Opinion
No. C 03-2986 SBA.
November 12, 2004
ORDER
This matter comes before the Court on Defendants' Motion to dismiss Plaintiff's Second Amended Complaint ("SAC"). Having read and considered the papers submitted by the parties and being fully informed, the Court finds this matter appropriate for resolution without a hearing. The Court hereby GRANTS Defendants' Motion to Dismiss.
BACKGROUND
A. Facts
DanielDen Hartog ("Plaintiff") has sued Defendants Jots, Inc., et. al. ("Defendants"), for an accounting of, and payment of monies from an investment of $2,000,000 that he made in 1985 and 1986. The investment primarily concerned the purchase and continued operation of a motel and resort in Oregon known as Jot's Resort. Plaintiff's original investment was primarily solicited by Gentry McKinney on behalf of Defendant McKinney Associates. (SAC, ¶ 19.) Plaintiff alleges that his $2 million investment constituted a 40 per cent share in McKinney Associates. ( Id.)
The Defendants in this action include Jots, Inc., doing business as Jots Resort, McKinney Associates, doing business as Jot's Resort Venture and/or Jot's Resort Ventures, and the Estate of Gentry McKinney. (SAC, ¶ 1.)
Gentry McKinney allegedly used Plaintiff's investment to further develop Jot's Resort in Wedderburn, Oregon, a motel consisting of approximately fifty or sixty rooms at the time of purchase by McKinney and Associates. ( Id., ¶ 20.) The parties allegedly agreed that Gentry McKinney and Virginia McKinney would manage any and all properties acquired by McKinney and Associates, including the day-to-day operations of Jots. ( Id., ¶ 22.) Plaintiff alleges that by virtue of the relationship between him and the McKinneys and McKinney Associates, Plaintiff placed confidence in the fidelity and integrity of the Defendants and each of them including, but not limited to entrusting Defendants to receive funds from the operations of Jots and maintain financial records so as to then distribute Plaintiff's share of the net gain or loss. ( Id., ¶ 24.) Plaintiff alleges that he has performed all conditions, covenants and promises required to be performed on his part regarding his investment in McKinney and Associates and its successors.
Plaintiff alleges that the assets of the defendant partnership McKinney and Associates were transferred to an Oregon Corporation, Jots, Inc. Further, he alleges that Jots Inc. is the successor in interest to McKinney and Associates, and that therefore Plaintiff is entitled to 40% interest in Jots, and is an actual or beneficial owner of shares in the stock of Defendant Jots. ( Id., ¶ 26 32.) Plaintiff alleges that after Gentry McKinney's death in 1993, "his wife Virginia McKinney has continued to control and operate the assets of the partnership and its successor in interest, Defendant Jots, up to and including the present." ( Id., ¶ 27.) Plainitff was employed by Jots for approximately one year, terminating in June 2002, when "Plaintiff made demands on Virginia McKinney (in her capacity as partner/manager/officer and director) and Jots to account to him and provide him his interest in the successor defendant corporation and all other entities, businesses, or properties." ( Id., ¶ 28.)
Plaintiff seeks a constructive trust on the assets and shares of Jots (Claim 1); for damages and injunctive relief for alleged breaches by Defendants of their fiduciary duties (Claim 2); for damages and injunctive relief associated with fraud, deceit, misrepresentation, and conspiracy; (Claim 3); for a dissolution and winding up of the limited partnership (Claim 4); and for an accounting (Claim 5).
B. Procedural History
Plaintiff instituted this suit after he demanded an accounting of Jot's Inc., a business which he believes to be the successor in interest of McKinney Associates, the company in which he made the initial $2 million investment. Defendant McKinney Associates is an Oregon limited partnership which became inactive in 1992. Gentry McKinney died in 1993 and defendant the Estate of Gentry McKinney was probated in Oregon in 1998. As such, the Estate is closed.
