Larson Manufacturing et al v. Western Showcase Homes et al
ORDER denying 13 Motion for Leave to File Third-Party Complaint. Signed by US Magistrate Judge Veronica L. Duffy on 3/8/2017. (CG)
UNITED STATES DISTRICT COURT
DISTRICT OF SOUTH DAKOTA
LARSON MANUFACTURING COMPANY
OF SOUTH DAKOTA, INC., SUPERIOR
ORDER DENYING DEFENDANTS'
MOTION TO FILE THIRD-PARTY
WESTERN SHOWCASE HOMES, INC.,
AMERICAN MODULAR HOUSING
GROUP, LLC, AMERICAN MODULAR
HOUSING GROUP, INC., PAUL THOMAS,
DOCKET NO. 13
This matter is before the court on the basis of diversity jurisdiction, 28
U.S.C. § 1332, after defendants removed the matter from South Dakota state
court. See Docket No. 1, 1-1. Defendants now seek permission to file a thirdparty complaint adding claims against six new third-party defendants. See Docket
No. 13, 13-1. Plaintiffs oppose the motion. See Docket No. 15. The court denies
the motion for the following reasons.
The following facts are taken from plaintiffs' amended complaint. The
recitation of these facts should not be interpreted as the court's imprimatur of the
verity of the facts. Rather, they are recited to frame the claims in order to evaluate
defendants' pending motion.
Plaintiff Larson Manufacturing Company of South Dakota, Inc. (Larson) is
the parent company of plaintiff Superior Homes, LLC (Superior). See Docket No.
1-6 at 4. Both are South Dakota business entities. Id. Superior is in the
business of manufacturing and selling modular homes. Id.
Defendant Western Showcase Homes, Inc. ("Western") is a Nevada
corporation in the business of purchasing, reselling, and financing modular
homes. Id. at 5. Defendant Paul Thomas, a Nevada resident, is the sole member
of American Modular Housing Group, LLC (AMHG, LLC), a Nevada company in the
business of buying and reselling modular homes. Id. American Modular Housing
Group, Inc. (AMHG, Inc.), is a Canadian corporation with its principal place of
business in Nevada that also buys and resells modular homes. Id. Thomas is the
principal agent and owner of both AMHG entities. Id.
The defendant entities would purchase modular homes from Superior and
then re-sell those homes to customers, sometimes arranging for delivery, set and
completion of the home at the customer's location. Id. Larson and Superior
extended credit to the defendant entities for these purchases; AMHG would then
repay the loans when its customer paid the defendant entities. Id. at 6.
The complaint recites that defendant entities placed orders for 26 modular
homes with plaintiffs. Plaintiffs constructed the homes. Of the homes that were
delivered to defendants, full payment was never made although the complaint
alleges the ultimate customers who received these homes paid defendants. Other
modular homes ordered by defendants were custom-built and never delivered
because defendants never paid for the homes. As to the homes plaintiffs retain
possession of, plaintiffs allege the custom nature of the homes makes resale of the
homes at a reasonable value impracticable.
In addition, Larson entered into a loan agreement with Western which was
guaranteed by AMHG, Inc. This loan agreement ultimately encompassed $14
million in funds. Larson alleges that Western defaulted on the loan and AMHG,
Inc. refused to pay pursuant to its guarantee. For all these matters, plaintiffs
assert eight counts of breach of contract, five counts of unjust enrichment, two
counts of tortious interference with business expectancy, three counts of fraud,
two counts of conversion, one count each of debt and guarantee, and one count of
piercing the corporate veil.
Defendants generally deny nearly all of plaintiffs' allegations in their
amended complaint. See Docket No. 6 at 1-16. In addition, defendants assert five
counterclaims against Larson and Superior. Id. at 17-27. Those counterclaims
include breach of contract (failure to pay rebates, failure to pay personal loans
from Thomas); unjust enrichment (rebates, warranty and service fees); tortious
interference with business expectancy (Aspen Links Country Club, Aspen Village
Properties, and Waugh Who Developments); breach of contract (manufacturing
defects in modular homes); and fraud and deceit (fraudulent inducement to sign a
mortgage in connection with Aspen Village and McKenzie Lane, assignment of
mortgage interest in Moose Ridge). See Docket No. 6 at pp. 17-27. Defendants
seek compensatory and punitive damages on their counterclaims, pre- and postjudgment interest, attorney's fees, and other remedies. Id. at 27.
Defendants now seek to file a third-party complaint pursuant to Federal
Rule of Civil Procedure 14(a)(1). See Docket No. 13, 13-1. That third-party
complaint, if allowed, would add the following parties: William Retterath, Greg
Jahnke, Rylan Waugh, Aspen Village Properties, Ltd., Mauri Gwyn Development,
Ltd.; and Waugh Who Developments, Ltd. as parties. Id. at 1. Five of the six new
parties defendants seek to add are citizens and residents of Canada. Id. at 2-4.
