Davis Companies v. Emerald Casino Inc , 268 F.3d 477 ( 2001 )

In the
United States Court of Appeals
For the Seventh Circuit
No. 00-4042
Davis Companies, a California corporation,
Plaintiff-Appellant,
v.
Emerald Casino, Inc., formerly known as
HP, Inc., an Illinois corporation, Joseph
McQuaid, individually and as an agent of
HP, Inc., Donald F. Flynn, individually and
as an agent of HP, Inc., et al.,
Defendants-Appellees.
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 99 C 6822--Ronald A. Guzman, Judge.
Argued April 12, 2001--Decided September 28, 2001
Before Bauer, Manion, and Kanne, Circuit
Judges.
Manion, Circuit Judge. Davis Companies
filed a complaint against Emerald Casino,
Inc., formerly known as HP,/1 and three
of its officers, alleging breach of an
oral con-tract pursuant to which Davis
was to acquire stock ownership in HP. The
defendants moved to dismiss under Fed. R.
Civ. P. 12(b)(7) for failure to join
Richard Duchossois as a necessary and
indispensable party, claiming that he was
also a party to the alleged contract. The
district court granted the defendants’
motion, and since the joinder of
Duchossois would destroy complete
diversity the district court dismissed
the action. Davis appeals, and we
reverse.
I.
According to the Second Amended
Complaint,/2 on December 1, 1998, after
extensive negotiations, Davis Companies,
a California corporation, entered into an
oral contract with HP, an Illinois
corporation and owner of an Illinois
gaming license for the operation of
riverboat gambling. The oral contract was
negotiated for Davis by Michael Colleran,
its Executive Vice President, and for HP
by Kevin Flynn, a shareholder of HP and
son of Donald Flynn, an officer, director
and shareholder of HP.
The parties conditioned the oral
contract upon passage of legislation in
the Illinois General Assembly amending
the Illinois Riverboat Gambling Act, 230
ILCS 10/1 et seq., to permit HP’s license
to be used for a casino in Rosemont,
Illinois. Under the terms of the oral
contract, upon enactment of the amendment
HP would issue sufficient shares to Davis
to make Davis the owner of a 37.5%
interest in HP. In return, Davis would
make a $12 million capital contribution
to HP. Davis understood that HP would
also issue sufficient shares to make
Richard Duchossois, an Illinois resident,
owner of a 20% interest in HP, and to
make local investors collectively the
owner of a 5% interest in HP. The
issuance of shares to Duchossois and the
local investors was not a condition
precedent to the oral contract between
Davis and HP. After all shares were
issued (to Davis, Duchossois and the
local investors), the shares of the
existing HP shareholders as of December
1, 1998 would be diluted from a 100%
ownership to a 37.5% ownership interest.
Davis understood that HP intended to
raise a total of $30 million to be
distributed to HP’s original investors
who had lost their $30 million investment
in HP’s defunct riverboat operations.
Davis also understood that HP might issue
additional shares to third parties in the
future, and that the 37.5% shares of
Davis and the existing shareholders, the
20% interest of Duchossois and the 5%
interest of local investors would be
proportionally diluted. Davis also
alleged that on December 1, 1998, in a
separate oral contract, the Flynns
promised to take any and all steps to
assure HP’s performance of its
contractual obligation to Davis. The
Complaint describes in detail the
negotiations undertaken by a number of
parties to structure an overall plan to
open and support a casino in Rosemont.
According to the Complaint, immediately
following the December 1, 1998 meeting
between Flynn and Colleran, Flynn met
with Duchossois and other parties. At
that meeting, Flynn allegedly informed
the group that he and Colleran had
reached a deal and he also stated that he
was willing to sell Duchossois a 20%
interest in HP. Later that day,
Duchossois and others met with Colleran,
at which time Colleran also told
Duchossois that he and Flynn had agreed
to a deal. Duchossois confirmed to
Colleran that Flynn had told him he was
willing to sell him a 20% interest in HP.
The Illinois Riverboat Gambling Act was
amended, effective June 25, 1999, to
permit the holder of a dormant license to
renew and relocate its license to any
community willing to accept a casino. See
230 ILCS 10/11.2./3 Since HP owned the
only dormant license in the State of
Illinois, the legislation essentially
permitted HP to transfer its gaming
license to open a casino in Rosemont upon
Rosemont’s decision to approve the
relocation. Davis alleges that, once the
legislation passed, HP was obligated to
issue its shares to Davis and Davis was
obligated to pay $12 million to HP.
