Free Order on Motion to Dismiss Case - District Court of Arizona - Arizona

1 2 3 4 5 6 7 8 9 10 11 12 Home Mortgage, Inc., et al., 13 Defendants. 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28
Case 2:03-cv-00100-ROS-MEA Document 106 Filed 11/30/2006 Page 1 of 7

IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF ARIZONA

Cathleen Channel, et al., Plaintiffs, vs.

) ) ) ) ) ) ) ) ) ) ) )

No. CV-03-0100-PHX-ROS ORDER

Pending before the Court is Defendants Carl and Molly Brown's Motion to Dismiss (Doc. #92). Defendants argue that under Arizona Revised Statutes ("A.R.S.") section 12-541 Plaintiffs' claims against them are time barred. For the following reasons, Defendants' Motion is denied. I. BACKGROUND On January 1, 2003, Plaintiffs filed a complaint alleging that Defendant Home Mortgage, Inc. (HMI), their employer, violated A.R.S. § 23-355 by failing to pay them earned wages. In the initial complaint, only HMI was named as a Defendant. On June 24, 2003, Defendant HMI having failed to appear, Plaintiffs obtained a default judgment in the amount of $232,241.34.

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17

On August 26, 2003, Plaintiffs filed a Motion for Leave to Amend Complaint, requesting that they be able to name Carl Brown as a Defendant.1 This court granted that Motion, giving the Defendants until September 5, 2003 to file an objection to the Amended Complaint. No objection was filed and Plaintiffs filed their Second Amended Complaint on September 11, 2003. Defendants filed their Answer to the Second Amended Complaint on September 30, 2003. II. DISCUSSION A. Statute of Limitations

In their Motion to Dismiss, Defendant's argue that the statute of limitations for a failure to pay wages claim is one year pursuant to A.R.S. § 12-541. Arizona Revised Statutes § 12-541 states: There shall be commenced and prosecuted within one year after the cause of action accrues, and not afterward, the following actions: ... 3. For breach of an oral or written employment contract including contract actions based on employee handbooks or policy manuals that do not specify a time period in which to bring an action. ...

18 19 20 Plaintiffs argue that this statute of limitations does not apply, as A.R.S. § 23-355 states 21 that "[i]f an employer . . . shall fail to pay wages due any employee, such employee may 22 recover in a civil action against an employer or former employer an amount which is treble 23 the amount of the unpaid wages." Plaintiff argues that treble damages is a penalty, and 24 therefore under A.R.S. § 12-541(5), the one year statute of limitations does not apply. See 25 e.g. Apache East, Inc. v. Wiegand, 580 P.2d 769 (Ariz. App. 1978). 26 27 28 The amended complaint also names Carl Brown's wife, Molly and the marital community of Greg Brown, an officer and shareholder of HMI. -2Case 2:03-cv-00100-ROS-MEA Document 106 Filed 11/30/2006 Page 2 of 7
1

5. Upon a liability created by statute, other than a penalty or forfeiture.

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17

A.R.S. § 23-355, however, does not create Defendants' liability in this case. Plaintiffs would still have a claim for failure to pay wages against Defendants without A.R.S. § 23-355. That statute merely provides for the opportunity for Plaintiffs to recover treble damages in appropriate cases. See id. at 773-74 (discussing the discretionary nature of treble damages in such cases). Rather, Plaintiffs' complaint is best characterized under A.R.S. § 12-541(3) as one for breach of an oral or written employment contract. Therefore, Plaintiffs' claims must have been brought within one year of accrual of the cause of action. At the latest, this would be the date that Plaintiffs' ceased to be employed by Defendants, sometime in April 2002. Thus, the statute of limitations ran in April 2003. Since Plaintiffs' Second Amended Complaint, which was the first time Carl and Molly Brown were named as Defendants, was filed in September 2003, Plaintiffs' claims are time barred unless the Amendment to the complaint "relates back" to the date of the original Complaint under Rule 15(c). B. Relation Back

Rule 15(c) states: An amendment of a pleading relates back to the date of the original pleading when ...

