Court Opinion

ID: 2968034
Source: CourtListenerOpinion
Date Created: 2015-09-22 04:02:34.380025+00
Date Added: 2024-06-11T15:28:23.249663
License: Public Domain

PUBLISHED

UNITED STATES COURT OF APPEALS
                FOR THE FOURTH CIRCUIT

GENERAL TECHNOLOGY APPLICATIONS,        
INCORPORATED, a dissolved Virginia
corporation,
                  Plaintiff-Appellee,
                 v.
EXRO LTDA,
       Defendant-Counterclaimant-
                       Appellant,
                 v.
GENERAL TECHNOLOGY APPLICATIONS,
INCORPORATED, a dissolved Virginia
corporation; JERRY C. TRIPPE; JAMES
G. COUCH; DENIS M. NEILL; THOMAS
T. SCAMBOS; WILLIAM WEITZEN;               No. 03-1860
PAUL F. WATERS; ALBERT F.
HADERMAN,
           Counterclaim Defendants-
                          Appellees.

EXRO LTDA, derivatively on behalf
of EXG LLC;
                Plaintiff-Appellant,
                 v.
DENIS M. NEILL; THOMAS T.
SCAMBOS; WILLIAM WEITZEN; PAUL F.
WATERS; ALBERT F. HADERMAN; JOHN
W. O’CONNELL; STEVEN PERLES;
                                        
2                  GENERAL TECHNOLOGY v. EXRO

RICHARD B. WEITZEN; TERRY A.          
CRAIG; ESTATE OF WILLIAM WEITZEN;
ESTATE OF DAVID A. WRIGHT;
                                      
GENERAL TECHNOLOGY, LLC; GTA
LLC; JOHN AND JANE DOES 1-200,
              Defendants-Appellees,
EXG LLC,
                         Defendant.
                                      
           Appeal from the United States District Court
        for the Eastern District of Virginia, at Alexandria.
              Claude M. Hilton, Chief District Judge.
                   (CA-02-1706-A; CA-03-466)

                      Argued: May 4, 2004

                    Decided: October 28, 2004

      Before WILKINS, Chief Judge, MOTZ, Circuit Judge,
        and C. Arlen BEAM, Senior Circuit Judge of the
      United States Court of Appeals for the Eighth Circuit,
                     sitting by designation.

Vacated and remanded with instructions by published opinion. Senior
Judge Beam wrote the opinion, in which Chief Judge Wilkins and
Judge Motz joined.

                           COUNSEL

ARGUED: Thomas Joseph Hall, CHADBOURNE & PARKE,
L.L.P., New York, New York, for Appellant. John Patrick Rowley,
III, HOLLAND & KNIGHT, L.L.P., McLean, Virginia; Robert Powel
Trout, TROUT & RICHARDS, P.L.L.C., Washington, D.C., for
                     GENERAL TECHNOLOGY v. EXRO                         3
Appellees. ON BRIEF: Gregory J. Kerr, Jennifer L. Frattini, CHAD-
BOURNE & PARKE, L.L.P., New York, New York; Paul B. Terpak,
David J. Gogal, BLANKINGSHIP & KEITH, Fairfax, Virginia, for
Appellant. Richard O. Duvall, Jennifer A. Short, Robert T. Hicks,
HOLLAND & KNIGHT, L.L.P., McLean, Virginia; John Thorpe
Richards, Jr., TROUT & RICHARDS, P.L.L.C., Washington, D.C.,
for Appellees.

                               OPINION

BEAM, Senior Circuit Judge:

   Two cases give rise to this appeal. Both originated in state court
and were removed to federal court under 28 U.S.C. § 1441. They
were later consolidated. To summarize, and possibly oversimplify,
Exro, Ltda. (Exro) asserted various claims against a variety of indi-
viduals and GTA, Inc. (GTA). The basic claim was that GTA and the
individuals violated Exro’s right to litigation proceeds that GTA
recovered in a patent-infringement suit. GTA and the other parties
adverse to Exro prevailed below through dismissal and summary
judgment motions. We conclude the district court lacked jurisdiction,
vacate the district court’s judgments, and remand the case with
instructions to remand the case to state court.

                                    I

   GTA is a Virginia corporation with its principal place of business
in Virginia.1 Exro is a foreign corporation organized under the laws
of Columbia, South America, where it conducts its business. GTA
and Exro decided to pursue a business venture to produce and market
a drag reduction additive (DRA). The DRA is a product GTA devel-
oped that, as the name suggests, reduces the drag caused by petroleum
products moving in pipelines. GTA held patents on the technology
used to make this product. GTA and Exro created a Virginia limited
  1
    GTA has terminated its corporate existence, but, under Virginia law,
it continues to exist for the purposes of this suit. Va. Code Ann. § 13.1-
755.
4                   GENERAL TECHNOLOGY v. EXRO
liability company called EXG, L.L.C. (EXG), through which they
would pursue the DRA business. EXG had two members at its incep-
tion, Exro and GTA, as well as four managers charged with operating
the company. Two of these managers were Exro directors, and the
other two were GTA directors.

