Roger Potthoff v. William Morin ( 2001 )

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
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No. 99-2999
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Roger Potthoff, an individual, *
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Appellant, *
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*
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v. * Appeal from the United States
* District Court for the
William Morin, in his individual * District of Minnesota
capacity; Port Authority of the *
City of St. Paul, a public corporation, *
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Appellees. *
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*
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Submitted: October 20, 2000
Filed: April 5, 2001
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Before McMILLIAN, BOWMAN and LOKEN, Circuit Judges.
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McMILLIAN, Circuit Judge.
Roger Potthoff appeals from a final order entered in the United States District
Court1 for the District of Minnesota dismissing his state and federal claims against
William M. Morin, the Port Authority of the City of St. Paul (“Port Authority”), Hines
Interests Limited Partnership (“Hines”), and John Doe. See Potthoff v. Morin, No. 98-
1715 (D. Minn. June 14, 1999) (order dismissing complaint with prejudice pursuant to
Fed. R. Civ. P. 12(c)). For reversal, Potthoff argues that the district court erred in
dismissing for lack of standing his claim against Morin brought pursuant to 42 U.S.C.
§ 1983. For the reasons discussed below, we affirm the order of the district court.
Jurisdiction was proper in the district court under 28 U.S.C. §§ 1331, 1343, and
1367. Jurisdiction is proper in this court under 28 U.S.C. § 1291. The notice of appeal
was timely filed pursuant to Fed. R. App. P. 4(a).
Background
Potthoff is the sole shareholder of ComReal Corporation (“ComReal”), a
Minnesota corporation that has no parent corporation. On or about June 30, 1998,
Potthoff and ComReal (together “plaintiffs”) filed the underlying complaint in
Minnesota state court against Morin, the Port Authority, Hines, and John Doe. The
following is a summary of the pertinent factual allegations set forth in the complaint.
See Addendum to Brief for Appellant at 2-6 (complaint ¶¶ 8-31).
On January 23, 1996, Hines, a Delaware limited partnership with offices in
Ramsey County, Minnesota, entered into an Asset Management and Marketing
Agreement (“Marketing Agreement”) with the Port Authority.2 Under the Marketing
1
The Honorable David S. Doty, United States District Judge for the District
of Minnesota.
2
The Port Authority is a governmental subdivision of the City of St. Paul and has
the right to sue and be sued in its own name, as provided by Minn. Stat. § 469.049.
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Agreement, Hines agreed to manage, operate, and maintain the Piper Jaffray Plaza
(“Plaza”), which is located within the geographical limits of the City and is owned by
the Port Authority. The Marketing Agreement also required Hines to lease the Plaza’s
office space to individual tenants. In exchange, the Port Authority agreed to pay Hines
a fee.
On February 1, 1996, Hines and ComReal entered into an Exclusive Leasing
Agreement (“Leasing Agreement”), which provided that ComReal would have the
exclusive right to solicit and lease office space to tenants for the Plaza in exchange for
a fee to be paid by Hines to ComReal. The Leasing Agreement required Potthoff to
act as the principal employee of ComReal, and it provided Potthoff the opportunity to
earn significant commissions.
On or about May 1, 1997, a local newspaper published an article in which
Potthoff was quoted criticizing the Mayor of St. Paul regarding a matter involving
municipal parking lots. The same day, Morin, the manager of the Port Authority,
telephoned Potthoff and advised Potthoff “that he worked for the City, and that such
criticism of the Mayor would not be tolerated”; Morin further stated that the Leasing
Agreement would be terminated if Potthoff “did not recant and desist from such
criticism of Mayor Coleman.” Addendum to Brief for Appellant at 4 (complaint ¶¶ 19,
20). In response, Potthoff indicated that he “would not stand by and allow [Morin] or
other individuals acting on behalf of the Port Authority or the City of St. Paul to censor
him and otherwise interfere with his freedom of speech and other civil rights.” Id.(complaint ¶ 21).
