United States District Court, N.D. Illinois, Eastern Division
September 22, 2004.
GTC INTERNATIONAL HOLDINGS, INC., Plaintiff,
JOHN BURNS, Defendant.
The opinion of the court was delivered by: JOHN W. DARRAH, District Judge
MEMORANDUM OPINION AND ORDER
Plaintiff, GTC International Holdings, Inc., filed suit against
Defendant, John Burns, seeking damages for breach of Defendant's
fiduciary duty to Plaintiff and its shareholders. Plaintiff also
seeks a declaratory judgment affirming, among other things, that:
(1) Defendant is not owed accelerated final payment of all
outstanding principal and interest under a Secured Promissory
Note in consequence of the termination of his employment; and (2)
under certain conditions, a failure to make any payment due under
the Secured Promissory Note would not constitute a default.
Presently before the Court is Defendant's Motion to Dismiss
Plaintiff's Amended Complaint or, in the Alternative, to
Transfer. The basis for subject matter jurisdiction in
Plaintiff's Complaint is diversity jurisdiction. Defendant
contends that the real party in interest, New Art Co., has not
been added to this action by Plaintiff; Defendant also contends
that New Art Co. is an indispensable party to this action. Under
either analysis, if New Art Co. was added as a party, complete
diversity would not exist, and the matter would be subject to
dismissal for lack of subject matter jurisdiction because New Art
Co. and Defendant are both citizens of Arizona. For the following
reasons, Defendant's Motion to Dismiss is granted. LEGAL STANDARD
For subject matter jurisdiction to exist in a matter alleging
diversity of citizenship, two requirements must be met. First,
the amount in controversy between the parties must exceed
$75,000.00. 28 U.S.C. § 1332(a). Second, complete diversity of
citizenship must exist between the plaintiffs and the defendants.
28 U.S.C. § 1332(a). A corporation is deemed to be a citizen of
any state where it is incorporated and any state where it has its
principal place of business. 28 U.S.C. § 1332(c)(1).
Generally, if subject matter jurisdiction is not apparent from
the face of a complaint, the allegations from the complaint are
taken as true. United Phosphorus, Ltd. v. Angus Chem. Co.,
322 F.3d 942, 946 (7th Cir. 2003) (United Phosphorus). However, "if
the complaint is formally sufficient but the contention is that
there is in fact no subject matter jurisdiction, the movant may
use affidavits and other material to support the motion." United
Phosphorus, 322 F.3d at 946. "The burden of proof is on the
party asserting jurisdiction." United Phosphorus,
322 F.3d at 946. Evidence may be weighed to determine whether subject matter
jurisdiction has been established. United Phosphorus,
322 F.3d at 946.
Plaintiff is a Delaware corporation with its principal place of
business in Illinois. Defendant is a citizen of Arizona. New Art
Co. is Plaintiff's wholly-owned subsidiary and is incorporated in
and, therefore, is a citizen of Arizona. BACKGROUND
In January 2003, Defendant sold all the assets of his business
to New Art Co. Defendant then signed an employment agreement and
a non-competition agreement with New Art Co.*fn1 These
agreements were later superceded by other agreements among
Plaintiff, New Art Co., other wholly-owned subsidiaries of
Plaintiff, and Defendant.
Defendant and New Art Co. also executed a Secured Promissory
Note which provides that, in the event of certain defaults by New
Art Co., the principal and outstanding interest under the Secured
Promissory Note will become immediately due and payable. It
further provides that under certain conditions, a failure to make
any payment due under the Note does not constitute a default.
Defendant and New Art Co. were the only parties to the Secured
Promissory Note. The Secured Promissory Note is to be governed
according to Arizona law.
Pursuant to these agreements, Defendant became President and
Chief Operating Officer of Plaintiff and its subsidiaries.
Thereafter, Defendant resigned from many of these positions but
remained as President and Chief Operating Officer of New Art Co.
Plaintiff terminated Defendant's employment with New Art Co. for
cause, in part because of Defendant's alleged failure to perform
The Real Party in Interest
Defendant contends that Plaintiff is not the real party in
interest to most of the claims in the Amended Complaint.
Specifically, Defendant argues that New Art Co., and not
Plaintiff, is a party to the Secured Promissory Note; therefore, only New Art Co.
can seek a declaration concerning its obligations under the
Secured Promissory Note.
