Court Opinion

ID: 2682149
Source: CourtListenerOpinion
Date Created: 2014-07-08 07:00:57.514959+00
Date Added: 2024-06-11T09:41:52.755676
License: Public Domain

PUBLISHED

                    UNITED STATES COURT OF APPEALS
                        FOR THE FOURTH CIRCUIT

                             No. 13-2135

FLYING PIGS, LLC,

                Plaintiff – Appellant,

           v.

RRAJ FRANCHISING, LLC,

                Defendant – Appellee.

Appeal from the United States District Court for the Eastern
District of North Carolina, at Greenville. Terrence W. Boyle,
District Judge. (4:13-cv-00010-BO)

Argued:   April 11, 2014                     Decided:   July 1, 2014

Before KING, GREGORY, and THACKER, Circuit Judges.

Vacated and remanded by published opinion. Judge King wrote the
opinion, in which Judge Gregory and Judge Thacker joined.

ARGUED: Ernest Bradley Evans, WARD & SMITH, PA, Greenville,
North Carolina, for Appellant.     Gavin James Reardon, ROSSABI
BLACK SLAUGHTER, PA, Greensboro, North Carolina, for Appellee.
ON BRIEF: Norman J. Leonard, II, WARD & SMITH, PA, Asheville,
North Carolina, for Appellant. Amiel J. Rossabi, ROSSABI BLACK
SLAUGHTER, PA, Greensboro, North Carolina, for Appellee.
KING, Circuit Judge:

       In late 2012, a North Carolina business called Flying Pigs,

LLC, sued a North Carolina entity called RRAJ Franchising, LLC,

in the Superior Court of Lenoir County, North Carolina, alleging

a claim under North Carolina law.              RRAJ removed that lawsuit to

the    Eastern   District      of    North    Carolina,        asserting       federal

question    jurisdiction       pursuant      to     28    U.S.C.     § 1331.        The

district court denied Flying Pigs’s motion to remand to Lenoir

County for lack of federal jurisdiction, and then granted RRAJ’s

Rule 12(b)(6) motion to dismiss the complaint with prejudice.

See Flying Pigs, LLC v. RRAJ Franchising, LLC,                       No. 4:13-cv-10

(E.D.N.C. Aug. 22, 2013), ECF No. 22 (the “Dismissal Order”).

As explained below, we vacate the Dismissal Order and remand for

the Flying Pigs lawsuit to be returned to Lenoir County.

                                       I.

       Flying Pigs initiated this action in an effort to enforce,

by    foreclosure   and     judicial   sale,      an     equitable    lien     against

certain trademarks and associated goodwill now owned by RRAJ

Franchising.        The    equitable   lien       was    the   result   of     a    2010

lawsuit    in    the      Superior   Court     of       Guilford     County,       North

Carolina, where Flying Pigs pursued and was awarded more than

                                        2
$500,000 for rental payments owed by its delinquent commercial

tenant, Chelda, Inc. 1

        Chelda, which is headquartered in Greensboro, the county

seat of Guilford County, owned Ham’s Restaurants, Inc.                   Ham’s

operated a number of eponymously named family eateries in North

Carolina and Virginia.           In 1999, Chelda and Ham’s executed a

twenty-year lease with Flying Pigs to house a Ham’s Restaurant

in Kinston, the county seat of Lenoir County.              By 2008, however,

Chelda and Ham’s were in financial turmoil and, by June 2009,

ceased making their monthly rental payments to Flying Pigs.                On

October 9, 2009, Flying Pigs notified Chelda and Ham’s that they

were in breach of the lease, and on October 21, 2009, Flying

Pigs entered the Kinston restaurant to secure the premises.               The

next day, Ham’s (but not Chelda) filed for Chapter 11 bankruptcy

in the Eastern District of North Carolina.            Exercising its right

under       the   bankruptcy   code,   see   11   U.S.C.   §   365(a),   Ham’s

rejected its Kinston lease with Flying Pigs, leaving Flying Pigs

to pursue recourse solely from Chelda.

