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Green v. Blake

United States District Court, D. Kansas

October 25, 2019

JEFFREY S. GREEN, Plaintiff,
v.
CHRISTIAN BLAKE and JOSHUA LEONARD, Defendants.

          REPORT AND RECOMMENDATION

          JAMES P. O' HARA U.S. MAGISTRATE JUDGE

         Plaintiff, Jeffrey S. Green, a member and manager of 63rd Street Enterprises, LLC (“the LLC”) brings this diversity action against two former managers and officers of the LLC, Christian Blake and Joshua Leonard. Plaintiff's original complaint alleged that defendants made misrepresentations to plaintiff to induce him to invest in the LLC, breached fiduciary duties owed the LLC's members, converted LLC assets for their own use, and failed to produce an accounting of the LLC's income and expenses. On August 12, 2019, the presiding U.S. District Judge, Carlos Murguia, ruled that plaintiff's breach-of-fiduciary-duty, conversion, and accounting claims sought “redress of duties owed directly to the LLC and all its members, not any special duties owed exclusively to plaintiff, ”[1] and further ruled plaintiff's complaint failed to comply with the Fed.R.Civ.P. 23.1 “pleading requirements to initiate a derivative action” on behalf of the LLC.[2]Accordingly, Judge Murguia dismissed the derivative claims without prejudice, while allowing plaintiff's direct claim for misrepresentation to proceed.

         Plaintiff now has filed two interrelated motions seeking to reassert the derivative claims as a representative of the LLC: (1) a motion for leave to file an amended complaint under Rule 23.1 asserting derivative claims (in addition to his direct claim) (ECF No. 39); and (2) a motion under Fed.R.Civ.P. 20 to join himself as a plaintiff “derivatively on behalf of [the LLC]” and to join as a defendant in the derivative action Lynn Ebel, Blake's wife (ECF No. 37). The undersigned U.S. Magistrate Judge, James P. O'Hara, concludes the LLC is a necessary and indispensable party to the proposed derivative action and that the LLC cannot be joined without destroying the court's subject-matter jurisdiction. Therefore, it is recommended that Judge Murguia deny leave to file the proposed amended complaint as futile. The motion to add parties in the derivative action should then be denied as moot.

         Motion for Leave to Amend Complaint to Assert Derivative Claims

         Under Fed.R.Civ.P. 15(a)(2), once a responsive pleading has been filed, “a party may amend its pleading only with the opposing party's written consent or the court's leave.” Rule 15(a)(2) directs the court to “freely give leave when justice so requires.” The decision whether to grant leave to amend is within the discretion of the district court.[3] The court may refuse to grant leave to amend on the basis of “futility of the proposed amendment.”[4] To justify denying leave to amend on this basis, the proposed amendment must be clearly futile.[5] “Clearly futile” means that the proposed amended complaint would be subject to dismissal for any reason.[6] The undersigned finds the “clearly futile” standard satisfied here because the proposed derivative action would be subject to dismissal in the absence of a necessary and indispensable party, the LLC.

         Fed. R. Civ. P. 12(b)(7) permits a court to dismiss a case if a plaintiff has failed to join a necessary and indispensable party as required by Fed.R.Civ.P. 19.[7] In deciding whether to dismiss a case for failing to join a party under Rule 19, the court applies a three-step analysis.[8] First, under Rule 19(a)(1), the court determines “whether the [absent] party is necessary to the suit and must therefore be joined if joinder is feasible.”[9] A party is “necessary” if:

(A) in that person's absence, the court cannot accord complete relief among existing parties; or
(B) that person claims an interest relating to the subject of the action and is so situated that disposing of the action in the person's absence may: (i) as a practical matter impair or impede the person's ability to protect the interest; or (ii) leave an existing party subject to a substantial risk of incurring double, multiple, or otherwise inconsistent obligations because of the interest.[10]

         Second, if the court determines that the absent party is necessary, “the court then considers whether joinder is feasible-i.e., whether the person is subject to service of process and whether joinder will deprive the court of subject matter jurisdiction.”[11]

         Finally, “if the absent person is necessary, but joinder is not feasible, the court must decide whether that person is indispensable.”[12] In this third step, the court weighs the factors set out in Rule 19(b):

(1) the extent to which a judgment rendered in the person's absence might prejudice that person or the existing parties;
(2) the extent to which any prejudice could be lessened or avoided by:
(A) protective provisions in the judgment;
(B) shaping the relief; or
(C) other measures;
(3) whether a judgment rendered in the person's absence would be adequate; and
(4) whether the plaintiff would have an adequate remedy if the action were dismissed for nonjoinder.

         Applying the three-step analysis to the derivative action plaintiff proposes to bring, the undersigned finds that the LLC is a necessary and indispensable party whose joinder is not feasible. Without the LLC as a party, the proposed claims would be dismissed.

         Judge Murguia addressed the first step of the Rule 19 analysis in his August 12, 2019 order. After concluding he “need not determine whether the LLC is a necessary and indispensable party under Federal Rule of Civil Procedure 19” because, at that time, plaintiff had expressed an “eagerness ‘to avoid . . . asserting a derivative claim, '”[13] Judge Murguia nonetheless noted “courts in the federal district of Oregon and around the country have found LLCs to be necessary parties where the claims implicate the interests of the LLC itself.”[14] Plaintiff acknowledges in his instant briefing “that in the typical derivative action the company in which a stockholder/member owns an interest is joined” and that, in such cases, courts have found that “in the absence of the entity on whose behalf the derivative action is brought, the existing defendant(s) may be subject to a ‘substantial risk of incurring double, multiple, or otherwise inconsistent obligations.'”[15] The undersigned's independent ...


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