Bugsby Property LLC v. Marcus

Background

Bugsby Property LLC sued Alexandria Real Estate Equities, Inc. (ARE) and Joel S. Marcus, alleging that the defendants owed compensation for financial advice and services. Bugsby alleged that it created a strategy called the “Bugsby Blueprint,” including a joint-venture strategy that ARE adopted and renamed “Project Affirmed.” The complaint sought more than $100 million.

Bugsby was allegedly organized under Delaware law. Steven Marcus founded the company and initially held all of its membership interest. Sarah-Louise Ballot-Lena later acquired a 3% interest. In June 2017, Steven allegedly gifted his remaining 97% interest to Ballot-Lena, making her Bugsby’s sole member. Steven nevertheless remained Bugsby’s sole manager and retained authority to manage and control its business and affairs.

The parties had also litigated related disputes in New York state court and California state court. The New York state case was dismissed because New York was an inconvenient forum, and the California case was ongoing when this federal case was decided. The federal complaint differed from the earlier pleadings in important respects: only Bugsby was named as plaintiff, and Bugsby was described as a single-member limited liability company rather than a multi-member company.

Jurisdictional Issue

The defendants moved to dismiss under Federal Rule of Civil Procedure 12(b)(1), which permits dismissal when the court lacks subject-matter jurisdiction—that is, legal authority to decide the case. The court focused on diversity jurisdiction under 28 U.S.C. § 1332. For an LLC, citizenship is based on the citizenship of each member. On the face of the complaint, Bugsby’s sole member, Ballot-Lena, was a citizen of France, and the defendants were citizens of California.

The defendants argued, however, that the change in Bugsby’s membership structure improperly manufactured diversity jurisdiction, in violation of 28 U.S.C. § 1359. That statute bars federal diversity jurisdiction when a party has been improperly or collusively added or assigned to create federal jurisdiction.

Court’s Analysis

The court held that reorganizing Bugsby’s membership by removing Steven as a member and transferring his interest to Ballot-Lena triggered a presumption of collusion. The court explained that transfers among closely related people or entities receive especially careful scrutiny when they create diversity jurisdiction.

Bugsby asserted that the transfer occurred for business and operational reasons. The court found that explanation conclusory, unsupported, and insufficient. It identified several facts supporting the presumption of collusion:

- Steven repeatedly described himself in sworn statements and prior pleadings as Bugsby’s member or managing member, even after the purported 2017 transfer. - Steven continued to control Bugsby’s operations and the federal litigation. - Ballot-Lena had little or no connection to the business activities or events underlying the lawsuit. - Steven’s 97% interest was transferred as a gift, without meaningful consideration. - Although the transfer was said to have occurred in 2017, Steven continued to describe himself as a member through at least June 2019, shortly before the federal complaint was filed.

The court concluded that these circumstances were consistent with a sham transaction intended to create a path into federal court. Bugsby therefore failed to rebut the presumption that the transfer was collusive under Section 1359.

Disposition and Effect

Because the court lacked subject-matter jurisdiction, it did not address the defendants’ other arguments, including personal jurisdiction, failure to state a claim, failure to join a required party, issue preclusion, and dismissal based on an inconvenient forum. Judge Valerie Caproni granted the defendants’ motion to dismiss, dismissed the complaint without prejudice, directed the clerk to close the motion, and terminated the case.