Opinion
3:18-cv-01651-AC
09-15-2021
RICHARD LEE SMITH, JR., individually and on behalf of persons similarly situated, Plaintiffs, v. MATT MARTORELLO, and EVENTIDE CREDIT ACQUISITIONS, LLC, Defendants.
FINDINGS AND RECOMMENDATION
JOHN V. ACOSTA, United States Magistrate Judge
In this putative class action, Plaintiff Richard Lee Smith, Jr. (“Smith”), brings this action against Defendants Matt Martorello (“Martorello”) and Eventide Credit Acquisitions, LLC (“Eventide”) (collectively “Defendants”), alleging violations of Oregon consumer protection laws, OR. REV. STAT. §§ 82.010 AND 725.045; the Racketeer Influenced and Corrupt Organizations Act (“RICO”), 18 U.S.C. §§ 1962(c) & (d); and Oregon common law claims for unjust enrichment, based on the high-interest, short-term consumer loan he obtained from Defendants online. In this lawsuit, Smith, on behalf of borrowers nationwide and a subclass of Oregon borrowers, seeks an order declaring the lending scheme illegal, certain provisions of the loan agreements unenforceable, and asks the illegal proceeds be returned to the exploited borrowers. Presently before the court is Defendants' Motion to Dismiss pursuant to Federal Rules of Civil Procedure 19. For the following reasons, Defendants' motion should be denied.
The court finds this motion suitable for resolution without oral argument pursuant to Local Rule 7-1(d)(1).
Background
The factual background of this case is set forth in this court's January 5, 2021 Findings and Recommendation and adopted as clarified, modified, and supplemented by Judge Simon's March 16, 2021 Order. F&R, ECF No. 146; Order, 156; available at Smith v. Martorello, Case No. 3:18-cv-01651-AC, 2021 WL 1257941 (D. Or. Jan. 5, 2021), adopted 2021 WL 981491, at *1 (D. Or. Mar. 16, 2021). The court discusses only those facts and procedural background necessary for determining the instant motion.
On September 11, 2018, Smith filed this lawsuit against Defendants Martorello, Big Picture Loans, LLC (“Big Picture”), and Ascension Technologies, LLC (“Ascension”). (Compl., ECF No. 1.) Smith alleges that Martorello orchestrated a lending scheme that charged Smith and other Oregonians usurious interest rates for short-term loans. Smith, 2021 WL 981491, at *1. Smith received his loan online from Big Picture, a lender ostensibly created and controlled by the Lac Vieux Desert Band of Lake Superior Chippewa Indians, a Native American tribe (“the Tribe”). Id. Smith alleges that Martorello created Big Picture to insulate himself from liability and rebrand his lending operation in response to an enforcement action had been brought by the State of New York against Martorello and the Tribe's prior lending entities, Red Rock Tribal Lending, a tribal entity (“Red Rock”), and Bellicose Capital. Id. Martorello owned and controlled Bellicose, and, in turn, Bellicose ran Red Rock's day-to-day operations. Shortly after New York's enforcement action was permitted to proceed, Martorello instructed the Tribe to rebrand Red Rock as Big Picture. Id. at 2. Martorello then caused the Tribe to assume ownership of Bellicose under the name Ascension, although Ascension employs no members of the Tribe. Id. Smith alleges that just as Bellicose ran Red Rock, Ascension ran Big Picture. Id. As Judge Simon succinctly explained:
The Tribe purchased Ascension from Martorello with a $300 million promissory note issued to Defendant Eventide, even though Ascension appears to be worth only a small fraction of that amount. Martorello created Eventide shortly before the Tribe acquired Ascension, and Martorello continues to control and largely own Eventide. The promissory note provides Eventide with leverage over Ascension and therefore over Big Picture. Eventide retains significant authority to decide who leads Ascension (Ascension's manager is a close associate of Martorello), set lending policies and block changes in interest rates that Ascension charges for Big Picture's loans to the putative class members, and even decide in which jurisdiction Ascension markets Big Picture's lending services. Eventide receives the bulk of Big Picture's revenues, while the Tribal entities receive no more than six percent of revenues. Also according to Smith, most of Big Picture's and Ascension's employees work in the Philippines, Mexico, the Virgin Islands, or Puerto Rico. The few Tribal members whom Big Picture employs are paid only minimum wages and perform only menial or administrative tasks.Id. Martorello is not a member of the Tribe and Eventide is not a tribal entity. Id. Smith's lawsuit is related to several other lawsuits ongoing in the Eastern District of Virginia, including a class action on behalf of Virginia residents against Defendants in which Virginia residents allege similar facts. See Smith, 2021 WL 1257941, at *1 (identifying other cases against Defendants and entities allegedly controlled by Martorello, and collecting other cases involving “rent-a-tribe” lending schemes).
