Opinion
22-CV-3367 (JHR) (JLC)
07-28-2023
DR. MICHAEL MORGAN, Plaintiff, v. MARIO MONELLO, VINCENT J. PUMA, SCOTT HARTMAN, FLEX EMPLOYEE SERVICES LLC, and NPM MANAGEMENT LLC, Defendants.
To The Honorable Jennifer H. Rearden, United States District Judge:
REPORT AND RECOMMENDATION
JAMES L. COTT, United States Magistrate Judge.
Plaintiff Dr. Michael Morgan, proceeding pro se, has brought this breach of contract action against Mario Monello, Vincent J. Puma, Scott Hartman, Flex Employee Services LLC, and NPM Management, LCC (collectively “defendants”). Pending before the Court is defendants' motion to dismiss the second amended complaint (“SAC”) pursuant to Rules 12(b)(1) and 12(b)(6) of the Federal Rules of Civil Procedure. For the reasons set forth below, the motion should be granted and the SAC dismissed with prejudice.
I. BACKGROUND
A. Factual Background
The following facts are alleged in the SAC and accepted as true for purposes of the pending motion. See, e.g., Smolen v. Wesley, No. 16-CV-2417 (KMK), 2019 WL 4727311, at *4 (S.D.N.Y. Sept. 25, 2019) (citing Erickson v. Pardus, 551 U.S. 89, 94 (2007)).
1. The Parties
Morgan is a physical therapist, entrepreneur, and business owner residing in Nassau, New York. SAC at 4, Dkt. No. 19. Prior to the events underlying this action, he was the sole officer, director, and 100 percent shareholder of St. Mark's World, Inc. (“SMW”), a New York-based corporation founded on May 17, 2012. SAC at 7, Statement of Facts (“SOF”) ¶¶ 1-2. SMW provided temporary rehabilitation therapists (i.e., physical therapists, physical therapist assistants, occupational therapists, and occupational therapist assistants) who worked at clients' facilities. Id. ¶ 3. SMW generated more than six million dollars per year in revenue with a substantial annual profit. Id. ¶ 4.
The pagination of the SAC corresponds to the Electronic Case Filing (ECF) system pagination appended to the top of the document.
Scott Hartman was, until 2018, a 30 percent owner and member/manager of Flex Employee Services LLC (“Flex”). Id. ¶ 5. Jay Inbar of Inbar Group, an independent agency that Morgan hired to sell SMW, introduced Morgan to Hartman. Id. ¶¶ 4-5. On several occasions between June 24, 2015, and April 25, 2016, Hartman identified himself as President and representative of Flex. Id. ¶ 6. Hartman is a resident of Manhattan Beach, California, SAC at 5, and/or Texas, SOF ¶ 5. Hartman also initially “owned and controlled” St. Mark's World Acquisition LLC (“Acquisition”) with Puma and Monello. Id. ¶ 38.
Flex is an entity registered as a domestic limited liability company in the State of Delaware. Id. ¶ 7. Although it has offices and is headquartered at 501 Madison Avenue, New York, New York 10022, it is not registered as a corporate entity in the State of New York. Id. at 6. Flex's members and managing partners reside in New Jersey and California, id. ¶ 7, and to Morgan's knowledge, none of Flex's members resides in New York State. Id.
Mario Monello, a resident of Spring Lake, New Jersey, is a 40 percent owner and member/manager of Flex and served as Flex's President after July 2018. Id. ¶ 9. Monello is also a 40 percent owner and member/manager of Acquisition. Id.
Vincent Puma, a resident of Morganville, New Jersey, is the current Managing Director of Flex and a 30 percent owner and member/manager. Id. ¶ 10. Puma is also a 40 percent owner and member/manager of Acquisition, via NPM Management LLC, of which he is the sole owner. Id.
NPM Management LLC (“NPM LLC” or “NPM”) is registered as a domestic limited liability company in the State of New York. Id. ¶ 11. No member or manager of NPM LLC resides in New York State. Id.
Below is a summary of defendants, their respective ownership relationships, and residency, as alleged by Morgan in the SAC. See SAC at 5-6.
| Defendant Name | Ownership | Residence |
| Mario Monello | (1) 40% owner and member/manager of Flex; (2) 40% owner and member/manager of Acquisition | Spring Lake, New Jersey |
| Vincent J. Puma | (1) 30% owner and member/manager of Flex; (2) 40% owner and member/manager of Acquisition | Morganville, New Jersey |
| Scott Hartman | (1) Former 30% owner and member/manager of | Manhattan Beach, California |
Flex; (2) former 20% owner of Acquisition
Flex Employee Services
40% owned by Defendant Monello
NPM Management LLC
100% owned by Defendant Puma
Morganville, New Jersey
Morgan alleges in the SAC, as well as in previous pleadings, that Flex is a resident of New Jersey and California. See, e.g., SOF ¶ 7 (Flex's members and managing partners reside in New Jersey and California); Complaint (“Compl.”) at 11, Dkt. No. 1 (providing “work” and “home” addresses for individual and corporate defendants). However, he lists 501 Madison Avenue, Suite #501, New York, New York 10022, as the best address for service in the SAC. SAC at 5.
