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noting that "there is a split in the jurisprudence; some courts have interpreted 15 (c) to permit the addition of a new plaintiff, while others have not" and then applying Rule 15(c) to determine that the amendment seeking to add a plaintiff did not relate back to the original complaint.
Summary of this case from Altamirano v. VickersOpinion
No: 99-3313
February 2, 2001
MEMORANDUM AND ORDER
Background
Plaintiffs in the original complaint, Allyson May Sanderson and David Israel, are co-trustees for the Sanderson Children's Trust, created to benefit the four children of Michael Sanderson. Michael Sanderson was named as an additional plaintiff in the first amended and restated complaint.
This action arises out of Michael Sanderson's donation to the trust of stock appreciation rights ("SARS") he had been granted by defendant, H.I.G. P-XI Holding, Inc. ("P-XI"), as partial consideration for the sale of his interest in a company known as Milliken Michaels', Inc. to P-XI. The name of P-XI was later changed to Co-Source. Plaintiffs claim that when Co-Source was later sold, the trust received less value than the sum to which it was entitled from the proceeds of the sale, for the reason that Co. Source allegedly overpaid defendant, H.I.G. Capital Management, Inc. ("HIG Capital Management"), for services rendered in connection with the sale. Specifically, plaintiffs allege that the trust is entitled to an additional amount of $235,896, which represents 9.829% of the $2.4 million fee Co-Source paid to Capital Management.
Defendant, Capital Management, filed a motion to dismiss the plaintiffs' original complaint, arguing that plaintiffs had failed to state a claim against Capital Management under any legal theory. On July 27, 2000, I dismissed all of plaintiffs' claims against Capital Management, except for their claims of breach of contract and breach of the obligation of good faith and fair dealing. I further ordered that these claims would also be dismissed, unless plaintiffs amended their pleadings to sufficiently allege circumstances justifying the piercing of the corporate veil to hold Capital Management liable for breach of contract and breach of the obligation of good faith and fair dealing. Further, I noted that plaintiffs would not be precluded from alleging in their amended complaint facts that would support an alternative claim against Capital Management for tortious interference with contract.
On October 25, 2000, plaintiffs filed a pleading they entitled "First Amended and Restated Complaint," in which it added four new defendants and one new plaintiff.
"Plaintiffs omitted from this restated complaint the defendant PX-I, or Co-Source, presumably because they had negotiated a settlement with that defendant. In a proposed second amended complaint, the filing of which is presently an issue set for contradictory motion, plaintiffs assert their rights against defendants not only on their own behalf, but pursuant to assigment to them of Co-Source's rights against the defendants.
Before me is the defendants' motion to dismiss the plaintiffs' first amended and restated complaint.
Discussion
A motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) "is viewed with disfavor and is rarely granted." Kaiser Aluminum Chemical Sales v. Avondale Shipyards, 677 F.2d 1045, 1050 (5th Cir. 1982); Beanal v. Freeport-McMoran. Inc., 197 F.3d 161, 164 (5th Cir. 1999). The standard which governs the dismissal of a complaint under Rule 12(b)(6) is that a complaint should not be dismissed "unless it appears to be a certainty that plaintiff is entitled to no relief under any state of facts which could be proved in support of the claim." 2A Moore's Federal Practice P. 12.08 at 2271 (2d ed. 1975). The Supreme Court has held that when a court reviews the sufficiency of a complaint, its task is a limited one. "The issue is not whether a plaintiff will ultimately prevail but whether the claimant is entitled to offer evidence to support the claims." Scheur v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 1686, 40 L.Ed.2d 90 (1974).
In considering this motion to dismiss, I must accept as true not only the allegations of the complaint, but also "any reasonable inferences that may be drawn therefrom." Watts v. Graves, 720 F.2d 1416, 1419 (5th Cir. 1983). However, I need not accept as true "conclusory allegations or unwarranted deductions of fact" contained in the complaint. Tuchman v. DSC Communications Corp., 14 F.3d 1061, 1067 (5th Cir. 1994).
