November 13, 2023
By: Thomas O’Connell
Citation:
Dance Fitness Michigan LLC v. AKT Franchise LLC, 2023 WL 7549894 (C.D. Cal. Nov. 13, 2023)
Executive Summary:
In this unpublished decision, Judge James V. Selna of the United States District Court for the Central District of California denied a motion to remand filed by Plaintiffs, a group of franchisees, against Defendant AKT Franchise LLC. The case examined whether diversity jurisdiction existed, focusing on the forum-defendant rule, fraudulent joinder claims, and sufficiency of disclosures under Federal Rule of Civil Procedure 7.1. The court ruled in favor of Defendant AKT, allowing the case to remain in federal court.
Relevant Background:
The Plaintiffs, a group of franchisees including Dance Fitness Michigan LLC, initiated this lawsuit against Defendant AKT Franchise LLC and its affiliates, alleging that AKT made material misstatements and omissions about franchise opportunities. Plaintiffs contended that these misrepresentations led them to enter franchise agreements under false pretenses, incurring significant financial losses. Among the claims raised were violations of the California Franchise Investment Law (CFIL), which under Cal. Corp. Code § 31201, prohibits offering or selling franchises through misstatements or omissions of material fact.
The Plaintiffs further alleged that the Franchise Disclosure Documents provided by AKT understated the costs of opening and operating an AKT franchise while overstating profitability and support. Plaintiffs also brought claims under the Michigan Franchise Investment Law, the Florida Franchise Act, and for fraudulent inducement, negligent misrepresentation, and breach of contract. In addition, the Plaintiffs named three individual defendants, referred to as the Ohio Defendants, alleging they were materially involved in the alleged misrepresentations.
On September 1, 2023, AKT removed the case to federal court, citing diversity jurisdiction under 28 U.S.C. § 1332. AKT argued that the Plaintiffs’ inclusion of non-diverse defendants was an improper attempt to defeat diversity jurisdiction through fraudulent joinder. AKT also asserted that the forum-defendant rule under 28 U.S.C. § 1441(b)(2) did not bar removal because none of the California-based defendants had been properly joined and served before removal. The Plaintiffs moved to remand, disputing the procedural sufficiency of AKT’s removal and the completeness of its disclosures under Rule 7.1.
Decision:
The court denied Plaintiffs’ motion to remand, addressing the following issues:
- The court ruled that removal was proper under the forum-defendant rule codified in 28 U.S.C. § 1441(b)(2). This rule generally prohibits removal of a case based solely on diversity jurisdiction when any defendant is a citizen of the forum state, provided the defendant has been “properly joined and served.” The court found that at the time of removal, none of the forum-defendants (California-based parties) had been properly joined and served, allowing AKT to remove the case despite their presence. Citing Choi v. Gen. Motors LLC, the court explained that this procedural technicality enables removal under similar circumstances.
- The court acknowledged deficiencies in AKT’s initial Rule 7.1 disclosure statement regarding the citizenship of its members and affiliates. Rule 7.1 requires that parties disclose all entities or individuals whose citizenship is attributable to them to establish diversity jurisdiction. While Plaintiffs argued that these deficiencies warranted immediate remand, the court allowed AKT to amend its disclosure statement. The court ordered limited discovery to verify the accuracy and completeness of the amended disclosure, emphasizing the importance of precise corporate disclosures in diversity jurisdiction cases.
- The court evaluated whether the Ohio Defendants were improperly included to defeat diversity jurisdiction. Citing Padilla v. AT&T Corp., 697 F. Supp. 2d 1156 (C.D. Cal. 2009), the court stated that fraudulent joinder requires a showing that Plaintiffs could not possibly state a valid claim against the joined defendants. While the court found the claims against the Ohio Defendants tenuous, it deferred ruling on the issue until discovery clarified their role.
- Plaintiffs also argued that procedural errors in AKT’s removal notice, including incomplete disclosures, justified remand. The court rejected this contention, finding that procedural deficiencies were curable and had not caused significant prejudice. Additionally, the court noted that while the Plaintiffs raised doubts about AKT’s disclosures, these doubts could be resolved through discovery without remanding the case.
Looking Forward:
This case offers valuable insight into procedural strategies for franchisors and highlights critical areas of focus when navigating jurisdictional challenges.
- The court’s application of the forum-defendant rule under 28 U.S.C. § 1441(b)(2) reinforces the importance of timing in removal proceedings. Franchisors seeking to remove cases to federal court should ensure that no forum-defendant is “properly joined and served” before removal. Properly utilizing this procedural safeguard can prevent jurisdictional disputes and ensure access to potentially more favorable federal forums.
- The court’s handling of Rule 7.1 disclosures underscores the necessity of precise and comprehensive corporate citizenship disclosures. Franchisors must maintain meticulous records and documentation of their ownership structures to comply with federal jurisdictional requirements and avoid delays or challenges to removal.
- The court’s reasoning also sheds light on the scrutiny courts may apply when evaluating claims of fraudulent joinder. While the court allowed further discovery on this issue, franchisors should note that incomplete or implausible claims against non-diverse defendants may not automatically preclude federal jurisdiction.
Franchisors should continue to utilize well-drafted agreements that allocate liability appropriately and shield representatives from personal exposure. However, transparency and adherence to statutory obligations, such as those under CFIL, remain crucial to minimizing litigation risks.