Opinion
3:20-cv-946-JR
10-19-2020
NEBULAE INC., a Wyoming corporation, and CLAUDIA OCHOA, an individual, Plaintiffs, v. BRIAN TAYLOR, an individual, and NGU NGUYEN, an individual, Defendants.
FINDINGS & RECOMMENDATION :
Plaintiffs bring this action alleging defendants Brian Taylor and Ngu Nguyen, members of Forix, LLC (Forix), fraudulently induced plaintiffs to enter into and continue a contract with Forix. Defendants move to dismiss. For the reasons stated below, the motion should be denied.
ALLEGATIONS
A. Complaint Against Forix
On August 6, 2019, plaintiff initiated an action against Forix, Case No. 3:19-cv-1214-JR. In that case, plaintiffs alleged they entered into a contract with Forix in which Forix would create a subscription-based music streaming service where independent artists can share their music. Complaint (ECF 1 in 19-1214 case) at ¶ 8. Plaintiffs alleged Forix promised a project timeline of 29 weeks for completion, a total cost of $100,000, and a warranty to fix errors, free of charge, in the functional source code within the control of defendant. Id. Plaintiffs asserted the parties amended the contract three times adding nearly three weeks to the project timeline and additional costs of about $10,000. Id. at ¶ 10.
Plaintiffs alleged they terminated the contract on October 17, 2017, due to Forix's failure to meet the deadlines and for breaching its obligations. Plaintiffs assert they then had to seek the services of a third party who found excessive errors and security breaches in the work performed necessitating a rebuild of the program from scratch at great expense. Id. at ¶ 12. Accordingly, plaintiffs asserted a claim for breach of contract in the 19-1214 case seeking damages of $500,000.
B. Complaint Against Taylor and Nguyen
In this case, plaintiffs again rely on the contents of the Forix contract and allege that prior to entering into the contract:
defendant Taylor personally stated to Plaintiffs that the Program would incorporate the Drupal platform, the Program would launch for a wealth of media including tablet and mobile users, and support for the Program would be ongoing through the establishment of a roadmap for future iterations and ongoing refinement. In addition, defendant Taylor promised a project timeline of 29 weeks with a total cost of $100,000.00.
Defendant Taylor also assured Plaintiffs that the Program would be covered by a warranty to fix errors, free of charge. The promised warranty was to cover errors in the functional source code within the control of the Forix, which caused the software to not perform as it was designed.
At the time Plaintiffs entered into the Contract, they were relying on the statements made by defendant Taylor relating to the services Forix would perform for Plaintiffs in creating the Program and the projected timeline for completion of the Program.
....
Defendant Brian Taylor signed the Contract on behalf of Forix.
Over the course of performance of the Contract, three amendments added services to the scope of work....
Defendants personally made numerous misrepresentations to Plaintiffs regarding Defendants' and Forix's ability to timely compete a program that functioned as promised and Defendants' and Forix's ability to fix the errors and functionality issues in the Program.Complaint (ECF 1) at ¶¶ 12-14, 16-22.
Plaintiffs relied on Defendants' promises regarding the timely development of the Program and Defendants' and Forix's ability to correct the errors in the Program when Plaintiff agreed to sign the three, separate addenda to the Contract.
The Program created for Plaintiffs was full of errors. The Plaintiffs, nevertheless, worked with the Defendants and Forix in good faith in an attempt to get the Program to function properly. The promised project end dates came and went and neither the Defendants nor Forix were ever able to get the Program to function as promised.
On information and belief, in late 2016 or early 2017 Forix closed or reduced their staff and operations in Portland, Oregon and outsourced work on the Program to Vietnam.
On or about October 17, 2017, the Plaintiffs terminated the Contract for failure to meet deadlines and for material breach of Defendants' and Forix's obligations. As a result, the Plaintiffs had to seek the services of a third-party who found an excessive number of errors and security breaches in the Program. Due to Defendants' and Forix's defective work, the Plaintiffs must rebuild the Program from scratch at great expense.
Plaintiffs assert a claim for fraudulent misrepresentation based on defendant Taylor's alleged representations to plaintiffs regarding Forix's ability, before and during the contract, to provide the services involved in developing the program and the timeline to develop it, despite the fact that Taylor knew that Forix had neither the resources nor the skills to provide the program as promised.
Plaintiffs also assert defendant Nguyen similarly made false representations about Forix's ability to complete the program in a timely manner.
