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Transition Investments, Inc v. the Allen O. Dragge

November 21, 2011


The opinion of the court was delivered by: Honorable Paul A. Crotty, United States District Judge:



DOC #: _________________


On June 10, 2011, Plaintiff Transition Investments, Inc. ("Plaintiff") brought this action against The Allen O. Dragge, Jr. Family Trust, Allen O. Dragge, Jr. ("Dragge"), Dana Icaza ("Icaza"), John Does (1-10), Jane Does (1-10), and John/Jane Doe Trusts (1-10) (collectively, the "Defendants") in New York Supreme Court, New York County. Plaintiff asserts claims under New York law for breach of contract, quantum meruit, and unjust enrichment.

On July 11, 2011, Dragge and The Allen O. Dragge, Jr. Family Trust (the "Dragge Defendants") removed this action to this Court, pursuant to 28 U.S.C. §§ 1332(a) and 1441, et seq., on the basis of diversity jurisdiction. The Dragge Defendants claimed that Icaza, a New York resident who would destroy diversity jurisdiction, was fraudulently joined to defeat diversity.

On August 19, 2011, Plaintiff moved to remand to state court, pursuant to 28 U.S.C. §§ 1441(b), 1446, and 1447(c), based on the absence of diversity. Icaza simultaneously moved to dismiss Plaintiff's claims against her, pursuant to Fed.R.Civ.P. 12(b)(6). Plaintiff opposes Icaza's motion to dismiss; and Icaza and the Dragge Defendants oppose Plaintiff's motion to remand. The motions are fully briefed.

For the reasons that follow, the Plaintiff's motion for remand is DENIED and Icaza's motion to dismiss is GRANTED.


All individual Defendants are descendants of A.O. Smith. Until 2008, Defendants collectively owned-either directly or through their family trusts-a controlling interest in the shares of Smith Investment Company ("SMIC"), which owned approximately 8 million Class A and 1.5 million Common shares of A.O. Smith Corporation ("AO Smith"). (Compl. ¶¶ 9-10.)

In early 2006, Dragge approached Gary Lutin ("Lutin"), Plaintiff's President, seeking advice on how to best enhance the liquidity and value of Dragge's interests in SMIC. (Compl. ¶ 16.) On March 13, 2006, Dragge engaged Plaintiff to conduct an exploratory review and give advice regarding potential value enhancement opportunities. (Compl. ¶ 17.) Their agreement (the "2006 Engagement") was memorialized in an email from Lutin to Dragge. (Compl. Ex. A.) On or around April 19, 2006, while Plaintiff was conducting its exploratory review, Lutin met with Icaza, Dragge's niece. (Compl. Ex. D.) During their dinner, Lutin told Icaza that Plaintiff's 2006 Engagement was limited in nature and that any continued work would proceed under a second engagement, for which Plaintiff expected to be compensated at a rate of 2% annual fee based on the amount of the managed funds, plus 20% increase in the value of assets under management. (August 18, 2011 Declaration of Gary Lutin ("Lutin Decl.") ¶ 12.) Plaintiff alleges that Icaza understood that Plaintiff would not work for free and that Icaza would have to compensate Plaintiff, particularly if she benefited from Plaintiff's work and Dragge did not fully compensate Plaintiff. (Lutin Decl. ¶ 15.) On April 24, 2006, Icaza emailed Lutin, thanking him for "explain[ing] to [her] what the situation at hand is and next steps on how to improve/grow [their] Investments." (Compl. Ex. D.) The 2006 Engagement culminated with Plaintiff's 2006 Report, which outlined the "bare bones" of its plan to increase shareholder value. (Lutin Decl. ¶ 18.) By June 5, 2006, Plaintiff had been paid for its work under the 2006 Engagement. (Compl. ¶ 27.)

