Davis Companies v. Emerald Casino, Inc.

• Decision Date: 28 September 2001
• Docket Number: No. 00-4042,DEFENDANTS-APPELLEES,PLAINTIFF-APPELLANT,00-4042
• Citation: 268 F.3d 477
• Parties: (7th Cir. 2001) 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., ET AL.,
• Court: U.S. Court of Appeals — Seventh Circuit

Page 477

268 F.3d 477 (7th Cir. 2001)

DAVIS COMPANIES, A CALIFORNIA CORPORATION, PLAINTIFF-APPELLANT, 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., ET AL., DEFENDANTS-APPELLEES.

No. 00-4042

U.S. Court of Appeals, Seventh Circuit

Argued April 12, 2001

September 28, 2001

Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 99 C 6822--Ronald A. Guzman, Judge.

Before Bauer, Manion, and Kanne, Circuit Judges.

Manion, Circuit Judge.

Davis Companies filed a complaint against Emerald Casino, Inc., formerly known as HP,¹ and three of its officers, alleging breach of an oral that he was also a party to the alleged contract pursuant to which Davis was to acquire stock ownership in HP. The defendants moved to dismiss under Fed. R. Civ. P. 12(b)(7) for failure to join Richard Duchossois as a necessary and indispensable party, to the alleged contract. The district court granted the defendants' motion, and since the joinder of Duchossois would destroy complete diversity the district court dismissed the action. Davis appeals, and we reverse.

I.

According to the Second Amended Complaint,² on December 1, 1998, after extensive negotiations, Davis Companies, a California corporation, entered into an oral contract with HP, an Illinois corporation and owner of an Illinois gaming license for the operation of riverboat gambling. The oral contract was negotiated for Davis by Michael Colleran, its Executive Vice President, and for HP by Kevin Flynn, a shareholder of HP and son of Donald Flynn, an officer, director and shareholder of HP.

The parties conditioned the oral contract upon passage of legislation in the Illinois General Assembly amending the Illinois Riverboat Gambling Act, 230 ILCS 10/1 et seq., to permit HP's license to be used for a casino in Rosemont, Illinois. Under the terms of the oral contract, upon enactment of the amendment HP would issue sufficient shares to Davis to make Davis the owner of a 37.5% interest in HP. In return, Davis would make a $12 million capital contribution to HP. Davis understood that HP would also issue sufficient shares to make Richard Duchossois, an Illinois resident, owner of a 20% interest in HP, and to make local investors collectively the owner of a 5% interest in HP. The issuance of shares to Duchossois and the local investors was not a condition precedent to the oral contract between Davis and HP. After all shares were issued (to Davis, Duchossois and the local investors), the shares of the existing HP shareholders as of December 1, 1998 would be diluted from a 100% ownership to a 37.5% ownership interest.

Davis understood that HP intended to raise a total of $30 million to be distributed to HP's original investors who had lost their $30 million investment in HP's defunct riverboat operations. Davis also understood that HP might issue additional shares to third parties in the future, and that the 37.5% shares of Davis and the existing shareholders, the 20% interest of Duchossois and the 5% interest of local investors would be proportionally diluted. Davis also alleged that on December 1, 1998, in a separate oral contract, the Flynns promised to take any and all steps to assure HP's performance of its contractual obligation to Davis. The Complaint describes in detail the negotiations undertaken by a number of parties to structure an overall plan to open and support a casino in Rosemont.

According to the Complaint, immediately following the December 1, 1998 meeting between Flynn and Colleran, Flynn met with Duchossois and other parties. At that meeting, Flynn allegedly informed the group that he and Colleran had reached a deal and he also stated that he was willing to sell Duchossois a 20% interest in HP. Later that day, Duchossois and others met with Colleran, at which time Colleran also told Duchossois that he and Flynn had agreed to a deal. Duchossois confirmed to Colleran that Flynn had told him he was willing to sell him a 20% interest in HP.

The Illinois Riverboat Gambling Act was amended, effective June 25, 1999, to permit the holder of a dormant license to renew and relocate its license to any community willing to accept a casino. See 230 ILCS 10/11.2.³ Since HP owned the only dormant license in the State of Illinois, the legislation essentially permitted HP to transfer its gaming license to open a casino in Rosemont upon Rosemont's decision to approve the relocation. Davis alleges that, once the legislation passed, HP was obligated to issue its shares to Davis and Davis was obligated to pay $12 million to HP. However, the defendants denied the existence of any contracts with Davis.

