Davis Companies, a California Corporation v. Emerald Casino, Inc., Formerly Known as Hp, Inc., an Illinois Corporation, Joseph McQuaid Individually and as an Agent of Hp, Inc., Donald F. Flynn, Individually and as an Agent of Hp, Inc.
Docket: 00-4042
Court: Court of Appeals for the Seventh Circuit; September 28, 2001; Federal Appellate Court
Davis Companies initiated litigation against Emerald Casino, Inc. (formerly HP, Inc.) and its officers, alleging breach of an oral contract for stock acquisition. The defendants sought dismissal, claiming the necessary party Richard Duchossois was not joined in the suit, which would affect diversity jurisdiction. The district court granted the motion, leading to dismissal. On appeal, the Seventh Circuit reversed the decision.
The Second Amended Complaint detailed that on December 1, 1998, after negotiations, Davis entered an oral agreement with HP, contingent on legislative amendments allowing HP's gaming license to be used for a casino in Rosemont, Illinois. Under this agreement, HP was to issue shares giving Davis a 37.5% ownership stake in exchange for a $12 million capital contribution. Duchossois was to receive a 20% interest, and local investors 5%, but their share issuance was not a condition of Davis's contract. Davis acknowledged potential future dilution of shares due to additional issuances by HP.
Additionally, a separate oral contract was alleged in which the Flynns assured their commitment to facilitate HP’s obligations to Davis. The Complaint outlined extensive negotiations aimed at establishing a casino in Rosemont. After the December 1 meeting, Flynn reportedly communicated to Duchossois about the agreement with Colleran and offered to sell him a 20% interest in HP.
The Illinois Riverboat Gambling Act was amended on June 25, 1999, allowing the holder of a dormant gaming license to renew and relocate it to any community willing to accept a casino. HP held the only dormant license in Illinois, which enabled it to potentially transfer the license to operate a casino in Rosemont, contingent upon Rosemont's approval. Davis contended that following this amendment, HP was required to issue shares to him, and he was obligated to pay HP $12 million. The defendants, including HP, the Flynns, and Joseph McQuaid, denied any contractual relationship with Davis, leading to Davis filing a lawsuit in federal court for breach of contract, equitable estoppel, fraud, conspiracy, and seeking at least $250 million in damages.
The defendants moved to dismiss the case under Federal Rule of Civil Procedure 12(b)(7), arguing that Richard Duchossois was a necessary party under Rule 19 because he was also involved in the alleged contract. The district court agreed, determining that the contracts involving Davis and Duchossois were interrelated, making Duchossois a necessary party. However, joining Duchossois would destroy the complete diversity required for federal jurisdiction. The court then assessed whether to dismiss the case based on equitable considerations, concluding that Davis's claims would significantly affect Duchossois's interests, and the defendants could face prejudice from inconsistent verdicts if Duchossois was not joined. The court also noted the existence of an alternative forum in Illinois state court and ultimately granted the defendants' motion to dismiss.
Davis appealed, and the standard of review for the dismissal under Rule 19 was debated, with Davis advocating for de novo review and HP for an abuse-of-discretion standard. The court noted the importance of joining all materially interested parties to conserve judicial resources, but federal courts typically avoid dismissals that would deny a plaintiff their choice of federal forum. The inquiry for joinder under Rule 19 involves two steps, which were not detailed in this excerpt.
The court must first assess if a party, referred to as a "necessary party," should be joined under Federal Rule of Civil Procedure 19(a). If the court decides that such a party should be included but cannot be, it must evaluate whether the case can continue without that party. If the absence of the party prevents the court from granting relief or protecting the rights of both the unavailable party and the existing litigants, the party is deemed "indispensable," and the case may be dismissed under Rule 12(b)(7).
To determine if Duchossois is a necessary party, the court considers three factors: (1) whether complete relief can be granted without his participation, (2) whether his ability to protect his interests would be impaired, and (3) whether the current parties would face a risk of multiple or inconsistent obligations without him. The district court found that complete relief could not be granted in Duchossois's absence, that he had interests that would be unprotected without his joinder, and that HP would risk conflicting obligations.
In reviewing the district court's conclusion regarding the interdependence of contracts between Duchossois, Davis, and HP, the appellate court applies a de novo standard of review. It determined that it is unnecessary to establish the existence of a contract between HP and either party to conclude that Duchossois's alleged agreement is independent of Davis’s. Evidence indicated that Duchossois's interest in HP was separate from Davis's, leading to the conclusion that he lacks an interest in the lawsuit's subject matter.
Duchossois provided testimony during discovery, stating he had a "gentleman's agreement" for an option to acquire a 20% stake in HP, contingent on specific conditions. However, he clarified that the terms of this option were never finalized, and HP ultimately did not extend the offer. He expressed feelings of betrayal regarding the perceived agreement and emphasized that his dealings were entirely separate from Davis's, refuting any claims of interdependence in their agreements. Duchossois explained that collaboration among stakeholders regarding legislation was assumed, but no individual was responsible for another’s dealings.
