United States District Court, E.D. Virginia, Richmond Division
JAMES R. SPENCER, District Judge.
THIS MATTER is before the Court a Motion to Remand (ECF No. 7) filed by Plaintiffs Terry Phillips Sales, Inc. ("TPS"), Cathy Phillips, and Terry Philips and a Motion to Strike Jury Demands (ECF No. 9) filed by Defendant SunTrust Bank ("SunTrust"). For the reasons below, the Court will DENY the Motion to Remand because diversity jurisdiction is present where nondiverse defendants Claire E. Craighill ("Craighill"), Gary N. Witthoefft ("Witthoefft"), and Kenneth E. Sigmon ("Sigmon") (collectively "Nondiverse Defendants") have been fraudulently joined. The Court will GRANT the Motion to Strike Jury Trial Demands.
I. FACTUAL AND PROCEDURAL BACKGROUND
This case arises out of an Employee Stock Ownership Plan ("ESOP") created on August 1, 2003, between TPS and SunTrust. SunTrust advised Plaintiffs that they should sell 4, 750 shares of common stock (95% of TPS's stocks) to the ESOP for the total purchase price of $19, 500, 000 ($4, 105.26 per share) in return for a promissory note from the ESOP ("ESOP Note"). SunTrust controlled all aspects of the offer and sale of the shares. When the principal amount of the ESOP Note was reduced to $17, 007, 500, SunTrust then advised TPS to make a loan to the ESOP. In September 2004, SunTrust made a term loan to TPS in the amount $8, 000, 000 ("Term Loan"). TPS, in turn, loaned the $8, 000, 000 to the ESOP ("ESOP Loan"). The ESOP Loan was secured by a pledge of 1, 943 shares of TPS. TPS never actually obtained the proceeds of the ESOP Loan. Instead, as part of the SunTrust ESOP Investment Program, SunTrust required that the funds be used to purchase securities called "floating rate notes" ("FRN"). (Compl. ¶ 14). Under the ESOP Loan, the ESOP-and thus TPS-was required make principal payments of $533, 333.33 plus pay SunTrust four percent (4%) simple interest per annum ($320, 000 per year) on December 31 of each calendar year through.
As collateral for payment of the Term Loan, SunTrust required TPS to grant it a security interest in (i) $19, 500, 000 in floating rate securities purchased as part of the SunTrust ESOP Investment Program and held by SunTrust; (ii) $6, 000, 000 in cash, bonds, and marketable securities held by SunTrust; (iii) all the assets of TPS, Phillips Land, LC, Capitol Distributing, LLC, and SouthPeak Interactive, LLC; (iv) assignment of life insurance policies insuring Terry Phillips's life (face value not less than $3, 500, 000); (v) all of the issued and outstanding shares of stock of TPS; (vi) the property described in a certain security agreement dated as of September 13, 2004; and (vii) the property described in the ESOP Loan agreement.
In 2004, along with the Term and ESOP Loans, SunTrust established lines of credit in the principal amounts of $13, 162, 500 and $4, 387, 500 in favor of Terry and Cathy Phillips (collectively, "ESOP Lines of Credit"). As collateral for the payment of the ESOP Lines of Credit, SunTrust required Terry and Cathy Phillips to grant SunTrust a security interest in (i) $19, 500, 000 in floating rate securities purchased as part of the SunTrust ESOP Investment Program and held by SunTrust; (ii) $6, 000, 000 in cash, bonds, and marketable securities held by SunTrust; (iii) all the assets of TPS, Phillips Land, LC, Capitol Distributing, LLC, and SouthPeak Interactive, LLC; (iv) assignment of life insurance policies insuring Terry Phillips's life (face value not less than $3, 500, 000); (v) all of the issued and outstanding shares of stock of TPS; (vi) the property described in a certain security agreement dated as of September 13, 2004; and (vii) the property described in the ESOP Loan agreement.
As collateral for the ESOP Lines of Credit, SunTrust required Plaintiffs, Phillips Land, LC, Capitol Distributing, LLC, and SouthPeak Interactive, LLC to unconditionally guaranty and cross-guaranty all obligations to SunTrust. SunTrust also required Phillips Land, LC, Capitol Distributing, LLC, and SouthPeak Interactive, LLC to pledge all "now owned and hereinafter acquired" personal property as collateral for the ESOP Lines of Credit. (Compl. ¶ 15). SunTrust then required Plaintiffs to subordinate the ESOP Note and ESOP Loan indebtedness to Plaintiffs' ESOP Line of Credit indebtedness to SunTrust, thereby ensuring that SunTrust was in a "superior' position and got paid first from the various securities and loan transactions that were part of the SunTrust ESOP Investment Program." ( Id . ¶ 16).