On or about May 6, 1997, Potthoff had a telephone conversation with William
Chopp, the Group Property Manager of Hines, who told Potthoff that Hines had been
directed by Morin to terminate the Leasing Agreement. Chopp told Potthoff that Morin
and the Port Authority wanted Hines to terminate the Leasing Agreement because
“‘The Port [Authority] is pissed-off that you won't shut up in criticizing the Mayor on
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parking. They are the client, the owner, and they want you gone.’” Id. (complaint ¶ 24
(purportedly quoting William Chopp’s statement)). Potthoff and ComReal sent a letter
to Morin and the Port Authority indicating that they (Morin and the Port Authority)
were illegally interfering with the Leasing Agreement as well as Potthoff’s civil rights.
On May 15, 1997, Hines notified ComReal in writing that it was terminating the
Leasing Agreement pursuant to § 5.2 of the Leasing Agreement. Section 5.2 of the
Leasing Agreement provided Hines with the right to terminate the agreement if:
5.2 (a) Owner [Port Authority] so requests of Manager
[Hines]; or
5.2 (b) Broker [ComReal] shall fail to perform its duties
under this Leasing Agreement and such failure shall
continue for ten (10) days after written notice from
Manager to Broker; or
5.2 (c) Manager, in good faith, delivers to Broker a written
description of the deficiencies of Broker as
determined by Manager in performing Broker’s duties
under this Leasing Agreement and such deficiencies
are not corrected within (10) days after Broker
receives such description.
On or about May 14, 1998, counsel for plaintiffs wrote a letter to Hines
requesting clarification as to which of the three provisions in § 5.2 of the Leasing
Agreement Hines relied upon for authority to terminate. Hines did not respond to
plaintiffs’ letter.
Based upon the above-stated factual allegations, the complaint set forth the
following claims: Count I, “interference with contractual relations,” against Morin and
the Port Authority; Count II, “claim under 42 U.S.C. § 1983,” against Morin, for
violating the free speech and due process rights of Potthoff; Count III, “breach of
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contract,” against Hines; and Count IV, “liability of undiscovered parties.” See id. at
6-8 (complaint ¶¶ 31-43).
Morin and the Port Authority removed the case to federal court. They moved
to dismiss the complaint and to stay discovery. The matter was referred to a magistrate
judge3 pursuant to 28 U.S.C. § 636(b)(1)(B). Following a hearing, the magistrate judge
issued a report and recommendation. Potthoff v. Morin, No. 98-1715 (D. Minn.
Apr. 30, 1999) (hereinafter “report and recommendation”). In addressing Count II of
the complaint the magistrate judge observed that the § 1983 cause of action against
Morin alleged a deprivation of only Potthoff’s rights and, therefore, Potthoff was the
only plaintiff asserting the claim. The magistrate judge further noted that Potthoff, as
the sole shareholder of ComReal, only alleged losses that flowed from the termination
of the Leasing Agreement between ComReal and Hines. Thus, the magistrate judge
reasoned, Potthoff's allegations merely stated a claim of derivative injury, not injury
that was separate and independent from the injury allegedly suffered by ComReal. The
magistrate judge concluded that Potthoff lacked standing to bring his § 1983 claim
against Morin. See id. at 15-19 (citing Bellows v. Amoco Oil Co., 118 F.3d 268 (5th
Cir. 1997), cert. denied, 522 U.S. 1068 (1998), and Erlich v. Glasner, 418 F.2d 226(9th Cir. 1969)). The magistrate judge recommended dismissal with prejudice of the
claims against Morin and the Port Authority, pursuant to Fed. R. Civ. P. 12(c),4 and sua
sponte dismissal without prejudice of the claims against Hines and John Doe, pursuant
to Fed. R. Civ. P. 4(m). See id. at 19.
3
The Honorable John M. Mason, United States Magistrate Judge for the District
of Minnesota.
4
The magistrate judge declined to address Morin’s qualified immunity argument.
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Plaintiffs filed objections to the magistrate judge’s report and recommendation.
