Shannon's Rainbow, LLC v. Supernova Media, Inc.

683 F.Supp.2d 1261

SHANNON'S RAINBOW, LLC, a Utah limited liability company, Shannon's Rainbow, LLC, a Delaware limited liability company, Shannon's Rainbow Production, a Pennsylvania limited liability company, Plaintiffs, v. SUPERNOVA MEDIA, INC., a New York corporation; Joycelyn Engle a/k/a Joceyln DiPalma, an individual, Joseph DiPalma, an individual, Julianne Michelle, an individual, Kelly Kent, an individual, and Does 1-100, Defendants.

Case No. 2:08-CV-880 TS.

United States District Court, D. Utah, Central Division.

January 26, 2010.

Clay W. Stucki, Daniel L. Steele, Derek E. Anderson, Jaryl L. Rencher, Joseph G Pia, Stucki Steele Pia Anderson & Rencher, Salt Lake City, UT, for Plaintiffs.

C. Keith Rooker, Jason M. Yancey, Rooker Rawlins, John C. Rooker, Jones Waldo Holbrook & McDonough, Salt Lake City, UT, James S. O'Brien, Jr., Joshua Lipman, Pryor Cashman, New York, NY, for Defendants.

MEMORANDUM DECISION AND ORDER DENYING DEFENDANTS' MOTION TO DISMISS FOR LACK OF SUBJECT MATTER JURISDICTION, MOTION TO DISMISS FOR LACK OF PERSONAL JURISDICTION AND IMPROPER VENUE, AND GRANTING PLAINTIFFS' MOTION TO ENJOIN

TED STEWART, District Judge.

This matter is before the Court on Defendants' Motion to Dismiss for Lack of Subject Matter Jurisdiction, Lack of Personal Jurisdiction, Improper Venue or Transfer of Venue, Failure to State a Claim and Plaintiffs' Motion for Order Enjoining Prosecution of Second Filed Action. The controversy stems from disagreements regarding the production, distribution, and ownership of the film, Shannon's Rainbow ("the Film").

I. Factual Background

Plaintiffs and Defendants were engaged in the production of the Film.¹ The crux of the controversy regards the location and timing of the Film's distribution, between the U.S. and overseas markets.² On July 23, 2008, the parties documented the terms and conditions agreed upon by each party in settlement of the various disputes.³ However, these "Term Sheets" provided only a general and abbreviated description of the terms.⁴ Additionally, these documents were "silent" on a number of other various issues.⁵ With that in mind, the parties included a provision stating the parties agree to proceed in good faith to formalize a long form agreement.⁶ The parties continued to negotiate for several months, eventually drafting a document the parties agreed was an accurate reflection of the memorialized terms of the Term Sheet and Amended Term Sheet.⁷ The Term Sheet was then sent to Defendants for their signature.⁸ Upon receipt of the document executed by Plaintiffs, Defendants refused to sign the agreement.⁹ Defendants further stated that carrying out the terms of the agreement would result in a violation of an investor agreement, in addition to "providing excellent grounds for investors to institute legal proceedings."¹⁰ Recognizing that the issues would not be resolved absent litigation, Plaintiffs filed this case on November 11, 2008.¹¹ Shortly after filing this action, however, talks resumed for several months and Plaintiffs did not formally serve Defendants with the Complaint, although they were given a copy.¹² Eventually it again became clear litigation was necessary and on April 15, 2009, Plaintiffs' attorney asked Defendants attorney if he would accept service on behalf of Defendants Engle and Supernova.¹³ Defendants attorney refused to accept service.¹⁴ Defendants in this action filed a nearly identical action in the Southern District of New York (the Second Action) on April 15, 2009.¹⁵

II. Issues

Defendants argue that Plaintiffs' claims should be dismissed based on lack of subject matter and lack of personal jurisdiction. Defendants further argue this case should be dismissed for improper venue or, in the alternative, transferred to New York based on the same grounds. Defendants also argue three claims should be dismissed against Defendant DiPalma based on Plaintiffs' failure to state a claim upon which relief may be granted.

Plaintiffs argue this Court should enjoin the Second Action filed in New York, based on the first-to-file rule. Plaintiffs also argue that this Court should apply judicial estoppel and deny Defendants the ability to oust this Court of jurisdiction. In the alternative, Plaintiffs request leave to amend the Complaint to cure any jurisdictional defects. If this Court finds it lacks jurisdiction based on incomplete diversity, Plaintiffs ask the Court to dismiss Defendant DiPalma under Rule 21 to preserve jurisdiction.

