United States District Court, W.D. Washington
J.R. SIMPLOT COMPANY, et al., Plaintiffs,
WASHINGTON POTATO CO., et al., Defendants.
ORDER GRANTING DEFENDANTS' MOTION TO
RICARDO S. MARTINEZ CHIEF UNITED STATES DISTRICT JUDGE
matter comes before the Court on Defendants Washington Potato
Company (“WPC”), Oregon Potato Company
(“OPC”), and Frank Tiegs's (collectively
“Defendants”) motion to dismiss Plaintiff J.R.
Simplot Company's (“Simplot”) First Amended
Verified Complaint (the “Amended
Complaint”). Dkt. #49. Simplot's suit stems from
Defendants' alleged mismanagement of Pasco Processing LLC
(“Pasco”) and Gem State Processing LLC
(“Gem State”), two food processing and
distributing businesses co-owned by Simplot and WPC, and
Simplot and OPC, respectively. Defendants deny these
allegations and now seek to dismiss Simplot's Amended
Complaint on the ground that the Court lacks subject matter
jurisdiction over Simplot's claims. Defendants reason
that because the businesses co-owned by Simplot and WPC and
OPC are limited liability companies (“LLC”s)
whose citizenship is the same as that of its members, their
inclusion on either side of this matter destroys diversity
jurisdiction. Simplot does not agree and instead argues that,
even though it brings derivative claims on behalf of Pasco
and Gem State, Pasco and Gem State are merely nominal parties
whose citizenship does not matter to determine if subject
matter jurisdiction exists. In the alternative, Simplot
argues that even if the Court does not have subject matter
jurisdiction over its derivative claims, the Court
nonetheless has original jurisdiction over its direct claims.
Simplot thus urges the Court to exercise supplemental
jurisdiction over any of its non-diverse derivative claims.
reviewed Simplot and Defendants' briefing on this matter,
the Court finds it may have subject matter jurisdiction over
two of Simplot's direct claims. However, because it is
unclear from Simplot's Amended Complaint whether the
amount in controversy for these two claims exceeds $75, 000,
the Court cannot exercise subject matter
jurisdiction. The rest of Simplot's claims are
derivative claims, Pasco and Gem State are indispensable
parties to those claims, and Simplot's joinder of Pasco
and Gem State destroyed the diversity of those claims.
Accordingly, Defendants' motion to dismiss is GRANTED.
suit arises out of Simplot and Defendants' co-ownership
of Pasco and Gem State. Dkt. #46 ¶ 1. Pasco and Gem
State are multi-million dollar food processing and
distributing businesses formed under Washington State's
LLC Act. See id. ¶¶ 3, 23. Pasco, a
manager- managed LLC, is managed by Defendant WPC.
Id. ¶ 6. Gem State is also a manager-managed
LLC, and is managed by Defendant OPC. Id. ¶ 7.
Defendants WPC and OPC are Washington state corporations
whose principal place of business is in Washington.
Id. ¶¶ 20-21. Defendant Tiegs, who is a
citizen of Washington State, is the principal of both WPC and
OPC. Id. ¶¶ 6-7. Simplot, a Nevada
corporation whose principal place of business is in Idaho,
brings this action directly, based on its status as a member
of Pasco and Gem State, and derivatively on behalf of Pasco
and Gem State. Id. ¶¶ 3, 4, 19. In its
Amended Complaint, Plaintiff claims Defendants “through
gross negligence, recklessness, and intentional misconduct,
including self-dealing, have mismanaged Pasco, NFF, and Gem
State to the point where these companies are failing
financially and otherwise.” Id. ¶ 9.
Amended Complaint lists fifteen (15) claims for
relief. Dkt. #46 ¶ 121-181. Eight of
Simplot's claims are filed directly, six are filed
derivatively on behalf of Pasco and Gem State, and one is
filed on behalf of Simplot, Pasco, and Gem State.
Id. Simplot's direct claims for relief include
two claims for Defendants' alleged breach of the Pasco
and Gem State operating agreements (Counts I and II), two
claims for Defendants' alleged violation of the
Washington State Limited Liability Company Act's records
disclosure requirements (Counts III and IV), two claims for
Defendants' alleged breach of fiduciary duties owed to
Simplot (Counts V and VI), a claim for unjust enrichment
(Count VII), and a claim for declaratory judgment (Count
VIII). Id. ¶¶ 121-152. Simplot's
derivative claims include two claims for Defendants'
alleged breach of the Pasco and Gem State operating
agreements (Counts IX and X), two breach of fiduciary duty
claims (Counts XI and XII), one claim of unjust enrichment
(Count XIII), and one claim for WPC's alleged breach of
Pasco's management services agreement (Count
XIV).Id. ¶¶ 153-177. Count XV seeks the
appointment of a receiver for Pasco and Gem State, and it is
filed on behalf of Simplot, Pasco, and Gem State.
Id. ¶¶ 178-181.
request for declaratory judgment (Count VIII) stems from
WPC's declaration of a “Deadlock” under
Pasco's Operating Agreement (“Pasco OA”).
Dkt. #46 ¶ 100. Under the Pasco OA, a
“Deadlock” occurs when there is a tie vote
“with respect to any matter for which a majority of the
Board Members is required for approval, and such matter is
not approved as a result of a [tie] vote . . . on a matter
submitted to it at a meeting or in the form of a proposed
written consent.” Id. ¶ 101. When a
“Deadlock” occurs, Simplot and WPC must attempt
to resolve the “Deadlock” through mediation.
