Sheppard v. River Valley Fitness One, et al.

2002 DNH 020

• Court: District Court, D. New Hampshire
• Decided: January 24, 2002
• Docket: CV-01-111-M
• Status: Published

Opinion

UNITED STATES DISTRICT COURT

DISTRICT OF NEW HAMPSHIRE

Mary Chris Sheppard and Robert Sheppard, Plaintiffs

v. Civil No. 00-111-M Opinion No. 2002 DNH 020 River Valley Fitness One, P.P. d/b/a River Valiev Club; River Valiev Fitness GP, L.L.C.; River Valiev Fitness Associates, Inc.; Joseph Asch, and Elizabeth Asch, Defendants

O R D E R

Mary Chris Sheppard and Robert Sheppard ("the Sheppards")

move for leave to amend their complaint to incorporate a theory -

piercing the corporate veil - under which Joseph Asch and

Elizabeth Asch ("the Asches") might be held personally liable to

pay any judgment Ms. Sheppard may be awarded against her

employer. River Valley Fitness Associates, Inc. and River Valley

Fitness GP, L.L.C. (collectively "the GP defendants"), on her

Title VII claims. The Asches object on several grounds. For the

reasons given below, the Sheppards' Motion for Leave to Amend

and/or Supplement Complaint Pursuant to FRCP Rule 15 (document

no. 151, hereinafter "Motion to Amend") is denied. Factual Background

The events underlying the Sheppards' claims in this case

arose out of Ms. Sheppard's employment by River Valley Fitness

One, L.P., which was doing business at all relevant times as

River Valley Club ("RVC"). Both of the Asches served as managing

supervisors of RVC. As indicated by its name, RVC is a limited

partnership. It has approximately fifty-five limited partners

and has had two successive general partners - River Valley

Fitness Associates, Inc. ("RVFA") and River Valley Fitness GP,

L.L.C. ("the LLC"). Mr. Asch was the secretary and treasurer of

RVFA. Ms. Asch is the sole owner/member of the LLC, and serves

as its chairman and president. Mr. Asch holds no position in the

LLC. Both Asches have held themselves out as general partners of

RVC.

As it currently stands, the Sheppards' case consists of: (1)

two Title VII claims asserted by Ms. Sheppard against RVC, RVFA,

and the LLC; and (2) two state-law claims brought by the

Sheppards against the Asches individually.1 RVC, RVFA, and the

1 While not relevant to the question before the court, RVC filed a five-count counterclaim against Ms. Sheppard.

2 LLC are considered a single employer for purposes of the Title

VII claims.2 RVFA and the LLC are potentially liable to Ms.

Sheppard in two different ways: as defendants in their own right,

and as the successive general partners of RVC. While this case

was moving toward trial, RVC filed for bankruptcy, and is now

subject to the automatic stay provision of the bankruptcy code.

Then, on the eve of trial, RVFA and the LLC also filed for

bankruptcy protection, leaving Ms. Sheppard with no Title VII

defendants not subject to the automatic stay.

At some point after RVC declared bankruptcy, but before RVFA

and the LLC did so, defendants stated: "the two active defendants

[RVFA and the LLC] have no assets from which to fund a defense of

the case against them (or pay any award). They do not even have

a bank account." (Defs.' Obj./Part. Consent to Pis.' Cond. Mot.

2 The Asches are not defendants in the Title VII claims. By letter dated May 2, 2000, counsel for the Sheppards informed counsel for defendants that "the Asches were removed as defendants to those two counts [Ms. Sheppard's Title VII claims] in the First Amended Complaint . . ." (Defs.' Resp. Mem. on Piercing the Veil (document no. 145), Ex. 1), and by order dated October 16, 2001, the court (Muirhead, Mag. J.) denied the Sheppards' motion (based upon a single-employer theory) to amend their complaint to include the Asches as defendants in Ms. Sheppard's Title VII claims (see margin order on Pis.' Mot. to Amend Compl. (document no. 126)) .

3 to Stay Countercls. at 3.) In a subsequent pleading, RVFA and

the LLC offered further detail: "Both RVFA and LLC are mere

entity shells, with absolutely no assets, past or present, from

which to fund the trial or pay any judgment. Neither one has

ever had an employee, and neither even has so much as a bank

account." (Defs. RVFA's & LLC's Reply to Pis.' Reply Concerning

Stay (document no. 137) 5 4.) In response, the Sheppards

initiated their current attempt to "pierce the corporate veil" of

the GP defendants, to hold the Asches personally liable for any

judgment Ms. Sheppard might obtain against the GP defendants on

her Title VII claims. The reasoning behind the Sheppards'

position appears to be that if the Asches are the alter ego of

the GP entities, then Ms. Sheppard's Title VII claim against the

GP entities is necessarily a Title VII claim against the Asches

individually as well.