On July 28, 2003, Plaintiff filed a First Amended Complaint ("FAC"). On September 2, 2003, Defendants moved to dismiss Plaintiff's FAC for lack of personal jurisdiction over the defendants. On January 9, 2004, the Court ruled on Defendants' Motion to Dismiss, finding that it did not have personal jurisdiction over Defendant Virginia McKinney, but that it does have personal jurisdiction over the remaining Defendants. On February 10, 2004, Defendants moved to dismiss Plaintiff's Second Amended Complaint, alleging that Ms. McKinney is an indispensable party under Fed.R.Civ.P. 19(b) and that the Complaint should therefore be dismissed pursuant to Fed.R.Civ.P. 12(b)(7). Defendants also allege that Plaintiff has failed to state a claim upon which relief can be granted pursuant to Fed.R.Civ.P. 12(b)(6).
DISCUSSION
1. Motion to Dismiss Pursuant to Federal Rule of Civil Procedure 12(b)(7)
A. Legal Standard
A Motions to Dismiss under Fed.R.Civ.P. 12(b)(7) is for "failure to join a party under Rule 19." Fed.R.Civ.P. 12(b)(7). Fed.R.Civ.P. 19 establishes a two-step inquiry for determining who should be joined in a given action. Aguilar v. Los Angeles County, 751 F.2d 1089, 1091 (9th Cir. 1985). First, a court should determine whether a party should be joined. Id.; Fed.R.Civ.P. 19(a). A party should be joined if:
(1) in the person's absence complete relief cannot be accorded among those already parties, or (2) the person claims an interest relating to the subject of the action and is so situated that the disposition of the action in the person's absence may (i) as a practical matter impair or impede the person's ability to protect that interest or (ii) leave any of the persons already parties subject to a substantial risk of incurring double, multiple, or otherwise inconsistent obligations by reason of the claimed interest.
Fed.R.Civ.P. 19(a). When evaluating whether a person not a party has an "interest relating to the subject of the action," the "interest" need not be a legal one, but is one to "be determined from a practical perspective, not through the adoption of strict legal definitions or technicalities." Aguilar, 751 F.2d at 1093 (quoting Lopez v. Martin Luther King Jr. Hospital, 97 F.R.D. 24, 29 (C.D. Cal. 1983). "`Interest' under Rule 19 should be determined from a practical, and not a technical, perspective." Id. at 1093.
If the absent party should be joined, but cannot be joined for jurisdictional reasons, the second step of the inquiry requires the Court to determine whether, "in equity and good conscience," the action should proceed in her absence, or whether it must be dismissed. Fed.R.Civ.P. 19(b); Aguilar, 751 F.2d at 1092. The factors to be considered are:
First, to what extent a judgment rendered in the person's absence might be prejudicial to the person or those already parties; second, the extent to which, by protective provision in the judgment, by the shaping of relief, or other measures, the prejudice can be lessened or avoided; third, whether a judgment rendered in the person's absence will be adequate; and fourth, whether the plaintiff will have an adequate remedy if the action is dismissed for nonjoinder.
B. Analysis
1. Step 1: Federal Rule of Civil Procedure 19(a)
The first question before the Court is whether Virginia McKinney is a party who should be joined. Fed.R.Civ.P. 19(a). Pursuant to Fed.R.Civ.P. Rule 19(a)(2), Virginia McKinney should be joined if she claims "an interest relating to the subject of the action and is so situated that the disposition of the action in the person's absence may . . . as a practical matter impair or impede [her] ability to protect that interest." Fed.R.Civ.P. 19(a)(2). The parties have stipulated, both when Virginia McKinney was a party and after she was dismissed from the action for lack of personal jurisdiction, that Virgina McKinney is the sole shareholder of Jot's Inc. ( Compare September 28, 2004 Stipulation between Parties, ¶¶ 14-15 with December 23, 2003 Stipulation between Parties, ¶¶ 14-15.) Plaintiff's first claim for relief requests that the Court "impose a constructive trust upon the assets and shares of the Defendant Jots." (SAC, ¶ 35.) Here, requesting the imposition of a constructive trust on the shares of Jots "impairs" Virginia McKinney's interests because she owns all of the shares of Jots. Furthermore, Plaintiff requests an injunction restructuring Virginia McKinney's ability to receive dividends or transfer her shares in Jots. (SAC, Prayers for Relief.) Again, because Plaintiff seeks to enjoin Virginia McKinney's income from her shares in Jots and her ability to distribute them, this also "impairs" her interests.
