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Gardner v. Larkin

United States District Court, D. Rhode Island

November 13, 2019

JOHN GARDNER, IV, and DAVID GARDNER, Plaintiffs/Counter Defendants,
JAMES R. LARKIN, individually and as the Managing Member of BluShield Window Systems, LLC, and BLUSHIELD WINDOW SYSTEMS, LLC, Defendants/Third-Party Plaintiffs/Counter Claimants,



         Pending before the Court is a motion to dismiss (ECF No. 58) James Larkin's Verified Amended Counterclaim and Third-Party Complaint (ECF No. 41) (the “Larkin Pleading”).[1] The motion is brought by Counterclaim Defendants John Gardner IV (“Johnny”) and David Gardner, as well as by Third-Party Defendant John Gardner III (“John Sr.”).[2] The Gardners seek dismissal of every Count still pending[3] in the Larkin Pleading; these are as follows: Count II - Temporary Receivership / Corporate Deadlock; Count III - Breach of Fiduciary Duty / Corporate Freeze Out; Count IV - Inspection of Books and Records; Count V - Breach of Contract, Reinstatement and Unjust Enrichment; Count VI - Contract Formation (Declaratory Judgment); and Count VII - Shareholder's Election to Purchase (Declaratory Judgment / Injunction). Larkin pursues each of these Counts by counterclaim against David and Johnny and by third-party complaint against John Sr.

         The Gardners argue that Counts II, III and IV must be dismissed as moot pursuant to Fed.R.Civ.P. 12(b)(1). They contend that their filing on June 11, 2019, of “elections” pursuant to R.I. Gen. Laws § 7-1.2-1315 to force a buy-out of Larkin's ownership interests in Custom Built, Inc. (“CBI”), and Custom Built Window Manufacturing, LLC (“CBWM”), terminated Larkin's status as an owner of CBI and CBWM and eliminated any basis for the forward-looking relief sought in those causes of action. Turning to Counts V, VI and VII, the Gardners challenge the plausibility of Larkin's allegations pursuant to Fed.R.Civ.P. 12(b)(6), including that Counts VI and VII fail to allege plausible claims for declaratory relief. The Gardners also assert that Larkin's counterclaims all fail to comply with Fed.R.Civ.P. 13(a) because they do not arise from the same transaction or occurrence as Plaintiffs' claims, and that Larkin's third-party complaint against John Sr. violates Fed.R.Civ.P. 14(a) since it lacks a theory of secondary liability.

         Larkin counters that the Gardners' § 1315 buy-out elections do not moot any of his counterclaims because the validity, vel non, of the Gardners' buy-out elections is a live controversy animating Count VII (which asks the Court to declare the parties' rights under § 1315), as well as giving rise to the need for a temporary receiver pendente lite for the duration of the persisting deadlock in CBI and CBWM as sought by Count II, to his entitlement to reinstatement and his salary as sought by Count III, and to his ongoing need for access to the books and records of CBI and CBWM as sought by Count IV. In any event, Counts III and IV are not moot because they also seek money damages based on the Gardners' conduct prior to the filing of the election. As to Count V, Larkin asserts that the pleading contains sufficient factual detail to render plausible his claim to employment and a salary, which the Gardners breached, while Counts VI and VII plausibly present valid subjects for declaratory relief because they are grounded in live controversies relating to the Gardner/Larkin business agreements and the Gardners' § 1315 buy-out rights. Finally, Larkin argues that the Gardners misread the Rules governing joinder, and that joinder of all three Gardners as defendants on the claims asserted against them is procedurally proper under Fed.R.Civ.P. 13(b) and (h), 14, 19 and 20.

         The Gardners' motion to dismiss has been referred to me for report and recommendation. 28 U.S.C. § 636(b)(1)(B). For the reasons that follow, I recommend that the motion be denied.

         I. BACKGROUND[4]

         Larkin met the Gardners in February 2017. Larkin Pleading ¶ 13. Before then, Larkin had developed a background in sales of window systems and established Blushield Window Systems LLC (“Blushield”), while the Gardners (together with other Gardner family members) had been running their struggling family-owned window business, Custom Built Window and Doors Systems, Inc., the predecessor of CBI and CBWM. Id. ¶¶ 3-4, 10, 12. Larkin and the Gardners met multiple times during the spring of 2017 and ultimately formed a business relationship. Id. ¶¶ 13-14. Larkin applied his sales skills to CBI, and based on the positive results, the Gardners transferred him 33.5% of the outstanding common stock of CBI in May 2017. Id.

         In the course of the Gardner/Larkin negotiations, on August 11, 2017, Larkin, Johnny Gardner and David Gardner (but not John Sr.) signed a document titled “Ownership Agreement, ” which Larkin drafted. Id. ¶ 17; ECF No. 41-2 (“Ex. 2”). According to this document, Larkin would receive a 50% ownership interest in CBI and CBWM. Ex. 2. In exchange, the “Ownership Agreement” provides that Larkin would transfer ownership of Blushield to CBWM. ECF No. 6 ¶ 15. Larkin alleges that the “Ownership Agreement” was a mere outline of an agreement that the parties intended to later formalize and that, after August 11, 2017, their negotiations continued and the concept underlying their relationship profoundly changed. Larkin Pleading ¶¶ 17-19. Then, on October 31, 2017, Larkin and the Gardners executed the formal agreements; pursuant to these final documents, which superseded the concept embodied in the “Ownership Agreement, ” Larkin became a 50% owner of CBI and CBWM and Blushield was not mentioned at all. Id. ¶¶ 20-21. With no contractual commitment to do so, Larkin did not transfer Blushield to CBWM. Id. ¶ 22; see ECF Nos. 41-3 (“Ex. 3”), 41-4 (“Ex. 4”).