After raising their veil-piercing argument in several

different contexts, the Sheppards were directed, by order dated

November 28, 2001, to brief at least four issues: (1) whether

their veil-piercing theory had to be set out and supported by

factual allegations in a complaint; (2) whether their theory

4 required their complaint to be amended, whether such an amendment

should be allowed at this late date, and whether the subject

matter of the amendment had to "relate back" to a time within the

relevant limitation period; (3) whether the Asches would be

entitled to additional preparation time, should the court allow

the complaint to be amended; and (4) whether they (the Sheppards)

could bring an action to pierce the corporate veil of an entity

under bankruptcy protection without joining the bankruptcy

trustee as a necessary party.3 In response to the court's order,

the Sheppards move for leave to: (1) amend or supplement their

complaint to incorporate a veil-piercing theory into Counts I and

II (the Title VII claims); (2) amend their complaint to add

factual allegations and a claim for attorney's fees to their

3 While the Sheppards devote considerable attention in their brief to discussing whether a veil-piercing claim belongs exclusively to the bankruptcy trustee, they never answer the question posed by the court: whether the bankruptcy trustee would be a necessary party to their veil-piercing claim. For reasons explained in Section III, the court is able to resolve the matter before it without reaching the question of the bankruptcy trustee's participation in a veil-piercing claim. Nonetheless, the court notes that in Parting v. Nalco Chem. Co., 472 N.E.2d 1220 (111. A p p . C t . 1984), a case whose reasoning the Sheppards urge the court to adopt, the Illinois Court of Appeals explained that when a creditor of a bankrupt corporation seeks to pierce the corporate veil, the interests of other creditors "may be protected, for example, by the joining of the chapter 7 trustee as a necessary party," id . at 1224 (citing Stevhr Daimler Puch of Am. Corp. v. Pappas, 35 B.R. 1001 (E.D.Va. 1983)).

5 state-law claim for intentional interference with advantageous

relationship; and (3) serve a supplemental complaint that alleges

abuse of process. The Asches object, categorically.

Discussion

I. Motion to Amend the Intentional Interference Claim

The Sheppards move for leave to amend their intentional

interference claim (Count IV in the Second Amended Complaint,

Count III in the Third Amended Complaint) to include new factual

allegations concerning the Asches' conduct toward Ms. Sheppard

during her employment by RVC, and to include a claim for

attorney's fees. The Asches object on grounds that: (1) the

Sheppards' proposed amendment adds an entirely new cause of

action for interfering with an ongoing - rather than prospective

- contractual relationship; (2) the amendment does not "relate

back," as required by F e d . R. C i v . P. 15(c)(2); and (3) amendment

at this time would violate, among other things, the scheduling

order in this case.

Because the Sheppards' proposed alteration of their

intentional interference claim concerns conduct that occurred

6 prior to the time they initiated this suit, the proper way to

make that change is by amendment. See F e d . R. C i v . P. 15. Rule

15 provides, in pertinent part:

A party may amend the party's pleading Amendments. once as a matter of course at any time before a responsive pleading is served or, if the pleading is one to which no responsive pleading is permitted and the action has not been placed upon the trial calendar, the party may so amend it at any time within 20 days after it is served. Otherwise, a party may amend the party's pleading only by leave of court or by written consent of the adverse party; and leave shall be freely granted when justice so requires. . . .

F e d . R. C i v . P. 15(a). When ruling on a motion to amend, the

applicable standard provides that

[i]n the absence of any apparent or declared reason - such as undue delay, bad faith or dilatory motive on the part of the movant, repeated failure to cure deficiencies by amendments previously allowed, undue prejudice to the opposing party by virtue of allowance of the amendment, futility of amendment, etc. - the leave sought should, as the rules require, be "freely given."

Foman v. Davis, 371 U.S. 178, 182 (1962) (quoting F e d . R. C i v . P.

1 5 (a). "Prejudice is especially likely to exist if the amendment

involves new theories of recovery or would require additional

discovery." 3 Ja m e s W m . M o o r e , M o o r e 's F e d e r a l Pr a c t i c e § 15.15 [2] at

7 15-45, 47 (3d ed. 2000) (citing Bell v. Allstate Life Ins. Co.,

160 F.3d 452, 454 (8th Cir. 1998); McKniqht v. Kimberly Clark

Corp., 149 F .3d 1125, 1130 (10th Cir. 1998)).