2. The Agreements and Morgan's Allegations of Defendants' Misrepresentations, Breach, and Fraud
Morgan founded SMW, a rehabilitation therapy provider in New York State, on May 17, 2012. SOF ¶¶ 1-2. Between June 24, 2015, and April 21, 2016, Morgan and Hartman negotiated the proposed sale of SMW to Flex. Id. ¶ 12. While negotiations were ongoing, Hartman introduced Morgan to non-party Peter Ursino, “a business owner of a company that [Flex] had purportedly recently acquired.” Id. ¶ 13. Morgan alleges that Hartman and Ursino “falsely represented that Flex['s] purchase of . . . Ursino's company was the best thing that happened to [him],” id. ¶ 14, that Hartman and Flex used Ursino
to convince Dr. Morgan of the benefits of the sale[,] . . . assuage any doubts Dr. Morgan had about the legitimacy of the sale[,] and . . . induce Dr. Morgan to enter into the Stock Purchase Agreement rather than a straight 100% Sale, which Dr[.] Morgan originally sought when he listed his business for Sale.Id. ¶ 16-17. Morgan relied on both Hartman's presentation and Ursino's characterizations in deciding to sell his company. Id. ¶ 18. Morgan claims that “on multiple occasions . . . both orally and in writing, . . . Hartman falsely represented that he was a seasoned businessman with deep knowledge of the staffing industry.” Id. ¶ 23. In or around April 2016, Morgan and Hartman reached an agreement in principle to sell an 80 percent share of SMW to Flex. Id. ¶ 37.
On or around April 13, 2016, Hartman, Monello, and Puma formed Acquisition “as a Delaware Limited Liability Company for the sole purpose of buying a majority stake in [SMW] from Dr. Morgan.” Id. ¶ 38. On April 25, 2016, Acquisition entered into a Stock Purchase Agreement (“purchase agreement”) with Morgan. SOF ¶ 39; SAC Ex. A. Per the purchase agreement, Morgan retained 20 percent of his SMW shares and Acquisition acquired an 80 percent ownership interest. SAC Ex. A at 1. The purchase agreement contained a New York choice-of-law provision but not a forum-selection clause. Id. at 12 § 17. Hartman, as President, signed the purchase agreement on behalf of Acquisition. Id. at 14. Morgan was to receive cash compensation based on a formula used to calculate a purchase price. SOF ¶¶ 40-41; SAC Ex. A at 2.
Morgan and Acquisition agree that they “entered into a Stock Purchase Agreement on April 25, 2016,” SOF ¶ 39; Defendants' Memorandum of Law in Support of Their Motion to Dismiss (“Def. Mem.”) at 4, Dkt. No. 26; notwithstanding the fact that the signed Stock Purchase Agreement was dated April 21, 2016. See SAC Ex. A at 1.
Morgan claims that defendants breached their contractual obligations under New York Law by failing to comply with several clauses of the purchase agreement (e.g., providing the necessary proposal for an independent auditor whose purpose was to determine the valuation of SMW for payment purposes) and to pay the full purchase price (Morgan alleges that defendants only paid him 60 percent). See SOF ¶¶ 51-72. Morgan continued to submit formal written demands to finalize the purchase from on or around March 31, 2017, through November 20, 2018. Id. ¶ 146.
Morgan also claims-but does not seek relief on the grounds that-Monello and Puma improperly received a nearly $500,000 Paycheck Protection Program (“PPP”) loan from the U.S. Small Business Association (“SBA”) “based on inflated and incorrect [staffing] numbers.” Id. ¶¶ 73-75. According to Morgan, Monello and Flex employees Thae Kweon and Thomas G. Pinou “intentionally defrauded” the SBA by “misrepresenting that the company . . . had 24 employees” instead of four, and “bribe[d]” Morgan to sign for the loan by offering him $50,000 in back pay. Id. ¶¶ 73-90.
3. Prior Legal Actions
Morgan is involved in several actions against defendants. See id. ¶¶ 148-51 (collecting cases). On November 26, 2018, Morgan first commenced a lawsuit against Acquisition in the Supreme Court of the State of New York, Nassau County. See Morgan v. St. Mark's World Acquisition LLC (“Morgan I”), Index No. 615769/2018 (N.Y. Sup. Ct. 2018). Defendants, in response, filed an action against Morgan a few days later, on November 29, 2018, in the Supreme Court of the State of New York, New York County. See St. Mark's World Acquisition, LLC v. Morgan (“Morgan II”), No. 655925/2018 (N.Y. Sup. Ct. 2018); SOF ¶ 150. On December 31, 2018, the parties reached a settlement, which “resolved both the action Morgan had commenced in Nassau County [Morgan I] and the action before [the Honorable Barry R.] Ostrager,” Justice of the New York Supreme Court-an application in Morgan II to convert a temporary restraining order granted against Morgan into a preliminary injunction. Declaration of Scott R. Jacobsen in Support of Defendants' Motion to Dismiss dated November 18, 2022 (“Jacobsen Decl.”) Ex. A, at 8-11, Dkt. No. 27-1.
The Court takes judicial notice of the cases between Morgan and defendants. See, e.g., Bey v. City of New York, No. 99-CV-3873 (LMM) (RLE) (consolidated cases), 2010 WL 3910231, at *4 (S.D.N.Y. Sep. 21, 2010) (docket sheets, complaints, and court decisions associated with plaintiffs' related prior actions properly subject to judicial notice to establish fact of such litigation and related filings) (collecting cases); see also O'Neal v. East Hampton Town, No. 16-CV-579 (JFB) (GRB), 2017 WL 4174788, *1, n.2. (E.D.N.Y. Aug. 28, 2017) (“Judicial notice may be taken of the state court documentation submitted by defendants.”) (collecting cases), adopted by 2017 WL 4162307 (Sep. 19, 2017).
