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Monday
Mar262018

Hawkins v. Borsy: Court Finds It Does Not Have Proper Subject Matter Jurisdiction

In Hawkins v. Borsy, No. 1:05-cv-1256–LMB-JFA, 2018 WL 793599 (E.D. Va. Feb. 8, 2018), the United States District Court for the Eastern District of Virginia granted corporate affiliates (“Respondents”) of MediaTechnik Kft. (“MediaTechnik”) motion to vacate, the district court’s decision granting William Hawkins (“Hawkins”), Eric Keller, Thomas Zato, Kristof Gabor, and Justin Panchley (collectively, “Plaintiffs”) default judgment against Laszlo Borsy (“Borsy”), Mediaware Corporation (“Mediaware”), MediaTechnik, i-TV, and Peterfia Kft. (“Peterfia”) (collectively, “Defendants”) for lack of subject matter jurisdiction.

According to the allegations, Borsy approached Hawkins in 2001 to invest in MediaTechnik. As a result, Hawkins paid $330,000 for 35% of MediaTechnik’s stock and 33.33% of Peterfia’s stock. After Borsy approached Hawkins again, Hawkins paid $1 million for a 49% stake in MediaTechnik and its corporate affiliates. Allegedly, Borsy diverted those funds to purchase the remaining shares of i-TV to become i-TV’s sole owner, and conveyed Hawkins voting rights for Mediaware to himself. Furthermore, the complaint alleged that the remaining Plaintiffs in exchange for their services expected compensation with positions and equity in one or more of the companies, which they did not receive. In 2005, Plaintiffs filed a complaint against Defendants alleging fraud, breach of contract, conversion, breach of fiduciary duties (against Borsy), and unjust enrichment. The 2005 complaint sought an accounting of all Defendants’ transactions and a declaration establishing Plaintiffs’ interest in the corporate Defendants. In 2008, Plaintiffs received, and the Fourth Circuit affirmed, a default judgment against all of the Defendants. In response to Plaintiffs’ motion to enforce, Defendants argued the district court lacked subject matter jurisdiction because at least one of the original defendants, Peterfia, should be treated as an LLC, rather than a corporation.

District courts have original jurisdiction over civil actions involving sums or values over $75,000 when the controversy is between “citizens of a State and citizens or subjects of a foreign state” or “citizens of different States and in which citizens or subjects of a foreign state are additional parties.” 18 U.S.C. § 1332(a). To maintain an action in federal court under diversity jurisdiction, no plaintiff may be a citizen of the same state as any defendant. Diversity jurisdiction for an LLC is determined by the citizenship of all of its members. Finally, a judgment is void for lack of subject matter jurisdiction when the court cannot find that it had jurisdiction.

In applying the standards, the court concluded a Hungarian kft. should be treated like an LLC for purposes of § 1332(c) because its distinguishing characteristics fall closer to an American-style LLC. Accordingly, the court found Peterfia should be treated as an LLC and not a corporation. The court held that because Hawkins was a member of Peterfia when the complaint was filed, there was not complete diversity between the parties. As a result, the court did not have subject matter jurisdiction over the litigation. Furthermore, the court declined to use its discretion to drop a dispensable party, Peterfia, because Plaintiffs were “well aware that the kfts. were like limited liability companies, rather than corporations.”

Accordingly, the United States District Court for the Eastern District of Virginia granted Respondents’ motion to vacate for lack of subject matter jurisdiction.

The primary materials for this case may be found on DU Corporate Governance website.

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