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Prader v. Science Dynamics Corporation

IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW JERSEY


December 19, 2000

BRADLEY T. PRADER, PLAINTIFF,
v.
SCIENCE DYNAMICS CORPORATION, AND JONATHAN BEN LASSERS, DEFENDANTS.

The opinion of the court was delivered by: Simandle, District Judge

HONORABLE JEROME B. SIMANDLE

OPINION

This matter comes before the Court on defendant Science Dynamics Corporation's motion pursuant to Fed. R. Civ. P. 12(b)(7) to dismiss plaintiff Bradley T. Prader's complaint for failure to join a necessary party under Rule 19 and/or to dismiss pursuant to Fed. R. Civ. P. 12(b)(6) for failure to state a claim upon which relief can be granted. This motion presents an important issue regarding a New Jersey Limited Liability Company ("LLC"), namely, whether this LLC is a necessary and indispensable party to an action brought by one of its members alleging that a defendant breached a contract to pay a finders fee to the LLC. Because the Court finds that Skye Capital Group, L.L.C. is a necessary and indispensable party to this action, and that this entity is a New Jersey LLC whose presence would defeat diversity jurisdiction, defendant's motion pursuant to Fed. R. Civ. P. 12(b)(7) will be granted and this action must be dismissed without prejudice.

I. BACKGROUND

Plaintiff Bradley T. Prader ("Prader"), at the time this action was filed, resided in Doylestown, Pennsylvania. Defendant Science Dynamics Corporation ("Science Dynamics") is a Delaware Corporation whose principal place of business is in Cherry Hill, New Jersey. (Pls.' Opposition at 1.) Defendant Cross-Claimant Jonathan Ben Lassers ("Lassers") is a resident of Edinburgh, Scotland. (Pls.' Opposition, Ex. B.) Plaintiff asserts that this Court has jurisdiction under 28 U.S.C. § 1332 because the parties are completely diverse and the amount in controversy is greater than $75,000.00.

Skye Capital is a New Jersey Limited Liability Company ("LLC") that was formed in April, 1998 (Prader Dep., Aug. 16, 2000, T 20-24 to 21-08), with four members, Prader, Lassers, Roberta Babitz ("Babitz"), and Peter Kearns ("Kearns"). Prader formed the LLC himself, without the assistance of counsel, directly through the Secretary of State of New Jersey, and he and Kearns signed the incorporation papers. (Prader Dep., Aug. 16, 2000, T 21-22 to 22-16.) Prader, Lassers, Babitz and Kearns agreed to be equal members of Skye Capital, although no written document was ever produced to confirm that agreement. (Id. at 32-3 to 32-12.)

The underlying dispute in this case involves a breach of contract pursuant to a June 10, 1998 agreement (the "Contract") between Science Dynamics and Skye Capital Group, L.L.C. ("Skye Capital"). That Contract provided for the payment of a $10,000.00 Finder's Fee payable in Science Dynamics Stock to Skye Capital upon consummation of a merger or acquisition between or by Science Dynamics and GORCA Memory Systems, Inc. ("GMS"). (Defs.' Br. in Support of Mot. to Dismiss, Ex. A; Compl., Ex. A.) On February 8, 1999, the transaction between Science Dynamics and GMS was completed, and the price per share of Science Dynamics stock was $0.53. *fn1 (Final Pretrial Order, Oct. 19, 2000 at 3.) To date, no stock has been issued by Science Dynamics to Skye Capital, although a partial cash payment, which is discussed in greater detail below, was made to Skye Capital in July, 1999. (Id.)

On April 30, 1999, Prader communicated with Alan Bashforth of Science Dynamics ("Bashforth") and advised that Science Dynamics was "delinquent in delivering an advisory fee to Skye Capital Group, L.L.C. as per [Science Dynamic's] obligations under the [Contract]." (Defs. Br., Ex. B.) Prader went on to write that the "$10,000.00 fee will be paid in freely trading [Science Dynamic] stock at the price as of the time of closing ($0.49). Therefore, [Science Dynamic] shall issue 20,408 shares . . . to Skye Capital Group, L.L.C." (Id.) On June 3, 1999, an attorney for Skye Capital advised Bashforth that Science Dynamics had breached its contract with Skye Capital and wrote that "[t]he fee due is to be paid in Science Dynamics stock issued at the stock price quoted on February 8 of $0.49." *fn2 (Defs.' Br., Ex. C.)

