Highland Capital Management LP v. Schneider

198 F. App'x 41
Court of Appeals for the Second Circuit·Decided August 16, 2006·No. Nos. 05-4729-cv, 05-4869-cv·Published·Cited by 12 cases

Opinion

SUMMARY ORDER

Plaintiff Highland Capital Management (“Highland”), appeals a grant of summary judgment in favor of defendants Leonard, Leslie, Scott, and Susan Schneider (collectively, the “Schneiders”) and Jenkens & Gilchrist Parker Chapin (“JGPC”) in a dispute arising out of the Schneiders’ refusal to sell $69 million in promissory notes. We assume the parties’ familiarity with the facts and the record of prior proceedings, which we reference only as necessary to explain our decision.

1. Subject Matter Jurisdiction

Preliminarily, we consider (1) Highland’s motion to vacate the judgment entered by the district court for lack of subject matter jurisdiction, and (2) the Schneiders’ motion to sever and dismiss JGPC as a defendant if necessary in order to preserve subject matter jurisdiction. In order to better explain our decision, we briefly recount the facts giving rise to these motions.

Highland is a limited partnership organized under the laws of Delaware with its principal place of business in Texas. Defendant Leonard Schneider is a resident of Florida. Defendants Leslie, Scott, and Susan Schneider are residents of New York. This case was initially brought by Highland against the Schneiders in Texas state court in 2001, but was properly removed to federal court in 2002 on the basis of diversity jurisdiction. In 2004, Highland was granted leave to file its Third Amended Complaint, pursuant to which it added JGPC, a limited liability partnership organized under the laws of Texas, as a defendant. The parties now agree that the addition of JGPC as a defendant destroyed diversity jurisdiction because both JGPC [44]*44and Highland are residents of Texas. See St. Paul Fire & Marine Ins. Co. v. Universal Builders Supply, 409 F.3d 73, 80 (2d Cir.2005) (“Diversity is not complete if any plaintiff is a citizen of the same state as any defendant.”). At the time the Third Amended Complaint was filed, however, the parties did not note, and, thus, the district court did not recognize, this jurisdictional defect. Summary judgment was ultimately granted in favor of the defendants.

While this appeal was pending, Highland cited the addition of JGPC in further support of its motion to vacate the district court judgment for lack of diversity jurisdiction and to remand the case to Texas state court. In response, the Schneiders move to sever Highland’s claims against JGPC and to dismiss JGPC from the action. Alternatively, the Schneiders urge this court to find that it has federal question jurisdiction pursuant to 28 U.S.C. § 1331.

Initially, we hold that we lack federal question jurisdiction over this case under 28 U.S.C. § 1331. Federal question jurisdiction exists only where “a state-law claim necessarily raise[s] a stated federal issue, actually disputed and substantial, which a federal forum may entertain without disturbing any congressionally approved balance of federal and state judicial responsibilities.” Grable & Sons Metal Prods., Inc. v. Darue Eng’g & Mfg., 545 U.S. 308, 125 S.Ct. 2363, 2368, 162 L.Ed.2d 257 (2005) (emphasis added); see also Bracey v. Board of Educ., 368 F.3d 108, 114 (2d Cir.2004) (stating that federal question jurisdiction exists where “vindication of [the] right under state law necessarily turn[s] on some construction of federal law”) (internal quotation marks omitted). We agree with Highland that its claim against the defendants for tortious interference with prospective business relations, as pleaded in its Third Amended Complaint, does not necessarily require Highland to prove a violation of federal law because the defendants’ “wrongful” conduct, at least as pleaded, may presumably be demonstrated without showing that the defendants violated federal securities laws. See Carvel Corp. v. Noonan, 3 N.Y.3d 182, 191, 785 N.Y.S.2d 359, 363, 818 N.E.2d 1100 (2004) (identifying “wrongful” conduct as element of claim for tortious interference with prospective business relations); see also Broder v. Cablevision Sys. Corp., 418 F.3d 187, 194 (2d Cir.2005) (identifying relevant question as “whether at least one federal aspect of [Highland’s third amended complaint] is a logically separate claim, rather than merely a separate theory that' is part of the same claim as a state-law theory”). Moreover, we observe that Highland’s claim of wrongful conduct arising under federal securities laws appears to be patently without a basis in law or fact because the disclosure of certain information by McNaughton executives to attorneys for JGPC in no way harmed McNaughton’s shareholders and, hence, did not constitute a breach of any fiduciary duties owed to those shareholders. See Dirks v. SEC, 463 U.S. 646, 662, 103 S.Ct. 3255, 77 L.Ed.2d 911 (1983) (observing that, absent any breach of fiduciary duty by corporate insider, there can be no derivative breach by an outsider). Accordingly, we conclude that the claim lacks sufficient substance or merit to give rise to federal question jurisdiction. See Steel Co. v. Citizens for a Better Env’t, 523 U.S. 83, 89, 118 S.Ct. 1003, 140 L.Ed.2d 210 (1998) (“Dismissal for lack of subject-matter jurisdiction because of the inadequacy of the federal claim is proper ... when the claim is so insubstantial, implausible ... or otherwise completely devoid of merit as not to involve a federal controversy.”) (internal quotation marks omitted).

[45]*45We agree with the Schneiders, however, that it is appropriate in this case to sever Highland’s claims against JGPC and to dismiss JGPC as a defendant in order to preserve subject matter jurisdiction. The Supreme Court has held that federal appellate courts have the power “to allow a dispensable nondiverse party to be dropped at any time, even after judgment has been rendered,” Newman-Green, Inc. v. Alfonzo-Larrain, 490 U.S. 826, 832, 109 S.Ct. 2218, 104 L.Ed.2d 893 (1989), so long as the dismissal of that party will not “prejudice any of the parties in the litigation,” id. at 838, 109 S.Ct. 2218. In this case, JGPC is a dispensable party because it was sued as a joint tortfeasor and “it is settled federal law that joint tortfeasors are not indispensable parties.” Samaha v. Presbyterian Hosp. in New York, 757 F.2d 529, 531 (2d Cir.1985) (per curiam); see also Bassett v. Mashantucket Pequot Tribe, 204 F.3d 343, 358 (2d Cir.2000).

The dismissal of JGPC will not prejudice Highland because (1) that firm’s attorneys were available for discovery as non-parties, and (2) the Schneiders gained no tactical advantage from the addition of JGPC as a defendant. Indeed, the Schneiders strenuously opposed Highland’s attempts to add JGPC as a defendant.

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