Motion to Strike Fraudulently Joined Sham Defendants Added to Destroy Diversity
Posted by: albright on Wed, Nov 11, 2015Share this post
COME NOW Defendants VIS VIRES GROUP, INC., a New York Corporation; KBM WORLDWIDE, INC., a New York Corporation; ASHER ENTERPRISES, INC., a Delaware Corporation; SETH KRAMER; and CURT KRAMER (“Defendants”), by and through their undersigned counsel, ALBRIGHT, STODDARD, WARNICK & ALBRIGHT, and pursuant to FRCP 12(f), hereby moves to strike two fraudulently named defendants, EMPIRE STOCK TRANSFER, INC., a Nevada corporation (hereinafter “Empire”), and PACIFIC STOCK TRANSFER COMPANY, a Nevada corporation (hereinafter “Pacific”). Defendants recently discovered, after filing the Notice of Removal, that an Amended Complaint was filed some thirty minutes before the Notice of Removal fraudulently joining two sham defendants, Empire and Pacific, in an attempt to destroy diversity.
STATEMENT OF FACTS
There are eight (8) loans, each secured by a Convertible Promissory Note, from Defendants to Plaintiff, attached to the Complaint, as follows:
1. Convertible Promissory Note dated May 1, 2015, in the principal amount of $64,000.00, executed by Players Network, a Nevada corporation, in favor of Vis Vires Group, Inc., a New York corporation. (Transfer Agent: Clear Trust, LLC)
2. Convertible Promissory Note dated December 3, 2014, in the principal amount of $64,000.00, executed by Players Network, a Nevada corporation, in favor of KBM Worldwide, Inc., a New York corporation. (Transfer Agent: Clear Trust, LLC)
3. Convertible Promissory Note dated October 27, 2014, in the principal amount of $104,000.00, executed by Players Network, a Nevada corporation, in favor of KBM Worldwide, Inc., a New York corporation. (Transfer Agent: Clear Trust, LLC)
4. Convertible Promissory Note dated February 19, 2013, in the principal amount of $42,500.00, executed by Players Network, a Nevada corporation, in favor of Asher Enterprises, Inc., a Delaware corporation. (Transfer Agent: Clear Trust, LLC)
5. Convertible Promissory Note dated January 11, 2013, in the principal amount of $35,000.00, executed by Players Network, a Nevada corporation, in favor of Asher Enterprises, Inc., a Delaware corporation. (Transfer Agent: Empire Stock Transfer, Inc.)
6. Convertible Promissory Note dated December 12, 2012, in the principal amount of $32,500.00, executed by Players Network, a Nevada corporation, in favor of Asher Enterprises, Inc., a Delaware corporation. (Transfer Agent: Pacific Stock Transfer Co.)
7. Convertible Promissory Note dated September 6, 2012, in the principal amount of $37,500.00, executed by Players Network, a Nevada corporation, in favor of Asher Enterprises, Inc., a Delaware corporation. (Transfer Agent: Pacific Stock Transfer Co.)
8. Convertible Promissory Note dated July 12, 2012, in the principal amount of $37,500.00, executed by Players Network, a Nevada corporation, in favor of Asher Enterprises, Inc., a Delaware corporation. (Transfer Agent: Pacific Stock Transfer Co.)
All of the Notes above, except Number 1 with Vis Vires, have been satisfied.
9. The court should further take note of the following facts set forth in the Declaration of Curt Kramer, a copy of which is attached hereto as Exhibit “A,” and by this reference made a part hereof:
4. All of the eight loans attached to the Amended Complaint as described above have been paid (by cash or conversion) with the sole exception of Loan A above with Vis Vires.
5. These companies do not now, and never have, done business in Nevada, and do not own or lease any real or personal property in Nevada, and do not have, and have never had, any employees in Nevada.
6. In addition, Asher Enterprises, Inc. made four other loans to Plaintiff not mentioned in the Complaint as follows:
A. October 28, 2013, for $12,500.00.
B. July 30, 2013, for $25,500.00.
C. May 8, 2103, for $25,500.00.
D. May 14, 2012, for $58,000.00
These four Asher Enterprises loans were all prepaid or satisfied by conversions.