On April 6, 2022, the Honorable Henry Pitman, a retired magistrate judge, entered a Final Arbitration Award in Morgan II, which included factual findings derived from stipulated facts, admissions in the pleadings, and testimony and evidentiary exhibits presented at the arbitration hearing. See Final Arbitration Award at 3 n.2, Morgan II, Index No. 655925/2018, NYSCEF Doc. No. 70; Jacobsen Decl. Ex. A. This case is currently on appeal. See Notice of Appeal, Morgan II, Index No. 655925/2018 (filed Oct. 4, 2022), NYSCEF Doc. No. 107 (appealing motion to vacate or modify the Final Arbitration Award dated September 12, 2022); Notice of Appeal, Morgan II, Index No. 655925/2018 (filed Nov. 4, 2022), NYSCEF Doc. No. 114 (appealing notice of settlement dated November 4, 2022).
On July 17, 2020, Morgan filed another suit against defendants, this time in New York County. See Morgan v. St. Mark's World Acquisition LLC (“Morgan III”), No. 653179/2020 (N.Y. Sup. Ct. 2020) (listing as defendants Acquisition, Hartman, Pinou, Monello, Kweon, NPM, Puma, and Flex). This case is currently stayed. See Decision and Order on Motion, Morgan III, Index No. 653179/2020, NYSCEF Doc. No. 124 (Oct. 28, 2020), motion to lift stay denied, NYSCEF Doc. No. 197 (June 14, 2021).
On February 19, 2021, Morgan again filed suit in New York County. See Morgan v. St. Mark's World Acquisition LLC (“Morgan IV”), Index No. 651186/2021 (N.Y. Sup. Ct. 2021). This case is currently pending as of the date of this Report and Recommendation.
B. Procedural History
Morgan brought this action pro se on April 25, 2022, against Hartman, Monello, Puma, Kweon, Pinou, Acquisition, NPM, and Flex. See Dkt. No. 1. On May 16, 2022, Morgan was granted leave to file an amended complaint. Dkt. No. 3. Morgan then filed the first amended complaint (“FAC”) on July 15, 2022. Dkt. No. 4. In the FAC, Morgan sued three individuals (Monello, Puma, and Hartman), and two limited liability companies (Flex and NPM). Id. On October 7, 2022, Morgan filed the SAC with permission from the Court. Dkt. No. 19. Morgan invokes the Court's diversity jurisdiction under 28 U.S.C. § 1332 and asserts claims for breach of contract arising from the sale of SMW's stock and fraud. Id.; see SOF ¶¶ 12-36 (misrepresentations), 37-72 (breach), 73-146 (fraud).
On November 18, 2022, defendants moved to dismiss the SAC pursuant to Rules 12(b)(1) and 12(b)(6) of the Federal Rules of Civil Procedure, alleging both lack of subject matter jurisdiction and failure to state a claim. They also filed a memorandum of law and two supporting declarations. See Motion to Dismiss Plaintiff's Second Amended Complaint, Dkt. No. 25; Memorandum of Law in Support of Defendants' Motion to Dismiss (“Def. Mem.”), Dkt. No. 26; Jacobsen Decl., Dkt. No. 27; Declaration of Vincent J. Puma in Support of Defendants' Motion to Dismiss (“Puma Decl.”), Dkt. No. 28. On December 30, 2022, Morgan filed an opposition and accompanying declaration. Plaintiff's Response in Opposition to Defendants' Motion to Dismiss (“Pl. Mem.”), Dkt. No. 32; Declaration of Michael Morgan in Opposition to Defendants' Motion to Dismiss, Dkt. No. 33. Defendants filed their reply papers on January 13, 2023 (“Def. Reply”). Dkt. No. 34.
Morgan's original complaint alleged that the Court had federal question jurisdiction under 28 U.S.C. § 1331. See Compl. at 2, Dkt. No. 1. In the FAC and SAC, Morgan instead alleged that the Court had diversity jurisdiction under 28 U.S.C. § 1332. See FAC at 2, Dkt. No. 4; SAC at 2.
In their notice of motion, defendants mistakenly listed Rule 12(b)(2) as the basis for the motion. See Dkt. No. 25.
On September 16, 2022, the Honorable John P. Cronan referred this motion to me for a report and recommendation. Dkt. No. 14. The case was reassigned to the Honorable Jennifer H. Rearden on January 10, 2023.
II. DISCUSSION
A. Legal Standards
1. Subject Matter Jurisdiction Under Rule 12(b)(1)
“Federal courts are courts of limited jurisdiction, and Rule 12(b)(1) requires dismissal of an action ‘when the district court lacks the statutory or constitutional power to adjudicate it.'” Schwartz v. Hitrons Sols., Inc., 397 F.Supp.3d 357, 364 (S.D.N.Y. 2019) (quoting Makarova v. United States, 201 F.3d 110, 113 (2d Cir. 2000)). “The plaintiff bears the burden of proving subject matter jurisdiction by a preponderance of the evidence.” Mantena v. Johnson, 809 F.3d 721, 727 (2d Cir. 2015) (quoting Aurecchione v. Schoolman Transp. Sys., Inc., 426 F.3d 635, 638 (2d Cir. 2012)).