Id.¶ 103. However, if mediation is
unsuccessful, WPC, subject to a condition precedent, has the
option to purchase Simplot's interest in Pasco.
Id. The condition precedent (“Supply Agreement
Washington Potato's option to purchase Simplot's
Member Percentage Interest under this Section 9.5 shall be
conditioned upon the Company, Washington Potato and Simplot
entering into a supply agreement for a period of five (5)
years for the supply of vegetable products to Simplot with
terms and conditions mutually acceptable to Simplot and
alleges WPC unilaterally declared a “Deadlock” in
December 2016 after Simplot did not comply with WPC's
October 2016 request for Simplot to make an additional
capital contribution to Pasco. Id. ¶¶ 102,
107. Simplot alleges it has not refused to make the requested
capital contribution, but has instead asked Defendants to
comply with Simplot's pre-existing demand for records
before Simplot decides whether to further invest in Pasco.
Id. ¶ 107. Simplot claims Defendants
“manufactured” this “Deadlock” in an
“attempt to squeeze Simplot out of Pasco and Gem State
. . .” at a “significant loss.”
Id. ¶¶ 105, 108. If the Court determines a
“Deadlock” exists, Simplot requests a declaration
from the Court that WPC's purchase option is
unenforceable because the Pasco OA's Supply Agreement
Condition is unenforceable as a matter of law. Id.
¶ 152(E). In the alternative, Simplot seeks a
declaration that the purchase option is unenforceable as a
matter of law due to WPC's self-dealing, breaches of
fiduciary duties, and/or other conduct that reduced
Pasco's value to Defendants' benefit. Id.
to dismiss based on a lack of subject matter jurisdiction are
governed by Rule 12(b)(1) of the Federal Rules of Civil
Procedure. Section 1332(a)(1) of Title 28 of the United
States Code confers federal jurisdiction to courts over civil
actions where the amount in controversy exceeds $75, 000, and
the matter is between citizens of different states. Thus, for
the exercise of subject matter jurisdiction to be proper in a
diversity case, no plaintiff can be a citizen of the same
state as any defendant. Owen Equip. & Erection Co. v.
Kroger, 437 U.S. 365, 373 (1978). Diversity is
determined when the complaint is filed, Mann v. City of
Tucson, 782 F.2d 790, 794 (9th Cir. 1986), and the
burden of proving jurisdictional facts is on the party
asserting jurisdiction, McNutt v. Gen. Motors Acceptance
Corp., 298 U.S. 178, 182 (1936); Fenton v.
Freedman, 748 F.2d 1358, 1359 n. 1 (9th Cir. 1984). The
diversity statute is construed strictly and doubts are
resolved against finding jurisdiction. Kantor v.
Wellesley Galleries, Ltd., 704 F.2d 1088, 1092 (9th Cir.
purposes of subject matter jurisdiction, an LLC's
citizenship is determined according to the citizenship of the
members of the LLC. Johnson v. Columbia Props. Anchorage,
LP, 437 F.3d 894, 899 (9th Cir. 2006). However, in
determining subject matter jurisdiction, courts must
“disregard nominal or formal parties and rest
jurisdiction upon the citizenship of real parties to the
controversy.” Navarro Sav. Ass'n v. Lee,
446 U.S. 458, 460-61 (1980). Because Simplot and Defendant
WPC are both members of Pasco, Pasco is a citizen of Idaho
and Washington State. Including Pasco as a party to this case
therefore destroys diversity jurisdiction. The same is true
of Gem State's inclusion as a plaintiff. However, Pasco
and Gem State's citizenship may not be a factor in
determining subject matter jurisdiction if, as Simplot
argues, the Court finds these two LLCs are nominal parties
whose citizenship is irrelevant. See Dkt. #52 at
12-16. Defendants argue that Pasco and Gem State are not
nominal parties, but are instead indispensable parties whose
inclusion in this matter destroys diversity jurisdiction. The
Court agrees that, to the extent Simplot's claims are
derivative, Pasco and Gem State are not nominal parties whose
citizenship can be ignored.
Rule of Civil Procedure 17(a) requires that actions “be
prosecuted in the name of the real party in interest.”
Whether an LLC is a real party in interest is determined by
looking at the laws of the state where the LLC was organized.
See Fed. R. Civ. P. 17(b). Pasco and Gem State are
both Washington State LLCs. Dkt. #46 ¶ 3. Under
Washington State law, LLC members can bring derivative
actions to enforce the rights of an LLC. See RCW
25.15.386. Because LLC members can bring derivative actions
on behalf of an LLC, the Court must determine which of
Simplot's claims are derivative. Derivative claims will
render Pasco and Gem State real parties in interest to this
suit, which will destroy diversity jurisdiction over those
claims. See Kroupa v. Garbus, 583 F.Supp.2d 949, 952
(N.D. Ill. 2008) (applying Delaware law to determine if
plaintiff's claims were derivative, and finding lack of
complete jurisdiction where plaintiff's claims were
properly characterized as derivative); also Finley v.
Takisaki, No. C05-1118JLR, 2006 WL 1169794, *3 (W.D.
Wash. April 28, 2006) (disallowing ...