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J. R. Simplot Co. v. Washington Potato Co.

United States District Court, W.D. Washington

April 14, 2017

J.R. SIMPLOT COMPANY, et al., Plaintiffs,
v.
WASHINGTON POTATO CO., et al., Defendants.

          ORDER GRANTING DEFENDANTS' MOTION TO DISMISS

          RICARDO S. MARTINEZ CHIEF UNITED STATES DISTRICT JUDGE

         I. INTRODUCTION

         This 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”).[1] 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.

         Having 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.[2] 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.

         II. BACKGROUND

         This 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.”[3] Id. ¶ 9.

         Simplot's Amended Complaint lists fifteen (15) claims for relief.[4] 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.

         Simplot's 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 Condition”) states:

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 Washington Potato.

Id.

         Simplot 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. ¶ 152(F).

         III. LEGAL STANDARD

         Motions 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. 1983).

         IV. DISCUSSION

         For 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.

         Federal 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 ...


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