When deciding a motion to dismiss under Rule 12(b)(1) at the pleading stage, “the district court must take all uncontroverted facts in the complaint . . . as true, and draw all reasonable inferences in favor of the party asserting jurisdiction.” Parker Madison Partners v. Airbnb, Inc., 283 F.Supp.3d 174, 178 (S.D.N.Y. 2017) (emphasis added) (ellipsis in original) (quoting Tandon v. Captain's Cove Marina of Bridgeport, Inc., 752 F.3d 239, 243 (2d Cir. 2014)). “However, ‘jurisdiction must be shown affirmatively, and that showing is not made by drawing from the pleadings inferences favorable to the party asserting it.'” Id. (quoting Morrison v. Nat'l Austl. Bank Ltd., 547 F.3d 167, 170 (2d Cir. 2008)).
When a defendant moves for dismissal under Rule 12(b)(1) in addition to other grounds, “the court should consider the Rule 12(b)(1) challenge first since if it must dismiss the complaint for lack of subject matter jurisdiction, the accompanying defenses and objections become moot and do not need to be determined.” Saint-Armour v. Richmond Org., Inc., 388 F.Supp.3d 277, 286 (S.D.N.Y. 2019). “In resolving a motion to dismiss for lack of subject matter jurisdiction . . ., a district court may [also] refer to evidence outside the pleadings.” Shulman v. Chaitman LLP, 392 F.Supp.3d 340, 350 (S.D.N.Y. 2019) (quoting Cortlandt St. Recovery Corp. v. Hellas Telecomm., S.a.r.l., 790 F.3d 411, 419 n.5 (2d Cir. 2015)). Dismissals based solely on subject matter jurisdiction grounds must be “without prejudice” as a matter of law. See, e.g., Green v. Dep't of Educ. of City of New York, 16 F.4th 1070, 1074 (2d Cir. 2021).
2. Failure to State a Claim Under Rule 12(b)(6)
Under Rule 12(b)(6) of the Federal Rules of Civil Procedure, a complaint may be dismissed for “failure to state a claim upon which relief can be granted.” Fed.R.Civ.P. 12(b)(6). To survive a Rule 12(b)(6) motion, a plaintiff must plead facts in his complaint that “state a claim to relief that is plausible on its face” and that satisfy Federal Rule of Civil Procedure 8(a)(2). Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). Rule 8(a)(2) requires a “short and plain statement of the claim showing that the pleader is entitled to relief.” Id. at 677-78 (quoting Fed.R.Civ.P. 8(a)(2)). A claim is facially plausible when the plaintiff pleads “factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id. at 678 (citing Twombly, 550 U.S. at 556).
Nevertheless, this standard requires a plaintiff's pleadings to sufficiently “nudge[ ] [its] claims across the line from conceivable to plausible.” Twombly, 550 U.S. at 570. It is “a plaintiff's obligation to provide the grounds of [his] entitlement to relief requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do.” Id. at 555 (cleaned up). Therefore, “[w]hile legal conclusions can provide the framework of a complaint, they must be supported by factual allegations.” Iqbal, 556 U.S. at 679; see also Port Dock & Stone Corp. v. Oldcastle Ne., Inc., 507 F.3d 117, 121 (2d Cir. 2007) (complaint insufficient when lacking factual allegations necessary “to give the defendant fair notice of what the claim is and the grounds upon which it rests”).
In deciding a Rule 12(b)(6) motion, a court may consider matters of which judicial notice may be taken under Rule 201 of the Federal Rules of Evidence. See, e.g., Kramer v. Time Warner, Inc., 937 F.2d 767, 773-75 (2d Cir. 1991). Such matters include documents that are “publicly available” and whose “accuracy cannot reasonably be questioned.” Apotex, Inc. v. Acorda Therapeutics, Inc., 823 F.3d 51, 60 (2d Cir. 2016).
Finally, dismissals for failure to state a claim are considered to be “with prejudice.” See, e.g., Lynch v. Hanley, No. 21-CV-25 (GTS) (ML), 2021 WL 2309688, at *2 n.4 (N.D.N.Y. June 7, 2021) (collecting cases and holding that dismissal for failure to state a claim viewed as adjudication “on the merits” of the action, and thus dismissal “with prejudice” appropriate).
3. Standards for Pro Se Plaintiffs
A complaint filed by a pro se plaintiff “is to be liberally construed and . . . must be held to less stringent standards than formal pleadings drafted by lawyers.” Bennett v. City of New York, 425 Fed.Appx. 79, 80 (2d Cir. 2011) (cleaned up). Accordingly, pleadings of a pro se party should be read “to raise the strongest arguments they suggest.” Kevilly v. New York, 410 Fed.Appx. 371, 374 (2d Cir. 2010) (cleaned up). The Court may also consider allegations that appear in a pro se plaintiff's opposition papers or other submissions to the Court. See e.g., Henning v. N.Y.C. Dep't of Corr., No. 14-CV-9798 (JPO), 2016 WL 297725, at *3 (S.D.N.Y. Jan. 22, 2016) (“Although this allegation appears in his opposition papers, the Court -consistent with its duty to liberally construe pro se pleadings - will credit Plaintiff's assertion in evaluating the sufficiency of his complaint.”).
