Z & B Enterprises, Inc. v. Tastee-Freez International, Inc.

Not For Publication in West's Federal Reporter
Citation Limited Pursuant to 1st Cir. Loc. R. 32.3
United States Court of Appeals
For the First Circuit
No. 05-1064
Z & B ENTERPRISES, INC., a corporation organized and existing
under the laws of the Commonwealth of Puerto Rico;
LUIS VALLE-FIGUEROA, EIMYE BLAS-OLIVER, and the conjugal
partnership constituted between them; and LUIS VALLE-GONZÁLEZ,
ALICIA FIGUEROA-MERCADO, and the conjugal partnership
constituted between them,
Plaintiffs, Appellants,
v.
TASTEE-FREEZ INTERNATIONAL, INC., a corporation organized
and existing under the laws of Michigan,
Defendant, Appellee.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF PUERTO RICO
[Hon. Héctor M. Laffitte, U.S. District Judge]
Before
Torruella, Circuit Judge,
Dyk,* Circuit Judge,
and Howard, Circuit Judge.
Luis F. Del Valle-Emmanuelli, with whom García & Fernández,
was on brief, for appellants.
Diana M. Batlle-Barasorda, with whom Fiddler González &
Rodríguez PSC and Ricardo F. Casellas, were on brief, for appellee.
January 18, 2006
*
Of the Federal Circuit, sitting by designation.
TORRUELLA, Circuit Judge. In this suit, Plaintiffs are
suing Defendant for deceptive and fraudulent conduct in the sale of
a Tastee-Freez franchise. The district court granted Defendant's
motion to dismiss under Federal Rule of Civil Procedure 12(b)(7)
for failure to join an indispensable party. Plaintiffs appeal the
district court's finding that the missing parties are
indispensable. We affirm.
I.
Tastee-Freez is "one of America's favorite establishments
for high quality fast food and delicious soft-serve products." See
Tastee-Freez Story, http://www.tastee-freez.com/products.htm. This
case concerns alleged deceptive and fraudulent activities arising
from the sale of a Tastee-Freez franchise in Aguadilla, Puerto
Rico. Plaintiffs Luis Valle-Figueroa ("Valle-Figueroa") and Luis
Valle-González ("Valle-González") sought to purchase a Tastee-Freez
franchise, and they formed Z & B Enterprises, also a Plaintiff, to
be the owner of the franchise. Additional Plaintiffs are the
spouses of Valle-Figueroa and Valle-González and their respective
conjugal partnerships. Defendant is Tastee-Freez International
("TFI"), a corporation that grants Tastee-Freez franchises to
franchisees.
In April 2001, Plaintiffs commenced negotiations with
J.F., Inc., ("JF") to purchase the Tastee-Freez franchise in
Aguadilla owned by JF. Plaintiffs and JF entered into a contract
-2-
where Plaintiffs would be required to pay about $800,000.
Plaintiffs paid JF $191,400, although it is not clear if this was
an initial installment or payment for an option to purchase. In
June 2001, Plaintiffs paid the balance, and JF advised Plaintiffs
that they had the rights to operate the Aguadilla Tastee-Freez.
Plaintiffs were never presented with and never signed the
Restaurant License Agreement that is normally entered into by
franchise owners and TFI.
Plaintiffs allege that they were forced to enter into an
Account Executive Agreement with Auspiciadora TF, Inc., ("ATF"),
but does not state how they were forced. ATF and/or JF also forced
Plaintiffs to enter into other agreements and contracts. These
agreements and contracts violated TFI's Restaurant License
Agreement and rules established by the Federal Trade Commission
("FTC"). It was not until after these agreements and contracts
were entered into that TFI, ATF, or JF presented Plaintiffs with
the disclosures required by the FTC and/or TFI.
Plaintiffs were hindered in the operation of their
Aguadilla Tastee-Freez by a lack of support from TFI, ATF, and JF.
TFI did not fulfill its obligations to provide advertising,
training programs, and promotions. Although Plaintiffs had never
signed a Restaurant License Agreement, TFI cashed checks written by
Plaintiffs, and TFI invited Plaintiffs to attend a Tastee-Freez
-3-
conference. The franchise lost money, and Plaintiffs shut it down
on April 30, 2001.
