Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caed-2_05-cv-02486/USCOURTS-caed-2_05-cv-02486-0/pdf.json

Nature of Suit Code: 196
Nature of Suit: Franchise
Cause of Action: 28:1332 Diversity-Other Contract

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UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF CALIFORNIA

MAMMOTH HARDWARE & LUMBER,

INC., a California corporation,

NO. CIV. S-05-2486 LKK/JFM

Plaintiff,

v. O R D E R

ACE HARDWARE CORPORATION, a

Delaware corporation; and 

LEE DICKMAN, an individual,

Defendants.

 /

Plaintiff Mammoth Hardware & Lumber (owned by Ms. Nowell)

filed suit in state court against defendants Ace Hardware, Ace

employee Lee Dickman and 100 Does. The complaint alleges six

causes of action under California law. The first cause of action

is against Dickman, Ace, and the Does for intentional interference

with prospective economic advantage. The remaining causes of

action (not at issue in this motion) are for breach of the implied

covenants of good faith and fair dealing, tortious interference

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1 The facts are taken from the parties’ papers and the

complaint, they are not to be treated as final for anything beyond

this motion. 

2

with contract, and for violation of California Business and

Professions Code Sections 20020 and 20035. 

Defendants removed the case to this court based on diversity

jurisdiction asserting that Dickman was fraudulently joined. 

Plaintiff now moves to remand the case. 

I.

FACTS1

Plaintiff Mammoth Hardware & Lumber, Inc. entered into a

written franchise agreement with Ace Hardware, whereby plaintiff

was granted the right to do business in Mammoth Lakes, California,

as an "Ace Hardware Store." It sold hardware items, construction

materials, tools and related items in accordance with a marketing

plan prescribed in substantial part by Ace Hardware, hereafter,

"the contract". Pl.’s Br. in Supp. of Mot. to Remand at 2.

Plaintiff claims that the contract required Mammoth Hardware

to share privileged information with Ace Hardware, including any

changes or modification in the ownership of the store, leases,

proposed leases, financial statements, etc. Id. Plaintiff claims

that it complied with the disclosure terms of the contract by

releasing information to Ace Hardware as well as directly to

defendant Lee Dickman, an employee of Ace. Id. Because of this,

plaintiff asserts, the defendants were aware of plaintiff’s efforts

to sell their store to James and Elaine Smith. Id. Plaintiff

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alleges that these privileged communications were the sole basis

of defendants’ knowledge. Id.

Plaintiff alleges that, in insisting on attending a meeting

with the proposed buyers, Dickman represented to Mammoth that his

sole purpose in attending the meeting was to "evaluate" the

proposed buyers, under the terms of the contract. Id. at 3. It

claims that this statement was false and that Dickman instead used

the meeting to interfere with the proposed sale of Mammoth Hardware

by falsely advising the Smiths that it would be less expensive for

them to start up a new franchise with Ace than to purchase Mammoth

Hardware. Id. Plaintiff claims that it would have been more

expensive to start-up a new business than to purchase an

established local hardware store with substantial good will in the

community, and that the purpose of the statement was to prevent the

sale, and to steer the franchise toward High Country Lumber. Id.

James and Elaine Smith did not purchase Mammoth Hardware, and

plaintiffs allege that the sale was thwarted by the

misrepresentation and action of defendants Ace and Dickman.

Eventually, a franchise was granted by Ace to High Country Lumber.

Nowling Dec. at 17, ¶ 6.

Defendants claim that Dickman had no access to privileged

information, and that he attended the meeting with the Smiths only

because it was arranged by Ms. Nowling so that Ace could perform

a due diligence check on the prospective commercial purchase.

Defs.’ Opp’n at 3. They claim that at the meeting Dickman actually

informed the Smiths that “an existing store does have an

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established customer base and it is usually easier to obtain

financing, whereas opening a new store is generally riskier.”

Dickman Dec. at ¶ 8. 

II.

STANDARDS

A. FRAUDULENT JOINDER STANDARD

Civil actions not involving a federal question are removable to a

federal district court only if there is diversity of citizenship

between the parties. 28 U.S.C. § 1332(a)(1). Section 1332

requires that there be complete diversity; that is, each

plaintiff's citizenship must be diverse as to each defendant's

citizenship. Id. Nonetheless, a defendant may remove a civil

action that alleges claims against a non-diverse defendant when the

plaintiff has no basis for suing that defendant, or in other words,

when that defendant has been fraudulently joined. McCabe v.

General Foods Corp., 811 F.2d 1336, 1339 (9th Cir. 1987). 

"[F]raudulent joinder is a term of art. If the plaintiff

fails to state a cause of action against a resident defendant, and

the failure is obvious according to the settled rules of the state,

the joinder of the resident defendant is fraudulent." Ritchey v.

