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U.S. Equal Employment Opportunity Commission v. Phase 2 Investments, Inc.

United States District Court, D. Maryland

August 6, 2018

PHASE 2 INVESTMENTS INC., et al., Defendants. CWP WEST CORP., Cross-claimant
PHASE 2 INVESTMENTS INC., Cross Defendant. CWP WEST CORP., Third-Party Plaintiff
DAVID PODROG Third-Party Defendant.



         In this employment discrimination case, the Equal Employment Opportunity Commission (“EEOC”) brought claims against co-Defendants Phase 2 Investments, Inc. (“Phase 2”) and CWP West Corp. d/b/a/ Mister Carwash (“Mister”) alleging violations of Title VII of the Civil Rights Act of 1964 in regard to the operation of a carwash previously owned by corporations that merged into Phase 2 (as well as other entities), and is now owned by Mister. Mister filed a cross-claim against Phase 2 and a third party claim against David Podrog, Director of Phase 2 and previous owner of the carwash, on May 14, 2018, asserting various claims related to Mister's purchase of the carwash. (See Cross-claim, ECF No. 50 pp. 20-41; Third Party Compl., ECF No. 51.) Phase 2 and Mr. Podrog (collectively, “the Sellers”) have filed separate motions to dismiss (ECF Nos. 57 and 66, respectively) that present largely the same arguments. These motions were fully briefed. (See ECF Nos. 67, 68, 71, 73). The Court then ordered supplemental briefing (see Order for Supplemental Briefing, ECF No. 74) and the Sellers and Mister have filed their supplemental briefs (see ECF Nos. 75 and 76, respectively). The Sellers' motions to dismiss are therefore ripe for review. There is no need to hold a hearing to resolve either motion. See Local Rule 105.6 (D. Md. 2016). For the reasons stated below, the Court will, by accompanying order, grant in part and deny in part the Sellers' motions to dismiss.

         I. Background[1]

         In 2013, the EEOC began investigating unlawful employment practices at the Sellers' carwashes in Maryland. (Cross-claim, ¶ 23.) In early 2014, the EEOC issued fourteen charges of discrimination on behalf of employees that the Sellers terminated. (Id. ¶ 24.) The Sellers responded to these charges of discrimination. (Id. ¶ 25.)

         Meanwhile, beginning in June 2014, Mr. Podrog approached Mister about selling the carwashes. (Cross-claim ¶ 27.) Throughout their discussions, the Sellers did not fully disclose their knowledge of the EEOC investigation, including “certain details regarding the EEOC investigation and the EEOC Charges.” (Id. ¶¶ 29-31.)

         In January 2015, Mister and the Sellers entered into an Asset Purchase Agreement (“APA”) for the sale of the carwashes. (Cross-claim ¶ 34; see APA, ECF No. 23-5.) In the APA, the Sellers agreed to indemnify Mister for a range of “Losses.” (See APA § 8.2.) “Losses” were defined very broadly in the APA. (See Id. § 8.2(a).) They included: “damages, liabilities, losses, taxes, fines, penalties, costs, and expenses . . . of any kind or nature whatsoever.” (Id.) The Sellers agreed to indemnify Mister for “Losses” “which may be sustained or suffered by any of [the buyers] arising out of or based upon . . . fraud . . . intentional misrepresentation [or] any other breach of any agreement, representation, warranty or covenant of Seller under this Agreement.” (Id.) In short, the Sellers, in the APA, agreed to compensate Mister for money it lost because of any breaches by the Sellers of the APA, as well as any money it lost because of the Sellers' “fraud [or] intentional misrepresentation, ” regarding the APA.

         The Sellers also agreed in the APA to provide Mister with a defense against certain claims under certain circumstances. Of importance to this case, the Sellers agreed that “if the named parties to [an] action or proceeding include[d] both [Mister] and [the Sellers], and [Mister] [was] advised that representation of both parties by the same counsel would be inappropriate under applicable standards of professional conduct, [Mister] may engage separate counsel at the expense of the [the Sellers].” (APA. § 8.4.)

