Lotus Industries LLC et al v. Duggan et al

Filing 227

OPINION AND ORDER granting 209 Motion to Dismiss; and Show Cause Remaining Parties. Signed by District Judge Laurie J. Michelson. (WBar)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MICHIGAN
SOUTHERN DIVISION
GWENDOLYN WILLIAMS, et al.,
Plaintiffs,

Case No. 16-14112
Honorable Laurie J. Michelson
Magistrate Judge Anthony P. Patti

v.
CITY OF DETROIT, et al.,
Defendants.

OPINION AND ORDER GRANTING THE DEGC’S
UNOPPOSED MOTION TO DISMISS [209]
Lotus Industries, LLC ran Centre Park Bar. Not long after Centre Park opened, the City of
Detroit announced plans to redevelop the neighborhood surrounding the bar. And the bar’s
managers submitted a proposal to take part in the redevelopment project. But their bid was rejected.
And when Detroit announced the winning project, the redevelopment did not include Centre Park
Bar. The bar’s managers cried foul. Appearing on local radio stations and in local papers, they
complained that the proposal process was rigged.
Soon after the public complaints, one of the bar’s owners and two of its managers insisted
the City and redevelopment officials retaliated against the bar. So Lotus, one of its members, and
the bar’s two managers brought suit. The individual plaintiffs say the retaliation escalated after
they filed suit. Midway through this litigation, Lotus filed for bankruptcy. The bankruptcy trustee
settled the lawsuit, leaving the three individuals as the only plaintiffs. Because the three individuals
complain about the same injuries as the LLC, either they lack standing or they are not the real
parties in interest. Recognizing this issue, Detroit Economic Growth Corporation moved to have
the suit dismissed. Plaintiffs did not respond. The Court will grant the unopposed motion.

I.

In 2013, Centre Park Bar opened in the Harmonie Park area of Detroit. Centre Park was
owned by Lotus Industries, LLC. Lotus had two members: Gwendolyn Williams and Kenneth
Bridgewater.1 (ECF No. 211, PageID.5802.) Neither Gwendolyn nor Kenneth played any role in
running Centre Park. (Id. at PageID.5803.) Instead, Gwendolyn’s son Christopher Williams and
Kenneth’s son Kenneth Scott Bridgewater co-managed Centre Park. (Id.; see also id. at
PageID.5799.) And over time, Centre Park became a popular downtown attraction. (See, e.g., ECF
No. 211, PageID.5928–5953; ECF No. 211-3.)
In 2015, Centre Park’s landlord, the Detroit Downtown Development Authority, alongside
the City of Detroit, revealed plans to redevelop the Harmonie Park area. (ECF No. 211,
PageID.5806.) The DDA put out a request for proposals, and Christopher, along with Kenneth
Scott, submitted one. Yet Kenneth Scott was late submitting the proposal. (Id. at PageID.5808–
5809, 5530.) The rules governing the proposal process indicated that late proposals would not be
considered. Even so, Kenneth Scott says the DDA’s receptionist accepted the late proposal. (Id.;
see also id. at PageID.5846.) Eventually, though, the proposal was rejected as tardy. (Id. at
PageID.5530, 5824.)
Upset by the rejection, Christopher reached out to City and DDA officials to seek
reconsideration. (ECF No. 211, PageID.5825–5829, 5530–5549.) Christopher says he had
informal conversations with DDA officials and City Council members, many of whom said they