Nevertheless, “dismissal of a pro se complaint is appropriate where a plaintiff fails to state a plausible claim supported by more than conclusory factual allegations.” Jones v. City of New York, No. 18-CV-1937 (VSB), 2020 WL 1644009, at *5 (S.D.N.Y. Apr. 2, 2020) (citing Walker v. Schult, 717 F.3d 119, 124 (2d Cir. 2013)). Even a pro se plaintiff's complaint “must contain factual allegations that sufficiently raise a right to relief above the speculative level.” Ole v. Sauer, No. 19-CV-8865 (NSR), 2022 WL 1204862, at *3 (S.D.N.Y. Apr. 22, 2022) (cleaned up). “[T]he court's duty to construe the complaint liberally is not the equivalent of a duty to re-write it.” Id. (cleaned up).
B. Analysis
Defendants argue that the SAC should be dismissed because (1) there is not complete diversity and thus the Court lacks subject matter jurisdiction; (2) Morgan failed to include necessary and indispensable parties; (3) res judicata precludes the action; and (4) Morgan fails to state a cognizable claim on which relief can be granted. Def. Mem. at 8-21. Morgan counters that his complaint should not be dismissed, but that, in the alternative, the Court should grant him leave to further amend his complaint to address any deficiencies. See Pl. Mem. at 1-2. Plaintiff also requests that the Court strike any documents appended to defendants' motion. Pl. Mem. at 2. For the reasons discussed below, subject matter jurisdiction exists, but dismissal is warranted on res judicata grounds.
Both because it is permissible to consider materials attached to the pleadings on a jurisdictional motion, and because it is proper to take judicial notice of the prior state court cases, Morgan's request to strike is without merit.
1. The Court Has Subject Matter Jurisdiction
Defendants argue that there is no basis for diversity jurisdiction and the case should be dismissed because Morgan, NPM, and Flex are all citizens of New York State. Specifically, defendants contend that because Flex and NPM are headquartered and do business in New York State, this defeats diversity jurisdiction. Def. Mem. at 8-9. Morgan counters that, for diversity jurisdiction purposes, an LLC (such as Flex and NPM), has the citizenship of each of its members. Under the correct standard, and given that Morgan's SAC “is to be liberally construed,” Bennett, 425 Fed.Appx. at 80, this suit should not be dismissed for lack of subject matter jurisdiction.
As a threshold matter, to establish diversity jurisdiction under 28 U.S.C. § 1332, there must be complete diversity among the parties. See, e.g., Pa. Pub. Sch. Emples.' Ret. Sys. v. Morgan Stanley & Co., 772 F.3d 111, 119 (2d Cir. 2014) (“[C]omplete diversity . . . is an absolute, bright-line prerequisite.”). While diversity jurisdiction for a corporation is based either on its incorporation state or where its “nerve center” is located, Hertz Corp. v. Friend, 559 U.S. 77, 78-79 (2010), “citizenship of an LLC has nothing to do with its state of formation or principal place of business; rather, the citizenship of an LLC consists of the imputed citizenship of each one of its members.” Kenshoo, Inc. v. Aragon Advert., LLC, 586 F.Supp.3d 177, 182 (E.D.N.Y. 2022) (citing Bayerische Landesbank, N.Y. Branch v. Aladdin Cap. Mgmt. LLC, 692 F.3d 42, 49 (2d Cir. 2012). Where an LLC's members are residents of multiple states, “diversity [is] destroyed if any member of the . . . LLC were a citizen” of the same state as the opposing party. Alvarez & Marshal Glob. Forensic & Disp. Servs., LLC v. Cohen-Cole, No. 14-CV-290 (JPO), 2014 WL 641440, at *1 (S.D.N.Y. Feb. 19, 2014); see also Handelsman v. Bedford Vill. Assocs. Ltd. P'ship, 213 F.3d 48, 51-52 (2d Cir. 2000) (diversity lacking because plaintiffs and defendants were all citizens of Florida “because both [defendants Bedford Partnership and Bedford LLC] have Florida members”).
Although they correctly state the standard for corporations, defendants conflate this standard with the standard for LLC citizenship, which is member dependent. Without ever engaging with or responding to the applicable case law, defendants incorrectly determine Flex and NPM's citizenship. Defendants, for example, argue that Morgan “concedes” that he, NPM, and Flex are all New York residents because NPM was incorporated in New York and Flex maintains its headquarters there. See Def. Mem. at 9 (first citing SOF ¶¶ 1, 11; then citing Puma Decl. ¶ 1). Morgan's “concessions,” however, have little bearing on the diversity analysis given that they do not address LLC membership at all. Moreover, defendants do not account for Morgan's allegations that Flex and Acquisition were incorporated in Delaware. Compare, e.g., Def. Mem. at 4, 7 (arguing that Morgan, NPM, and Flex are New York citizens), and Puma Decl. (listing Flex's New York headquarters but not its incorporation state), with SAC at 3-4 (describing Flex as “incorporated under” Delaware law, NPM as “incorporated” under New York law, that both LLC's principal places of business were in New Jersey, and that NPM's one member resides in New Jersey).