However, the defendants denied the
existence of any contracts with Davis.
Accordingly, Davis sued HP, the Flynns
and Joseph McQuaid, an officer and
director of HP, in federal district court
claiming breach of contract, equitable
estoppel, fraud and conspiracy, and
seeking specific performance or monetary
damages of not less than $250 million and
punitive damages. The defendants moved to
dismiss under Fed. R. Civ. P. 12(b)(7)
for failure to join Richard Duchossois as
a necessary and indispensable party under
Fed. R. Civ. P. 19. The defendants
claimed that Duchossois (then Chairman of
Arlington International Racecourse) was
also a party to the alleged contract.
After considering the pleadings and
extrinsic evidence, the district court
agreed./4 The district court concluded
that the contracts or options (both
Davis’s and Duchossois’s) were
interrelated and interdependent in
substance and operation, and that
Duchossois was therefore a necessary
party that should be joined under Rule
19(a).
Since the joinder of Duchossois would
destroy complete diversity, however, the
court then proceeded under Rule 19(b) to
determine whether in "equity and good
conscience" the case should be
dismissed./5 The court found that
Davis’s claims would significantly impact
Duchossois’s interests. Next, it found
that the defendants could suffer
prejudice as a result of the failure to
join Duchossois, because a later lawsuit
could subject them to multiple and
possibly inconsistent verdicts. Next, the
court found that it could not easily
fashion relief limited to Davis’s options
without delving into the alleged contract
between the defendants and Duchossois.
Lastly, the court noted that there was an
alternative forum, Illinois state court.
Accordingly, the district court granted
the defendants’ motion and dismissed the
action. Davis appeals.
II.
An initial matter concerns the
appropriate standard of review of the
district court’s Rule 19 dismissal. Davis
argues for de novo review while HP urges
us to adopt an abuse-of-discretion
standard. While we have noted the
advantages of the more deferential
standard, see Sokaogon Chippewa Cmty. v.
State of Wisconsin, Oneida County, 879
F.2d 300, 303-04 (7th Cir. 1989), we have
yet to decide on the appropriate
standard. See Thomas v. United States,
189 F.3d 662, 666 (7th Cir. 1999); United
States ex rel. Hall v. Tribal Dev. Corp.,
100 F.3d 476, 478 (7th Cir. 1996). That
decision need not be made today, however,
because we would reverse the district
court under either standard.
The purpose of Rule 19 under the Federal
Rules of Civil Procedure is "to permit
joinder of all materially interested
parties to a single lawsuit so as to
protect interested parties and avoid
waste of judicial resources." Moore v.
Ashland Oil, Inc., 901 F.2d 1445, 1447
(7th Cir. 1990). However, federal courts
are reluctant to dismiss for failure to
join where doing so deprives the
plaintiff of his choice of federal forum.
See Pasco, 637 F.2d at 501. Joinder under
Rule 19 is a two-step inquiry:
First, the court must determine whether a
party is one that should be joined if
feasible--called, in the old days, a
"necessary party." Fed. R. Civ. P. 19(a);
Hall, 100 F.3d at 478. . . . [I]f the
court concludes . . . that the party
should be included in the action but it
cannot be, it must go on to decide
whether the litigation can proceed at all
in the party’s absence. See Fed. R. Civ.
P. 19(b). If there is no way to structure
a judgment in the absence of the party
that will protect both the party’s own
rights and the rights of the existing
litigants, the unavailable party is
regarded as "indispensable" and the
action is subject to dismissal upon a
proper motion under Federal Rule of Civil
Procedure 12(b)(7).
See Thomas, 189 F.3d at 667.
To answer the first question, whether
Duchossois is a necessary party, under
Rule 19(a)/6, we must consider (1)
whether complete relief can be accorded
without joinder, (2) whether Duchossois’s
ability to protect his interest will be
impaired, and (3) whether the existing
parties will be subjected to a
substantial risk of multiple or
inconsistent obligations unless he is
joined. See Thomas, 189 F.3d at 667. The
district court concluded that complete
relief could not be accorded in
Duchossois’s absence, that he had an
interest in the present action which he
would be unable to protect without
joinder, and that HP would be subjected
to a substantial risk of multiple or
inconsistent obligations in his absence.
Granting the facts upon which the
district court based its Rule 19
determination, the issue is what legal
meaning those facts possess. To the
extent that the district court concluded
that Davis and Duchossois had
interdependent contracts (or options)
with HP, this is a legal conclusion that
we review de novo. See Janney Montgomery
Scott, Inc. v. Shepard Niles, Inc., 11
F.3d 399, 404 (3d Cir. 1993) (finding
that, to the extent a district court’s
Rule 19(a) determination is premised on a
conclusion of law, review is plenary).