The Sheppards characterize the proposed amendment as merely

adding more facts or descriptive allegations to their basic claim

for intentional interference with advantageous relationship, but

that characterization is too modest. Rather than being merely a

clarification, the proposed Count III either asserts an entirely

different cause of action, or represents an attempt to import a

substantial portion of Counts I and II, action on which has been

stayed, into Count III, which remains unaffected by the

bankruptcy stay.

In the Second Amended Complaint - the operative complaint in

the case - Count IV (the intentional interference claim) alleges

that the Asches interfered with Ms. Sheppard's prospective

relationship with RVC by influencing RVC not to rehire her after

she had resigned. Based upon the facts alleged in Count IV, the

court, in an order dated September 28, 2001 (document no. 128),

recognized Count IV as a claim for intentional interference with a prospective contractual relationship, and ruled that the claim

was not barred by Wenners v. Great State Beverages, Inc., 140

N.H. 100, 103 (1995) (citing Howard v. Dorr Woolen Co., 120 N.H.

295, 297 (1980); Thompson v. Forest, 136 N.H. 215, 216 (1992))

("a plaintiff may not pursue a common law remedy where the

legislature intended to replace it with a statutory cause of

action"). The facts the Sheppards now seek to add to their

intentional interference claim, concerning various actions by the

Asches that "created a work environment that forced Plaintiff to

resign . . ." (Third Amended Compl. 5 62), do not merely enhance

the descriptive quality of that claim; they are presented in such

a way as to assert a new theory of recovery, akin to wrongful

constructive discharge, that was not asserted in Count IV of the

Second Amended Complaint.

In the Sheppards' Second Amended Complaint, the gravamen of

their Count IV claim is that the Asches kept RVC from rehiring

Ms. Sheppard. In Count III of the proposed Third Amended

Complaint, the Sheppards assert that the Asches improperly caused

RVC not to rehire Ms. Shepard and also wrongfully caused Ms.

Sheppard's resignation from RVC. Those are different wrongs.

9 remedied under different theories of recovery, each of which

would require proving different sets of facts. Based only upon a

comparison of Count IV in the Second Amended Complaint and Count

III in proposed Third Amended Complaint, the court would

ordinarily deny the motion to amend on grounds that an amendment

asserting an entirely new cause of action, on the eve of trial,

would unduly prejudice the Asches.

However, the claim the Sheppards seek to introduce into

Count III is not new to this case. Under Count III of the

proposed Third Amended Complaint, the Sheppards state:

In addition, as described in 1119-32 (which are incorporated in this Count), Joseph Asch interfered with Plaintiff's relationship with her employer by sexually harassing her. Further, both Joseph and Elizabeth Asch further interfered by attempting to intimidate employees who had complained about harassment and by failing to properly investigate or remedy the harassment. This conduct forced Plaintiff to resign in December of 1998.

(Third Am. Compl. 1 61 (emphasis added).) In Count I of both the

second and third amended complaints, Ms. Sheppard charges RVC,

RVFA, and the LLC with sexual harassment in violation of Title

VII. Count II of both complaints, Ms. Sheppard's retaliation

10 claim, alleges that "[d]efendant retaliated against Ms. Sheppard

for her complaints of sexual harassment by allowing Mr. Asch to

have others undermine and threaten M s . Sheppard, constructively

discharging Ms. Sheppard . . . ." (Second Am. Compl. 5 52; Third

Am. Compl. 5 53 (emphasis added.) Thus, plaintiffs appear to be

attempting to rescue Ms. Sheppard's claim of sexual harassment

from Count I and her retaliatory constructive discharge claim

from Count II, both of which are subject to the bankruptcy stay.

In other words, the Sheppards are attempting to turn their Title

VII claims against RVC, RVFA, and the LLC into a common-law tort

claim against Mr. Asch, in which they would be able to rehearse

their sexual harassment case. Because the Sheppards themselves

let the Asches out of Counts I and II, and because the court

denied the Sheppards' motion to bring the Asches back into the

Title VII action, the Asches have not been preparing to defend

against those claims, and, on the eve of trial, it would be

unduly prejudicial to force them to do so. But, perhaps more

importantly, the availability of a Title VII remedy for a

constructive discharge resulting from either sexual harassment or

retaliation bars Ms. Sheppard from pursuing a common-law cause of

action for wrongful constructive discharge. See Smith v. F.W.