In any event, Morgan has the burden of “affirmatively” proving subject matter jurisdiction, see, e.g., Parker Madison Partners, 283 F.Supp.3d at 178, and he has done so here. Throughout the SAC, Morgan, a New York resident, specifically alleges the percentage makeup of each corporation (SMW) and LLC (Flex, NPM, Acquisition) and the residency or physical residence of each member. See, e.g., SAC at 2-4; SOF ¶¶ 1-2, 7, 9-11, 38. Besides denying that Flex and NPM's principal places of business are in New York, defendants make no attempt to controvert Morgan's membership or residency claims. Indeed, the Puma declaration-which was submitted in support of defendants' motion to dismiss- addresses neither claim: it does nothing to controvert Morgan's allegations that Puma is a 30 percent owner and member/manager of Flex, a 40 percent owner and member/manager of Acquisition (via his sole ownership of NPM), and a resident of New Jersey. Compare Puma Decl. ¶ 1, with SOF ¶ 10.
Accordingly, the “uncontroverted” and “material facts” pled are that (1) NPM, having one sole member (Puma) based in New Jersey, is a New Jersey resident; (2) Flex, in which Puma (a New Jersey resident), is a 30 percent member; Monello (also a New Jersey resident), is a 40 percent member; and Hartman (allegedly a California or Texas resident) is a 30 percent member, is a resident of both New Jersey and California/Texas. See SOF ¶ 5.
By this same logic, Acquisition-which defendants argue must be joined to this suit-is also not a New York resident as Puma and Monello are each New Jersey residents with 40 percent stakes (totaling 80 percent) and Hartman, who initially held the remaining 20 percent, see SOF ¶ 38, is a California or Texas resident.
Because the Court “must take all uncontroverted facts in the complaint . . . as true,” Parker Madison Partners, 283 F.Supp.3d at 178, and because defendants make no effort to controvert Morgan's assertions of member residency, Morgan has established complete diversity for the purposes of his suit, and the SAC should not be dismissed on these grounds.
Notably, if no diversity jurisdiction were found, then dismissal would be without prejudice as a matter of law. However, as discussed, infra, because the SAC should be dismissed on res judicata grounds, the dismissal can and should be with prejudice.
2. Acquisition Should Be Added as an Indispensable Party, But to do so Would Not Destroy Complete Diversity
Defendants contend that Morgan failed to include necessary and indispensable parties Kweon, Pinou, and Acquisition. Def. Mem. at 9-10. Defendants further argue that the Court must dismiss this action because Morgan “manufactured complete diversity” by dismissing non-diverse defendants Kweon, Pinou, and Acquisition from the action. Id. Morgan counters that Kweon, Pinou, and Acquisition were “mere functionaries” that need not be included in the suit because neither Kweon nor Pinou were involved in the alleged misrepresentations that induced Morgan to sell to defendants, nor did they take any actions against him. Pl. Mem. at 11-12. Defendants have the better argument on this point.
Per the complaint, Kweon and Pinou are residents of New York, see Compl. Ex. 1, while Acquisition is a resident of New Jersey and California/Texas.
Rule 19(a) states, in relevant part, that a nonparty is necessary (and thus must be joined in a lawsuit) if: (A) “the court cannot accord complete relief among existing parties” or (B) the party “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 . . . as a practical matter impair or impede the person's ability to protect the interest.” Fed.R.Civ.P. 19(a)(1). Rule 19 thus “sets forth a two-step test for determining whether the court must dismiss an action for failure to join an indispensable party. “First, the court must determine whether an absent party belongs in the suit, i.e., whether the party qualifies as a ‘necessary party' under Rule 19(a).” Viacom Int'l, Inc. v. Kearney, 212 F.3d 721, 724 (2d Cir. 2000) (citing Provident Tradesmens Bank & Trust Co. v. Patterson, 390 U.S. 102, 124, (1968)); see also Vision en Analisis y Estrategia, S.A. v. Andersen, 662 Fed.Appx. 29, 31 (2d Cir. 2016). Assuming “the court makes a threshold determination that a party is necessary under Rule 19(a), and . . . joinder of the absent party is not feasible for jurisdictional . . . reasons, the court must . . . determine whether the party is ‘indispensable' ” under Rule 19(b).” Vision, 662 Fed.Appx. at 31 (quoting Viacom, 212 F.3d at 725).
The Court considers four factors when determining if a party is indispensable:
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 provisions 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; fourth, whether the plaintiff
will have an adequate remedy if the action is dismissed for nonjoinder.Associated Dry Goods Corp. v. Towers Fin. Corp., 920 F.2d 1121, 1124 (2d Cir. 1990) (quoting Fed.R.Civ.P. 19(b)). “The language of Rule 19(b) leaves the district court with substantial discretion in considering which factors to weigh and how heavily to emphasize certain considerations” in determining whether to dismiss an action. Spencer Stuart Hum. Res. Consultancy (Shanghai) Co. v. Am. Indus. Acquisition Corp., No. 17-CV-2195 (DLC), 2017 WL 4570791, at *3 (S.D.N.Y. Oct. 12, 2017) (citing Envirotech Corp. v. Bethlehem Steel Corp., 729 F.2d 70, 75 (2d Cir. 1984)).