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Gwendolyn thought that Christopher might also be a member of the LLC. (ECF No. 211,
PageID.5564.) However, Christopher said the LLC had only two members and he was not one of
them. (Id. at PageID.5802.) None of the parties provided any documentation identifying the
members of the LLC.
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would look into why the bid was rejected. (Id.) When nothing came of Christopher’s informal
conversations, Christopher, Gwendolyn, and Kenneth Scott secured a meeting in the Mayor’s
Office with high-level DDA officials. (Id. at PageID.5831, 5535, 5543.) But the proposal was not
reconsidered. (Id. at PageID.5551.) Eventually, Detroit announced the winning bidder of the
redevelopment project, and the winner’s proposal did not include Centre Park Bar. (Id. at
PageID.5981–5982.)
Left out of the DDA’s redevelopment project and faced with the loss of the business they
managed, Christopher and Kenneth Scott publicly complained. They appeared on radio and in print
calling the bid proposal process a sham. (ECF No. 211, PageID.5851.) The men came to believe
the DDA had been working behind the scenes with the Detroit Economic Growth Corporation and
the Mayor’s Office to hand the redevelopment project to a preselected candidate. (Id. at
PageID.5853–5855.) And they said they were in the boardroom where it happened. (Id. at
PageID.5851.)
The bar managers believed their complaints led to retaliation. After complaining, they say
Detroit police officers started to show up at the bar. (ECF No. 211, PageID.5890.) The officers
said they were showing up in response to a neighboring hotel’s noise complaints. (ECF No. 211,
PageID.5890.) But Christopher suspected the hotel’s complaints were all part of a conspiracy. To
him, the hotel’s noise complaints were manufactured by redevelopment officials and the Mayor’s
Office. (Id. at PageID.5890–5891, 5894, 6078–6079, 6100; but see ECF No. 211-3.) Christopher
contends that even though other bars in the area operated outdoor spaces, and, like Centre Park,
did so without the necessary permits, only Centre Park received police attention. (ECF No. 211,
PageID.5891, 6097–6098.)

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The police attention started to cost the bar business. (Id.) Fed up, Gwendolyn, Kenneth
Scott, Christopher, and Lotus filed suit. (ECF No. 1.) Lotus and the individual plaintiffs alleged
the Mayor’s Office, Detroit police officers, and redevelopment officials conspired to violate Lotus’
First Amendment rights and discriminate against the bar because it was a black-owned business
attracting black clientele. (ECF No. 66, PageID.1937, 1942.) All told, Lotus and the individual
owners and managers alleged First Amendment retaliation, equal protection, promissory estoppel,
tortious interference, and trespass claims. (ECF No. 66.)
After bringing the lawsuit, Gwendolyn, Christopher, and Kenneth Scott say they were
subjected to more retaliation. Though they never bothered the bar before, after the lawsuit, Detroit
police officers issued Centre Park citations for fire code violations, over-occupancy, and even
arrested Kenneth Scott. (ECF No. 66, PageID.1949.) Kenneth Scott says the arrest was retaliation
for the lawsuit. (ECF No. 66, PageID.1950; ECF No. 211, PageID.5472–5475.) The DEGC also
initiated eviction proceedings against Centre Park Bar. So the Plaintiffs amended their complaint
to expand their First Amendment retaliation claims. (ECF No. 66.) Eventually, Centre Park Bar
closed for good. And from Plaintiffs’ perspective, Detroit, the DDA, and the DECG conspired to
manufacture the closure as punishment for Lotus’ attempts to expose the City’s corruption. (Id.)

Discovery took some time. In that time, Lotus filed for Chapter 11 bankruptcy protection.
(ECF No. 126, PageID.2462.) As part of the bankruptcy proceeding, Lotus reached a settlement
with all the defendants and dismissed its claims. (ECF No. 208.) Lotus’ departure left only the