   In the EXG Operating Agreement, Exro, GTA, and EXG promised
to do certain things. Exro promised to arrange funding through out-
side investors, while GTA promised to license the intellectual prop-
erty associated with the DRA. EXG promised to pay a licensing fee
and royalties for the use of that technology. The Operating Agreement
says that these initial capital contributions were to be contributed as
of the "effective time" of the agreement. Exro claims GTA contrib-
uted a patent license to EXG as of the effective time of the agreement,
while GTA argues its contribution was a promise to give a patent
license that was never triggered because EXG did not pay the licens-
ing fee and Exro did not arrange for funding.

   EXG never successfully produced or marketed the DRA. As it
turns out, a competitor in the field, Conoco, Inc. (Conoco) was
infringing on the patented technology and had thereby produced a
superior product. The litigation on appeal centers on that infringe-
ment. GTA successfully sued Conoco. The total amount awarded for
the infringement was approximately $60 million. EXG was not a
party to the infringement action. Exro, once it learned of the award,
demanded that GTA pay it half of the proceeds of the Conoco litiga-
tion. According to Exro, EXG had an exclusive license to the GTA
patents, making the infringement award EXG’s. Exro, as a member
of EXG, claimed entitlement to its membership share of the funds.
GTA refused, dispersed the funds to its shareholders, and this litiga-
tion ensued.

   As indicated, two different suits have brought about this appeal.
The first initially involved arbitration. After Exro demanded arbitra-
tion of the dispute, GTA filed a claim in a Virginia state court against
Exro seeking a declaration that the dispute was not arbitrable. Exro
removed the case to federal court under 28 U.S.C. § 1441 and appar-
ently waived arbitration. Exro then asserted counterclaims against
GTA, the two GTA-affiliated EXG managers, and several GTA
shareholders. As to GTA, Exro’s counterclaims centered on EXG’s
                     GENERAL TECHNOLOGY v. EXRO                        5
rights under the patent license that GTA allegedly gave EXG. The
counterclaims made against the individuals were also premised on
that license. GTA amended its complaint to assert a claim against
Exro for breaching the EXG Operating Agreement and sought a dec-
laration that GTA owed none of the Conoco recovery to Exro. The
district court dismissed the counterclaims Exro made against the indi-
viduals (the two EXG managers and the GTA shareholders) upon
those parties’ motion to dismiss. And it dismissed one of the counter-
claims made against GTA upon GTA’s motion for summary judg-
ment.

   A second state court suit followed. Exro styled this suit as a deriva-
tive action, filed on EXG’s behalf, against EXG and the individuals
dismissed from the previous action. In the derivative action, Exro
asserted the same claims it had made against those individuals in the
GTA v. Exro litigation. Exro also named 200 John and Jane Doe
defendants who were GTA shareholders, asserting various claims
against them. The defendants removed the case to federal court. Exro
moved to remand the case, arguing there was no diversity jurisdiction.
The district court did not rule on this motion and consolidated the
case with the already pending GTA v. Exro litigation.

   Once consolidated, GTA moved for summary judgment on Exro’s
counterclaims and for judgment on the pleadings on the claims it
made against Exro. The individual defendants also moved to dismiss
the claims made against them. The district court granted these
motions on the merits.

                                   II

  We must first address jurisdiction. Standing is a jurisdictional issue
we must consider independently. FW/PBS, Inc. v. City of Dallas, 493
U.S. 215, 231 (1990).

       Standing does not refer simply to a party’s capacity to
    appear in court. Rather, standing is gauged by the specific
    common-law, statutory or constitutional claims that a party
    presents. "Typically, . . . the standing inquiry requires care-
    ful judicial examination of a complaint’s allegations to
6                      GENERAL TECHNOLOGY v. EXRO
        ascertain whether the particular plaintiff is entitled to an
        adjudication of the particular claims asserted."

