Opinion
05 C 1139
May 24, 2006, Decided . May 24, 2006, Filed
For WMH Tool Group Hong Kong Limited, a Hong Kong Limited Company, Plaintiff: Jeffrey L. Widman, Steven Bennett Towbin, Allen Jay Guon, Robert William Glantz, Shaw, Gussis, Fishman, Glantz, Wolfson & Towbin LLC, Chicago, IL.
For Illinois Industrial Tool, Inc., doing business as JMK/IIT, Inc., formerly known as Midwest Tool Distributors, Inc., Defendant: Andrew Szot, Thomas John Verticchio, Sheryl Jaffee Halpern, Patzik, Frank & Samotny, Ltd., Chicago, IL.
For CHRISTOPHER ANTHONY, LANCE ERICSON, Defendants: Michael D Hayes, Varga, Berger, Ledsky, Hayes & Casey, Chicago, IL.
For LEAP, HONG KONG LIMITED, a Hong Kong limited company, Defendant: Joshua Edward Liebman, Steven E. Danekas, Swanson, Martin & Bell, Chicago, IL.
For Illinois Industrial Tool, Inc., Counter Claimant: Andrew Szot, Patzik, Frank & Samotny, Ltd., Chicago, IL.
For WMH Tool Group Hong Kong Limited, a Hong Kong Limited Company, Counter Defendant: Jeffrey L. Widman, Shaw, Gussis, Fishman, Glantz, Wolfson & Towbin LLC, Chicago, IL.
This case is before the court for ruling on defendants' motion to dismiss for lack of subject matter jurisdiction pursuant to Rule 12(b)(1) of the Federal Rules of Civil Procedure and plaintiff's motion for leave to file a third amended complaint. For the reasons explained below, the court grants plaintiff leave to file its third amended complaint and denies defendants' motion to dismiss as moot.
BACKGROUND
In its original and first amended complaints, WMH Tool Group Hong Kong Limited's ("WMH"), a Hong Kong limited company, sued defendant Illinois Industrial Tool, Inc. ("IIT"), an Illinois corporation, for the unpaid principal balance due and owing for products that WMH had sold and delivered to IIT. Then in November 2005, WMH filed its second amended complaint, adding four more defendants: Leap, Hong Kong Limited, a Hong Kong limited company (Leap HK), Leap Ltd., an Illinois corporation ("Leap Illinois"), and Christopher Anthony and Lance Ericson, two individual defendants who are citizens of Illinois (the "Individual Defendants"). Through the second amended complaint, WMH also added additional counts, including a claim against Leap HK, Leap Illinois and the Individual Defendants for violation of the Uniform Fraudulent Transfer Act (the "fraudulent transfer count") and a claim against the Individual Defendants for breach of fiduciary duty.
In each of its complaints, WMH asserted that this court has diversity jurisdiction over the subject matter pursuant to 28 U.S.C. § 1332(a)(2) and (3). After WMH filed its second amended complaint, defendants moved to dismiss for lack of subject matter jurisdiction under Rule 12(b)(1) because the addition of Leap HK destroyed diversity jurisdiction. As defendants correctly pointed out, "the presence of foreign parties on both sides of an action destroys diversity if there is not a citizen of the United States on each side of the action. . . ." Zenith Elecs. Corp. v. Kimball Int'l Mfg., Inc., 114 F. Supp. 2d 764, 773 (N.D. Ill. 2000). In other words, where a foreign corporation (WMH) sues another foreign corporation (Leap HK) as well as domestic defendants (Leap Illinois and the Individual Defendants), there is no diversity jurisdiction because "the statute creating the diversity jurisdiction does not contemplate the alignment of alien versus citizen plus alien." Israeli Aircraft Indus. Ltd. v. Sanwa Bus. Credit Corp., 16 F.3d 198, 202 (7th Cir. 1994); Karazanos v. Madison Two Assocs., 147 F.3d 624, 627 (7th Cir. 1998) (diversity jurisdiction lacking where "'one side of the litigation had only foreign parties and the other had a mixture of foreign and domestic parties,' because such a case does not fit within any of the [diversity] statute's jurisdictional pigeonholes").