In November 2019, Big Picture and Ascension notified the court that, in conjunction with the Tribe, they had reached a preliminary settlement agreement in the Eastern District of Virginia that would resolve Smith's claims against them, as well as resolve other litigation claims against them nationwide. (Joint Status Report at 2, ECF No. 94.) The proposed settlement agreement, however, would resolve Smith's claims against Big Picture and Ascension but would not resolve any claims against Martorello or Eventide. (Id.; Settlement Agreement ¶ 2.16, ECF No. 149 at 26.) The Eastern District of Virginia granted preliminary approval of the settlement on December 20, 2019, and, pursuant to the terms of the Settlement Agreement, Smith dismissed his claims against Big Picture and Ascension on December 30, 2019. (Notice of Dismissal, ECF No. 96.)
On January 17, 2020, Smith filed a First Amended Class Action Complaint in this court removing all claims against Big Picture and Ascension and adding Eventide as a defendant. (First Am. Compl., ECF No. 100.) On December 18, 2020, the Eastern District of Virginia granted final approval of the settlement agreement which resolved Smith's claims against Big Picture, Ascension, and the Tribe (the “Settled Parties.”) Galloway v. Williams, Case No. 3:19-cv-470, 2020 WL 7482191, at *1 (E.D. Va. Dec. 18, 2020). Defendants subsequently filed the instant motion under Rule 19, contending that this lawsuit cannot proceed because the Settled Parties are indispensable.
Legal Standards
Under Rule 12(b)(7), a defendant may move to dismiss an action for failure to join an indispensible party under Rule 19. See FED. R. CIV. P. 12(B)(7). When considering a motion pursuant to Rule 12(b)(7) for failure to join a party, the court must accept the allegations in complaint as true and construe all inferences in plaintiff's favor. Dine Citizens Against Ruining Our Env't v. Bureau of Indian Affairs, 932 F.3d 843, 851 (9th Cir. 2019). Under Rule 19, the court employs a three-step inquiry: (1) is the absent party necessary; (2) if so, is it feasible to join the absent party; and (3) if joinder is not feasible, can the action proceed without the absent party or “is the absent party indispensable, ” thereby requiring dismissal of the action. FED. R. CIV. P. 19(a); Salt River Project Agric. Imp. & Power Dist. v. Lee, 672 F.3d 1176, 1179 (9th Cir. 2012); United States v. Bowen, 172 F.3d 682, 688 (9th Cir. 1999). The court examines each factor in turn. Alto v. Black, 738 F.3d 1111, 1126 (9th Cir. 2013).
An absent party may be “required” or a “necessary” party under Rule 19(a)(1)(A) or (B) 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 the person's absence may:
(i) as a practical matter impair or impede the person's ability to protect the interest; or
(ii) leave an existing party subject to a substantial risk of incurring double, multiple, or otherwise inconsistent obligations because of the interest.FED. R. CIV. P. 19(A)(1)(A)-(B); Salt River, 672 F.3d at 1179; Disabled Rights Action Comm. v.Las Vegas Events, Inc., 375 F.3d 861, 879 (9th Cir. 2004) (stating a party is deemed “necessary” if complete relief cannot be granted in its absence). “The moving party has the burden of persuasion in arguing for dismissal.” Makah Indian Tribe v. Verity, 910 F.2d 555, 558 (9th Cir. 1990). The analysis under Rule 19 is “a practical, fact-specific one, designed to avoid the harsh results of rigid application.” Dawavendewa v. Salt River Project Agric. Improvement & PowerDist., 276 F.3d 1150, 1154 (9th Cir. 2002).
Discussion
I. Big Picture, Ascension, and the Tribe Are Not Necessary Parties
Defendants argue that Big Picture, Ascension, and the Tribe are necessary parties under both prongs of Rule 19(a)(1). Defendants argue that proceeding without the tribal lending entities and the Tribe will impair their sovereign interests and their economic interests in the various loan agreements with Smith and the putative class members. Defendants contend that the court cannot afford complete relief without the Settled Parties and that the case must therefore be dismissed. Smith responds that Rule 19 is inapplicable here because Rule 19 is directed at non-joined parties, not settling parties. Smith argues that because Big Picture, Ascension, and the Tribe have settled their interests with respect to this litigation and are not claiming an interest in this case, they are not necessary parties. Smith is correct.