On July 9, 1999, after a meeting between Prader for Skye Capital and Bashforth for Science Dynamics, Science Dynamics issued a check in the amount of $2,000.00, payable to Skye Capital, L.L.C., representing a partial cash payment of the $10,000.00, which was originally to be delivered in stock pursuant to the Contract. (Id. at T 93-8 to 93-20.) Science Dynamics claims that Prader, on behalf of Skye, agreed to accept $10,000.00 in cash in lieu of $10,000.00 worth of stock. In his deposition, Prader admitted that he agreed with Bashforth on July 9, 1999 to take the cash value of the stock (id. at T 92-8 to 93-7), but later testified that he believed he and Skye were entitled to the full value of the stock owed on that date, or approximately $15,000.00. *fn3 (Id. at T 93-23 to 94-4.) Prader did not notify the other members of Skye Capital of the $2,000.00 cash payment and disbursed the entire payment to himself. (Id. at T 96-6 to 97-6.) No further payments have been made by Science Dynamics to Prader or Skye Capital to date. (Id. T 93-23 to 94-4.)

In the amended complaint, plaintiff Prader alleges that he is "the principal, sole employee, and sole member of Skye Capital," (Amended Compl., para. 7), and as such, he is entitled to 16,303 shares of stock, or its cash equivalent. (Id., paras. 8, 17, 18). In his answer to Prader's complaint, Lassers denied that Prader was the sole member of Skye or that he was authorized to deal independently with Science Dynamics. (Def's Answer, Counter-cl, and Cross-cl, para. 14.) Lassers also made claims for specific performance (id. at 4) and breach of contract (id. at 5), and asserted a cross-claim against Science Dynamics, and a counter-claim against Prader. (Id. at 8-11).

On September 26, 2000, Prader and Lassers entered into a written agreement (the "Agreement") stating: 1) That Skye Capital remained a New Jersey LLC, and that at its formation, Prader, Lassers, Kearns, and Babitz were equal co-owners, but that at a time prior to the agreement, Babitz abandoned her interest in Skye *fn4 and Kearns assigned his interest to Prader; *fn5 2) that Prader retains an interest in 60% of any recovery from this litigation and Lassers retains a 40% interest, *fn6 and that both immediately withdraw any and all claims that they have asserted against one another; and 3) that Alan L. Frank, Esquire, would be lead trial counsel in this action and prosecute the claims of both Prader and Lassers against Science Dynamics, and that Laurence Rosoff, Esquire would assist to the extent permitted by the Court. (Pls.' Opp. to Mot. to Dismiss, Ex. A.) An October 4, 2000 affidavit, written and signed by Lassers, confirms that he and Prader had settled their dispute and wished to proceed together as plaintiffs and the only remaining members of Skye Capital, against Science Dynamics. (Id., Ex. B.)

In response to a jurisdictional inquiry by this Court, *fn7 Prader and Lasser submitted a letter valuing their claim as of the date of the filing of the amended complaint at $261,866.93. *fn8 They asserted that they were entitled to compensatory damages reflective of the highest value of the stock during the period following the one-year restrictive registration period. The highest value of the stock was reported as $21.75 per share on March 1, 2000, which amounts to a total value of $410,357.25 for 16,303 shares. *fn9

Defendant Science Dynamics now moves under Fed. R. Civ. P. 12(b)(7) to dismiss Prader's claims for failure to name Skye Capital as a party pursuant to Rule 19 and/or to dismiss pursuant to Fed. R. Civ. P. 12(b)(6) for failure to state a claim upon which relief can be granted. For the following reasons, Defendant's motion to dismiss plaintiffs' claims based on failure to join an indispensable party is granted, and plaintiff's claim is dismissed without prejudice.