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individual owners/managers as plaintiffs. And these individuals were pursuing the same claims
against all Defendants.2
In time, all Defendants moved to put an end to the lawsuit. The City of Detroit moved for
summary judgment. (ECF No. 211.) So did the DEGC. (ECF No. 210.) But the DEGC also moved
to dismiss for lack of subject-matter jurisdiction, believing the individual owners and managers
lack standing to sue. (ECF No. 209.)
II.
The DEGC challenges subject-matter jurisdiction, based on a lack of standing, by way of
a Rule 12(b)(1) motion. Rule 12(b)(1) motions mount either factual or facial attacks to subjectmatter jurisdiction. Cooper v. Rapp, 702 F. App’x 328, 331 (6th Cir. 2017). Here, the DEGC opts
for a factual challenge. A factual challenge means the Court need not accept the complaint at face
value. See Russell v. Lundergan-Grimes, 784 F.3d 1037, 1045 (6th Cir 2015). Instead, the Court
has “‘substantial authority’” to “‘weigh the evidence and satisfy itself as to the existence of its
power to hear the case.’” Global Tech., Inc. v. Yubei (Xinxiang) Power Steering Sys. Co., 807 F.3d
806, 814 (6th Cir. 2015) (quoting RMI Titanium Co. v. Westinghouse Elec. Corp., 78 F.3d 1125,
1134 (6th Cir. 1996)). And “the party invoking federal jurisdiction”—in this case the individual
Plaintiffs—have “the burden to prove the existence of [federal] jurisdiction.” Funderwhite v. Local
55, United Ass’n, 702 F. App’x 308, 311 (6th Cir. 2017) (citing Russell, 784 F.3d at 1045). Finally,
even though the Court did not get any help from the Plaintiffs, it is required to police the boundaries
of its limited jurisdiction. Heartwood, Inc. v. Agpaoa, 628 F.3d 261, 266 (6th Cir. 2010).

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The Court dismissed the individual plaintiffs’ claims against the DDA as a discovery
sanction. (See ECF No. 201.)
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III.
The DEGC thinks Gwendolyn, Christopher, and Kenneth Scott lack Article III standing.
To be sure, federal courts are, by design, courts of limited jurisdiction. For a federal court to have
subject-matter jurisdiction, the plaintiff must have standing. Lujan v. Defenders of Wildlife, 504
U.S. 555, 560 (1992). Standing requires an injury in fact to the plaintiff, caused by the defendant,
and likely to be redressed by a favorable decision. See Cranpark, Inc. v. Rogers Group, Inc., 821
F.3d 723, 730 (6th Cir. 2016) (citing Lujan, 504 U.S. at 560 (1992)).
The DEGC’s standing argument goes as follows: Lotus, LLC settled and has been
dismissed, leaving only the individual plaintiffs; to have Article III standing, the individual
plaintiffs need an injury separate and distinct from the LLC’s injury; but the individual plaintiffs
and the LLC share the same injury, so none of the remaining plaintiffs have standing; and absent
any plaintiff with standing, this Court lacks subject-matter jurisdiction.
At its core, the DEGC’s argument rests on the shareholder-standing doctrine. The doctrine
says shareholders cannot sue in their individual capacities to redress injuries suffered by the
corporation. See Franchise Tax Bd. of California v. Alcan Aluminum Ltd., 493 U.S. 331, 336
(1990); Nicholson v. Ticketmaster, 42 F. App’x 696, 697 (6th Cir. 2002). Where a shareholder’s
claim derives from an injury to the corporation, the shareholder’s claim belongs to the corporation.
See 12B William Meade Fletcher, Fletcher Cyclopedia of the Law of Private Corporations § 5911
(Perm. ed. 2000). A shareholder may only sue where the shareholder personally suffers an injury
distinct from the corporation’s injury. See Harker v. Troutman (in Re Troutman Enters., Inc.), 286
F.3d 359, 364 (6th Cir. 2002).
So the issue presented is whether the individual plaintiffs can satisfy shareholder standing.
There are two potential routes to resolving this issue. One route, marked by published and

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unpublished opinions in the Sixth Circuit, treats shareholder-standing issues as a concern of
Federal Rule of Civil Procedure 17’s real-party-in-interest requirement. Another route, taken by
an unpublished Sixth Circuit case, says shareholder standing implicates Article III. Either way, the
individual plaintiffs’ claims against the DEGC should be dismissed.

