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Second State Enterprises, Inc. v. Mid-Atlantic Investments, LLC

United States District Court, M.D. Pennsylvania

August 18, 2014

SECOND STATE ENTERPRISES, INC., BERNARD L. WASHABAUGH II, and PJ 13, LLC, Plaintiffs,
v.
MID-ATLANTIC INVESTMENTS, LLC, Defendant.

MEMORANDUM

CHRISTOPHER C. CONNER, District Judge.

Plaintiffs Second State Enterprises, Inc. ("Second State"), Bernard L. Washabaugh II ("Washabaugh"), and PJ 13, LLC ("PJ 13") filed the instant action, seeking a declaratory judgment on certain rights and responsibilities under PJ 13's Operating Agreement ("PJ 13 Operating Agreement"). Presently before the court is defendant Mid-Atlantic Investments, LLC's ("Mid-Atlantic") motion to dismiss PJ 13 as a dispensable party pursuant to Federal Rules of Civil Procedure 19(b) and 21. (Doc. 2). For the reasons that follow, the court will grant the motion.

I. Factual Background and Procedural History

The instant action arises out of a dispute between Second State and Mid-Atlantic regarding the parties' rights and obligations under the PJ 13 Operating Agreement dated July 15, 2008. The PJ 13 Operating Agreement governs a joint venture relationship between Second State and Mid-Atlantic to design, construct, finance, operate, manage, and ultimately sell a hotel located in Martinsburg, Berkley County, West Virginia. (Doc. 1, Ex. A ¶ 1).

A. Parties

Plaintiff Second State is a Pennsylvania close corporation with its principal place of business in Chambersburg, Pennsylvania. (Id. ¶ 3). Plaintiff Washabaugh is a resident of Pennsylvania and currently serves as the President of Second State and a Manager of PJ 13. (Id. ¶¶ 1, 4). Defendant Mid-Atlantic is a Minnesota limited liability company with its principal place of business in Chanhassen, Minnesota. (Id. ¶ 6). Mid-Atlantic's sole member is Northcott Hospitality, LLC, a Minnesota limited liability company, whose members are three separate trusts created for the benefit of Rhonda N. Fowler, Melanie M. Nelson, and Melinda N. Pfohl pursuant to that certain Trust Agreement dated January 20, 1978, by and among Wyman D. Nelson, as Trustor, and Reynold M. Anderson, Richard S. Taylor, Howard S. Cox, and National Bank of South Dakota, as Trustees. (Doc. 8 at 3). None of the current trustees are residents of Pennsylvania. (Id.) On July 15, 2008, Second State and Mid-Atlantic formed PJ 13, a Pennsylvania limited liability company, in which each party holds a 50% membership interest. (Doc. 1, Ex. A ¶¶ 5, 16).

B. Joint Venture

In April 2007, Second State obtained an option to purchase real property located in Martinsburg, West Virginia for the purpose of developing a hotel on the premises. (Id. ¶¶ 13-14). In early 2008, AmericInn International, LLC ("AI") contacted Washabaugh regarding a plan to expand its hotel chain into the region. (Id. ¶¶ 12, 15). For approximately six months, AI and Second State negotiated a joint venture agreement and decided to use PJ 13 to construct and operate a new hotel near Martinsburg, West Virginia. (Id. ¶¶ 15-16). On July 15, 2008, Second State, Mid-Atlantic, which is a wholly-owned subsidiary of AI, and the newly formed PJ 13 entered into the PJ 13 Operating Agreement. (Id. ¶ 17).

C. PJ 13 Operating Agreement

Pursuant to the PJ 13 Operating Agreement, Second State contributed an assignment of the purchase agreement for the real property and Mid-Atlantic contributed the purchase price of $800, 000 to PJ 13. (Id. ¶ 22). Second State and Mid-Atlantic agreed that PJ 13 would develop and construct a three-story, seventy-three-unit AmericInn Lodge & Suites Hotel ("Hotel"). (Id. ¶ 18). Thereafter, PJ 13 would operate and manage the Hotel and ultimately sell the Hotel together with an assignment of a long-term management agreement with Three Rivers Hospitality, LLC, a wholly-owned subsidiary of AI. (Id.)

The PJ 13 Operating Agreement provides that, as long as Second State and Mid-Atlantic each hold a 50% membership interest, then each party is entitled to appoint one manager. (Id. ¶ 20). The initial managers were Washabaugh and Arnold N. Angeloni, CEO of Mid-Atlantic. (Id.) In December 2009, Mr. Angeloni stepped down as CEO of Mid-Atlantic and Manager of PJ 13. (Id. ¶ 21). The parties dispute whether Mid-Atlantic properly designated new CEO, Paul S. Kirwin, as replacement manager for PJ 13. (See id.; Doc. 8 at 2).

The PJ 13 Operating Agreement also divided certain tasks between Second State and Mid-Atlantic as well as their appointed managers in order to achieve the purposes of the joint venture. (Doc. 1, Ex. A ¶ 23). Second State agreed to apply for land development approvals, obtain construction financing, and engage an architect to construct the Hotel using building plans and specifications approved by Mid-Atlantic. (Id. ¶¶ 22-24). Mid-Atlantic, on the other hand, had the responsibility to franchise and select the management of the Hotel. (Id. ¶ 23). To date, PJ 13 has purchased the real property using Mid-Atlantic's initial contribution, but Plaintiffs have not obtained financing or commenced construction on the Hotel. (Doc. 8 at 2).

D. Procedural History

On February 11, 2014, Plaintiffs filed a complaint against Mid-Atlantic in the Franklin County Court of Common Pleas, seeking a declaratory judgment on their rights and obligations as a result of the failure to develop the Hotel as set forth in the PJ 13 Operating Agreement. (Doc. 1, Ex. A). Specifically, Plaintiffs request a judicial declaration that, inter alia , (1) neither Washabaugh nor Second State is a guarantor of the assigned tasks in the Operating Agreement, (2) Plaintiffs did not breach the Operating Agreement, and (3) Plaintiffs did not violate any duty owed to Mid-Atlantic. (Id. at 10-12). On March 10, 2014, Mid-Atlantic removed the instant action to federal court and filed a motion to dismiss PJ 13 as a dispensable party pursuant to Federal Rules of Civil Procedure 19(b) and 21. (Docs. 1, 2). Mid-Atlantic contends that Second State and Washabaugh improperly joined PJ 13 as a plaintiff solely to destroy complete diversity between Plaintiffs and Mid-Atlantic and prevent removal to federal ...


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