In support of their negligent misrepresentation claims, plaintiffs add the allegations that defendant Taylor had a special relationship with plaintiffs based on his status as an expert in computer program creation, Taylor's role as representative for Forix, which claims to specialize in eCommerce as well as custom web and mobile app development, and Taylor's position on the development team creating the program for which plaintiffs' contracted. Similarly, plaintiffs assert defendant Nguyen had a special relationship with plaintiffs based on his status as an expert in computer program creation, Nguyen's role as a representative for Forix, and his position on the development team creating the program.
Plaintiffs also allege a claim for fraud in the inducement based on the alleged misrepresentations about Forix's ability to deliver the program to get plaintiffs to enter into the contract with Forix.
DISCUSSION
Defendants move to dismiss plaintiffs' case asserting plaintiffs fail to plead necessary facts showing defendants control Forix. In addition, defendants assert Forix is an indispensable party and joining it is not feasible due to the case already pending against it.
A. Immunity for Members of an LLC
Plaintiffs allege defendant Taylor is listed as the registered agent for and a member of Forix. Complaint (ECF 1) at ¶ 8. Plaintiffs also allege defendant Nguyen is a member of Forix and that Forix is a limited liability company. Id. at ¶¶ 9-10.
A limited liability company is liable for loss or injury caused to a person, or for a penalty incurred, as a result of a wrongful act or omission, or other actionable conduct, of a member or manager acting in the ordinary course of the business of the limited liability company or with authority of the limited liability company.Or. Rev. Stat. § 63.170.
In responding to the motion plaintiffs assert the claims in the complaint are not against defendants in their capacities as members of Forix, but as individuals for actions personally undertaken as agents of Forix. This is a distinction without a difference for purposes of Forix's liability under Oregon law. To be an "agent," two requirements must be met: (1) the individual must be subject to another's control; and (2) the individual must "act on behalf of" the other person. Vaughn v. First Transit, Inc., 346 Or. 128, 136, 206 P.3d 181, 187 (2009).
Members of an LLC, however, do enjoy a certain level of immunity for the liabilities of the LLC:
(1) The debts, obligations and liabilities of a limited liability company, whether arising in contract, tort or otherwise, are solely the debts, obligations and liabilities of the limited liability company. A member or manager is not personally liable for a debt, obligation or liability of the limited liability company solely by reason of being or acting as a member or manager.Or. Rev. Stat. § 63.165.
(2) The failure of a limited liability company to observe the usual limited liability company formalities or requirements relating to the exercise of its limited liability company powers or management of its business is not a ground for imposing personal liability on the members or managers for liabilities of the limited liability company.
Defendants argue the statute provides immunity and that plaintiffs must allege facts sufficient to "pierce the corporate veil" to sufficiently allege a tort claim against them individually. Nonetheless, this general immunity does not immunize the member for his own actions. A member or manager remains responsible for his acts or omissions to the extent those acts, or omissions would be actionable against the member or manager if that person were acting in an individual capacity. Cortez v. Nacco Material Handling Grp., Inc., 356 Or. 254, 268-69, 337 P.3d 111, 119 (2014). This is true even if the allegedly tortious actions were taken in the individual's capacity as member of the LLC in furtherance of the LLC's business. See Cortez, 337 P.3d at 119 (Or. Rev. Stat. § 63.165(1) does not shield the member owner from responsibility for his own negligent acts in managing Sun Studs, LLC). In other words, the immunity provided by the statute only provides immunity for vicarious liability for the liabilities of the LLC. See Cortez, 337 P.3d at 118 (members and managers remain personally liable for the actions they take on behalf of an LLC). Accordingly, the allegations seeking to hold defendants liable for the alleged fraudulent misrepresentations are not deficient and the motion to dismiss on this ground should be denied.
Even if plaintiffs were required to allege such facts, it appears that an amendment would cure this purported deficiency as plaintiffs assert defendants are the president and vice president of Forix. To pierce the veil of the LLC a plaintiff must allege the member was in actual control of the LLC and that an inability to collect from the LLC is a result of the member's improper conduct. See. Handam v. Wilsonville Holiday Partners, LLC, 221 Or. App. 493, 496, 190 P.3d 480, 483 (2008) (The shareholder's conduct must have been improper either in relation to the plaintiffs entering the transaction in which the debt was incurred or in preventing or interfering with the corporation's performance or ability to perform its obligations toward the plaintiff).
B. Failure to Join an Indispensable Party
As noted above, Forix is liable for the conduct of its members acting in the ordinary course of the LLC. Defendants assert Forix is an indispensable party and cannot be joined because of the advanced stage of the litigation in the case against Forix based on the same transaction (case 19-1214-JR).