II. DISCUSSION

Defendants seek dismissal of plaintiffs's claims because, they argue, Skye Capital is a necessary and indispensable party to this action whose joinder would destroy the diversity jurisdiction of this Court under 28 U.S.C. § 1332. *fn10 Plaintiff Prader, now joined as a plaintiff by Lassers, argue that they are the only remaining members of Skye Capital and, as such, may therefore properly assert the LLC's interests without requiring joinder of the LLC. The Court will first address defendant's motion under Fed. R. Civ. P. 12(b)(7) to dismiss for failure to join a party under Rule 19, and, if necessary, will then address defendant's motion to dismiss for failure to state a claim pursuant to Fed. R. Civ. P. 12(b)(6).

A. Defendant's Motion to Dismiss for Failure to Join SkyeCapital as a Party Pursuant to Rule 19

Defendants claim that Prader's non-joinder of Skye Capital mandates dismissal of the action pursuant to Fed. R. Civ. P. 19(b). Because Skye Capital and Science Dynamics are both citizens of New Jersey, joinder of Skye Capital as a plaintiff would defeat diversity. *fn11 Prader claims that he and Lassers, as the remaining members of Skye Capital, may adequately litigate on behalf of Skye, thereby obviating the need for the LLC itself to be named as a party. Defendants challenge such an assertion and argue that Prader and Lassers lack standing to sue on behalf of Skye Capital.

In order to dismiss a claim or action for failure to join an indispensable party, the Court must undertake a three-step inquiry. First, the Court must determine whether the absent party is "necessary" under Fed. R. Civ. P. 19(a). *fn12 4 Moore's Fed. Prac., Parties § 19.02[3][a](1997). Second, if the Court determines that the party is necessary, the court must determine whether joinder of the necessary party is feasible. 4 Moore's Fed. Prac., Parties § 19.02[3][b]. Third, if joinder of the absentee is not feasible, the Court must determine "whether in equity and good conscience the action should proceed among the parties before it, or should be dismissed, the absent party thus being regarded as indispensable." Weber v. King, 110 F. Supp. 2d 124, 127 (E.D.N.Y. 2000).

1. Skye Capital as a Necessary and Feasible Party

As a direct party to the Contract, Skye Capital is a necessary party for several reasons under Fed. R. Civ. P. 19(a). First, because the Contract at issue is undisputedly between Skye Capital and Science Dynamics, Skye Capital is a person in "whose absence complete relief cannot be accorded among those already parties." Fed. R. Civ. P. 19(a)(1). The Advisory Committee wrote that "the interests . . . being furthered here are not only those of the parties but also that of the public in avoiding repeated lawsuits on the same essential subject matter." Fed. R. Civ. P. 19(a) advisory committee's note. Prader's current attempt to recover the proceeds of the Contract for himself, much like his previous coveting of the initial payment from Science Dynamics without notifying Skye Capital's other members, arises under the same essential subject matter as Skye Capital's rights under the Contract. Therefore, Skye Capital appears to be a necessary party in this action.

Prader and Lassers argue that they are the sole interest holders in Skye Capital and therefore may bring an action on behalf of Skye Capital without naming the LLC and destroying diversity. Science Dynamics argues that Skye Capital is a separate legal entity from its members under New Jersey law and therefore plaintiffs do not have the right to enforce the terms of the Contract on its behalf. Defendant also points out, and plaintiff does not dispute, that no dissolution of Skye Capital has occurred. (See Defs.' Reply Br. at 4; Pls.' Opp., Ex. A, para. 1(a).)

There is no binding New Jersey case law that addresses whether a limited liability company ("LLC") is a necessary party to an action brought by one member pursuant to the contractual rights of the LLC, where the LLC and several other members are not parties to the action. A review of N.J.S.A. 42:2B-1, et seq., the New Jersey Limited Liability Company Act (the "LLC Act"), and persuasive case law from other jurisdictions, however, support the conclusion that Skye Capital, a New Jersey LLC, is a separate legal entity from its members and is a necessary party to this action brought by Prader and Lassers pursuant to Skye Capital's contract with Science Dynamics.