Leap HK and Leap Illinois filed their motion to dismiss pursuant to Rule 12(b) (1), which IIT and the Individual Defendants adopted.
Although WMH initially resisted the defendants' motion to dismiss on the merits, it eventually conceded that defendants were correct. At the January 4, 2006 hearing regarding the 12(b)(1) motion to dismiss, WMH informed the court that it intended to render the subject-matter-jurisdiction problem moot by voluntarily dismissing Leap HK and Leap Illinois (collectively "the Leap Entities") pursuant to Rule 41 of the Federal Rules of Civil Procedure. Defendants objected, arguing that voluntary dismissal was not an option because the Leap Entities were necessary and indispensable parties under Rule 19 of the Federal Rules of Civil Procedure. As a result, we ordered the parties to submit supplemental briefs addressing whether WMH had the right to voluntarily dismiss the Leap Entities under Rule 41.
After submitting several additional briefs, the parties finally have clarified the issues and solidified their respective positions. WMH originally submitted a sur-reply brief in which it explained that a plaintiff has an absolute right to voluntarily dismiss a defendant under Rule 41 as long as that defendant has not yet filed an answer or a motion for summary judgment. E.g., Madsen v. Park City, 6 F. Supp. 2d 938, 943 (N.D. Ill. 1998). That point of law is not disputed, however. Rather, the pertinent issue is whether the Leap Entities are necessary and indispensable parties to the litigation under Rule 19 of the Federal Rules of Civil Procedure, thus making voluntary dismissal of those defendants inappropriate. See, e.g., Brown v. Texas & P. R. Co., 392 F. Supp. 1120, 1123 (W.D. La. 1975) ("A federal district court has the power to preserve and perfect its diversity jurisdiction over a case by dropping a nondiverse party providing the nondiverse party is not an indispensable party whose presence is required under Rule 19[.]") (emphasis added). According to defendants, the Leap Entities cannot be voluntarily dismissed because they are necessary and indispensable parties to the fraudulent transfer count, which alleges that the Individual Defendants as transferors made fraudulent monetary transfers to the Leap Entities as transferees. See e.g., Nastro v. D'Onofrio, 263 F. Supp. 2d 446, 450 (D. Conn. 2003) (because action to set aside fraudulent transfer necessarily affects transferee's interest in the property received, transferee is necessary party); Krol v. Wilcek (In re H. King & Assocs.), 295 B.R. 246, 293 (Bankr. N.D. Ill. 2003) ("Courts have held that the transferor and the transferee are deemed to be necessary parties to a fraudulent transfer suit."). In response to that argument, WMH stated that it intended to dismiss the fraudulent transfer count in its entirety, not just against the Leap Entities, and thus moved for leave to file its third amended complaint to omit that count.
According to WMH, it made it clear at the January 4, 2006 hearing that it was dismissing the fraudulent transfer claim in its entirety. WMH thus suggests that the defendants misunderstood the issues that were supposed to be briefed. We cannot agree. The transcript of the January 4, 2006 hearing reflects that WMH stated that it would dismiss the fraudulent transfer claim against the Leap Entities in its entirety. (1.4.06 Tr. at 3:12-19.) WMH did not state any intention to dismiss the fraudulent transfer claim as it pertained to the Individual Defendants, however. In fact, the transcript reveals that WMH did not realize that it had named the Individual Defendants as defendants to the fraudulent transfer claim, (id.), although clearly it had, (Sec. Am. Compl., Count III). Any resulting misunderstanding or confusion was caused by WMH, not defendants.
Accordingly, the dispositive question is whether the Leap Entities will be necessary and indispensable parties to the litigation if the fraudulent transfer claim is dismissed. We turn to that issue now.
