Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-4_02-cv-02336/USCOURTS-cand-4_02-cv-02336-9/pdf.json

Nature of Suit Code: 160
Nature of Suit: Stockholder's Suits
Cause of Action: 28:1332 Diversity-Breach of Fiduciary Duty

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United States District Court

For the Northern District of California

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IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

CARL MERNER and MERNER LAND COMPANY,

a California Corporation,

Plaintiffs,

v.

PETER W. MERNER,

Defendant.

 /

No. C 02-2336 CW

ORDER GRANTING

PLAINTIFFS' MOTION

FOR LEAVE TO FILE AN

AMENDED COMPLAINT

AND TO VACATE DATES

RELATED TO SUMMARY

JUDGMENT AND DENYING

DEFENDANT'S MOTION

FOR SUMMARY JUDGMENT

WITHOUT PREJUDICE TO

REFILING

Plaintiffs Carl Merner (Carl) and the Merner Land Company

(MLC) move for leave to file a First Amended Complaint (FAC) and to

vacate the pending dates related to Defendant's motion for summary

judgment. Defendant Peter Merner (Peter) opposes the motion. This

matter was taken under submission on the papers. Having considered

all of the papers filed by the parties, the Court GRANTS

Plaintiffs' motion for leave to file an amended complaint and to

vacate the pending dates related to Defendant's motion for summary

judgment (Docket No. 86) and DENIES Defendant's motion for summary

judgment without prejudice to refiling (Docket No. 92). 

Case 4:02-cv-02336-CW Document 100 Filed 01/22/07 Page 1 of 7
United States District Court

For the Northern District of California

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BACKGROUND

As stated in the Court's earlier orders on this case, Carl 

and Peter are the only two shareholders in MLC, a California

corporation. Carl owns 98.9% of the shares of stock in MLC and

Peter owns 1.1%. Pursuant to the consent of both Carl and Peter,

the corporation elected Subchapter S tax treatment. The

corporation would lose its Subchapter S status if any of its shares

were sold to a corporation. 

Carl claims that he offered to purchase Peter's shares for

fair market value as determined by a neutral third party or for

$115,000. Peter did not accept this offer. Instead Peter accepted

an offer from Catamount Corporation to purchase his shares for

$100,000, Catamount's commitment to pay all legal fees incident to

the sale, "sixty-five percent of the funds received from Merner

Land Company" after Catamount recoups the purchase price and its

legal fees, and an equity interest in Catamount. 

 In October, 2001, Peter informed Carl of his intent to sell

his shares to Catamount. In response, MLC's attorney informed

Peter by letter that such a sale would violate Peter's fiduciary

duty to the corporation and would result in legal action. On April

16, 2002, Peter nevertheless entered into a letter agreement with

Catamount to sell his shares. 

 Carl and MLC brought this action seeking to enjoin Peter from

selling his shares to Catamount or any other corporation. On May

21, 2002, the Court entered a temporary restraining order in favor

of Carl and MLC, and on January 8, 2003, the Court entered a

preliminary injunction in favor of Carl and MLC. The Court

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United States District Court

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reasoned that Carl and MLC had shown the requisite likelihood of

success on their claim that Peter's sale of MLC stock in a manner

that would deprive MLC of its Subchapter S tax status should be

permanently enjoined because such a sale would breach Peter's

fiduciary duty to MLC. 

 On July 3, 2003, the Court granted Plaintiffs' motion for

summary judgment, and enjoined Defendant from selling his shares of

MLC stock in a way that would cause MLC to lose its Subchapter S

tax status. The Clerk entered judgment. Peter appealed. The

Ninth Circuit, in an unpublished decision, held that as a minority

shareholder Peter did not owe a fiduciary duty to Carl or MLC that

would prevent him from selling his shares in MLC to an entity that

would cause MLC to lose its Subchapter S tax status. Merner v.

Merner, 129 Fed. Appx. 342 (9th Cir. March 18, 2005). The Ninth

Circuit reversed and remanded so that the Court could consider the

remaining claims in Carl's complaint. Id.

 In its July 3, 2003 Order, the Court noted that it did not

address Carl's and MLC's argument that they are entitled to summary

judgment and injunctive relief because Peter's sale of his stock in

MLC to a non-qualified entity would breach his implied promise not

to do so and violate the covenant of good faith and fair dealing. 

Therefore, the Court ordered the parties to file by September 30,

2005 a stipulated schedule for briefing on those points. After the

parties attempted to settle the case and several stipulated

extensions of time, the Court ordered that Plaintiffs file by

December 29, 2006 their motion for summary judgment and injunctive

relief and that Defendant file by January 29, 2007 his cross-motion

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for summary judgment and any opposition to Plaintiffs' motion.

On December 21, 2006, Plaintiffs filed this motion, seeking

leave to file an amended complaint and to vacate the pending dates

related to Defendant's motion for summary judgment. On December

28, 2006, Defendant filed his motion for summary judgment.