In his sur-reply, Plaintiff cites United States v. Bowen, 172 F.3d 682, 688 (9th Cir. 1996) to suggest that because Virginia McKinney is aware of this lawsuit and has not sought to join the lawsuit, she is not an indispensable party. ( See Sur-reply, 3.) As a preliminary matter, Bowen does not involve the joinder of an entity over which the district court lacked personal jurisdiction. Indeed, in Bowen, the Court did not even reach the issue of whether joinder of the entity would affect jurisdiction. Id. at 689. To the extent that Plaintiff relies on Bowen to assert that Virginia McKinney has not claimed an interest in the subject matter of the lawsuit, Bowen is distinguishable. In Bowen, the government brought suit against an individual who was a former board member of a company called Sterilization Systems. Id. at 684. Sterilization Systems had sold a sterilization device called SteriSafe without seeking FDA approval, despite explicit warning from the FDA that such approval was required. Id. In 1996, Sterilization Systems filed for Chapter 11 bankruptcy. Id. Thereafter, defendant left Sterilization Systems to start an entity called Aespis, where he repaired existing SteriSafes and also developed and marketed an accessory to SteriSafes. Defendant did not seek FDA approval for the accessory. Id. The district court had enjoined defendant from introducing into, or receiving from interstate commerce any SteriSafe devices or SteriSafe accessories. Id. at 683. On appeal, defendant claimed that the trial court had erred by failing to join Sterilization Systems. Id. at 688. The Ninth Circuit held that because Sterilization Systems had never claimed an interest relating to the subject of the action, the district court's failure to join it was not an abuse of discretion. Id. at 688-89.
Here, the parties have stipulated that "Virginia McKinney has since that transfer [from Gentry McKinney] been the only shareholder of Jot's, Inc. up to the present." (September 28, 2004 Stipulation, ¶ 15.) Moreover, when Virginia McKinney was a defendant in this action (before she was dismissed for lack of personal jurisdiction), the parties submitted the identical stipulation. (Stipulation Between the Parties, Dec. 23, 2003, ¶ 15.) Thus, it is undisputed that Virginia McKinney was a party to a stipulation in this action stating that she has been, and is, the only shareholder in Jots. Thus, unlike in Bowen, where Sterilization Systems never asserted an interest in SteriSafes after the litigation ensued, Virginia McKinney has "claimed an interest relating to the subject matter" of the instant action — her shares of Jots. Plaintiff requests that this Court place a constructive trust on Virginia McKinney's shares of Jots, Inc. and declare that Plaintiff is entitled to 40% of her shares. (SAC, ¶ 35.) In addition, Plaintiff seeks to enjoin the "distributions, payments, transfers, and charges" of Jots shareholders. (SAC, Prayers for Relief.) As a practical matter, if the Court were to impose the relief requested by Plaintiff, Virginia McKinney would lose 40% of her shares. Moreover, enjoining the shares of Jots obviously affects Virginia McKinney because she owns all of the shares. Thus, Virginia McKinney's interests are clearly at stake. Accordingly, Virginia McKinney is a party that should be joined pursuant to Fed.R.Civ.P. 19(a)(2) because she claims "an interest relating to the subject of the action and is so situated that the disposition of the action in the person's absence may . . . as a practical matter impair or impede [her] ability to protect that interest."
Moreover, Plaintiff's assertion that Virginia McKinney is not indispensable because she could simply join the instant action if she chooses would require Virginia McKinney to make a Hobson's Choice: either seek joinder in a forum which has no personal jurisdiction over her because of a lack of contacts, or risk leaving an interest unprotected. Plaintiff cites no authority demonstrating that Virginia McKinney is required to make such a choice.
2. Step 2: Federal Rule of Civil Procedure 19(b)
Having previously determined that Virginia McKinney cannot be made a party to this action because the Court lacks personal jurisdiction over her (Jan. 9, 2004 Order at 10:22-23), the Court must turn to Rule 19(b) to decide whether Virginia McKinney is an "indispensable" party. Aguilar, 751. F.2d at 1092. The factors to be considered in this determination are: (1) to what extent a judgment rendered in Virginia McKinney's absence might be prejudicial to her or to those already parties; (2) the extent to which, by protective provisions in the judgment, by the shaping of relief, or other measures, the prejudice can be lessened or avoided; (3) whether a judgment rendered in Virginia McKinney's absence will be adequate; and (4), whether Plaintiff will have an adequate remedy if the action is dismissed for nonjoinder. Fed.R.Civ.P. 19(b).