9. It appears Empire Stock Transfer, Inc. was only involved in January of 2013, and the transfer agent only for Loan E from Asher.
11. As can be seen from the eight ledger sheet attached hereto as Exhibit 1 through 8, Empire and Pacific, the former transfer agents for Players Network, had been replaced by Clear Trust, LLC for 2014 and 2015.
12. To the best of my knowledge, Clear Trust is currently the only transfer agent for Players Network, and that it is a Florida limited liability company doing business in Florida, with its managers residing and working in Florida.
18. Since Empire and Pacific are no longer responsible for transferring and/or re-registering the shares of stock of Players Network on the corporate records, and since there is in place a current transfer agent, Clear Trust, LLC, who can be directed by the court to transfer shares in Plaintiff, Empire and Pacific are neither stake holders nor depositories of any shares and have no authority relative to Plaintiff’s shares, nor do they have any present duties or responsibilities relative to Players Network’s records.
19. Empire and Pacific are not even nominal parties in this litigation since they are completely uninterested and unrelated to the current proceedings. They are certainly not indispensable parties, but rather they appear to be sham defendants who apparently have been fraudulently joined in a bogus attempt to divest the court of diversity jurisdiction.
A. Governing Law and Forum Selection Clause
The choice of law (New York) and forum selection clause (New York) in the agreement is exclusive and mandatory. All eight Notes select New York in Paragraph 4.6 regarding governing law and forum selection, as follows:
4.6 Governing Law. This Note shall be governed by and construed in accordance with the laws of New York without regard to principles of conflicts of law. Any action brought by either party against the other concerning the transactions contemplated by this Note shall be brought only “in the state courts of New York or in the federal courts located in the state and county of Nassau. The parties to this Note hereby irrevocably waive any objection to jurisdiction and venue of any action instituted hereunder and shall not assert any defense based on lack of jurisdiction or venue or based upon forum non conveniens. The Borrower and Holder waive trial by jury….
The choice of law and forum selection clause quoted above is exclusive and mandatory.
Fraudulent Joinder is when a plaintiff fails to state a cause of action against a resident defendant and the failure is obvious according to the settled rules of the state. In McCabe v. General Foods Corp., 811 F.2d 1336 (9th Cir. 1987), the court stated as follows with respect to fraudulently joined parties:
The district court has jurisdiction to determine if its jurisdiction was defeated by the mention in the complaint by the two residents of California, Moltz and Ladson. On the defendants raising the issue, the court had to determine if they were fraudulently joined. Fraudulent joinder is a term of art. If the plaintiff fails to state a cause of action against a resident defendant, and the failure is obvious according to the settled rules of the state, the joinder of the resident defendant is fraudulent. See, Moore’s Federal Practice 1986 ¶0.161(2). The defendant seeking removal to the federal court is entitled to present the facts showing that the joinder to be fraudulent. Smith v. Southern Pacific Co., 187 F.2d 397 (9th Cir. 1951)…. On the basis of the complaint alone, the district court could rightly conclude that no cause of action had been stated against Moltz and Ladson.
Plaintiff may not destroy Defendant’s right of removal by fraudulently and improperly joining a resident defendant having no real connection with the controversy presented in the pleadings. In Wilson v. Republic Iron and Steel Co., 257 U.S. 92, 97, (1921), 42 S. Ct. 5, the court held that:
the right of removal cannot be defeated by a fraudulent joinder of a resident defendant having no real connection with the controversy. Wecker v. National Enameling and Stamping Co., 204 U.S. 176, 185, 186, 27 Supp. Ct. 184, 51 L.Ed. 430, 9 Ann. Cas. 757. If in such a case a resident defendant is joined, the joinder, although fair upon its face, may be shown by a petition for removal to be only a sham or fraudulent device to prevent a removal; but the showing must consist of a statement of facts rightly leading to that conclusion apart from the pleader’s deductions. Chesapeake and Ohio RY Co. v. Cockrell, 232 U.S. 146, 152, 34 Supp. Ct. 278, 58 L.Ed. 544. . . . If a removal is effected, the Plaintiff may, by a motion to remand, plea or answer, take issue with the statements in the petition. If he does, the issue so arising must be heard and determined by the District Court.