In this case, it is unnecessary for us
to determine whether a contract actually
existed (whether between HP and Davis or
between HP and Duchossois) in order to
find that the alleged contract between HP
and Davis is independent from one between
HP and Duchossois. Based on the record
before us, the district court incorrectly
concluded that Davis and Duchossois had
interdependent contracts or options.
Instead, we conclude that the evidence
demonstrates that, no matter what
interest or relation he ultimately had
with HP, it was separate from Davis’s
alleged contract and therefore Duchossois
has no interest in the subject matter of
this lawsuit.
Duchossois was deposed during discovery
and testified that he had a "gentleman’s
agreement" for an option to acquire a 20%
interest in HP in the event HP’s license
was actually used in Rosemont. He
testified that the precise terms of the
option, such as price, were not agreed
to. Furthermore, he testified that the
"option" was never actually offered to
him. He stated that a few days after the
legislation was enacted, "[t]hey told us
then that they couldn’t make the offer.
They reneged on making the offer."
Duchossois testified that "there was a
breach of trust, breach of confidence, a
breach of a contract or breach of a
gentleman’s agreement." Duchossois
testified that "I wasn’t doing any
dealing with Colleran. We were entirely
separate. His deal with Kevin [Flynn] was
entirely separate from mine." In
discussing his involvement with the
passage of the gambling law amendment,
Duchossois testified that "if any
legislation was going to go through for
the villages that were benefitting by
Rosemont, for Rosemont, for the casinos,
for the harness people, the breeders, the
thoroughbred people and the race track,
everyone had to come together with some
sort of a consensus. . . . That had been
assumed from the very beginning that
everyone was going to pull their own
weight on the thing. There was no such
thing as I would be helping them, they
would be helping me; that wasn’t even
part of it. We were all going to be
working together in one coalition." Pl.
App. A57.
Duchossois’s attorney, David Filkin,
testified that he understood that
Duchossois "would be offered 20 percent
of the entity which owned the license of
the relocated riverboat." He further
testified that, in a meeting with Flynn,
Flynn did not say that Duchossois’s
ability to purchase 20% depended upon
whether Davis purchased 37.5% and vice-
versa.
Colleran testified that he discussed
Duchossois’s interest in the deal with
Flynn, but that "the deal for Duchossois
to have acquired an interest was really a
separate agreement between him and HP,
the way I understood it." In addition, he
testified that his "agreement with Kevin
Flynn was that Davis would receive a
37.5% interest for $12 million; and, you
know, what he agreed to with respect to
Duchossois and the 5% had to be up to
him. I had no agreement with him on that.
It was only with respect to what I could
speak for, which was the Davis Group."
Eugene Reineke, Davis’s principal
lobbyist for gaming legislation in
Illinois, testified similarly that the
deals were separate. Lastly, Marvin Davis
testified that he "had nothing to do with
Duchossois’s deal."
Following briefing on HP’s motion to
dismiss and after the close of discovery,
the district court granted HP’s motion to
compel Duchossois to produce a December
2, 1998 memorandum which had been
prepared by his lawyer, David Filkin (the
"Filkin Memo"), to which Duchossois had
asserted an attorney-client privilege.
The Filkin Memo summarized the December
1, 1998 meeting among Duchossois, Filkin
and Colleran. At the meeting, Colleran
stated that he had just come from a
meeting with Kevin Flynn wherein they had
allegedly negotiated the oral contract at
issue in this case. Filkin’s handwritten
notes from the meeting had already been
produced in discovery and both Filkin and
Duchossois were deposed on the notes and
their recollection of the meeting.
Finding that the Filkin Memo contained
nothing that was not already in the
handwritten notes, the district court
ordered its production. No party
requested that the court reopen discovery
to allow depositions on the Filkin Memo.
The district court relied heavily on the
Filkin Memo in granting HP’s motion to
dismiss under Rule 19. According to the
district court’s interpretation of that
memo, all of the parties at that meeting
considered Duchossois to be a party to
"whatever agreement they might reach."
The district court’s reliance on the
Filkin Memo to establish a tripartite or
interrelated deal was misplaced. The
Filkin Memo states that "Mike [Colleran]
stated that he and Kevin Flynn had just
agreed upon a deal structure as follows:
Marvin Davis 37.5%, Flynns 37.5%, R.L.