Here, the parties have stipulated that Virginia McKinney is the sole shareholder of Jots. (Stipulation, ¶¶ 14-15.) Plaintiff's SAC makes clear that he seeks a constructive trust on those shares and that he seeks to enjoin her use and income from those shares. Thus, as to the first factor, it is clear that a judgment rendered in Virginia McKinney's absence would be prejudicial to her. Unlike a case in which a suit is brought against a corporation only for damages, Plaintiff is asserting that he is actually entitled to Virginia McKinney's shares, and seeks to enjoin the payment of dividends to her from those shares. Second, there is no Court-created procedure or remedy that would both protect the interests of Virginia McKinney and make available the relief sought by Plaintiff. Plaintiff asserts that he is the rightful owner of 40% of the shares Virginia McKinney owns in Jots, Inc, that payment of dividends and distributions on those shares should be enjoined, that Gentry and Virginia McKinney have breached fiduciary duties to him, and that Jots Inc. should be dissolved and its assets re-distributed. Accordingly, it does not appear that the prejudice to Plaintiff or Virginia McKinney can be lessened or avoided.
As for the third factor, Plaintiff asserts that he can obtain full relief in Virginia McKinney's absence. (Sur-reply, 3.) Fourth, Defendants assert, and Plaintiff does not contest, that if the Court were to dismiss the action for failure to join an indispensable party, Plaintiff would have an adequate remedy if the action was dismissed for nonjoinder. ( See Motion to Dismiss, 17.) The parties do not dispute that Plaintiff could bring the instant action in Oregon, where Virginia McKinney resides and where the remaining defendants are located. Thus, three of the four factors that the Court is required to consider under Rule 19(b) favor a finding that because Virginia McKinney cannot be joined, "in equity and good conscience," the action should be dismissed. Fed.R.Civ.P. 19(b).
In Opposition to Defendants' motion, Plaintiff asserts that because Jots is incorporated, Virginia McKinney as a shareholder is not an indispensable party in a lawsuit against Jots. In support of its position, Plaintiff cites Erkenbrecker v. Grant, 187 Cal. 7, 9 (1921). Erkenbrecker, however, is inapposite to the instant case. As a preliminary matter, Erkenbrecker does not purport to interpret Fed.R.Civ.P. 19(b). In Erkenbrecker, the Supreme Court of California held that the plaintiff's cause of action was not barred by the statute of limitations described in Cal. Civ. P. Code § 339. Id. at 642. Furthermore, Erkenbrecker involved a transaction between an owner and the company, and did not address in any way whether both the owner of the company and the company itself should be joined in the lawsuit. Id. Because the legal and factual issues of Erkenbrecker are inapposite, Plaintiff's citation of Erkenbrecker is unavailing.
In Erkenbrecker, the plaintiff and the defendants together issued promissory notes that were purchased by a company which plaintiff wholly owned. Id. at 641. The defendants asserted that because the plaintiff and his company were one legal entity, the company's purchase of the notes was equivalent to plaintiff himself purchasing the notes, thus extinguishing their obligations to pay on the notes and starting the clock on the statute of limitations for any actions against them. Id. The California Supreme Court determined that because no fraud was involved in the transaction between the plaintiff and his wholly owned company, the two entities were not identical for these purposes, and that therefore the clock had not begun to run on the statute of limitations. Id. at 644.
Accordingly, because Virginia McKinney is: (1) a party that should be joined under Rule 19(a), but cannot be joined because of lack of personal jurisdiction; and (2) because she is an indispensable party pursuant to Rule 19(b), Defendants' Motion to Dismiss for failure to join her is GRANTED.
Because the Court finds that Defendants' Rule 12(b)(7) Motion is granted, and the action dismissed with prejudice, the Court does not reach the issues raised in Defendants' motion to dismiss under Fed.R.Civ.P. 12(b)(6).
CONCLUSION
For the foregoing reasons, Defendants' Motion to Dismiss pursuant to Fed.R.Civ.P. 12(b)(7) is GRANTED. Plaintiff's Second Amended Complaint is DISMISSED WITH PREJUDICE. The clerk of the Court shall terminate all pending matters and close the file.IT IS SO ORDERED.