18 19 20 21 22 23 24 25 Therefore, in order for Plaintiffs' Second Amended Complaint to relate back to the 26 original Complaint, (1) Plaintiffs' claims asserted in the Second Amended Complaint against 27 Defendants must have arisen out of the same conduct set forth in the original pleading, (2) 28 -3Case 2:03-cv-00100-ROS-MEA Document 106 Filed 11/30/2006 Page 3 of 7

(2) the claim or defense asserted in the amended pleading arose out of the conduct, transaction, or occurrence set forth or attempted to be set forth in the original pleading, or (3) the amendment changes the party or the naming of the party against whom a claim is asserted if the foregoing provision (2) is satisfied and, within the period provided by Rule 4(m) for service of the summons and complaint, the party to be brought in by amendment (A) has received such notice of the institution of the action that the party will not be prejudiced in maintaining a defense on the merits, and (B) knew or should have known that, but for a mistake concerning the identity of the proper party, the action would have been brought against the party.

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

Defendants Carl and Molly Brown must have received notice of the institution of the action within 120 days of the filing of the original complaint, and (3) Defendants knew or should have know that they would have been named as Defendants in the original complaint, but for a mistake concerning the identity of the proper party to bring suit against. 1. Notice and Similar Conduct

The first two requirements are clearly met. First, Plaintiffs' claims in the Second Amended Complaint arise from the same conduct that was set forth in the original complaint. Plaintiffs' sued and obtained judgment against HMI for failure to pay wages, and now seek to pierce the corporate veil and hold Defendant Carl Brown, an officer of HMI, personally liable for that same conduct. Second, Carl Brown, as the statutory agent of HMI, was served with notice of the original complaint within 120 days its filing. Even if this service was only effective as actual notice against HMI, Carl Brown was still given constructive notice. "[I]f the proposed new defendants have an identity of interest with the named defendant, notice will be imputed to the former." Brink v. First Credit Resources, 57 F.Supp.2d 848, 853-54 (D. Ariz.1999). "[W]hen a person owns most or all of the shares in a corporation and controls the affairs of the corporation, it is presumed that in litigation involving that corporation the individual has sufficient commonality of interest." Id. at 854. Carl Brown, as a primary shareholder and officer of HMI, had constructive notice of the original complaint against the corporation, as he had an identity of interest with HMI.. Defendants argue that in order to comply with Rule 15(c), Plaintiffs should have served them with the Second Amended Complaint within 120 days of the institution of the action. This is a misstatement of the law. Rule 15(c) states that the party to be added, in this case Carl Brown, must have receive notice of the institution of the action, namely the original complaint, within 120 days of its filing. Rule 15(c) does not state, however, that the party to be added must be served with notice of the amendment within 120 days of the institution of the action.

-4Case 2:03-cv-00100-ROS-MEA Document 106 Filed 11/30/2006 Page 4 of 7

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21

2.

Mistake

The final requirement for the amended complaint to relate back to the original complaint is that Defendants knew or should have know that they would have been named as Defendants in the original complaint, but for a mistake concerning the identity of the proper party to bring suit against. Defendants argue that since Plaintiffs' checked the Arizona Corporation Commission records to determine the name of the statutory agent of HMI in order to serve their original complaint, they must have known that Carl Brown was a shareholder and officer of HMI. Yet, the Plaintiffs chose not to name him as a defendant in the original complaint, electing only to file suit against the corporation. Thus, Plaintiffs were not mistaken about the proper party to bring suit against, as they already knew of Carl Brown's relation to HMI. Defendants argue that they deserve the protection of the statute of limitations because they believed the Plaintiffs made a conscious decision not to include them in the original complaint. See id. at 856. They cite Brink, which details two situations in which the relation back doctrine does not apply: In one situation, the plaintiff is aware of the potential defendant's identity at the time the original complaint is filed but is uncertain whether the potential defendant may be found liable. In this situation, the amendment to add a party that plaintiff had known of from the outset is never allowed. In the second situation, the plaintiff is unaware of a potential defendant or its identity at the time the complaint is filed, learns of the potential defendant within the time established in the statute of limitations, but seeks to add only after the statute of limitations has expired. Id. (citations omitted).