It is possible that the individual plaintiffs lack Article III standing to bring their claims
against the DEGC. To have Article III standing, a plaintiff needs a personal injury. Lujan, 504
U.S. at 560. And one unpublished Sixth Circuit case holds that even a sole shareholder of a
corporation does not suffer a personal injury when suing “‘based solely on an injury to the
corporation.’” Old Blast, Inc. v. Operating Eng’rs Local 324 Pension Fund, 663 F. App’x 454,
457, (6th Cir. 2016) (quoting Gaff v. Fed. Deposit Ins. Corp., 814 F.2d 311, 315 (6th Cir. 1987)
modified at 933 F.2d 400 (6th Cir. 1991)); see also 62-64 Kenyon St., Hartford LLC v. City of
Hartford, No. 16-cv-00617, 2017 U.S. Dist. LEXIS 212955, at *13–14 (D. Conn. Dec. 29, 2017);
but see Whelan v. Abell, 953 F.2d 663, 671–72 (D.C. Cir. 1992). Rather, to establish Article III
standing, a sole shareholder must suffer “an injury that is ‘separate and distinct’ from the
corporation’s injury.” Old Blast, 663 F. App’x at 457 (quoting Gaff, 814 F.2d at 315).
Applying Old Blast to the facts at hand, the individual plaintiffs lack standing. The
individual plaintiffs’ claims all seek redress for injuries to Lotus, an LLC.3 When Lotus went
under, Gwendolyn, as one of only two members of Lotus, says she took a hit to her income and
investment earnings. But Gwendolyn’s injuries are analogous to “depreciation in the value of a

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Michigan LLC’s are governed by the “rules regarding corporate form.” Salem Springs,
LLC v. Salem Twp., 880 N.W.2d 793, 800–01 (Mich. Ct. App. 2015). And Michigan follows the
default shareholder standing rule articulated above. See Michigan Nat’l Bank v. Mudgett, 444
N.W.2d 534, 536 (Mich. Ct. App. 1989) (establishing both the shareholder-standing rule and the
exception for shareholders who have an individual injury).
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shareholder’s stock in a corporation” which “does not establish ‘the type of direct, personal injury
which is necessary to sustain a direct cause of action.’” Old Blast, 663 F. App’x at 457 (quoting
Gaff, 814 F.2d at 315). And the other two individual plaintiffs were not even members of the LLC;
they were employees who each lost income and future business earnings. So at best, they, too,
bring suit to redress injuries suffered by Lotus. At bottom then, applying Old Blast, the individual
plaintiffs bring derivative claims and thus lack Article III standing to bring their claims against the
DEGC.
However, it is not a foregone conclusion that shareholder standing is a jurisdictional issue.
Shareholder standing traces its roots to prudential limits on federal jurisdiction. See Zurich Ins.
Co. v. Logitrans, Inc., 297 F.3d 528, 531 (6th Cir. 2002). Prudential limits are less about the power
of a federal court to hear a case, and more about the wisdom of doing so. See Miller v. Redwood
Toxicology Lab., Inc., 688 F.3d 928, 934 (8th Cir. 2012). One of the prudential limits on standing
bars person A from bringing the claims of person B, even if person A can satisfy Article III. See
Elk Grove Unified Sch. Dist. v. Newdow, 542 U.S. 1, 17–18 (2004); see also Erwin Chemerinsky,
Federal Jurisdiction § 2.3.4 at 83 (5th ed. 2007). Shareholder standing logically follows from that
rule: when a corporation (person B) is injured, a shareholder (person A) generally may not sue
based on the indirect harm they suffered as a result of the corporation’s injury. And the modern
trend does not treat prudential standing doctrines as jurisdictional concerns. See Knopick v. Jayco,
Inc., 895 F.3d 525, 529–30 (7th Cir. 2018); Grocery Mfrs. Ass’n v. EPA, 693 F.3d 169, 185 (D.C.
Cir. 2012) (Kavanaugh, J., dissenting) (collecting cases); Rawoof v. Texor Petroleum Co., Inc.,
521 F.3d 750, 756 (7th Cir. 2008); see also James M. Wagstaffe, Wagstaffe Prac Guide: Fed Civil
Proc Before Trial § 15-IV (collecting authorities); but see Animal Legal Defense Fund, Inc. v.
Espy, 29 F.3d 720, 723 n.2, 308 U.S. App. D.C. 74 (D.C. Cir. 1994); Lexmark International, Inc.

