Wednesday, April 29, 2015

Exclusive Shareholder Remedy Under Alberta Corporations Act Was Not Available in U.S. Courts

By Lene Powell, J.D.

A panel of the Ninth Circuit affirmed the dismissal of a counterclaim alleging breach of fiduciary duty by directors of a California corporation with a Canadian parent company. In what it called an “anomalous case,” the panel said that although the district court did have subject matter jurisdiction regarding the controversy, the counterclaim by the shareholder did not raise a cause of action for which the district court could grant relief, because the right could only be enforced in the Court of Queen’s Bench of Alberta (Seismic Reservoir 2020, Inc. v. Paulsson, April 27, 2015, Sentelle, D.).

Background. Seismic Reservoir 2020, Inc. (Seismic), a California company, provided oil reservoir imaging technology and services. In 2009, Seismic sued Bj√∂rn Paulsson, alleging violations of the Lanham Act and breach of fiduciary duty. Paulsson countersued, bringing his own breach of fiduciary duty claim, as well as other claims arising from his status as a shareholder and director of Seismic’s parent company, Seismic Reservoir 2020, Ltd., which was incorporated in Alberta, Canada.

In 2012, Paulsson dropped some of the counterclaims, and in a trial brief characterized his remaining counterclaim as “a breach of fiduciary duties owed by directors to shareholders” under Section 242 of the Alberta Business Corporations Act, which gives the Court of Queen’s Bench of Alberta broad equitable powers to regulate corporate matters. The district court recast the claim as an action for shareholder oppression under that section.

To determine whether it could hear the case, the district court appointed an independent expert on Alberta corporate law, who gave the opinion that the statute conferred exclusive jurisdiction on the Alberta court. The expert said that “only an Alberta Court has jurisdiction to grant a remedy for oppression brought in respect of an Alberta corporation.” The district court decided it could not issue a remedy for shareholder oppression under Section 242, and dismissed Paulsson’s counterclaim under Federal Rule of Civil Procedure 12(b)(1) for lack of subject matter jurisdiction.

Exclusive remedy. Reviewing the dismissal de novo, the panel concluded that actually, the district court did have subject matter jurisdiction. Paulsson, a California citizen, sought damages of more than $75,000 against Canadian citizens. This fit “squarely within” the language of 28 U.S.C § 1332(a)(2), relating to diversity jurisdiction. The exclusive jurisdiction provision in the Alberta statute did not divest the district court of its jurisdiction, because only the Constitution and the laws of the United States can dictate what cases or controversies U.S. federal courts may hear.

However, Paulsson was still out of luck. The panel explained that although foreign law cannot limit the jurisdiction of an Article III court to entertain controversies, when foreign law creates a right, it may determine the remedy. The Alberta statute provided a remedy available only through the Court of Queen’s Bench of Alberta, so the district court could not grant the relief requested. Therefore, the panel affirmed the dismissal of the counterclaim under Rule 12(b)(6), rather than 12(b)(1).

Because Paulsson could not possibly win relief, the panel did not remand to the district court to give him an opportunity to amend his pleadings.

The case is No. 13-55413.