In determining whether an action should be dismissed for failure to join a party the Court must first analyze whether the absent party is necessary to the suit. Fed. R. Civ. P. 19(a). If so, and if that party cannot be joined, the Court must then assess whether the party is indispensable so that in equity and good conscience the suit should be dismissed. Makah Indian Tribe v. Verity, 910 F.2d 555, 558 (9th Cir. 1990); Fed. R. Civ. P. 19(b). The inquiry is a practical fact-specific determination and is designed to avoid the harsh results of rigid application. Id.
Whether Forix is necessary depends upon whether its absence will (1) impair or impede its ability to protect its interest; or (2) expose the existing parties to the risk of multiple or inconsistent obligations by reason of that interest. See Fed. R. Civ. P. 19(a)(2); Makah Indian Tribe, 910 F.2d at 558.
Defendants argue Forix could conceivably prevail in the 19-1214 case while its agents could be found liable for its supposed torts. However, plaintiffs, through this action seek to hold defendants liable not on a veil piercing theory for the acts of the LLC, but directly for their acts as individuals. In addition, in the first action, plaintiffs seek to hold Forix responsible under a breach of contract theory, not a tort theory.
It is not necessary for all joint tortfeasors to be named as defendants in a single lawsuit. Temple v. Synthes Corp., 498 U.S. 5, 7 (1990). As reflected in the Advisory Committee's Notes to the 1966 amendment to Fed. R. Civ. P. 19(a), the Rule's "description [of persons to be joined] is not at variance with the settled authorities holding that a tortfeasor with the usual 'joint-and-several' liability is merely a permissive party to an action against another with like liability. Joinder of these tortfeasors continues to be regulated by Rule 20[.]" (internal citations omitted). See also Union Paving Co. v. Downer Corp., 276 F.2d 468, 471 (9th Cir. 1960) (noting that "it is well established that a joint tort-feasor is not an indispensable party").
Accordingly, the motion to dismiss should also be denied on this basis. However, the parties agree that for purposes of judicial economy the cases should be at least consolidated. Plaintiffs assert they chose to pursue defendants in this case because Forix would not consent to the filing of an amended complaint and they chose to file the new action rather than seek leave to amend. Plaintiffs note that in the event the motion to dismiss is denied they will move to consolidate the case at bar with case 19-1214-JR. Defendants assert plaintiffs should simply move to amend in 19-1214-JR.
Although the parties moved to extend most case deadlines in the 19-1214 case and discovery is ongoing, the parties did not move to extend the deadline to amend. See (ECF 3 in 3:19-cv-1214-JR) (within 120 days from August 6, 2019, the parties shall join claims, remedies, and parties); (ECF 27) (moving to extend deadlines for discovery, consents, ADR report, dispositive motions, and pretrial order only). Accordingly, a motion to amend in that case would require plaintiff to show good cause for modification of the pretrial schedule pursuant to Fed. R. Civ. P. 16(b)(4) (allows modifications of the pretrial schedule only for good cause). A party demonstrates good cause for the modification of a scheduling order by showing that, even with the exercise of due diligence, he or she was unable to meet the deadlines set forth in the order. See Zivkovic v. S. California Edison Co., 302 F.3d 1080, 1087-88 (9th Cir. 2002). However, even with a lack of due diligence, good cause may exist based on an "overall evaluation of the rights of the parties, the ends of justice, and judicial economy." United States v. Dang, 488 F.3d 1135, 1143 (9th Cir. 2007). Moreover, because discovery is still open in the 19-1214 case and because defendants themselves, represented by the same counsel as Forix in the 19-1214 case, suggest amendment in that case is preferable, defendants will suffer no prejudice if amendment of the case schedule and amendment of the 19-1214 complaint is allowed. Accordingly, while the motion to dismiss should be denied, for purposes of efficiency and judicial economy, plaintiffs should seek to amend in the 19-1214 case to add the defendants and tort claims. Then upon granting of that motion, plaintiffs can voluntarily dismiss this case (20-946).
CONCLUSION
Defendants' motion to dismiss (ECF 13) should be denied.
This recommendation is not an order that is immediately appealable to the Ninth Circuit Court of appeals. Any notice of appeal pursuant to Fed. R. App. P. 4(a)(1), should not be filed until entry of the district court's judgment or appealable order. The parties shall have fourteen (14) days from the date of service of a copy of this recommendation within which to file specific written objections with the court. Thereafter, the parties shall have fourteen (14) days within which to file a response to the objections. Failure to timely file objections to any factual determination of the Magistrate Judge will be considered as a waiver of a party's right to de novo consideration of the factual issues and will constitute a waiver of a party's right to appellate review of the findings of fact in an order or judgment entered pursuant to this recommendation.
DATED this 19th day of October, 2020.
/s/ Jolie A. Russo
Jolie A. Russo
United States Magistrate Judge