Upjohn Drug Co., 139 F.3d 1313, 1318 (9th Cir. 1998)(quoting

McCabe, 811 F.2d at 1339) (citations omitted). Where a non-diverse

defendant has been "fraudulently joined" to an otherwise completely

diverse case, that defendant is disregarded for diversity

jurisdiction purposes. See, e.g., Calero v. Unisys Corp., 271

F.Supp.2d 1172, 1176 (N.D. Cal. 2003). 

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On a motion to remand, the removing defendant faces a strong

presumption against removal, and bears the burden of establishing

that removal was proper by a preponderance of evidence. Sanchez

v. Monumental Life Ins. Co., 102 F.3d 398, 403-404 (9th Cir. 1996);

Gaus v. Miles, Inc., 980 F.2d 564, 567 (9th Cir. 1992). Thus, the

defendant carries a high burden of establishing that the nondiverse party was fraudulently joined. See Gaus, 980 F.2d at 564.

28 U.S.C. § 1447(c) provides that a case removed from state

court should be remanded if it appears that the case was removed

improvidently or without jurisdiction. Federal jurisdiction must

be rejected if there is any doubt as to the right of removal. Gaus,

980 F.2d at 566. 

In determining whether a non-diverse defendant has been

improperly joined, courts may look beyond the pleadings and examine

the factual record. McCabe, 811 F.2d at 1339. 

III.

ANALYSIS

As outlined above, defendants have a heavy burden to carry in

demonstrating that Dickman was fraudulently joined. They attempt

to meet this burden through three different arguments. First, they

claim that plaintiff’s complaint does not state a viable claim

against Dickman in his individual capacity. Second, they claim

that the complaint does not allege facts that amount to wrongful

conduct. Finally, they claim that even if the court reviews the

additional allegations made in plaintiffs brief that there is still

not sufficient evidence to support a claim. These arguments will

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2 Plaintiff reads the case to say that there was a wrongful

discharge claim in the complaint, but as stated in the case it is

not entirely clear what the exact allegations were against the

individual defendants. 

6

be addressed in turn. 

In support of the first argument defendants cite McCabe v.

General Foods Corp., 811 F.2d 1336, 1339 (9th Cir. 1987). They

assert McCabe stands for the proposition that when an agent acts,

at least in part, to benefit his principal, that his conduct is

privileged. The court in McCabe held that two individual

defendants could not be held liable if they were “motivated in

party by a desire to benefit [their] principal.” Id. (quoting Los

Angeles Airways, Inc. v. Davis, 687 F.2d 321, 328 (9th Cir. 1982)).

It appears that the plaintiff’s original complaint alleged wrongful

discharge against the individual defendants as well as the

company.2 The court found that their actions had been “in their

managerial capacity” and that the complaint had stated that the

actions were ratified by General Foods, but did not allege that

they acted in their own initiative. Id. 

Mammoth seeks to distinguish the case on the grounds that

there was contractual privity between the employer and the

plaintiff (but not plaintiff and co-workers) and that privity is

an essential element of a wrongful discharge claim. They claim

that privity is not required for a tort of interference with

prospective economic advantage. They further cite to California

Civil Code § 2343 as setting out when an agent, such as Dickman,

can be liable to third parties for their own wrongful conduct. The

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section, in its entirety, reads as follows:

AGENT'S RESPONSIBILITY TO THIRD PERSONS. One who assumes

to act as an agent is responsible to third persons as a

principal for his acts in the course of his agency, in

any of the following cases, and in no others:

1. When, with his consent, credit is given to him

personally in a transaction;

2. When he enters into a written contract in the name of

his principal, without believing, in good faith, that he

has authority to do so; or,

3. When his acts are wrongful in their nature.

Cal. Civ. Code § 2343 (emphasis added). The statute’s plain words

provide that if Dickman’s conduct was “wrongful”, he may be

individually liable for his actions. 

Defendants argue that “no law stands for the proposition that

an agent is liable for legal conduct occurring for the sole benefit

of the principal.” Defs.’ Br. in Opp’n to Mot. to Remand at 5. 

Given the statute, the court assumes defendants mean no case. 

While this may be true (although the fact that there is no law does

not make it the case one way or the other), plaintiff has alleged,

both in the complaint and in the additional information provided

with their motion to remand, that Dickman’s behavior did not

constitute “legal conduct.” Defendants do not address the above

statutory section at all in their opposition brief. 

The court has done a general review on the standard for agent

liability to third parties for torts committed while acting as an

agent to a principal. While it appears that plaintiff probably

has a weak case against Dickman, the standard of review here

requires that it be “obvious” that there is no possibility of

liability. A number of cases directly say that the rule is not

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clear although most lean against imposing liability. See Aalgaard

v. Merchants Nat. Bank, Inc., 224 Cal.App.3d 674, 685 (3d Dist.

1990) (finding that there is a “knot of authority” on the issue of

whether the privilege is absolute, but ultimately holding that if

there is no evidence that the defendant acted in self interest that

the privilege is intact even if it may be qualified); Graw v. Los

Angeles County Metropolitan Transp. Authority, 52 F. Supp. 2d 1152,

1155 (C.D. Cal. 1999) (finding that “there is no consensus of

California decisions” on the question of privilege, but ultimately

finding that the “manager's privilege applies if the manager acted

at least in part to benefit the company.”). 