Upon review, the district court adopted the recommendations of the magistrate judge.
See id. (June 14, 1999) (order dismissing the complaint) (hereinafter “slip op.”).
Regarding Potthoff’s § 1983 claim, the district court observed that compensatory
damages may not be recovered under § 1983 based upon an alleged violation of an
abstract constitutional right, unaccompanied by some other form of harm. See id. at 5-6
(citing Memphis Community Sch. Dist. v. Stachura, 477 U.S. 299, 310 (1986)
(Stachura)).5 The district court agreed with the magistrate judge that Potthoff had not
pled any damages other than a derivative claim for compensatory damages based upon
economic harm suffered by ComReal. See id. at 6. Thus, the district court concluded
that, “[b]ecause damages may not be recovered for the abstract value of a constitutional
right, and Potthoff has not alleged any other cognizable damages, his claim under
§ 1983 must be dismissed for lack of standing as recommended by the magistrate
judge.” Id.
The district court therefore dismissed the claims against Morin and the Port
Authority with prejudice pursuant to Fed. R. Civ. P. 12(c), and dismissed the claims
against Hines and John Doe without prejudice pursuant to Fed. R. Civ. P. 4(m). See
id. at 7. Judgment was entered accordingly, and Potthoff timely appealed.
5
Potthoff sought only compensatory damages on his § 1983 claim. See
Addendum to Brief for Appellant at 8-9 (complaint). No demand was made, nor was
any argument presented, for nominal damages.
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Discussion
We review a judgment on the pleadings de novo. National Car Rental Sys., Inc.
v. Computer Assocs. Int’l, Inc., 991 F.2d 426, 428 (8th Cir.), cert. denied, 510 U.S.
861 (1993). Judgment on the pleadings is appropriate only where the moving party has
clearly established that no material issue of fact remains and the moving party is
entitled to judgment as a matter of law. See id. (quoting Iowa Beef Processors, Inc. v.
Amalgamated Meat Cutters, 627 F.2d 853, 855 (8th Cir. 1980)). We must accept as
true all facts pled by the non-moving party and grant all reasonable inferences from the
pleadings in favor of the non-moving party. See id.“Article III of the United Constitution confines the federal courts to adjudicating
actual ‘cases and controversies.’” Boyle v. Anderson, 68 F.3d 1093, 1100 (8th Cir.
1995) (citation omitted), cert. denied, 516 U.S. 1173 (1996). To acquire Article III
standing, a plaintiff must have a “personal stake in the outcome of the controversy.”
Baker v. Carr, 369 U.S. 186, 209 (1962). To satisfy this requirement, the plaintiff must
have “a definite and concrete controversy involving adverse legal interests at every
stage in the litigation . . . for which the court can grant specific and conclusive relief.”
Arkansas AFL-CIO v. FCC, 11 F.3d 1430, 1435 (8th Cir. 1992) (citing McFarlin v.
Newport Special Sch. Dist., 980 F.2d 1208, 1210 (8th Cir. 1992)).
In its constitutional dimension, standing imports justiciability:
whether the plaintiff has made out a “case or controversy” between
himself and the defendant within the meaning of Art. III. This is the
threshold question in every federal case, determining the power of the
court to entertain the suit. As an aspect of justiciability, the standing
question is whether the plaintiff has alleged such a personal stake in the
outcome of the controversy as to warrant his invocation of federal-court
jurisdiction and to justify exercise of the court’s remedial powers on his
behalf. The Art. III judicial power exists only to redress or otherwise to
protect against injury to the complaining party, even though the court’s
judgment may benefit others collaterally. A federal court’s jurisdiction
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therefore can be invoked only when the plaintiff himself has suffered
some threatened or actual injury resulting from the putatively illegal
action.
