Court Opinion

ID: 202022
Source: CourtListenerOpinion
Date Created: 2011-02-07 05:42:59+00
Date Added: 2024-06-11T17:27:23.160444
License: Public Domain

Not For Publication in West's Federal Reporter
                 Citation Limited Pursuant to 1st Cir. Loc. R. 32.3

            United States Court of Appeals
                          For the First Circuit

No. 05-1064

     Z & B ENTERPRISES, INC., a corporation organized and existing
           under the laws of the Commonwealth of Puerto Rico;
        LUIS VALLE-FIGUEROA, EIMYE BLAS-OLIVER, and the conjugal
    partnership constituted between them; and LUIS VALLE-GONZÁLEZ,
         ALICIA FIGUEROA-MERCADO, and the conjugal partnership
                        constituted between them,

                         Plaintiffs, Appellants,

                                        v.

      TASTEE-FREEZ INTERNATIONAL, INC., a corporation organized
               and existing under the laws of Michigan,

                           Defendant, Appellee.

             APPEAL FROM THE UNITED STATES DISTRICT COURT
                    FOR THE DISTRICT OF PUERTO RICO
            [Hon. Héctor M. Laffitte, U.S. District Judge]

                                     Before

                        Torruella, Circuit Judge,
                           Dyk,* Circuit Judge,
                       and Howard, Circuit Judge.

     Luis F. Del Valle-Emmanuelli, with whom García & Fernández,
was on brief, for appellants.
     Diana M. Batlle-Barasorda, with whom Fiddler González &
Rodríguez PSC and Ricardo F. Casellas, were on brief, for appellee.

                              January 18, 2006

*
     Of the Federal Circuit, sitting by designation.
           TORRUELLA, Circuit Judge.      In this suit, Plaintiffs are

suing Defendant for deceptive and fraudulent conduct in the sale of

a Tastee-Freez franchise.     The district court granted Defendant's

motion to dismiss under Federal Rule of Civil Procedure 12(b)(7)

for failure to join an indispensable party.      Plaintiffs appeal the

district   court's   finding     that    the   missing   parties   are

indispensable.   We affirm.

                                  I.

           Tastee-Freez is "one of America's favorite establishments

for high quality fast food and delicious soft-serve products." See

Tastee-Freez Story, http://www.tastee-freez.com/products.htm. This

case concerns alleged deceptive and fraudulent activities arising

from the sale of a Tastee-Freez franchise in Aguadilla, Puerto

Rico.   Plaintiffs Luis Valle-Figueroa ("Valle-Figueroa") and Luis

Valle-González ("Valle-González") sought to purchase a Tastee-Freez

franchise, and they formed Z & B Enterprises, also a Plaintiff, to

be the owner of the franchise.          Additional Plaintiffs are the

spouses of Valle-Figueroa and Valle-González and their respective

conjugal partnerships.      Defendant is Tastee-Freez International

("TFI"), a corporation that grants Tastee-Freez franchises to

franchisees.

           In April 2001, Plaintiffs commenced negotiations with

J.F., Inc., ("JF") to purchase the Tastee-Freez franchise in

Aguadilla owned by JF.   Plaintiffs and JF entered into a contract

                                  -2-
where   Plaintiffs    would        be    required       to    pay     about     $800,000.

Plaintiffs paid JF $191,400, although it is not clear if this was

an initial installment or payment for an option to purchase.                             In

June 2001, Plaintiffs paid the balance, and JF advised Plaintiffs

that they had the rights to operate the Aguadilla Tastee-Freez.

Plaintiffs    were   never     presented        with         and    never     signed    the

Restaurant License Agreement that is normally entered into by

franchise owners and TFI.

