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K & S Real Properties, Inc. v. Olhausen Billiard Manufacturing, Inc.

United States District Court, D. Maryland

June 7, 2016

K & S REAL PROPERTIES, INC. Plaintiff and Counter-Defendant,
v.
OLHAUSEN BILLIARD MANUFACTURING, INC. Defendant and Counter-Plaintiff.

          MEMORANDUM

          Ellen 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.[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 pending.[2]

         The Smith Parties filed a motion to dismiss OBM’s counterclaims (ECF 37), [3] 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.

         Pursuant 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."[4] 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) (collectively, "Surreply").

         Thereafter, 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 filed.

         The 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.

         I. Factual and Procedural Background[5]

         In a 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.

         The 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).

         On July 16, 2015, OBM filed an Amended Answer to the Complaint and Amended Counterclaims. ECF 19, Amended Answer.[6] 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.

         In 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.

         The 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.[7] 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 Note.

         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.

         According 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.

         OBM 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.

         According 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."[8] 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 14-16.

         The 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.

         OBM 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." Id. [the]

         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 thereon." Id.

         II. Discussion

         A. The Smith Parties’ Motion to Dismiss

         The Smith Parties have moved to dismiss OBM’s counterclaims. ECF 37.[9] 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.

         OBM 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.

         1. Joinder

         I turn first to the Smith Parties’ joinder challenge.[10]

         As noted, OBM has lodged five causes of action against the Smith Parties: fraud; fraud in the inducement;[11] legal malpractice; breach of fiduciary duty;[12] 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.

         OBM 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.

         As to 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.

         Fed. R. Civ. P. 19 governs required joinder. It states, in relevant part:

(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 party if:
(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 ...

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