In response, Plaintiff claims that it is in privity to the
Secured Promissory Note and can seek a determination of its
rights under the Note. Plaintiff also asserts that it can assert
the claims under the Secured Promissory Note because the parent
corporation, Plaintiff, is the real party interest for the claims
of its wholly-owned subsidiary, New Art Co. Plaintiff further
asserts that any claims that could be asserted by New Art Co. are
merely incidental to Plaintiff's claims relating to Defendant's
Federal Rule of Civil Procedure 17(a) states that "[e]very
action shall be prosecuted in the name of the real party in
interest." To determine whether a party is a "real party in
interest" in a diversity proceeding, a court "must look to the
applicable state substantive law." Am. Nat'l Bank & Trust Co. v.
Weyerhaeuser Co., 692 F.2d 455, 459-60 (7th Cir. 1982).
Neither party has addressed what law should apply. However,
both Illinois law and Arizona law only permit a party to a
contract, a third-party beneficiary to that contract, or a party
in privity to a contract to enforce that contract. White Hen
Pantry, Inc. v. Cha, 574 N.E.2d 104, 109 (1991); Lake Havasu
Resort, Inc. v. Commercial Loan Ins. Corp., 678 P.2d 950, 956
(Ariz.Ct.App. 1983). Here, Plaintiff is not a party to the
Secured Promissory Note nor a third-party beneficiary to the
Secured Promissory Note, and Plaintiff presents no arguments to
Plaintiff argues that it is in privity to Defendant concerning
the Secured Promissory Note because New Art Co. is Plaintiff's
wholly-owned subsidiary. Privity is defined as the connection
that exists between two contracting parties. Collins Co. v.
Carboline Co., 532 N.E.2d 834, 839 (Ill. 1998); Samsel v.
Allstate Ins. Co., 19 P.3d 621, 625 (Ariz.Ct.App. 2001).
Generally, a subsidiary corporation which is wholly owned by a parent
corporation is considered a separate and distinct legal entity.
See Colin Hahn v. The Paul Revere Life Ins. Co., No. 03 C 1062,
2004 WL 557380, at *1 (N.D. Ill. Feb. 17, 2004); Taeger v.
Catholic Family & Cmty. Servs., 995 P.2d 721, 734
(Ariz.Ct.App. 1999). Plaintiff has presented no authority in support of
its argument that a parent of its wholly-owned subsidiary is in
privity to a contract signed by the subsidiary and another party,
nor has Plaintiff demonstrated any other connection between
Plaintiff and Defendant with regard to the Secured Promissory
Note. Accordingly, Plaintiff is not in privity to Defendant.
Plaintiff next contends that, as the parent corporation, it is
the real party in interest for the claims of its subsidiary, New
Art Co. In support of this argument, Plaintiff cites FDIC v.
I-Tex Energy Corp., No. 83 C 3994, 1991 WL 61067, at *2 (N.D.
Ill. Apr. 10, 1991) (I-Tex). However, as Defendant points out,
that case is distinguishable because the subsidiary was actually
added as a party plaintiff. I-Tex, 1991 WL 61067, at *2.
Furthermore, on appeal, the Seventh Circuit recognized that the
subsidiary's presence in the lawsuit was necessary: "[t]he
district court recognized that [the subsidiary] should be added
as a party Plaintiff." FDIC v. Knostman, 966 F.2d 1133, 1138
(7th Cir. 1992). Finally, as discussed above, both Illinois and
Arizona law recognize that a subsidiary is generally a distinct
and separate entity from a parent corporation.
Plaintiff contends that any claims that could be asserted by
New Art Co. are merely ancillary to Plaintiff's claims relating
to Defendant's alleged wrongdoings arising principally from the
employment agreement and that New Art Co.'s claims regarding the
Secured Promissory Note between Defendant and New Art Co. are
only implicated in a limited fashion. Although the claims regarding the Secured Promissory Note may
only be ancillary to other claims between Plaintiff and Defendant
as to the Note, clearly Plaintiff also is seeking to assert
claims belonging to New Art Co., a separate and distinct entity.
As discussed above, Plaintiff is not entitled to assert claims on
behalf of New Art Co.
Based on the above, New Art Co. must be added as a party
plaintiff for claims regarding the Secured Promissory Note.