            Plaintiffs allege that they were forced to enter into an

Account Executive Agreement with Auspiciadora TF, Inc., ("ATF"),

but does not state how they were forced.                ATF and/or JF also forced

Plaintiffs to enter into other agreements and contracts.                             These

agreements    and    contracts          violated    TFI's          Restaurant     License

Agreement and rules established by the Federal Trade Commission

("FTC").     It was not until after these agreements and contracts

were entered into that TFI, ATF, or JF presented Plaintiffs with

the disclosures required by the FTC and/or TFI.

            Plaintiffs      were    hindered       in   the        operation    of     their

Aguadilla Tastee-Freez by a lack of support from TFI, ATF, and JF.

TFI   did   not   fulfill    its    obligations         to     provide      advertising,

training programs, and promotions.              Although Plaintiffs had never

signed a Restaurant License Agreement, TFI cashed checks written by

Plaintiffs, and TFI invited Plaintiffs to attend a Tastee-Freez

                                          -3-
conference.   The franchise lost money, and Plaintiffs shut it down

on April 30, 2001.

          Plaintiffs filed suit in Puerto Rico Commonwealth Court

against ATF and JF, and this suit is still pending.1     Plaintiffs

filed another suit in federal district court against TFI, asserting

several grounds for TFI's liability. First, Plaintiffs allege that

TFI is liable for the actions of ATF and JF because ATF and JF are

its agents, and TFI ratified or authorized their actions.   Second,

Plaintiffs claim that TFI is liable under the indemnity provision

of the Restaurant License Agreement that Plaintiffs never signed.

Finally, Plaintiffs claim that TFI failed to support the franchise

and make required disclosures.        In this suit, Plaintiffs seek

rescission of the contracts they signed with ATF and JF.

          TFI moved to dismiss Plaintiffs' complaint for failure to

state a claim and for failure to join indispensable parties ATF and

JF.   A federal magistrate judge denied TFI's motion to dismiss.

The district court rejected the magistrate's recommendation and

found that ATF and JF were indispensable parties under Federal Rule

of Civil Procedure Rule 19.      The district court granted TFI's

1
   Plaintiffs stated in their brief that a default judgment had
been entered against ATF and JF in commonwealth court.         TFI,
however, moved to supplement the record with documents showing that
no judgment has been entered against ATF and JF in commonwealth
court, and Plaintiffs did not respond to this motion.      We take
judicial notice that no default judgment has been entered against
ATF and JF in commonwealth court. White v. Gittens, 121 F.3d 803,
805 n.1 (1st Cir. 1997).

                                -4-
motion to dismiss under Federal Rule of Civil Procedure 12(b)(7),

and Plaintiffs appeal.

                                        II.

              The joinder of parties is controlled by Rule 19 of the

Federal Rules of Civil Procedure.                "The Rule furthers several

related policies, including the public interest in preventing

multiple and repetitive litigation, the interest of the present

parties in obtaining complete and effective relief in a single

action, and the interest of absentees in avoiding the possible

prejudicial effect of deciding the case without them."                 Acton Co.

of Massachusetts v. Bachman Foods, Inc., 668 F.2d 76, 78 (1st Cir.

1982).    Rule 19 defines a two-step process.                 In the first step

under    Rule    19(a),   the   court    determines     whether    a   party   is

necessary, i.e., one who must be joined if feasible to do so.

Joinder is not feasible if it will deprive the court of subject

matter jurisdiction.       If the party is necessary but joinder is not

feasible, the court must then determine under Rule 19(b) whether

the   party     is   indispensable   or       whether   "in   equity   and   good

conscience the action should proceed among the parties before it."

Fed. R. Civ. P. 19(b).

                                        A.

              The parties dispute the standard of review we should

apply to the district court's determination that ATF and JF are

indispensable parties under Rule 19.            Plaintiffs erroneously argue

                                        -5-
that we should review this determination de novo, because the

district court ultimately dismissed the case for lack of subject

matter jurisdiction.   While a district court's decision to dismiss

for lack of subject matter jurisdiction is reviewed de novo, this

standard of review clearly does not apply to all determinations by

the district court leading up to the dismissal.     See United States

v. San Juan Bay Marina, 239 F.3d 400, 403 (1st Cir. 2001).

