Opinion
Case No. 3:18-cv-00938-YY
09-17-2018
RAJASHAKHER P. REDDY, Plaintiff, v. MANJU MORRISSEY, Defendant.
FINDINGS AND RECOMMENDATION :
Rajashakher P. Reddy ("Reddy") has filed this action against Manju Morrissey ("Morrissey") seeking a declaratory judgment (first claim), and alleging breach of contract (second claim), unjust enrichment (third claim), promissory estoppel (fourth claim), and fraud (fifth claim), arising from a dispute concerning the ownership of Piper and Associates, LLC ("Piper"). Compl., ECF #1. Morrissey moves this court for an order dismissing the first claim for failure to join an indispensable party under FRCP 12(b)(7). ECF #5. The court has subject matter jurisdiction over this case pursuant to 28 U.S.C. § 1332(a)(1). For the reasons that follow, Morrissey's motion to dismiss should be denied.
In the same pleading, Morrissey also moves to strike paragraphs in the complaint that she contends contain inadmissible settlement communications under FRE 408. ECF #5, at 8-10. Because that motion is not dispositive, it is resolved in a separate Opinion and Order issued on this same date. ECF #18.
FACTUAL BACKGROUND
As alleged in the complaint, Reddy formed Piper, a limited liability company, for the purpose of acquiring beachfront property in Walton County, Florida. Compl. ¶¶ 7-8, EFC #1. Reddy executed the Operating Agreement of Piper and Associates, LLC ("Operating Agreement") as the sole member of Piper. Id. at ¶ 9. On or about February 25, 2011, Piper purchased the property for $123,895 using funds contributed by Reddy. Id. at ¶ 10.
After the purchase of the property, Reddy was convicted of criminal charges and, concerned he would be sent to prison, assigned his membership interest in Piper to his sister, Morrissey. Id at ¶ 15. Reddy alleges that Morrissey agreed to return the membership interest to him when he was able to resume his duties, subject to Reddy repaying Morrissey for all expenses she incurred related to the property. Id. at ¶¶ 13-15. The parties dispute whether the assignment also required Reddy to pay an additional $90,000 owed to Morrissey as part of a separate, unrelated transaction. Id. at ¶¶ 21-22. Reddy alleges that he reimbursed Morrissey for taxes and homeowner's association fees, and offered to reimburse her expenses, but Morrissey refused to return the membership interest in Piper and instead demanded $350,000. Id. at ¶¶ 17-19, 23.
In addition to claims for breach of contract, unjust enrichment, promissory estoppel, and fraud, Reddy asks this court to issue a declaratory judgment that he is the owner and sole member of Piper because Morrissey failed to execute Piper's Operating Agreement, a necessary condition for the transfer of membership. Id. ¶¶ 26-30.
In 2016, Reddy filed suit in Walton County Circuit Court, Florida, alleging claims of breach of contract and promissory estoppel against Morrissey, and claims of constructive trust, unjust enrichment, and unjust enrichment-equitable lien against Morrissey and Piper. ECF #6, Exs. 1 & 4, at 3. On January 3, 2017, the case was removed to the Northern District of Florida. Id., Ex. 4. The district court dismissed Morrissey for lack of personal jurisdiction on September 15, 2017. Id., Ex. 4, at 7. On March 15, 2018, the district court granted summary judgment in Piper's favor, holding there was no genuine issue of material fact regarding Reddy's unjust enrichment, equitable lien, and constructive trust claims against Piper. Id., Ex. 2, at 6. In doing so, the district court recognized that to the extent Reddy had valid claims, it would be against Morrissey:
By separate order, this court has taken judicial notice of the complaint and other documents pertaining to the Florida case. ECF #17.
To the extent that the plaintiff has a valid claim, it is for fraud or breach of contract, or for something related to Morrisey's actions. But he has not asserted such a claim against Piper (nor could he). The only breach of contract claim that he raised was against Morrisey, and that claim has been dismissed from this lawsuit and either is currently or will be part of the Oregon case.Id.
Reddy filed this action against Morrissey in the District of Oregon on May 30, 2018. ECF #1.
FINDINGS
Morrissey contends that Reddy's first claim for declaratory judgment must be dismissed pursuant to Rule 12(b)(7) because Reddy has failed to join Piper, which is a necessary and indispensable party. Morrissey also contends that Reddy cannot cure this defect, because the Northern District of Florida has granted summary judgment in favor of Piper and claim preclusion applies. Mot. 6-7, ECF #5.
Under FRCP 12(b)(7), a party may move to dismiss a case for "failure to join a party under Rule 19." EEOC v. Peabody Western Coal Co., 400 F.3d 774, 778 (9th Cir. 2005). The court must determine whether a non-party should be joined, whether such joinder is feasible, and, if not, whether the action should be dismissed in the absence of that party. Id. at *779. The burden of persuasion is on the party moving to dismiss for failure to join. Makah Indian Tribe v. Verity, 910 F.2d 555, 558 (9th Cir. 1990); Sulit v. Slep-Tone Entm't, No. C06-00045 MJJ, 2007 WL 4169762, at *2 (N.D. Cal. Nov. 20, 2007).