I. Summary of First Amended and Restated Complaint
The plaintiffs' amended and restated complaint goes well beyond the amendments contemplated in my order of July 27, 2000. In my order, they were provided with the opportunity to amend their complaint to allege circumstances that would justify piercing the corporate veil in order to make a claim against Capital Management for breach of contract and breach of the obligation of good faith and fair dealing. They were further provided with the opportunity to allege an alternative claim against Capital Management for tortious interference with contract. However, they were not authorized to add an additional plaintiff, or four additional defendants, or to make new claims. Nevertheless, in the interest of justice and judicial economy, I will consider the amended and restated complaint in its entirety, particularly since the defendants have not filed a motion to strike the new parties and claims, but have chosen instead to seek their dismissal through a Rule 12(b)(6) motion. The following is a brief summary of the amended and restated complaint.
The plaintiffs have added Michael G. Sanderson as an additional plaintiff in order to reassert the securities claim which I dismissed on July 27, 2000. The basis of my dismissal of the plaintiffs' securities fraud claims was that plaintiffs, who received the SARs by way of donation from Sanderson, lacked standing because there was no express assignment to them of Sanderson's rights under Rule 10b-5 of the Securities Exchange Act of 1934. As stated in my ruling, Rule 10b-5 rights are not automatically assigned by the transfer of the underlying security. Smith v. Ayres, 977 F.2d 946, 949 (5th Cir. 1992); In re Saxon Securities Litigation, 644 F. Supp. 465' (S.D.N.Y. 1985).
Mr. Sanderson has apparently been added in an alternative capacity, since the plaintiffs allege that Mr. Sanderson intended and in fact has now expressly assigned to the co-trustees all rights, including securities fraud claims, which he may have had pursuant to the SAR Agreement. However, no "express assignment" is attached to the amended complaint. Mr. Sanderson asserts that in the event that all his rights were not assigned, he is entitled to make the securities fraud claim on his own behalf.
The plaintiffs have added two other H.I.G. entities as defendants: 1) H.I.G. Investment Group, L.P. ("HIG Investment Group"), and 2) H.I.G. Capital, LLC ("HIG Capital). Further, plaintiffs have added as defendants two individuals associated with the RIG entities, John P. Bolduc and Charles J. Hanemann.
Plaintiffs allege six "counts" in their amended and restated complaint.
II. Breach of Securities Exchange Act and Rule 10b(5)
Plaintiff, Sanderson, alleges that he became a purchaser of securities when he acquired the SARS from P-XI as partial consideration for the sale of his interest in Milliken Michael. He claims in Count II of the amended complaint that under 15 U.S.C. § 78j and 17 C.F.R. § 240.10b-5, HIG Investment Group was obligated, before transfer of the SARs to Sanderson, to 1) disclose all material facts that could have affected the value of the SARs, and 2) disclose all "actual or planned self-dealing" that might result in an advantage to RIG Investment Group or in a disadvantage to Sanderson. Plaintiffs allege that RIG Investment Group violated its obligations under the cited law, by failing to disclose that a $4.2 million fee would be paid to a company "with common ownership and control" in the event that P-XI (now Co-Source)was sold. Plaintiffs further allege that either Sanderson or the co-trustees have the right to recover the profit which they allege was improperly gained as a result of the non-disclosure.
In my July 27, 2000 ruling, I found that the co-trustee plaintiffs lacked standing to assert these claims, since they had not and indeed could not allege that they were the purchasers or sellers of a "security," nor had they alleged any express assignment of 10b-5 rights. Plaintiffs attempt to reassert the same securities fraud claim on the basis that Sanderson has now executed an express assignment to the co-trustees. Alternatively, they argue that Sanderson has retained the rights. Their argument, quite simply, is that one or the other of the original purchaser or his donee must have standing to challenge the payment of the fee, and both are now before the court.
I did not decide whether stock appreciation rights were, in fact, securities within the meaning of the Securities Exchange Act, since I found that plaintiffs did not have standing to assert these claims. Plaintiffs did not receive an express assignment of 10b-5 rights, and were not entitled to sue based upon their alleged status as "putative asignee." See Minute Entry, July 27, 2000, pp. 25-26, and cases cited therein.
