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Incredible Investments Limited v. Parlato

July 15, 2010

INCREDIBLE INVESTMENTS LIMITED, PLAINTIFF,
v.
FRANK PARLATO, JR., WHITESTAR DEVELOPMENT CORP., ONE NIAGARA, INC., ONE NIAGARA PLAZA, INC., TOURIST SERVICES, LLC, GORDON REGER, LARRY REGER, REMAN LLC, RH NIAGARA BUILDING, LLC, AND JOHN DOES 1 THROUGH 10, DEFENDANTS.



The opinion of the court was delivered by: Jeremiah J. Mccarthy United States Magistrate Judge

REPORT AND RECOMMENDATION

This case has been referred to me by Hon. William M. Skretny for supervision of pretrial proceedings, including the preparation of a Report and Recommendation on dispositive motions [6].*fn1 Before me is defendants' motion to dismiss the Amended Complaint of plaintiff Incredible Investments Limited ("IIL") for lack of subject matter jurisdiction, and for an award of attorney's fees [60]. For the following reasons, I recommend that defendants' motion be granted in part and denied in part.

BACKGROUND

This action relates to a parcel of real property located at 360 Rainbow Boulevard South in the City of Niagara Falls, New York, which was owned by Aqua Falls Plaza, LLC ("Aqua Falls") for purposes of developing it into a tourist attraction. Amended Complaint [2], ¶¶22, 24 and 25. Under an October 20, 2004 agreement between Aqua Falls and defendant Frank Parlato, Jr., Parlato was granted an ownership interest in the property in exchange for his promise to loan $4 million to the property. Id., ¶¶26, 72. This was accomplished by the creation of an entity known as One Niagara LLC, which acquired the property. Id., ¶¶28, 30.

The members of One Niagara LLC are IIL and defendant Whitestar Development Corp. ("Whitestar"), which is owned by Parlato. Id., ¶¶4 and 75; Altissima defendants' Statement of Material Facts [151], Ex. B.*fn2 Parlato is the sole manager of One Niagara LLC under a Rider to the Operating Agreement, which grants Whitestar a proxy to vote IIL's membership interest with respect to the election of managers. Id., ¶¶87 and 89.

IIL alleges that Parlato never provided the $4 million loan, and that he has operated One Niagara LLC for his own benefit by diverting sums earned from the property through the creation of various entities, including defendant Tourist Services, LLC ("Tourist Services"), which leases the income generating portions of the property. Id. ¶¶34, 50, 73. Defendant Gordon Reger signed the Tourist Services' lease on behalf of defendants Reman LLC ("Reman") and RH Niagara Building, LLC ("RH"), as members of Tourist Services. Id., ¶50. IIL alleges that these entities are alter-egos of defendant Larry Reger. Id.

IIL alleges that subject matter jurisdiction arises under 28 U.S.C. §1332(a)(2) because it "is a citizen of a foreign state and all defendants are citizens of different states". Id., ¶17. In moving pursuant to Fed. R. Civ. P. ("Rule") 12(c) to dismiss the Amended Complaint for lack of subject matter jurisdiction, defendants argue that IIL's principal place of business is in New York (Roscetti Declaration [60], Point I; Grenga Sur-Reply Declaration & Combined Memorandum of Law [63], ¶¶7-8); that One Niagara LLC is a necessary party which shares British Virgin Islands ("BVI") citizenship with IIL*fn3 (Roscetti Declaration [60], Point II); that Tourist Services shares BVI citizenship with IIL (id., ¶33); that One Niagara Plaza Inc. and One Niagara Inc. share BVI citizenship with IIL (id., Point III), and that One Niagara LLC is an indispensable party (id., Point IV).*fn4 Each of these arguments will be addressed.

ANALYSIS

"The burden of demonstrating subject-matter jurisdiction lies with the party asserting it". Mathirampuzha v. Potter, 548 F. 3d 70, 85 (2d Cir. 2008). In resolving issues of subject matter jurisdiction, "the District Court has leeway as to the procedure it wishes to follow". Alliance For Environmental Renewal, Inc. v. Pyramid Crossgates Co., 436 F. 3d 82, 88 (2d Cir. 2006). "As there is no statutory direction for procedure upon an issue of jurisdiction, the mode of its determination is left to the trial court". Gibbs v. Buck, 307 U.S. 66, 71-2 (1939).

