Magistrate Judge McCarthy Terminates Federal Court Action Based on Lack of Diversity Jurisdiction and Remands to State Court

In a shareholder derivative action commenced by a Connecticut Plaintiff in New York State Court, Defendants (New York residents) removed the case to Federal Court on the basis of diversity jurisdiction. Defendants aligned the New York corporation at issue on their side of the caption for diversity purposes given that one of the Defendants managed the corporation, and therefore the corporation was allegedly “actively antagonistic” to the Plaintiff’s interests. In Federal Court, the Defendants obtained favorable rulings over the course of several years. On the eve of trial, Plaintiff moved to terminate the case in Federal Court based on a lack of diversity jurisdiction. Despite Defendant’s management role in the corporation, novel arguments based on the 50/50 shareholder ownership of the corporation were asserted in favor of alignment of the corporation on the Plaintiff’s side of the caption, thereby destroying diversity jurisdiction. In her Opinion and Order dated May 11, 2023, Magistrate Judge McCarthy agreed with these arguments, terminated the case in Federal Court due to lack of subject matter jurisdiction based on diversity, and remanded the case to Westchester Supreme Court. All prior Federal Court rulings in the case were a nullity due to lack of subject matter jurisdiction. Scott M. Salant handled the matter for the Firm’s client.