          Defendant correctly notes that our standard of review

under Rule 19(b) is abuse of discretion.    Id.   Defendant ignores,

however, that a necessary precursor to a decision under Rule 19(b)

is a decision under Rule 19(a).       Id. at 405.    We have yet to

determine whether abuse of discretion or de novo review is the

appropriate standard of review for district court decisions under

Rule 19(a).   Id. at 403.      Because we would come to the same

conclusion under either standard of review, we need not and do not

decide this issue here.

                                 B.

          We first consider whether ATF and JF are necessary

parties under Rule 19(a).   Necessary parties are those "who ought

to be made parties, in order that the court may act on that rule

which requires it to decide on, and finally determine the entire

controversy, and do complete justice, by adjusting all the rights

involved in it."   Shields v. Barrow, 58 U.S. 130, 139 (1855).   "[A]

court essentially will decide whether considerations of efficiency

                                -6-
and fairness, growing out of the particular circumstances of the

case, require that a particular person be joined as a party."

Pujol v. Shearson/American Express, Inc., 877 F.2d 132, 134 (1st

Cir. 1989).

          In   Plaintiffs'   vaguely-worded       Complaint,    they   seek

recovery from TFI primarily for acts of its alleged agents.             The

complaint does not identify the agents by name or the basis of the

agency relationship, but the parties' briefs identify the alleged

agents as ATF and JF.   Before turning to the text of Rule 19, it is

fruitful to consider the relationships between the present and

absent parties, and Plaintiffs' theories for imposing liability

upon TFI for the actions of its alleged agents.

          First, virtually all of the affirmative acts that caused

harm to the Plaintiffs were done by ATF or JF.           It was ATF and JF

that   "provided     false    and         misleading     information    and

representations" and "deceived and misled plaintiffs into signing

contracts."    In contrast, the alleged involvement by TFI is much

less clear and arises from the failure to act and what it should

have known.    Plaintiffs do allege that TFI failed to comply with

FTC rules regulating franchise agreements.             Although TFI cashed

Plaintiff's checks, Plaintiffs and TFI never entered into an

explicit franchise agreement, and thus it is not clear whether TFI

was obligated to comply with these FTC rules.             Plaintiffs state

that TFI should have been aware of the deceptive practices of ATF

                                    -7-
and JF but never explains why.   It appears that the presence of ATF

and JF "is critical to the disposition of the important issues in

the litigation."    Freeman v. Northwest Acceptance Corp., 754 F.2d

553, 559 (5th Cir. 1985) (internal quotation marks omitted).

           Second, Plaintiffs assert that TFI is liable for the

actions of ATF and JF, because ATF and JF were acting as agents on

behalf of TFI.     TFI denies that ATF and JF were its agents, and

even if they were, they were acting outside the scope of the agency

relationship.    Plaintiff has not put forth any evidence of an

agency relationship between TFI and ATF or JF, and the Restaurant

License Agreement between TFI and JF explicitly states that JF is

not TFI's agent.

           Third, Plaintiffs assert that TFI's liability arises from

the indemnity provision of the Restaurant License Agreement.    The

Restaurant License Agreement requires TFI to indemnify a franchisee

for "any obligations or liability for damages attributable to

agreements, representations or warranties of or authorized by

[TFI]" or "caused by the negligence or willful actions of [TFI]."

Plaintiffs' argument is difficult to understand because Plaintiffs

never state whom TFI is obligated to indemnify and for what

reasons.   It is undisputed that JF signed a Restaurant License

Agreement with TFI.    Under certain circumstances, the Restaurant

License Agreement could thus require TFI to indemnify JF for

damages incurred by JF.    In this situation, only JF could invoke

                                 -8-
the indemnity provision of the contract.           It is also undisputed

that Plaintiffs did not sign a Restaurant License Agreement with

TFI.   Even    if   other   circumstances    effectively       bound   TFI   and

Plaintiffs to the Restaurant License Agreement, most of the acts

causing harm to Plaintiffs and requiring indemnification were done

by ATF and JF, not TFI.        ATF and JF are thus active participants

and "more than . . . key witness[es] whose testimony would be of

inestimable value."     Id.