        1
        The litigation culminating in this appeal involves
proceedings in myriad North Carolina state and federal courts.
Two of the state lawsuits originated in Guilford County, and the
third in Lenoir County.    One of the Guilford County suits was
removed to the Middle District of North Carolina, and the case
at bar, as we have noted, was removed from Lenoir County to the
Eastern   District  of   North   Carolina.     Ham’s   bankruptcy
proceedings were likewise administered in the Eastern District.

                                        3
         To that end, Flying Pigs sued Chelda on March 12, 2010, in

the Superior Court of Guilford County.                 On July 6, 2010, Flying

Pigs obtained a default judgment against Chelda in excess of

$567,000.        The lion’s share of the judgment was attributed to

Chelda’s obligations through the remaining term of the Kinston

lease,    less    any    rents   received      in   mitigation.       In    order    to

effectuate       at     least    partial       satisfaction    of     the    default

judgment,    Flying      Pigs    sought    an    equitable     lien   against       two

federally registered trademarks, and their associated goodwill,

which had     been      registered   by    Chelda    but    used    exclusively      by

Ham’s (the       “intellectual     property”).         On   July    30,    2010,    the

Guilford    County      court    granted    Flying    Pigs’s    request     in     that

regard, imposing an equitable lien on — and authorizing the

judicial sale of — the intellectual property.                       That very day,

Flying Pigs registered a notice of its equitable lien with the

United States Patent and Trademark Office (“PTO”).

     Meanwhile, the Ham’s bankruptcy proceedings moved forward.

A Greensboro entity called RCR Marketing, LLC, bid $360,000 in

the Chapter 11 proceedings for

     all of [Ham’s] assets, property and rights, tangible
     and intangible, including without limitation . . .
     equipment,   furniture,   fixtures  . . .    goodwill,
     trademarks, licenses (including but not limited to any
     rights and/or licenses to the name ‘Ham’s Restaurant’
     and all related trademarks) and all other intellectual
     property.

                                           4
J.A. 119.         The assets of Ham’s were to be sold in “as is”

condition,        “without     any    warranties,             express       or     implied,

including    without      limitation      any     warranties         concerning      title,

merchantability,         or   fitness.”         Id.      On    August    3,      2010,    the

bankruptcy    court      approved     the       sale    of    Ham’s    assets      to    RCR,

converting    the    Chapter     11   matter       to    a    Chapter    7    liquidation

proceeding.        Consistent with the bankruptcy court’s order, the

parties scheduled the bankruptcy sale for closing on August 19,

2010.

     On the morning of the bankruptcy sale’s closing, however,

the Bank of North Carolina (“BNC”) filed suit in Guilford County

against     RCR    and    Chelda.         Throughout          the     Ham’s      bankruptcy

proceedings, BNC had asserted that it held a perfected security

interest in Chelda’s personal property, including its equipment

and trademarks, and that Chelda — rather than Ham’s — was the

actual    owner     of    a    substantial        portion       of    the     assets      RCR

purported to have purchased from the bankruptcy estate. 2                               Thus,

BNC’s Guilford County lawsuit sought to prevent RCR’s imminent

     2
        BNC’s alleged security interest in Chelda’s property
derived from a $3.5 million dollar commercial loan Chelda
obtained in 2004 and refinanced through BNC in 2006.         The
promissory note appurtenant to the 2006 loan was secured by a
lien on certain of Chelda’s assets, including most of the
machinery and equipment used at the Ham’s restaurants.       The
intellectual property was not specifically included within BNC’s
lien.

                                            5
and allegedly unauthorized appropriation of Chelda’s property,

including the intellectual property.                      That same morning, the

Guilford      County      court   awarded       a   temporary      restraining   order

(“TRO”) enjoining RCR and Chelda’s use of the equipment and the

intellectual property.            Nonetheless, on the Bankruptcy Trustee’s

advice and insistence, the closing of the bankruptcy sale of

Ham’s assets to RCR proceeded as scheduled. 3

        On August 27, 2010, RCR removed BNC’s Guilford County suit

to the Middle District of North Carolina.                         By March 11, 2011,

BNC, Chelda, and RCR had agreed to compromise and settle all

their claims and disputes, pursuant to which the district court

entered      an   order    dismissing     the       BNC   lawsuit    with   prejudice.