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v. Static Control Components, Inc., 572 U.S. 118, 127 n.3 (2014) (leaving open the possibility that
third-party standing remains properly classified as a standing concern). So the shareholderstanding rule may not implicate Article III.

Apart from addressing shareholder standing as an Article III issue, published and
unpublished Sixth Circuit caselaw also looks to Federal Rule of Civil Procedure 17. See Cranpark,
821 F.3d at 730–31; White v. JPMorgan Chase Bank, NA, 521 F. App’x 425, 428 (6th Cir. 2013);
see also Wells Fargo Fin. Leasing, Inc. v. Griffin, No. 13-00075, 2014 U.S. Dist. LEXIS 7702, at
*19–21 (W.D. Ky. Jan. 22, 2014). Rule 17 codifies the real-party-in-interest defense. Fed. R. Civ.
P. 17(a). And the real-party-in-interest analysis, says the Sixth Circuit, is another way to determine
whether a shareholder has standing to sue. See Cranpark, 821 F.3d at 730–732 (applying realparty-in-interest analysis to issue of shareholder standing); White, 521 F. App’x at 428 (holding
that the issue of shareholder standing is a question for Federal Rule of Civil Procedure 17).
Moreover, the cases treating shareholder standing as a Rule 17 issue are clear that the real-partyin-interest analysis does not implicate Article III. Cranpark, 821 F.3d at 731–732; White, 521 F.
App’x at 428; Zurich Ins. Co. v. Logitrans, Inc., 297 F.3d 528, 531–32 (6th Cir. 2002).
However, if Rule 17 is the proper way to challenge a shareholder’s standing, then the
DEGC may not have properly raised the issue by invoking Rule 12(b)(1). But the Court recognizes
that the proper procedure for raising a real-party-in-interest defense is a gray area. Whelan, 953
F.2d at 672 n.7. The Sixth Circuit at least strongly suggests that real party in interest should be
raised as an affirmative defense. See Cranpark, 821 F.3d at 730. Consistent with that approach, at
least one Sixth Circuit panel has addressed the issue on summary judgment. See White, 521 F.
App’x at 428. And other circuits allow the defense to be raised via other procedural vehicles—

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though none suggest 12(b)(1). See United Coal Companies v. Powell Const. Co., 839 F.2d 958,
960 (3d Cir. 1988) (Rule 17(a) motion); Whelan, 953 F.2d at 672 (Rule 12(b)(6) motion); James
M. Wagstaffe, Wagstaffe Prac Guide: Fed Civil Proc Before Trial § 15-IV (Rule 21 motion,
among others).
In any event, the DEGC’s 12(b)(1) motion accomplishes the purposes of a Rule 17 motion.
The DEGC’s 12(b)(1) motion gave fair notice of the meat of the DEGC’s contention: the individual
plaintiffs’ lacked shareholder standing. And all Rule 17 says is that the Court “may not dismiss an
action for failure to prosecute in the name of the real party in interest until, after an objection, a
reasonable time has been allowed for the real party in interest to ratify, join, or be substituted into
the action.” Fed. R. Civ. P. 17(a)(3). The key word in Rule 17(a)(3) is objection. Procedural flaws
aside, the DEGC’s motion mounts an objection. The thrust of the DEGC’s motion explains why
the plaintiffs are not real parties in interest. And the plaintiffs had a reasonable time to respond.
They did not.
Moreover, because the DEGC’s 12(b)(1) motion mounted a factual challenge, the
individual plaintiffs’ response could have considered the entire record. See Global Tech., Inc., 807
F.3d at 814. On the entire record, the real party in interest is not difficult to discern. And “when
the determination of the proper party is not difficult and when there has been no understandable
mistake, dismissal is warranted despite Rule 17(a)(3).” Barefield v. Hanover Ins. Co., 521 B.R.
805, 810 (E.D. Mich. 2014).
Pointing further toward proceeding ahead, Lotus was once a party to this case. But shortly
after entering bankruptcy, Lotus settled its claims with the Defendants. (ECF No. 208.) So Lotus
has nothing left to litigate. In the end, even though the DEGC’s Rule 12(b)(1) motion is, in these
circumstances, no glass slipper, it nonetheless fits.