To determine whether a party is necessary under Rule 19(a), the court "must consider whether 'complete relief' can be accorded among the existing parties, and whether the absent party has a 'legally protected interest' in the subject of the suit." NovelPoster v. Javitch Canfield Group, No. 13-cv-05186-WHO, 2014 WL 1312111, at *5 (N.D. Cal. Apr. 1, 2014) (quoting Shermoen v. United States, 982 F.2d 1312, 1317 (9th Cir. 1992)). There is no precise formula for determining whether a particular nonparty should be joined under Rule 19(a). "The determination is heavily influenced by the facts and circumstances of each case." M.O.R.E., LLC v. U.S., No. C 12-3609 PJH, 2012 WL 4902802, at *3 (N.D. Cal. Oct. 15, 2012) (quoting Northern Alaska Envtl. Ctr. v. Hodel, 803 F.2d 466, 468 (9th Cir. 1986)).
As the Ninth Circuit explained in United States v. Bowen, 172 F.3d 682, 688 (9th Cir. 1999), the analysis under Rule 19 proceeds in three steps. First, the court determines whether the absent party is necessary. Id. Rule 19(a)(1) requires joinder of parties if:
(A) in that person's absence, the court cannot accord complete relief among existing parties; orFRCP 19(a)(1).
(B) that person claims an interest relating to the subject of the action and is so situated that disposing of the action in the person's absence may:
(i) as a practical matter impair or impede the person's ability to protect the interest; or
(ii) leave an existing party subject to a substantial risk of incurring double, multiple, or otherwise inconsistent obligations because of the interest.
Second, if the absent party is necessary, the court must determine whether joinder is "feasible." Id. (citing FRCP 19(a) & (b)). Third, if joinder is not "feasible," the court must determine whether the absent party is "indispensable"—that is, whether in "equity and good conscience" the action can continue without that party. Id. (citing FRCP 19(b)).
"An archetypal example of a necessary and indispensable party is a corporation that was not joined in a derivative suit by one of its shareholders." Azoulai v. La Porta, No. CV 15-06083-MWF-PLA, 2016 WL 9045852, at *2 (C.D. Cal. Jan. 25, 2016). Because a "company has a legal existence separate from its members, . . . a corporation which suffers damages through wrongdoing by its officers and directors must itself bring the action to recover the losses thereby occasioned." Id. (citing PacLink Communications Int'l, Inc. v. Superior Court, 90 Cal. App. 4th 958, 965, 109 Cal. Rptr. 2d 436 (2001)).
Courts in this district and around the country have found LLCs to be necessary parties where the claims implicate the interests of the LLC itself. See, e.g., Sulit, 2007 WL 4169762, at *4 (finding corporation is a necessary party where the defamation claim is, by plaintiff's own admission, related to the actions of both the named defendants and the corporation); Beane v. Beane, No. 06-cv-446-SM, 2008 WL 1787105 (D. N.H. Apr. 18, 2008) (finding LLC was necessary party to dispute about intellectual property owned by the LLC); Trademark Retail, Inc. v. Apple Glen Investors, LP, 196 F.R.D. 535 (N.D. Ind. 2000) (finding LLC was necessary party where the complaint alleged breaches of fiduciary duty that were causing harm to the LLC); Bartfield v. Murphy, 578 F. Supp. 2d 638 (S.D.N.Y. 2008) (finding plaintiff's claims that defendant misused voting power and aided and abetted breaches of fiduciary duty were derivative and therefore the LLC was a necessary party).
The instant case, however, is not a derivative action implicating the interests of Piper, the LLC. Rather, Reddy is acting on his own behalf against Morrissey for allegedly breaching their contractual agreement. Reddy asks this court to interpret the terms of a contract, and does not seek judgment about the management of or duties owed to Piper, i.e., issues on which Piper would want to be heard. Otherwise stated, Piper has no "legally protected interest" in this proceeding. Shermoen, 982 F.2d at 1317. Indeed, as the Northern District of Florida observed in dismissing all claims against Piper, to the extent that Reddy has valid claims, it is against Morrissey for breach of contract and fraud, which that court correctly predicted would be brought in this lawsuit. ECF #6, Ex. 2, at 6.
This case is easily distinguished from Weber v. King, on which Morrissey relies. 110 F. Supp. 2d 124 (E.D.N.Y. 2000). In Weber, plaintiffs Robert and Kevin Weber, both members of Kathleen's Bake Shop, LLC, brought suit alleging breach of contract and other claims against the third member Kathleen King. King had sold two-thirds of her business to the Webers for promissory notes valued at $433,333.33 each. At issue was whether the monthly payments on the notes were to be paid from the LLC's funds or by the Webers personally. King moved to dismiss for failure to join a necessary and indispensable party pursuant to FRCP 12(b)(7) and the court agreed, finding that one of the issues in the case was whether to permit the Webers to "invade the coffers" of the LLC to pay down their promissory notes. 110 F. Supp. 2d at 128. Unlike the dispute of ownership alleged by Reddy, the LLC in Weber plainly had an interest that diverged from its members.
