Green v. Blake

Decision Date12 August 2019
Docket NumberCase No. 18-2247-CM-JPO
Citation406 F.Supp.3d 984
Parties Jeffrey S. GREEN, Plaintiff, v. Christian BLAKE and Joshua Leonard, Defendants.
CourtU.S. District Court — District of Kansas

Joel B. Laner, Hazelton & Laner, Kansas City, MO, for Plaintiff.

Christian Blake, Roeland Park, KS, pro se.

Joshua Leonard, Leawood, KS, pro se.

MEMORANDUM & ORDER

CARLOS MURGUIA, United States District Judge

In this action among three members of an Oregon limited liability company, 63rd Street Enterprises, LLC ("the LLC"), Plaintiff Jeffrey S. Green—represented by an attorney who has handled various matters for the LLC—sues defendants Christian Blake and Joshua Leonard for allegedly: inducing him through misrepresentations to contribute $200,000 to the LLC; breaching fiduciary duties owed to the LLC and its members; converting the LLC's assets for personal use; and failing to produce an accounting of the LLC's income and expenses. This court must now decide two interrelated motions: Defendants' Motion To Dismiss For Lack Of Subject Matter Jurisdiction And Other Reasons (Doc. 19) and Defendants' Motion to Disqualify Counsel (Doc. 9). Because plaintiff properly pleads one direct claim and improperly pleads three derivative claims, defendants' motion to dismiss is denied in part and granted in part. As that ruling makes the LLC's involvement in this suit unnecessary, and defendants establish no prior attorney-client relationship between themselves personally and plaintiff's counsel, defendants' motion to disqualify plaintiff's counsel is denied.

I. Background
A. Plaintiff's Complaint1

63rd Street Enterprises, LLC is an Oregon limited liability company, formerly managed by two of its members, defendants Blake and Leonard. As managers of the LLC, defendants allegedly made various representations to plaintiff that induced plaintiff to contribute to and become a member of the LLC. Plaintiff alleges defendants fraudulently misrepresented their own assets and finances, the LLC's assets and finances, and their own receipt and use of the LLC's funds by:

• falsely representing their business acumen and that their personal assets could finance the LLC;
• misrepresenting that they had secured, on the LLC's behalf, "the assets and services of Mr. Marsden;"2 and
• falsifying information about the LLC's finances to avoid discovery of (1) unapproved compensation they paid themselves for managing the LLC and (2) other unauthorized financial transactions and personal use of the LLC's funds.

Plaintiff alleges that these actions misled him—"and other investors"—as to the LLC's viability and financial status, inducing him to contribute to the LLC investments totaling $200,000.3 Plaintiff characterizes the misdeeds underlying these misrepresentations as both a breach of the fiduciary duties that defendants owed "[a]s [m]anagers and officers of the [LLC]" and as unlawful conversion of "the [LLC's] inventory and property." (Doc. 1, at 3, 7.) Plaintiff finally claims that defendants "have a duty" but have failed, despite his demands, "to account for the [LLC's] income and expenses." (Doc. 1, at 8.)

B. Procedural History

Plaintiff, through his attorney, Joel B. Laner, filed this suit on May 11, 2018. A few months later, defendants filed a motion to disqualify Mr. Laner and all members of his law firm. (Doc. 9.) Defendants argued that Mr. Laner's representation of plaintiff was unfair and in violation of certain ethical rules because he allegedly had represented defendants in various matters related to various limited liability companies, including 63rd Street Enterprises, LLC. (Docs. 9 & 10.) Shortly thereafter, in the process of screening the case to verify its jurisdiction, the court issued an order requesting that the parties address four issues:

1. Do plaintiff's claims fall under Kansas's choice-of-law statute for foreign LLC's, such that Oregon law applies to the substantive claims?
2. Under the applicable law, are all or some of plaintiff's claims derivative in nature?
3. Is the LLC a necessary and/or indispensable party under Fed. R. Civ. P. 19 ?
4. How do the answers to the above questions impact the resolution of defendants' pending motion to disqualify plaintiff's counsel?

(Doc. 15, at 2.) Defendants answered these questions by way of their motion to dismiss plaintiffs' case. (Doc. 19.)

II. Proceeding Pro Se

Before turning to defendants' motions, the court would note that defendants represent themselves. Courts "afford a liberal construction to [filings] of a defendant appearing pro se." Binford v. United States , 436 F.3d 1252, 1253 n.1 (10th Cir. 2006). "[T]his rule of liberal construction stops, however, at the point at which [the court] begin[s] to serve as [the pro se litigant's] advocate." United States v. Pinson , 584 F.3d 972, 975 (10th Cir. 2009). As such, the court must not "construct arguments or theories for [defendants] in the absence of any discussion of those issues." Drake v. City of Fort Collins , 927 F.2d 1156, 1159 (10th Cir. 1991) (citations omitted).

III. Defendants' Motion to Dismiss
A. Subject-Matter Jurisdiction

Defendants first move to dismiss plaintiff's claims on the basis that this court lacks subject matter jurisdiction. In support, defendants cite authority concerning Kansas' choice-of-law rules. This authority convinces defendants that Oregon (and possibly Arizona) law applies to plaintiffs' claims. Defendants further reason that because Oregon law applies to plaintiff's claims this court lacks subject-matter jurisdiction over the claims: "Kansas' choice-of-law rule dictates that Oregon is the proper jurisdiction, if at all, not Kansas. Therefore, this Court is obliged to dismiss Plaintiff's Complaint for lack of subject-matter jurisdiction." (Doc. 20, at 6.)