LEGAL STANDARD

 Federal Rule of Civil Procedure 15(a) provides that leave of

the court allowing a party to amend its pleading "shall be freely

given when justice so requires." Leave to amend lies within the

sound discretion of the trial court, which discretion "must be

guided by the underlying purpose of Rule 15--to facilitate

decisions on the merits rather than on the pleadings or

technicalities." United States v. Webb, 655 F.2d 977, 979 (9th

Cir. 1981). Thus, Rule 15's policy of favoring amendments to

pleadings should be applied with "extreme liberality." Id.; see

also DCD Programs, Ltd. v. Leighton, 833 F.2d 183, 186 (9th Cir.

1987). 

 Four factors are relevant to whether a motion for leave to

amend should be denied: undue delay, bad faith or dilatory motive,

futility of amendment, and prejudice to the opposing party. See

Foman v. Davis, 371 U.S. 178, 182 (1962). However, these factors

are not of equal weight; specifically, delay alone is insufficient

ground for denying leave to amend. See Webb, 655 F.2d at 980. 

Futility of amendment, by contrast, can alone justify the denial of

a motion for leave to amend. See Bonin v. Calderon, 59 F.3d 815,

845 (9th Cir. 1995). A proposed amendment is futile "if no set of

facts can be proved under the amendment to the pleadings that would

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constitute a valid and sufficient claim or defense." Miller v.

Rykoff-Sexton, Inc., 845 F.2d 209, 214 (9th Cir. 1988). In other

words, if the proposed amended complaint cannot withstand a motion

to dismiss, it should be denied as futile. See id. (citing 3 J.

Moore, Moore's Federal Practice § 15.08[4] (2d ed. 1974)). 

DISCUSSION

Plaintiffs argue that the Court should grant their motion for

leave to amend the complaint because they recently discovered that

Peter did not disclose his shares of MLC when he filed for

bankruptcy in 1992. Therefore, Plaintiffs argue, the shares are

still part of the bankruptcy estate under 11 U.S.C. § 554(d), and

Peter did not actually own the shares when he agreed to sell them

to Catamount in 2002. Further, Plaintiffs assert that any delay in

bringing the motion for leave to amend stems from Defendant's

refusal to answer questions about his bankruptcy case at his March,

2006 deposition. 

Under 11 U.S.C. § 554(c), "any property scheduled under

section 521(1) of this title not otherwise administered at the time

of the closing of a case is abandoned to the debtor." However,

"property of the estate that is not abandoned under this section

and that is not administered in the case remains property of the

estate." 11 U.S.C. § 554(d). Plaintiffs argue that Defendant's

shares were not properly scheduled so they could not have been

abandoned to him when the court closed the case. Therefore,

Plaintiffs contend that the shares are still property of the estate

and that Defendant did not have the authority to sell them. 

Plaintiffs argue, "Now the primary issue is not whether or not

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United States District Court

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Peter breached a contractual or other duty to the plaintiffs in

selling the Shares to Catamount, but whether he had anything to

sell at all." Motion at 7. To this end, Plaintiffs have added a

cause of action in their proposed FAC, seeking declaratory judgment

that Peter does not own any shares in MLC and has nothing to sell

to Catamount. 

Peter does not dispute that he failed to disclose the shares

in the bankruptcy proceedings. Rather, he argues that this Court

lacks jurisdiction to consider whether he owned the MLC shares in

2002, and that Plaintiffs' claim that he delayed their motion for

leave to amend the complaint is unfounded. 

Defendant argues that the United States Bankruptcy Court for

the Southern District of New York, where Defendant filed his 1992

bankruptcy petition, has exclusive jurisdiction over any property

that was not administered or abandoned. Plaintiffs counter, and

the Court agrees, that allowing them "to amend their complaint to

allege Peter’s lack of ownership in the share[s] does not require

this court to assert in rem jurisdiction over any asset of Peter’s

prior bankruptcy estate [because t]he ultimate disposition of the

asset will be determined by the bankruptcy court consistent with

the rights of the bankruptcy estate." Plaintiffs' Reply at 6. The

Court need not exercise jurisdiction over the shares in order to

resolve Plaintiffs' claim for declaratory relief. Even if the

Court finds that Defendant did not own the shares at the time he

purported to sell them, it can leave the determination of who does

own them to the bankruptcy court.

Defendant next argues that "Plaintiffs' motion is an untimely

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attempt to avoid summary judgment." Opposition at 6. However,

Plaintiffs clearly document that they acted reasonably quickly when

they learned of the bankruptcy filing and that Defendant himself

delayed the case by initially refusing to answer questions about

the bankruptcy proceedings. 

CONCLUSION

For the foregoing reasons, Plaintiffs' motion for leave to

amend the complaint and to vacate the dates related to the motion

for summary judgment is GRANTED (Docket No. 86). Defendant's

motion for summary judgment is DENIED without prejudice to refiling

according to a new briefing schedule to be set.

Plaintiffs shall file their amended complaint within one week

of the date of this order. Defendant shall respond within twenty 

days of service. A case management conference will be held on

Friday, March 30 at 1:30 p.m.

IT IS SO ORDERED.

1/22/07

Dated: ________________________ 

CLAUDIA WILKEN

United States District Judge

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