AKH Company, Inc. v. Universal Underwriters Insurance Company
MEMORANDUM AND ORDER denying 480 Motion for Leave to File to Amend Counterclaim and Add Parties. Signed by Magistrate Judge Kenneth G. Gale on 10/24/17. (df)
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF KANSAS
AKH COMPANY, INC.,
Case No. 13-2003-JAR-KGG
MEMORANDUM & ORDER DENYING DEFENDANT’S MOTION
TO AMEND COUNTERCLAIM AND ADD PARTIES
Before the Court is Defendant Universal Insurance Company’s Motion for
Leave to Amend its Counterclaim (Doc. 480). Because Defendant is seeking to
add additional parties solely to provide additional sources to execute its potential
judgement, the motion is DENIED.
The history of this now-epic litigation has been recounted numerous times.
Now almost five-years old, this action was filed in 2013 as a declaratory judgment
by the Plaintiff-insured requesting a finding that it does not owe its Defendantinsurer a reimbursement of approximately $5 million paid in a litigation settlement
in California. Defendant’s counter-claim requests judgment against Plaintiff and
has, through the course of discovery, development a number of contract and tort
theories for additional damages.
The amount of money at stake in the case is substantial. The case has been
unusually contentions, even for a dispute of this financial magnitude. Discovery
has been marked by scarce cooperation between the parties and the awarding of
sanctions against Plaintiff on more than one occasion.
During the last several months, the deadlines and schedule which would
move this case finally to a Pretrial Conference, and then to trial, have been
suspended while Defendant attempts to complete discovery into Plaintiff’s
financial assets for the purpose of supporting its claim for punitive damages. (Doc.
472.) Discovery on the substantive claims is complete.
Defendant alleges in the proposed amended pleading that it discovered that
Plaintiff “essentially ceased its operation . . . , instead transferring or selling all of
its assets to other corporate entities owned by [Plaintiff’s] owners . . . .” (Doc.
481-1, at 75.) Defendant alleges that assets were transferred to the owners of the
Plaintiff personally. (Id.) Defendant alleges that Plaintiff has been rendered
essentially judgment-proof by these transfers.
Because of this development, Defendant has moved to amend its counter
claim to add related corporate entities and the individual owners as parties to this
litigation for the purpose of adding claims of fraudulent transfer and claims of
alter ego against the proposed new parties. Plaintiff opposes the motion, claiming
the amendment would be futile because the Court would have no jurisdiction
against the proposed new parties, and because adding new parties at this juncture
would unreasonably complicate and delay the litigation. (See generally Doc. 487.)
Although Defendant moves to amend pursuant to Fed.R.Civ.P. 15(a), which
governs motions to amend before trial, this motion also must be evaluated as a
motion add parties under either Fed.R.Civ.P. 19 or 20. Unfortunately, neither party
has undertaken this needed analysis. Consequently, Defendant does not argue, and
the Court does not find, that adding the new parties is required under Rule 19.
This case can proceed to judgment against the existing parties, and adding the
additional parties for the purpose of providing a source for execution of the
judgment does not make the proposed parties indispensable to that end.
This issue is, therefore, governed by Rule 20, which permits, but does not
require, the joinder of new third-party defendants if (A) any right is asserted
against them jointly or severally, or in the alternative with respect to or arising out
of the same transaction or occurrence; and (B) any question of law or fact common
to all defendants will arise in the action. Rules covering joinder are to be construed
broadly, and joinder is strongly encouraged. DIRECTV, Inc. v. Barrett, 220
F.R.D. 630, (D. Kan. 2004). Adding a party under the permissive joinder
provisions of Rule 20, and which meet those requirements, is within the Court’s
discretion. Green Const. Co. V. Kansas Power and Light, 1989 WL 117440, No.
87-2070-S (D. Kan. September 11, 1989) citing Horton Co. v. International
Telephone and Telegraph Corp., 85 F.R.D. 369, 371 (W.D. Pa. 1980). The
present motion must be evaluated within the parameters of Rule 20.
As a predicate to decision, the Court examines the claims alleged against the
third parties in the proposed amended pleading. (Doc. 481-1.) There are two
The first is a claim that assets of Plaintiff were fraudulently transferred to the
third parties for the purpose of protecting them from Defendant’s claims. (Count
XXVI, Doc. 481-1, at 121.) The relief requested (id., at 128) includes the
avoidance of the asset transfers and other relief. The avoidance of fraudulent
transfers is the classic remedy for this sort of claim, thus making the receiving
entity liable for a judgment (if any) obtained against the Plaintiff, at least up to the
amount of the fraudulent transfer. Notably, this sort of claim does not make the
fraudulent transferee liable for the contract or tort claims per se, but allows the
equitable attachment of fraudulently transferred assets for the satisfaction of a
judgment against the Plaintiff. See generally Fidelity National Title Ins. Co. v.
Schroeder, 179 Cal.App.4th 834, 101 Cal.Rptr.3d 854 (Ct. App. 5th Dist. 2009).
The second claim is a claim under the alter ego doctrine that the third parties
and Plaintiff are not separate entitles, thus permitting the Defendant to “pierce the
corporate veil.” Under California law, the alter ego doctrine is applied when the
corporate form is used to perpetuate a fraud, circumvent a statute, or accomplish
some other wrongful act or inequitable purpose. Tatung Company, Ltd. v. She
Tze Hse, 217 F.Supp. 1138 (C.D. Cal. 2016). The doctrine operates to dissolve the
wall shielding a corporate owner from liability for actions of the corporation. See
generally Minton v. Cavaney, 56 Cal.2d 576, 579, 15 Cal.Rptr. 641, 364 P.2d 473
(1961). However, the claims plead in the proffered amendment are based on
alleged inequitable conduct after the present claim arose. The Court does not read
the proposed pleading as claiming the corporate forms were being improperly
utilized during the facts which lead to the claims in this case. Therefore, like the
fraudulent conveyance claims, the alter ego doctrine would be used here to reach
the assets of the proposed third parties to execute a judgment, not to hold them
liable for the Defendant’s actions comprising the basis of the Defendant’s
The question, then, is whether a fraudulent conveyance or alter-ego claim
against a third party asserted for the purpose of reaching assets of the third party to
enforce judgment Defendant has not yet obtained, is as to Plaintiff and the third
parties, “any right is asserted against them jointly or severally, or in the alternative
with respect to or arising out of the same transaction or occurrence” within the
meaning of Rule 20. It is not. The Defendant’s substantive claims in this case
arising out of the insurance transaction are solely against Plaintiff. The third
parties are, at least technically, strangers to those claims and will not share primary
liability with Plaintiff, even if the third party assets become vulnerable to the
execution of that judgment. The fraudulent conveyance and alter ego claims are
separate, and involve separate allegations and factual issues and, like a
garnishment or other judgment enforcement action, may be brought as a separate
action if and when Defendant obtains judgment against Plaintiff.
Even if the proposed third-party claims could now be brought under Rule 20,
the Court would not exercise its discretion to add those parties at this time. Those
claims may be brought after judgment in this case. They are contingent on the
outcome of the existing claims. Adding the new parties would essentially create a
wholly new claim with new issues, with discovery and litigation in a case which
has already lasted almost five years and is not yet ready for trial. The new parties
would be strangers to the very-substantial litigation and discovery which has
already ensued, and not bound by discovery and rulings to date. There is little
reason to insert these new parties into the present mix.
The Motion to Amend (Doc. 480) is, therefore, DENIED.
Dated this 24th day of October, 2017.
S/ KENNETH G. GALE
Kenneth G. Gale
United States Magistrate Judge
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