United States District Court, D. Maryland
K & S REAL PROPERTIES, INC. Plaintiff and Counter-Defendant,
OLHAUSEN BILLIARD MANUFACTURING, INC. Defendant and Counter-Plaintiff.
L. Hollander United States District Judge
K & S
Real Properties, Inc. ("K & S"), plaintiff, filed
suit against Olhausen Billiard Manufacturing, Inc.
("OBM"), alleging breach of contract with respect
to a promissory note. ECF 1. OBM filed counterclaims against K
& S; Timothy Guy Smith, P.C., trading as The Law Offices of
Timothy Guy Smith ("Smith, P.C."); and Timothy Guy
Smith ("Smith") (collectively, the "Smith
Parties"). ECF 19, Amended Answer. OBM alleges claims of
fraud; fraud in the inducement; legal malpractice (against
Smith Parties); and breach of fiduciary duties (against Smith
Parties). Id. at 15-21. OBM also seeks declaratory
relief. Id. at 21-22. Three motions are now
Smith Parties filed a motion to dismiss OBM’s
counterclaims (ECF 37),  along with a supporting memorandum (ECF
37-1) (collectively, "Motion to Dismiss"). They
maintain that OBM lacks subject matter jurisdiction as to
them, based on diversity, because OBM "has failed to
sufficiently plead damages exceeding $75, 000 . . . ."
ECF 37 at 2; see also ECF 37-1 at 3-4. In addition,
they argue that dismissal is appropriate because they are not
subject to joinder under Rule 19 or Rule 20 of the Federal
Rules of Civil Procedure. Id. at 2-3. OBM opposes
the Motion to Dismiss. ECF 40, "Opposition-Motion to
Dismiss." No reply has been filed.
to Fed.R.Civ.P. 20, K & S filed a "Motion To Join"
Donald Olhausen, OBM’s President, as a
defendant/counter-plaintiff (ECF 49), supported by a
memorandum (ECF 49-1) (collectively, "Motion to
Join"). OBM opposes the Motion to Join (ECF 51,
"Opposition-Motion to Join") and has submitted
three exhibits. These include a Declaration by Donald
Olhausen (ECF 51-1) ("Olhausen Declaration"),
identical to declarations previously submitted by Olhausen
(ECF 9-1; ECF 44-1) in opposition to K & S’s earlier
motion for summary judgment (ECF 7), and in support of
OBM’s prior Motion to Disqualify K & S’s counsel
(ECF 43). In addition, K & S submitted a complaint from a
related lawsuit in Tennessee between Olhausen and Smith (ECF
51-2), and another Declaration of Olhausen. ECF 53,
"Second Olhausen Declaration." K & S filed a
Reply (ECF 54) and, with leave of court (ECF 62), OBM filed a
surreply (ECF 60-2), supported by a memorandum (ECF 61)
K & S filed its "Motion To Strike And/Or Request for
Reconsideration." ECF 63, "Motion to Strike."
According to K & S, there is no basis for the filing of a
surreply. OBM opposes the Motion to Strike. ECF 64,
"Opposition-Motion to Strike." No reply has been
motions have been fully briefed, and no hearing is necessary
to resolve them. See Local Rule 105.6. For the
reasons stated below, I shall deny the Motion to Dismiss in
part and grant it in part; deny the Motion to Join; and deny
the Motion to Strike.
Factual and Procedural Background
Complaint filed April 27, 2015 (ECF 1), K & S sued OBM for
breach of contract. K & S alleged that in October 2008, OBM
entered into a Non-Recourse Revolving Line of Credit with K &
S (ECF 1-1, the "Note") and that, since January 28,
2009, OBM failed to make any payments due on the Note. ECF 1,
¶ 4. The Note, which is dated October 3, 2008 (ECF 1-1
at 1), came due on October 31, 2013. ECF 1, ¶ 5. K & S
seeks $600, 000 in unpaid principal, interest in excess of
$400, 000, and attorney’s fees. ECF 1 at 2.
