Micro-Medical Industries, Inc. v. Hatton

• Decision Date: 19 February 1985
• Docket Number: Civ. No. 84-3055 (JP).
• Citation: 607 F. Supp. 931
• Parties: MICRO-MEDICAL INDUSTRIES, INC., Plaintiff, v. Robert HATTON, Industrial Care Corporation, Hospital Marketing Systems, Inc. and Hospital & Surgical Systems, Inc., Defendants.
• Court: U.S. District Court — District of Puerto Rico

607 F. Supp. 931

MICRO-MEDICAL INDUSTRIES, INC., Plaintiff, v. Robert HATTON, Industrial Care Corporation, Hospital Marketing Systems, Inc. and Hospital & Surgical Systems, Inc., Defendants.

Civ. No. 84-3055 (JP).

United States District Court, D. Puerto Rico.

February 19, 1985.

Roberto Boneta, Hato Rey, P.R., for plaintiff.

Frank Dalmau, Hato Rey, P.R., Harold D. Vicente, Santurce, P.R., for defendants.

OPINION AND ORDER

PIERAS, District Judge.

This case is before the Court on defendants' Motion to Dismiss for Lack of Jurisdiction filed January 3, 1985, together with the transcript of a hearing on jurisdiction held before this Court on January 4, 1985, defendants' Motion filed January 18, 1985, (Document No. 16) and Plaintiff's Opposition with attached Affidavit, filed January 18, 1985 (Document No. 16(a). Defendant's Reply to Plaintiff's Opposition (Document No. 18), filed January 30, 1985, is not before the consideration of the Court since a Reply was not requested by the Court. In its Order of January 4, 1985, the Court ordered the parties to file briefs simultaneously, after which the matter would stand submitted to this Court for decision.

Defendants have attacked plaintiff's first three causes of action under F.R.C.P. 12(b)(1) for lack of subject matter jurisdiction based on diversity of citizenship under 28 U.S.C. § 1332, and have moved to dismiss plaintiff's fourth cause of action under F.R.C.P. 12(b)(6) for failure to state a claim under the Racketeer Influenced and Corrupt Organization ("RICO") Act, 18 U.S.C. §§ 1961 et seq.

This Opinion and Order is entered pursuant to this Court's finding of diversity jurisdiction on January 30, 1985 and the denial of defendant's Motion to Dismiss on January 31, 1985. For purposes of evaluating defendant's factual attack on the existence of diversity jurisdiction, this Court is free to weigh the evidence and satisfy itself as to the existence in fact of subject matter jurisdiction; even so, the allegations of the complaint will be construed favorably to the plaintiff. 27 Fed.Proc., L.Ed. § 62:453 (T. Goger ed. 1984). However, with regard to the Court's evaluation of the Rule 12(b)(6) motion to dismiss the RICO claim, plaintiff's allegations must be taken as true. Radovich v. National Football League, 352 U.S. 445, 77 S.Ct. 390, 1 L.Ed.2d 456 (1956).

1. Motion to Dismiss for Lack of Jurisdiction

This is a case seeking damages and injunctive relief for alleged breach of contract, breach of warranty, and fraud in connection with plaintiff's purchase of certain assets from defendants under the terms and conditions of an Asset Purchase Agreement and Consulting Agreement, both executed September 19, 1984. The Asset Purchase Agreement was signed by plaintiff Micro-Medical Industries, Inc. through its then Vice-President, Ralph A. Sair, and by Robert Hatton, individually and as president of each of the defendant corporations, Industrial Care Corporation (ICC), Hospital Marketing Systems, Inc. (HMS) and Hospital and Surgical Systems, Inc. (HSS). The signatories to the Consulting Agreement were plaintiff Micro-Medical through its then Vice-President Ralph A. Sair, plaintiff's subsidiary, Micro-Scientific Corporation through its President Ralph A. Sair, and defendant Robert Hatton.

Diversity of citizenship between the named plaintiffs in this case is not in dispute. Plaintiff Micro-Medical claims to be a corporation incorporated in Delaware with its principal place of business in Illinois. Defendants, although initially raising the defense that Micro-Medical may have its principal place of business in Puerto Rico, have offered no evidence to contradict plaintiff's allegation, which is supported by the testimony and affidavits of Ralph Sair and accepted by the Court. Plaintiffs have also alleged that codefendants ICC, HMS and HSS are corporations organized and existing under the laws of the Commonwealth of Puerto Rico with principal places of business located within Puerto Rico, and that defendant Robert Hatton is a resident and citizen of Puerto Rico. Defendants have admitted that ICC, HMS and HSS are domestic corporations and, Robert Hatton has stated, by affidavit, that he was a resident of Puerto Rico.

