Bancroft Life & Cas. Icc, Ltd. v. FFD Res. II, LLC

Decision Date02 August 2012
Docket NumberCivil Action No. H–11–2384.
Citation884 F.Supp.2d 535
CourtU.S. District Court — Southern District of Texas
PartiesBANCROFT LIFE & CASUALTY ICC, LTD., Plaintiff, v. FFD RESOURCES II, LLC, Defendant. Fed Resources II, LLC and FFD Ventures, LP, Counterclaim Plaintiffs, v. Bancroft Life & Casualty ICC, Ltd., Counterclaim Defendant.


Andrew M. Edison, Houston, TX, C. Dennis Southard, IV, Christopher “Kip” Schwartz, Eric N. Heyer, Schwartz & Associates PLLC, Washington, DC, Leslie J. Suson, Thompson Hine LLP, Atlanta, GA, for Plaintiff.

Jeremiah J. Anderson, Houston, TX, Charles L. Bachman, Jr., Robert L. Fortson, Turner, Bachman & Garrett LLC, Marietta, GA, for Defendant.


MELINDA HARMON, District Judge.

Pending before the Court in the above referenced cause, alleging that Defendant/Counterclaim–Plaintiff FFD Resources II, LLC (FFD2) defaulted on five loans from Plaintiff/Counterclaim–Defendant Bancroft Life & Casualty ICC, Ltd. (Bancroft), in the total amount of $1,546,650.00, and that FFD2 misused the collateral securing the loans, are two inter-related matters: (1) Bancroft's objections to United States Magistrate Judge Frances Stacy's September 19, 2011 order 1 granting FFD2's motion to join FFD Ventures, L.P. (Ventures) as a Counterclaim–Plaintiff under Federal Rule of Civil Procedure 20 (instrument # 35); and (2) Bancroft's motion to dismiss counterclaims 2 (# 36).

I. Bancroft's Objections to Rule 20 Joinder

The Magistrate Judge granted FFD2's motion to join Ventures, not under Federal Rule of Civil Procedure 19, as requested, but under Rule 203 on the grounds that Ventures' claims arise out of the same transaction(s) or occurrence(s) as the claims currently in the lawsuit between Bancroft and FFD2 (both claims and counterclaims) and involve common issues of law or fact.

A. Federal Rule of Civil Procedure 72(a)

After a nondispositive motion regarding a pretrial matter is referred to a magistrate judge for resolution under 28 U.S.C. § 636(b)(1)(A) and after the resulting order is timely appealed, Federal Rule of Civil Procedure 72(a) requires that the district court “in the case must consider timely objections and modify or set aside any part of [the magistrate judge's order] that is clearly erroneous or is contrary to law.” To the Magistrate Judge's factual findings the district court applies a clearly erroneous standard and may not disturb the factual findings unless despite the fact that there is evidence to support them, the reviewing court is left with the definite and firm conviction that the magistrate judge has made a mistake. Benton v. U.S. E.P.A., 2012 WL 1037454, *1 (N.D.Tex. Mar. 28, 2012), citing Smith v. Smith, 154 F.R.D. 661, 665 (N.D.Tex.1994). If the Magistrate Judge's “account of the evidence is plausible in light of the record viewed in its entirety,” it is not clearly erroneous. Smith v. Smith, 154 F.R.D. at 665. The district court reviews the Magistrate Judge's legal conclusions de novo. Benton, 2012 WL 1037454, at *1,citing id. Where the Magistrate Judge has properly applied the law to fact findings that are not clearly erroneous, “a vast area of choice” exists in which the magistrate judge's decisions are discretionary and the Magistrate Judge's ruling may only be reversed for abuse of discretion standard. Id.;Lahr v. Fulbright & Jaworski, L.L.P., 164 F.R.D. 204, 208 (N.D.Tex.1996). The party appealing/objecting to the order must show how the order is reversible under the applicable standard of review. Benton, 2012 WL 1037454, at *1.

B. Federal Rules of Civil Procedure 20(a), 19, 21, and 12(b)(7)

Federal Rule of Civil Procedure 20(a)(1) provides,

(a) Persons Who May Join or Be Joined.

(1) Plaintiffs. Persons may join in one action as plaintiffs if:

(A) they assert any right to relief jointly, severally, or in the alternative with respect to or arising out of the same transaction, occurrence, or series of transactions or occurrences; and (B) any question of law or fact common to all plaintiffs will arise in the action.

Both the same transaction and occurrence requirement and the common question of law or fact requirement must be satisfied. 7 Charles Alan Wright, Arthur Miller & Mary Kay Kane, Federal Practice and Procedure § 1683 (3d ed. 2001). Rule 20 is merely a procedural device and does not alter the substantive rights of the parties.” Id. at n. 49.

Rule 19(a), addressing “Persons Required to Be Joined if Feasible,” provides,

(1) Required Party. A person who is subject to service of process and whose joinder will not deprive the court of subject-matter jurisdiction must be joined as a party if:

(A) in that person's absence, the court cannot accord complete relief among existing parties; or

(B)that person claims an interest relating to the subject of the action and is so situated that the disposing of the action in the person's absence may:

(i) as a practical matter impair or impede the person's ability to protect the interest; or

(ii) leave an existing party subject to a substantial risk of incurring double, multiple, or otherwise inconsistent obligations because of the interest.