Defendants, however, confuse two distinct questions: which court has the power to adjudicate plaintiff's claims (a subject-matter jurisdiction question) with what jurisdiction's law controls that adjudication (a choice-of-law question).4 While defendants' efforts help answer the choice-of-law question, those efforts leave the subject-matter-jurisdiction question unaddressed. Addressing the subject-matter-jurisdiction question would require defendants to show that, contrary to plaintiff's well-pleaded assertions, at the time this case was filed, it involved either nondiverse parties or an amount in controversy less than $75,000. See Mocek v. City of Albuquerque , 813 F.3d 912, 934 (10th Cir. 2015) ("A federal court has diversity jurisdiction in suits between citizens of different states where the amount in controversy exceeds $75,000."); Ravenswood Inv. Co. v. Avalon Corr. Servs. , 651 F.3d 1219, 1223 (10th Cir. 2011) ("Federal jurisdiction is determined based on the facts as they existed at the time the complaint was filed."). Here, however, the only information before the court shows that an Arizona resident sued two Kansas residents for damages in excess of $75,000.5 As such, subject-matter jurisdiction exists under 28 U.S.C. § 1332.6 Any dismissal, therefore, will have to come by other means.

B. Pleading Direct vs. Derivative Claims

Defendants next argue that plaintiff improperly pleads derivative claims subject to dismissal. Defendants view plaintiff as a "disgruntled minority LLC member" seeking to vindicate "rights only the LLC may properly assert." (Doc. 20, at 6.) And to assert the LLC's rights in a derivative action, defendants argue that plaintiff needed, but failed, to comply with Federal Rule of Civil Procedure 23.1(a)'s pleading requirements.

Plaintiff responds that his complaint focuses—not on how he and other of the LLC's members were treated as members, but—on "the process by which he became a member" of the LLC. (Doc. 18, at 8.) His "principal grievance" concerns defendants' misrepresentations. (Doc. 18, at 7; see also Doc. 22, at 4 ("These falsehoods are the crux of his actions.").) Those pre-investment misrepresentations, according to plaintiff, caused "a harm distinct to him and separate from harm to the [LLC]."

(Doc. 18, at 9.) Stated otherwise by plaintiff:

The failure of the [d]efendants to manage the company or to discharge their fiduciary duties with respect to the use and safekeeping of the Company's funds is separate and distinct from their misrepresentations to [plaintiff]. In the absence of the [d]efendants' misrepresentations, he would not have invested in the [LLC]. [Plaintiff] can press a claim against [d]efendants for misrepresentation separate from the [LLC's] claim against [d]efendants for mismanagement and embezzlement.

(Doc. 22, at 4.) Plaintiff further assures that he "can refine his pleading to avoid any misunderstanding that he is asserting a derivative claim," including dismissing his conversion and accounting claims. (Doc. 22, at 4; see also Doc. 18, at 10 ("To the extent [plaintiff's] conversion and accounting torts could be construed as derivative, ... he can dismiss those claims....").)

Whether plaintiff brings direct or derivative claims is a substantive-law question, for which this court, sitting in diversity, looks to state law. See U.S. Cellular Inv. Co. of Okla. City, Inc. v. SW. Bell Mobile Sys., Inc. , 124 F.3d 180, 181 (10th Cir. 1997) ("[W]e first ask whether this action is a direct action or a derivative one. In a diversity case, the characterization of an action is a state law question."); Freeman v. Premium Nat. Beef, LLC , No. CIV-12-1390-D, 2013 WL 5441349, at *5 (W.D. Okla. Sept. 27, 2013) (following U.S. Cellular 's state-law approach to resolve whether the individual brought direct claims or derivative claims on an LLC's behalf). The parties agree that, under Kansas's choice-of-law rules, Oregon law governs this dispute.7 (Doc. 18, at 4–7 ("Oregon law applies to [plaintiff's] substantive claims."); Doc. 20, at 2–6 ("Oregon law applies to [plaintiff's] substantive tort claims.").) Given the parties' agreement, this court will assume Oregon's substantive law controls. See In re ZAGG Inc. Shareholder Derivative Action ,...

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  • Lantz Ret. Invs. v. Glover
    • United States
    • U.S. District Court — Eastern District of California
    • December 23, 2021
    ...requirements similar to Fed.R.Civ.P. 23.1 on members seeking to initiate derivative proceedings on an LLC's behalf.” Green v. Blake, 406 F.Supp.3d 984, 993 (D. Kan. Aug. 12, (Doc. No. 42 at 13-14.) The court previously dismissed plaintiffs' sixth cause of action due to its failure to allege......
  • Lantz Ret. Invs., LLC v. Glover
    • United States
    • U.S. District Court — Eastern District of California
    • January 31, 2020
    ...similar to Fed. R. Civ. P. 23.1 on members seeking to initiate derivative proceedings on an LLC's behalf." Green v. Blake, 406 F. Supp. 3d 984, 993 (D. Kan. Aug. 12, 2019). Here, Plaintiffs' complaint states that "following discovery of the breaches alleged herein," Plaintiffs, "by letter d......

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