Turning first to Acquisition and to the first part of Rule 19's test, Acquisition must be joined in the suit, as it is a counterparty to the contractual agreements at issue and its exclusion from this action would prevent the Court from “accord[ing] complete relief among existing parties.” Fed.R.Civ.P. 19(a)(1); see also Travelers Indem. Co. v. Household Int'l., Inc., 775 F.Supp. 518, 527 (D. Conn. 1991) (“[P]recedent supports the proposition that a contracting party is the paradigm of an indispensable party.”). Even after a careful review of Morgan's pleadings and opposition papers “to raise the strongest arguments they suggest,” Kevilly, 410 Fed.Appx. at 374, there is no denying Morgan's own allegations that Acquisition was formed “for the sole purpose” of the transactions at issue. SOF ¶ 38.
By contrast, defendants' argument that Kweon and Pinou are “indispensable” parties fails to carry the day in light of the text of Rule 19. While Kweon and Pinou allegedly participated in a scheme to defraud the SBA, Morgan describes them merely as “employees” doing the work of Monello and Puma-both of whom are already named in the suit and more “intimately involved” with the alleged SBA scheme and Morgan's broader contractual claims. Id. ¶¶ 73-90; Pl. Mem. at 11-12 (describing Kweon and Pinou as “mere functionaries”). Considering the Rule 19 factors, it is not the case that Morgan will have an inadequate remedy if the action were dismissed on the grounds that Kweon and Pinou were not joined, whereas “[i]t is well-established that a party to a contract which is the subject of the litigation”- such as Acquisition in this case-“is considered a necessary party.” Ryan v. Volpone Stamp Co., Inc., 107 F.Supp.2d 369, 387 (S.D.N.Y. 2000).
For these reasons, only Acquisition would need to be joined, as it is an indispensable counterparty to the contractual agreements that give rise to the suit and its joinder would not destroy diversity.
3. Morgan's Lawsuit Is Precluded by the Doctrine of Res Judicata
Having considered the jurisdictional and related indispensable parties issues first, as it must, the Court next considers defendants' res judicata arguments. See, e.g., Spoleto Corp. v. Eth. Airlines Grp., 21-CV-5407 (PAE), 2022 WL 329265, at *5 (S.D.N.Y. Feb. 3, 2022) (“A court may consider a res judicata defense on a Rule 12(b)(6) motion to dismiss when the court's inquiry is limited to the plaintiff's complaint, documents attached or incorporated therein, and materials appropriate for judicial notice.” (quoting TechnoMarine SA v. Giftports, Inc., 758 F.3d 493, 498 (2d Cir. 2014) (citation omitted))).
“Res judicata bars re-litigation if ‘(1) the previous action involved an adjudication on the merits; (2) the previous action involved the plaintiffs or those in privity with them; [and] (3) the claims asserted in the subsequent action were, or could have been, raised in the prior action.'” Soules v. Conn., Dep't of Emergency Servs. & Pub. Prot., 882 F.3d 52, 55 (2d Cir. 2018) (quoting Monahan v. N.Y.C. Dep't of Corr., 214 F.3d 275, 285 (2d Cir. 2000)). “[F]ederal court[s] must give to a statecourt judgment the same preclusive effect as would be given that judgment under the law of the State in which the judgment was rendered,” Jacobson v. Fireman's Fund Ins. Co., 111 F.3d 261, 265 (2d Cir. 1997) (quoting Migra v. Warren City Sch. Dist. Bd. of Educ., 465 U.S. 75, 81 (1984)), and New York courts have held that res judicata applies to state arbitration proceedings and awards, as well as other judgments. See, e.g., Streit v. Amdocs, Inc., 307 Fed.Appx. 505, 509 (2d Cir. 2009) (plaintiff's claims for value of lost stock options blocked by res judicata because they “stem[med] from the same series of transactions at issue in [an] earlier arbitration, and c[ould] be proven only by the same evidence”); Am. Ins. Co. v. Messinger, 43 N.Y.2d 184, 189-90 (1977) (“[T]he doctrines of claim preclusion and issue preclusion . . . apply as well to awards in arbitration as they do to adjudications in judicial proceedings.”). As there is no question as to whether the previous state court actions included Morgan (since he initiated all but one of them and was named defendant in the other), I will address the two remaining factors.
First, not only are there multiple previous actions stemming from the same controversy (Morgan I, II, III, and IV), but it is clear that Morgan II was adjudicated on the merits-a Final Arbitration Award was entered and then confirmed under separate decision and order and in a judgment. See Jacobsen Decl. Ex. A at 4, 24 (Dkt. No. 27-1) (Final Arbitration Award); Jacobsen Decl. Ex. B at 3-4 (Dkt. No. 27-2) (Decision and Order on Motion Confirming Final Award); Ex. C at 2-3 (Dkt. No. 27-3) (Final Judgment). The arbitration award specifically addressed many of the same allegations that appear in the SAC. See Jacobsen Decl. Ex. A at 5-8 (discussing same purchase and shareholder agreements). Both the Final Arbitration Award and the Decision and Order on Motion Confirming Final Award in Morgan II, NYSCEF Doc. Nos. 70 & 103, include references to factual findings based on joint exhibits, three days of live hearing testimony, and written declarations, as well as credibility findings. See Jacobsen Decl. Exs. A, B. Morgan's claims were thus “adjudicated” in that the state court action “resolved all issues raised by both parties” and made conclusions based on factual and legal determinations. The final award was then confirmed over a “litany of challenges,” with the Honorable Barry R. Ostrager, Justice of the New York State Supreme Court, confirming that Judge Pitman “carefully considered and decided all issues” “in his 64-page Final Award.” Jacobsen Decl. Ex. B at 2.