DISCUSSION
As explained above, it is undisputed that if Leap HK remains a defendant in this case, the court will lack diversity jurisdiction over the subject matter and must dismiss the case. See Karazanos, 147 F.3d at 627; Israeli Aircraft, 16 F.3d at 202. WMH hopes to moot the jurisdictional flaw by voluntarily dismissing both of the Leap Entities and filing its third amended complaint that eliminates the fraudulent transfer count in its entirety. Defendants, however, contend that the Leap Entities cannot be voluntarily dismissed because they are indispensable parties even under the proposed third amended complaint. Defendants make two arguments in support of their position, neither of which is persuasive.
First, defendants argue that even if the fraudulent transfer count is omitted from the proposed third amended complaint, the allegations regarding fraudulent transfers remain, so the recipients of those allegedly fraudulent transfers -- the Leap Entities -- remain indispensable parties under Rule 19. We cannot agree. Under Rule 19, if a party is a necessary party under Rule 19(a) who should, but cannot, be joined because joinder would destroy jurisdiction, the court must assess under Rule 19(b) whether in equity and good conscience the litigation can proceed at all in the party's absence. See Thomas v. United States, 189 F.3d 662, 667 (7th Cir. 1999) (setting forth two-step analysis under Rule 19). "If there is no way to structure a judgment in the absence of the party that will protect both the party's own rights and the rights of the existing litigants, the unavailable party is regarded as 'indispensable' and the action is subject to dismissal. . . ." Id. But the court considers whether a party is indispensable under Rule 19(b) only if it first determines that the party is necessary under Rule 19(a). Id.; Wright, Miller & Kane, 7 Fed. Practice and Procedure: Civil 3d, § 1604 at 440-441. Here, because we hold that the Leap Entities are not necessary parties, we need not reach defendants' contention that they are indispensable.
A party is necessary if its joinder is required in order to (1) render complete relief among those already parties to the litigation, (2) prevent impairment of the absent party's ability to protect its interest in the subject matter of the litigation, or (3) protect any of the existing parties to the litigation from a substantial risk of incurring multiple or inconsistent obligations. Thomas, 189 F.3d at 667 (citing Fed. R. Civ. P. 19(a)). Defendants argue that because the Leap Entities, as recipients of allegedly fraudulent transfers, would be necessary parties to a fraudulent transfer claim, e.g., Nastro, 263 F. Supp. 2d at 450; In re King & Assoc., 295 B.R. at 293, they are likewise necessary parties to the breach-of-fiduciary-duty claim against the Individual Defendants because that claim is premised on fraudulent transfers. But defendants offer no legal support for that conclusion. A fraudulent transfer claim is an action to set aside, or void, a transfer of assets. See e.g., Nastro, 263 F. Supp. 2d at 450; 740 ILCS 160/8(a)(1). Because the challenged transfer may be voided if the claim is successful, the outcome of the claim "necessarily impacts the transferee's interest in the property the transferee received." Nastro, 263 F. Supp. 2d at 450. Accordingly, the transferee is a necessary party. Id. In other words, because the Leap Entities could be ordered to return the transferred assets if WMH were to prevail on a fraudulent transfer claim, the Leap Entities have a right to be heard before such an order is entered. See id. In contrast, as both sides agree, the Leap Entities face no liability for breach of fiduciary duty because they were not fiduciaries of WMH. Even if WMH prevails on its breach-of-fiduciary-duty claim, the judgment would affect only the Individual Defendants -- the Leap Entities would have no legal obligation to return the assets they received from the Individual Defendants. So it is not necessary to join the Leap Entities in order for WMH to obtain complete relief. See Fed. R. Civ. P. 19(a). Likewise, the Leap Entities need not join the litigation in order to protect their interest in the assets they received from the Individual Defendants because their interest will not be affected by the outcome of the breach-of-fiduciary-duty claim. See id. Moreover, there is no plausible argument that the Individual Defendants will face a substantial risk of multiple or inconsistent obligations if the Leap Entities are not joined. See id. The fact that the breach-of-fiduciary-duty claim is premised on allegedly fraudulent transfers to the Leap Entities does not make them necessary parties.