Int’l Primate Prot. League v. Adm’rs of Tulane Educ. Fund, 500 U.S.
72, 77 (1991) (alterations in original) (quoting Allen v. Wright, 468
U.S. 737, 752 (1984)). Our jurisdictional inquiry includes both consti-
tutional and prudential aspects of standing. Elk Grove Unified Sch.
Dist. v. Newdow, 124 S. Ct. 2301, 2308-09 (2004). Prudential con-
cerns include the notion that a plaintiff "generally must assert his own
legal rights and interests." Hodel v. Irving, 481 U.S. 704, 711 (1987).
In a diversity case, we must consult state law to determine the nature
of the litigant’s rights and whether he is entitled to assert the claims
he makes. See Gallagher v. Cont’l Ins. Co., 502 F.2d 827, 832-33
(10th Cir. 1974); cf. Newdow, 124 S. Ct. at 2311 (looking to state
law). A litigant bringing a diversity action (or seeking removal on that
basis) can have no greater ability to assert legal rights created under
state law than it would have in the state forum. "We are obligated to
construe removal jurisdiction strictly because of the ‘significant feder-
alism concerns’ implicated. Therefore, ‘[i]f federal jurisdiction is
doubtful, a remand [to state court] is necessary.’" Dixon v. Coburg
Dairy, Inc., 369 F.3d 811, 816 (4th Cir. 2004) (en banc) (alterations
in original) (quoting Mulcahey v. Columbia Organic Chems. Co., 29
F.3d 148, 151 (4th Cir. 1994)). "Likewise, it is equally well-settled
that the parties’ characterization of themselves or their claims is not
determinative for federal jurisdiction purposes." Roche v. Lincoln
Prop. Co., 373 F.3d 610, 615-16 (4th Cir. 2004).

                                    A.

   With regard to the initial suit, GTA v. Exro, Exro’s counterclaims
are made individually and not derivatively—i.e., Exro seeks recovery
on its own behalf. In those counterclaims, Exro claimed that GTA
licensed its patent rights to EXG; that this license was "exclusive" and
it therefore carried an obligation to turn the proceeds over to the
licensee; and, thus, GTA must share the proceeds it recovered from
Conoco with EXG (and therefore Exro as a member of EXG).

  All of Exro’s counterclaims are based on the patent license it says
EXG had—a license that, if it existed, gave certain rights to EXG.2
    2
  We express no opinion on whether an "exclusive licensee" can
demand a share of the proceeds of an infringement action prosecuted by
                    GENERAL TECHNOLOGY v. EXRO                       7
Exro itself has no rights in the patent. A Virginia limited liability
company, in contrast to a partnership, is an entity separate from its
members, and it may acquire property, sue, or be sued. Hagan v.
Adams Prop. Assoc., Inc., 482 S.E.2d 805, 807 (Va. 1997); Va. Code
Ann. § 13.1-1021. The property of such an entity, once acquired,
"vests in the limited liability company." Va. Code Ann. § 13.1-1021.
Statutorily, the members of the limited liability company have "no
right to demand and receive any distribution from a limited liability
company in any form other than cash," id. § 13.1-1034, and, under
EXG’s Operating Agreement, "[n]o Member . . . [has] the right to
demand and receive property other than cash." Because it is EXG’s
property that gives rise to EXG’s alleged legal right to the Conoco
proceeds, the claim Exro seeks to assert is EXG’s. Exro’s right to a
cash distribution from EXG is not directly at issue and is insufficient
to give Exro standing to assert EXG’s legal rights. And even though
Exro could in certain circumstances assert EXG’s claim against GTA
on EXG’s behalf—i.e., derivatively under Va. Code Ann. § 13.1-1042
—Exro has not done that in its counterclaims. Virginia strictly
adheres to the derivative-claim rule. See Simmons v. Miller, 544
S.E.2d 666, 673-75 (Va. 2001) (refusing to create an exception for
direct claims in cases of closely held corporations). Thus, Exro has no
standing to assert EXG’s claim for money GTA recovered from Con-
oco.

   One wrinkle appears. The State of Virginia, before the Conoco
judgment was rendered and before Exro commenced this litigation,
cancelled EXG’s certificate of organization. This may give Exro
standing to pursue the claims it has made if EXG’s dissolution gave
its member, Exro, the authority to pursue EXG’s claim individually.

   As earlier stated, the license Exro claims EXG had was EXG’s. Va.
Code Ann. § 13.1-1021. EXG’s certificate of operation was automati-
cally cancelled in December 1999 for failing to pay its annual regis-
tration fee. See id. § 13.1-1064(B)(1). Under Virginia law, once the
certificate of operation was cancelled, EXG was automatically "dis-

his licensor (the patent owner) absent an express agreement to share
those proceeds. Exro cites no authority for that premise and we have
found none.
8                    GENERAL TECHNOLOGY v. EXRO
solved" and obligated to wind up. Id. Winding up can generally be
done by the members. Id. § 13.1-1048(A). However, if a manager-
managed company like EXG has its certificate of operation automati-
cally cancelled under section 13.1-1064, the property and affairs of
the company automatically pass "to its managers . . . as trustees in liq-
uidation." Id. § 13.1-1064(B)(3). Liquidating trustees have the power
to prosecute and defend suits "in the name and on behalf of the lim-
ited liability company." Id. § 13.1-1048(B); accord id. § 1064(B)(1)
& (3).