Note identifies OBM as the "Borrower" and K & S as
the "Lender[.]" ECF 1-1 at 1. It was signed by Mr.
Olhausen for OBM (ECF 1-1 at 3), and witnessed by David
Robinson, OBM’s chief financial officer. ECF 7-1
(memorandum supporting K & S’s summary judgment
motion), ¶ 3. The Note states, ECF 1-1 at 1: "For
value received, the undersigned, [OBM] . . . promise [sic] to
pay to the order of [K & S] . . . the principal sum of Seven
Hundred Fifty Thousand and no/100ths Dollars ($750, 000.00),
as advanced and re-advanced, with interest at the rate of
Eight [per cent] (8.00%) per annum until paid. Prior to
maturity, the Borrower(s) shall have the right to borrow. . .
." Further, the Note provides, id.:
Interest shall be payable monthly on the outstanding
principal balance commencing on the 3rd day of November, 2008
and continuing on the 3rd day of each month until the 3rd day
of October, 2013, when all principal and unpaid interest is
due in full, provided however, Lender shall have the right to
demand full payment of all outstanding principal and unpaid
interest on each anniversary date of the Note upon thirty
(30) days advance written notice to Borrower(s).
16, 2015, OBM filed an Amended Answer to the Complaint and
Amended Counterclaims. ECF 19, Amended Answer. The Amended
Answer includes 15 affirmative defenses. ECF 19 at 3-10.
According to OBM, at the time the Note was executed, the
Smith Parties served as OBM’s "legal counsel . . .
[and] . . . acted as such from 2007 to January 2015 . . .
advis[ing] OBM on a variety of legal and business
matters." ECF 19 at 12.
addition, ECF 19 contains five causes of action against K & S
and the Smith Parties. As noted, the counterclaims allege the
following: fraud, against all three counterdefendants; fraud
in the inducement, against all three counterdefendants; legal
malpractice, against the Smith Parties; breach of fiduciary
duties, against the Smith Parties; and declaratory relief, as
to all counterdefendants. ECF 19 at 15-22. With respect to
the demand for declaratory relief, OBM seeks numerous
"[j]udicial declarations" (id. at 22), to
the effect that "the Note is void, voidable, or
unenforceable . . . ." Id. at 21.
parties agree that OBM obtained $600, 000. ECF 1, ¶ 4;
ECF 19, Amended Answer, at 3; ECF 9, OBM’s Opposition
to K & S’s summary judgment motion, at 4; ECF 51-1,
Olhausen Declaration, ¶ 10. However, the parties
disagree about the source of the funds, the genesis of the
Note, its validity, and K & S’s right to recover on the
K & S
asserts that OBM received "drafts . . . as follows:
October 10, 2008 - $150, 000.00; October 27, 2008 - $250,
000.00; January 28, 2009 - $200, 000.00." ECF 1, ¶
4. K & S alleges that the "failure of the Defendant to
make payments as agreed upon in [the] Note amounts to a
material default and is otherwise a breach of the contract
between the parties." ECF 1, ¶ 7.
to OBM, K & S provided OBM with "four checks totaling
$600, 000 from October 2008 to February 2009." ECF 51-1,
Olhausen Declaration, ¶ 10; see also ECF 51-1
at 18-25 (including account statements and copies of the four
checks OBM received, the last of which is undated, and all of
which are signed by Smith); ECF 35-7 (appended to K &
S’s reply in support of its summary judgment motion,
ECF 7). However, according to OBM, the "funds
purportedly loaned to defendant . . . did not belong to
plaintiff." ECF 19, Amended Answer, at 2.
explains that it "needed an infusion of funds in 2008
due to the recession, and Mr. Olhausen determined to borrow
the funds from his personal IRA and pay any resulting taxes
and penalties." ECF 51 at 2; ECF 19 at 13. However,
Smith, who was then "representing OBM on diverse legal
issues" (ECF 51 at 2), and also a principal of K & S
(ECF 19 at 3), allegedly "advised" Olhausen
"not to cash out his IRA, but to use Attorney
Smith’s scheme to borrow the IRA funds without
incurring taxes and penalties." Id. In
particular, OBM claims that Smith "instructed Mr.
