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Hale v. China Online

August 21, 2009

LYRIC HALE, MICHAEL GRAINGER, DR. RONALD MICHAEL, AND CHINA ONLINE, INC., PLAINTIFF,
v.
CHINA ONLINE, INC., VICTOR CHU, PANSY HO CHIU-KING AND STANLEY HO CHIU-KING, DEFENDANTS.



The opinion of the court was delivered by: Virginia M. Kendall, United States District Judge Northern District of Illinois

Judge Virginia M. Kendall

MEMORANDUM OPINION AND ORDER

Plaintiffs Lyric Hale ("Hale"), Michael Grainger ("Grainger"), Dr. Ronald Michael ("Michael") and China Online, Inc. ("China Online") (collectively "Plaintiffs") move this Court to remand their civil action against Defendants China Online, Victor Chu ("Chu"), Pansy Ho Chiu-King ("Pansy") and Stanley Ho Chiu-King ("Stanley") (collectively "Defendants") to the Circuit Court of Cook County, Illinois, asserting that Chu improperly removed the action to federal court based on diversity of citizenzhip. Chu opposses Plaintiffs' Motion to Remand and moves this Court to dismiss Plaintiffs' Complaint pursuant to Fed. R. Civ. P. 12(b)(2) & 12(b)(6). For the reasons stated, Plaintiffs' Motion to Remand is Denied and Chu's Motion to Dismiss is granted.

STATEMENT OF FACTS/PROCEDURAL HISTORY

On February 29, 2008, Plaintiffs filed a corporate derivative lawsuit against Defendants captioned Hale et al. v. China Online, Inc., et al., 08 L 2343 in the Circuit Court of Cook County, Illinois. Plaintiffs' Complaint contains two counts; the first alleges that Chu breached his fiduciary obligation to China Online by engaging in a series of illegal acts designed to undercut the financial health of China Online (Count I), and the second alleges that Pansy and Stanley knew of Chu's fiduciary obligation to China Online and aided and abetted him in subverting the corporate health of China Online as described in Count I (Count II). Plaintiffs Hale, Grainger and Michael are all citizens and residents of Illinois and Plaintiff China Online is a corporation organized under the laws of the State of Delaware with its principal place of business in Illinois.*fn1 Defendant Hale is a citizen of Great Britain and a resident of Hong Kong. Defendants Pansy and Stanley are citizens and residents of Hong Kong and, as previously stated, Defendant China Online is a Delaware corporation with its principal place of business in Illinois.*fn2

On September 29, 2008, Chu filed a Notice of Removal pursuant to 28 U.S.C. § 1446,*fn3 asserting that the Court has diversity jurisdiction pursuant to 28 U.S.C. §§ 1332 and 1441.*fn4 Specifically, Chu asserts that this Court has diversity jurisdiction because Plaintiffs fraudulently joined China Online as a defendant, and as such, China Online should be disregarded in determining whether there is diversity of citizenship. Chu asserts that when China Online's citizenship is disregarded, complete diversity exists between the Plaintiffs and the properly joined Defendants.*fn5

Plaintiffs now seek to remand this action to state court, asserting that China Online is not a fraudulently joined defendant, and therefore diversity jurisdiction is defeated. Chu opposes this motion and moves the Court to dismiss Plaintiffs' Complaint.

DISCUSSION

I. Plaintiffs' Motion to Remand

The removal of actions from state to federal court is governed, in part, by 28 U.S.C. §1441. Under Section 1441, a defendant may remove a case from state court to federal court where the district courts have original jurisdiction. See 28 U.S.C. § 1441(a). District courts have original jurisdiction of all civil actions where the matter in controversy exceeds the sum or value of 75,000, exclusive of interests or costs, and is between "citizens of a State and citizens or subjects of a foreign State." 28 U.S.C. § 1332(a)(2). "The party seeking removal, not the party moving to remand, has the burden of establishing that the court has jurisdiction." Boyd v. Phoenix Funding Corp., 366 F.3d 524, 529 (7th Cir. 2004).

