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Groman v. Cola

November 7, 2007


The opinion of the court was delivered by: Robert P. Patterson, Jr., U.S.D.J.


Plaintiffs Robert H. Groman and Helga Hensing, Co-Executors of the Last Will and Testament of Christo Byron Pappas, commenced this action on behalf of the Estate of Christo Byron Pappas on December 22, 2006, in the Surrogate's Court of the State of New York, New York County. On March 30, 2007, Defendant Nicholas Cola filed a notice of removal to the United States District Court for the Southern District of New York based on diversity of citizenship, pursuant to 28 U.S.C. § 1332 and § 1441(a). After removing this action to federal court, Defendant filed an answer, affirmative defenses, and counterclaims. On August 24, 2007, Plaintiffs filed this motion to remand to New York County Surrogate's Court on the ground that the probate exception bars this Court's exercise of subject matter jurisdiction. For the following reasons, Plaintiffs' motion to remand is granted but without an award of costs and attorneys' fees.


The underlying action in this case stems from a dispute over the purchase price of shares of Byron Chemical Company, Inc. ("Byron") that were sold by the Estate of Christo Byron Pappas (the "Estate") to Defendant Nicholas Cola on December 22, 2003. In September 1993, Christo Byron Pappas ("Pappas"), formerly the sole shareholder of Byron, transferred 9% of his Byron shares each to Defendant, Vice President of Sales of Byron, and to Laura Candela ("Candela"), Vice President of New Product Development. (Def.'s Mem. Law Opp'n to Pls.' Mot. to Remand at 2.) The three individuals entered into a Shareholder Agreement which provided that, upon the death of a shareholder, the other shareholders will purchase the decedent shareholder's shares. (Pls.' Notice Mot. to Remand, Ex. A at 10-14.) The Shareholder Agreement, as amended on December 23, 2002, set the purchase price of the decedent shareholder's shares at one hundred fifty percent of the book value of such shares, as set forth on Byron's balance sheet attached to the most recent U.S. Corporate Income Tax Return filed prior to the date of death.*fn1 (Pls.' Notice Mot. to Remand, Ex. A, First Amendment at 2.)

Pappas died on June 6, 2003, at which time he was a resident and domiciliary of the City and State of New York. (Groman Aff. ¶ 2.) On October 23, 2003, the New York County Surrogate's Court admitted his Last Will and Testament to probate and issued Letters Testamentary to Plaintiffs Groman and Hensing.*fn2 (Id. ¶¶ 2-5.) Upon the death of Pappas, the Estate became the majority owner of 82% of Byron shares.

Pursuant to the Shareholder Agreement, Defendant purchased 41% (or 82 shares) of Byron from the Estate at the stock sale closing on December 22, 2003. (Id. ¶ 16.) The purchase price was based upon the book value of the shares of Byron purchased, as reflected on the balance sheet as of December 31, 2002, attached to Byron's 2002 United States Income Tax Return. (Pls.' Notice Mot. to Remand, Ex. C at ¶ 19.) As consideration for the shares, Defendant tendered to the Estate a total price of $1,721,081.80: a check in the sum of $172,108.18 (10% of the purchase price) and the balance by a non-negotiable promissory note in the amount of $1,548,973.00 payable to the Estate. (Groman Aff. ¶ 18.) Defendant has made timely payments due on the note, and the Estate has accepted these payments through 2006. (Def.'s Mem. Law Opp'n to Pls.'s Mot. to Remand at 3.)

At the time of the stock sale closing on December 22, 2003, however, there was an issue as to the accuracy of the balance sheet attached to Byron's 2002 tax returns. (Groman Aff. ¶ 19; see also Pls.' Notice Mot. to Remand, Ex. B at 1.) Therefore, at the closing, the parties entered into a Price Adjustment Agreement, by which both Plaintiffs and Defendant reserved the right to claim whether or not a purchase price adjustment should be made. (Groman Aff. ¶ 20.) The agreement provided that the price shall be adjusted "[i]f a Purchase Price adjustment is agreed to between the parties or required by Court Order." (Pls.' Notice Mot. to Remand, Ex. B at 1.) In the event the purchase price were increased, Defendant would be obligated to tender to the Estate a supplemental note for the difference; if the purchase price were decreased, the note that Defendant tendered at the closing would be recast to reflect the lower amount. (Groman Aff. ¶ 21.)