A. The Court Can Afford Complete Relief Among The Existing Parties
Under Rule 19(a)(1)(A), the court must consider whether complete relief can be afforded between the existing parties. See Disabled Rights Action Comm., 375 F.3d at 879 (discussing whether absence of party “would preclude the district court from fashioning meaningful relief as between the parties”); U.S.A. Fund, LLLP v. Wealthbridge Mortg. Corp., Case No. 3:11-cv-510-HZ, 2011 WL 3476815, at *3 (D. Or. Aug. 9, 2011) (finding absent party was not a necessary party under Rule 19(a)(1)(A) because complete relief was possible between existing parties); see also NGV Gaming, Ltd. v. Upstream Point Molate, LLC, 355 F.Supp.2d 1061, 1068 (N.D. Cal. 2005) (“A Rule 19(a)(1) inquiry is limited to whether the district court can grant complete relief to the persons already parties to the action. The effect a decision may have on an absent party is not material.”) (internal quotation marks and citation omitted). Relief is “meaningful” when it is not “partial or hollow” and when it precludes “multiple lawsuits on the same cause of action.” Disabled Rights, 375 F.3d at 879 (quotations omitted); U.S. ex rel. Morongo Band of Mission Indians v. Rose, 34 F.3d 901, 907 (9th Cir. 1994); Fanning v. Grp. Health Co-op., No. C-07-1716MJP, 2008 WL 2148753, at *2 (W.D. Wash. May 21, 2008).
Defendants insist that the court cannot fashion meaningful relief among the existing parties on Smith's claims for declaratory relief. They argue that Smith seeks to have various provisions of the loan agreements declared void and unenforceable as to Oregon residents because they violate Oregon law, are unconscionable, and are contrary to public policy. Defendants contend the court cannot effectively grant relief among the existing parties because Martorello and Eventide are not parties to the loan agreements with Big Picture, and thus Big Picture would not be bound by the judgment.
Parties to a contract may be necessary parties where litigation is seeking to set aside the contract. See, e.g., Northrup v. McDonnell Douglas Corp., 705 F.2d 1030, 1044 (9th Cir. 1983) (“parties who may be affected by a suit to set aside a contract must be present, ” but rule inapplicable because parties were not seeking to set contract aside or enjoin contract's performance). Defendants misunderstand the relief Smith seeks here. Smith is not bringing an action for breach of contract or recission, and he does not seek to have the loan agreement invalidated per se. He also does not seek injunctive relief against the Tribe, Big Picture, or Ascension. Instead, Smith seeks a declaration that the choice of law, forum selection, class action waiver, and dispute resolution provisions in the loan agreements are unenforceable because they violate Oregon law. (First Am. Compl. ¶ 140, ECF No. 100.) Smith seeks declaratory relief related solely to contractual defenses, which relief does not inhibit the court's ability to fashion meaningful relief between Smith, the putative class members, and Defendants. Additionally, to the extent that Smith seeks a monetary judgment against Defendants, Smith seeks recovery of all the net revenue, profits, or sums paid to Defendants, directly or indirectly, out of the loan proceeds resulting from the allegedly illegal lending scheme. (First Am. Compl. ¶¶ 145, 195, 199.) In other words, Smith is seeking to disgorge the unjustly gained profits Defendants realized from the allegedly illegal lending scheme; he is not seeking loan forgiveness under the terms of the agreements.
Other courts examining similar claims have concluded that the tribes' absence does not prevent the court from fashioning meaningful relief under Rule 19(a)(1)(A). For example, in Think Finance, the court concluded that “the Plaintiff seeks disgorgement of the money earned by the Defendants only, not the money the tribes have earned, through the alleged scheme. The Plaintiff is not seeking a declaration that the contracts themselves are illegal, but rather a declaration that the Defendants' conduct violates a number of state and federal laws.” Pennsylvania v. Think Finance, Inc., Civ. No. 14-cv-7139, 2016 WL 183289, at *4 (E.D. Pa. Jan. 14, 2016); see also Gingras v. Rosette, 5:15-cv-101, 2016 WL 2932163, at *20 (D. Vt. May 18, 2016) (finding tribe and tribal entity were not indispensable parties because court had authority to adjudicate rights under state and federal law); Williams v. Big Picture Loans LLC, Civ. Action No. 3:17cv461 (E.D. Va. May 20, 2021) (Mem. Order denying Martorello's motion to dismiss pursuant to Rules 19 and 12(b)(7) for failure to join Big Picture, Ascension, and the Tribe) (attached as Ex. A to Pls.' Notice Resp., ECF No. 162-1); see also Dillon v. BMO Harris Bank, N.A., 16 F.Supp.3d 605, 615 (M.D. N.C. 2014) (“[J]udgment . . .will not prohibit the lenders from lending money or from relying on other mechanisms to collect on their loans.”).