Under New Jersey's LLC Act, an LLC "formed under this act shall be a separate legal entity." N.J.S.A. 42:2B-11b. An LLC's members are afforded corporate-like limited liability protections, such as the absence of personal liability for the debts, obligations, and liabilities of the LLC. N.J.S.A. 42:2B-23. Additionally, the LLC has separate and distinct rights and obligations beyond those of its members. N.J.S.A. 42:2B-43 (directing that a LLC interest is personal property and that a member has no interest in specific limited liability company property). Considering these factors, Judge Mishler found a New York LLC to be indispensable in an action where certain LLC members sued creditors for breach of contract on a LLC contract. In Weber v. King, 110 F. Supp.2d 124 (E.D.N.Y. 2000), the court determined that New York's Limited Liability Company Law, which is similar to New Jersey's LLC Act, directed that an LLC was a necessary party to an breach of contract action. In Weber, even though all of the individual members of the LLC were before the court in some capacity, the court still ruled that there was insufficient assurance that the interests of the company would be adequately represented, because the members were in conflict with one another. 110 F. Supp. 2d at 128. In this case, only two of the four original members of Skye Capital are before the Court; the other two, Babitz and Kearns, are not involved and seem to be unaware of the litigation, so far as the record reflects. *fn13

Another recent case addressing this issue is Trademark Retail, Inc. v. Apple Glen Investors, Inc., 196 F.R.D. 535 (N.D. Ind. 2000), which held that the LLC was a necessary party to an action by a member pursuant to a contract of the LLC. The Apple Glen court did not hold that this was always the case, however, and cited the Third Circuit: the Partnership, like a marionette, cannot make a move unless some human being pulls the strings. And all the people, who under the Partnership Agreement, have the power to cause the Partnership to bring suit . . are before the court. The court can therefore enjoin all the partners from bringing a subsequent suit on behalf of the Partnership . . . Thus, at least in certain cases, it is possible that a partnership's interests can be effectively represented in litigation by participation of its partners. Apple Glen Investors, 196 F.R.D. at ___ (quoting HB Gen. Corp. v. Manchester Partners, LP, 95 F.3d 1185, 1191-93 (3d Cir. 1996)).

Here, all the parties are not before the Court and there is no guarantee that Science Dynamics will not be subjected to multiple litigation and that the rights absent members will not be prejudiced by an adjudication with these parties. The Court, therefore, finds that Skye Capital is a necessary party to this litigation.

The Court now must determine whether joinder of Skye Capital is feasible. Joinder is not feasible if it destroys subject matter jurisdiction, if the court cannot exercise personal jurisdiction over the absentee, or if the absentee objects to the venue as improper. 4 Moore's Fed. Prac., Parties § 19.04[1]-[3]. Jurisdiction in this action is based solely on diversity of citizenship pursuant to 28 U.S.C. § 1332; there are no federal claims being made. As discussed earlier, the parties as they are currently arranged are completely diverse. *fn14 Joinder of Skye Capital, a New Jersey LLC, would destroy the complete diversity of the parties because defendant Science Dynamics, a Delaware Corporation whose principal place of business is in New Jersey, is also a citizen of New Jersey for jurisdictional purposes. Joinder, therefore, of Skye Capital is not feasible.

2. Skye Capital as an Indispensable Party

Because it has been determined that Skye Capital cannot be made a party to this action, the Court must now determine "whether in equity and good conscience the action should proceed among the parties before it, or should be dismissed, the absent person being thus regarded as indispensable." Fed. R. Civ. P. 19(b). Rule 19(b) also lists four non-exhaustive factors to be considered when determining whether that necessary party is indispensable:

first, to what extent a judgment rendered in the person's absence might be prejudicial to the person or those already parties; second, the extent to which, by protective provisions in the judgment, by shaping relief, or other measures, the prejudice can be lessened or avoided; third, whether a judgment rendered in the person's absence will be adequate; fourth, whether the plaintiff will have an adequate remedy if the action is dismissed for non-joinder. Fed. R. Civ. P. 19(b). "The language of Rule 19(b) leaves the district court with substantial discretion in considering which factors to weigh and how heavily to emphasize certain considerations." Weber, 110 F. Supp. 2d at 129 (quoting Envirotech Corp. v. Bethlehem Steel Corp., 729 F.2d 70, 75 (2d Cir. 1984)(citations omitted)).