Accordingly, Davis sued HP, the Flynns and Joseph McQuaid, an officer and director of HP, in federal district court claiming breach of contract, equitable estoppel, fraud and conspiracy, and seeking specific performance or monetary damages of not less than $250 million and punitive damages. The defendants moved to dismiss under Fed. R. Civ. P. 12(b)(7) for failure to join Richard Duchossois as a necessary and indispensable party under Fed. R. Civ. P. 19. The defendants claimed that Duchossois (then Chairman of Arlington International Racecourse) was also a party to the alleged contract. After considering the pleadings and extrinsic evidence, the district court agreed.⁴ The district court concluded that the contracts or options (both Davis's and Duchossois's) were interrelated and interdependent in substance and operation, and that Duchossois was therefore a necessary party that should be joined under Rule 19(a).

Since the joinder of Duchossois would destroy complete diversity, however, the court then proceeded under Rule 19(b) to determine whether in "equity and good conscience" the case should be dismissed.⁵ The court found that Davis's claims would significantly impact Duchossois's interests. Next, it found that the defendants could suffer prejudice as a result of the failure to join Duchossois, because a later lawsuit could subject them to multiple and possibly inconsistent verdicts. Next, the court found that it could not easily fashion relief limited to Davis's options without delving into the alleged contract between the defendants and Duchossois. Lastly, the court noted that there was an alternative forum, Illinois state court. Accordingly, the district court granted the defendants' motion and dismissed the action. Davis appeals.

II.

An initial matter concerns the appropriate standard of review of the district court's Rule 19 dismissal. Davis argues for de novo review while HP urges us to adopt an abuse-of-discretion standard. While we have noted the advantages of the more deferential standard, see Sokaogon Chippewa Cmty. v. State of Wisconsin, Oneida County, 879 F.2d 300, 303-04 (7th Cir. 1989), we have yet to decide on the appropriate standard. See Thomas v. United States, 189 F.3d 662, 666 (7th Cir. 1999); United States ex rel. Hall v. Tribal Dev. Corp., 100 F.3d 476, 478 (7th Cir. 1996). That decision need not be made today, however, because we would reverse the district court under either standard.

The purpose of Rule 19 under the Federal Rules of Civil Procedure is "to permit joinder of all materially interested parties to a single lawsuit so as to protect interested parties and avoid waste of judicial resources." Moore v. Ashland Oil, Inc., 901 F.2d 1445, 1447 (7th Cir. 1990). However, federal courts are reluctant to dismiss for failure to join where doing so deprives the plaintiff of his choice of federal forum. See Pasco, 637 F.2d at 501. Joinder under Rule 19 is a two-step inquiry:

First, the court must determine whether a party is one that should be joined if feasible--called, in the old days, a "necessary party." Fed. R. Civ. P. 19(a); Hall, 100 F.3d at 478. . . . [I]f the court concludes . . . that the party should be included in the action but it cannot be, it must go on to decide whether the litigation can proceed at all in the party's absence. See Fed. R. Civ. P. 19(b). If there is no way to structure a judgment in the absence of the party that will protect both the party's own rights and the rights of the existing litigants, the unavailable party is regarded as "indispensable" and the action is subject to dismissal upon a proper motion under Federal Rule of Civil Procedure 12(b)(7).

See Thomas, 189 F.3d at 667.

To answer the first question, whether Duchossois is a necessary party, under Rule 19(a)⁶, we must consider (1) whether complete relief can be accorded without joinder, (2) whether Duchossois's ability to protect his interest will be impaired, and (3) whether the existing parties will be subjected to a substantial risk of multiple or inconsistent obligations unless he is joined. See Thomas, 189 F.3d at 667. The district court concluded that complete relief could not be accorded in Duchossois's absence, that he had an interest in the present action which he would be unable to protect without joinder, and that HP would be subjected to a substantial risk of multiple or inconsistent obligations in his absence. Granting the facts upon which the district court based its Rule 19 determination, the issue is what legal meaning those facts possess. To the extent that the district court concluded that Davis and Duchossois had interdependent contracts (or options) with HP, this is a legal conclusion that we review de novo. See Janney Montgomery Scott, Inc. v. Shepard Niles, Inc., 11 F.3d 399, 404 (3d Cir. 1993) (finding that, to the extent a district court's Rule 19(a) determination is premised on a conclusion of law, review is plenary).

In this case, it is unnecessary for us to determine whether a contract actually existed (whether between HP and Davis or between HP and Duchossois) in order to find that the alleged contract between HP and Davis is independent...