The court went on to explain that in the case before it, it was clear and apparent “that the co-employee was joined as a defendant without any purpose to prosecute the action in good faith as against him and with the purpose of fraudulently defeating the employer’s right of removal. This is the rational conclusion from the facts appropriately stated apart from the pleader’s deductions….” Id. at 98. The court went on to find that the “joinder was a sham and fraudulent and hence was not a legal obstacle to the removal or to the retention of the cause by the District Court.” Id.
The same can be easily applied to the case at bar and that the old former transfer agents for Players Network Inc. were replaced by Clear Trust LLC, a Florida corporation, which completely replaced the former transfer agents of Players Network (Empire and Pacific) who no longer have any responsibilities or duties with respect to Players Network. The former transfer agents were named as defendants in the amended complaint purely as a sham and in an attempt to divest this court of federal diversity jurisdiction.
However, the truth of the matter is that Empire and Pacific are no longer involved with Players Network Inc. as their transfer agent and their participation is not needed to adjudicate ownership claims or disputes regarding shares in Players Network Inc. The current transfer agent, Clear Trust, LLC, is a Florida corporation, with its nerve center in Florida, and maintains the corporate records of Players Network.
Since the addition of Empire and Pacific, both prior transfer agents, was a complete sham and fraudulent joinder, it is not a legal obstacle for this Court to retain the cause of action that was removed from the Nevada Court. For example, in Travis v. Erby, 326 F.3d 644 (5th Cir. 2003), the court noted that:
Fraudulent joinder can be established in two ways, (1) actual fraud in the pleading of jurisdiction facts or (2) inability of the plaintiff to establish a cause of action against the non-diverse party in state court.” Griggs v. State Farm Lloyds, 181 F.3d 694, 698 5th Cir. (1999). The defendants do not dispute that Erby is Mississippi resident. Accordingly, we focus on the second test. Neither our circuit nor other circuit courts have been clear in describing the fraudulent joinder standard. The test has been stated by this Court in various terms, even with the same opinion. For example, the Griggs opinion states “to establish that a non-diverse defendant has been fraudulently joined to defeat diversity, the removing party must prove that there is absolutely no possibility that the plaintiff will be able to establish a cause of action against the non-diverse defendant in state court.” 181 F.3d at 699. The Griggs opinion later restates the test as follows: “Stated differently, we must determine whether there is any reasonable basis for predicting that the plaintiff might be able to establish the non-diverse defendant’s liability on the pleading claims in state court.”
Similarly, in summing up federal law, Morris Federal Practice states “to establish fraudulent joinder a party must demonstrate the absence of any possibility that the opposing party has stated a claim under state law.” 16 Morris Federal Practice §107.14(2)(c).”
The Ninth Circuit has agreed that in determining the existence of removal jurisdiction, the district court may ignore a fraudulently joined defendant. For example, in Morris v. Princess Cruise Lines, 236 F.3d 1061, 1067-68 (9th Cir. 2001), the court held as follows:
Joinder of a non-diverse defendant is deemed fraudulent and the defendant’s presence in the lawsuit is ignored for purposes of determining diversity if the plaintiff fails to state a cause of action against a resident defendant and the failure is obvious according to the settled rules of the state. Further, the defendant is entitled to present the facts showing the joinder to be fraudulent.
Here the Amended Complaint filed minutes before the Notice of Removal, adds Empire and Pacific in the first paragraph, but the Amended Complaint then makes no allegations or claims for relief against the old former transfer agents. Clear Trust LLC is the current transfer agent. The ridiculousness of the sham and fraudulent addition of two Nevada resident corporations, is that a corporation normally has only one transfer agent at any given point in time. Privately held companies would never have two transfer agents maintaining the same corporate books and records and stock ledgers of the company, at the same time. US Securities and Exchange Commission website describes transfer agents as follows:
Companies who have publicly traded securities typically use transfer agents to keep track of the individuals and entities that own their stocks and bonds. Most transfer agents or banks or trust companies, but sometimes a company acts as its own transfer agent. Transfer agents perform three main functions: (1) issue and cancel certificates to reflect changes in ownership, (2) act as an intermediary for the company, and (3) handle loss, destroyed or stolen certificates.
