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Larson Manufacturing Company of South Dakota, Inc. v. Western Showcase Homes, Inc.

United States District Court, D. South Dakota, Southern Division

December 11, 2018





         This matter is before the court on the basis of diversity jurisdiction, 28 U.S.C. § 1332, after defendants removed the matter from South Dakota state court. The parties have consented to this magistrate judge handling their case pursuant to 28 U.S.C. § 636(c).

         Plaintiff Larson Manufacturing Company of South Dakota, Inc. (Larson) is the parent company of plaintiff Superior Homes, LLC (Superior). Superior is in the business of manufacturing and selling modular homes.

         Defendant Western Showcase Homes, Inc. (Western) in the business of purchasing, reselling, and financing modular homes. Defendant Paul Thomas is the sole member of Defendant American Modular Housing Group, LLC (AMHG, LLC), a company in the business of buying and reselling modular homes. Defendant American Modular Housing Group, Inc. (AMHG, Inc.), is a corporation that also buys and resells modular homes. Thomas is the principal agent and owner of both AMHG entities.

         The defendant entities purchased modular homes from Superior and then re-sold those homes to customers, sometimes arranging for delivery, set and completion of the home at the customer's location. Larson and Superior extended credit to the defendant entities for these purchases; AMHG would then repay the loans when its customer paid the defendant entities.

         The second amended complaint recites that defendant entities placed orders for fourteen modular homes with plaintiffs. Plaintiffs constructed the homes. Of the homes that were delivered to defendants, full payment was never made even though the complaint alleges the ultimate customers who received these homes paid defendants. Other modular homes ordered by defendants were custom-built and never delivered because defendants never paid for the homes. As to the homes plaintiffs retain possession of, plaintiffs allege the custom nature of the homes makes resale of the homes at a reasonable value impracticable.

         In addition, Larson entered into a loan agreement with Western which was guaranteed by AMHG, Inc. This loan agreement ultimately encompassed $14 million in funds. Larson alleges Western defaulted on the loan and AMHG, Inc. refused to pay pursuant to its guarantee. For all these matters, plaintiffs assert three counts of breach of contract, two counts of fraud, two counts of conversion, one count each of debt and guarantee, and one count of piercing the corporate veil.[1] Plaintiffs also allege defendant Thomas converted money which was received from third parties and intended for plaintiffs, but was instead used by Mr. Thomas for his own personal use.

         In their answer to the second amended complaint, defendants generally deny nearly all of plaintiffs' allegations. Defendants Western Showcase, Inc., and American Modular Housing Group, Inc., assert five counterclaims against Larson and Superior. Those counterclaims include breach of contract (failure to pay rebates, failure to repay personal loans from Thomas and failure to provide future promised business); unjust enrichment (rebates, warranty and service fees); tortious interference with business expectancy (Aspen Links Country Club and Aspen Village Properties); breach of contract (manufacturing defects in modular homes); and fraud and deceit (fraudulent inducement to sign a mortgage in connection with Aspen Village and McKenzie Lane, assignment of mortgage interest in Moose Ridge, fraudulent building practices).

         Defendants/counterclaim plaintiffs Western Showcase, Inc. and AMHG, Inc. seek compensatory and punitive damages on their counterclaims, pre-and post-judgment interest, attorney's fees, and other remedies.

         Now pending is the defendants' motion to amend the scheduling order and to join necessary, or in the alternative, permissive, parties (Docket No. 109). The plaintiffs oppose the motion (Docket No. 115).


         An abbreviated version of the facts is recounted here, consisting mostly of the procedural history pertinent to the defendants' motion to join the Aspen entities as parties.

         This lawsuit began in state court. The defendants removed it to federal court, after which they requested and received an extension of time to file their answer. The defendants' answer asserted several counterclaims against the plaintiffs.

         Approximately three months after filing their answer to the plaintiffs' complaint, the defendants filed a motion for leave to file a third-party complaint (Docket 13). That motion sought to assert third-party claims against William Retterath, Greg Jahnke, Ryland Waugh, Aspen Village Properties, Mauri Gwynn Developments, and Waugh Who Developments. Id. The plaintiffs resisted the motion because it did not seek contribution or indemnity. See Docket 15. This court agreed, and on March 8, 2017, denied the defendants' motion for leave to file a third-party complaint.