Although the terms of the compromise and settlement are not of

record here, it led to the following events:                        (1) on March 16,

2011,       the   PTO   recorded     an     assignment       of     the   intellectual

property from Chelda to RCR, effective March 3, 2011; (2) then,

on June 15, 2011, BNC released its security interest in the

intellectual property; and (3) finally, on September 19, 2011,

RCR assigned the intellectual property to its sister entity,

defendant-appellee RRAJ Franchising, LLC.

        3
       The Bankruptcy Trustee took the position that the Guilford
County TRO contravened the automatic stay imposed by federal
law, see 11 U.S.C. § 362, and was void ab initio. See J.A. 116.

                                            6
     Thereafter, on December 12, 2012, Flying Pigs filed the

complaint underlying this appeal against RRAJ Franchising in the

Superior Court of Lenoir County, seeking to foreclose on its

equitable    lien    against     the     intellectual         property,      to    subject

that property to a judicial sale, and to enjoin RRAJ from any

further use thereof in connection with operations of the Ham’s

restaurants.        On     January    17,    2013,    RRAJ        removed    the    Lenoir

County     case     to     the   Eastern        District      of     North     Carolina,

characterizing       the    complaint       therein      as   a    “dispute    over     two

trademarks held and registered pursuant to the Federal Lanham

Act.”     J.A. 7.

     On     February       25,   2013,      RRAJ   Franchising         moved       in   the

district    court    to     dismiss    the      Flying    Pigs      complaint      on   the

ground that the settlement of BNC’s Guilford County lawsuit — to

which Flying Pigs was not a party — nonetheless barred the

foreclosure action under the principles of res judicata.                                The

next day, Flying Pigs moved to remand the Lenoir County lawsuit

to state court, asserting a lack of federal jurisdiction.                               On

August 14, 2013, the district court conducted a hearing on the

respective motions.          On August 22, 2013, the court entered its

Dismissal Order, denying the remand requested by Flying Pigs and

granting RRAJ’s Rule 12(b)(6) motion to dismiss on the basis of

res judicata.       On September 13, 2013, Flying Pigs filed a timely

                                            7
notice of appeal, and we possess jurisdiction pursuant to 28

U.S.C. § 1291.

                                          II.

         Flying Pigs maintains on appeal that the district court

erred in denying its motion to remand, asserting that its Lenoir

County complaint alleges a state law cause of action and does

not, on its face, present any federal question sufficient to

invoke federal jurisdiction. 4             RRAJ Franchising, on the other

hand, contends that its removal of the Lenoir County case to

federal      court   was    proper   because    an     adjudication   of    Flying

Pigs’s complaint requires the application of federal trademark

law. 5

         Inasmuch    as   Flying   Pigs   and   RRAJ    Franchising   are    North

Carolina entities, the jurisdiction of the district court was

entirely dependent upon the existence of a federal question.

See 28 U.S.C. § 1441(a) (authorizing removal to district court

of any state court civil action “of which the district courts of

         4
       Flying Pigs also contends on appeal that the district
court   erred  in   granting  the   dismissal   sought  by RRAJ
Franchising. In light of our jurisdictional ruling, we need not
reach or decide whether the court erred in that regard.
         5
       We review de novo a district court’s denial of a motion to
remand to state court.    See Hoschar v. Appalachian Power Co.,
739 F.3d 163, 169 (4th Cir. 2014).

                                           8
the United States have original jurisdiction”); id. at § 1331

(providing for original jurisdiction in the district courts of

“all    civil    actions       arising   under       the   Constitution,     laws,    or

treaties of the United States”).                      In deference to federalism

concerns,       we   are   obliged    to    “strictly       construe”    §   1441    and

ensure that any claim alleged to afford a basis for federal

jurisdiction indeed arises under federal law.                          See Pinney v.

