Kanaan v. Yaqub

Background

Nabih Kanaan alleged that he and Nizar Yaqub were the sole members of The Inn at Del Monte Beach, LLC. Kanaan alleged that Yaqub engaged in fraud and other misconduct to take most of Kanaan’s ownership interest in the LLC. The allegations included changing the LLC’s operating agreement without notice, falsifying documents to reduce Kanaan’s interest from 30% to 8%, scheduling a capital call without notice, and falsifying LLC minutes.

Kanaan originally sued both Yaqub and the LLC, but later voluntarily dismissed the LLC after Yaqub argued that the court lacked diversity jurisdiction. The court previously denied Yaqub’s motions under Rules 12(b)(6) and 12(b)(1). Yaqub then filed a motion under Rule 12(b)(7), which allows dismissal for failure to join a party required under Rule 19.

Parties’ Arguments

Yaqub argued that the LLC was a necessary and indispensable party and that joining it was not feasible because doing so would destroy personal jurisdiction. Kanaan argued that the court’s earlier ruling prevented Yaqub from raising the issue again under the law-of-the-case doctrine. Alternatively, Kanaan argued that the LLC was not indispensable.

Court’s Analysis

The court declined to apply the law-of-the-case doctrine because the issue had not been fully presented when the court previously considered whether dismissing the LLC cured the jurisdictional problem. The court therefore reassessed whether the LLC was indispensable and considered Yaqub’s motion on its merits.

Rule 19 requires the court to determine whether an absent party must be joined if feasible, whether joinder is feasible, and, if it is not feasible, whether the case can proceed without that party. The court explained that claims are generally derivative when they seek recovery for harm to a company or seek to protect the company’s assets. By contrast, an LLC owner may bring direct claims for harm suffered personally, including certain claims against a majority owner for breach of fiduciary duty.

The court found that Kanaan’s claims for breach of fiduciary duty, breach of contract, breach of the implied covenant of good faith and fair dealing, unfair competition, declaratory and injunctive relief, and fraudulent concealment were direct claims. The court concluded that the central alleged harm was Yaqub’s effort to squeeze Kanaan out of the LLC and reduce Kanaan’s individual ownership interest. That harm was separate from harm to the LLC itself.

The court acknowledged that some allegations—such as Yaqub’s alleged misuse of LLC funds and failure to renew the liquor license for LLC property—could support derivative claims requiring the LLC’s joinder. But the court found those allegations were not central to the complaint. It concluded that the LLC was not an indispensable party to Kanaan’s claims as pleaded.

Disposition

The court denied Yaqub’s motion to dismiss the first amended complaint for failure to join an indispensable party. The court ordered Yaqub to file an answer by May 31, 2023, and terminated the motion listed as ECF 45.