Warth v. Seldin, 422 U.S. 490, 498-99 (1975) (citations and internal quotation marks
omitted). Additionally, under the prudential limits of the standing doctrine, “even when
the plaintiff has alleged injury sufficient to meet the ‘case or controversy’ requirement,
[the Supreme Court] has held that the plaintiff generally must assert his own legal rights
and interests, and cannot rest his claim to relief on the legal rights or interests of third
parties.” Id. at 499. “For purposes of ruling on a motion to dismiss for want of
standing, both the trial and reviewing courts must accept as true all material allegations
of the complaint, and must construe the complaint in favor of the complaining party.”
Id. at 501.
In the present case, Potthoff contends that the district court erred in granting
Morin judgment on the pleadings on his claim pursuant to 42 U.S.C. § 1983. Potthoff
maintains that, in dismissing his claim for lack of standing, the district court failed to
accept as true all material facts pled in the complaint and to draw all reasonable
inferences from the pleadings in his favor. Potthoff highlights the allegations in the
complaint setting forth his personal financial losses and injuries. He also highlights the
allegations describing Morin’s ultimatum – that Potthoff must either recant and desist
from criticizing the Mayor of St. Paul or suffer the termination of the Leasing
Agreement. Pottfhoff contends that Morin’s threat, coupled with the subsequent
termination of the Leasing Agreement, not only deprived him of constitutional rights,
but also caused him direct and personal injuries such as the loss of work and
commissions and the immediate devaluation of his corporation. Potthoff thus argues
that the district court mistakenly concluded that he failed to allege nonderivative
damages apart from the pecuniary injuries suffered by ComReal and only alleged direct
injury to himself based upon the deprivation of an abstract constitutional right. Potthoff
additionally suggests that the present case is distinguishable from the shareholder cases
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upon which the district court relied because, in those cases, the shareholder suffered
no independent constitutional injury. By contrast, Potthoff argues, he has suffered a
constitutional injury that is neither the same as, nor derived from, ComReal’s injuries.
Potthoff cites as precedent O’Hare Truck Serv., Inc. v. City of Northlake, 518 U.S. 712(1996) (district court erred in dismissing independent contractor's First Amendment
claim against city, brought pursuant to 42 U.S.C. § 1983, where independent contractor
alleged city terminated their longstanding contractual relationship in retaliation for
contractor's political support of the mayor’s opponent; holding that First Amendment
protections afforded public employees may be extended to independent contractors).
In response, Morin and the Port Authority argue that the district court correctly
dismissed Potthoff’s § 1983 claim against Morin for lack of standing, and alternatively
could have dismissed the claim based upon Morin’s qualified immunity.
Upon careful de novo review, we agree with the district court’s determination
that Potthoff lacks standing to assert his § 1983 civil rights claim against Morin.
Accordingly, we decline to address Morin’s alternative qualified immunity argument.
“A corporation is an entity separate and distinct from its stockholders and its
separate entity will generally be recognized.” Bankers Life & Cas. Co. v. Kirtley, 338
F.2d 1006, 1013 (8th Cir. 1964). Generally, if a harm has been directed toward the
corporation, then only the corporation has standing to assert a claim. In Brictson v.
Woodrough, 164 F.2d 107, 109 (8th Cir. 1947) (footnotes omitted), cert. denied, 334
U.S. 849 (1948), our court adopted this shareholder standing rule and held that
“[a]ctions to enforce corporate rights or redress injuries to the corporation cannot be
maintained by a stockholder in his own name . . . even though the injury to the
corporation may incidentally result in the depreciation or destruction of the value of the
stock.” See also Vanderboom v. Sexton, 460 F.2d 362, 364 (8th Cir. 1972)
(determining that individual stockholders lacked standing to file suit on corporation’s
behalf). The shareholder standing rule applies even if the plaintiff is the sole
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shareholder of the corporation. See Canderm Pharmacal, Ltd. v. Elder
Pharmaceuticals, Inc., 862 F.2d 597, 603 (6th Cir. 1988) (holding that an action to
redress injuries to a corporation cannot be maintained by a stockholder in his or her
own name, even where the individual is the sole stockholder) (citing cases). In In re
Dein Host, Inc., 835 F.2d 402, 406 (1st Cir. 1987), the First Circuit explained:
The rule is a salutary one: if a shareholder, dissatisfied with the
dealings entered into between his corporation and a third party,
automatically possessed a personal right of action against the third party,
then corporations would be paralyzed. They could rarely act except upon
unanimous consent. Business affairs would slow to a crawl, and the
courts, confronted with a bewildering myriad of shareholder claims,
would be as busy as a colony of centipedes with athlete's foot.