The third-party complaint would assert a claim of tortious interference with
contract or business expectancy against all the new parties. Id. at 5-7. It would
assert claims of defamation against Jahnke and Retterath. Id. at 7. It would
assert claims of breach of contract against Aspen Village, Mauri Gwyn, and Waugh
Who. Id. at 8-10. And it would seek punitive damages against Retterath. Id. at
Retterath is the only proposed new party who is a resident of the United
States. Id. at 2-3. He is the Chief Financial Officer of plaintiff Larson and resides
in Brookings, South Dakota. Id.
Plaintiffs oppose defendants' request to file the proposed third-party
complaint. See Docket No. 15. They assert Rule 14(a)(1) does not authorize
defendants' third-party complaint. Id. at 1-5. Plaintiffs also assert they would be
prejudiced by allowing defendants to file a third-party complaint. Id. at 5-6.
Rule 14(a)(1), which defendants invoke in support of their motion, provides
(a) When a Defending Party May Bring in a Third Party.
(1) Timing of the Summons and Complaint. A defending
party may, as third-party plaintiff, serve a summons and
complaint on a nonparty who is or may be liable to it for all or
part of the claim against it. But the third-party plaintiff must,
by motion, obtain the court's leave if it files the third-party
complaint more than 14 days after serving its original answer.
See FED. R. CIV. P. 14(a)(1).
Here, defendants filed their answer to plaintiffs' amended complaint on
September 21, 2016. See Docket No. 6. They filed the motion seeking to file their
proposed third-party complaint on January 31, 2017. Therefore, more than 14
days have elapsed since the answer was filed and defendants must have leave of
court to assert their third-party complaint.
A reading of the plain language of Rule 14(a)(1) shows that the rule
authorizes a defendant to assert a third-party complaint only when the party
named in that third-party complaint is liable to the defendant for part or all of the
defendants' liability (if any) to the plaintiff. Rule 14(a)(1) requires the third-party
defendants' liability to be derivative of defendants' own liability to plaintiffs.
The claims defendants wish to assert in their proposed third-party
complaint do not fit this rubric—the claims are independent, free-standing claims.
The claims defendants sketch out are not dependent upon a finding of defendants'
liability to plaintiffs under plaintiffs' amended complaint. Thus, Rule 14(a)(1) does
not appear to authorize defendants' proposed third-party complaint. This reading
of Rule 14(a)(1) is supported by the cases and secondary sources interpreting it.
In Mattes v. ABC Plastics, Inc., 323 F.3d 695, 697 (8th Cir. 2003), plaintiffs
sued defendants in Iowa state court for payment of rent on real property. The
defendants filed a third-party complaint against the Small Business
Administration (SBA), alleging the SBA had given defendants a loan for a business
but failed to warn defendants the business had faulty equipment and
contaminated material. Id. The SBA removed the matter to federal court and
moved to dismiss the third-party complaint arguing, among other things, that the
third-party complaint was not proper under Rule 14. Id. at 697-98. The Eighth
Circuit agreed. Id. at 698.
Rule 14(a)(1) authorizes suits against a third party where "the third party's
liability is in some way dependent on the outcome of the main claim and is
secondary or derivative thereto." Id. (quoting Stewart v. American Internat'l Oil &
Gas Co., 845 F.2d 196, 199 (9th Cir. 1988)). The rule "allows a defendant to
assert a claim against any person not a party to the main action only if that third
person's liability on that claim is in some way dependent upon the outcome of the
main claim. Rule 14(a) does not allow the defendant to assert a separate and
independent claim even though the claim arises out of the same general set of
facts as the main claim." Id. (quoting United States v. Olavarrieta, 812 F.2d 640,
643 (11th Cir. 1987)). Because defendants had not shown that the SBA's potential
liability on the business loan was in any way dependent upon or derivative of
defendants' liability to the plaintiffs on the real property lease, the court held the
third party complaint was not proper under Rule 14. Id. at 698-99. See also
Gaines v. Sunray Oil Co., 539 F.2d 1136, 1139 n.7 (8th Cir. 1976) (claim could not
be asserted as a third-party complaint because it was not a claim for indemnity);
Martin Ankeny Corp. v. CTB Midwest, Inc., 2015 WL 11112557 at *4 (S.D. Iowa
2015) (disallowing a third-party complaint where the claims therein were not
dependent upon the plaintiff's claims against the defendant).
The secondary sources agree with the above court interpretations of Rule
A third-party claim may be asserted under Rule 14(a)(1) only when
the third party's liability is in some way dependent on the outcome of
the main claim or when the third party is secondarily liable to the
defending party. The secondary or derivative liability notion is central
and thus impleader has been successfully utilized when the basis of
the third-party claim is indemnity, subrogation, contribution, express
or implied warranty, or some other theory.