"Diversity jurisdiction cannot be destroyed by joinder of nondiverse parties if such joinder is fraudulent." Gottlieb v. Westin Hotel Co., 990 F.2d 323, 327 (7th Cir. 1993). Therefore, when determining whether there is diversity of citizenship, parties fraudulently joined are disregarded. See id. An out-of-state defendant who wants to remove a case to federal court based on fraudulent joinder must show that, after resolving all issues of fact and law in favor of the plaintiff, the plaintiff cannot state a cause of action against the nondiverse defendant in state court. See Gottlieb, 990 F.2d at 327. Although a defendant seeking removal based on fraudulent joinder bears a heavy burden, he need not negate any possible theory that the plaintiff might allege in the future: only the plaintiff's present allegations count. See Poulos v. Naas Foods, Inc., 959 F.2d 69, 74 (7th Cir. 1992) (citing Kruso v. International Telephone & Telegraph Corp., 872 F.2d 1416, 1426 n.12 (9th Cir. 1989) (refusing to consider unfiled amended complaint for purposes of jurisdictional inquiry because whether a case should be remanded must be resolved by reference to the complaint at the time the petition for removal was filed)). Put another way, the Court may find fraudulent joinder without deciding whether the problem in a plaintiff's complaint can be cured by amending it. See Poulos, 959 F.2d at 74 (finding defendant was fraudulently joined without deciding whether plaintiff could have cured the problem with his complaint by amending it while in federal court).

Here, Plaintiffs' Complaint attempts to assert a derivative action and therefore names China Online as a defendant. See Ross v. Bernhard et al., 396 U.S. 531, 538 (1970) (holding a corporation is a necessary defendant in a derivative action). A derivative action permits an individual shareholder to bring "suit to enforce a corporate cause of action against officers, directors, and third parties." Ross, 396 U.S. at 534. Section 327 of the Delaware General Corporation Law*fn6 and Court of Chancery Rule 23.1 specify the minimal requirements that must be met by a derivative plaintiff.*fn7

Taken together, they require that a "plaintiff, bringing a derivative suit on behalf of a corporation, must be a stockholder of the corporation at the time he commences the suit and must maintain that status throughout the course of the litigation." Parfi Holding AB v. Mirror Image Internet, Inc., 954 A.2d 911, 935 (Del. Ch. 2008) (internal citations omitted) (emphasis added); see also Lewis v. Anderson, 477 A.2d 1040, 1049 (Del. Ch. 1984) (a plaintiff who is not a stockholder, or who ceases to be a stockholder during the pendency of his suit, loses standing to maintain a derivative action). This rule applies to derivative actions brought in state court, see e.g., Parfi Holding AB, 954 A.2d at 935, and to actions brought in federal court. See e.g., Winters v. Stemberg, 529 F. Supp. 2d 237, 245 (D. Mass. 2008) (applying Delaware law); Brambles USA, Inc. V. Blocker, 731 F. Supp. 643, 648 (D. Del. 1990) (applying Delaware law). Under Delaware law, dissolution of a corporation terminates an individual's status as a shareholder of the corporation and therefore bars the individual from bringing a derivative action on behalf of the dissolved corporation. See Giordano v. Marta, No. CIV. A. 11613, 1998 WL 227888, at *4 (Del. Ch. April 28, 1998) (plaintiff was no longer stockholder of dissolved corporation and never complained or took any action with respect to the dissolution and therefore no longer had standing to sue derivatively on behalf of corporation).

Here, China Online was dissolved on March 1, 2006. Plaintiffs did not file the instant action until February 29, 2008. Therefore, at the time Plaintiffs filed the instant action, China Online was dissolved and its dissolution terminated Plaintiffs' status as shareholders. Pursuant to 8 Del. C. ยง 327, only current shareholders have standing to pursue a derivative cause of action and ...


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