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Alaska Financial Co. III, LLC v. Global Mortgage Group, LLC

United States District Court, D. Delaware

January 26, 2018

ALASKA FINANCIAL COMPANY III, LLC, Plaintiff.
v.
GLOBAL MORTGAGE GROUP, LLC; LFC GLOBAL, LLC; WELL ROCK HOLDINGS, LLC; and MATTHEW Q. HAINLINE, Defendants.

          MEMORANDUM OPINION

          Matthew W. Brann United States District Judge

         Plaintiff Alaska Financial Company, LLC, moved to remand this case to the Delaware Court of Chancery after Defendants-Global Mortgage Group, LLC; LFC Global, LLC; Well Rock Holdings, LLC; and Matthew Q. Hainline- removed it to this Court. For the reasons that follow, that motion is denied.

         I. BACKGROUND

         On November 14, 2017, Alaska Financial Company, LLC (“Alaska”) initiated a suit in the Delaware Court of Chancery against Defendants Global Mortgage Group, LLC (“Global”), LFC Global, LLC (“LFC”), Well Rock Holdings, LLC (“Well Rock”), and Matthew Q. Hainline.[1]

         Alaksa's complaint alleges that, during the late spring and the summer of 2017, the parties and their agents discussed plans to form a mortgage lending business together.[2] To this end, Tobias Preston-Alaska's President-and Matthew Hainline-Well Rock's Manager-signed a series of three agreements.[3]Pursuant to those agreements, Alaska wired more than $1 million to a Well Rock bank account[4] and alleges that it shared numerous trade secrets with the Defendants.[5] Despite these contributions, however, Alaska alleges that it was not given the agreed-upon level of control over the business, and that Defendants began to spend its cash on projects unrelated to the mortgage business.

         The amended complaint[6] contains ten counts, including claims for breach of contract (Count II) and for conversion (Count VII). On November 15, 2017, Alaska moved for a temporary restraining order against the Defendants based on the complaint, and Defendants replied to this motion on November 20, 2017.[7]The Court of Chancery held a telephonic argument on the motion on November 21, 2017, and granted Alaska's TRO the next day, enjoining Defendants from using Alaska's trade secrets or cash, and requiring Defendants to submit a report to the court “on the amount of and location of” Alaska's funds.[8] The Court of Chancery also requested that the parties “confer and submit a joint stipulated implementing form . . . that defines the trade secrets that will be governed by the TRO.”[9]Because the parties could not agree on this definition, they submitted competing proposals on this issue on November 27, 2017.[10]

         On November 30, 2017, pursuant to 28 U.S.C. § 1446, Defendants removed the action to this Court on the basis of diversity jurisdiction.[11] Alaska filed the instant Motion to Remand on December 4, 2017.[12] After a teleconference on January 11, 2018, this Court ordered the parties to develop and submit a factual record and supplemental brief to assist in deciding Alaska's motion.[13] Those materials were submitted by the parties on January 22, 2018.[14]

         II. DISCUSSION

         A. Whether Complete Diversity Exists Between the Parties

         Alaska makes two arguments as to why this action should be remanded to the Delaware Court of Chancery. First, Alaska argues that the parties to this action are not completely diverse and, therefore, that this Court lacks jurisdiction.

         Under 28 U.S.C. § 1332(a), this Court has “original jurisdiction of all civil actions where the matter in controversy exceeds the sum or value of $75, 000, exclusive of interests and costs, and is between . . . citizens of different States.” When a case involves multiple plaintiffs or multiple defendants, there must be complete diversity-i.e., “no plaintiff [may] be a citizen of the same state as any defendant.”[15] The United States Court of Appeals for the Third Circuit has held that the citizenship of unincorporated associations, such as LLCs, is determined by the citizenship of the associations' partners or members.[16] And when “an LLC has, as one of its members, another LLC, ” its citizenship is “traced through however many layers of partners or members there may be.”[17]

         Alaska is an LLC whose sole member is McKinley Mortgage Company, LLC; McKinley's sole member, in turn, is Mr. Preston, who is a citizen of Alaska.[18] Therefore, in order for the parties to be completely diverse, none of the Defendants may be Alaskan citizens.

         Well Rock is an LLC whose sole member is a Texan trust; Mr. Hainline is likewise a citizen of Texas.[19] LFC is an LLC whose sole member is Global, [20] and the Defendants allege that Well Rock is Global's sole member.[21] If that were true, all Defendants would be citizens of Texas, and complete diversity would exist. Alaska, however, contends that it became a member of Global by virtue of its cash investment and that, therefore, it shares its Alaskan citizenship with Global (and, for that matter, LFC).

         As noted supra, Mr. Preston and Mr. Hainline signed three agreements during their business negotiations. Pursuant to the first agreement, dated July 23, 2017, Alaska agreed to invest $1 million in exchange for a 12.5% equity interest in Global.[22] The second agreement, which superseded the first agreement and was dated August 6, 2017, indicated that Alaska would receive the 12.5% equity interest after investing $1.1 million and “extend[ing] or caus[ing] to be extended a revolving line of credit” to Global “in the principal amount of at least” $2 million.[23] The third agreement, an amendment to the second, confirmed that, “[f]or an initial cash infusion of $1.1 million . . . plus the extension of a revolving line of credit to [Global] in the principal amount of at least $2 million . . . Alaska will receive a 12.5% equity interest in [Global].”[24]

         Global was formed on August 23, 2017, and its LLC agreement indicates that, at that time, its sole member was Well Rock.[25] In its papers before this Court, Alaska admits that, while it provided the $1.1 million investment, it never extended any line of credit to Global.[26] Perhaps, as Alaska contends, the line of credit was not yet needed by Global; nevertheless, the plain language of the parties' agreement indicates that extending that credit was required for admission into Global.

         Alaska argues that is should be entitled to some equity interest in Global- even if not the promised 12.5%-by virtue of its cash transfer to Well Rock's bank account. Under Delaware law, however, additional members are admitted to an existing LLC only as the LLC agreement provides-here, the agreement is silent- or “upon consent of all members and when the person's admission is reflected in the records of the [LLC].”[27] Alaska has produced no evidence that those criteria have been met; consequently, this Court may conclude that Alaska never acquired an equity interest in Global, that Well Rock is Global's sole member, [28] and that the parties are completely diverse.[29]

         It may be that the parties, by their negotiations and actions (including Alaska's cash transfer), formed a joint venture. And it may be that Defendants' actions breached some agreement among the parties for operating that joint venture. But this suit was filed against four identified, distinct defendants-LFC, Global, Well Rock, and Mr. ...


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