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LLC v. Sonic Drive-In of Pittsburg, LLC

United States District Court, D. Kansas

December 13, 2019

U4, LLC, Plaintiff,
v.
SONIC DRIVE-IN OF PITTSBURG, LLC, JOHN R. MARTIN, and WAYNE McCABE, Defendants.

          MEMORANDUM AND ORDER

          ERIC F. MELGREN UNITED STATES DISTRICT JUDGE.

         This case involves a dispute over the ownership of a limited liability company known as Sonic Drive-In of Pittsburg, LLC (“Sonic”). The Court previously stayed this case pending the outcome of a parallel case that was ongoing in state court. In its stay Order, the Court directed the parties to file a “notice of the state court judgment within 30 days after it is entered.” Defendants Sonic, John Martin, and Wayne McCabe have provided the Court with notice of that judgment. In addition, they move the Court for an order to release the funds currently being held in trust pursuant to the Court's preliminary injunction order and to dismiss this action without prejudice (Doc. 47). In response, Plaintiff U4, LLC (“U4”), contends that there is a dispute regarding the funds held in trust and moves for leave to amend its Complaint to interplead the funds, to add defendants, and release U4 from any further liability regarding the disputed funds (Doc. 50). For the reasons explained below, the Court grants Defendants' motion and denies U4's motion.

         I. Factual and Procedural Background

         Before April 5, 2016, Sonic was owned by three members: Martin owned 53%, McCabe owned 22%, and R&L Carpenter Enterprises, Inc. (“R&L”) owned 25%. Sonic's operating agreement restricted the members' right to sell their membership interests to third parties by providing the other members with a right of first refusal.

         In November 2015, R&L desired to sell its 25% interest in Sonic. R&L, Martin, and McCabe engaged in various communications regarding this sale that are not at issue in this motion. R&L subsequently identified U4 as a potential buyer. On April 5, 2016, R&L notified Martin and McCabe that it had sold its membership interests in Sonic to U4. Martin and McCabe, however, refused to recognize the sale, and asserted that the sale was invalid and unenforceable because they had properly exercised their right of first refusal in November 2015. They contended that they were the actual owner of R&L's 25% interest.

         Litigation followed. First, on June 29, 2016, U4 filed the instant action in this Court. In its Complaint, U4 names Sonic, Martin, and McCabe as defendants. U4 alleges that when R&L informed Martin and McCabe of its intent to sell its interest in Sonic, they failed to exercise their right of first refusal. Therefore, U4 contends that its purchase of R&L's membership interest is valid and enforceable. Accordingly, U4 seeks a judgment from this Court declaring that U4 owns a 25% membership interest in the Sonic and is entitled to all the rights and privileges that accompany such interest. U4 also seeks damages for profits that it claimed it was entitled to, but has not received, since April 5, 2016.

         After U4 initiated this action, Sonic, Martin, and McCabe filed suit against R&L and Roger Carpenter[1] in the District Court of Crawford County, Kansas. In that state court action, which was filed on October 13, 2016, Sonic, Martin, and McCabe alleged that they exercised their right of first refusal over R&L's 25% interest in November 2015. They also asked for the Court to order specific performance, i.e., to order R&L to convey its interest to Martin and McCabe.

         During litigation, Sonic continued its business operations and generated profits that would inure to the benefit of its members. Because of the ongoing dispute regarding who owned R&L's 25% membership interest, it was unclear who should receive these distributions in the interim. Recognizing this issue, the parties agreed to a preliminary injunction in this case under which R&L's distributions would be deposited into the trust account of Defendants' counsel until further order of the Court. The Court approved the parties' preliminary injunction order on January 30, 2017.

         On February 17, 2017, the Court entered the Pretrial Order in this case. U4's contentions in the Pretrial Order are similar, if not identical, to those plead in its Complaint. U4 contends that Defendants have breached Sonic's operating agreement by failing to recognize U4's 25% ownership interest and refusing to distribute earnings from this 25% interest to it. U4 seeks a declaratory judgment (1) stating that it is the owner of R&L's 25% interest in Sonic, (2) granting compensatory damages for earnings distributed on this 25% interest from April 5, 2016, and (3) ordering Defendants to distribute earnings consistent with the operating agreement into the future. Defendants deny U4's purchase of R&L's interest in Sonic, deny that U4 is entitled to an injunction, and assert that they exercised their right of first refusal to purchase R&L's interest in November 2015. They also asserted that the instant action should be stayed until the state court action is resolved.

         On July 31, 2017, this Court granted Defendants' motion to stay this case pending the outcome of the state court litigation. Relying on the Colorado River [2] abstention doctrine, the Court stated:

After carefully considering each factor, the Court finds that the exceptional circumstances in this case warrant a stay of the instant action. Before this Court can determine whether R&L sold its 25% membership interest to U4, the state court must first determine whether R&L had already agreed to [sell] that same interest to Martin and McCabe. The principles underlying Colorado River-wise judicial administration, the conservation of judicial resources, and the comprehensive disposition of litigation-are all furthered by a stay in this case.
For these reasons, the Court exercises its inherent authority to stay the instant case pending the outcome of the state court case.[3]

In July 2019, the state court litigation concluded. The court granted summary judgment to Martin and McCabe. The state court judgment ordered R&L (and its owner Roger Carpenter) to transfer the disputed 25% interest to Martin and McCabe upon their payment of $824, 605.13 to R&L. The attempted sale of interest to U4 was “set aside and held for naught.” Martin and McCabe paid $824, 605.13 to R&L, and the disputed 25% interest was transferred and assigned to them. Martin and McCabe have acknowledged receipt and transfer of the 25% interest and filed a satisfaction and release of judgment in the state court case. R&L did not appeal the state court judgment.

         In July 2019, Defendants provided notice to this Court of the state court judgment and moved to release the funds held in trust and dismiss this action with prejudice. Defendants contend that as a result of the state court judgment, U4 no longer has any claim of ownership in Sonic, nor does it have any claim to the funds held in trust pursuant to the preliminary injunction order. In response, U4 recognized that “the state court action has concluded in a final judgment determining the ownership of the disputed interest in Sonic.” U4 further contends, however, that there is an existing dispute as to the distribution of funds held in trust. According to U4, R&L and its assignees[4] have asserted a claim to the funds, and Defendants Martin and McCabe have asserted a claim to the funds. Accordingly, U4 asks this Court for leave to amend its Complaint to interplead the disputed funds, to add R&L and R&L's assignees as defendants in this action, and release U4 from any further liability related to the disputed funds.

         II. Analysis

         As an initial matter, the Court lifts the stay in this case. The Court previously stayed this case pending outcome of the state court case. The state court case has been resolved, and Defendants have provided the Court with notice of that judgment. The Court will now address the parties' pending motions.

         A. U4's Motion for Leave to Amend the Complaint

         1. U4's motion is procedurally improper.

         U4 seeks leave to amend its Complaint under Rules 15(a) and 22 of the Federal Rules of Civil Procedure. Rule 15(a) provides that leave to amend “shall be freely given when justice so requires.”[5] Defendants argue, however, that the Complaint is not the operative pleading in this case. They point out that the Court entered the Pretrial Order on February 17, 2017, which states:

This pretrial order supersedes all pleadings and controls the subsequent course of this case. It will not be modified except by consent of the parties and the court's approval, or by order of the court to prevent manifest injustice. Fed.R.Civ.P. 16(d) & (e); D. Kan. Rule 16.2(b).

Rules 16(d) and (e) state:

(d) Pretrial Orders. After any conference under this rule, the court should issue an order reciting the action taken. This order controls the course of the ...

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