Plaintiffs filed suit in Puerto Rico Commonwealth Court
against ATF and JF, and this suit is still pending.1 Plaintiffs
filed another suit in federal district court against TFI, asserting
several grounds for TFI's liability. First, Plaintiffs allege that
TFI is liable for the actions of ATF and JF because ATF and JF are
its agents, and TFI ratified or authorized their actions. Second,
Plaintiffs claim that TFI is liable under the indemnity provision
of the Restaurant License Agreement that Plaintiffs never signed.
Finally, Plaintiffs claim that TFI failed to support the franchise
and make required disclosures. In this suit, Plaintiffs seek
rescission of the contracts they signed with ATF and JF.
TFI moved to dismiss Plaintiffs' complaint for failure to
state a claim and for failure to join indispensable parties ATF and
JF. A federal magistrate judge denied TFI's motion to dismiss.
The district court rejected the magistrate's recommendation and
found that ATF and JF were indispensable parties under Federal Rule
of Civil Procedure Rule 19. The district court granted TFI's
1
Plaintiffs stated in their brief that a default judgment had
been entered against ATF and JF in commonwealth court. TFI,
however, moved to supplement the record with documents showing that
no judgment has been entered against ATF and JF in commonwealth
court, and Plaintiffs did not respond to this motion. We take
judicial notice that no default judgment has been entered against
ATF and JF in commonwealth court. White v. Gittens, 121 F.3d 803,
805 n.1 (1st Cir. 1997).
-4-
motion to dismiss under Federal Rule of Civil Procedure 12(b)(7),
and Plaintiffs appeal.
II.
The joinder of parties is controlled by Rule 19 of the
Federal Rules of Civil Procedure. "The Rule furthers several
related policies, including the public interest in preventing
multiple and repetitive litigation, the interest of the present
parties in obtaining complete and effective relief in a single
action, and the interest of absentees in avoiding the possible
prejudicial effect of deciding the case without them." Acton Co.
of Massachusetts v. Bachman Foods, Inc., 668 F.2d 76, 78 (1st Cir.
1982). Rule 19 defines a two-step process. In the first step
under Rule 19(a), the court determines whether a party is
necessary, i.e., one who must be joined if feasible to do so.
Joinder is not feasible if it will deprive the court of subject
matter jurisdiction. If the party is necessary but joinder is not
feasible, the court must then determine under Rule 19(b) whether
the party is indispensable or whether "in equity and good
conscience the action should proceed among the parties before it."
Fed. R. Civ. P. 19(b).
A.
The parties dispute the standard of review we should
apply to the district court's determination that ATF and JF are
indispensable parties under Rule 19. Plaintiffs erroneously argue
-5-
that we should review this determination de novo, because the
district court ultimately dismissed the case for lack of subject
matter jurisdiction. While a district court's decision to dismiss
for lack of subject matter jurisdiction is reviewed de novo, this
standard of review clearly does not apply to all determinations by
the district court leading up to the dismissal. See United States
v. San Juan Bay Marina, 239 F.3d 400, 403 (1st Cir. 2001).
Defendant correctly notes that our standard of review
under Rule 19(b) is abuse of discretion. Id. Defendant ignores,
however, that a necessary precursor to a decision under Rule 19(b)
is a decision under Rule 19(a). Id. at 405. We have yet to
determine whether abuse of discretion or de novo review is the
appropriate standard of review for district court decisions under
Rule 19(a). Id. at 403. Because we would come to the same
conclusion under either standard of review, we need not and do not
decide this issue here.
B.
We first consider whether ATF and JF are necessary
parties under Rule 19(a). Necessary parties are those "who ought
to be made parties, in order that the court may act on that rule
which requires it to decide on, and finally determine the entire
controversy, and do complete justice, by adjusting all the rights
involved in it." Shields v. Barrow, 58 U.S. 130, 139 (1855). "[A]
court essentially will decide whether considerations of efficiency
-6-
and fairness, growing out of the particular circumstances of the
case, require that a particular person be joined as a party."
Pujol v. Shearson/American Express, Inc., 877 F.2d 132, 134 (1st
Cir. 1989).
In Plaintiffs' vaguely-worded Complaint, they seek
recovery from TFI primarily for acts of its alleged agents. The
complaint does not identify the agents by name or the basis of the
agency relationship, but the parties' briefs identify the alleged
agents as ATF and JF. Before turning to the text of Rule 19, it is
fruitful to consider the relationships between the present and
absent parties, and Plaintiffs' theories for imposing liability
upon TFI for the actions of its alleged agents.
