Opinion
CV 21-03595-RSWL-ASx
07-25-2022
SPRINGFIELD CLINIC, LLP, Plaintiff, v. PRIMEX CLINICAL LABORATORIES, INC., Defendant. PRIMEX CLINICAL LABORATORIES. INC., Third-Party Plaintiff, v. TBS BUSINESS SOLUTIONS USA INC.; and TEWODROS SAHILU, Third-Party Defendants.
ORDER RE: TBS DEFENDANTS' MOTION FOR JUDGMENT ON THE PLEADINGS [78]
HONORABLE RONALD S.W. LEW SENIOR U.S. DISTRICT JUDGE
Plaintiff Springfield Clinic, LLP (“Springfield”) initiated this Action [1] against Defendant Primex Laboratories, Inc. (“Primex”), alleging: (1) breach of contract; (2) unjust enrichment; (3) money had and received; (4) conversion; (5) negligent misrepresentation; and (6) violations of California's Unfair Competition Law.
On July 7, 2021, Primex impleaded TBS Business Solutions, Inc. (“TBS”) and Tewodros Sahilu (collectively, “TBS Defendants”). Primex filed a Third-Party Complaint [14] against TBS Defendants for: (1) breach of contract; (2) unjust enrichment; (3) money had and received; (4) conversion; (5) negligent misrepresentation; (6) violations of California's Unfair Competition Law; and (7) equitable indemnity.
Currently before the Court is TBS Defendants' Motion for Judgment on the Pleadings (the “Motion”) [78]. Having reviewed all papers submitted pertaining to this Motion, the Court NOW FINDS AND RULES AS FOLLOWS: the Court GRANTS TBS Defendants' Motion.
I. BACKGROUND
A. Factual Background
Springfield is a multi-specialty physician practice that provides health care throughout central Illinois. Compl. (“Springfield Compl.”) ¶¶ 6, 8, ECF No. 1. On or about April 6, 2020, Springfield entered into a Product Supply Agreement (“PSA”) with Primex, a diagnostic service provider, for the purchase of 1 million 3M-branded masks. Third-Party Compl. (“Primex Compl.”) ¶ 11, ECF No. 14. On April 30, 2020, Springfield sent a purchase order to Primex in accordance with the PSA (“Springfield Purchase Order”). Springfield Compl. ¶ 18. That same day, Primex responded to the Springfield Purchase Order with an invoice for $1,789,425, and Springfield paid the invoice by wire transfer. Id. ¶¶ 19-20.
Immediately upon receipt of these funds on April 30, Primex tendered the sum of $970,000 to TBS, a supplier and distributor of various goods, in exchange for 1 million 3M masks. Primex Compl. ¶ 19. This was the first of a series of transactions entered into between Primex and TBS in April, May, and June 2020. Id. ¶ 17. Through these transactions, Primex sought to fulfill the Springfield Purchase Order along with orders placed by seven other clients. Id. ¶ 17 tbl.1. In fact, Primex placed three additional orders with TBS on April 30, 2021, for clients other than Springfield. Id. This included an order for 1.5 million masks for a total purchase price of $1,455,000. Id.
Primex alleges that Sahilu, an agent and alter ego of TBS, had represented to Primex that TBS could obtain 3M products more quickly than any other wholesaler and that Primex would receive priority allocation of masks because Primex was a first responder. Id. ¶¶ 5, 18. However, TBS failed to supply masks sufficient to satisfy the Springfield Purchase Order or any of the other purchase orders from Primex's various clients. Primex Compl. ¶ 20. Primex accepted some alternative, non-3M branded masks from TBS and was refunded a total of $1,086,400. Id. ¶¶ 22 tbl.2, 23. Primex alleges that TBS refuses to either perform its remaining contractual obligations or refund the remaining balance owed to Primex. Id. ¶ 25. Primex now seeks recovery from TBS for a total of $2,220,731.20. Id. ¶ 24. This total includes an alleged balance owed for the orders involving Primex clients other than Springfield. Id. ¶¶ 17 tbl.1, 22 tbl.2; id. Prayer for Relief.