Nokia, Inc., 402 F.3d 430, 441 (4th Cir. 2005) (concluding that

district court lacked “arising under” jurisdiction over state

tort claims potentially implicating federal regulations).                             In

this regard, the “well-pleaded complaint rule” demands that we

confine our inquiry to the “plaintiff’s statement of his own

claim    . . .       unaided    by   anything        alleged    in   anticipation     or

avoidance   of       defenses    which     it   is    thought    the   defendant     may

interpose.”          Christianson v. Colt Indus. Operating Corp. 486
U.S. 800, 809 (1988).

       A civil action can “arise under” federal law in two ways.

Most commonly, “a case arises under federal law when federal law

creates the cause of action asserted.”                     Gunn v. Minton, 133 S.

Ct. 1059, 1064 (2013) (citing Am. Well Works Co. v. Layne &

Bowler Co., 241 U.S. 257, 260 (1916)).                         In this proceeding,

however, the effort of Flying Pigs to foreclose on the equitable

lien awarded by the Guilford County court is manifestly a cause

of action created by state law.                  See Fulp v. Fulp, 140 S.E.2d
9
708,       711-13   (N.C.    1965)   (describing            circumstances       from     which

equitable lien can arise under North Carolina Law); Winborne v.

Guy, 22 S.E.2d 220, 223 (N.C. 1942) (explaining that, in North

Carolina, “[a] suit in equity to foreclose is the proper remedy”

to enforce an equitable lien).                       Thus, we must determine the

presence or absence of federal question jurisdiction under the

second, more narrow basis applicable only to a state-law cause

of action implicating a “significant” federal issue.                            See Grable

& Sons Metal Prod., Inc. v. Darue Eng’g & Mfg., 545 U.S. 308,

312 (2005) (citation omitted).                       In recent years, the Supreme

Court has brought greater clarity to what it describes as a

traditionally           “unruly      doctrine,”             emphasizing        its      “slim

contours.”            See   Gunn,    133    S.       Ct.    at   1065.         Among    other

prerequisites for “significance,” the federal issue must have

been       “necessarily     raised”        in    the       litigation.         Id.     (citing

Grable).

       On appeal, RRAJ Franchising maintains that Flying Pigs’s

Lenoir County complaint necessarily raises a significant federal

issue       because    Flying     Pigs   cannot        prevail    in     its    foreclosure

action without resorting to the Lanham Act. 6                     In particular, RRAJ

       6
       The Lanham Act, codified in Title 15 of the United States
Code, contains most of the federal statutes concerning federal
trademark law.     Among other matters, it governs trademark
registration, infringement, and dilution.

                                                10
argues that Flying Pigs must rely on the Lanham Act to establish

that       Chelda    owned   the   intellectual      property    subject    to   the

equitable lien when it was imposed by the Guilford County court. 7

We are constrained to reject that contention.                   The subject order

of July 30, 2010, relied on the court’s implicit finding (based

on the PTO registration) that Chelda then owned the intellectual

property.           The Lenoir County lawsuit is nothing more than an

action to enforce that equitable lien — which has not been

appealed,      modified,     or    challenged   in   any     forum.    It   appears

entirely unnecessary, therefore, for Flying Pigs to again prove

its entitlement to the equitable lien it seeks to enforce in the

Lenoir County court.

       Moreover,       assuming     that   Flying     Pigs    were    required    to

reestablish Chelda’s ownership of the intellectual property in

order to make a prima facie case in the Lenoir County lawsuit,

we are yet unconvinced that a significant federal issue would be

necessarily raised.           Our conclusion is supported by the settled

       7
       It appears that RRAJ would defend the Lenoir County
lawsuit by interposing the affirmative defense that Chelda
abandoned any beneficial ownership interest in the intellectual
property prior to the imposition of the equitable lien.    It is
well established, however, that “‘a case may not be removed to
federal court on the basis of a federal defense . . .    even if
the defense is anticipated in the plaintiff’s complaint, and
even if both parties admit that the defense is the only question
truly at issue in the case.’”      See Pinney, 402 F.3d at 443
(quoting Franchise Tax Bd. of Cal. v. Constr. Laborer’s Vacation
Trust, 463 U.S. 1, 14 (1983)).

                                           11
proposition     that     “[t]rademark      ownership     is   not   acquired     by

federal or state registration.             Ownership rights flow only from

prior use[.]”      2 J. Thomas McCarthy, McCarthy On Trademarks and

Unfair Competition § 16:18 (4th ed. 2013) (collecting cases).

