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FRS GC Corp. v. Oak Tree Management LLC

United States District Court, D. Arizona

March 1, 2019

FRS GC Corp., a Delaware corporation, Plaintiff/Counterdefendant,
Oak Tree Management LLC and Milagro Consulting LLC, Wyoming limited liability companies; and David and Abby Harbour, a married couple and citizens of Arizona, Defendants/Counterclaimants.


          David G. Campbell Senior United States District Judge.

         Plaintiff FRS GC Corp. (“FRS Corp”) has sued Defendants Oak Tree Management LLC (“Oak Tree”), Milagro Consulting LLC (“Milagro”), and David and Abby Harbour, asserting various state-law claims related to an alleged misappropriation of funds. Doc. 1. Defendants have filed a motion to dismiss for lack of subject matter jurisdiction pursuant to Federal Rule of Civil Procedure 12(b)(1). Doc. 59. The motion is fully briefed (Docs. 63, 66), and oral argument has not been requested. For reasons stated below, the Court will grant the motion.

         I. Background.

         Plaintiff's predecessor in interest, FRS GC LLC (“FRS”), filed a nearly identical suit against Defendants in April 2017, which was assigned to Judge James A. Teilborg. See Doc. 1, No. CV-17-01189-JAT. The complaint asserted diversity jurisdiction under 28 U.S.C. § 1332. Id. ¶ 21.

         For purposes of diversity jurisdiction, “an LLC is a citizen of every state of which its owners/members are citizens.” Johnson v. Columbia Props. Anchorage, LP, 437 F.3d 894, 899 (9th Cir. 2006). FRS alleged that no member of Oak Tree or Milagro is a citizen of the same state as any member of FRS. Doc. 1 ¶ 18. Judge Teilborg found this allegation insufficient to establish diversity jurisdiction and directed FRS to supplement its complaint with the name and citizenship of each LLC member. Doc. 17 at 2. FRS filed a supplement stating in part that Princeton Alternative Income Fund L.P. (“PAIF”), a Delaware limited partnership, is FRS's sole member. Doc. 20 at 1. Judge Teilborg concluded that the supplement was deficient because it failed to provide information for each PAIF partner. Doc. 21. Declining an opportunity to file an additional supplement, FRS chose instead to dismiss the complaint on June 14, 2017. Doc. 22.

         The next day, PAIF incorporated Plaintiff FRS Corp in Delaware. On the following day - June 16, 2017 - FRS assigned its claims against Defendants to Plaintiff. Plaintiff brought this action one month later, asserting the assigned claims. Doc. 1, No. CV-17-02348-DGC. The complaint asserts diversity jurisdiction (id. ¶ 22), which appears to exist from the face of the complaint.[1]

         In April 2018, Plaintiff filed a motion to transfer the case to the federal bankruptcy court in New Jersey. Doc. 45. In response, Defendants presented facts sufficient to raise a legitimate question as to whether Plaintiff and FRS have attempted to collusively manufacture diversity jurisdiction in violation of 28 U.S.C. § 1359. Doc. 46 at 7-9. The Court denied the motion to transfer and allowed the parties to conduct jurisdictional discovery. Docs. 49, 51.

         Defendants filed the present motion to dismiss following completion of the discovery. Doc. 59. FRS's claim assignment to Plaintiff, Defendants argue, is a sham transfer to a shell corporation made solely to invoke the Court's jurisdiction. Id. at 2, 7-9. Plaintiff asserts that the assignment serves the legitimate business purpose of keeping the identities of PAIF's partners confidential. Doc. 63 at 2.

         II. Discussion.

         A. The Anti-Collusion Statute and Presumptively Collusive Assignments.

         The federal anti-collusion statute, 28 U.S.C. § 1359, provides that “[a] district court shall not have jurisdiction of a civil action in which any party, by assignment or otherwise, has been improperly or collusively made or joined to invoke the jurisdiction of such court.” The statute is “aimed at preventing parties from manufacturing diversity jurisdiction to inappropriately channel ordinary business litigation into the federal courts.” Yokeno v. Mafnas, 973 F.2d 803, 809 (9th Cir. 1992). The Supreme Court has explained:

If federal jurisdiction could be created by assignments . . . which are easy to arrange and involve few disadvantages for the assignor, then a vast quantity of ordinary contract and tort litigation could be channeled into the federal courts at the will of one of the parties. Such ‘manufacture of Federal jurisdiction' was the very thing which Congress intended to prevent when it enacted § 1359 and its predecessors.

Kramer v. Caribbean Mills, Inc., 394 U.S. 823, 828-29 (1969).

         “When the issue of a collusive assignment is raised, the party asserting diversity has the burden of showing the non-collusive nature of the assignment.” W. Farm Credit Bank v. Hamakua Sugar Co., 841 F.Supp. 976, 981 (D. Haw. 1994) (citing Dweck v. Japan CBM Corp., 877 F.2d 790, 792 (9th Cir. 1989)). Certain types of assignments “warrant particularly close scrutiny” and “are presumptively ineffective to create diversity jurisdiction.” Yokeno, 973 F.2d at 809-10 (quoting Dweck, 877 F.2d at 792). These include assignments between parent companies and subsidiaries and between corporations and their officers, where the close relationship “necessarily presents opportunities for the collusive manufacture of commercial reasons for the assignment.” Nike, Inc. v. Comercial Iberica de Exclusivas ...

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