On May 17, 2006, Dragge notified Icaza and all other Smith family member that he had asked Plaintiff to continue working on its plan. (Compl. Ex G.) Plaintiff's "Plan" involved changing the trusteeship of the Smith family trusts so that Dragge would control the trusts' votes through new trustees, who would work towards increasing shareholder value. (Lutin Decl. ¶ 18.) If enough trusts changed trustees and acted together, they would be able to replace the current board of directors. (Lutin Decl. ¶ 19.) To implement its Plan, Plaintiff advised and assisted Dragge and Icaza with interviewing potential replacement trustees, transitioning co-trusteeship and administration of the Smith family trusts to a new trustee, and by communicating with Smith family members and decision makers at SMIC. (Lutin Decl. ¶ 24; Compl. ¶ 32.) Plaintiff also suggested that Defendants establish a Smith Investor Association, of which Lutin would be the director, to share costs and benefits of managing investments in SMIC. (Lutin Decl. ¶ 20; Compl. ¶ 48, Ex. M.)

Icaza became the family "information gathering delegate" in implementing the Plan. (Lutin Decl. ¶ 25.) Lutin sought to assist Icaza in this role, as reflected by an April 27, 2006 email to U.S. Trusts-a potential new trustee-where Lutin wrote:

"The family information-gathering delegate is expected to be Dana Icaza. . . . I'd like to send her some introductory literature and then arrange a meeting for some time later next week or the following week. I'm not actually involved in the family trust aspect of this, of course, but wanted to extend any courtesy that will help these people realize the full value of their investments." (Lutin Decl. Ex. B.)

A year and a half later, in September 2007, Plaintiff sent Dragge a draft engagement letter reflecting the terms of their second engagement (the "2007 Engagement") involving Plaintiff's continued work on its Plan. (Compl. ¶ 34.) After several revised drafts, Plaintiff emailed Dragge a "Final form of letter," dated October 26, 2007. (See Compl. ¶ 39, Ex. J) The 2007 Engagement was addressed to Dragge and was not signed by either Dragge or Lutin. (See Compl. Ex. J.) The 2007 Engagement letter stated, in part:

At least for now, you [Dragge], individually, will be the person I [Plaintiff] advise. But I will accept any reasonable request to add trusts or other entities for which you're responsible, and will also consider the addition of any other Smith shareholders recommended or approved by you. Ideally, of course, it should be Smith itself that I am advising in relation to the enhancement of value to benefit all the corporation's shareholders. My responsibility, though, will be to advise only those with whom I have an agreement. I will have no responsibility to serve the interests of anyone I have not specifically agreed to advise. (Compl. Ex. J.) The 2007 Engagement (Compl. Ex. J) set forth Plaintiff's compensation and reflected that "both [Dragge and Lutin] have to assume risk" because it was in both their interests to have all SMIC shareholders contribute to Plaintiff's expenses pro-rata, based on the value of their trusts enhancement. Otherwise, Dragge would be "effectively penalized by the amount of costs [he] incur[red] relative to the 'free riders.'" Plaintiff's compensation included a monthly retainer and, if the plan was acceptable, either a right to buy SMIC shares or an acceptable alternative of equivalent value. Dragge did not raise any objection to the 2007 Engagement, and starting paying Plaintiff its monthly retainer. (Compl. ¶¶ 44-45.)

On January 7, 2008, Plaintiff assisted Dragge in formulating a 'pitch' to the Smith family trust members to introduce Morgan Stanley as a new trust administrator. (Compl. ¶ 49.) On February 3, 2008, Dragge told Plaintiff that they "won" and promised to seek reimbursement from SMIC for his expenses incurred on behalf of all shareholders, which would include Plaintiff's compensation. (Compl. ¶¶ 60, 61.) Plaintiff does not allege that a Smith Investor Association was ever formed. Around this time, Icaza transferred trusteeship of her trust to Morgan Stanley. (Lutin Decl. ¶ 31.)

Plaintiff then sought to collect from Dragge either shares of SMIC stock or an equivalent value, under the terms of the 2007 Engagement. (Compl. ΒΆ 62.) On February 22, 2008, Dragge emailed Plaintiff confirming that he had terminated Plaintiff's services ...

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