Endico v. Endico

Background

Felix W. Endico sued William A. Endico and ACE Endico Corp., with UFS Industries, Inc., doing business as Sally Sherman, named as the nominal defendant. The complaint asserted claims including corporate waste, breach of fiduciary duty, unjust enrichment, conversion, unfair competition, constructive trust, and an accounting. After the court’s earlier summary-judgment decision, Felix’s remaining claims were derivative breach-of-fiduciary-duty and accounting claims against William. William’s counterclaims also remained.

The action was filed in New York state court and removed to federal court based on diversity jurisdiction. Diversity jurisdiction generally requires more than $75,000 in controversy and complete diversity—that is, no plaintiff may share state citizenship with any defendant. Felix was a Connecticut resident, William was a New York resident, and Sally Sherman was a New York corporation with its principal place of business in New York.

Issue

Felix moved to dismiss for lack of subject-matter jurisdiction under Federal Rule of Civil Procedure 12(b)(1). The key issue was how Sally Sherman should be aligned for diversity purposes in the shareholder derivative claims. Ordinarily, a corporation in a derivative suit is aligned with the plaintiff because it is the real party in interest. An exception applies if the corporation is actively opposed to the plaintiff’s interests.

Court’s analysis

The court concluded that Sally Sherman was not actively opposed to Felix. Felix and William were equal shareholders, each owning 50 percent of the company. The court treated that structure as a deadlock that prevented the corporation from expressing opposition to Felix’s lawsuit. The court also rejected William’s argument that allegations that he controlled the company, his anticipated trial witnesses, or out-of-state decisions required a different result. The court noted that William had denied allegations that he controlled Sally Sherman to Felix’s exclusion.

With Sally Sherman aligned with Felix, complete diversity did not exist because Sally Sherman and William were New York citizens while Felix was a Connecticut resident. The court also held that William’s counterclaims could not create removal jurisdiction or establish jurisdiction based on the face of Felix’s complaint. The court therefore did not decide how Sally Sherman should be aligned for purposes of the counterclaims.

Disposition

The court concluded that it lacked subject-matter jurisdiction because diversity jurisdiction was lacking. It remanded the action to the Supreme Court of the State of New York, County of Westchester, under 28 U.S.C. § 1447(c), and denied Felix’s motion to dismiss as moot. The clerk was directed to terminate the pending motion, remand the case, and terminate the federal action.