         On July 11, 2017, the Western entities initiated a separate lawsuit against Larson, William Retterath, Greg Jahnke, Rylan Waugh, Aspen Village Properties, Mauri Gwyn Development, and Waugh Who Developments. See Civ. No. 17-4091, United States District Court, District of South Dakota, Southern Div., Docket No. 1. In that separate lawsuit, the Western entities asserted Greg Jahnke was the principal of both Aspen and Mauri Gwyn. Western further alleged it had a contractual relationship with Aspen/Mauri Gwyn over a period of years for the sale and development of modular homes, and that Aspen/Mauri Gwyn breached its contract with Western. Id. Docket 1. Specifically, Western alleged Aspen/Mauri Gwyn failed to properly remit payments to Western. Western alleged Aspen/Mauri Gwyn (1) failed to remit a share of profits to Western as agreed by contract; (2) failed to remit rebates; (3) failed to remit administration fees; (4) failed to remit other agreed upon payments to Western; and (5) failed to pay development costs such as taxes, insurance, bonds, and commissions; (6) authorized changes and modifications not contemplated by the contract; and (7) failed to adequately fulfill its duties of contractor of record for the work in question.

         The defendants in that separate lawsuit moved to dismiss, arguing some claims in the separate lawsuit were duplicative of the counterclaims in this pending lawsuit and that the non-duplicative claims were not adequately pled. See defendants' motion to dismiss, Civ. No. 17-4091, Docket No. 6.

         On August 10, 2017, the district court sua sponte ordered the parties to brief whether the court had jurisdiction to determine the claims within the separate lawsuit that were made against the Canadian defendants. Id., Docket No. 13. On September 25, 2017, the Western entities, by then represented by their current counsel, voluntarily dismissed the separate lawsuit without prejudice. See Civ. No. 17-4091, Docket No. 16 & 17.


         Defendants move to amend the scheduling order and to join a necessary or alternatively a permissive party. The defendants wish to add the Aspen entities-one of the Canadian defendants the plaintiffs were previously unsuccessful in bringing into this lawsuit as a third-party defendant and which was a named defendant in the separate lawsuit the defendants previously voluntarily dismissed without prejudice.

         The defendants assert joinder of the Aspen entities is necessary to a full and fair adjudication of this lawsuit under Fed.R.Civ.P. 19 because (1) complete relief cannot be afforded among the existing parties in their absence; (2) the Aspen entities claim interests in this action that will be impaired or impeded if they are not joined; (3) the parties may incur multiple or otherwise inconsistent obligations if the Aspen entities are not joined.

         Alternatively, the defendants ask the court to join the Aspen Entities as a permissive party under Fed.R.Civ.P. 20. In support of this argument, the defendants assert the Aspen entities may be jointly or severally liable for the claims the plaintiffs have asserted against Western, and because there are numerous questions of law and fact common to all parties.

         A. Rule 16(b) and the Modification of the Scheduling Order

         Pursuant to Fed.R.Civ.P. 16, the court's scheduling order must limit the time to join other parties, amend the pleadings, complete discovery, and file motions. See Fed.R.Civ.P. 16(a)(3)(A). Motions to amend a scheduling order are governed by Fed.R.Civ.P. 16(b)(4). That rule provides in relevant part:

         (4) Modifying a Schedule.

A schedule may be modified only for good cause and with the judge's consent.

         A federal court may modify a scheduling order where the moving party has been diligent and the non-moving party will not be prejudiced. Sherman v. Winco Fireworks, 532 F.3d 709, 717 (8th Cir. 2008). When the original date set by the court has already passed, the party requesting the modification must show good cause. IBEW Local 98 Pension Fund v. Best Buy Co., Inc., 2018 WL 337715 at * 7 (D. Minn. July 11, 2018). And the primary measure of good cause under Rule 16(b) is the moving party's diligence in attempting to meet the order's requirements. Id.

         While prejudice to the non-moving party remains relevant to the inquiry, generally the court will need not even consider prejudice if the moving party has not been diligent. Id. (citing Bradford v. DANA Corp., 249 F.3d 807, 809 (8th Cir. 2001)) (reasoning that under Rule 16(b), when the moving party has not shown diligence, the analysis need not proceed to, or consider the non-movant's prejudice). And finally, “[A] party does not meet the good cause standard under Rule 16(b) if the relevant information on which it based the amended claim was available to it earlier in the litigation.” Id. (citing Parker v. Columbia Pictures Industries, 204 F.3d 326, 340-41 (2d. Cir. 2000)).