First, virtually all of the affirmative acts that caused
harm to the Plaintiffs were done by ATF or JF. It was ATF and JF
that "provided false and misleading information and
representations" and "deceived and misled plaintiffs into signing
contracts." In contrast, the alleged involvement by TFI is much
less clear and arises from the failure to act and what it should
have known. Plaintiffs do allege that TFI failed to comply with
FTC rules regulating franchise agreements. Although TFI cashed
Plaintiff's checks, Plaintiffs and TFI never entered into an
explicit franchise agreement, and thus it is not clear whether TFI
was obligated to comply with these FTC rules. Plaintiffs state
that TFI should have been aware of the deceptive practices of ATF
-7-
and JF but never explains why. It appears that the presence of ATF
and JF "is critical to the disposition of the important issues in
the litigation." Freeman v. Northwest Acceptance Corp., 754 F.2d
553, 559 (5th Cir. 1985) (internal quotation marks omitted).
Second, Plaintiffs assert that TFI is liable for the
actions of ATF and JF, because ATF and JF were acting as agents on
behalf of TFI. TFI denies that ATF and JF were its agents, and
even if they were, they were acting outside the scope of the agency
relationship. Plaintiff has not put forth any evidence of an
agency relationship between TFI and ATF or JF, and the Restaurant
License Agreement between TFI and JF explicitly states that JF is
not TFI's agent.
Third, Plaintiffs assert that TFI's liability arises from
the indemnity provision of the Restaurant License Agreement. The
Restaurant License Agreement requires TFI to indemnify a franchisee
for "any obligations or liability for damages attributable to
agreements, representations or warranties of or authorized by
[TFI]" or "caused by the negligence or willful actions of [TFI]."
Plaintiffs' argument is difficult to understand because Plaintiffs
never state whom TFI is obligated to indemnify and for what
reasons. It is undisputed that JF signed a Restaurant License
Agreement with TFI. Under certain circumstances, the Restaurant
License Agreement could thus require TFI to indemnify JF for
damages incurred by JF. In this situation, only JF could invoke
-8-
the indemnity provision of the contract. It is also undisputed
that Plaintiffs did not sign a Restaurant License Agreement with
TFI. Even if other circumstances effectively bound TFI and
Plaintiffs to the Restaurant License Agreement, most of the acts
causing harm to Plaintiffs and requiring indemnification were done
by ATF and JF, not TFI. ATF and JF are thus active participants
and "more than . . . key witness[es] whose testimony would be of
inestimable value." Id.Plaintiffs argue that ATF and JF should not be considered
necessary parties because TFI could join them as third-party
defendants. Plaintiff is correct that TFI could implead ATF and JF
as third-party defendants without breaking this court's diversity
jurisdiction even though Plaintiffs, ATF, and JF are all citizens
of Puerto Rico. See Owen Equipment & Erection Co. v. Kroger, 437
U.S. 365, 370 (1978). Disregarding the fact that TFI is by no
means required to implead ATF and JF, even if TFI did implead ATF
and JF they would be only third-party defendants and not principal
defendants in this suit. As a result, Plaintiffs could not assert
claims against ATF and JF. See id. at 377. If ATF and JF are
necessary parties in this suit, then they are necessary as
defendants and not as third-party defendants.
We now consider the factors enumerated in Rule 19(a). A
party is necessary under Rule 19(a)
if (1) in the person's absence complete relief
cannot be accorded among those already
-9-
parties, or (2) the person claims an interest
relating to the subject of the action and is
so situated that the disposition of the action
in the person's absence may (i) as a practical
matter impair or impede the person's ability
to protect that interest or (ii) leave any of
the persons already parties subject to a
substantial risk of incurring double,
multiple, or otherwise inconsistent
obligations by reason of the claimed interest.
Fed. R. Civ. P. 19(a). To be necessary, a party need only satisfy
one of these factors. We find that two of these factors show that
ATF and JF are necessary parties who ought to be joined if
feasible.
First, we may not be able to grant complete relief to
Plaintiffs in the absence of ATF and JF. Plaintiffs are seeking
rescission of contracts they made with ATF and JF. If this case
were to proceed without ATF and JF, they would not be bound by a
judgment concerning the invalidity or enforceability of the
contracts to which they were parties. This would be a waste of
judicial resources. "The interests that are being furthered [by
Rule 19(a)(1)] 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 advisory committee's note.