In early 2004, Candela, who had declined to purchase the other 41% of Byron shares pursuant to the Shareholder Agreement, brought an action against Byron, the Estate of Pappas, and George Liss, the former accountant for Byron, in the Supreme Court, State of New York, County of Nassau.*fn3 (Def.'s Answer, Affirmative Defenses, and Counterclaims ¶ 93.) Based on information she discovered following the death of Pappas, Candela alleged that Pappas had caused Byron's inventory to be underreported on the tax returns filed by Byron and that Pappas had improperly and fraudulently underpaid her mandatory bonus over the ten years of her employment. (Id. ¶¶ 95-96.) In a decision dated July 24, 2006, the Supreme Court Justice made a number of findings, including that for more than ten years Pappas had caused the inventory of Byron to be underreported on Byron's corporate income tax returns and had caused Byron to underpay Candela's mandatory bonus of 10% of Byron's gross profits.*fn4 (Id. ¶ 101 (citing Candela v. Byron Chemical Co., No. 328/04 (N.Y. Sup. Ct., Nassau County, July 24, 2006)); id., Ex. A at 25.) That decision is currently on appeal. (Id. ¶ 102.)

In early 2004, around the same time Candela brought her action, an independent accounting firm prepared, at Candela's request, a Draft Financial Statement, which proposed adjustments on Byron's balance sheet for the year ending December 31, 2002, including an adjustment upward for inventory in the amount of $2,270,534. (Def.'s Notice of Removal ¶¶ 43-46.) At a special joint meeting on March 24, 2004, the Board of Directors of Byron, including Defendant Cola, unanimously resolved to adopt the inventory reflected on the Draft Financial Statement for Byron's 2002 balance sheet prepared by the independent accounting firm. (Id. ¶ 47.)

On December 22, 2006, subsequent to the Nassau County Supreme Court's decision in Candela's action, Plaintiffs commenced this proceeding on behalf of the Estate in the New York County Surrogate's Court. Plaintiffs' petition sought a declaration that the purchase price must be adjusted upward to reflect upward inventory adjustments and a determination of the amount of such upward adjustment to be $1,396,378.41, plus accrued interest. (Pls.' Notice of Mot. to Remand, Ex. C at 1.) Defendant, a New Jersey citizen, removed this proceeding to this Court based upon diversity of citizenship. Defendant subsequently filed counterclaims in this Court seeking a declaration that, at the time of the stock sale closing, Byron had a negative book value due to a number of liabilities, including Candela's claims; a declaration that the promissory note he tendered at the closing is null and void; and a determination that the Estate must reimburse Defendant in the amount of $1,215,937.17, which includes all sums tendered at the closing and paid thus far on his promissory note. (Def.'s Answer, Affirmative Defenses, and Counterclaims ¶¶ 121-22.) Plaintiffs then moved to remand this proceeding to New York County Surrogate's Court. Plaintiffs do not contest that the requirements of diversity jurisdiction under 28 U.S.C. § 1332 are met; they argue instead that this Court lacks subject matter jurisdiction under the probate exception to federal diversity jurisdiction.


I. Removal Jurisdiction

Under 28 U.S.C. § 1441, a defendant may remove "any civil action brought in a State court of which the district courts of the United States have original jurisdiction." 28 U.S.C. § 1441(a) (2000). A district court is required to remand the action to state court, however, "[i]f at any time before final judgment it appears that the district court lacks subject matter jurisdiction." Id. § 1447(c). As removal is a statutory and not constitutional prerogative, federal courts must narrowly construe removal jurisdiction in favor of the non-removing party to prevent intrusion on the sovereignty of state courts to decide cases properly before them. Shamrock Oil Corp. v. Sheets, 313 U.S. 100, 107-09, (1941). Such narrow construction is also warranted because removal "abridges the deference courts generally give to a plaintiff's choice of forum." Frontier Ins. Co. v. MTN Owner Trust, 111 F. Supp. 2d 376, 378 (S.D.N.Y. 2000).

Acknowledging that this case requires fine line drawing, the Court is further guided by the principle that where removal jurisdiction is doubtful, remand is appropriate. Somlyo v. J. Lu-Rob Enterprises, Inc., 932 F.2d 1043, 1045-46 (2d Cir. 1991) (stating that "federal courts construe the removal statute narrowly, resolving any doubts against removability"); Lowe v. Trans World Airlines, Inc., 396 F. Supp. 9, 12 (S.D.N.Y.1975) (noting "the basic principle that if the right to remove is doubtful, the case should be remanded"). Remand is warranted in close cases because it spares the litigants the possibility of relitigation, Video Connection of Am. Inc. v. Priority Concepts, 625 F. Supp. 1549, 1551 (S.D.N.Y 1986), and avoids the unnecessary extension of federal jurisdiction at the expense of state sovereignty, Shamrock Oil & Gas Corp., 313 U.S. at 108-09. Mindful of these cautions, the ...

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