1. Statute of Limitations
Defendants argue that Sanderson's lOb-5 claim is barred, for the reason that private actions under 10b must be filed within one year of the discovery of the facts constituting the violation.
Plaintiffs filed their lawsuit in state court on September 29, 1999. Defendants contend that plaintiffs learned of the payment of the fee to Capital Management no later than May 20, 1999. Plaintiffs do not dispute this fact. Nor do they dispute that their first amended and restated complaint was not filed until October 25, 2000, approximately one year and five months after the payment of the fee. However, they contend that the securities claim alleged by the newly added plaintiff, Sanderson, relates back to the original complaint under Federal Rule of Civil Procedure 15(c).
FRCP 15(c) provides, in relevant part, that an amendment of a pleading relates back to the date of the original pleading when:
(2) the claim or defense asserted in the amended pleading arose out of the conduct, transaction or occurrence set forth or attempted to be set forth in the original pleading, or
(3) the amendment changes the party or the naming of the party against whom a claim is asserted if the foregoing provision (2) is satisfied, and . . . the party to be brought in by amendment (A) has received such notice of the institution of the action that the party will not be prejudiced in maintaining a defense on the merits, and (B) knew or should have known that, but for a mistake concerning the identity of the proper party, the action would have been brought against the party.
The 1966 Advisory Committee Notes to Rule 15(c) suggests that the relation back of amendments changing plaintiffs is not expressly treated in Rule 15(c), since the problem is "generally easier." According to the notes, the rule concerning defendants is extended to plaintiffs. See Flores v. Cameron County, Texas, 92 F.3d 258, 272-3 (5th Cir. 1996); FDIC v. Conner, 20 F.3d 1376, 1385-86(5th Cir. 1994).
In the case before me, however, plaintiffs are not seeking to change a plaintiff or a plaintiff's name; rather, they seek to add Sanderson as a new plaintiff to assert the same securities fraud claim raised in the original complaint by the co-trustee plaintiffs. However, that securities fraud claim was dismissed in my ruling of July, 2000.
In Newell v. Harrison, 779 F. Supp. 388 (E.D.La. 1991), I held that Rule 15(c) did not permit the relation back of a wife's claim for loss of consortium in a lawsuit arising out of her husband's injuries in an accident that had occurred more than a year earlier. Thus, the case involved both a new plaintiff and a new claim. I found that there was no reason not to adhere to a "plain language" interpretation of Rule 15 (c) in that case, and concluded that the rule was not intended to permit a party to amend its pleadings to add party plaintiffs.
However, I acknowledged that there is a split in the jurisprudence; some courts have interpreted 15(c) to permit the addition of a new plaintiff, while others have not. For citations, see the cases discussed in Newell.
In light of the fact that the securities claim has been dismissed, the plaintiffs are seeking to add not only a new plaintiff, but essentially a new claim. Under the specific circumstances of this case, I find that the amendment adding Sanderson as a plaintiff does not relate back to the originally filed complaint. I further find that co-trustees' attempt to reassert a securities fraud claim on the basis of a purported "express assignment" (a copy of which was not attached to the amended complaint) does not relate back. The purported assignment was granted more than one year after the plaintiffs had knowledge of the conduct they complained of. Thus, co-trustees received, at the very best, an assignment of prescribed rights to pursue a securities fraud claim. Accordingly, the securities fraud claim is dismissed.
II. Count IV: Tortious Interference with Contract
1. Choice of Law
In my minute entry of July 27, 2000, plaintiffs were granted leave to amend their complaint in order to allege tortious interference with contract. Plaintiffs have now alleged in Count IV that RIG Investment Group, and the individual defendants, Bolduc and Hanemann, interfered with the contract between plaintiffs and Co-Source, by intentionally causing Co-Source to wrongfully pay an excessive and exorbitant fee to RIG Capital. Plaintiffs contend that Co-Source would not have breached its contract but for the tortious interference of RIG Investment Group, acting through Bolduc and Hanemann.