B. Procedural Background
Springfield filed its complaint (“Springfield Complaint”) [1] against Primex on April 28, 2020. Primex filed its third-party complaint (“Primex Complaint”) [14] on July 7, 2020, impleading TBS Defendants into this Action. TBS Defendants then filed a third-party complaint [29] on October 5, 2020, impleading Studebaker Defendants. On January 6, 2022, this Court granted [57] Studebaker Defendants' motion to dismiss TBS's third-party complaint. TBS then amended its Answer [60] to the Primex Complaint on January 19, 2022, to include counterclaims against Studebaker Defendants that were nearly identical to the claims it had alleged in its third-party complaint. Studebaker Defendants moved to dismiss [71] the counterclaims brought against it, and the Court granted Studebaker Defendants' motion [77].
TBS Defendants filed the instant Motion for Judgment on the Pleadings [78] on May 20, 2022; Primex filed its Opposition [79] on June 1, 2022; TBS Defendants replied [83] on June 7, 2022.
II. DISCUSSION
A. Legal Standard
Federal Rule of Civil Procedure 12(c) states that “[a]fter the pleadings are closed . . . a party may move for judgment on the pleadings.” Judgment on the pleadings is appropriate when the moving party is entitled to judgment as a matter of law. Fajardo v. County of Los Angeles, 179 F.3d 698, 699 (9th Cir. 1999). A motion for judgment on the pleadings is “functionally identical” to a Rule 12(b)(6) motion to dismiss for failure to state a claim, meaning the same pleading standards apply. Dworkin v. Hustler Magazine, Inc., 867 F.2d 1188, 1192 (9th Cir. 1989). Allegations in the non-moving party's pleadings are taken as true, and facts are viewed in the light most favorable to the non-moving party. Living Designs, Inc. v. E.I. DuPont de Nemours & Co., 431 F.3d 353, 360 (9th Cir. 2005). Any allegations made by the moving party that are denied or contradicted are assumed to be false. MacDonald v. Grace Church Seattle, 457 F.3d 1079, 1081 (9th Cir. 2006); Doleman v. Meiji Mut. Life Ins. Co., 727 F.2d 1480, 1482 (9th Cir. 1984).
Judgment on the pleadings is improper when the district court goes beyond the pleadings to resolve an issue; such a proceeding must properly be treated as a motion for summary judgment. Hal Roach Studios, Inc. v. Richard Feiner & Co., 896 F.2d 1542, 1550 (citing Fed R. Civ. P. 12(c)). However, the court may consider facts that are subject to judicial notice. Heliotrope Gen., Inc. v. Ford Motor Co., 189 F.3d 971, 981 n.18 (9th Cir. 1999).
B. Analysis
1. Bad Faith Allegation
Primex asserts that TBS Defendants filed the instant Motion in bad faith and that counsel for TBS Defendants admitted to bringing this Motion to “buy time.” See Decl. of Houston M. Watson (“Watson Decl.”) ¶¶ 7-9, ECF No. 79-1. TBS Defendants dispute this interpretation of its counsel's words and object to the statements in the Watson Declaration on various evidentiary grounds. See Decl. of Arash Beral in Supp. of Reply ¶ 4, ECF No. 83-1; TBS Defs.' Evid. Objs. to Watson Decl., ECF No. 83-2.
The Court will consider TBS Defendants' Motion regardless of the bad faith allegations because there is a strong legal basis for finding that the impleader of TBS Defendants was improper. The merits of the Motion thus run contrary to the notion that it was filed in bad faith. For this reason, the Court also declines to issue sanctions here based on any recklessness by TBS Defendants' counsel. See Calop Bus. Sys., Inc. v. City of L.A., 984 F.Supp.2d 981, 1020-21 (C.D. Cal. 2013). Because the Court concludes that the Motion should be granted regardless of the bad faith allegations, the Court need not consider TBS Defendants' evidentiary objections to the Watson Declaration and therefore OVERRULES them as moot.
2. The Motion
TBS Defendants move for judgment on the pleadings, asserting that: (1) Primex failed to properly plead alter-ego liability against Sahilu; (2) Primex's Counts II-VII fail to state valid claims; and (3) Primex improperly joined TBS Defendants to this Action. See generally Mot. The Court finds that TBS Defendants' impleader was improper under Rule 14 of the Federal Rules of Civil Procedure for three reasons. First, the Springfield Complaint and the Primex Complaint concern two distinct contracts regarding entirely separate transactions. Second, Primex fails to state a claim for equitable indemnity because TBS Defendants' liability is not derivative of the main action. Lastly, permitting TBS Defendants to remain in this suit would not promote judicial efficiency.