Morrissey also relies on two old decisions, Crump v. Thurber, 115 U.S. 56, 60 (1885), and Muellhaupt v. Joseph A. Strowbridge Estate Co., 136 Or. 106, 118 (1931), in which corporations were held to be indispensable because the relief sought required the corporations to cancel and reissue stock. Piper, however, does not issue stock. Moreover, Morrissey has not asserted what action, if any, Piper would have to take to effectuate a transfer of ownership, if ordered by the court.
More closely on point is Incredible Investments Ltd. v. Parlato, No. 09-CV-00576(S)(M), 2010 WL 11546025 (W.D.N.Y. July 15, 2010). There, the plaintiff also sought a declaratory judgment regarding the ownership of an LLC. Id. at *6. While the court applied Rule 19 for purposes of determining diversity jurisdiction, the analysis is the same. The court noted that there is a distinction between direct actions and derivative actions, and that "[a] membership interest in the limited liability company is personal property." Id.; see ORS 63.239 ("A membership interest [in an LLC] is personal property."). The court concluded that the LLC was not an indispensable party because the plaintiff had brought a direct rather than a derivative claim:
These causes of action emanate from the agreement reached between the members of One Niagara LLC and seek to define the membership rights and interests of the members. Because they address the interests of the members rather than the assets of One Niagara LLC, I conclude that these claims are direct rather than derivative.Id. (citing DirecTV Latin America, LLC, No. 08 Civ. 3987(VM)(GWG), 2009 WL 692202, at *9 (S.D.N.Y. Mar. 18, 2009) (finding the LLC (LAS) to be dispensable to a suit between its members (Direct TV and Park 610) where "DirecTV is not seeking rights in any assets belonging to LAS. Rather, it seeks a determination of the proper ownership of LAS as between DirecTV and Park 610, and for specific performance of Park 610's purported obligation to transfer Park 610's interest for book value."). Here, likewise, Reddy makes a direct claim regarding his membership interest in Piper; there are no derivative claims that implicate Piper's interests.
In her briefing, Morrissey avers that this court would be "hard-pressed" to "declare whether [Reddy] or Morrissey is the true owner without Piper [] being a party to such adjudication." Mot. 5, ECF #5. She also contends that disposition in Piper's absence will impair its ability to protect its interests. Id. However, these conclusory arguments do not satisfy Morrissey's burden of establishing that Piper is a necessary party. As Reddy correctly contends, Piper is a single-member LLC and "will suffer no adverse consequences, whether its ownership changes hands or not." Response, 6-7.
At oral argument, Morrissey argued that Reddy's claim for declaratory judgment, as it is currently phrased in the complaint, necessitates that Piper be joined as a party. In his claim for declaratory judgment, Reddy seeks "an order declaring Plaintiff is the owner and sole member of Piper." Compl. ¶ 30. Morrissey contends that no such order can be entered unless Piper is joined. As explained above, however, this court can issue an order as to Reddy's membership interest in the LLC without implicating Piper's interests in any way.
Morrissey also claimed at oral argument that failing to join Piper could result in inconsistent rulings. Although Morrissey argued that Piper could hypothetically bring some kind of action against her, she failed to provide a convincing example of what kind of action would result in an inconsistent decision.
FRCP 19(a)(1) compels this court to consider, in deciding whether Piper is a necessary party, whether an existing party would be subject to a substantial risk of incurring double, multiple, or otherwise inconsistent obligations because of the interest.
Because Morrissey has not met her burden of proving that Piper is an indispensable party, this court need not conduct further analysis under the remaining steps of Rule 19 or reach the question of whether any claims against Piper would be barred by claim preclusion.
RECOMMENDATION
For the foregoing reasons, Morrissey's motion to dismiss pursuant to FRCP 12(b)(7) (ECF #5) should be DENIED.
SCHEDULING ORDER
These Findings and Recommendation will be referred to a district judge. Objections, if any, are due Monday, October 01, 2018. If no objections are filed, then the Findings and Recommendation will go under advisement on that date.
If objections are filed, then a response is due within 14 days after being served with a copy of the objections. When the response is due or filed, whichever date is earlier, the Findings and Recommendation will go under advisement.
NOTICE
These Findings and Recommendation are not an order that is immediately appealable to the Ninth Circuit Court of Appeals. Any Notice of Appeal pursuant to Rule 4(a)(1), Federal Rules of Appellate Procedure, should not be filed until entry of a judgment.
DATED September 17, 2018.
/s/ Youlee Yim You
Youlee Yim You
United States Magistrate Judge