On April 15, 1997, P-XI (now, Co-Source) and Sanderson entered in the agreement entitled "Grant of Stock Appreciation Rights." Paragraph 18, entitled "Governing Law," provided:
All questions concerning the construction, validity and interpretation of this Agreement shall be governed by the internal law, and not the law of conflicts, of the State of New York.
Since the claim of tortious interference with contract is a tort, and not a contract claim, the choice of law provision in the agreement is not applicable. As the plaintiffs correctly pointed out, in my July, 2000 minute entry I noted that the parties agreed that New York law would apply. However, at that time there was no claim for tortious interference with contract.
Defendants contend that Louisiana law should be applied because Louisiana has a strong interest in applying its law to tort claims brought by its citizens. Since there is nothing in the record to reflect a tie with New York, beyond the choice of law provision pertaining to contract issues, I concur that Louisiana law is applicable to this issue.
II Prescription
Louisiana Civil Code Article 3492 provides a one year prescriptive period for actions in tort, including the tort of interference with contract. See Crowe v. Smith, 848 F. Supp. 1248 (W.D.La. 1994). However, I find that the plaintiffs' claim relates back to the original lawsuit under FRCP 15(c), for the reason that the claim arises out of the same conduct and transaction described in the original complaint. Accordingly, plaintiffs' claim for tortious interference with the contract is not time-barred.
II Elements of Claim
Defendants argue that even if the claim is not time-barred, plaintiffs have failed to allege the elements of tortious interference with contract.
Prior to 1989, a cause of action for tortious interference with a contractual relationship was not recognized in Louisiana. However, in 9 to 5 Fashions Inc. v. Spurney, 538 So.2d 228 (La. 1989), the Louisiana Supreme Court concluded that:
. . . in light of modern empirical considerations and the objectives of delictual law, an officer of a corporation owes an obligation to a third person having a contractual relationship with the corporation to refrain from acts intentionally causing the company to breach the contract or to make performance more burdensome, difficult or impossible or of less value to the one entitled to performance, unless the officer has reasonable justification for his conduct. The officer's action is justified, and he is entitled to a privilege of immunity, if he acted within the scope of his corporate authority and in the reasonable belief that his action was for the benefit of the corporation. Id, at 231.
The court reasoned that when a corporate officer's actions are detrimental to the corporation or outside the scope of his authority, he should be responsible for his interference with the contractual rights of another.
Although the Louisiana Supreme Court acknowledged the existence of such a cause of action, it found in 9 to 5 Fashions that the chief executive officer did not commit any acts with the intention to interfere with the performance of the contract, or that he had acted outside the scope of his authority or knowingly contrary to the best interests of the corporation.
Subsequent Louisiana courts of appeal cases have noted that principles of tort law requires a determination of whether the defendant breached a legal duty imposed to protect against the particular risk. Accordingly, they have looked at the relationship of the parties, the risks involved in the transaction or conduct and an appraisal of what a reasonable man would do or refrain from doing under the specific circumstances of each case. Using these principles, the courts have rarely upheld a claim for tortious interference with contract. See Thornton v. Lanehart, 723 So.2d 1127 (La.App. 1st Cir. 1998); Spencer-Wallington v. Service Merchandise. Inc., 562 So.2d 1060 (La.App. lst Cir. 1990); Tallo v. Stroh Brewery Company, 544 So.2d 452 (La.App. 4th Cir. 1989), writ denied; compare Kreb v. Mull, 727 So.2d 564 (La.App. lst Cir. 1998).
Plaintiffs have alleged in Count IV that HIG Investment Group, Bolduc, and/or Hanemann, interfered with their contract with P-XI (now, Co-Source) by paying an exorbitant and excessive "management fee" to a company with common ownership or control. Although under the narrow rule of 9 to 5 Fashions, plaintiffs may be unable to prove their cause of action, I find that they have stated adequate allegations to withstand the defendants' motion to dismiss.
IV. Annulment of the Co-Source Approval to Pay the `Fee'
Plaintiffs allege in Count I of their amended and restated complaint that the vote of the directors of Co-Source approving the "excessive and exorbitant" $2.42 million fee to HIG Capital Management, was "tainted" by the votes of defendants Bolduc and Hanemann, who were two of the three directors of Co-Source, as well as officers of HIG Capital Management. Plaintiffs argue that since Bolduc and Hannemann were officers of HIG Capital Management, their votes as directors of Co-Source authorizing payment of the fee to HIG Capital Management should be annulled. They contend that the $2.42 million fee was "unfair to Co-Source" and should be returned to Co-Source and paid to the plaintiffs in accordance with their interest.