11 Morse & C o ., 76 F.3d 413, 428-29 (1st Cir. 1998) (citing Wenners,

140 N.H. 100; Howard. 120 N.H. 295).

II. Motion to Add Count IV: Abuse of Process

The Sheppards also seek to supplement their complaint by

adding an entirely new claim for abuse of process. In

particular, they seek to recover from the Asches for various

alleged "abusive litigation tactics" (Mot. to Amend 5 35) that

have occurred: (1) in this court, in this case; (2) in this

court, in another case (Aubin v. River Valley Fitness One, L.P.,

et a l ., Civil. No. 00-110-B); and (3) in the bankruptcy court

(with respect to the bankruptcy filing by RVFA and the LLC). The

Asches object on both general and specific grounds. As a general

objection, the Asches challenge the timeliness of the Sheppards'

assertion, by amendment, of a new cause of action on the eve of

trial. Specifically, they argue that the Sheppards can have no

abuse of process claim because: (1) most of the legal processes

allegedly abused by the Asches, such as actions taken in Aubin

and the bankruptcy court, were directed toward parties other than

the Sheppards; and (2) the one legal process that was directed

12 toward the Sheppards - the counterclaim in this case - was not

brought by the Asches, but was asserted by RVC.

Because the Sheppards' claim for abuse of process is based

upon conduct that occurred after they initiated this suit, the

proper way to incorporate that claim into this case is by serving

a supplemental complaint. See F e d . R. C i v . P. 15(d) . Rule 15

provides, in pertinent part:

Upon motion of a party the Sup pleme ntal Pl e a d i n g s . court may, upon reasonable notice and upon such terms as are just, permit the party to serve a supplemental pleading setting forth transactions or occurrences or events which have happened since the date of the pleading sought to be supplemented. Permission may be granted even though the original pleading is defective in its statement of a claim for relief or defense. If the court deems it advisable that the adverse party plead to the supplemental pleading, it shall so order, specifying the time therefor.

Id. While a pleading may be supplemented to include events

occurring after it was filed, those after-occurring events must

"bear some relationship to the subject of the original pleading."

3 M o o r e 's F e d e r a l Practice § 15.30 at 15-108 (citations omitted) .

Finally, "the standard used by courts in deciding to grant or

deny leave to supplement is the same standard used in deciding

13 whether to grant or deny leave to amend." Id. at 15-109 (citing

Glatt v. Chicago Park Dist., 87 F.3d 190, 194 (7th Cir. 1996));

but see Burns v. Exxon Corp., 158 F.3d 336, 343 (5th Cir. 1998)

("While the text of Rule 1 5 (a) provides that leave should be

freely granted, the text of Rule 1 5 (d) does not similarly

provide. Rule 15(d) is clear that the court may permit a

supplemental pleading setting forth changed circumstances.")

(emphasis in the original).

Here, the Sheppards' proposed abuse of process claim bears

no relationship, other than a fortuitous one, to the subject of

their original claims. That is, the abuse of process claim

pertains exclusively to the manner in which the Asches have

conducted this - and other - litigation. While it is perhaps

arguable that the Asches' allegedly abusive litigation tactics,

vis a vis the Sheppards, represent a continuation of RVC's

allegedly unlawful employment practices, vis a vis Ms. Sheppard,

in that both sets of actions, if proven, harmed the Sheppards,

the better view is that the Sheppards' proposed supplemental

pleading represents something other than an attempt "to 'set

forth new facts in order to update the earlier pleading . . .'"

14 Manning v. City of Auburn, 953 F.2d 1355, 1359-60 (11th Cir.

1992) (quoting Lussier v. Dugger, 904 F.2d 661, 670 (11th Cir.

1990)).

For example, in Keith v. Volpe, 858 F.2d 467, 474 (9th Cir.

1988), the court of appeals affirmed the district court's order

allowing a supplemental pleading where the original complaint

charged various state and federal agencies with failing to "meet

federal statutory requirements concerning relocation payments,

relocation assistance programs, and adequate replacement housing

[for persons displaced by a new freeway]," id., and the proposed

supplemental complaint charged a municipality, working on the

same project, with "refusal to approve housing developments

specifically meant to provide replacement housing for the Century

Freeway displacees," id. In Keith, both the original pleading

and the supplemental pleading charged the various defendants with

malfeasance in the administration of their particular parts of

the same federally funded highway project. See also Ouaratino v.

Tiffany & C o ., 71 F.3d 58, 65-66 (2nd Cir. 1995) (reversing

district court's denial of leave to supplement Title VII

complaint alleging pregnancy discrimination under 42 U.S.C.

15 2000e(k) with claim for unlawful retaliation, based upon conduct

by defendant after plaintiff filed discrimination charge with

EEOC).