WallStreet.com explains the term as follows:
A stock transfer agent or share registry is a company, usually a third party unrelated to stock transactions, which cancels the name and certificate of the shareholder who sold the shares of stock and substitutes the new owner’s name on the official master shareholder listing. Stock transfer agent is the term used in the United States and Canada. A public company usually only designates one company to transfer its stock.
WallStreet.com, The importance of a transfer agent for public companies.
The District Court must evaluate fraudulent joinder claims by properly considering the allegations of the Complaint and any evidence submitted by the party showing that the joinder was fraudulent. For example, in Ritchey v. Up John Drug Co., 139 F.3d 1313, 1318 (9th Cir. 1998), the Ninth Circuit Court of Appeals explain that:
It is common place that fraudulent joined defendants will not defeat removal on diversity grounds.” See, Emrich v. Touche Ross & Co., 846 F.2d 1190, 1193 and N1 (9th Cir. 1988); McCabe v. General Foods Corp., 811 F.2d 1336, 1339 (9th Cir. 1987). But fraudulent joinder is a term of art. If the plaintiff fails to state a cause of action against a resident defendant, and the failure is obvious according to the subtle rules of the state, the joinder of resident defendant is fraudulent. In deciding whether a cause of action is stated, we have declared that we will look only to a plaintiff’s pleadings to determine removability. Gould, 790 F.2d at 773, and we have commented that we will determine the existence of federal jurisdiction solely by examination of the plaintiff’s case without recourse to the defendant’s pleadings. Selfie General Motors Corp., 588 F.2nd 655, 657 (9th Cir. 1978). At least that is true when there has not been a fraudulent joinder. Id. at 659. Where fraudulent joinder is an issue, we will go somewhat further. The defendant seeking removal to the federal court is entitled to present the facts showing the joinder to be fraudulent. McCabe, 811 F.2nd at 1339. See also, Wilson v. Republic Iron and Steel Co., 257 U.S. 92, 97-99 (1921). Chesapeake and Ohio v. Cockrell, 232 U.S. 146 (1914); Alabama Great S RY Co. v. Thompson, 200 US 206 (1906). That approach is reasonable and necessary. For example, a defendant must have the opportunity to show that the individuals joined the action can not be liable on any theory . . . . Similarly, the Supreme Court has pointed out that a removing defendant could submit facts showing that a resident defendant had no real connection with the controversy. Wilson, 257 US at 97, 42 S.Ct. at 37.
The same is true in the case at bar, the old former transfer agents of Players Network have clearly been fraudulently named as a sham in an attempt to preclude diversity. There are no claims for relief set forth against the old former transfer agents. They cannot be liable to Players Network on any theory. They are not related to the controversy set forth in the Amended Complaint. They are indeed not named as parties to the eight promissory notes which are the subject matter of the Amended Complaint. There are absolutely no legal claims being asserted against the two former transfer agents. They are not parties to the notes and should not be parties to this action and their joinder should not preclude removal to federal court. All of the Convertible Promissory Notes were paid and satisfied prior to the Vis Vires Note.
To establish that a non-diverse defendant is fraudulently joined, the removing party must establish either that there is no possibility that the plaintiff would be able to establish a cause of action against the in state defendant in state court, or that there has been outright fraud in the plaintiff’s pleading of jurisdictional facts. See, B, Inc. v. Miller Brewing Co., 663 F.2d 545 (5th Cir. 1981).