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So the Court turns to whether the three individuals are real parties in interest.
Given all of the above, consider, first, Gwendolyn. She was a member of the LLC. (ECF
No. 211, PageID.5564.) And while Michigan law carves out limited circumstances where LLC
members may sue based on the LLC’s rights, see Mich. Comp. Laws 450.4510, Gwendolyn has
done nothing to establish that this case falls within those limited circumstances. Instead,
Gwendolyn seeks to bring these claims on her own behalf.
And Gwendolyn’s explanation of her damages underscores the derivative nature of her
claims. Gwendolyn said her damages amounted to a loss of investment opportunity and diminished
returns on her investment.4 (ECF No. 211, PageID.5589–5590.) Gwendolyn was an investor in
Lotus. Lotus’ only revenue came from Centre Park Bar. But Centre Park was injured and, as a
result, lost customers and revenue. Eventually it closed. Ultimately, Centre Park’s losses meant
losses for Lotus, and losses for Lotus meant losses for Gwendolyn. So Gwendolyn’s injury solely
derives from Lotus’ injury and she is not the real party in interest.
Next consider Christopher’s and Kenneth Scott’s claims against the DEGC. Neither
Christopher nor Kenneth Scott were members of Lotus. Both were managers of Centre Park Bar.
But just like Gwendolyn, both Christopher and Kenneth Scott said they sought redress for Lotus’
losses, specifically Lotus’ loss of business income. (See ECF No. 211, PageID.5980–5981, 6002–
6004; ECF No. 209, PageID.4622–4623.) Accordingly, just like Gwendolyn, Christopher and
Kenneth Scott have injuries that derive entirely from Lotus’ injuries. They, too, are not the real
parties in interest.

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At her deposition, Gwendolyn referred most questions about damages to Christopher.
(ECF No. 211, PageID.5619–5625.) Christopher said the individual plaintiffs and Lotus suffered
the same damages flowing from the same injuries. (ECF No. 211, PageID.5980–5981, 6002–
6004.)
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Finally, all three say the DEGC trespassed one time against Centre Park Bar. But that claim
belongs to Lotus. Only Lotus, LLC has a property interest in the bar. See Mich. Comp. Laws
450.4504(2). So only Lotus can allege a trespass. See Mable Cleary Trust v Edward-Marlah Muzyl
Trust, 686 N.W.2d 770, 786 (Mich. Ct. App. 2004).
IV.
In summary, none of the individual plaintiffs’ claims should proceed. Potentially, the
individual plaintiffs lack Article III standing. Or, none of Gwendolyn, Kenneth Scott, or
Christopher are the real parties in interest to enforce the claims they assert against the DEGC.
Either way, their claims against the DEGC are dismissed.
And because the Court believes it can raise Rule 17 (and Article III) defects sua sponte,
see RK Co. v. See, 622 F.3d 846, 851 (7th Cir. 2010); Cont'l Ins. Co. v. N.A.D., Inc., 16 F. App’x
659, 661 (9th Cir. 2001), the Court orders the remaining parties to show cause, in writing, why the
individual plaintiffs’ claims against the remaining Defendants, with the exception of Kenneth
Scott’s First Amendment retaliation claim based on his personal arrest, should not be dismissed
for reasons consistent with this opinion and order. The parties are to respond no later than 14 days
from the date of entry of this order.
SO ORDERED.
s/Laurie J. Michelson
LAURIE J. MICHELSON
UNITED STATES DISTRICT JUDGE
Date: June 7, 2019

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CERTIFICATE OF SERVICE
I hereby certify that a copy of the foregoing document was served upon counsel of record
on this date, June 7, 2019, using the Electronic Court Filing system.
s/William Barkholz
Case Manager

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