Olhausen to transfer his IRA to KH Funding Company
(‘KHFC’), a financial firm with which Attorney
Smith was associated, then KHFC would ‘loan’ the
funds to Plaintiff K & S, which would ‘loan’ the
funds back to OBM." Id. at 3.
to OBM, it relied on Smith’s advice. As a result,
Olhausen "transferred [his] IRA from SunTrust Bank to
KHFC in September 2008." ECF 51-1, Olhausen Declaration,
¶ 6. At the time, the IRA held "at least $789,
725.40." ECF 19 at 13. Also in September 2008, and
allegedly at the direction of Smith, Olhausen signed two
memoranda authorizing KHFC to transfer funds from his IRA
account to K & S (ECF 51-1, Olhausen Declaration, ¶ 8;
see also ECF 51-1 at 14), and to "Timothy G.
Smith and Douglas K. Kelly." ECF 51-1, Olhausen
Declaration, ¶ 9; see also ECF 51-1 at 16. It
appears that both memoranda are related to the same
transaction. See ECF 51-1, Olhausen Declaration, at
events following the transfer of IRA funds from KHFC are not
clear. See ECF 51-1, Olhausen Declaration, ¶ 7;
ECF 51-1 at 8 (Olhausen’s IRA transfer request); ECF
14-1, Declaration of Melissa H. Lum, Esq., counsel for OBM
("Lum Declaration"), at 8. According to OBM,
Olhausen had about $825, 000 in his IRA at SunTrust Bank in
September 2008. ECF 40, Opposition-Motion to Dismiss, at 4;
see also ECF 51-1, ¶ 6. But, KHFC reported
receipt of $789, 000. Id. OBM states: "It is
unknown why there was a $36, 000 shortfall." ECF 40 at
4. And, on October 3, 2008, "KHFC transferred up to
$750, 000 of [the total IRA] sum to Attorney Timothy G. Smith
himself and Douglas K. Kelly, the principals of plaintiff K &
S Real Properties, Inc." ECF 19, Amended Answer, at 3;
see also ECF 14-1, Lum Declaration, at 8. In
particular, an "[u]ndisclosed amount" was conveyed
pursuant to a line of credit of $750, 000, reflected in a
promissory note "guaranteed" by K & S and
"secured by [an] Indemnity Deed of Trust dated
10/3/2008." ECF 14-1, Lum Declaration, at 8; see
also ECF 9-2, Declaration of Nancy Correa, Esquire,
counsel for OBM (including the Indemnity Deed of Trust), at
20-45. Thereafter, K & S transferred $600, 000 to OBM.
See note 7, supra; see also ECF
14-1, Lum Declaration, at 8; ECF 1, ¶ 4.
maintains that Olhausen’s IRA held about $828, 000, and
is now "reduced to about $70, 000, with only $600, 000
being transferred to OBM as planned." ECF 14-1, Lum
Declaration, ¶ 7. Lum avers: "Smith has never
accounted for approximate $158, 000 shortfall."
K & S
has submitted what appears to be a record of payments made to
OBM, but the documentation is difficult to decipher and does
not address the alleged shortfall in funds. See ECF
7-4 (copies of account statements submitted by K & S).
According to OBM, the four checks that it received are
"drawn on the joint account of ‘KH Funding Company
Reserve Account and K. & S. Real Properties,
Inc.[’]" ECF 51-1, Olhausen
Declaration, ¶ 10; ECF 51-1 at 18-21 (copies of the
checks that align with this description). "All checks
were signed by Attorney Smith, and the account holder address
on the checks matches Attorney Smith’s current
address." Id. Additionally, a KHFC account
statement submitted by OBM shows a payment of $13, 927.50 to
"Kugler." ECF 51-1, Olhausen Declaration, at 25.