Second, TFI could be subject to inconsistent or double
obligations. Plaintiffs have filed a suit against ATF and JF in
commonwealth court. It is possible that the federal district court
could find that TFI is not liable to Plaintiffs, but that the
commonwealth court could find that ATF and JF are liable to
-10-
Plaintiffs. Then TFI might be liable at least to JF because of the
indemnity provision in the Restaurant License Agreement.
Alternatively, the commonwealth court could find that ATF and JF
are liable to Plaintiffs, and the federal court could find that TFI
is liable to Plaintiffs. JF could then file suit against TFI for
indemnity, thus subjecting TFI to a double obligation.
C.
Under Rule 19(a), a necessary party is to be joined as
long as it is feasible to do so. Joinder is not feasible if it
would deprive the court of subject matter jurisdiction. Plaintiff
is a citizen of Puerto Rico, Defendant TFI is a citizen of
Michigan, and the amount in controversy exceeds $75,000. Without
ATF and JF, this court thus has diversity jurisdiction under 28
U.S.C. § 1332. ATF and JF are also citizens of Puerto Rico.
Joining ATF and JF as defendants in this suit would break complete
diversity and thus deprive this court of subject matter
jurisdiction. Plaintiffs do not contend that the doctrine of
supplemental jurisdiction extends our jurisdiction to include ATF
and JF as defendants. See Acton, 668 F.2d at 79-80; 28 U.S.C.
§ 1367(b).
D.
Finally, since ATF and JF are necessary parties but
joinder is not feasible, we must "determine whether in equity and
good conscience the action should proceed" without ATF and JF as
-11-
defendants. Fed. R. Civ. P. 19(b). If we cannot proceed without
ATF and JF, then they are indispensable parties. Rule 19(b) gives
four non-exclusive factors for courts to consider in making this
determination:
[F]irst, 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 the shaping of 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
nonjoinder.
Fed. R. Civ. P. 19(b). Applying these four factors, we find that
ATF and JF are indispensable parties.
For the first factor, we already discussed above how
proceeding to judgment without ATF and JF could be prejudicial to
TFI, as TFI could be subjected to double or inconsistent
obligations. This factor weighs in favor of finding ATF and JF
indispensable.
The second factor is whether this prejudice may somehow
be lessened by the court's shaping of the potential verdicts.
Plaintiffs proposed a one-sentence solution for shaping relief to
lessen the prejudice to TFI:
[P]ursuant to the indemnity clause of the
franchise agreement, [TFI could be made
liable] for any damages attributable to the
agreements, representations or warranties of
or authorized by TFI, specifically providing
that ATF and JF are not bound by such a
-12-
judgment because they cannot be liable under
the indemnity clause.
Plaintiffs' proposition does not prevent TFI from being subjected
to double or inconsistent obligations, and we do not see any manner
of shaping relief that would prevent this from occurring.
The third factor is whether a judgment rendered in the
absence of ATF and JF is likely to be adequate. This factor
includes "the interest of the courts and the public in complete,
consistent, and efficient settlement of controversies." Provident
Tradesmens Bank & Trust Co. v. Patterson, 390 U.S. 102, 111 (1968).
ATF and JF are the principal actors in this lawsuit and could be
the only entities liable to Plaintiffs. Alternatively, if TFI is
liable to Plaintiffs, ATF and JF could in turn be liable to TFI.
The absence of ATF and JF could thus prevent complete relief to the
parties. For the same reasoning, the outcome could be inefficient
as a further lawsuit could be necessary that would require
relitigating nearly identical issues. Finally, because Plaintiffs
are suing ATF and JF in commonwealth court, any judgment made by a
federal court could be inconsistent with the outcome in the
commonwealth court.
Finally, the last factor is whether an adequate,
alternative forum is available to the Plaintiffs. Plaintiffs can
join TFI, ATF, and JF as defendants in a suit in commonwealth
court. Plaintiffs have not given any reason as to why the
commonwealth court would be an inadequate alternative, and we see
-13-
no reason to believe that the commonwealth court would be an
inadequate forum.
Considering the four factors together, it is clear that
ATF and JF are indispensable parties in this lawsuit. A judgment
in the absence of ATF and JF could be prejudicial to TFI, relief
cannot be shaped to avoid this prejudice, a judgment rendered in
the absence of ATF and JF is unlikely to be adequate, and the
commonwealth court provides an adequate remedy for Plaintiffs.
"Equity and good conscience" require us to dismiss this lawsuit for
failure to join indispensable parties ATF and JF.
III.
For the foregoing reasons, the district court's decision
is affirmed.
Affirmed.
-14-