ORDER GRANTING MOTION TO DISMISS Docket Nos. 26 & 27
JEFFREY T. MILLER, District Judge.
Plaintiff The Neighborhood House Association ("NHA") filed a complaint in this court on August 25, 2011 against Defendants Children of the Rainbow Head Start, LLC ("COTRHS"), Children of the Rainbow, Inc. ("COTRI"), and Gale Walker (collectively "Defendants" or "COTR"), who, pursuant to the parties' contracts, operated several Head Start facilities using funding provided by NHA. Defendants filed a complaint in state court based on a dispute arising out of the same set of contracts in June 2011 (the "COTR complaint" or "COTR case"). It was removed to this court by NHA in August 2011, but shortly thereafter it was remanded to state court. Now, Defendants move to dismiss this case and NHA moves for a preliminary injunction. Because this court lacks subject matter jurisdiction, the motion to dismiss is GRANTED and the motion for preliminary injunction is DENIED as moot.
In 2007, NHA and Defendants entered into multiple short term agreements under which Defendants received Head Start funding and services to operate child care facilities. Compl. ¶ 12. Under several Service Agreements and Memoranda of Understanding, NHA agreed to provide Head Start funding and property, and COTRI agreed to use the money and property in a specific manner. ¶ 12. Eventually COTRHS came to manage nine Head Start facilities originally opened by NHA and were provided with funding to run Head Start programs at two COTRI facilities. ¶¶ 13-17.
The most recent agreements between the parties expired on June 30, 2011. ¶ 26. Defendants filed a complaint against NHA in state court consisting of contract and tort claims, which was removed to this court in August. In September the matter was remanded, as "[t]he federal claims appear[ed] collateral to the allegedly contractual and tortious disputes." Case No. 3:11-CV-1786, Doc. 20 at 4.
NHA filed the instant complaint in this court on August 25, claiming that after the contracts expired Defendants failed to return property purchased with federal funds, including classroom supplies and playground equipment. The complaint also alleges that Defendants failed to return confidential children files that NHA needs to properly run the Head Start program for the 2011-2012 school year. The complaint requests injunctive and declaratory relief clarifying the parties' rights to classroom contents, playground equipment, and children files.
In early September, Plaintiff requested a Temporary Restraining Order ("TRO") to prevent Defendants from disposing of, selling, or using any of the assets acquired through Head Start funding. The court issued a TRO on September 15, requiring Defendants to immediately make all children files available to NHA and to return all property "purchased by or procured through federal Head Start funds." The TRO also required NHA to post a $25,000 bond.
NHA now moves for a preliminary injunction, claiming that Defendants have hidden and kept property belonging to NHA and that they have refused to provide a statement under oath affirming that they have complied with the TRO. Defendants move to dismiss the case, principally arguing that (a) NHA was required to file their claims as compulsory counterclaims in Defendants' case against NHA and (b) the court lacks subject matter jurisdiction.
As discussed below, Defendants' motion to dismiss is GRANTED as the court lacks subject matter jurisdiction. Consequently, Plaintiff's motion for a preliminary injunction is DENIED as moot.
II. LEGAL STANDARD AND DISCUSSION
A. Lack of Subject Matter Jurisdiction
While the court has already issued a TRO in this action, the case must be dismissed if at any time the court determines it lacks subject matter jurisdiction. Fed. R. Civ. P. 12(h)(3). Because Plaintiff does not seek relief directly under a federal statute and no diversity jurisdiction is alleged, the court must determine whether Plaintiff's requests for declaratory and injunctive relief arise under federal law.
Defendants argue that this court lacks subject matter jurisdiction because the complaint relies "on obligations created by the Services Agreement and MOU." They maintain that even if the contracts require adherence to federal law, that requirement is not sufficient to confer subject matter jurisdiction. NHA's opposition focuses on the use of Head Start funds to purchase the property in question. NHA also argues that the federal reversionary interest in the property favors the exercise of federal jurisdiction.
While it is undisputed that Head Start is a federally created and governed program, NHA has failed to demonstrate that this court's decision will turn on a substantial, disputed question of federal law. Instead, basic contract principles provide a sufficient basis to determine this dispute. Furthermore, Defendants acknowledge their duty to return all Head Start property, and, at this stage in the litigation, the only material issue is a factual one: whether all property has been returned.
1. Existence of a Disputed and Substantial Federal Issue
NHA vigorously argues that federal law dominates this case because the Head Start Act limits how Defendants may use the property in question. While that is true, it is undisputed that the contract requires Defendants to return the property to NHA. No construction or application of the federal law is necessary to make that determination, as was the case in
While it is true that the Head Start Act provides a context for assessing any harm NHA might face if deprived of its property, that statutory reference is insufficient to confer federal jurisdiction. Any potential harm is apparent and implicates no statutory or regulatory construction within the meaning of
2. Existence of a Federal Reversionary Interest
NHA also bases much of its jurisdictional argument on the reversionary interest in the property. Though the authority cited by NHA supports the claim that there is a federal reversionary interest in the property, the cases do not establish that federal subject matter jurisdiction exists automatically when there is such an interest.
NHA relies partially on
NHA also cites
In sum, NHA has failed to demonstrate that there is a disputed and substantial issue of federal law as required by
B. Existence of a Compulsory Counterclaim
Even if the court had subject matter jurisdiction to hear this case, the existence of compulsory counterclaims in this matter would persuade the court to grant the motion to dismiss. COTR argues that because NHA's claims all arise from the same contract, NHA was required to bring its claims as counterclaims in the COTR case. NHA responds that while its claims arise from the contract between the two parties, the claims are not compulsory counterclaims because they arise from separate actions taken by the parties after the contracts' expiration.
Because this court lacks subject matter jurisdiction, COTR's motion must be granted regardless of whether NHA's claims belong in the COTR case. Nevertheless, COTR has demonstrated that under California's logical relationship test, NHA's claims arise from the same transaction or occurrence as the claims in COTR's complaint.
NHA argues that even if its claims are compulsory under the logical relationship test, it is not precluded from proceeding here because it has not yet filed an answer in the COTR case. Like Fed. R. Civ. P. 13(a), Cal. Civ. Proc. §426.30 states that the principal part of the compulsory counterclaim rule does not apply if "[t]he person who failed to plead the related cause of action did not file an answer to the complaint against him." Cal. Civ. Proc. §426.30(b)(2).
However, this case presents an unusual procedural posture: the COTR case was filed first, but has progressed more slowly than the instant case.
Despite NHA's argument,
For this reason, even if this court had subject matter jurisdiction, it would hesitate to deny the motion to dismiss and see NHA risk losing the opportunity to pursue its claims in either court.
NHA has not shown that there is a substantial, disputed issue of federal law that would confer subject matter jurisdiction on this court. Likewise, it has not shown that the existence of a federal reversionary interest in NHA's property is sufficient to provide subject matter jurisdiction. Even if subject matter jurisdiction existed, a sensible application of Cal. Civ. Proc. §426.30 would lead the court to hold that NHA's claims should be brought in state court as compulsory counterclaims.
For these reasons, the motion to dismiss is GRANTED, and NHA's motion for a preliminary injunction is DENIED as moot.