         After October 31, 2017, Larkin provided valuable services to the two entities. Larkin Pleading ¶ 59. However, the Gardners embarked on an incremental course of oppressive conduct, freezing-out Larkin as an owner, cutting off his salary and then his employment; this course of oppressive, illegal and fraudulent conduct culminated in the delivery of a letter written by Johnny Gardner that informed Larkin that he was locked him out of the premises and was cut off completely from access to the books and records. Id. ¶¶ 23-30. The Gardners also refused to convene meetings of CBI and CBWM as required by their respective documents. Id. ¶ 31. With the Gardner/Larkin relationship in tatters and CBI and CBWM deadlocked, the Gardners initiated this case in March 2019 seeking to compel the transfer to CBWM of what they contend is its valid ownership interest in Blushield based on the “Ownership Agreement.” Id. ¶¶ 23-25; see ECF No. 6.

         In Count II of the Larkin Pleading, Larkin states that the division between him (a 50% owner of CBI and CBWM) and the Gardners (collectively the other 50%) has resulted in deadlock in the management of the entities because neither can properly elect management in accordance with their respective organizational documents; as a remedy, Larkin asks the Court to appoint a temporary receiver pendente lite, a remedy contemplated by R.I. Gen. Laws § 7-1.2-1323 (if grounds for liquidation, such as deadlock, are established, but it is also established that liquidation would not be appropriate, court may appoint receiver). See Larkin Pleading ¶¶ 42-43. Count III avers that the Gardners breached their fiduciary duty to Larkin in contravention of his rights and reasonable expectations as an owner, deprived him of employment and his corporate office, took unauthorized action without the required approval, wasted corporate assets, withheld financial information, prevented Larkin from participating in the companies and barred him from the premises of CBI and CBWM. Id. ¶ 47. Count IV is based on the Gardners' refusal to allow Larkin to access CBI and CBWM's books and records, including that this action has impaired Larkin's ability to exercise his rights under R.I. Gen. Laws § 7-1.2-1315 (the buyout statute). Larkin Pleading ¶¶ 53-54, 70.

         In Count V, Larkin asserts that the Gardners failed to pay him sufficiently, and ultimately discontinued his salary and health benefits completely, even as he had been and continued to provide valuable services, all in contravention of Larkin's view of the parties' understandings in executing the final documents on October 31, 2017. Id. ¶¶ 56-58. Count VI seeks a judicial declaration finding that the “Ownership Agreement” signed on August 11, 2017, does not constitute an enforceable agreement implicating Larkin's ownership of Blushield. Id. ¶ 63. And Count VII requests that this Court declare the meaning of R.I. Gen. Laws § 7-1.2-1315 (the buyout statute) as applied in the context of this case, including that the Larkin Pleading does not constitute a “petition for dissolution of a corporation” so that the buy-out election right has not been triggered, that the Gardners should be estopped from exercising the right of buy-out by their inequitable conduct, and that, if and when a petition for dissolution is ever filed, Larkin has the same right to elect to buy-out as the Gardners have. Id. ¶¶ 65-69.


         A. Fed.R.Civ.P. 12(b)(1) Mootness Challenge to Counts II, II and IV

         The Gardners' first line of attack is based on mootness. They argue for dismissal based on the lack of subject matter jurisdiction pursuant to Fed.R.Civ.P. 12(b)(1) because there is no case or controversy presented by Counts II, III or IV as a result of the Gardners' June 11, 2019, filing of elections pursuant to R.I. Gen. Laws § 7-1.2-1315 to buy-out Larkin's ownership interests in CBI and CBWM after Larkin filed the Larkin Pleading. The Gardners contend that the election erases any forward-looking live issue regarding corporate deadlock (Count II), corporate freeze out (Count III) or inspection of books and records (Count IV). In so doing, they rely on the provision of § 1315, which states: “The petitioner is entitled to interest . . . on the purchase price of the shares from the date of the filing of the election to purchase the shares, and all other rights of the petitioner as owner of the shares terminate on that date.” Id. (emphasis supplied).

         The constitutional requirement of a case or controversy “was designed to ensure that federal courts decide only disputes of ‘a Judiciary nature,' thereby prohibiting advisory opinions[.]” Gilday v. Dubois, 124 F.3d 277, 295 (1st Cir. 1997) (quoting M. Farrand, 2 Recordsof the Federal Convention of 1787, at 430 (1911)); Operation Clean Gov't v. R.I. Ethics Comm'n, 315 F.Supp.2d 187, 193 (D.R.I. 2004) (“federal courts do not issue advisory opinions”). “It follows that federal courts lack constitutional authority to decide moot questions; the fact that a live controversy existed when the plaintiff brought suit is not enough.” Redfern v. Napolitano, 727 F.3d 77, 83 (1st Cir. 2013) (internal quotation marks omitted); Operation Clean Gov't, 315 F.Supp.2d at 193 (“If the case and controversy requirement is not satisfied, the matter is moot, and must be dismissed.”). A case is moot “when the issues presented are no longer live or when the parties lack a legally cognizable interest in the outcome.” Cruz v. Farquharson, 252 F.3d 530, ...

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