We hold that the shareholder standing rule applies to civil rights actions brought
pursuant to 42 U.S.C. § 1983 by shareholders claiming injury to their corporations.
Accord Gregory v. Mitchell, 634 F.2d 199, 202 (5th Cir. 1981) (extending shareholder
standing rule to civil rights actions under § 1983) (citing cases); Erlich v. Glasner, 418
F.2d at 228 (“[E]ven though a stockholder owns all, or practically all, of the stock in
a corporation, such a fact of itself does not authorize him to sue as an individual. . . .
We find nothing in the Civil Rights Act which would permit [the plaintiff-stockholder]
to circumvent the rule of law just stated, completely avoid the corporate entity and thus
maintain an action in his own name.”).
When Potthoff incorporated ComReal, he relinquished the right to seek direct
legal redress under § 1983 for injuries suffered by him as ComReal’s sole shareholder
and principal employee. See Kush v. American States Ins. Co., 853 F.2d 1380, 1384
(7th Cir. 1988) (Kush) (corporate form confers many advantages, in return for which
the shareholder relinquishes several prerogatives, “including that of direct legal action
to redress an injury to him as primary stockholder in the business”). Potthoff “may not
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move freely between corporate and individual status to gain the advantages and avoid
the disadvantages of the respective forms.” Id.6
Potthoff’s § 1983 claim can survive only if he has alleged that he personally has
suffered a direct, nonderivative injury. Flynn v. Merrick, 881 F.2d 446, 450 (7th Cir.
1989) (“Filing suit under 42 U.S.C. § 1983 does not diminish the requirement that the
shareholder suffer some individual, direct injury.”); Kush, 853 F.2d at 1383(“Generally, courts allow a shareholder to sue only where there is a direct injury to the
shareholder in his or her individual capacity, independent of any duty owed the
corporation.”). Potthoff insists that he pled such a direct, nonderivative injury because
Morin directed the ultimatum at him personally, not at ComReal, in violation of his
First Amendment rights. However, as the district court observed, it is well established
that a claim based merely upon the deprivation of an abstract constitutional right is not
justiciable unless a legally protectible interest is at stake. Stachura, 477 U.S. at 310.
In sum, even accepting as true all facts pled by Potthoff, and granting him the
benefit of all reasonable inferences therefrom, the record does not reflect any
cognizable injury to Potthoff that is distinct from the harm suffered by ComReal.
6
O’Hare Truck Serv., Inc. v. City of Northlake, 518 U.S. 712 (1996) (O’Hare),
cited by Potthoff, does not contradict the application of the shareholder standing rule
to Potthoff’s claim. In O’Hare, the § 1983 claim at issue was brought by the
independent contractor, O’Hare Truck Services, Inc. (the party directly affected by the
termination of the contractual relationship in question) and the owner-operator of the
company, John Gratzianna, both of whom were petitioners in the Supreme Court. See
id. at 715. The issue before the Supreme Court was whether certain First Amendment
protections afforded public employees extended to “independent contractors” (not
whether Gratzianna had standing to sue on behalf of O'Hare). Id. at 716. The
distinction between the company and its owner-operator for purposes of applying
standing rules was neither raised nor discussed. Indeed, the Supreme Court at times
simply referred to petitioners together as “O'Hare.” See id. at 715.
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Accordingly, upon de novo review, we hold that the district court properly dismissed
Potthoff’s claim under 42 U.S.C. § 1983 for lack of standing to sue under Article III.
Conclusion
We need not address the remaining issues raised in this appeal. The judgment
of the district court is affirmed.
A true copy.
Attest:
CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT.
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