Wachtell v. CVR Energy, Inc.

Citations: 18 F. Supp. 3d 414; 2014 U.S. Dist. LEXIS 35625; 2014 WL 1078633Docket: No. 14 Civ. 80(PAE)

Court: District Court, S.D. New York; March 18, 2014; Federal District Court

SummaryOriginalCytator Case TreatmentBackward CitatorAnalysis

EnglishEspañolSimplified EnglishEspañol Fácil

Plaintiff Wachtell, Lipton, Rosen & Katz (Wachtell) filed a lawsuit in the New York Supreme Court against Defendants CVR Energy, Inc., Icahn Enterprises, L.P., Icahn Enterprises Holdings L.P., and Carl Icahn, alleging breach of contract and abuse of process. The Defendants removed the case to federal court, claiming Wachtell fraudulently joined certain parties to defeat diversity jurisdiction. Wachtell subsequently moved to remand the case back to state court for lack of federal subject matter jurisdiction, a motion that was granted.

The background reveals that CVR, an energy company incorporated in Delaware, was taken over by investor Carl Icahn in 2012. Wachtell, along with Goldman Sachs and Deutsche Bank, was retained to provide legal and financial advice during this takeover, leading to engagement letters with CVR. After Icahn gained control, he instructed CVR not to pay the banks or Wachtell for their services, despite Wachtell having already received payment. Subsequent lawsuits by Goldman Sachs and Deutsche Bank to recover fees owed were consolidated into a single case known as the "Bank Action." A Protective Order was established in the Bank Action to limit the use of confidential information produced during discovery, allowing parties to designate documents as “Confidential” for litigation purposes only. Wachtell produced documents under this Protective Order in response to a subpoena, marking them as “Confidential.” In September 2013, an attorney for Icahn threatened Wachtell with a malpractice suit, alleging inadequate advisory regarding the banks' fees.

Schaitkin provided Wachtell with a draft complaint that included documents designated as “Confidential” from the Bank Action. Wachtell declined to settle to prevent litigation. On October 24, 2013, CVR, under Icahn's control, initiated a malpractice lawsuit against Wachtell in the U.S. District Court for Kansas, claiming Wachtell failed to disclose fees owed to banks before Icahn's control. This lawsuit referenced the “Confidential” documents from the Bank Action. Subsequently, on December 18, 2013, Wachtell filed a complaint in New York State court alleging that the Defendants improperly influenced CVR to file the Kansas Action. Wachtell's claims include breach of the Protective Order (Count Two), abuse of process related to the Kansas Action (Count Three), and a declaratory judgment asserting it is not liable for malpractice to CVR (Count One). On January 7, 2014, the Defendants removed the case to federal court based on diversity jurisdiction. Wachtell moved to remand the case to state court, with subsequent filings and a hearing occurring between February 3 and February 24, 2014. Legal standards dictate that defendants can remove civil actions to federal court if original jurisdiction exists due to diversity of citizenship and the amount in controversy exceeds $75,000. However, Wachtell and the Icahn Defendants are both citizens of New York, which, if properly joined, would eliminate diversity and invalidate the removal.

Defendants claim that Wachtell's state-court Complaint fraudulently joined the Icahn Defendants to undermine federal subject matter jurisdiction. For a defendant to prove fraudulent joinder, they must provide clear and convincing evidence of either outright fraud in the pleadings or show that there's no possibility of the plaintiff stating a valid claim against the non-diverse defendant. The burden of proof for fraudulent joinder is substantial, and any potential for recovery, however slim, counters a finding of fraud. 

In assessing the fraudulent joinder claim, all factual and legal issues are resolved in favor of the plaintiff. Defendants do not allege that Wachtell's pleadings are fraudulent; therefore, the focus is on whether they can prove that recovery on Counts Two or Three is legally impossible. 

Regarding Count Two, which alleges breach of the Protective Order, Defendants argue that Wachtell cannot state a claim because, under New York law, there is no independent cause of action for breach of a court order, and the Icahn Defendants were not signatories to the Protective Order. The Court addresses only the latter argument, concluding that Wachtell has at least a potential recovery avenue based on a contract theory against the Icahn Defendants. This legally viable theory of recovery negates the Defendants’ assertion of fraudulent joinder.

Under New York law, corporate owners can be held liable for the corporation's actions if they exercised complete control over the corporation in a manner that resulted in fraud or wrongdoing against a plaintiff, leading to the plaintiff's injury. In this case, the Complaint states that the Icahn Defendants had a controlling interest in CVR and directed CVR to obtain and misuse confidential information from Wachtell under a Protective Order. The allegations suggest that the Icahn Defendants exercised "complete domination" over CVR, committing a wrong that caused the plaintiff's loss. The Icahn Defendants’ lack of signatory status on the Protective Order does not automatically exempt them from liability. 

While the defendants argue that a veil-piercing claim is not viable under these circumstances, they fail to cite definitive legal precedent to dismiss the claim against the Icahn Defendants. Wachtell contends that the Protective Order implicitly bound the Icahn Defendants as non-parties receiving confidential information, obligating them to adhere to its terms. The defendants counter that the Complaint does not allege the Icahn Defendants intended to be bound by the Order. However, Wachtell maintains that the Icahn Defendants' actions of using confidential information for non-litigation purposes could lead to liability for breach of the Order. 

A New York court may not determine whether Wachtell’s breach of contract claim is sufficient at this stage, and the outcome may depend on discovery findings. To establish fraudulent joinder, the removing defendants must prove, with clear and convincing evidence, that the plaintiff's claim cannot succeed. The defendants have not met this burden, indicating that recovery for Wachtell’s breach of contract theory is legally possible.

The Complaint alleges that CVR, under the Icahn Defendants' control, improperly subpoenaed documents from Wachtell in the Bank Action, violating a Protective Order and subsequently misusing confidential information to threaten Wachtell with malpractice and demand payment. New York law defines abuse of process as involving: 1) issuance of regular civil or criminal process; 2) intent to harm without justification; and 3) misuse of the process for an improper purpose. The Defendants challenge the sufficiency of the Complaint, asserting they did not issue the process, but legal precedent indicates liability can arise from improper use of already issued process. The Court finds that the Complaint sufficiently states viable claims against the Icahn Defendants for both breach of the Protective Order and abuse of process, rejecting the Defendants’ fraudulent joinder argument. Consequently, the Court determines it lacks subject matter jurisdiction due to the presence of the Icahn Defendants and grants Wachtell’s motion to remand the case to New York State Supreme Court. The Clerk of Court is instructed to terminate pending motions and close the case.

In considering a motion to remand, the district court treats all relevant allegations in the complaint as true and resolves factual ambiguities in favor of the plaintiff. The court considered various documents related to the case, including declarations from parties involved and prior case law. The complaint does not assert federal claims, so the only potential basis for federal jurisdiction is diversity of citizenship under 28 U.S.C. § 1332. Wachtell, having its principal place of business in New York, is considered a New York citizen. Similarly, the Icahn Defendants, including Carl Icahn and his enterprises, are also deemed New York citizens. 

For diversity jurisdiction, a party's citizenship is determined by domicile. The court highlighted that piercing the corporate veil is fact-intensive and cannot be governed by rigid rules, which indicates that the defendants did not prove that recovery for Wachtell is legally impossible. The defendants argued that Wachtell did not claim the Icahn Defendants issued process; however, the complaint suggests that they influenced the issuance of process through CVR, which acted under their control in a related bank action. This allegation is likely sufficient to establish a claim for abuse of process under New York law, as such a claim can also be brought against an attorney who initiates process in bad faith for ulterior motives.