Tuesday, April 04, 2017

Long Lasting Fight Between Factoring Companies Kicked By An Agitated Fifth Circuit

By Chris Littell

After more than four years in federal court, in litigation originally filed in state court in 2006, the Fifth Circuit Court of Appeals has held that federal jurisdiction does not exist, remanding the case back to state court.*1  Unsurprisingly, Circuit Judge E. Grady Jolly’s opinion noted that “[w]e are not happy that jurisdiction is a later show-up in this case.”

In 2006, a group of factoring companies operating as “Peachtree Settlement Funding”*2  alleged that a factoring company known as “RSL” tortiously interfered with contracts Peachtree had with third parties,*3  alleging that RSL had scanned court filings trying to identify structured settlement payees that were interested in selling their payments. Peachtree alleges that RSL let Peachtree pay the expenses of searching for and advertising to these payees, only for RSL to swoop in after the payees were already under contract with Peachtree, trying to steal the deal with a better price.

In 2012, six years later, RSL asserted new claims against a group of third-party defendants called the “Wentworth Parties,” alleging state law conspiracy claims that potentially implicated federal anti-trust law and resulted in the case being removed to federal court.

Four years later, to the agitation of the Fifth Circuit, RSL argued for the first time on appeal that neither federal question nor diversity of citizenship existed in the case that would allow the federal courts to hear the litigation.

The Fifth Circuit was equally unimpressed that Peachtree was “not able to determine the citizenship” of its own member entities “as [they] existed at the time that this case was removed from state court.”  The Court further noted that despite being represented by a large multinational law firm, in the months since the issues were raised Peachtree did not indicate that it would ever be able to ascertain the citizenship of its member entities.

The Fifth Circuit held that because “because the removal statute should be strictly construed in favor of remand ... we hold that the complaint, on its face, does not implicate federal antitrust law and therefore does not raise a federal question.*4  Further, because Peachtree was unable to determine the citizenship of its own member entities, it had not met its burden to prove that complete diversity existed, and therefore the Court could not say that it had jurisdiction over the case.

This case provides us with a helpful practice tip for all companies. Know the makeup of your own companies and keep clear records of entity filings and members. Had Peachtree been able to identify the citizenship of each of its member entities, it very well may have been able to keep its case in federal court instead of being remanded back to state court after languishing more than four years in the federal court system.
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  1. Settlement Funding, L.L.C. v. Rapid Settlements, Ltd., No. 16-20109, 2017 U.S. App. LEXIS 5115 (5th Cir. 2017).
  2. Peachtree Settlement Funding, LLC and Settlement Funding, LLC, related companies owned by the same holding company, constitute the plaintiffs in this case along with an individual structured settlement payee, Evelyn Franklin.
  3. Rapid Settlements, Ltd., Rapid Management Corporation, RSL Funding, LLC, and Stewart Feldman, are the named defendants in the original litigation. Stewart Feldman owns and/or controls each of the related RSL entities.
  4. Citing Manguno v. Prudential Prop. & Cas. Ins. Co., 276 F.3d 720, 723 (5th Cir. 2002).
     

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