22 Plaintiffs argue that the third scenario outlined in Brink, one in which the relation back 23 doctrine does apply, is most similar to the case at bar 24 25 26 27 28 The third situation in which a plaintiff seeks to add defendants after the statute of limitations has run arises when the information about the additional defendant's identity is within the defendants' control but the defendants are not forthcoming. For example, in G.F. Co. v. Pan Ocean Shipping Co., Ltd., the plaintiff had named the claims agent as the defendant, not the owner of the vessel on which plaintiff's goods were damaged. 857 23 F.3d [1498, 1503]. The plaintiff did not become aware -5Case 2:03-cv-00100-ROS-MEA Document 106 Filed 11/30/2006 Page 5 of 7

1 2 3 4 5 6 7 8 9 10 11 12 13 14

of the owner of the vessel as a potential defendant until after the statute of limitations had expired because the named defendant had been purposely ambiguous about its, the named defendant's, status with regard to the vessel. Id. The named defendant did not explain why it was not the proper defendant until it filed a motion for summary judgment after the statute of limitations had run. Id. at 1504. The Court allowed the plaintiff to amend its complaint, adding the owner of the vessel. Id. Similarly, in Korn v. Royal Caribbean Cruise Line, Inc., the named defendant informed the plaintiff that the "principals" had been notified and were looking into his claim. 724 F.2d [1397, 1400-01]. Furthermore, Mr. Korn's attorney was assured by the named defendant that he had named the proper party. Id. at 1401. The plaintiff later discovered he had named the marketing corporation for the cruise line and not the owner of the vessel. He was allowed to amend his complaint to name the proper party because the Court would not allow the defendants to use Rule 15(c) as a "log to hide behind." Id. The cases indicate the "mistake concerning . . . identity" requirement may be satisfied when the plaintiff was unaware of the new defendant's identity at the time the complaint was filed and learns the identity of the new defendant only after the statute of limitations has expired because the named defendant failed to provide the information sooner. The Court agrees with Plaintiffs. In this case, Defendant HMI failed to respond to the

15 original complaint and failed to appear at an order to show cause hearing. Accordingly, 16 default judgment was entered against them. Since Plaintiffs are suing Carl Brown under a 17 piercing the corporate veil theory, there is no way they could have known that he was the 18 proper party to sue, as HMI never responded to Plaintiffs' original complaint. Plaintiffs had 19 no opportunity to conduct discovery as to whether Carl Brown acted as the alter ego of HMI. 20 HMI was the proper party to sue for Plaintiffs' failure to pay wages claims; naming Carl 21 Brown as a individual defendant would have been improper at the time, as Carl Brown was 22 not Plaintiffs' employer, HMI was. Plaintiffs are arguing that HMI was a mere shell, and that 23 Carl Brown was the alter ego of the corporation. At the earliest, Plaintiffs would not have 24 known that Carl Brown was the proper party to sue until the debtor's examination on HMI 25 on August 4, 2003. 26 Defendants' argument that since Plaintiffs knew Carl Brown was a shareholder of 27 HMI there can be no mistake is unpersuasive. Under Arizona law, shareholders are not the 28 -6Case 2:03-cv-00100-ROS-MEA Document 106 Filed 11/30/2006 Page 6 of 7

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

proper parties to sue for failure to pay wages claims, employers are. See A.R.S. § 23-355 (stating that a civil action may be brought against the employer, not a shareholder, for failure to pay wages due). Plaintiff could not have been aware that Carl Brown was their employer, as the alter ego of HMI, before the filing of the original complaint. The Court finds persuasive the line of cases that Plaintiff cites in support of its position that piercing the corporate veil claims against an alter ego relate back to timely claims against the corporation. Therefore, the third requirement of Rule 15(c) is met, and Plaintiffs' Second Amended Complaint relates back to the original complaint. III. CONCLUSION Accordingly, IT IS ORDERED that Defendants' Motion to Dismiss (Doc. #92) is DENIED. IT IS ALSO ORDERED that Plaintiffs' Motion to Strike Defendants' Motion to Dismiss (Doc. # 93) is DENIED as moot.

DATED this 30th day of November, 2006.

-7Case 2:03-cv-00100-ROS-MEA Document 106 Filed 11/30/2006 Page 7 of 7