Defendants' second argument is that the proposed third amended complaint triggers possible third-party claims against the Leap Entities which make Leap Illinois (but not Leap HK) an indispensable party. Specifically, based on WMH's allegations that the Leap Entities received large sums of IIT's money without giving IIT any benefit or consideration, defendants contend that IIT may have a third-party claim against the Leap Entities for unjust enrichment. Additionally, the Individual Defendants maintain that if they are liable for breach of fiduciary duty, they may have a third-party claim against the Leap Entities under theories of implied indemnity or contribution. According to defendants, however, neither IIT nor the Individual Defendants could bring such third-party claims against Leap Illinois in this litigation, because IIT, the Individual Defendants and Leap Illinois are all Illinois citizens and diversity jurisdiction over third-party claims against Leap Illinois therefore would be lacking. See Guigliano v. Danbury Hosp., 396 F. Supp. 2d 220, 224 (D. Conn. 2005) (citing Caterpillar, Inc. v Lewis, 519 U.S. 61, 66-67 n. 1, 117 S. Ct. 467, 136 L. Ed. 2d 437 (1996)) ("Diversity jurisdiction over a third-party claim depends on the citizenship of the third-party plaintiff and defendant only.") Defendants thus argue that Leap Illinois is an indispensable party who cannot be joined, so the case must be dismissed. This argument is fundamentally flawed, however.
For one thing, the possibility of a claim against a third-party does not render the third-party a necessary, let alone indispensable, party under Rule 19. For example, although the Individual Defendants contend that they may have a third-party claim against the Leap Entities for implied indemnity, "potential indemnitors have never been considered indispensable parties, or even parties whose joinder is required if feasible." Pasco Int'l (London) Ltd. v. Stenograph Corp., 637 F.2d 496, 503 (7th Cir. 1980). Further, although defendants argue that it would be unfair and prejudicial to require them to litigate their third-party claims in a separate state court action, the possibility of subsequent litigation for indemnity or contribution "was not an eventuality that Rule 19 was designed to avoid." Id. at 505. Nor does the possibility of a third-party claim for unjust enrichment by IIT against Leap Illinois make Leap Illinois a necessary party under Rule 19(a). Under the Rule 19(a) analysis, when the court considers whether "complete relief" can be accorded without joining the absent party, "[t]he term complete relief refers only 'to relief between the persons already parties, and not as between a party and the absent person whose joinder is sought.'" Perrian v. O'Grady, 958 F.2d 192, 196 (7th Cir. 1992). Yet defendants fail to explain how IIT's ability to bring a third-party claim against Leap Illinois could have any effect on the court's ability to render complete relief between WMH and defendants. And in any event, it is unlikely that separate litigation would be necessary for the third-party claims defendants have identified. Even if the court would lack diversity jurisdiction over third-party claims against Leap Illinois, it seems evident that we may exercise supplemental jurisdiction under 28 U.S.C. § 1367(a) over those third-party claims as claims arising from the same "common nucleus of operative fact" as the claims in the original action. United States Liab. Ins. Co. v. Fassbinder United Builders, Inc., 2002 U.S. Dist. LEXIS 11027, No. 99 C 50330, 2002 WL 1359428, at *1 (N.D. Ill. June 20, 2002) (where third-party claims arise from "a common nucleus of operative fact," court may exercise supplemental jurisdiction under § 1367).
Neither side raised the issue of supplemental jurisdiction.
Accordingly, as long as the fraudulent transfer claim is voluntarily dismissed and only the breach-of-fiduciary-duty claim remains against the Individual Defendants, the Leap Entities are not necessary parties under Rule 19(a). We therefore conclude that WMH has the right to voluntarily dismiss the Leap Entities and the fraudulent transfer count under Rule 41. WMH is given leave to file its third amended complaint, dropping those defendants and the fraudulent transfer count. As a result, defendants' motion to dismiss for lack of subject matter jurisdiction is moot.
CONCLUSION
For the reasons explained above, plaintiff's motion for leave to file its third amended complaint is granted and defendants' motion to dismiss for lack of subject matter jurisdiction is denied as moot.
DATED: May 24, 2006
ENTER:
John F. Grady, United States District Judge