   With the license in the managers’ hands, holding it in trust for the
benefit of EXG’s creditors and members, Exro is still without stand-
ing to pursue its own action against GTA. To the extent, if any, GTA
is obligated to pay part of the Conoco recovery over to EXG under
the purported license, the cancellation, dissolution, and transfer
placed EXG’s rights in the trustees’ hands. This does not mean that
Exro could not assert the trustees’ rights to collect trust property. See
Restatement (Second) of Trusts § 282 (1959). And it does not neces-
sarily mean that a derivative action is barred during the post-
dissolution winding-up process. But it does mean that the legal rights
at issue in this particular situation are not Exro’s to pursue individu-
ally. We see nothing in the limited liability company statute that gives
a member any greater rights in a manager-managed company’s prop-
erty after it has been automatically dissolved under section 13.1-
1064(B) than before. Thus, Exro is without standing to pursue its
counterclaims against GTA.

   Exro had no standing to assert the counterclaims against the indi-
viduals it brought into the GTA v. Exro litigation for the same rea-
sons. Exro’s claims against the individual GTA shareholders and the
EXG managers were premised on EXG’s rights, which, if they exist
at all, vested in EXG and passed to the liquidating trustees.

   Finally, Exro’s lack of standing with regard to the counterclaims it
seeks to assert is no less applicable to the claims GTA makes against
Exro. Quite simply, the wrong party has been sued. The real contro-
versy asserted is between GTA and EXG. Jurisdiction is therefore
lacking and the case must be remanded to state court under 28 U.S.C.
§ 1447(c), where, possibly, the defect can be cured by adding the
proper parties.
                     GENERAL TECHNOLOGY v. EXRO                         9
                                   B.

   As to the derivative action, Exro purports to act on behalf of EXG
—derivatively. Given the automatic cancellation of EXG’s operating
certificate, it is unclear whether EXG, its trustees in liquidation (i.e.,
EXG’s managers), or both can assert the legal rights that Exro is try-
ing to assert. Whether EXG continues to exist for purposes of this suit
is a question entwined with this issue. Virginia law provides no clear
answer, and we will not answer these difficult issues of state law
because we lack jurisdiction in any event. If EXG continues to exist,
there is no diversity jurisdiction. If EXG ceased to exist, then Exro,
which asserts only EXG’s rights in this derivative action, has no
rights to assert. We assume for purposes of this analysis that EXG
continues to exist.

   We start with the citizenship of the various parties. EXG has the
citizenship of its members: Columbia, South America, and Virginia.
See, e.g., GMAC Commercial Credit LLC v. Dillard Dep’t Stores,
Inc., 357 F.3d 827, 828-29 (8th Cir. 2004) (one of many cases in
which the court concludes a limited liability company is assigned the
citizenship of its members). Exro is Columbian for diversity purposes
and, as is relevant here, at least some of the named defendants are
Virginia citizens.

   Next, we evaluate whether both sides of the controversy are com-
pletely diverse. In a derivative action, where there are three parties
conceptually presented as "A" v. "B" v. "C," the parties must be
aligned for diversity purposes. Generally, the represented entity (i.e.,
the entity on whose behalf the suit is initiated— "B"), here EXG, is
aligned as a defendant. But EXG can be realigned as a plaintiff under
certain circumstances. See Smith v. Sperling, 354 U.S. 91 (1957). In
either case diversity jurisdiction does not exist. If we align EXG as
a defendant, then Exro (Columbia) is suing EXG (Columbia and Vir-
ginia) and the other defendants (Virginia). The alien citizenship on
both sides of the controversy destroys diversity. See Universal Licens-
ing Corp. v. Paola Del Lungo S.P.A., 293 F.3d 579, 581 (2d Cir.
2002) ("diversity is lacking . . . where on one side there are citizens
and aliens and on the opposite side there are only aliens"). If we align
EXG as a plaintiff, then Exro (Columbia) and EXG (Columbia and
Virginia) are suing the various defendants (Virginia). Virginia’s pres-
10                    GENERAL TECHNOLOGY v. EXRO
ence on both sides of the controversy destroys diversity. See 28
U.S.C. § 1332(a)(3) (diversity jurisdiction exists between "citizens of
different States and in which citizens or subjects of a foreign state are
additional parties") (emphasis added).3

