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Bates Energy Oil & Gas, LLC v. Complete Oil Field Services, LLC

United States District Court, W.D. Texas, San Antonio Division

September 7, 2017




         On this date, the Court considered Defendant Complete Oil Field Services LLC's amended Notice of Removal and response to the Court's Show Cause Order.

         Plaintiff Bates Energy Oil & Gas, LLC filed this action in state court against Defendants Complete Oil Field Services, LLC (“COFS”) and Sam Taylor. Bates sues COFS for breach of contract and sues Taylor for tortious interference with contract. COFS filed a Counterclaim against Bates for declaratory judgment, rescission, fraud, breach of contract, equitable accounting, and theft, and sought a writ of attachment to protect an escrow account. Defendants then removed this case, alleging diversity jurisdiction. After removal, Defendant COFS filed an “Original Third Party Complaint, ” asserting claims against new parties Equity Liaison Company (“ELC”) and its principal/agent Dewayne D. Naumann for breach of the Escrow Agreement, breach of fiduciary duty, “restitution and money had and received, ” and equitable accounting.

         Because Defendants had not adequately alleged facts establishing the existence of diversity jurisdiction, the Court issued an Order directing them to file an Amended Notice of Removal that adequately demonstrated the existence of diversity jurisdiction. And because the third-party action was filed in violation of Rule 14's procedural and substantive requirements, the Court directed COFS to show cause why the Third Party Complaint should not be dismissed. Defendants timely responded to both orders.

         For jurisdiction, the Court noted two issues. First, both Plaintiff Bates and Defendant COFS are LLCs, yet the Notice of Removal did not distinctly and affirmatively allege the citizenship of their members. Thus, the Court was unable to determine whether there was complete diversity of citizenship. Second, neither the existence of diversity of citizenship nor the amount in controversy had been demonstrated for the Court to exercise jurisdiction over the claim by Bates against Taylor.

         The Amended Notice of Removal sufficiently pleads the existence of diversity jurisdiction. The Amended Notice of Removal asserts that the sole member of Bates Energy is Blair Bates, an individual, who is a citizen of Texas.[1] It further asserts that COFS has three individual members, all of whom are citizens of Utah, and that Defendant Taylor is a citizen of Utah. Thus, diversity of citizenship exists. Further, the claim by Bates against COFS clearly exceeds the $75, 000 threshold, and under § 1441(a) this is an action in which the Court would have had original diversity jurisdiction under § 1332.[2]

         With regard to the claim by Bates against Taylor, the Court noted that, because Bates did not appear to be asserting joint liability against COFS and Taylor, the claims could not be aggregated for amount in controversy purposes. Even if original diversity jurisdiction existed as to the claim against COFS, it had not been established as to the claim against Taylor, and no basis for supplemental jurisdiction appeared to exist.[3] Defendants contend that the amount in controversy for the tortious interference claim exceeds $75, 000, based on testimony before the state court during the temporary injunction proceedings.[4] Specifically, they note Bates's counsel's testimony that Bates lost profits and that Bates's COO testified they lost at least five suppliers, including CSI. With respect to CSI, Defendants contend that Bates alleges that COFS improperly obtained 9, 200 tons of sand with a resulting lost profit to Bates of $7 per ton, or a total of $64, 400. Given that this does not include the lost profits for other supplier deals and the claim for exemplary damages, Defendants contend that the amount in controversy likely exceeds $75, 000. The Court agrees, and finds that the amount in controversy is sufficiently established at this time. Accordingly, the Court finds that Defendants have adequately demonstrated the existence of removal jurisdiction at this time.

         With regard to COFS's Original Third Party Complaint against ELC and its principal Naumann, COFS states that, despite the fact that it filed this action separately and styled it as a Third Party Complaint, it was not intending to join ELC and Naumann under Rule 14, which governs third-party complaints, but under Rule 20, which governs joinder of parties. Thus, although the pleading was not filed as part of an amended counterclaim, COFS seeks to join ELC and Naumann to its existing counterclaim against Bates.