Duchossois's attorney, David Filkin, testified that Duchossois was to be offered a 20% stake in the entity owning the relocated riverboat. He indicated that Kevin Flynn did not link Duchossois's purchase of the 20% stake to Davis's 37.5% acquisition. Colleran clarified that Duchossois's interest was a separate agreement with HP, while his own agreement with Flynn involved Davis's 37.5% interest for $12 million, with no agreement regarding Duchossois's 5% stake. Eugene Reineke, Davis's lobbyist, echoed that the deals were distinct, and Marvin Davis stated he had no involvement in Duchossois's arrangement.
The district court compelled Duchossois to produce a December 2, 1998 memorandum (the "Filkin Memo") that Duchossois had claimed was protected by attorney-client privilege. This memo summarized a meeting where Colleran discussed negotiations with Flynn regarding an oral contract relevant to the case. The court found the memo redundant to previously disclosed handwritten notes and ordered its production, heavily relying on it to grant HP's motion to dismiss under Rule 19. The court interpreted the memo to suggest that all parties at the meeting recognized Duchossois as part of the agreement.
However, this reliance was deemed misplaced because the memo indicated a deal structure that included Duchossois but did not confirm the interconnectedness of the agreements as the district court concluded. It should have resolved any discrepancies between the memo and the witnesses' depositions in favor of the plaintiff, as established in Deluxe Ice Cream Co. v. R.C.H. Tool Corp., instead of favoring the defendants based on its interpretation of the memo.
Davis's pleadings do not indicate that Duchossois was a party to the contract with HP, explicitly stating that Duchossois’s participation was not a condition precedent to the oral agreement. Deposition testimony confirms that Duchossois denied being part of the alleged contract between Davis and HP. The Filkin Memo does not contradict this, supporting the conclusion that Duchossois's interest in the Rosemont casino deal differs from the contract Davis claims with HP. Although multiple parties collaborated to support the casino project, the contracts involved were not interdependent or tripartite. Duchossois's interests in HP are separate from the contract in this litigation, and he has denied any relevant interest, which under Rule 19(a) indicates no necessity for his joinder in the lawsuit.
The court emphasizes that, despite a contracting party typically being an indispensable party, if a person is not a party to the contract being litigated and has no rights or obligations under it, they are not considered indispensable. Additional parties involved in the casino effort are also not deemed necessary litigants in the dispute between Davis and HP. The defendants argue that complete relief cannot be granted without joining Duchossois, but the term "complete relief" pertains only to existing parties, not to absent parties. The lawsuit focuses on HP's alleged breach of contract and its liability to Davis for damages. If HP prevails, Davis's claims are resolved; if Davis prevails, the court will determine his damages without needing to address other parties’ rights related to HP’s corporate structure.
Rule 19(a)(2)(i) indicates that Duchossois's lack of interest in the current lawsuit means his ability to pursue future claims is not impaired. Davis is not representing Duchossois nor claiming any legal relationship with him, so any judgment in this case will not affect Duchossois's ability to file his own suit later. This is consistent with precedent where separate contracts lead to independent obligations, thus decisions in one case do not bind absent parties.
Under Rule 19(a)(2)(ii), the potential for HP to face liability to Duchossois in a future case does not create a substantial risk of multiple or inconsistent obligations. The shares involved in the claims against HP by Davis and Duchossois do not overlap, eliminating the possibility of conflicting obligations. Once Davis’s case concludes, no further claims between Davis and HP can arise, and any liability to Duchossois would be separate.
The defendants' strategy appears contradictory; they want the court to recognize Duchossois as a contracting party to dismiss the case from federal court while simultaneously denying any contract exists for the case's merits. This inconsistency benefits HP but does not necessitate Duchossois's inclusion as a necessary party. Additionally, HP retains the right to present evidence concerning Duchossois's awareness of the alleged oral contract and his involvement in the matter, as he has already testified during discovery.
Duchossois is determined not to be a necessary party under Rule 19(a), which leads to the reversal of the district court's judgment and remand for further proceedings. HP, previously known as Emerald Casino, Inc. since August 16, 1999, is referred to as HP in this opinion. For motions to dismiss based on failure to join a party under Rule 19, the allegations in the complaint are accepted as true. The court can consider extrinsic evidence when ruling on dismissals for lack of joinder of indispensable parties. Rule 19(b) outlines factors for determining if the action should proceed without an absent party, including potential prejudice to the absent party, the adequacy of relief, and whether the plaintiff will have an adequate remedy if the case is dismissed. Rule 19(a) mandates that parties subject to service of process must be joined if complete relief cannot be granted without them, or if their absence may impair their ability to protect their interests or expose existing parties to inconsistent obligations.