Duchossois 20%, Other 5%." The district
court concluded that this established the
interrelatedness of the deals. To the
extent that the Filkin Memo can be
interpreted to conflict with the
witnesses’ sworn deposition testimony,
the district court should have resolved
any "conflicts in the affidavits and
depositions submitted by the parties . .
. in favor of the plaintiff." Deluxe Ice
Cream Co. v. R.C.H. Tool Corp., 726 F.2d
1209, 1215 (7th Cir. 1984). Instead, the
district court resolved any conflicts
created by its interpretation of the
Filkin Memo in favor of the defendants.
Davis’s pleadings in no way indicate
that Duchossois was a party to their
contract, and indeed specifically state
that Duchossois’s own expected
participation was not a condition
precedent to the Davis/HP oral contract.
In addition, the overwhelming deposition
testimony establishes that whatever
interest he had, Duchossois specifically
denied being part of the alleged contract
between Davis and HP. The Filkin Memo
does not contradict this. On the record
before us, construing the evidence in the
light most favorable to the plaintiff, it
is clear that whatever his interest in
the Rosemont casino deal, it was not the
same as the contract Davis alleges to
have with HP. A number of parties clearly
worked together to garner support for the
Rosemont casino and to lobby the state
legislature. In those negotiations, it
would not be unusual for one party to
refer to other capital suppliers as
evidence that the deal would ultimately
be lucrative or successful. Even if the
negotiations were necessarily
interrelated, the deals were not
necessarily so. Thus, we conclude that
the contracts were not interdependent and
tripartite in nature. Whatever interest
Duchossois has in HP, it is separate from
the contract at issue before the court.
Indeed, Duchossois denies an interest
relating to the subject matter of this
lawsuit and under Rule 19(a) it is the
absent party that typically must claim
such an interest. See United States v.
Bowen, 172 F.3d 682, 689 (9th Cir. 1999)
(where absent party was aware of action
and claimed no interest, district court
did not err in finding joinder
unnecessary); Peregrine Myanmar Ltd. v.
Segal, 89 F.3d 41, 49 (2d Cir. 1996)
(accord).
Thus, while it is true that "a
contracting party is the paradigm of an
indispensable party," Hall, 100 F.3d at
479 (citation omitted), "[w]hen a person
is not a party to the contract in
litigation and has no rights or
obligations under that contract, even
though the absent party may be obligated
to abide by the result of the pending
action by another contract that is not at
issue, the absentee will not be regarded
as an indispensable party in a suit to
determine obligations under the disputed
contract . . . ." 7 Charles Wright,
Arthur Miller and Mary Kay Kane, Federal
Practice and Procedure Civil 3d, sec.
1613 at 197 (2001). In addition to
Duchossois there were no doubt a number
of other parties involved in and
certainly interested in the effort to
open a casino in Rosemont. Obviously the
litigation between Davis and HP would not
label these parties as necessary
litigants. Likewise, we decline to find
that Duchossois is a necessary party to
litigation between Davis and HP.
The defendants respond by arguing that
"complete relief" cannot be accorded
among the existing parties absent joinder
because any relief would require a
determination of the respective stock
ownership rights of HP’s shareholders,
Davis’s claimed rights and any right
Duchossois may claim. However, the term
"complete relief" refers only to "relief
between the persons already parties, and
not as between a party and the absent
person whose joinder is sought." Perrian
v. O’Grady, 958 F.2d 192, 196 (7th Cir.
1992) (citation omitted). The present
lawsuit concerns the alleged breach of
contract by HP and its liability to Davis
for damages caused by that breach. Here,
if HP prevails, Davis’s claims would be
completely resolved. If, on the other
hand, Davis prevails in this litigation,
the court need only determine, under the
contract at hand, the proper damages due
Davis. See Abel v. American Art Analog,
Inc., 838 F.2d 691, 695 (3d Cir. 1988)
(where partner brought suit for 30% share
of profits on his own behalf, and not on
behalf of the partnership, and because a
jury could easily calculate partner’s
rights and damages independently of other
partners, other partners were not
necessary parties). According complete
relief to Davis would not require
resolving every other collateral issue
relating to HP’s corporate structure.
As noted, Rule 19(a)(2)(i) requires us
to consider whether Duchossois’s ability
to protect his interest will be impaired.