Plaintiff s have failed to allege standing to bring this claim on behalf of Co-Source. Although, as I noted earlier, plaintiffs assert in their second amended complaint that they have been assigned all of Co-Source's rights in this litigation, the filing of the second amended complaint is the subject of a pending contradictory motion. The motion to dismiss before me solely addresses the first amended complaint. Accordingly, since plaintiffs have failed to allege that they are appearing pursuant to an assignment of rights from Co-Source, Count I will be dismissed to the extent that plaintiffs attempt to assert the rights of Co-Source. However, I must also determine whether plaintiffs have stated a claim in Count I on their own behalf.
1. Choice of Law
Plaintiffs have asserted their claim for annulment under New York law. However, defendants contend that plaintiffs' annulment claim must be analyzed under Delaware law.
Defendants argue that plaintiffs' claim for annulment of the fee is not a claim pertaining to the "construction, validity, and interpretation" of the stock appreciation agreement. Accordingly, they claim that the parties' agreement to be governed by New York law does not apply to this claim. I agree.
I have previously addressed a similar issue in Powerup of Southeast Louisiana. Inc. v. Powerup U.S.A., Inc. et al., 1994 WL 543731 (E.D.La. 1994). In Powerup, plaintiff alleged that the three corporate defendants were a single instrumentality. One of the corporations was a Canadian corporation. Plaintiff claimed that Louisiana law should be applied to determine if the three defendants were a single entity. The Canadian defendant argued that the law of Calgary, Alberta, the place of its incorporation, should apply.
In balancing the interests of Louisiana with Alberta, I found that although Louisiana had more of an interest in the breach of contract portion of the dispute, Alberta's interest in the single instrumentality issue was more significant, since it involved determination of the status of one of its corporate citizen. Further, the Canadian corporation had a reasonable expectation that it would be governed by the laws of the place of its incorporation, since it had designed its structure according to that law.
I find that while the parties have agreed to apply New York law to the "construction, validity, and interpretation" of their contract, the plaintiffs' claim that the fee should be annulled and returned to the corporation should be governed by the laws of Delaware, the state of incorporation of PX-I and two of the three other H.I.G. entities.
Neither party has provided me with the relevant Delaware law on plaintiffs' claim for annulment. Accordingly, I defer my ruling on the issue of the plaintiffs' claim for annulment until I have been provided with memoranda fully addressing the relevent Delaware law.
V. Piercing the Corporate Veil
Counts III (breach of contract, etc.), V (piercing the corporate veil), and VI (individuals' breach of duties) all require a determination of whether the co-trustees are entitled to pierce the corporate veil in order to reach some or all of the HIG entities and/or the individual defendants. In Count III, plaintiffs seek to have the RIG entities held liable for breach of contract. In Count VI, plaintiffs seek to have the individual defendants, as officers and directors of the RIG entities, held liable for the payment of the fee. Count V does not request a remedy, but merely alleges facts which plaintiffs contend support a basis to pierce the corporate veil. These allegations would seem more appropriately included in Count III.
Neither party has provided me with the relevant Delaware law on the issue of the liability of the HIG entities for the claims asserted in these claims. Accordingly, I defer my ruling on the defendants' motion to dismiss Claims III, V, and VI until I have been provided with memoranda fully addressing the relevant Delaware law.
Considering the foregoing,
IT IS ORDERED, that the defendants' motion to dismiss plaintiffs' claim for securities fraud is GRANTED; IT IS FURTHER ORDERED, that the defendants' motion to dismiss plaintiffs claim for tortious interference with contract is DENIED; IT IS FURTHER ORDERED, that the parties submit on or before February 26, 2001, memoranda addressing Delaware law applicable to the plaintiffs' claims asserted under Counts I, III, V and VI of their first amended and restated complaint.