As long as this Court finds subject matter jurisdiction the Court may continue to analyze the remaining claims. Therefore, as the threshold issue, subject matter jurisdiction will be addressed first. Because the venue and first-to-file rule analysis are closely related to and somewhat dependant on the jurisdictional analysis they will be addressed after the discussion on personal jurisdiction. The failure to state a claim upon which relief can be granted for Defendant DiPalma will be addressed last.

III. Analysis

A. Subject Matter Jurisdiction

District courts have original jurisdiction in two instances. The first, federal question jurisdiction, gives courts "original jurisdiction of all civil actions arising under the Constitution, laws or treaties of the United States."¹⁶ In the second type, diversity jurisdiction, "district courts shall have original jurisdiction of all civil actions where the matter in controversy exceeds the sum or value of $75,000, exclusive of interests and costs, and is between .... citizens of different States."¹⁷ "Diversity jurisdiction requires that `all of the adverse parties in a suit .... be completely diverse with regard to citizenship.'"¹⁸ This case is predicated on diversity jurisdiction.

The issue before the Court is the citizenship of an LLC. Two methods are employed to determine the citizenship of a corporation: "(1) the state of incorporation, and (2) the state where the corporation's principle place of business is located."¹⁹ In 1990, the Supreme Court, in C.T. Carden v. Arkoma Assoc.'s,²⁰ addressed a related issue dealing with the citizenship of limited partnerships. In that case the Supreme Court acknowledged the similarities between corporations and limited partnerships but declined to extend the corporate diversity status to limited partnerships and instead held that determining the citizenship of an artificial entity depends on the citizenship "of all the members," "the several persons composing such associations," "each of its members."²¹ Following Carden, Judge Posner, in Cosgrove v. Bartolotta,²² started a domino effect of circuit courts in deciding that for the purposes of diversity, limited liability corporations are treated in the same manner as limited partnerships.²³ Courts generally follow the Carden Court's reasoning that "Congress, if it so chooses, is capable of adjusting the rules of diversity jurisdiction to account for unincorporated associations."²⁴

Defendant DiPalma admits that he is a member of Shannon's Rainbow, LLC, a Delaware limited liability company, and Plaintiff in this case.²⁵ As stated above, the majority rule is that, for diversity purposes, an LLC is a citizen of every state in which its members reside. Therefore, as Defendant DiPalma is a member of Plaintiff Shannon's Rainbow, LLC, a Delaware limited liability company, Shannon's Rainbow and DiPalma share citizenship and are therefore not diverse. Without complete diversity this court lacks jurisdiction.

Plaintiffs offer four alternatives for curing this jurisdictional defect. First, Plaintiffs argue that the Cosgrove holding is not the law of Utah or Tenth Circuit. Second, given the very similar action filed by Defendants in the Southern District of New York, Plaintiffs ask the Court to judicially estopp Defendants from arguing subject matter jurisdiction does not exist. Third, Plaintiffs argue that their amended complaint supports federal jurisdiction based on federal questions. If the Court does not find substantive federal questions in the pleadings, Plaintiffs ask the Court to grant them leave to amend so they may be able to properly include federal questions into their pleadings. Finally, Plaintiffs urge the Court to allow them to dismiss Defendant DiPalma under Rule 21 in order to preserve diversity jurisdiction.

i. Tenth Circuit Precedent

In support of the argument that LLCs should not be treated like corporations, Plaintiffs cite two cases, neither of which are on point. In Dygert v. Collier,²⁶ the Utah Court of Appeals, in an unpublished opinion, stated that "a company formed under the Act is a legal entity distinct from its members."²⁷ Although Dygert deals with the liability of members to an LLC, it does not address anything regarding an LLCs citizenship for purposes of diversity. Nor is it a Tenth Circuit case.

Shell Rocky Mountain Prod. v. Ultra Res., Inc.,²⁸ similarly does not deal with the current issue before the Court. Although the Shell Court does state that because Shell is a Delaware limited liability corporation and its principal place of business is Houston, Texas, it is a citizen of both Delaware and Texas, the issue in that case was the citizenship of Ultra Resources, a corporation, not the citizenship of Shell LLC.²⁹ Moreover, neither the facts nor the opinion make any mention of other members to the Shell LLC. Therefore, even though in this context the Tenth Circuit did treat the LLC as a corporation for diversity purposes, neither the facts nor the issues are similar to the question presented here.

In the absence of Tenth Circuit law on this issue, the Court will follow the majority rule and hold complete diversity is lacking in this case.

ii. Judicial Estoppel

The doctrine of judicial estoppel was first explained in New Hampshire v. Maine,³⁰ as an effort to "protect the integrity of the judicial process by prohibiting parties from deliberately changing positions according to the exigencies of the moment."³¹ "The rule is intended...