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Wolf v. Kennelly

February 12, 2008

KENNETH J. WOLF AND KJW, LLC, PETITIONERS,
v.
FORD KENNELLY, ROSENTHAL COLLINS GROUP, LLC, AND LAWRENCE SPAIN, RESPONDENTS.



The opinion of the court was delivered by: Judge Rebecca R. Pallmeyer

MEMORANDUM OPINION AND ORDER

Ford Kennelly claims that he lost more than $150,000 in bad investments and $235,000 in commissions due to the "boiler room" operations of his brokers. Kennelly took his dispute to arbitration, where he won an award of compensatory and punitive damages in excess of $1 million. Rosenthal Collins Group, LLC ("RCG"), who acted as Kennelly's commodities broker, filed a Petition to Vacate that arbitration award in this court. Shortly thereafter, petitioners Kenneth J. Wolf and KJW, LLC ("KJW") brought this separate action against Kennelly in Illinois state court, seeking to vacate the arbitration award and to resolve an indemnity dispute between Wolf and respondent RCG. Without RCG's acquiescence, Kennelly removed that action to federal court, where it was declared related to RCG's lawsuit.

Wolf and KJW have now moved for remand of the case they filed, arguing that removal was not proper because RCG, a respondent in the state action is an Illinois resident and did not consent to removal. In addition, Wolf and KJW contend that, if RCG were realigned as a petitioner, diversity jurisdiction would be defeated. Counsel for RCG has twice stated in open court that, if this lawsuit is remanded to Illinois state court, it will voluntarily dismiss its earlier-filed Petition to Vacate and litigate its claims against Kennelly in the state court action. In response, Kennelly has asked the court to sever Wolf's indemnity claim from this lawsuit. For the reasons explained below, the court concludes that unresolvable jurisdictional defects require remand of this dispute to state court.

FACTUAL BACKGROUND

I. The Parties

The relationship among the parties to this action dates back to 2003. KJW, a limited liability company with its principal place of business in Florida, was at all relevant times registered with the Commodity Futures Trading Commission ("CFTC") as an introducing broker. (Pet. to Vacate ¶ 2, Ex. C to Pet. to Remove; Kennelly's Opp. to Wolf and KJW, LLC's Mot. for Remand ("Kennelly's Opp.") at 2.)*fn1 KJW's members are all Florida citizens. (Pet. to Remove ¶ 18.) Wolf, a Florida citizen and resident, was at all relevant times registered with the CFTC as the principal of KJW. (Pet. to Vacate ¶ 1; Kennelly's Opp. at 2.) Nominal respondent Lawrence S. Spain, a Florida citizen and resident, is the KJW employee who solicited Kennelly to open an account. (Pet. to Vacate ¶¶ 5, 9.) KJW and Wolf serviced Kennelly's account and introduced him to RCG, which acted as the futures commission merchant that cleared Kennelly's trades. (Kennelly's Opp. at 2.) In October 2003, Kennelly, an Indiana citizen and resident, signed an RCG Commodity Customer Agreement and opened an account to speculate in commodity options. (RCG Commodity Customer Agreement, Ex. A to Kennelly's Opp.; Pet. to Vacate ¶¶ 3, 8.) Pursuant to that agreement, RCG accepted Kennelly's account and agreed to act as his commodities broker. (RCG Commodity Customer Agreement.) Kennelly contends that the "boiler room" operations of RCG, KJW, and Wolf convinced him to open this account, and that he suffered severe losses as a result.*fn2

As a result of losses he suffered, Kennelly filed arbitration proceedings against RCG, KJW, Wolf, and Spain before the National Futures Association ("NFA"), Kennelly v. Rosenthal Collins Group, LLC, NFA Case No. 05-ARB-85. (Award, Ex. A to Pet. to Remove.) In December 2006, a panel of three NFA arbitrators entered a unanimous award for Kennelly of: $385,286.12 in compensatory damages (plus interest), $154,000 in attorneys' fees, and $4,100 in costs. (Id.) The panel held RCG, KJW, Wolf, and Spain jointly and severally liable for that award. (Id.) In addition, the panel held Wolf solely liable for an award of $750,000 in punitive damages. (Id.) In response to a Motion for Reconsideration, the panel entered a modified award in February 2007, which awarded the same relief but clarified that attorneys' fees were awarded pursuant to Indiana state law. (Modified Award, Ex. B to Pet. to Remove.) Petitioners Wolf and KJW challenge that arbitration award in this lawsuit. For purposes of this action, the parties dispute whether RCG should be considered a respondent, realigned as a petitioner, or altogether severed from this action based on principles of misjoinder. RCG is an Illinois limited liability company with its principal place of business in Illinois. (Id. ¶ 4.) As discussed below, however, RCG's members appear to include one Indiana resident. (See Letter from J. Schulman to R. Pallmeyer of 12/11/07, Docket Entry No. 43.) Thus, the question of its proper status in the proceedings implicates jurisdictional principles.