         1. Good Cause.

         The court entered a scheduling order in this matter (Docket 12) setting January 31, 2017, as the deadline for joining additional parties. The first relevant inquiry is whether the defendants should be allowed to modify the scheduling order to add a new party-several months after that deadline has expired, and after the court has already once denied the defendants' motion to add this same party.

         The defendants assert good cause exists to modify the scheduling order to add the Aspen entities, and that they have been diligent. In support of this argument, the defendants cite “the benefit of additional discovery and production of documents, some of which have been produced within the last few months, and which affirmatively demonstrate the Aspen entities' wrongdoing.” Docket 110, p. 6.

         In support of their position, the defendants cite documents (Docket Nos. 107-35, 43, 44, 45, 46, 48, 50, 80, 85, 111, 112, 113) which appear to show how the Aspen entities have appraised certain of the Aspen properties, how money has been withdrawn and paid to the credit line from Larson, and how monies collected from the sale of the Aspen condos was disbursed by Aspen's law firm (McKercher). The defendants assert these documents, recently produced in the discovery portion of this lawsuit, show that Aspen has acted wrongfully in all of these areas, to the defendants' detriment.

         But other documents produced in this lawsuit indicate all this information is not new to the defendants. In a July 27, 2015, email from Mr. Thomas to Mr. Retterath, [2] Mr. Thomas explained the appraisals and accounting information were in his (Thomas's) possession and that he (Thomas) had shared that information with Mr. Jahnke. The email string indicates Mr. Thomas or his associate, Sal Torresco, had all of this information and had forwarded it to the Aspen entity's principal, Mr. Jahnke. Mr. Thomas further explained:

[A]all deals funded to date and any or all purchase contracts were signed by Jahnke and Aspen Village with partial release of Mortgage documents sent to Larson. All deals funded to date including land and any homes/condos were signed by Jahnke and handled by the McKercher Law Firm. They would have all those records as they were the entity that produced those closing documents and distributed all the funds. They call those documents SOA (Statement of Adjustments). Any questions give me a call. Regards, Paul.

See email dated July 27, 2015, from Paul Thomas to Bill Retterath, Docket No. 107-47. This communication between Mr. Thomas and Mr. Retterath indicates Mr. Thomas knew of the information contained in the appraisals and the manner in which the McKercher Law Firm distributed the funds generated by the sale of the Aspen Village condos long before discovery was exchanged in this lawsuit.

         The court is not persuaded that any of discovery produced in this lawsuit tips the scale in the defendants' favor on the issue of diligence. Nevertheless, the defendants did first try to add the Aspen entities as parties to this dispute before the expiration of the deadline for adding parties. That the court denied their motion at that time does not detract from the diligence of the defendants' efforts. The court therefore turns to whether adding the Aspen entities at this time would cause prejudice to the plaintiffs.

         2. Prejudice to Plaintiffs.

         The prejudice to the non-moving party in the context of a Rule 16 motion to amend includes both timing and logistical considerations. Specifically, the court must consider whether the modification of the scheduling order would significantly delay the proceedings or expand the scope of the issues in the lawsuit. Vails v. United Community Health Center, Inc., 283 F.R.D. 512, 514 (N.D. Iowa 2012) (court found prejudice would result if motion to amend scheduling order was granted because discovery, and ultimately trial dates would need to be extended).

         In this case, the defendants indicate their amendment will cause neither problem, while the plaintiffs assert the proposed amendment will cause both problems. The defendants assert plaintiffs will not be prejudiced if the Aspen entities are added as parties to this lawsuit because discovery is in its infancy, and the parties have yet to complete expert discovery. They further assert that depositions have not been taken, [3] three months remain to complete fact discovery, and trial is nine months away. Further, the defendants argue, the discovery necessitated by adding the Aspen entities will be required even if the Aspen entities are not made parties to the lawsuit. The defendants assert adding the Aspen entities will benefit rather than prejudice the plaintiffs.

         The plaintiffs, however, disagree. They assert that adding the Aspen entities to this lawsuit will cause them prejudice. The plaintiffs do not want the Aspen entities added to what the plaintiffs characterize as a simple contractual claim between the plaintiffs and the defendants. The plaintiffs allege that adding the Aspen entities would expand the scope of the issues, facts, and parties to the suit. They also assert it would delay the course of this already extended litigation, because, the plaintiffs predict, the Aspen entities will most certainly make a motion to dismiss. In ...

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