         Rule 13 governs the filing of counterclaims, and Rule 13(h) provides that “Rules 19 and 20 govern the addition of a person as a party to a counterclaim or crossclaim.” Fed.R.Civ.P. 13(h). Rule 20 provides that persons may be joined in one action as defendants if any right to relief is asserted against them jointly, severally, or in the alternative with respect to or arising out of the same transaction, occurrence, or series of transactions or occurrences, and any question of law or fact common to all defendants will arise in the action. Fed.R.Civ.P. 20.[5]

         COFS concedes the confusion created by its pleading method, but cites two cases in which courts have converted such claims into claims under Rule 13(h) and Rule 20 and allowed them to proceed after concluding that the claims could not proceed under Rule 14. In Baltimore & Ohio Railroad Co. v. Central Railway Services, Inc., 636 F.Supp. 782, 786 (E.D. Pa. 1986), the defendant filed counterclaims against the plaintiff and a third-party action against new parties, which the plaintiffs and third-party defendants moved to strike. The court concluded that the third-party claims were improper under Rule 14, but noted that it appeared that the defendants actually intended to join the new parties as defendants to the existing counterclaim against the plaintiff. It noted that the attempt to proceed under Rule 14 “was not an appropriate means to accomplish this end, ” but that Rule 13(h) would allow the joinder of non-parties as defendants to the counterclaims. Id.

         In Superior Performers, Inc. v. Ewing, No. 1:14-CV-232 (M.D. N.C. Feb. 25, 2015), the defendant filed counterclaims and a third-party action, which the plaintiff and the third-party defendant moved to strike. The defendant argued that the third-party action was a proper third-party claim under Rule 14, but the court rejected that argument. The defendant argued alternatively that the parties could be joined as counterclaim defendants under Rules 19 and 20. The court agreed that the claims could be brought under Rule 20.

         However, other courts have not allowed joinder when the causes of action asserted against the non-parties are different from the causes of action asserted in the counterclaim against the plaintiff, holding that non-parties may be joined only to existing causes of action in the counterclaim. In All Tech Communications LLC v. Brothers, 601 F.Supp.2d 1255 (N.D. Okla. 2008), the defendant filed third-party claims, and after a motion to dismiss the third-party claims was filed on the basis that the claims did not comply with Rule 14, the defendant filed a motion for leave to amend the counterclaim pursuant to Rule 15(a) to add the claims. After agreeing that the claims were not proper under Rule 14, the court rejected the motion to amend under Rule 15 as well, holding that “[t]he weight of authority holds that Rule 13(h) cannot be used to assert a counterclaim or crossclaim solely against an unnamed party.” Id. at 1260.

         The court cited the Federal Practice and Procedure treatise, which states, “It should be noted that courts generally have interpreted Rule 13(h) as authorizing the joinder of parties only for the purposes of adjudicating counterclaims or crossclaims that already have been interposed in the action or that are being asserted simultaneously with the motion to add the new parties.” Fed. Prac. & Proc. § 1434. “This means that a counterclaim or crossclaim may not be directed solely against persons who are not already parties to the original action, but must involve at least one existing party.” Id. § 1435. “If it is not directed to an existing party, neither the counterclaim nor the party to be added will be allowed in the action.” Id. The Alltech court construed this language and the language of Rule 13 to mean that there must be “common claims asserted against” the plaintiff and the non-parties in the counterclaim, not different claims. Alltech, 601 F.Supp.2d at 1261.

         The Alltech court noted that the court in Various Markets, Inc. v. Chase Manhattan Bank, 908 F.Supp. 459, 471 (E.D. Mich. 1995) had relied on the same language in the Federal Practice treatise to conclude that different claims could be asserted against non-parties under Rule 13(h) and Rule 20, so long as there was an existing or simultaneously filed counterclaim against an existing party. It noted that the court “apparently interpreted the phrase ‘counterclaim' to refer to a pleading or document rather than an individual claim for relief, such that a counterclaim asserted against a non-party is authorized so long as it is contained within the same document or pleading as counterclaims asserted against existing parties” but concluded that the “better interpretation” would be ...

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