"The court need not confine its evaluation to the face of the pleadings, but may review or accept any evidence, such as affidavits, or it may hold an evidentiary hearing." 2 Moore's Federal Practice (Third Ed. 2010), §12.30[3]; Makarova v. United States, 201 F. 3d 110, 113 (2d Cir. 2000) ("In resolving a motion to dismiss for lack of subject matter jurisdiction under Rule 12(b)(1), a district court . . . may refer to evidence outside the pleadings").

A. Is IIL's Principal Place of Business in New York?

IIL is a corporation incorporated in the BVI. Schmueli Supplemental Declaration [51], ¶2(A) and Ex. A. However, under 28 U.S.C. §1332(c)(1), a corporation is considered to be a citizen not only of the place of its incorporation, but also "of the State where it has its principal place of business". "'Principal place of business' is best read as referring to the place where a corporation's officers direct, control, and coordinate the corporation's activities. It is . . . the corporation's 'nerve center.' And in practice it should normally be the place where the corporation maintains its headquarters - provided that the headquarters is the actual center of direction, control, and coordination, i.e., the 'nerve center,' and not simply an office where the corporation holds its board meetings (for example, attended by directors and officers who have traveled there for the occasion)." Hertz Corp. v. Friend, 130 S.Ct. 1181, 1192 (2010).

IIL argues that its principal place of business is in Hong Kong, where its officers and directors reside, where officers' and directors' meetings and decisionmaking takes place, and where its books and records are located. Schmueli Supplemental Declaration [51], ¶2(A-E). Defendants argued initially that "IIL's office is located at the Property" in Niagara Falls, New York. Roscetti Declaration [60], ¶25. However, it is the location of the principal office, not the location of an office, which is determinative for citizenship purposes.*fn5

Ignoring Mr. Schmueli's Supplemental Declaration, defendants argue that "no evidence has been put forward that IIL's principal place of business is anywhere else than . . . Niagara Falls, NY". Grenga Declaration [63], ¶7. Defendants note that after they sent correspondence to IIL at the Hong Kong address listed in its August 20, 2009 proxy, they were advised by Federal Express that "the package is undeliverable - recipient has moved". Grenga Declaration [56], ¶Twenty-seventh. However, the address to which they sent the correspondence (id., ¶Twenty-fifth) is different from the address shown for IIL on Mr. Schmueli's business card. See Altissima Shmueli Declaration [163], ¶8 and Ex. D.

Should they develop additional information in the future suggesting that IIL's principal place of business is in New York rather than Hong Kong, defendants may request an evidentiary hearing at that time. However, I do not believe that they have cast sufficient doubt upon Mr. Schmueli's statements as to the location of IIL's principal place of business to warrant a hearing at this time.

B. Is Tourist Services a BVI Citizen?

Defendants next argue that Tourist Services' "members include One Niagara LLC, a BVI citizen, and as a result Tourist Services is also a BVI citizen". Roscetti Declaration [60], ¶34. If true, diversity would be defeated. See Handelsman, 213 F. 3d at 51-2 (holding that an LLC shares the citizenship of its members).

However, there is no competent proof that One Niagara LLC is a member of Tourist Services. Although defendant Parlato has stated that Tourist Services is owned by RH and One Niagara LLC (Altissima Parlato Declaration [151-4], ¶27, this claim is belied by the record. For example, Tourist Services' April 2006 Operating Agreement states that it is between Parlato "on behalf of a New York corporation to be formed having an address at 360 Rainbow Boulevard South, Niagara Falls, New York 14303 . . . and RH". Bloom Declaration [61], Ex. B (emphasis added). However, One Niagara LLC is not a corporation and was formed in November 2004, prior to the formation of Tourist Services. Id., Ex. C.

Moreover, Parlato testified during his July 2009 deposition that it was merely his "intention" for One Niagara LLC to have an ownership interest in Tourist Services, either directly or through a corporation owned by One Niagara LLC. Id., Ex D, p. 154. During One Niagara LLC's annual meeting in August 2009, Parlato wrote that:

"One Niagara's proposed ownership or interest in Tourist Services is predicated upon a number of conditions which our lawyers will outline in a future correspondence with the members of ...


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