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DBD Franchising, Inc. v. DeLaurentis

June 23, 2009


The opinion of the court was delivered by: Judge Marvin E. Aspen


Plaintiffs DbD Franchising, Inc., a Wisconsin corporation ("DbDFI - Wisconsin"), and Dinner by Design, Inc., also a Wisconsin corporation ("DbD - Wisconsin") (collectively, the "DbD Plaintiffs") filed a complaint for breach of contract against Defendant, Sharyn DeLaurentis, on February 2, 2009. Presently before us is the DbD Plaintiffs' motion for reassignment as related and DeLaurentis's motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(1). For the following reasons, we deny DeLaurentis's motion and grant the DbD Plaintiffs' motion.


In 2003, Julie Duffy incorporated Dinner by Design, Inc. in Illinois ("DbD - Illinois").

(DbD Resp. to DeLaurentis's Mot. to Dismiss at 3 (hereinafter, "DbD Resp."), Ex. A, Julie Duffy Decl. ¶ 2.) DbD - Illinois provided ready-to-cook meals to its customers. (Compl. ¶ 1; DbD Resp. at 3.) At the time of its incorporation, Julie Duffy and her husband, Patrick Duffy, lived in Illinois. (DbD Resp. at 3.) In 2004, Julie Duffy incorporated DbD Franchising, Inc. as an Illinois corporation ("DbDFI - Illinois"), for the purpose of franchising the Dinner by Design concept (DbDFI - Illinois and DbD - Illinois are collectively referred to as the "Illinois companies"). (Id.) DbDFI - Illinois sold approximately 90 franchises over the next two years. (Id.) However, in 2006, the Duffys sold their business to DeLaurentis, pursuant to a written agreement ("Agreement"). (Compl. ¶ 1.) Although DeLaurentis purchased the Illinois companies' assets, Julie Duffy remained the sole shareholder of both Illinois companies, whose only asset appears to be their Agreement with DeLaurentis. (See DbD Resp. at 4; DeLaurentis Reply at 4.)

In February 2008, the Duffys moved to Sister Bay, Wisconsin. (DbD Resp. at 4.) The DbD Plaintiffs contend that when the Duffys moved to Wisconsin, the Illinois companies also moved. (Id.) The Illinois companies did not maintain an office in Illinois and all decisions related to the companies were made in Wisconsin. (Id.) On April 2, 2008, the Duffys voluntarily dissolved DbD - Illinois, but left the status of DbDFI - Illinois untouched. (Id. at 5.) Some time before November 2008, the Duffys discussed whether to transfer DbDFI - Illinois' state of incorporation to Wisconsin and decided to do so. (Id. at 4.) However, the Duffys did not actually complete the transfer of incorporation until January 8, 2009, when DbDFI - Illinois filed a Certificate of Conversion with the Wisconsin Department of Financial Institutions, which created DbDFI - Wisconsin. (Id. at 5, Ex. E.) Similarly, on January 7, 2009, Julie Duffy incorporated a new corporation in Wisconsin, DbD - Wisconsin. (Id. at 6.) Simultaneously, Julie Duffy and the dissolved DbD - Illinois agreed to transfer their rights and obligations under the Agreement with DeLaurentis to DbD -Wisconsin. (Id.) The Duffys claim that they converted DbD - Illinois and incorporated DbD -Wisconsin because they moved to Wisconsin, their principal place of business was Wisconsin, and because they wanted the companies to enjoy the same benefit of diversity jurisdiction as they would receive in a suit against DeLaurentis. (Id. at 6; Patrick Duffy Decl. ¶¶ 20, 22.)

Meanwhile, on November 26, 2008 -- after DbD - Illinois was dissolved, but before either DbDFI - Illinois was converted to DbDFI - Wisconsin or DbD -Wisconsin was incorporated -- DeLaurentis filed a three-count complaint against the Duffys for fraud, violation of the Illinois Deceptive Business Practices Act ("IDBPA"), and rescission of contract, in the Circuit Court of Lake County, Illinois (the "DeLaurentis action"). (DeLaurentis Mem. in Support of Mot. to Dismiss at 2 (hereinafter, "DeLaurentis Mem.").) On January 9, 2009, the Duffys removed that case to the Northern District of Illinois. See DeLaurentis v. Patrick & Julie Duffy, No. 09 C 133 (N.D. Ill.). (DeLaurentis Mem. at 3; DbD Mot. for Reassignment ¶ 3 (hereinafter, "DbD Mot.").) The DbD Plaintiffs are not parties to that action, as DeLaurentis sued the Duffys individually. In their Rule 26(f) Report submitted on January 28, 2009, the parties in the DeLaurentis action consented to the jurisdiction of a United States magistrate judge and the case was reassigned to Magistrate Judge Mason. (Report of Rule 26(f) Planning Meeting, Dkt. No. 11, No. 09 C 133; 3/6/2009 Order, No. 09 C 133.) The DbD Plaintiffs filed the suit before us on February 2, 2009. In it, they allege that DeLaurentis breached the Agreement. (Id. ¶¶ 14-21.) On March 19, 2009, the DbD Plaintiffs filed a motion for reassignment as related, asking us to reassign this case to Judge Mason. On March 31, 2009, DeLaurentis moved to dismiss the case for lack of subject matter jurisdiction.