Again, because we conclude that
Duchossois has no interest in the subject
matter of this particular lawsuit, his
ability to bring his own future lawsuit
to protect any individual claims will not
be impaired. Davis is not pursuing this
litigation on Duchossois’s behalf, and
does not allege to be in privity with
him. Accordingly, a decision for or
against Davis in this action should not
preclude any subsequent case filed by
Duchossois, as unlikely as that
litigation seems to be, given his
apparent unwillingness to join this
litigation. See Evergreen Park Nursing &
Convalescent Home, Inc. v. American
Equitable Assurance Co., 417 F.2d 1113,
1115 (7th Cir. 1969) (where separate
contracts created separate obligations,
decision in one case would not bind
absent parties in future cases).
Finally, Rule 19(a)(2)(ii) requires us
to consider whether the existing parties
will be subjected to a substantial risk
of multiple or inconsistent obligations
unless Duchossois is joined. The fact
that HP might be liable to Duchossois in
a future action does not create the
substantial risk of multiple or
inconsistent obligations. This is not a
case where a judgment imposing liability
on HP to Davis necessarily implies that
HP is also liable to Duchossois. There is
no overlap between the shares allegedly
offered to Davis and to Duchossois, and
therefore no inconsistent or multiple ob
ligations are possible. Once Davis’s suit
against HP is concluded, no further suits
between those two parties are possible.
Any subsequent liability of HP to
Duchossois is independent of liability
determined in the present lawsuit. And,
the risk of an additional lawsuit is
certainly insubstantial because
Duchossois is clearly disinclined to sue.
In closing, we note that the defendants
are unlikely to produce someone to
contradict Duchossois’s denial that he
had an interdependent agreement with HP
and Davis. Indeed, their entire defense
is premised on the fact that no contract
existed. However, this litigation
illustrates that the defendants would
like to have their cake and eat it too.
They would like the court to declare
Duchossois a contracting party for
purposes of dismissal from federal court,
yet will deny the existence of any
contract at all for purposes of the
underlying merits of the case. The
advantage of such a cross-current flows
only to HP, and it does not persuade us
that Duchossois must be joined as a
necessary party to this litigation. See
Pasco, 637 F.2d at 505. We also note that
HP is certainly not precluded from
presenting evidence relating to
Duchossois’s knowledge of the alleged
oral contract, as well as his involvement
in the deal. This is reinforced by the
fact that Duchossois has already given
testimony during discovery. See Perrian,
958 F.2d at 196 n.5.
Because we conclude that Duchossois is
not a necessary party pursuant to Rule
19(a), we need not examine the factors
articulated in Rule 19(b), id. at n.6,
and therefore REVERSE the judgment of the
district court and REMAND for further
proceedings.
FOOTNOTES
/1 On August 16, 1999, HP changed its corporate name
to Emerald Casino, Inc. However, we will refer to
the corporate defendant as HP throughout this
opinion.
/2 For purposes of a motion to dismiss for failure
to join a party under Rule 19, we accept the
allegations in the complaint as true. See Pasco
Int’l (London) Ltd. v. Stenograph Corp., 637 F.2d
496, 499 n.2 (7th Cir. 1980).
/3 The amendment also provided that any such relo-
cated licensee shall "attain a level of at least
20% minority person and female ownership, at
least 16% and 4% respectively . . . ." 230 ILCS
10/11.2(b).
/4 In ruling on a dismissal for lack of joinder of
an indispensable party, a court may go outside
the pleadings and look to extrinsic evidence. See
English v. Cowell, 10 F.3d 434, 437 (7th Cir.
1993); Capitol Leasing Co. v. Fed. Dep. Ins.
Corp., 999 F.2d 188, 191 (7th Cir. 1993).
/5 Rule 19(b) provides, in relevant part: "If a
person described in subdivision (a)(1)-(2) hereof
cannot be made a party, the court shall determine
whether in equity and good conscience the action
should proceed among the parties before it, or
should be dismissed, the absent person being thus
regarded as indispensable. The factors to be
considered by the court include: first, to what
extent a judgment rendered in the person’s ab-
sence 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 othermeasures, the preju-
dice 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 dis-
missed for nonjoinder." Fed. R. Civ. P. 19(b).
/6 Rule 19(a) provides, in relevant part: "A person
who is subject to service of process and whose
joinder will not deprive the court of jurisdic-
tion over the subject matter of the action shall
be joined as a party in the action if (1) in the
person’s absence complete relief cannot be ac-
corded among those already parties, or (2) the
person claims an interest relating to the subject
of the action and is so situated that the dispo-
sition 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, multi-
ple, or otherwise inconsistent obligations by
reason of the claimed interest. If the person has
not been so joined, the court shall order that
the person be made a party." Fed R. Civ. P.
19(a).