It may be that the question of agent liability depends upon

the type of action being pursued. If the allegation is that the

agent committed a tort then under Civil Code § 2343, liability may

exist. See, e.g., California Jurisprudence 3d § 122 (“If a

tortious act has been committed by an agent acting under authority

of the principal, the fact that the principal is liable, including

liability arising from the principal's ratification, does not

exonerate the agent from liability. An agent's duty to the

principal does not preclude the agent's liability to third parties

foreseeably injured by his or her conduct. The agent becomes

personally liable for his or her own tortious acts even when

committed at the direction of the principal.”). 

In sum, defendants have not met their burden of showing that

Dickman is “obviously” not liable. Without a clear statement of

the law prohibiting application of liability to Dickman, this court

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cannot find that he was fraudulently joined. 

The second argument presented by defendants is that the

complaint does not allege facts amounting to “wrongful” conduct.

To establish a claim for interference with prospective economic

advantage, Mammoth must prove that Ace and/or Dickman engaged in

an independently wrongful act (outside of interference). As Korea

Supply Co. v. Lockheed Martin Corp. states, to satisfy the

independently wrongful prong plaintiff “must plead and prove as

part of its case-in-chief that the defendant not only knowingly

interfered with the Plaintiff’s expectancy, but engaged in conduct

that was wrongful by some legal measure other than the fact of

interference itself.” 29 Cal.4th 1134, 1158-59 (2003). The

complaint states that the conduct of Ace and Dickman was

“intentional, wrongful, and in violation of the implied covenants

of good faith and fair dealing in the Agreement. . .” Compl. at

¶ 11. It further states that the wrongful act by Dickman included

“discourag[ing] potential buyers of the BUSINESS from dealing with

MAMMOTH by advising such buyers that it would be cheaper and to

their economic advantage to start up a new operation with a new

franchise issued by ACE, than to purchase the existing BUSINESS.”

Compl. at ¶ 10. It thus appears from the face of the complaint

alone that plaintiff has alleged at least one act which it believes

to be wrongful. 

Plaintiff’s motion to remand further clarifies and sets out

three specific acts which are allegedly wrongful. First, it claims

that Dickman represented to plaintiff that he only wanted to meet

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with the Smiths in order to “evaluate” the proposed buyers.

Plaintiff claims that this representation was false and that

Dickman instead used the meeting and the privileged information he

had to “interfere with the proposed sale” by advising the Smiths

that it would be cheaper to start up a new franchise. Plaintiff

alleges that this statement was also false and that is purpose was

to thwart the sale and instead steer the Smiths towards the

franchise for High Country Lumber. 

Defendants claim that the above statements were not wrongful,

and rather were only a matter of opinion for which a person cannot

incur liability, citing Morningstart Inc. v. Superior Court, 23

Cal.App.4th 676, 696 (1994). Defendants characterization of that

case, however, states that “expressions of opinion or advice cannot

form the basis of an interference . . . unless those expressions

contain false or defamatory statements of fact.” Id. It appears

that this is exactly what plaintiff alleges. The same goes for

their citation of Savage v. Pacific Gas & Electric Co. which held

that a defendant cannot incur liability for truthful information

given. 21 Cal.App.4th 434, 449-50 (1993). Plaintiff alleges that

Dickman gave false statements of fact to the Smiths. 

Finally, defendants claim that even if the court looks beyond

the pleadings that plaintiff’s evidence does not support a viable

claim. They ask the court to review the credibility of various

sets of conflicting declarations. Plaintiff believes that Dickman

intentionally misrepresented facts to the Smiths in order to derail

their plan of purchasing Mammoth Hardware by disclosing privileged

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3 Based on the court’s disposition above, the court need not

reach the motion to dismiss now pending before the court.

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information and by alleging false information about the costs.

Dickman’s testimony states that he did not have any access to

privileged information, that the meeting he attended with the

Smiths was arranged by Ms. Nowling, and that he did not know the

asking price of Mammoth and therefore could not represent that the

purchase of a new franchise would be less expensive. 

Defendants also note that plaintiff fails to present any

competent evidence that Dickman’s statement was false by some

objective measure. The burden is on defendants, however, and

plaintiff has provided general statements about why they think

buying a store with “considerable goodwill” in the community would

be a wiser choice. In construing this evidence against removal,

it appears to be appropriate to allow the state court to determine

this issue on a motion to dismiss in that court. 

Accordingly, the motion to remand is GRANTED and the abovecaptioned case is hereby REMANDED to the Superior Court of the

State of California in and for the County of Mono.3 

IT IS SO ORDERED. 

DATED: February 3, 2006

/s/Lawrence K. Karlton 

LAWRENCE K. KARLTON

SENIOR JUDGE

UNITED STATES DISTRICT COURT

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