One of those conclusions was that “to the extent Morgan claim[ed] he [was] entitled to dividend's [sic] . . . his argument border[ed] on . . . frivolous.” Jacobsen Decl. Ex. A at 28. The arbitrator also concluded that “[defendants] . . . established that Morgan was a faithless servant from . . . [November 2018] to [January 2019] and that [defendants] are entitled to recover [any] compensation paid to Morgan during that period.” Id. at 47.
Second, it is evident from the record that Morgan's present claims were raised and resolved in Morgan II. For example, although their alleged breach is not mentioned in the Final Arbitration Award, defendants emphasize that Morgan originally brought his breach and fraud claims against defendants-the same ones as in this case-in his Answer and Counterclaims in Morgan II. See, e.g., Jacobsen Decl. Ex. E ¶¶ 73-94 (listing counterclaims for breach of fiduciary duty, theft, and conversion; fraud/misrepresentation; and breach of contract, among others). These claims were considered and dismissed. See generally Jacobsen Decl. Ex. A (omitting breach and fraud claims from arbitration award).
Moreover, Morgan does not even contest the rule that any claims (including his) arising out of the same transaction or occurrence would be barred as a matter of law. See Def. Reply at 4 (citing Def. Mem at 12-13). Defendants emphasize that, in Morgan's view, “this Action may proceed because [Morgan] has not ‘lost on all the issues' in the prior litigation.” Id. (quoting Pl. Mem. at 3). But this is not the standard. As discussed above, the question of whether a suit is barred by res judicata turns not on the validity or success of a plaintiff's claims but on whether there was a judgment on those claims.
Accordingly, because Morgan has not substantially changed “the main core of [his] case,”-i.e., the breach and fraud claims against defendants-and these claims are virtually identical to those adjudicated in Morgan II, Morgan should be precluded from litigating these claims in this action.
Defendants also argue that Morgan's claims should be dismissed because he fails to state a cognizable claim on which relief may be granted. Because this action is precluded on res judicata grounds, the Court need not address whether Morgan has sufficiently pled his claims of fraud and breach of contract. To the extent the Court reaches the cognizability of Morgan's claims, they do not pass muster for the reasons set forth in defendants' memorandum of law. See Def. Mem. at 19-20.
4. Because Morgan's Lawsuit Is Precluded by Res Judicata , Granting Him Further Leave to Amend Would Be Futile
Because Morgan's claims are barred by res judicata, “better pleading will not cure their defects, and granting leave to amend would be futile.” Brady v. IGS Realty Co. L.P., No. 19-CV-10142 (PAE) & 19-CV-10622 (PAE), 2020 WL 5414683, at *13 (S.D.N.Y. Sep. 8, 2020) (leave to amend futile when claims barred by Rooker-Feldman doctrine, res judicata, collateral estoppel, or some combination thereof) (cleaned up), affirmed by No. 20-CV-3512, 2021 WL 4302737 (2d Cir. Sep. 22, 2021); see also, e.g., MacKinnon v. City of New York/Hum. Res. Admin., 580 Fed.Appx. 44, 45 (2d Cir. 2014) (no need to grant pro se litigant leave to amend when dismissal based on res judicata is “substantive” and “better pleading will not cure it”) (cleaned up). As defendants note, the parties have been “litigating successive actions against each other.” Def. Mem. at 14 (quoting Pawling Lake Prop. Owners Assn., Inc. v. Greiner, 72 A.D.3d 665, 668 (2d Dep't 2010). Morgan's continued litigation of these claims not only “justif[ies] dismissal under . . . res judicata,” Id., but also demonstrates why granting Morgan leave to further amend would be futile: there are no facts or allegations that could be added to the SAC that would defeat the application of res judicata. Thus, the Court should not grant Morgan, who has already had three pleading opportunities, leave to further amend.
III. CONCLUSION
For the foregoing reasons, defendants' motion to dismiss should be granted on res judicata grounds. Moreover, because granting Morgan further leave to amend would be futile, the SAC should be dismissed with prejudice.
PROCEDURE FOR FILING OBJECTIONS
Pursuant to 28 U.S.C. § 636(b)(1) and Rule 72(b) of the Federal Rules of Civil Procedure, the parties have fourteen (14) days (including weekends and holidays) from service of this Report and Recommendation to file any objections (plus three days because the Report is being mailed to Plaintiff). See Fed.R.Civ.P. 6(a), (b), (d). Such objections, and any responses to objections, shall be filed with the Clerk of Court, with courtesy copies delivered to the chambers of the Honorable Jennifer H. Rearden, United States Courthouse, 500 Pearl Street, New York, New York 100071312. Any requests for an extension of time for filing objections must be directed to Judge Rearden.
FAILURE TO FILE OBJECTIONS WITHIN FOURTEEN (14) DAYS WILL RESULT IN A WAIVER OF OBJECTIONS AND WILL PRECLUDE APPELLATE REVIEW. 28 U.S.C. § 636(b)(1); Fed.R.Civ.P. 72. See Thomas v. Arn, 474 U.S. 140 (1985); Wagner & Wagner, LLP v. Atkinson, Haskins, Nellis, Brittingham, Gladd & Carwile, P.C., 596 F.3d 84, 92 (2d Cir. 2010).