Applying the foregoing legal principles, the court in Pesch v. The First City Bank of Dallas, 637 F.Supp 1530 (M.D. Texas 1986), held that the transfer agent was merely a nominal or former party whose presence did not preclude removal on ground of diversity. The court went on to hold that the corporation and its transfer agent whose conduct was proper had been fraudulently joined and thus there was complete diversity for removal. The court explained its holdings as follows:
28 U.S.C. §1441(b) permits the removal of an action to federal court if there is diversity of citizenship among the parties in interest properly joined. “Parties in interest” do not include formal or unnecessary parties, thus a plaintiff’s joinder of such parties can not defeat the federal court’s subject matter jurisdiction. See, Salem Trust Co., 264 U.S. at 189, 44 S.Ct. at 267, and can not prevent the removal of an action to federal court, see, Nunn v. Feltinton, 294 F.Supp 450, 453 (5th Cir. 1961). The test whether or not a defendant is a nominal party is whether his role in the lawsuit is that of depositary or stake holder. Tri City’s Newspaper, Inc. v. Tri City’s Printing Pressman, 349 427 F.2nd 325, 327 (5th Cir. 1970).
The court went on to hold that where as here “a corporation and its transfer agent are joined as defendants (1) only to prevent their transferring and re-registering shares of the corporation stock, to which the adverse ownership claims have been made by others, and (2) to obtain a judgment directing them to surrender the shares and pertinent stock powers to the plaintiff, and for no other substantive purpose, such defendants are merely nominal or formal parties whose presence does not preclude removal. Id. at 1537. The same can be said here of the two former transfer agents named in the Amended Complaint. They are not even nominal defendants; they are not stake holders. They are not depositories of any shares. They are no longer stake holders nor responsible for transferring shares in the Plaintiff entity.
Similarly, in Salt Lake Tribune Publishing Co. v. AT&T Corp., 320 F.3d 1081 (10th Cir. 2003), the court of appeals held that joinder of a non-diverse defendant did not destroy district court’s diversity jurisdiction since non-diverse defendant was not a necessary party. Likewise, in Alpers Jobbing Co., Inc. v. Northland Casualty Co., 173 F.R.D.. 517 (E.D. Missouri, 1997), the district court held that non-diverse defendants whom the plaintiff sought to join were not indispensable and non-diverse defendants were not parties to the disputed contract and they would not be joined. The court analyzed whether the additional defendants were indispensable under Rule 19(b) and noted that the potential defendants were not parties to the insurance contract. The court then held as follows:
when a person is not a party to the contract and litigation and has no rights or obligations under that contract even though he may have obligated himself to abide by the result of the pending action or another contract that is not at issue, he will not be regarded as an indispensable party in a suit to determine obligations under the disputed contract. Cassiss Office Machine Inc. 42 F.3d at 676, Quoting 7 Charles A. Wright Federal Practice and Procedures §1613 (1986).
Id. at 519.
Applied to the case at bar, the two former transfer agents, Empire and Pacific, are clearly not parties to any of the eight Convertible Promissory Notes that are in dispute in the litigation. True, the current transfer agent will be obligated eventually to abide by the result of the Court’s decision in this dispute between Players Network and its shareholders, but the two former transfer agents who have been replaced by Clear Trust LLC, are clearly not indispensable parties and they are not nominal. They are sham defendants, added fraudulently in an attempt to preclude diversity. There are no claims for relief asserted against them. Hence their joinder can be ignored and the removal to federal court can be recognized as proper. The two former transfer agents are not stake holders and have no responsibility for transferring or registering any shares in the Plaintiff corporation.
DATED this _____ November, 2015.
ALBRIGHT, STODDARD, WARNICK & ALBRIGHT
G. MARK ALBRIGHT, ESQ.
Nevada Bar No. 1394
WILLIAM H. STODDARD, SR., ESQ.
Nevada Bar No. 1477
801 South Rancho Drive, Suite D-4
Las Vegas, Nevada 89106
Attorney for Defendants Vis Vires Group, Inc.;
KBM Worldwide, Inc., Asher Enterprises, Inc.;
Seth Kramer and Curt Kramer
About the Authors: The law firm of Albright, Stoddard, Warnick & Albright is an A-V Rated Nevada-based full-service law firm having attorneys licensed in Nevada, California and Utah. Our firm’s practice includes a strong emphasis on personal injury accidents. Call us at 702-384-7111.
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