The Court therefore GRANTS TBS Defendants' Motion. Because the improper joinder of TBS Defendants is dispositive of the Motion, the Court need not address TBS Defendants' other arguments concerning alter ego liability and failure to state a claim.
a. Joinder under Rule 14
A defendant is permitted to implead a third party “who is or may be liable to it for all or part of the claim against it.” Fed.R.Civ.P. 14(a)(1). “The crucial characteristic of a Rule 14 claim is that the defendant is attempting to transfer to the third-party defendant the liability asserted against him by the original plaintiff.” Stewart v. Am. Int'l Oil & Gas Co., 845 F.2d 196, 199 (9th Cir. 1988) (quoting 6 Fed. Prac. & Proc. § 1446 (1971 ed.)). Thus, for impleader to be permitted, the third party's liability must be “in some way dependent on the outcome of the main claims” and be secondary or derivative in nature. United States v. One 1977 Mercedes Benz, 708 F.2d 444, 452 (9th Cir. 1983) (citations omitted).
It is not enough that the facts underlying the main claim and those underlying the third-party claim are “inextricably intertwined.” Uldricks v. Kapaa 382, LLC, No. 07-117 JMS/KSC, 2007 WL 2694409, at *4 (D. Haw. Sept. 11, 2007). A third-party claim is also not derivative of the main claim simply because the pending action between the plaintiff and defendant establishes the measure of damages sustained by the defendant due to a breach by a third party. Ruthardt v. Sandmeyer Steel Co., No. Civ. A. 94-6105, 1995 WL 434366, at *2 (E.D. Pa. July 21, 1995).
i. Separate and Distinct Contracts
Impleader is improper where the underlying suit and the third-party suit are governed by separate and distinct contracts. See Stewart, 845 F.2d at 199 (affirming the district court's ruling that impleader was improper where “the transaction which gave rise to the original complaint and the transaction which gave rise to the third-party complaint were completely separate”); see also Ruthardt, 1995 WL 434366, at *2 (finding impleader improper where defendant alleged that a third party's breach of its contract with defendant caused defendant to breach its separate contract with plaintiff). Here, joinder of TBS Defendants to this Action is improper because TBS Defendants' liability to Primex is governed solely by the provisions of the Primex-TBS contract. Thus, TBS Defendants' liability is not derivative in nature because it in no way depends on the outcome of the suit between Springfield and Primex.
Primex argues that impleader is proper because the Springfield-Primex contract and the Primex-TBS contract were negotiated and executed contemporaneously on April 30, 2020. Opp'n 6:19-22. But the action between Springfield and Primex arises from a Product Supply Agreement, dated April 6, 2020, which led to a Purchase Order on April 30, 2020. Primex Compl. ¶ 11. By contrast, the claims between Primex and TBS Defendants arise from a series of transactions entered into in April, May, and June 2020. Id. ¶ 17. Moreover, Primex's claims against TBS Defendants also involve orders for masks destined for other clients. Id. ¶ 17 tbl.1. These facts together establish that the Springfield and Primex Complaints involve distinct transactions and separate contracts.
The fact that both contracts may have involved the same product does not make TBS Defendants' liability derivative in nature. See Produce Pay, Inc. v. Agrosale, Inc., 533 F.Supp.3d 1140, 1144 (S.D. Fla. 2021) (concluding impleader was improper because the main action and third-party action were governed by separate contracts, even though the very same shipment of produce was involved in both branches of litigation). Regardless, the masks that TBS ultimately procured for Primex were different from the ones Primex had originally contracted for with Springfield. Primex Compl. ¶ 21.
Because the Springfield and Primex Complaints concern separate contracts with distinct facts underlying their creation and execution, TBS Defendants' liability does not depend on the outcome of the suit between Springfield and Primex. It may be found that TBS Defendants are not liable to Primex even if Primex is found liable to Springfield. Conversely, it may be the case that TBS Defendants breached their contract with Primex even though Primex did not breach its contract with Springfield. These possibilities support the conclusion that impleader of TBS Defendants is improper. See Stewart, 845 F.2d at 199; Ruthardt, 1995 WL 434366 at *2.
ii. Equitable Indemnity
Impleader requires some legal basis for holding TBS Defendants liable for Springfield's injuries, such as an assertion of “contribution, indemnification, subrogation, or another type of vicarious liability.” Ruthardt, 1995 WL 434366, at *2. Because the two actions are governed by separate contracts, the only possible basis for TBS Defendants' derivative liability is Primex's claim for equitable indemnity. However, this equitable indemnity claim fails because Primex has not proven that TBS Defendants had a sufficient legal obligation to Springfield.
