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Federal Court Declines To Exercise Jurisdiction Involving Predominantly State Law Claims

Posted In Jurisdiction
In Re Litigation Trust of MDIP, Inc., No. Civ.A. No. 03-779GMS, 2005 WL 1242157 (D.Del. May 25, 2005). The Court considered six motions in this action: (1) motion to dismiss Count I, seeking to recover damages from directors for breach of fiduciary duties of care, duty and loyalty and to dismiss Count II, asserting a claim for damages against director Rapoport; (2) a motion for partial summary judgment on both counts above; (3) a motion to strike the plaintiff's summary judgment affidavits; (4) a motion to strike the plaintiff's jury demand; (5) a motion in limine for exclusion of evidence and testimony not disclosed in plaintiff's responses and contention interrogatories; and (6) a motion in limine to preclude evidence relating to events that took place prior to August 6, 1998. The Court granted the motions to dismiss Counts I and II but denied the other motions as moot to the extent they related to Counts I and II. Kelso & Co., a joint holder of over 59% of Mosler Inc. ("Mosler") stock along with some of its senior Mosler directors, appointed three directors (the "Kelso Directors") on Mosler's board. In February 1995, Mosler's Chairman and CEO requested the Kelso Directors to hire Michel Rapoport as its next CEO, because such a move was allegedly consistent with Kelso's succession planning. Succession planning was neither discussed by the board nor did the Chairman's memo to the Kelso Directors contain sufficient information on Rapoport's qualifications and experience. The board did not consider any other candidates and appointed Rapoport. Mosler's business fortunes then declined, due to "numerous reckless and misinformed decisions" and Rapoport's and the Kelso Directors' mismanagement. The series of events alleged to have contributed to Mosler's dip in fortunes included: (1) acquisition of a security equipment business that was not adequately studied and which was overvalued; (2) inefficient and financially detrimental integration of the LeFebure security business into Mosler; (3) financial damage to Mosler on account of unprofessional steps taken to update the software used by Mosler to process orders and collect account receivables, causing deterioration in Mosler's financial condition; (4) failure to install adequate business controls, increasing, for example, bad-debt accounts to $100 million from $46 million; (5) ignoring the auditor's reports on lack of internal controls; and (6) failure to investigate serious business problems. The series of events led to a Chapter 11 filing in Delaware. Mosler, now named MDIP, auctioned its assets for $28 million, an amount insufficient to pay creditors. Accordingly, the MDIP Trust was created to pursue claims for the benefit of holders of Class 3 and 4 claims. The Trust brought suit against the Kelso Directors, Rapoport and Kelso for recovery. The defendants challenged Counts I and II, which were state law claims, and requested dismissal for lack of subject matter jurisdiction on account of incomplete diversity and inappropriate exercise of supplemental jurisdiction. After examining copious case law on the issue of diversity in the case of Trusts, the Court held that to provide subject matter jurisdiction, the citizenship of each creditor-beneficiary must be diverse from the three Kelso Directors. As a result, the Court found diversity lacking for Counts I and II. The Court also examined supplemental jurisdiction under 28 U.S.C. § 1367 (1993) and found that state law claims predominated the federal law claims. Therefore the Court granted the motion to dismiss for lack of original jurisdiction over Counts I and II and because it declined to exercise supplemental jurisdiction. Authored by: Raj Srivatsan 302.888.6831 rsrivatsan@morrisjames.com