Registration of a trademark under the Lanham Act merely “helps

in this regard, as registration is prima facie evidence that the

registrant is the owner of the mark.”                    George & Co., LLC v.

Imagination Entm’t Ltd., 575 F.3d 383, 400 n.15 (4th Cir. 2009)

(citing 15 U.S.C. § 1057(b)).                  Thus, Flying Pigs could well

argue    that   Chelda    owned     the   intellectual     property     simply   by

virtue of its use.            See, e.g., id. at 400 (trademark ownership

exists, regardless of registration, “so long as a person is the

first to use a particular mark to identify his goods in a given

market, and so long as that owner continues to make use of the

mark”).    As we have recognized, “a plaintiff’s right to relief

for a given claim necessarily depends on a question of federal

law only when every legal theory supporting the claim requires

the resolution of a federal issue.”               See Dixon v. Coburg Dairy,

Inc., 369 F.3d 811, 816 (4th Cir. 2004) (en banc).                  Accordingly,

the “necessarily raised” requirement for a “significant” federal

issue — formulated and explained by the Supreme Court in Grable

and Gunn — has not been satisfied. 8

     8
        To serve         as    an   adequate     basis   of   federal    question
(Continued)
                                          12
     The disposition of this appeal is also consistent with our

circuit     precedent       concerning       “arising      under”    federal

jurisdiction     pursuant     to    28    U.S.C.       § 1331.      In     the

aforementioned Pinney case, the plaintiffs had filed tort claims

in state courts against numerous manufacturers of communications

equipment whose cell phones were alleged to emit unsafe levels

of radio frequency radiation.        The lawsuits were removed to the

federal district court and consolidated, where the plaintiffs’

motion to remand was denied on the ground that the defendants

would   interpose   their    compliance      with    federal   standards   and

argue that the claims were preempted.               On consideration of the

plaintiffs’    appeal,   Judge     Michael    carefully    explained     that,

under such circumstances, “‘[t]he most one can say is that a

question of federal law is lurking in the background,’ . . . but

that does not make the claims into ones arising under federal

law.” 402 F.3d at 446 (quoting Gully v. First Nat’l Bank, 299
U.S. 109, 117 (1936)).

jurisdiction, a federal issue implicated by a state law cause of
action must also be “actually disputed,” “substantial,” and
“capable of resolution in a federal court without disrupting the
federal-state balance” of power.   See Gunn, 133 S. Ct. at 1065
(citing Grable).     Inasmuch as the foreclosure proceeding in
Lenoir County does not necessarily raise the Lanham Act issue
identified by RRAJ Franchising, we need not address these three
other prerequisites.

                                     13
       Similarly, in our earlier decision in Gibraltar, P.R., Inc.

v. Otoki Group, Inc., 104 F.3d 616 (4th Cir. 1997), we concluded

that    a     lawsuit        contesting     trademark     ownership       among     joint

venture      participants         was    properly    dismissed      for     lack    of    a

sufficient federal question, admonishing that “[t]he Lanham Act

does   not     confer        jurisdiction     simply     because    the     subject      in

dispute      is    a     trademark.”         Id.    at   619.       Judge     Wilkinson

recognized that the matter was “not a Lanham Act case; it [was]

a    simple       contract       case.      It     pos[ed]    not   a     question       of

infringement,          but   a   question    of    ownership.”      Id.       The    same

result obtains here.               Flying Pigs has not filed a complaint

arising under the Lanham Act; it has initiated a foreclosure

proceeding in Lenoir County to enforce an equitable lien under

North Carolina law, and we are bound to respect the state court

lawsuit as such.             Under these circumstances, the remand motion

of   Flying       Pigs   should     have    been    granted   and   this     proceeding

returned to the state court.

                                            III.

       Pursuant to the foregoing, we vacate the judgment of the

district court and remand for the return of this litigation to

the Superior Court of Lenoir County, which will conduct such

other and further proceedings as may be appropriate.

                                                                VACATED AND REMANDED

                                             14