The crux of defendant's jurisdictional attack lies in the assertion that plaintiff's Puerto Rican subsidiary, Micro-Scientific, is an indispensable party whose joinder to this action would destroy diversity and in whose absence this action should not proceed in equity and good conscience. F.R. C.P. 19(a) and 19(b). The identity and Puerto Rican citizenship of Micro-Scientific are not in dispute. The fact that Micro-Scientific is a wholly-owned subsidiary of the holding company Micro-Medical Industries, and a Delaware corporation with its principal place of business in Puerto Rico was confirmed by the testimony of Ralph Sair, President of Micro-Scientific. The issue before us is whether Micro-Scientific is an indispensable party and, if so, whether in equity and good conscience, this action should proceed among the parties before us nonetheless.

(a) Whether Micro-Scientific should be joined to this action if feasible.

Rule 19(a) of the Federal Rules of Civil Procedure provides a three-part test for determining whether the public and private interests in effective and efficient litigation require a person to be joined as a party if feasible. Under this test, Micro-Scientific must be joined if, in its absence, (1) complete relief cannot be accorded the present parties, (2) the disposition of the action would prejudice, as a practical matter, its ability to protect its own interest, or (3) any of the present parties would be subject to a substantial risk of multiple or inconsistent obligations by reason of its absence. F.R. C.P. 19(a); see Acton Co., Inc. of Mass. v. Bachman Foods, Inc., 668 F.2d 76, 78 (1st Cir.1982).

We do not find that any of these factors mandate the joinder of Micro-Scientific to the present action. As the Sair affidavit and Exhibit 1 to plaintiff's Opposition reveal, Micro-Scientific had no role in negotiating the Asset Purchase Agreement. After the signing of the Letter of Intent by plaintiff's parent's parent, Griffith Laboratories, Inc. (Griffith) and defendant Hatton, Micro-Medical was formed, in part to proceed with the asset purchase at issue. Micro-Medical alone signed the Asset Purchase Agreement and alone bears the purchaser's obligations detailed therein, including payment of the purchase price.¹ After being purchased from defendants, certain of the assets were then transferred from Micro-Medical to Micro-Scientific, as a contribution to capital. However, the rights given to Micro-Medical in the Asset Purchase Agreement are not shared by Micro-Scientific², as for example, the right to set off the purchase price with any idemnifiable damages, including those from a breach of the Consulting Agreement. On the other hand, in the Consulting Agreement, the rights to injunctive relief and damages for breach of the covenant not to compete contained in the Consulting Agreement, as well as other remedies not sought in this suit, are shared equally by the "Micro Companies" signatory to that agreement. From the foregoing, it appears that whatever rights of action Micro-Scientific may have as a signatory to the Consulting Agreement or even as a third party beneficiary to the Asset Purchase Agreement are shared by its parent Micro-Medical.

Being thus situated as parent and wholly owned subsidiary, members of a single enterprise engaged in a common business venture, it appears to us that the interests of the parent in this suit encompass those of the subsidiary. The close interrelationship between the subsidiary and its parent is evident. The subsidiary is wholly-owned by the parent. The president of the subsidiary is also president of the parent and one of three members of the parent's Board of Directors. From the close relationship between those closely-held companies and their shared interests in this cause of action, we cannot see how, as a practical matter, the disposition of this action would prejudice the subsidiary's interest. Furthermore, any relief granted the parent would likewise benefit the subsidiary. See Gadd v. Pearson, 351 F.Supp. 895 (M.D. Fla.1972).

In addition, we can find no substantial risk of prejudice to defendant as a result of Micro-Scientific's absence. As a wholly-owned subsidiary of plaintiff, Micro-Scientific most likely would be bound by Micro-Medical's suit under the rule that res judicata applies not only to actual parties, but also to those in privity with the parties. See Pan American Match Inc. v. Sears, Roebuck & Co., 454 F.2d 871 (1st Cir.), cert. denied, 409 U.S. 892, 93 S.Ct. 113, 34 L.Ed.2d 149 (1972). A finding of privity in a later suit would likely result from an evidentiary examination into the actual participation or control by Micro-Medical of the subsidiary's litigation. See, e.g., International Telephone & Telegraph Corp. v. General Telephone & Electric Corp., 380 F.Supp. 976 (M.D.N.C.1974), rev'd on other grounds per curiam, 527 F.2d 1162 (4th Cir.1975). Furthermore, any claim brought by Micro-Scientific pursuant to the contract with the defendants would necessarily meet the second essential element of res judicata; namely, that the claim be identical or closely related.

The existence of closely-related claims, the parent's control of any subsequent suit, and the identity of interest between the parent and its subsidiary would all mandate a later finding that Micro-Scientific has had its day in Court through this present action.³Cf. Acton Co. v. Bachman Foods, supra, 668 F.2d at 78. We therefore find that Micro-Scientific is not a party to be joined under Rule 19(a).

(b) Assuming Micro-Scientific should be joined, whether the action should proceed in equity and good conscience without Micro-Medical.

Assuming, arguendo, that Micro-Scientific qualifies as a party to be joined under Rule...