Stuart I. Friedman dated Apr. 11, 2007 ("Friedman Aff.") at ¶ 2.) Offman owned a 31% interest in Carlin until 2005, when he sold his stock to plaintiffs Shear, Frommer, and others. (See Declaration of Jonathan Rogin dated Mar. 28, 2007 ("Rogin Decl.") at ¶ 2; Friedman Aff. at ¶ 3.) In January 2007, the Royal Bank of Canada ("RBC") purchased CFGI's brokerage business. (Compl. ¶ 9.) A few months prior to the completion of that transaction, Offman learned of the pending RBC acquisition and, in a series of letters, questioned whether he had received adequate disclosure of negotiations between Carlin and RBC that he believed were taking place prior to the sale of his stake in Carlin. (Rogin Decl. at ¶¶ 2, 4; Friedman Aff. at ¶¶ 5-6.)

On November 30, 2006, Offman filed suit against the Carlin Parties in New York Supreme Court, New York County, alleging fraud, breach of fiduciary duty, breach of contract, rescission, and violations of section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule10b-5 promulgated thereunder. The action was then removed to federal court on the grounds that Offman's complaint included a federal securities claim. Five days after its removal -- January 16, 2007 -- Offman voluntarily dismissed the removed action. The next day, the Carlin Parties brought this action pursuant to the Declaratory Judgment Act, seeking a declaration of non-liability to Offman with respect to the RBC transaction. One day later, Offman filed another suit in state court containing the same state-law claims as those pressed in the November 30, 2006 action, but not asserting any federal securities claims. (Rogin Decl. at ¶ 7; Friedman Aff. at ¶ 14.) Offman then filed this motion to dismiss plaintiffs' declaratory judgment action.

II. DISCUSSION

A. Subject Matter Jurisdiction

1. Legal Standard

A motion to dismiss for lack of subject matter jurisdiction made pursuant to Fed. R. Civ. P. 12(b)(1) will be granted "when the district court lacks the statutory or constitutional power to adjudicate" the action. Luckett v. Bure, 290 F.3d 493, 496 (2d Cir. 2002) (quoting Makarova v. United States, 201 F.3d 110, 113 (2d Cir. 2000)) (internal quotation marks omitted). In deciding the motion, the party asserting subject matter jurisdiction bears the burden of proving by a preponderance of the evidence that it exists, and the court can refer to evidence outside the pleadings to the issue. Id. at 496-97.

2. Offman's Motion to Dismiss

Offman contends that this action fails to satisfy the Declaratory Judgment Act's requirement that an "actual controversy" exist, 28 U.S.C. § 2201, due to Offman's declaration of March 28, 2007 in which he pledges "never [to] sue or assert any claim against any of the Carlin Parties for any federal securities law violation," (Declaration of Mayer Offman dated March 28, 2007 ("Offman Decl.") at ¶ 3).*fn1 Offman maintains that this declaration extinguished the federal-law controversy between the parties by rendering that controversy "moot," and on that basis, urges this Court to dismiss plaintiffs' complaint for lack of subject matter jurisdiction.

3. The Court Has Subject Matter Jurisdiction over this Action

Offman's position is in direct conflict with the holding of the U.S. Court of Appeals for the Second Circuit in Kidder, Peabody & Co. v. Maxus Energy Corp., 925 F.2d 556 (2d Cir. 1991).

In Kidder, an investment bank -- Kidder, Peabody -- brought a declaratory judgment action seeking a determination that it was not liable to a former client -- Maxus Energy -- under sections 10(b) and 14(e) of the Securities Exchange Act of 1934. The basis for the action was Maxus Energy's representation that it intended to sue Kidder, Peabody for disclosing material non-public information. Kidder, 925 F.2d at 559. In fact, Maxus Energy filed the threatened suit in state court on the same day that Kidder, Peabody filed its declaratory judgment action. Id. Maxus Energy then moved to dismiss Kidder, Peabody's federal action for lack of subject matter jurisdiction. Id. at 560. In support of its motion, Maxus Energy represented "on several occasions to the [district] court that neither it nor Maxus Corporate ...


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