I. DeLaurentis's Motion to Dismiss Pursuant to Rule 12(b)(1)

Rule 12(b)(1) requires dismissal of claims over which the federal court lacks subject matter jurisdiction. Jurisdiction is the "power to decide," and must be conferred upon the federal courts. In re Chicago, Rock Island & Pacific R.R. Co., 794 F.2d 1182, 1188 (7th Cir. 1986). In reviewing a 12(b)(1) motion to dismiss for lack of subject matter jurisdiction, the court may look beyond the complaint to pertinent evidence submitted by the parties. See United Transp. Union v. Gateway W. Ry. Co., 78 F.3d 1208, 1210 (7th Cir. 1996). The plaintiff faced with a properly supported 12(b)(1) motion to dismiss bears the burden of proving that the jurisdictional requirements have been met. See Kontos v. U.S. Dep't of Labor, 826 F.2d 573, 576 (7th Cir. 1987).

Plaintiffs have asserted subject matter jurisdiction based on diversity of the parties. (Compl. ¶ 5.) Pursuant to 28 U.S.C. § 1332, the district courts have original jurisdiction over civil actions between citizens of different states in which the amount in controversy exceeds $75,000. 28 U.S.C. § 1332(a). A corporation is deemed to be a citizen of both the state where it is incorporated and the state where it maintains its principal place of business, and citizenship is determined as of the date the lawsuit is filed.*fn2 See 28 U.S.C. § 1332(c)(1); Aurora Loan Servs., Inc. v. Craddieth, 442 F.3d 1018, 1025 (7th Cir. 2006); Johnson v. Wattenbarger, 361 F.3d 991, 993 (7th Cir. 2004). Additionally, 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." 28 U.S.C. § 1359. In her motion to dismiss, DeLaurentis argues that the Duffys converted DbDFI's state of incorporation to Wisconsin and transferred the dissolved DbD - Illinois' assets from Julie Duffy to the newly incorporated DbD - Wisconsin*fn3 in an attempt to manufacture diversity in contravention to § 1359. (DeLaurentis Mem. at 9.) We disagree.

In Kramer v. Caribbean Mills, 394 U.S. 823, 89 S.Ct. 1483 (1969), the Supreme Court held that § 1359 prohibited diversity jurisdiction when an assignor assigns a legal claim but retains an interest in that claim, the assignee had no previous connection to the assigned claim, and the assignment was made solely to create diversity jurisdiction. Id. at 827-28, 89 S.Ct. at 1487. Kramer explicitly stated that its holding did not affect "cases in which this Court has held that where the transfer of a claim is absolute, with the transferor retaining no interest in the subject matter, then the transfer is not 'improperly or collusively made,' regardless of the transferor's motive." Id. at 828 n.9, 89 S.Ct. at 1490. This statement affirmatively included Black & White Taxi Cab Co. v. Brown & Yellow Taxi Cab Co., 276 U.S. 518, 48 S.Ct. 404 (1928). See Kramer, 394 U.S. at 828 n.9, 89 S.Ct. at 1490 (citing Black & White Taxi Cab). In Black & White Taxi,*fn4 the Supreme Court concluded that a corporation's transfer of its assets to a newly created diverse corporation, followed by the dissolution of the former, non-diverse corporation, was not collusive and did not prohibit diversity jurisdiction under § 1332. 276 U.S. at 524, 48 S.Ct. at 405. It further instructed courts not to inquire into the motives of the parties where "[t]he succession and transfer were actual, not feigned or merely colorable." Id.

Since Kramer, some circuits have adopted a presumption that transfers and assignments between related entities are collusive. See, e.g., Toste Farm Corp. v. Hadbury, Inc., 70 F.3d 640, 643-44 (1st Cir. 1995) (applying an "elevated scrutiny to assignments between affiliated parties"); Nike, Inc. v. Comercial Iberica de Exclusivas Deportivas, S.A., 20 F.3d 987, 991-92 (9th Cir. 1994) (adopting a presumption of collusion for assignments from a non-diverse subsidiary to a diverse parent corporation); Prudential Oil Corp. v. Phillips Petroleum Co., 546 F.2d 469, 476 (2d Cir. 1976) (presuming collusion where non-diverse parent company assigns claims to a diverse subsidiary that "engaged in no business other than the prosecution of that claim"). This presumption of collusion can only be rebutted "by offering evidence that the transfer was made for a legitimate business purpose unconnected with the creation of diversity jurisdiction." Prudential Oil Corp., 546 F.2d at 476. The Seventh Circuit, however, has explicitly rejected the adoption of such a presumption.*fn5 Herzog, 976 F.3d at 1067; see also Ambrosia Coal & Constr. Co. v. Pages Morales, 482 F.3d 1309, 1314 (11th Cir. 2007) (adopting the reasoning of the Seventh Circuit and rejecting a presumption).

In rejecting a presumption of collusion for assignments or transfers between related parties, Herzog instructs courts to make a factual determination of whether the assignment was collusive, "in the relevant sense of being motivated by the assignor's desire to obtain access to a federal court under the diversity jurisdiction." Herzog, 976 F.2d at 1066. In Herzog, the plaintiff's non-diverse subsidiary assigned promissory notes issued by the defendant to the plaintiff. Id. The notes could only be collected by filing a lawsuit, and the assignment of the notes created diversity jurisdiction. Id. at 1066-67. The Seventh Circuit admitted that "the timing of the assignment in relation to the parties' dispute and to the law suit[] emit[ed] an odor of collusion." Id. at 1067. However, it recognized that the district judge "was not required -- perhaps was not permitted -- to disregard the sworn evidence to the contrary submitted by [the plaintiff] and not countered by any evidence submitted by [the defendant]." Id. The plaintiff had submitted affidavits stating that the assignment was not made to create diversity, "but to facilitate the provision of additional capital" to its subsidiary. Id. at 1066. The court doubted the true value of the assignment, but refused to apply an inference of collusion simply because the parties were under ...

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