Olhausen asserts he does "not know who Kugler is or why
he received that sum from [Olhausen’s] IRA."
Id. ¶ 11.
K & S
maintains that OBM "is attempting to blend several
matters into a singular event" and nothing
"alter[s] the fact that $600, 000.00 was loaned" by
K & S to OBM. ECF 35-1 (reply memorandum in support of
summary judgment motion), at 2. K & S contends: "Any and
all . . . issues related to Donald Olhausen’s IRA
related to Donald Olhausen personally, related to conflicts
of interest, have no bearing upon the primary issue in this
case, namely the loaning of funds and the lack of repayment
The Smith Parties’ Motion to Dismiss
Smith Parties have moved to dismiss OBM’s
counterclaims. ECF 37. They argue that OBM "has failed to .
. . demonstrate proper subject matter jurisdiction." ECF
37-1 at 3-4. Further, the Smith Parties contend that the
counterclaims do not meet the requirements for joinder under
Fed.R.Civ.P. 19 or 20. ECF 37-1 at 4.
insists that joinder of the Smith Parties is appropriate,
because they are "necessary parties." ECF 40 at 2.
In this regard, OBM observes that the counterclaims involve
the "same series of transactions" as the Complaint.
Id. at 11. OBM also cites 28 U.S.C. § 1367(b)
and states: "This Court has supplemental jurisdiction
over the parties because the counterclaims arise out of the
same transaction or occurrence." ECF 19 at 12.
first to the Smith Parties’ joinder
noted, OBM has lodged five causes of action against the Smith
Parties: fraud; fraud in the inducement; legal
malpractice; breach of fiduciary duty; and
declaratory relief. ECF 19, Amended Answer, at 15-23. In
moving to dismiss the counterclaims, the Smith Parties argue
that OBM has not met the requirements for joinder of the
Smith Parties under Fed.R.Civ.P. 19 or Fed.R.Civ.P. 20. ECF
37, Motion to Dismiss, ¶ 8. In particular, the Smith
Parties contend that Rule 19 has not been satisfied because
neither Smith, P.C. nor Smith "has any obligations under
the Note, " and that "[s]hould either current party
prevail regarding the note, the relief would be
complete." ECF 37, ¶ 9. The Smith Parties also
argue that OBM has not met the "‘same
transaction’ requirement of Federal Rule 20 to permit
joinder." Id. ¶ 8. Thus, the Smith Parties
assert that they "should be dismissed from this
action." ECF 37, ¶ 14.
maintains that the counterclaims satisfy both Rule 19 and
Rule 20. ECF 40, Opposition-Motion to Dismiss, at 2-3. In its
view, the Promissory Note "is a sham" and "a
component" of the "scheme to misappropriate
funds" that was devised by Smith when he served as
OBM’s general counsel. Id. at 2. Moreover, OBM
maintains that the Smith Defendants "are necessary
parties because they allegedly caused, aided, or abetted in
the creation of the sham promissory note. . . ."
Id. at 2.
Rule 19, OBM argues that joinder of the Smith parties
"is necessary to afford complete relief to the
parties" (id. at 7), and that joinder is
"proper because having these claims tried separately
could negatively impact OBM’s ability to defend the
case." Id. at 9. Alternatively, OBM asserts
that "this case clearly meets the standard for
permissive joinder under Rule 20." Id. at 10.
According to OBM, "the counterclaim involves the same
series of transactions" at issue in K & S’s suit,
and there are "many common questions of facts and law at
issue in the Complaint and the counterclaim."
Id. at 11.
Civ. P. 19 governs required joinder. It states, in relevant
(a) Persons Required to Be Joined if Feasible.
(1) Required Party. A person who is subject to
service of process and whose joinder will not deprive the
court of subject-matter jurisdiction must be joined as a
(A) in that person’s absence, the court cannot accord
complete relief among existing parties; or
(B) that person claims an interest relating to the subject of
the action and is so situated that disposing of the action in