   The defendants, in support of federal jurisdiction, argue that EXG’s
"dual citizenship" means that we should ignore its alien status and
regard it as a Virginia citizen for the purposes of diversity jurisdiction.4
The "dual citizenship" cases the defendants cite are inapplicable.
Unies v. Kroll & Linstrom, 957 F.2d 707, 711 (9th Cir. 1992), is one
example. In that case, after four years of litigation, the defendant law
partnership moved to dismiss the action for lack of subject matter
jurisdiction. It argued that one of its lawyer partners was both a for-
eign citizen and a United States citizen. Thus, it argued, there was no
diversity between it and the foreign plaintiff. The court initially cited
the defendant’s lack of evidence and then "reject[ed] the argument,"
stating that "[d]ual citizenship (even when established) does not
defeat jurisdiction." Id. (citing Sadat v. Mertes, 615 F.2d 1176, 1187
(7th Cir. 1980) ("only the American nationality of the dual citizen
should be recognized")). The court was not clear, however, as to
whether it was speaking of the individual’s dual citizenship or the
resulting dual citizenship of the partnership. If it was the latter, then
Unies seems to stand for the proposition that a court is free to disre-
gard partial alien citizenship when evaluating a partnership’s or, by
extension, other unincorporated associations’ citizenship.

   However, in Nike, Inc. v. Comercial Iberica de Exclusivas Depor-
tivas, S.A., 20 F.3d 987, 990 (9th Cir. 1994), the court retreated by
  3
     Diversity jurisdiction is also judged by the real parties in interest.
Roche, 373 F.3d at 615. As we explained above, the legal rights asserted
here belong to EXG. Thus, one of the real parties in interest is EXG.
Ross v. Bernhard, 396 U.S. 531, 538 (1970) ("Although named a defen-
dant, [the corporation in a derivative suit] is the real party in interest, the
stockholder being at best the nominal plaintiff."). The various defendants
are the other real parties in interest. Under this reasoning, a suit between
EXG and the various defendants is not within the federal courts’ diver-
sity jurisdiction because there are Virginians on both sides.
   4
     This argument could only work in this case if EXG was properly
aligned as a defendant.
                     GENERAL TECHNOLOGY v. EXRO                          11
classifying Unies as involving only individuals. Because Congress
had established dual citizenship for corporations, but not for individu-
als, the court concluded it could not disregard the dual citizenship of
the corporation at issue there. The Nike court makes it clear that the
Unies court’s statements about dual citizenship were with regard to
the individual that the partnership claimed was both a foreign citizen
and an American citizen. EXG is certainly not an individual with this
sort of dual citizenship.

   Exro, on the other hand, argues that EXG is like a corporation
whose citizenship can be "dual" under cases like Nike, and, therefore,
its foreign citizenship cannot be ignored. While a manager-managed
limited liability company looks and acts somewhat like a corporation,
especially with regard to derivative actions and members’ claims, this
argument misses the mark. A limited liability company organized
under the laws of a state is not a corporation and cannot be treated
as such under section 1332 until Congress says otherwise. GMAC
Commercial Credit LLC, 357 F.3d at 829 (quoting Carden v. Arkoma
Assocs., 494 U.S. 185, 197 (1990)). It is an unincorporated associa-
tion, akin to a partnership for diversity purposes, whose citizenship is
that of its members. Thus, EXG is a citizen of Columbia, South
America, and Virginia. We can find no basis upon which to disregard
either aspect of EXG’s citizenship.5

                                    III

   Exro and GTA chose to create an entity through which to pursue
their development of DRA. They cannot now disregard, and we can-
not ignore, that aspect of their relationship. Accordingly, we vacate
  5
    Grupo Dataflux v. Atlas Global Group, L.P., 124 S. Ct. 1920 (2004),
suggests the result we reach here. In that case the plaintiff partnership,
Atlas, had partners that were Mexican citizens and partners that were
United States citizens. The defendant, Grupo, was a Mexican corpora-
tion. Diversity jurisdiction was therefore lacking. Although the Court did
not specifically validate this aspect of the case because it was concentrat-
ing on whether a later withdrawal of the foreign partners could cure the
jurisdictional defect, it would not have reached the issue it did address
if the case presented no underlying jurisdictional defect. Even the dis-
senters saw such a defect. Id. at 1932 (Ginsburg, J., dissenting).
12                  GENERAL TECHNOLOGY v. EXRO
the district court’s summary judgment and dismissal orders and
remand this case to the district court with instructions to remand it to
state court.

              VACATED AND REMANDED WITH INSTRUCTIONS