Equitable indemnity “permit[s] a concurrent tortfeasor to obtain partial indemnity from other concurrent tortfeasors.” Am. Motorcycle Ass'n v. Superior Ct., 20 Cal.3d 578, 598 (1978). Under California law, equitable indemnity also encompasses claims for implied contractual indemnity, which exists where “two parties in a contractual relationship were both responsible for injuring a third party.” Prince v. Pac. Gas & Elec. Co., 45 Cal.4th 1151, 1159 (2009). However, implied contractual indemnity is not available “in the absence of a joint legal obligation to the injured party.” Id. at 1160. Thus, the success of Primex's indemnity claim hinges on whether TBS Defendants owed a duty to Springfield, either in contract or in tort. See Patton v. Experian Data Corp., No. SACV 17-01559-JVS(DFMx), 2018 WL 6184773, at *3 (C.D. Cal. Sept. 12, 2018).
Primex argues that TBS Defendants owed a duty to Springfield because all of the Purchase Orders between TBS and Primex clearly indicated that Springfield was the ultimate delivery destination and because TBS accepted money from Primex knowing it came from Springfield. Opp'n 2:11-15, 8:6-7. Primex thus argues that these facts made Springfield a beneficiary of the Primex-TBS contract and created a duty of care running from TBS to Springfield. Id. at 13:9-11.
First, there is no contractual duty running from TBS to Springfield because the Springfield-Primex agreement does not refer to TBS and does not evince an intent to incorporate the Primex-TBS agreement. See generally Springfield Compl; see Unilease Comput. Corp. v. Major Comput. Inc., 126 F.R.D 490, 493 (S.D.N.Y 1989) (holding that where plaintiff's lease with defendant did not refer in any way to defendant's lease with third-party defendant, impleader was improper because there was no indication of an intent to incorporate the third-party agreement by reference). While Primex may have only played an intermediary role, its contractual duty to Springfield was not contingent on TBS's delivery of masks to Primex.
Further, TBS's knowledge that the goods it agreed to supply would ultimately be delivered to Springfield did not create a contractual duty running from TBS to Springfield. Id. at 493. Primex alone owed a contractual duty to Springfield to deliver masks pursuant to their agreement. Since the underlying claim between Springfield and Primex is governed by a contract that does not include TBS, TBS Defendants are not jointly and severally liable to Springfield for Primex's breach. See Zurich Am. Ins. Co. of Il., 2020 WL 2732046, at *9 (E.D. Cal. May 26, 2020) (holding that defendant and third party were not jointly and severally liable for defendant's breach of contract with plaintiff where third party did not contract with plaintiff); Produce Pay, Inc., 533 F.Supp.3d at 1145 (finding defendant's allegation that it was acting as an intermediary between plaintiff and a third party insufficient to conclude that either contract at issue was contingent on the performance of the other, and therefore no duty existed between plaintiff and third party).
Primex's claim that a tort duty exists running from TBS to Springfield also fails. The Primex Complaint's allegations regarding the existence of a tort duty are conclusory and not entitled to deference. See Tesoro Refin. & Mktg. Co. LLC, 2014 WL 4364393, at *5 (N.D. Cal. Aug. 29, 2014). Moreover, the California Supreme Court has held that negligent breach of contract is generally insufficient to establish tort liability. Erlich v. Menezes, 21 Cal.4th 543, 552 (1999). Some California cases have found a tort duty of care running from a third party to a plaintiff where two separate contracts governed the action. See, e.g., Langley v. Pac. Gas & Elec. Co., 41 Cal. 2d 655, 660 (1953). However, these cases are limited to special situations warranting independent tort damages, such as construction contracts or duties owed by public utilities derived from the Public Utilities Code. Willdan v. Sialic Contracts Corp., 158 Cal.App.4th 47, 50; Langley, 41 Cal. 2d at 661.