II. Procedural History

On March 13, 2007, RCG filed a Petition of Rosenthal Collins Group, LLC to Vacate Arbitration Award in this court, Rosenthal Collins Group, LLC v. Kennelly, Case No. 07 C 1421. Soon after, on March 26, 2007, Wolf and KJW filed a Petition to Vacate in the Circuit Court of Cook County, Chancery Division, Wolf v. Kennelly, 07 CH 8610. (Pet. to Vacate.) The Petition to Vacate named Wolf and KJW as petitioners and Kennelly, RCG, and Spain as respondents. (Id.) In that Petition, Wolf and KJW contended that the arbitration award should be vacated and, in the alternative, sought a declaratory judgment that Wolf owes RCG no indemnity obligation on any portion of Kennelly's award. (Id. at 1-2.) On April 23, 2007, Kennelly removed the action to this court. (Pet. to Remove.) The caption on Kennelly's Removal Petition aligns the parties in the same way that the Petition to Vacate had, with Wolf and KJW as petitioners and Kennelly, RCG, and Spain as respondents. (Id.) But the removal statute, 28 U.S.C. § 1441 precludes removal where any defendant is non-consenting or an Illinois citizen, and RCG is both. Kennelly's Petition to Remove therefore asserts that RCG should be realigned as a petitioner because, like Wolf and KJW, RCG's primary interest is in vacating the arbitration award. (Id. ¶ 9.) Arguing against realignment, Wolf and KJW moved to remand the action to the Circuit Court of Cook County on the grounds of the absence of diversity jurisdiction and procedural defects in the removal papers.*fn3

On December 7, 2007, Wolf and KJW asked for leave to file an Amended Petition in this case. (Docket Entry No. 38.) Wolf and KJW informed the court that at least one of RCG's members was in fact an Indiana citizen at the time they filed their Petition to Vacate in the Circuit Court of Cook County. (Id. ¶ 2.) On December 11, 2007, the court ordered RCG to specify the identity and citizenship of each of its members at the time the Petition to Vacate was filed. (Docket Entry No. 40.) If any of RCG's members is a citizen of Indiana, RCG could not be realigned as a petitioner without defeating diversity jurisdiction, since Kennelly is an Indiana citizen.*fn4 Wolf's and KJW's Amended Petition, filed on December 13, 2007, asserted that one of RCG's members is an Indiana resident. A letter RCG sent to the court identifies three classes of members. (Docket Entry No. 43.) Its Class A members, or managing members, and two Illinois limited liability companies own 95% of RCG and are all Illinois citizens and residents. (Id.) Its Class B members, or individuals associated with RCG and required to be listed as members due to industry rules and regulations, are all Illinois citizens residents as well. (Id.) Its Class C members, who deposit trading capital with RCG to clear and trade futures products, include one Indiana citizen and resident. (Id.) There are approximately 50-75 class C members, none of whom own more than 1/10 of 1% of RCG; in the aggregate, Class C members own 5% of RCG. (Id.) RCG has also asserted that it would prefer to litigate all issues in state court and will dismiss its pending petition in the 07 CV 1421 case if the court grants Wolf and KJW's motion for remand. (Jt. Supp. Br. of RCG, Wolf, and KJW, Inc. in Further Supp. of Mot. for Remand at 1.) RCG has echoed this preference in open court. More importantly, given this information, RCG's claim that the court has diversity jurisdiction over its claims cannot be accurate.

To confirm the assertion that one of RCG's members was an Indiana citizen when the Petition to Vacate was filed, the court directed RCG to produce documents reflecting the citizenship of all of its members at that time. (Docket Entry No. 46.) Then, on January 10, 2008, Kennelly moved to sever the action seeking to vacate the arbitration award from the action for declaratory relief regarding Wolf's indemnity obligations. Kennelly argued that the declaratory count regarding indemnification was joined in the Petition to Vacate only to defeat diversity jurisdiction and that the joinder is improper under Federal Rules of Civil Procedure 20 and 21. (Kennelly's Mem. of Law in Supp. of His Mot. to Sever ("Mot. to Sever").) For the first time, this Motion to Sever contains a caption classifying Wolf and KJW as the petitioners and counter-respondents, Kennelly as the respondent and counter-petitioner, and RCG and Spain as third-party counter-respondents. (Id.)*fn5 Despite this, the court concludes that it is without jurisdiction to resolve this dispute, which was improperly removed from state to federal court. Thus, the court grants Wolf's and KJW's motion to remand and denies Kennelly's motion to sever.

DISCUSSION

I. Removability

A. Legal ...


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