         Finally, the APA limited Mr. Podrog's individual liability. In Section 8.2(d) of the APA, Mr. Podrog's personal liability to indemnify Mister was limited to two million dollars, and was set to expire two years from the Closing Date, i.e., January 21, 2017. Section 8.2(d) concludes: “Except for authority of Seller as provided in Section 2.2 and for fraud, any claim noted after that date against Podrog individually shall be null and void under any and all circumstances.” Between March and June 2015, the EEOC amended the charges in its investigation to name Mister as a co-defendant, asserting that Mister was liable for the practices at the carwash under a theory of successor liability. (Cross-claim ¶ 35-36.) On July 16, 2015 (six months after Mister and the Sellers signed the APA) Mister noted four separate claims against the Sellers (the “Claim Notices”). (See Claim Notices, ECF No. 50-1.) Claim No. 3 concerned the Sellers' representations and warranties surroundings their compliance with federal and state labor and employment laws and the nature of the EEOC action. (Id. pp. 1-2, ECF No. 50-1 at 7-8.) Specifically, Claim No. 3 sought damages for “Losses” arising out of breaches of those representations and warranties in Sections 2.8(b) and 2.18 of the APA, sections in which the Sellers represented they were “in compliance with all applicable statutes . . . which apply to the conduct of the Business, ” had “received no notice of any violation or alleged violation of any such statute” and were “in compliance with all applicable laws and regulations respecting [among other things] labor [and] employment.” (Id. §§ 2.8(b) and 2.18).

         On October 5, 2015, Mister and the Sellers settled these claims by entering into a “Settlement Agreement and Release” (“Release”). (Cross-claim ¶ 39; see Release, ECF No. 50-2.) In the Release, Mister “release[d] and forever discharge[d] the [Sellers]” from any claims that “did, do or may arise or derive from or are related to the Asset Purchase Agreement, ” except for two types of claims. (Id. at 6-7.) Mister did not “release and forever discharge” its own “respective rights and obligations arising under [the APA].” (Id. at 6.) And Mister did not “release and forever discharge” the Sellers from claims arising out of “the prior agreement by Sellers to indemnify [Mister] for Losses, if any, as defined in the [APA], that relate to Claim No. 3, described in the [Claim Notices].” (Id.)

         So, to summarize, in the APA the Sellers agreed to pay for any losses Mister suffered as a result of any breach of the APA (by the Sellers), as well as any fraud, or intentional misrepresentation (by the Sellers); Mister noted claims against the Sellers asserting various breaches and misrepresentations; and Mister and the Sellers then settled those claims except that Mister could still seek indemnification from the Sellers for claims relating to Sections 2.8(b) and 2.18 of the APA, which deal with the Sellers' representations regarding the EEOC action and their compliance with labor and employment laws generally.

         After the EEOC's attempts at conciliation failed, the EEOC filed suit against Phase 2 and Mister in this Court on August 28, 2017. Mister was named as a Defendant in the suit under a theory of successor liability, and “[j]oint representation of Cross-Claimant Mister and Defendant Phase 2 in the EEOC Action [was] inappropriate pursuant to the applicable standards of professional conduct.” (Cross-claim ¶ 55.) Further, Mister alleges it “was advised by multiple lawyers that a claim conflict existed.” (Id. ¶ 55 n.1.) However, the Sellers have refused to pay for Mister's separate counsel in this matter. (See Id. ¶¶58-59.)

         Phase 2 and Mister both filed motions to dismiss the EEOC complaint. (See ECF Nos. 15 and 23, respectively).[2] While those motions were pending, Mister filed suit against Phase 2 in Anne Arundel Circuit Court (“the State Court Action”) on January 19, 2018. (See State Court Action Compl., ECF No. 57-2.) In the State Court Action, Mister sought indemnification from the Sellers and other entities, alleging that they breached the APA and intentionally misrepresented the status of the EEOC investigation in the APA. Mister also brought a fraudulent conveyance claim against the Sellers under the Maryland Uniform Fraudulent Conveyance Act (“MUFCA”), Md. Code Ann., Commercial Law § 15-201 et seq., alleging that Mr. Podrog fraudulently conveyed assets in order to shield them from Mister. The Sellers moved to dismiss the State Court Action, and a hearing on those motions is set in for November 5, 2018. (See Mister Supp. Brief 3 n.2, ECF No. 76; Sellers' Supp. Brief 2, ECF No. 75.)