If the claim is separate or independent from the main action, the
impleader will be denied. The claim against the third party must be
based upon plaintiff's claim against defendant. The crucial
characteristic of a Rule 14 claim is that defendant is attempting to
transfer to the third-party defendant the liability asserted against
defendant by the original plaintiff. The mere fact that the alleged
third-party claim arises from the same transaction or set of facts as the
original claim is not enough.
See Charles Alan Wright, Arthur R. Miller, Mary Kay Kane, Richard L. Marcus,
A. Benjamin Spencer, and Adam N. Steinman, Fed. Practice & Procedure Civ.,
§ 1446 (3d ed. Jan. 2017) (emphasis added). See also 3 James W. Moore et al,
Moore's Fed. Practice, § 13.112 (3d ed. 2015).
An examination of defendants' claims in their proposed third-party
complaint reveals they are not pleading any derivative claims based on indemnity,
subrogation, contribution, or a warranty on defendants' own performance owed to
plaintiffs. See Docket No. 13-1. Instead, the claims are independent, stand-alone
claims. For example, the tortious interference claim alleges, inter alia, that the
third-party defendants1 have interfered with defendants' business expectancies
and contracts with the plaintiffs. Id. at 5-7. If true, third-party defendants would
be liable to defendants for this claim regardless of whether plaintiffs succeed in
obtaining a judgment against defendants.
The proposed defamation claims against Jahnke and Retterath allege that
those two parties have made intentional false statements to various individuals
Count One in the proposed third-party complaint states it is being asserted
against all third-party defendants. However, only third-party defendants
Retterath, Jahnke, and Waugh are stated to have intentionally and tortiously
interfered. See Docket No. 13-1 at 5-7. Thus, it appears no tortious interference
claim is proposed against third-party defendants Aspen Village Properties, Ltd.;
Mauri Gwyn Development, Ltd.; and Waugh Who Developments, Ltd.
(not just plaintiffs) that have damaged defendants. Id. at 7-8. Again, if this is
true, Jahnke and Retterath would be liable to defendants regardless of whether
plaintiffs succeed in obtaining judgment against defendants.
The breach of contract claims are of similar character. Plaintiffs' amended
complaint alleges, for example, as to the Aspen Units, that plaintiffs supplied
defendants ten units worth $2 million to be assembled at the Aspen Village
Properties development in Regina, Saskatchewan, Canada. See Docket No. 1-6 at
16. Plaintiffs loaned defendants money to develop this real estate in which
defendants had an interest. Id. at 16-17. Plaintiffs allege defendants received
payments from the final customers, and that plaintiffs had a right to receive those
payments. Id. at 17. Instead of turning the payments over to plaintiffs,
defendants are alleged to have kept the payments and converted them to their own
Although defendants propose to assert breach of contract claims against
Aspen Village Properties, Ltd., those claims are distinct from plaintiffs' claims. See
Docket No. 13-1 at 8-9. Defendants allege they have entered into "multiple
contracts" with Aspen Village over the years concerning the sale and development
of modular homes. Id. Without specifying which contracts were breached,
defendants allege Aspen Village breached its contract with defendants by failing to
remit a share of profits to defendants as agreed; failure to remit rebates owed to
defendants; failure to remit administration fees to defendants; failure to remit
"other agreed payments" to defendants; failure to pay taxes, insurance, bonds and
commissions; authorizing changes and modifications not contemplated by
contract; and failing to fulfill its duties of contractor of record for the work. Id.
These allegations, if true, would obligate Aspen Village to defendants regardless of
whether plaintiffs succeed in their claims against defendants.
In Martin Ankeny Corp., the district court found that, even though
defendants' motion to add parties under Rule 14 was not well placed, dismissal
was not appropriate. Martin Ankeny Corp., 2015 WL 11112557 at *5. Instead,
the court considered whether joinder of the additional parties was proper under
Rules 13(h), 19 and 20. Id. Those rules govern the joinder of an additional party
to a counterclaim. Id.
Here, nothing in defendants' proposed third-party complaint indicates that
any of the proposed third-party defendants is in contractual privity with plaintiffs
or have been injured by plaintiffs in the ways defendants allege in their
counterclaims. Therefore, unlike in the Martin Ankeny Corp. case, denial of the
request to add these parties under Rule 14 is appropriate. Alternative joinder
under Rules 13(h), 19 and 20 is unavailing—at least based on the information
presented to the court at present.
Finally, the plaintiffs' assertion of prejudice is fairly obvious. Defendants'
third-party complaint, if allowed, would greatly expand the scope of issues, facts,
and parties presented in this lawsuit. It would entail a great deal of additional
discovery, and would delay plaintiffs' lawsuit significantly, without having any
impact on plaintiffs' basic claims against defendants or defendants' counterclaims
Based on the foregoing facts, law and analysis, it is hereby
ORDERED that defendants' motion to file a third-party complaint pursuant
to FED. R. CIV. P. 14(a)(1) is hereby denied.
DATED March 8, 2017.
BY THE COURT:
VERONICA L. DUFFY
United States Magistrate Judge
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