            Plaintiffs argue that ATF and JF should not be considered

necessary parties because TFI could join them as third-party

defendants. Plaintiff is correct that TFI could implead ATF and JF

as third-party defendants without breaking this court's diversity

jurisdiction even though Plaintiffs, ATF, and JF are all citizens

of Puerto Rico.     See Owen Equipment & Erection Co. v. Kroger, 437

U.S. 365, 370 (1978).         Disregarding the fact that TFI is by no

means required to implead ATF and JF, even if TFI did implead ATF

and JF they would be only third-party defendants and not principal

defendants in this suit.       As a result, Plaintiffs could not assert

claims against ATF and JF.         See id. at 377.       If ATF and JF are

necessary   parties   in    this   suit,   then   they   are    necessary     as

defendants and not as third-party defendants.

            We now consider the factors enumerated in Rule 19(a).              A

party is necessary under Rule 19(a)

            if (1) in the person's absence complete relief
            cannot be accorded among those already

                                    -9-
            parties, or (2) the person claims an interest
            relating to the subject of the action and is
            so situated that the disposition of the action
            in the person's absence may (i) as a practical
            matter impair or impede the person's ability
            to protect that interest or (ii) leave any of
            the persons already parties subject to a
            substantial    risk   of   incurring   double,
            multiple,     or    otherwise     inconsistent
            obligations by reason of the claimed interest.

Fed. R. Civ. P. 19(a).     To be necessary, a party need only satisfy

one of these factors.     We find that two of these factors show that

ATF and JF are necessary parties who ought to be joined if

feasible.

            First, we may not be able to grant complete relief to

Plaintiffs in the absence of ATF and JF.         Plaintiffs are seeking

rescission of contracts they made with ATF and JF.         If this case

were to proceed without ATF and JF, they would not be bound by a

judgment    concerning   the   invalidity   or   enforceability   of   the

contracts to which they were parties.        This would be a waste of

judicial resources.      "The interests that are being furthered [by

Rule 19(a)(1)] are not only those of the parties, but also that of

the public in avoiding repeated lawsuits on the same essential

subject matter."    Fed. R. Civ. P. 19 advisory committee's note.

            Second, TFI could be subject to inconsistent or double

obligations.    Plaintiffs have filed a suit against ATF and JF in

commonwealth court. It is possible that the federal district court

could find that TFI is not liable to Plaintiffs, but that the

commonwealth court could find that ATF and JF are liable to

                                  -10-
Plaintiffs.    Then TFI might be liable at least to JF because of the

indemnity     provision    in    the     Restaurant     License   Agreement.

Alternatively, the commonwealth court could find that ATF and JF

are liable to Plaintiffs, and the federal court could find that TFI

is liable to Plaintiffs.        JF could then file suit against TFI for

indemnity, thus subjecting TFI to a double obligation.

                                        C.

            Under Rule 19(a), a necessary party is to be joined as

long as it is feasible to do so.              Joinder is not feasible if it

would deprive the court of subject matter jurisdiction.            Plaintiff

is a citizen of Puerto Rico, Defendant TFI is a citizen of

Michigan, and the amount in controversy exceeds $75,000.               Without

ATF and JF, this court thus has diversity jurisdiction under 28

U.S.C. § 1332.       ATF and JF are also citizens of Puerto Rico.

Joining ATF and JF as defendants in this suit would break complete

diversity     and   thus   deprive      this    court   of   subject    matter

jurisdiction.       Plaintiffs do not contend that the doctrine of

supplemental jurisdiction extends our jurisdiction to include ATF

and JF as defendants.       See Acton, 668 F.2d at 79-80; 28 U.S.C.