The first factor, prejudice, involves a similar analysis to the one conducted to determine whether Skye Capital is a necessary party. Although Defendant's primary argument is that Prader and Lassers lack standing or authorization to sue on behalf of Skye Capital pursuant to the Contract, the more compelling problem is that the absence of Skye Capital and Babitz and Kearns could expose Science Dynamics to multiple and duplicitous litigation arising from the same breach of contract claim. Also, litigation of this claim without Skye Capital as a named plaintiff might prejudice the rights of the absent parties (e.g., Skye Capital, Babitz, Kearns) if the present plaintiffs fail to make certain legal arguments or if they fail to properly litigate the claim. If the case was fully and inadequately litigated by the present plaintiffs it might foreclose the absent parties from relitigating the same issue based on their original privity to the Contract as members of Skye Capital. As discussed earlier, Babitz and Kearns might experience a renewed interest in their share of a possible $400,000.00 claim than they did in their share of a $10,000.00 claim that seemed headed for court.

The second factor, whether protective provisions in the judgment could decrease or avoid prejudice, also weighs in favor of requiring Skye Capital as an indispensable party. Unlike the facts in HB Gen. Corp., where the Third Circuit held that joinder of a partnership entity was not required because all partners of the small limited partnership were before the district court, 95 F.3d at 1191, all the members of Skye Capital are not before this Court. In HB Gen. Corp., the Third Circuit reasoned that a protective provision in the judgment precluding any of the partners from bringing individual claims pursuant to the same action and ensure that the partnership's interests were fully and adequately represented by the individual partners. Id. at 1193. Such a protection is not possible in this case, nor is an LLC a "partnership" under New Jersey law, since it is regarded as a legal entity separate from its members, as discussed above.

The third factor, which focuses on prejudice to parties presently before the court, namely Science Dynamics, also weighs in favor of dismissal. Defendant Science Dynamics might be subject to multiple duplicitous claims pursuant to the Contract if the present case were to be litigated without Skye Capital. Indeed, Science Dynamics seeks this dismissal.

Likewise, the fourth factor clearly supports dismissal of the plaintiffs's claim because, as plaintiffs have admitted, this is a "very basic breach of contract claim" (Pls.' Nov. 14, 2000 Letter Resp. to the Court's Jurisdictional Inquiry), and plaintiffs have an alternate remedy in state court. With Skye Capital named as a plaintiff, this action can be refiled in a court of competent jurisdiction.

In conclusion, this Court finds that Skye Capital is a necessary and indispensable party to this litigation. Because joinder of Skye Capital would destroy this Court's diversity jurisdiction, it is not necessary to consider Defendant's motion to dismiss pursuant to Fed. R. Civ. P. 12(b)(6). This action, therefore, must be dismissed without prejudice to further proceedings in a court of competent jurisdiction.

III. CONCLUSION

For the foregoing reasons, the Court will grant defendant's motion to dismiss the Complaint for failure to join a necessary party under Rule 19, will dismiss defendant's motion to dismiss based on failure to state a claim, and will dismiss the Complaint without prejudice. The accompanying Order will be entered.

JEROME B. SIMANDLE U.S. District Judge

ORDER

THIS MATTER having come before the Court on defendant's motion to dismiss plaintiff's Complaint for failure to join a necessary party and/or for failure to state a claim upon which relief can be granted, pursuant to Federal Rules of Civil Procedure 12(b)(7) and (6); the Court having considered the moving papers and the opposition thereto; and for the reasons stated in the accompanying Opinion;

IT IS on this day of December 2000, hereby ORDERED that defendant's motion to dismiss plaintiff's Complaint for failure to join a necessary party is GRANTED; and

IT IS FURTHER ORDERED that defendant's motion to dismiss plaintiff's Complaint for failure to state a claim is DISMISSED; and

IT IS FURTHER ORDERED that plaintiff's Complaint is hereby DISMISSED WITHOUT PREJUDICE.

JEROME B. SIMANDLE U.S. District Judge


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