Here, Primex offers no compelling rationale for finding that a tort duty exists between TBS and Springfield. Primex had the freedom to bargain for an express indemnification clause in its contract with TBS and failed to do so. There are no inequities in bargaining power or other policy reasons to support treating Primex differently than any other business entity. See Tesoro Refin. & Mktg. Co. LLC v. Pac. Gas & Elec. Co., No. 14-cv-00930-JCS, 2014 WL 4364393, at *6 (N.D. Cal. Aug. 29, 2014) (finding no tort duty between third-party and plaintiff where there was no independent basis for the duty, such as a state regulation evincing an intent to impose such a duty, or policy reasons to support treating the third-party differently from a typical business entity). The California Supreme Court has cautioned against awarding such tort remedies in contract disputes because “restrictions on contract remedies serve to protect the ‘freedom to bargain over special risks and [to] promote contract formation by limiting liability to the value of the promise.'” Erlich, 21 Cal.4th at 553 (quoting Freeman & Mills, Inc. v. Belcher Oil Co., 11 Cal.4th 85, 98 (1995)).
iii. Judicial Efficiency
Finally, even if TBS Defendants were derivatively liable to Springfield, impleader would not serve Rule 14's purpose of promoting judicial efficiency. Sw. Adm'rs, Inc. v. Rozay's Transfer, 791 F.2d 769, 777 (9th Cir. 1986).
The distinct facts underlying the negotiation and execution of the Springfield-Primex contract and the Primex-TBS contract would make litigating them together inefficient. Each Complaint describes an entirely distinct set of events and transactions. Compare Springfield Compl., with Primex Compl. The Complaints relate to one another only in that they both involved the purchase of the same product. See Springfield Compl. ¶ 1; Primex Compl. ¶ 18. The Primex Complaint, however, involves transactions with seven clients other than Springfield and seeks relief against TBS Defendants related to all seven transactions. Primex Compl. ¶ 1722, 17 tbl.1. Thus, the Primex Complaint involves claims regarding transactions that are irrelevant to the underlying suit between Springfield and Primex. See Helferich Pat. Licensing, LLC v. Legacy Partners, LLC, 917 F.Supp.2d 985, 989-90 (D. Ariz. 2013) (denying impleader where the original claim and third-party claim were governed by different contracts because it would raise issues extraneous to the primary contract).
In short, Primex has not sufficiently established that TBS Defendants would be derivatively liable in the event Primex is held liable to Springfield. Permitting the impleader of TBS Defendants would unduly complicate litigation of Springfield's claims and would not serve the goal of judicial efficiency. The parties in this Action would be best served by the opportunity to litigate their contractual disputes separately. Impleader of TBS Defendants into this Action is thus improper, and the Court therefore GRANTS the Motion for Judgment on the Pleadings.
b. Leave to Amend
“The court should give leave [to amend] freely when justice so requires.” Fed.R.Civ.P. 15(a)(2). In the Ninth Circuit, “Rule 15's policy of favoring amendments to pleadings should be applied with ‘extreme liberality.'” United States v. Webb, 655 F.2d 977, 979 (9th Cir. 1981). In deciding whether to grant leave to amend, a Court may consider “the presence of . . . bad faith, undue delay, prejudice to the opposing party, and/or futility.” Owens v. Kaiser Found. Health Plan, Inc., 244 F.3d 708, 712 (9th Cir. 2001).
Primex claims that it is “ready willing and able” to supplement and elaborate on the derivate nature of the duty undertaken by the TBS Defendants in connection with the acquisition of the masks for Springfield. Opp'n 7:19-20. However, even if Primex was willing to amend and limit its Complaint against TBS Defendants to the transactions exclusively relating to the Springfield Purchase Order, Primex would still lack a basis for derivative liability because the two Complaints are based on distinct contracts.
The other facts that Primex states it would add are either irrelevant to derivative liability or are already alleged in the Primex Complaint. See Opp'n 7:18-8:7. Because the defective impleader of TBS Defendants into this Action cannot be cured through amendment, leave to amend would be futile. See Nat'l Funding, Inc. v. Com. Credit Counseling Servs., Inc., 817 Fed.Appx. 380, 385 (9th Cir. 2020) (affirming district court's denial of leave to amend where plaintiff “failed to delineate any additional facts it would add in support of [its] claim to cure [the] deficiencies”). The Court therefore DENIES Primex leave to amend.
III. CONCLUSION
Based on the foregoing, the Court GRANTS TBS Defendants' Motion for Judgment on the Pleadings and DISMISSES the Primex Complaint without leave to amend.
IT IS SO ORDERED.