§ 1367(b).

                                        D.

            Finally, since ATF and JF are necessary parties but

joinder is not feasible, we must "determine whether in equity and

good conscience the action should proceed" without ATF and JF as

                                       -11-
defendants.    Fed. R. Civ. P. 19(b).      If we cannot proceed without

ATF and JF, then they are indispensable parties.         Rule 19(b) gives

four non-exclusive factors for courts to consider in making this

determination:

            [F]irst, to what extent a judgment rendered in
            the person's absence might be prejudicial to
            the person or those already parties; second,
            the extent to which, by protective provisions
            in the judgment, by the shaping of relief, or
            other measures, the prejudice can be lessened
            or avoided; third, whether a judgment rendered
            in the person's absence will be adequate;
            fourth, whether the plaintiff will have an
            adequate remedy if the action is dismissed for
            nonjoinder.

Fed. R. Civ. P. 19(b).     Applying these four factors, we find that

ATF and JF are indispensable parties.

            For the first factor, we already discussed above how

proceeding to judgment without ATF and JF could be prejudicial to

TFI,   as   TFI   could   be   subjected   to   double   or   inconsistent

obligations.      This factor weighs in favor of finding ATF and JF

indispensable.

            The second factor is whether this prejudice may somehow

be lessened by the court's shaping of the potential verdicts.

Plaintiffs proposed a one-sentence solution for shaping relief to

lessen the prejudice to TFI:

            [P]ursuant to the indemnity clause of the
            franchise agreement, [TFI could be made
            liable] for any damages attributable to the
            agreements, representations or warranties of
            or authorized by TFI, specifically providing
            that ATF and JF are not bound by such a

                                   -12-
            judgment because they cannot be liable under
            the indemnity clause.

Plaintiffs' proposition does not prevent TFI from being subjected

to double or inconsistent obligations, and we do not see any manner

of shaping relief that would prevent this from occurring.

            The third factor is whether a judgment rendered in the

absence of ATF and JF is likely to be adequate.                      This factor

includes "the interest of the courts and the public in complete,

consistent, and efficient settlement of controversies."                  Provident

Tradesmens Bank & Trust Co. v. Patterson, 390 U.S. 102, 111 (1968).

ATF and JF are the principal actors in this lawsuit and could be

the only entities liable to Plaintiffs.              Alternatively, if TFI is

liable to Plaintiffs, ATF and JF could in turn be liable to TFI.

The absence of ATF and JF could thus prevent complete relief to the

parties.    For the same reasoning, the outcome could be inefficient

as   a   further   lawsuit      could   be     necessary   that    would    require

relitigating nearly identical issues.             Finally, because Plaintiffs

are suing ATF and JF in commonwealth court, any judgment made by a

federal    court   could   be    inconsistent      with    the    outcome   in   the

commonwealth court.

            Finally,   the      last    factor     is   whether     an   adequate,

alternative forum is available to the Plaintiffs.                  Plaintiffs can

join TFI, ATF, and JF as defendants in a suit in commonwealth

court.     Plaintiffs have not given any reason as to why the

commonwealth court would be an inadequate alternative, and we see

                                        -13-
no reason to believe that the commonwealth court would be an

inadequate forum.

          Considering the four factors together, it is clear that

ATF and JF are indispensable parties in this lawsuit.   A judgment

in the absence of ATF and JF could be prejudicial to TFI, relief

cannot be shaped to avoid this prejudice, a judgment rendered in

the absence of ATF and JF is unlikely to be adequate, and the

commonwealth court provides an adequate remedy for Plaintiffs.

"Equity and good conscience" require us to dismiss this lawsuit for

failure to join indispensable parties ATF and JF.

                               III.

          For the foregoing reasons, the district court's decision

is affirmed.

          Affirmed.

                               -14-