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GTC INTERNATIONAL HOLDINGS, INC. v. BURNS

September 22, 2004.

GTC INTERNATIONAL HOLDINGS, INC., Plaintiff,
v.
JOHN BURNS, Defendant.



The opinion of the court was delivered by: JOHN W. DARRAH, District Judge

MEMORANDUM OPINION AND ORDER

Plaintiff, GTC International Holdings, Inc., filed suit against Defendant, John Burns, seeking damages for breach of Defendant's fiduciary duty to Plaintiff and its shareholders. Plaintiff also seeks a declaratory judgment affirming, among other things, that: (1) Defendant is not owed accelerated final payment of all outstanding principal and interest under a Secured Promissory Note in consequence of the termination of his employment; and (2) under certain conditions, a failure to make any payment due under the Secured Promissory Note would not constitute a default.

Presently before the Court is Defendant's Motion to Dismiss Plaintiff's Amended Complaint or, in the Alternative, to Transfer. The basis for subject matter jurisdiction in Plaintiff's Complaint is diversity jurisdiction. Defendant contends that the real party in interest, New Art Co., has not been added to this action by Plaintiff; Defendant also contends that New Art Co. is an indispensable party to this action. Under either analysis, if New Art Co. was added as a party, complete diversity would not exist, and the matter would be subject to dismissal for lack of subject matter jurisdiction because New Art Co. and Defendant are both citizens of Arizona. For the following reasons, Defendant's Motion to Dismiss is granted. LEGAL STANDARD

  For subject matter jurisdiction to exist in a matter alleging diversity of citizenship, two requirements must be met. First, the amount in controversy between the parties must exceed $75,000.00. 28 U.S.C. § 1332(a). Second, complete diversity of citizenship must exist between the plaintiffs and the defendants. 28 U.S.C. § 1332(a). A corporation is deemed to be a citizen of any state where it is incorporated and any state where it has its principal place of business. 28 U.S.C. § 1332(c)(1).

  Generally, if subject matter jurisdiction is not apparent from the face of a complaint, the allegations from the complaint are taken as true. United Phosphorus, Ltd. v. Angus Chem. Co., 322 F.3d 942, 946 (7th Cir. 2003) (United Phosphorus). However, "if the complaint is formally sufficient but the contention is that there is in fact no subject matter jurisdiction, the movant may use affidavits and other material to support the motion." United Phosphorus, 322 F.3d at 946. "The burden of proof is on the party asserting jurisdiction." United Phosphorus, 322 F.3d at 946. Evidence may be weighed to determine whether subject matter jurisdiction has been established. United Phosphorus, 322 F.3d at 946.

  Plaintiff is a Delaware corporation with its principal place of business in Illinois. Defendant is a citizen of Arizona. New Art Co. is Plaintiff's wholly-owned subsidiary and is incorporated in and, therefore, is a citizen of Arizona. BACKGROUND

  In January 2003, Defendant sold all the assets of his business to New Art Co. Defendant then signed an employment agreement and a non-competition agreement with New Art Co.*fn1 These agreements were later superceded by other agreements among Plaintiff, New Art Co., other wholly-owned subsidiaries of Plaintiff, and Defendant.

  Defendant and New Art Co. also executed a Secured Promissory Note which provides that, in the event of certain defaults by New Art Co., the principal and outstanding interest under the Secured Promissory Note will become immediately due and payable. It further provides that under certain conditions, a failure to make any payment due under the Note does not constitute a default. Defendant and New Art Co. were the only parties to the Secured Promissory Note. The Secured Promissory Note is to be governed according to Arizona law.

  Pursuant to these agreements, Defendant became President and Chief Operating Officer of Plaintiff and its subsidiaries. Thereafter, Defendant resigned from many of these positions but remained as President and Chief Operating Officer of New Art Co. Plaintiff terminated Defendant's employment with New Art Co. for cause, in part because of Defendant's alleged failure to perform his duties.

  ANALYSIS

  The Real Party in Interest

  Defendant contends that Plaintiff is not the real party in interest to most of the claims in the Amended Complaint. Specifically, Defendant argues that New Art Co., and not Plaintiff, is a party to the Secured Promissory Note; therefore, only New Art Co. can seek a declaration concerning its obligations under the Secured Promissory Note.

  In response, Plaintiff claims that it is in privity to the Secured Promissory Note and can seek a determination of its rights under the Note. Plaintiff also asserts that it can assert the claims under the Secured Promissory Note because the parent corporation, Plaintiff, is the real party interest for the claims of its wholly-owned subsidiary, New Art Co. Plaintiff further asserts that any claims that could be asserted by New Art Co. are merely incidental to Plaintiff's claims relating to Defendant's alleged wrongdoings.

  Federal Rule of Civil Procedure 17(a) states that "[e]very action shall be prosecuted in the name of the real party in interest." To determine whether a party is a "real party in interest" in a diversity proceeding, a court "must look to the applicable state substantive law." Am. Nat'l ...


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