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Kline Enterprises Inc., A California Corporation v. Douglas Swenson

June 6, 2012

KLINE ENTERPRISES INC., A CALIFORNIA CORPORATION
PLAINTIFF,
v.
DOUGLAS SWENSON, AN INDIVIDUAL; JEREMY SWENSON, AN INDIVIDUAL; GARY BRINGHURST, AN INDIVIDUAL; MATTHEW DUCKETT, AN INDIVIDUAL; . THOMAS VAR REEVE, ALL INDIVIDUAL; DANIEL ORR, AN INDIVIDUAL; DAVID ROTTMAN, AN INDIVIDUAL; JOHN MAYERON, AN INDIVIDUAL; CHARLES E. HASSARD, AN INDIVIDUAL; THOMAS A KRAUSE, AN INDIVIDUAL; DAN FALLS, AN INDIVIDUAL; DBSI TIEGS 979, LLC, AN IDAHO LIMITED LIABILITY COMPANY; AND JOHN AND JANE DOES 1 THROUGH 10, WHOSE TRUE IDENTITIES ARE UNKNOWN,



The opinion of the court was delivered by: B. Lynn Winmill Chief Judge United States District Court

MEMORANDUM DECISION AND ORDER

INTRODUCTION

Before the Court are motions to dismiss filed by defendants Charles Hassard, Var Reeve, John Mayeron, Gary Bringhurst, Jeremy Swenson, and David Swenson, and a motion to extend the time to serve defendant Douglas Swenson filed by plaintiff Kline Enterprises Inc. The motions are fully briefed and at issue. For the reasons explained below, the Court will (1) grant Kline's motion to extend the time to serve Douglas Swenson, (2) grant John Mayeron's motion to dismiss due to untimely service, (3) deny that portion of the motion to dismiss filed by Gary Bringhurst and David Swenson based on untimely service; (4) deny the motion to dismiss brought by Charles Hassard and Var Reeve based on Kline's failure to state a claim, (5) deny that portion of the motion to dismiss brought by David Swenson, Jeremy Swenson, and Gary Bringhurst based on Kline's failure to state a claim, and (6) deem the denials of the motions to dismiss for failure to state a claim to be without prejudice to the movants' right to refile the motions after Kline files an amended complaint.

FACTUAL BACKGROUND

Plaintiff Kline originally filed this action in Idaho state court and it was removed here by the defendants on November 3, 2011. While the case was still in state court, the deadline imposed by Idaho law for the service of process on the defendants passed without some of the defendants being served. All parties agree that Kline failed to serve defendants John Mayeron, Gary Bringhurst, David Swenson, and Douglas Swenson by the deadline of October 20, 2011, imposed by Idaho law. Kline did serve three of these defendants about ten days after the deadline expired, but has not yet served Douglas Swenson and seeks additional time to do so. The Court must determine (1) whether the Idaho deadline of October 20th applies or whether federal law governs so that Kline gets an additional 120 days from the date of removal to serve defendants, and (2) if Idaho law applies, whether Kline has shown good cause under Idaho law for the late service on three of the defendants and to extend the deadline for service on the fourth.

Kline is a privately held corporation comprised of two family trusts formed to manage investment properties for the benefit of Joanne Kresse and Patricia Kline. Defendant DBSI was one of a number of fictitious entities formed by defendant Douglas Swenson that offered to manage real estate. Along with Swenson, each of the named individual defendants is a principle of DBSI or its affiliates.

In May 2008, Kline invested funds with DBSI in return for ownership of Idaho farmland, which DBSI would manage for five years and then buy back. DBSI also promised to pay Kline a monthly return on its investment.

But shortly this agreement was made, DBSI filed bankruptcy, stopped paying Kline, and forced Kline to manage the farmland itself. To further complicate matters, DBSI's bankruptcy trustee initiated an avoidance action to recoup over $60,000 that DBSI had paid Kline before it filed bankruptcy. Instead of receiving a guaranteed return, Kline found itself embroiled in unexpected litigation and managing Idaho farm properties.