As did plaintiff in Think Finance, here Smith seeks a declaration that certain provisions of the loan agreements violate state law and public policy, and he asks the court to disgorge the alleged illegal proceeds Defendants received. Smith, on behalf of the Oregon subclass, seeks a declaration that Defendants' lending scheme violates Oregon's lending laws, RICO and Oregon statutes, and equitable theories. The Settled Parties' absence does not prevent the court from fashioning relief complete relief here. Because this prong focuses solely on the current parties to this action, any effect of such declarations has on Big Picture, Ascension, and the Tribe is immaterial. t'Bear v. Forman, Case No. 17-cv-00796-JSC, 2020 WL 703888, at *2 (N.D. Cal. Feb. 12, 2020) (finding senior secured creditors and various entities were not necessary parties under Rule 19(a)(1)(A) in declaratory action arising out of failed business venture with claims including breach of promissory notes, loan agreements, and recission); see also NGV Gaming, 355 F.Supp.2d at 1068 (finding that tribe was not necessary party under Rule 19(a)(1)(A) in developer's action competitor alleging tortious interference because developer was seeking monetary damages only, not to enforce contractual provisions).
Moreover, Defendants concede that the court can accord complete relief on Smith's RICO claims seeking monetary damages against Martorello and Eventide. (Defs.' Reply at 7, ECF No. 155.) The court agrees.
It is “well established that a joint tortfeasor is not an indispensable party.” Union PavingCo. v. Downer Corp., 276 F.2d 468, 471 (9th Cir. 1960) (citing Pioche Mines Consol., Inc. v.Fidelity-Philadelphia Trust Co., 206 F.2d 336, 337 (9th Cir. 1953)). “Joint tortfeasors subject to possible claims of contribution are categorically not indispensible parties under FRCP 19(b).” Bravo v. Kennedy, Case No. CV 10-228-MO, 2011 WL 653989, at *2 (D. Or. Feb. 14, 2011); Nebulae Inc. v. Taylor, Case No. 3:20-cv-946-JR, 2020 WL 8474587, at *4 (D. Or. Oct. 19, 2020) (“It is not necessary for all joint tortfeasors to be named as defendants in a single lawsuit.”); Homeland Ins. Co. of New York v. CentiMark Corp., Case No. 3:15-cv-01745-JR, 2019 WL 8223065, at *3 (D. Or. July 22, 2019) (“it is well-established that a joint tortfeasor is not an indispensable party”). An absent party need not be joined under Rule 19(a)(1)(A) simply because it may be required to provide indemnity or contribution for a loss. See Fleshman v. Wells Fargo Bank, N.A., No. 03:13-CV-02062-HZ, 2015 WL 4488163, at *8 (D. Or. July 23, 2015) (“[T]hat Fannie Mae may be an indemnitor does not make it a required party under Rule 19(a)(a).”) (citations omitted); Tinoco v. San Diego Gas & Elec. Co., 327 F.R.D. 651, 658-59 (S.D. Cal. 2018); see also SASCO v. Byers, No. C 08-5641 JF (RS), 2009 WL 1010513, at *2 (N.D. Cal. Apr. 14, 2009) (“[A] defendant's possible right of reimbursement, indemnity, or contribution against an absent party is not sufficient to make the absent party indispensable to the litigation.”).
In summary, the court finds that Defendants have not demonstrated that the Settled Parties are “necessary” under Rule 19(a)(1)(A).
B. Defendants Have Not Shown an Impact on the Settled Parties' Interests
“Rule 19(a)(1)(B) allows a forced joinder of an outside party only upon the impetus of that outside party.” Fanning, 2008 WL 2148753, at *2 (denying joinder where union did not claim interest or seek to join suit, despite being aware of ongoing litigation). Where a party is aware of an action and chooses not to claim an interest, joinder is not necessary. USA Fund, LLLP, 2011 WL 3476815, at *3 (citing Altmann v. Republic of Austria, 317 F.3d 954, 971 (9th Cir. 2002)).