In 2004, at or about the time it devised and issued the Term ESOP Loans and ESOP Lines of Credit, SunTrust created and opened certain custody accounts ("Custody Accounts"). SunTrust transferred Plaintiffs' FRNs into the Custody Accounts and held the securities in the Custody Accounts. The Custody Accounts were controlled entirely by SunTrust. SunTrust also required Terry Phillips to open investment management accounts at SunTrust into which certain cash, marketable securities, and other assets were transferred and held as security by SunTrust. SunTrust additionally required Terry Phillips to pledge personal securities accounts at SunTrust Securities, Inc., as security for all obligations of TPS, Phillips Land, LC, and Capitol Distributing, LLC to SunTrust.
Subsequent to all of these loans and investments, Plaintiffs represent that the ESOP Investment Program was an "unmitigated disaster." Plaintiffs obtained none of the tax benefits promised by SunTrust; the purchase the FRNs served no economic purpose and provided no benefit to Plaintiffs; the securities produced a negative rate of return; and the cost to service the Term Loan and ESOP Lines of Credit exceeded any possible benefit of owning and/or holding the FRNs. ( Id . ¶ 24). As a result, Plaintiffs incurred substantial losses each and every year in which the Term Loan and ESOP Lines of Credit remained outstanding. Between 2004 and 2013, Plaintiffs were forced to liquidate the FRNs in fixed amounts once a year by exercising options on the underlying securities. SunTrust used the proceeds of the option sales in each year to pay itself fees and commissions and to curtail the Term Loan and ESOP Lines of Credit.
In December 2011, most of Plaintiffs' SunTrust loan facilities, including those that were part of the ESOP Investment Program, matured. Witthoefft then began the process of renewing or modifying Plaintiffs' credit facilities. At the time, the outstanding balance on the ESOP Lines of Credit was approximately $3, 900, 000 and the outstanding principal amount of the Term Loan was approximately $589, 602.48. In addition to the collateral identified above, SunTrust held, as cross-collateral for all of Plaintiffs' obligations, several of Terry Phillips's personal real estate properties, including a home in Salisbury (occupied by Terry Phillips's mother), a vacation home at Smith Mountain Lake, and two waterfront land lots located at Smith Mountain Lake. SunTrust also held an assignment of a $750, 000 seller note owned by Terry Phillips relating to a development in Goochland County called Sabot Creek. The $750, 000 seller note was secured by a second deed of trust on unsold lots in Sabot Creek. At some point, Witthoefft represented to Terry Phillips that SunTrust would release his personal real estate from SunTrust's security interests upon the sale of certain properties in 2012. In reliance on SunTrust's representations and promises, the properties were sold in October 2012. However, SunTrust and Witthoefft subsequently refused to release any collateral, except of the deed of trust on a vacation home at Smith Mountain Lake.
On April 4, 2013, Terry Phillips attempted to transfer $100, 000 in identifiable funds from his investment account at SunTrust. However, SunTrust disapproved the transfer and withheld possession of Terry's funds. On April 5, 2013, Sigmon represented that he would "authorize the release of the hold" on Terry Phillips's investment account. (Compl. ¶ 34). However, Terry Phillips was again unable to transfer money from his account on April 8, 2013 because SunTrust had placed a restriction on his account. Later in the day, after Terry Phillips notified Sigmon that SunTrust's actions constituted conversion, Sigmon finally signed paperwork releasing the hold on Terry Phillips's securities accounts.
Presently, the ESOP Investment Program has not been terminated. SunTrust has not provided Plaintiffs with a final accounting or a statement of the losses incurred in connection with the ESOP Investment Program. The balance on Terry and Cathy Phillips's ESOP Line of Credit is now less than $4, 000, 000. Approximately $4, 000, 000 in FRNs remain in Terry and Cathy Phillips's Custody Account. SunTrust intends to sell the remaining securities and use the proceeds to pay off Terry and Cathy Phillips's ESOP Line of Credit.
On April 29, 2013, Plaintiffs filed a Complaint in the Circuit Court for the City of Richmond, Virginia alleging multiple tort claims. In Count I, Plaintiffs allege a claim of actual fraud and fraud in the inducement against SunTrust and its agents, including Craighill. In Count II, Plaintiffs allege a claim of securities fraud against SunTrust and its agents, including Craighill. In Count III, Plaintiffs allege a claim of constructive fraud against SunTrust and its agents, including Craighill. In Count IV, Plaintiffs allege a claim of breach of fiduciary duty against SunTrust. In Count V, Plaintiffs allege a claim of breach of custodial trust against SunTrust. In Count VI, Plaintiffs allege a claim of conversion against SunTrust and Sigmon. In Count VII, Plaintiffs allege a claim of breach of contract against SunTrust. In Count VIII, Plaintiffs allege a claim of unjust enrichment against SunTrust.
Plaintiffs request (a) damages in the amount to be determined by a jury, but no less than $19, 500, 000 including disgorgement of all fees, charges, commissions, profits, and interest income wrongfully obtained by SunTrust from Plaintiffs as a result of the ESOP Investment Program, plus prejudgment interest on such amount at the rate of six percent (6%) per year; (b) punitive damages in the amount of $350, 000; (c) post-judgment interest at the maximum rate allowed by law; (d) attorneys' fees under Bershader and sections 13.1-522 and ...