On April 20, 2011, Kline filed this action in Idaho State Court. Although Kline did not have the financial resources to pursue complicated litigation against DBSI, it filed suit to toll various statute of limitations. Meanwhile, Kline pursued reimbursement of its investment on two other fronts besides the Idaho state court action, by filing an arbitration action with the Financial Industry Regulatory Authority (FINRA), and an adversary proceeding in the DBSI bankruptcy. Both actions were expensive and drained Kline's financial resources. Finally, in December 2011, Kline's finances began to improve when the FINRA arbitration was settled and a buyer was found for the Idaho farmland.

In the Idaho state court action, all parties agree that under Idaho law, Kline's deadline for serving the defendants was October 20, 2011. Kline did not serve defendants Gary Bringhurst and John Mayeron until October 31, 2011, and did not serve David Swenson until November 1, 2011. To this date, Kline has not served Douglas Swenson. The case was removed here on November 3, 2011.

LEGAL STANDARDS

In determining the validity of service in the state court prior to removal, a federal court must apply the law of the state. Lee v. City of Beaumont, 12 F.3d 933, 936--37 (9th Cir.1993) (holding that "[t]he issues of the sufficiency of service of process prior to removal is strictly a state law issue"), overruled on other grounds, California Dept. of Water Resources v. Powerex Corp., 533 F.3d 1087, 1091 (9th Cir.2008).

However, once "a case has been removed to federal court, it is settled that federal rather than state law governs the future course of proceedings . . . ." Granny Goose Foods, Inc. v. Brotherhood of Teamsters, 415 U.S. 423, 436-37 (1974); see also, Fed.R.Civ.P. 81(c)(1) (stating that the Federal Rules of Civil Procedure "apply to a civil action after it is removed from a state court"). Under federal law, plaintiffs have 120 days to perfect service, see Fed.R.Civ.P. 4(m), and in a removed case, this 120-day period begins to run from the date of removal. See 28 U.S.C. §1448; Wallace v Microsoft Corp., 596 F.3d 703 (10th Cir. 2010).

The defendants allege that before this case was removed, the deadline under Idaho law for service of process expired before plaintiff Kline served these defendants. Kline responds that even if it failed to meet the Idaho state law deadline for service of process, it was entitled to a new 120-period -- beginning on the date of removal -- to serve the defendants under Rule 4(m) and §1448. Kline cites in support the case of Baumeister v. New Mexico Com'n for the Blind, 409 F.Supp. 2d 1351 (D.N.M. 2006). But in that case, there was no time deadline for service under New Mexico law; the plaintiff merely had to use "reasonable diligence" in serving the defendants. Id. at 1354. Thus the court was not faced there -- as this Court is here -- with a violation of the state law time deadline for service while the case sat in state court before removal.

Under these circumstances, giving Kline a new 120-day service period beginning on the date of removal would be to hold that defendants, by removing the case, waived any state defenses they would have had in state court. But that is not the law: On removal, "the defendant may take advantage of any legitimate defense that would have been available to him or her in state court." 5C, Wright and Miller, Federal Practice & Procedure §1395at p. 558 (3d ed. 2004). This ensures that "removal cannot breathe life into an expired claim." Id. at §3721 (4th ed. 2009).

These principles appear at first glance to have been affected by an amendment to 28 U.S.C. §1441 that states that a federal court, on removal, is not precluded from hearing a case just because the state court lacked jurisdiction. See 28 U.S.C. §1441(f). However, this amendment "focused on subject matter jurisdiction rather than personal jurisdiction or service of process." Id. at §1075 (emphasis added).*fn1 Hence, the amendment "left unchanged the principle that removal cannot breathe life into an expired claim." Id. at §3721; see also Wallace v Microsoft Corp., 596 F.3d 703, 707 (10th Cir. 2010) (stating that if state law service deadline had expired without service being accomplished, subsequent removal to federal court does not entitle plaintiff to a new 120-day service period); Marshall v. Warwick, 155 F.3d 1027, 1033 (8th Cir.1998) (same).

In this case, if the defendants had a defense in the Idaho court that Kline failed to perfect service by the deadline imposed by Idaho law, the defendants have not waived that defense by removing the case to this Court. And if this Court finds that while the case was in the Idaho court, Kline failed to perfect service within the deadline imposed by Idaho law, the subsequent removal of the case cannot cure that deficiency. In other words, Kline is not entitled to a ...


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