Defendants contend that Smith seeks to invalidate the loan agreements and that the Settled Parties are necessary “because they have a substantial interest in avoiding any judgment that impugns the legality of Big Picture's lending operation, undermines their tribal sovereignty, finds they are operating a RICO enterprise, or declares provisions of Big Picture's loan agreements improper, unconscionable, or unenforceable.” (Defs.' Mot. Dismiss at 10, ECF No. 149.) Defendants maintain that the Settlement Agreement does not modify the choice of law and forum selection provisions in Big Picture's loan agreements, and does not modify Big Picture or Ascension's operations or Defendants' alleged participation in the lending operation. (Defs.' Reply at 3.) Defendants' arguments miss the mark.
Big Picture and Ascension were parties to the instant lawsuit and could have remained in the lawsuit and pursued their interests. Instead, Big Picture and Ascension agreed to resolve the claims through settlement, and they negotiated their own dismissal from this action. Although the Tribe was not named as a party in this action, the Tribe has not sought to join this action at any point since this suit's inception in December 2018. The Tribe was a named party in related litigation and is identified as a party to the Settlement Agreement. (Defs.' Mot. Dismiss, Ex. A at 1-3, ECF No. 149 at 21-23.) The Settlement Agreement expressly identifies this lawsuit as being resolved by the Settlement Agreement. (Id.) Therefore, abundantly clear is that the Tribe was aware of the instant litigation and resolved its potential interests by entering the Settlement Agreement. USA Fund, LLLP, 2011 WL 3476815, at *3. Because Big Picture, Ascension, and the Tribe are not claiming any further interest in this case and are not seeking to join it, Defendants cannot demonstrate that the Settled Parties are required parties under Rule 19(a)(1)(B). See United States v. Bowen, 172 F.3d 682, 689 (9th Cir. 1999) (“Joinder under [Rule 19(a)(1)(B)] is ‘contingent . . . upon an initial requirement that the absent party claim a legally protected interest relating to the subject matter of the action.'” (quoting Northrop, 705 F.2d at 1043 (emphasis in original)). Accord Williams v. Big Picture Loans, LLC, Civ. No. 3:17cv416 (Memorandum Order, E.D. Va. May 20, 2021) (holding Big Picture Loans, Ascension Technologies, and Lac Vieux Desert Band of Lake Superior Chippewa Indians were not indispensable parties but rather were parties that reached settlement, holding Rule 19 does not apply and denying Martorello's Rule 19 motion to dismiss) (Pls.' Notice Supp. Auth. Ex. A, ECF No. 162-1.)
The court further observes that Big Picture and Ascension filed motions to dismiss based on sovereign immunity earlier in the litigation and opted instead to negotiate their dismissal through the Settlement Agreement. (See Def.'s Big Picture Mot. Dismiss at 14, ECF No. 39 (arguing Big Picture is arm of Tribe and claims barred by sovereign immunity); Def. Ascension Mot. Dimiss at 12, ECF No. 46 (same); Notice of Dismissal of Big Picture and Ascension, ECF No. 96). This is the best evidence that the Settled Parties' absence would not impair or impede their interests in asserting sovereign immunity. Morongo, 34 F.3d at 908 (holding former party that settled was not indispensable). Accordingly, Defendants have failed to meet their burden of establishing that joinder is required under Rule 19(a)(1)(B).
Because Defendants have not established that the Settled Parties are “necessary, ” the court need not address the remaining steps of the Rule 19 inquiry; that is, whether joinder is feasible or if the Settled Parties are indispensable parties necessitating dismissal under Rule 19(b). Templev. Synthes Corp., Ltd., 498 U.S. 5, 8 (1990) (“[N]o inquiry under Rule 19(b) is necessary, because the threshold requirements of Rule 19(a) have not been satisfied.”). The motion to dismiss pursuant to Rules 12(b)(7) and Rule 19 should be denied.
Conclusion
Based on the foregoing, Defendants' Motion to Dismiss under Rule 19 (ECF No. 149) should be DENIED.
Scheduling Order
These Findings and Recommendations will be referred to U.S. District Judge Michael H. Simon. Objections, if any, are due within fourteen (14) days. If no objections are filed, then the Findings and Recommendations will go under advisement on that date.
If objections are filed, then a response is due within fourteen (14) days after being served with a copy of the objections. When the response is due or filed, whichever date is earlier, the Findings and Recommendations will go under advisements