An Indispensable Party
Defendant also contends that New Art Co. is an indispensable
party that must be added to the matter. Defendant argues that he
could prevail in the matter presently before the Court but still
be subjected to liability from claims brought by New Art Co.
Motions brought pursuant to Federal Rule of Civil Procedure 19
for failure to join indispensable parties are analyzed via a
two-step process. Thomas v. United States, 189 F.3d 662, 667
(7th Cir. 1999) (Thomas). First, the court determines whether
the absent party should be joined if feasible, i.e., whether it
is a necessary party. Thomas, 189 F.3d at 667. If the party is
necessary but joinder is not feasible, the court must determine
if the litigation can proceed in the party's absence, i.e., if
the party is an indispensable party. Thomas, 189 F.3d at 667.
The determination of whether a party is necessary depends on
whether: (1) complete relief can be had without joinder, (2) the
absent party's ability to protect its interest will be impaired,
and/or (3) the existing parties will face a substantial risk of
inconsistent obligations unless the absent party is joined.
Thomas, 189 F.3d at 667.
Here, the relevant factors favor finding that New Art Co. is a
necessary party to this action. First, as discussed above,
Defendant cannot be assured of complete relief in this action unless New Art Co. is added as a Plaintiff; if Defendant was
victorious in this action, New Art Co. could assert similar
claims against Defendant. Furthermore, contrary to Plaintiff's
contentions, New Art Co. has a specific interest in this action.
Although Plaintiff may own New Art Co., New Art Co., as a party
to the Secured Promissory Note, owns the rights arising therefrom
and must participate as a party to any action affecting these
rights. Finally, without adding New Art Co. as a party in this
case, Defendant and Plaintiff may be subject to inconsistent
judgments if a later action is filed on the Note.
Once a court finds that the absent party is necessary, it must
decide if that party is indispensable to the litigation.
Thomas, 189 F.3d at 667. Four factors relevant to this
(1) the extent to which a judgment entered in the
absence of a party will be prejudicial to those
currently before the court; (2) the extent to which
such prejudice can be lessened or avoided by
reshaping the judgment; (3) whether a judgment
entered in a party's absence will be adequate; (4)
whether the plaintiff will have an adequate remedy if
the action is dismissed.
Moore v. Ashland Oil, Inc., 901 F.2d 1445
, 1447 (7th Cir.
Plaintiff argues that New Art Co. is not indispensable because
Plaintiff, as owner of New Art Co., owns the claims that could be
asserted by New Art Co. which arise out of the Secured Promissory
Note. However, as discussed above, only a party to a contract may
assert claims arising out of a contractual relationship.
Plaintiff also argues that New Art Co. is not an indispensable
party because Plaintiff's respective interest is identical to
those of its wholly-owned subsidiary, New Art Co. See, e.g.,
Extra Equipamentos E Exportado Ltda. v. Case Corp.,
361 F.3d 359, 364 (7th Cir. 2004) (Extra). That case, though, is distinguishable: the defendant,
the parent corporation, argued that the matter should have been
dismissed under Rule 19 because of the plaintiff's failure to
join defendant's wholly-owned subsidiary as another defendant.
See Extra, 361 F.3d at 364. The Seventh Circuit rejected that
argument because the parent corporation had the "identical
incentive to defend" its subsidiary's interest. Extra,
361 F.3d at 364. This factor, if applicable, is only one consideration in
the determination of a party as indispensable.
Other factors weigh in finding that New Art Co. is
indispensable to this action. As discussed above, any judgment
entered in this action could be highly prejudicial to Defendant
i.e., New Art Co. could reassert its claims arising out of the
Secured Promissory Note against Defendant. A full determination
of Plaintiff's claims would have to include a determination of
the parties' rights under the Secured Promissory Note. Finally,
Plaintiff has an adequate remedy if this action is dismissed
because Plaintiff and New Art Co. may bring all of their claims
against Defendant in a state court of competent jurisdiction.
Based on the above, New Art Co. is an indispensable party under
Federal Rule of Civil Procedure 19. New Art Co., though, cannot
be added to the present action because its presence would
eliminate complete diversity in this action. Accordingly, as
additional grounds, the matter must also be dismissed for failure
to join an indispensable party. CONCLUSION
For the foregoing reasons, Plaintiff's Complaint is dismissed.
Defendant's Motion to Transfer Venue is denied as moot.