Necessary parties must be joined in an action unless joinder is not feasible, i.e., the party is not subject to service of process, joinder would divest the court of subject matter jurisdiction, or the joinder would make venue improper. In re Apple iPhone 3G and 3GS MMS Marketing and Sales Practices Litig., 864 F.Supp.2d 451, 455–56 (E.D.La.2012). If the absent party is indispensable and must be joined under Rule 19(a) but cannot be, claims must be dismissed. August v. Boyd Gaming Corp., 135 Fed.Appx. 731, 732 (5th Cir.2005). If the party is not indispensable, the suit can proceed without joinder of the party. Hood ex rel. Miss. v. City of Memphis, Tenn., 570 F.3d 625, 629 (5th Cir.2009). For the joinder analysis, the Court takes the allegations in the complaint as true. Indian Harbor Ins. Co. v. KB Lone Star, Inc., Civ. A. No. H–11–CV–1846, 2012 WL 1038658, *2 (S.D.Tex. Mar. 27, 2012).

Federal Rule of Civil Procedure 21 states,

Misjoinder of parties is not a ground for dismissing an action. On motion or on its own, the court may at any time, on just terms, add or drop a party. The Court may also sever any claim against a party.

The district court has broad discretion in deciding whether to sever. Anderson v. Red River Waterway Comm'n, 231 F.3d 211, 214 (5th Cir.2000).

Finally, Rule 12(b)(7) permits the court to dismiss a suit for failure to join a required party under Rule 19, which mandatesjoinder to “all parties whose presence in a lawsuit is required for the fair and complete resolution of the dispute at issue” and “provides for dismissal of litigation that should not proceed in the absence of parties that cannot be joined.” HS Resources, Inc. v. Wingate, 327 F.3d 432, 438 (5th Cir.2003). Thus Rule 19 not only “provides a framework for deciding whether a given person should be joined,” but if he should be, “guides the court in deciding whether the suit should be dismissed if that person cannot be joined.” Pulitzer–Polster v. Pulitzer, 784 F.2d 1305, 1309 (5th Cir.1986).

C. Bancroft's Objections

Bancroft's objections to the joinder are that its claims against FFD2 are based on a series of loans it made to FFD2, memorialized by the five Promissory Notes signed by FFD2, secured by FFD2's assets, and on which FFD2 defaulted. It contends that Ventures, although the sole member and direct corporate subsidiary of FFD2, has no direct liability on the loans, is not a signatory or a guarantor of the loans, and has no interest in the security, while the Promissory Notes do not permit recourse to any person, entity or asset other than the stated security, i.e., assets owned solely by FFD2.

In contrast, except for one count for declaratory judgment, the eight other counts of the Counterclaims asserted by Ventures, as an insurance “Certificate Holder,” against Bancroft, the insurer, relate to matters regarding an insurance policy between Bancroft and Ventures. Although FFD2 is identified as an “Additional Insured” on the insurance certificates, it is not the certificate holder and has no standing to bring the insurance-based counterclaims.4 Bancroft's loan-based claims against FFD2 can be resolved without Ventures' participation, as can Ventures' insurance-based claims against Bancroft without the participation of FFD2.

Bancroft insists that the Magistrate Judge's order rests on the incorrect legal conclusion that a party can assert claims belonging exclusively to a non-party (here, allowing FFD2 to bring the insurance policy claims that belong only to Ventures) and use Rule 20 to join the non-party (Ventures) to the lawsuit. Bancroft maintains that the insurance-based counterclaims in this action are not properly asserted by FFD2, such that they could form a proper foundation to support the joinder of Ventures, and thus the order permitting joinder is contrary to law.

D. FFD2 and Ventures' Response (# 37)

Contending that the Magistrate Judge's ruling was correct, FFD2 and Ventures point to other cases pending in different courts involving Bancroft and other FFD entities, with essentially identical facts, circumstances, and counterclaims, and that those courts have permitted joinder of Ventures: Bancroft Life & Cas. ICC, Ltd. v. FED Resources IV, LLC, Civ. A. No. 3:11–CV–00214 (D.Nev. Sept. 29, 2011) (copy of docket sheet with minute entry granting joinder (but not identifying the Rule nor its reasoning, though the motion, like the one in the instant case, was brought under Rule 19) attached as Ex. A, entry # 41); and Bancroft Life & Cas. ICC, Ltd. v. Richard D. Clay,5 Civ. A. No. 1:11cv01505–SCJ (N.D.Ga. Oct. 6, 2011) (order granting Rule 20 joinder attached as Ex. B).6 FFD2 and Ventures emphasize that under Bancroft's practice, insured entities like FFD2 and Ventures would pay an insurance premium to Bancroft, and Bancroft would then “loan back” 70% of the premium amount to that...

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