         On April 17, 2018 this Court denied Mister's and Phase 2's motions to dismiss (construing them as motions for summary judgment). (See Order Denying Mots. Summ. J., ECF No. 46.) Phase 2 and Mister answered the EEOC's amended complaint on May 1. (See ECF Nos. 47 and 48 respectively). Then, on May 14, Mister amended its answer to include a cross-claim against Phase 2, and filed a third party complaint against Mr. Podrog. Mister's cross-claim and third party complaint are virtually identical to each other, and to Mister's earlier-filed complaint in the State Court Action.[3] Mister chose to name several additional defendants in the State Court Action, all of whom are entities related to the Sellers.

         The Sellers have now filed motions to dismiss the cross-claim/third party complaint (hereinafter, “the Cross-claim”). The Sellers contend that these claims were not properly brought under Federal Rule of Civil Procedure 13(g) (as against Phase 2), that the Court should abstain under Colorado River Water Conservation District v. U.S., 424 U.S. 800 (1976), because Mister instituted identical claims against these parties in a state court, and that, even if the Court did not abstain, each claim fails for various independent reasons under Federal Rule of Civil Procedure 12(b)(6). Mister explained in its briefing in opposition to the Sellers' motions that it had filed the State Court Action in January because the statute of limitations was running on these claims. This explanation left the Court confused as to why Mister needed to file the claim in a state court, and did not file them in this Court. Further, assuming Mister was correct about the statute of limitations and that it would have run by the end of January, the Court was confused as to why the identical claims it filed in May would not be time barred. Thus, the Court ordered supplemental briefing on these topics, which the parties responded to on July 26, 2018. The Court has fully considered this supplemental briefing, as well as all other briefing in relation to the Sellers' motions to dismiss the Cross-claim, and it will now turn to the disposition of those motions.

         II. Standards

         a. Rule 13(g)

         Under Federal Rule of Civil Procedure 13(g), a defendant may bring a cross-claim against a co-defendant “if the claim arises out of the transaction or occurrence that is the subject matter of the original action.” “A cross-claim arises out of the same transaction or occurrence as the original claim if it bears a logical relationship to it.” R.E. Linder Steel Erection Co., Inc. v. Aluminum Sys., Inc., 88 F.R.D. 629, 632 (D. Md. 1980) (internal quotation marks omitted). Further, such cross-claim “may include a claim that the coparty is or may be liable to the cross-claimant for all or part of a claim asserted in the action against the cross-claimant.” Fed.R.Civ.P. 13(g). Thus, claims by a defendant against a co-defendant seeking indemnity for losses resulting from the underlying action are generally authorized under Rule 13(g). See Day v. Robbins, 179 F.Supp.3d 538, 541 (D. Md. 2016).

         b. Colorado River abstention

         “Abstention from the exercise of federal jurisdiction is the exception, not the rule.” Colorado River, 424 U.S. at 813. But, when there are parallel proceedings in state and federal court, a federal court may abstain under certain “exceptional circumstances.” Id. This Colorado River abstention is “unrelated to considerations of proper constitutional adjudication and regard for federal-state relations, ” but rather “rest[s] on considerations of [w]ise judicial administration.” Id. at 817 (internal quotation marks omitted). “Generally, as between state and federal courts, the rule is that the pendency of an action in the state court is no bar to proceedings concerning the same matter in the Federal court having jurisdiction.” Id. (internal quotation marks omitted). Still, a “general principle” has evolved to “avoid duplicative litigation, ” id., even if “the balance [is] heavily weighted in favor of the exercise of jurisdiction, ” Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 16 (1983).

         c. Rule 12(b)(6)

         Cross claims, third party complaints, and complaints are evaluated the same when challenged by a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6). See Shelton v. U.S., PWG-14-2031, 2015 WL 4663713, at *2-*3 (D. Md. Aug. 5, 2015) (reviewing a cross-claim); U.S. v. Azrael, 774 F.Supp. 376, 377-78 (D. Md. 1991) (reviewing third party complaints). Under that familiar standard, a complaint must contain “sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.'” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007)). Facial plausibility exists “when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Iqbal, 556 U.S. at 678. “A pleading that offers ‘labels and conclusions' or ‘a formulaic recitation of the elements of a cause of action will not do.' . . . Nor does a complaint suffice if it tenders ‘naked assertion[s]' devoid of ‘further factual enhancement.'” Id. (quoting Twombly, 550 U.S. at 555, 557). Although when considering a motion to dismiss a court must accept as true all factual allegations in the complaint, this principle does not apply to legal conclusions couched as factual allegations. Twombly, 550 U.S. at 555.

         III. ...

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