Here, by contrast, the Sheppards' original claims against

the Asches are based upon the Asches' conduct as employers while

the abuse of process claim concerns their conduct as litigants

both here and in the bankruptcy court. On its face, the

Sheppards' abuse of process claim is inappropriate subject matter

for a supplemental pleading, and is denied on that ground alone.

Furthermore, even if their proposed abuse of process claim

qualified as proper subject matter for a supplemental pleading,

the court would necessarily deny the Sheppards' motion on grounds

of undue prejudice. See Foman, 371 U.S. at 182 (listing undue

prejudice as one ground for denying a motion to amend). The

addition of an entirely new fact-driven cause of action for abuse

of process on the eve of trial would prove to be at least as

prejudicial as permitting the amendment of the intentional

interference claim to add a claim for wrongful constructive

discharge. See 3 M o o r e ' s F e d e r a l Practice § 15. 15 [2] at 15-45

16 ("prejudice is especially likely to exist if the amendment

involves new theories of recovery In addition, denying

the Sheppards' motion to supplement the complaint does not

prejudice them. Defendants' counsel has been sanctioned for the

conduct alleged in paragraphs 67-69 of the proposed Third Amended

Complaint, and, in any event, like the plaintiff in Al-Ra'id v .

Ingle, 69 F.3d 28 (5th Cir. 1995), the Sheppards are free to

refile their abuse of process claim in a new complaint if they so

desire, id. at 33.

The Sheppards' motion to supplement their complaint with a

new claim for abuse of process is also subject to denial on

grounds of futility. See Foman, 371 U.S. at 182 (listing

futility as one ground for denying a motion to amend). There are

a number of ways in which a supplemental pleading might prove

futile. See generally 3 M o o r e ' s F e d e r a l Practice § 15.15 [3]. A

supplemental pleading is futile, and should not be allowed, when,

among other things, "the complaint as amended could not withstand

a Fed.R.Civ.P. 12(b)(6) motion." Sinav v. Lamson & Sessions Co.,

948 F.2d 1037, 1041 (6th Cir. 1991) (citing Roth Steel Prods, v.

Sharon Steel Corp., 705 F.2d 134, 155 (6th Cir. 1983)); see also

17 AM Int'l, Inc. v. Graphic Mqmt. Assocs., Inc., 44 F.3d 572, 578

(7th Cir. 1995) ("a judge should not grant a motion to amend the

complaint if the grant would merely set the stage for the

dismissal of the amended complaint").

Under New Hampshire law, which governs the Sheppards'

proposed abuse of process claim,

[o]ne who uses a legal process, whether criminal or civil, against another primarily to accomplish a purpose for which it is not designed, is subject to liability to the other for harm caused by the abuse of process.

Long v. Long, 136 N.H. 25, 29 (1992) (quoting R e s t a t e m e n t (Se c o n d )

of T orts § 682 at 474 (1977)).

A party claiming abuse of process must prove the following elements: (1) a person used (2) legal process, whether criminal or civil, (3) against the party (4) primarily to accomplish a purpose for which it is not designed and (5) caused harm to the party (6) by the abuse of process.

Long, 136 N.H. at 29. In a subsequent refinement of the legal

definition of abuse of process, the New Hampshire Supreme Court

explained:

18 The tort comprises two essential elements: an ulterior purpose and a wilful act in the use of the process not proper in the regular conduct of the proceeding. The improper purpose usually takes the form of coercion to obtain a collateral advantage, not properly involved in the proceeding itself, such as the surrender of property or the payment of money, by the use of the process as a threat or a club. There is, in other words, a form of extortion, and it is what is done in the course of negotiation, rather than the issuance or any formal use of the process itself, which constitutes the tort.

Cabletron Sys., Inc. v. Miller, 140 N.H. 55, 57-58 (1995)

(quoting Clipper Affiliates v. Checovich, 138 N.H. 271, 277

(1994)).

In 5 67 of their proposed Third Amended Complaint, the

Sheppards allege that the Asches misled the court with respect to

the settlement in Aubin, for the purpose of obtaining favorable

discovery rulings in this case. That allegation, however, would

not survive a Rule 12(b)(6) motion to dismiss because the

Sheppards do not claim that the Asches misled the court in order

to obtain a "collateral advantage." Rather, the advantage the

Asches sought, favorable discovery rulings in this case, was

properly and directly involved in this case, and the Asches

conduct in seeking that advantage has already been sanctioned.

19 (It would appear that the availability of sanctions in any given

case is the reason why the tort of abuse of process requires that

the advantage sought be collateral to the proceeding in which

process has allegedly been abused.)

In 5 68, the Sheppards charge the Asches with using the

court to obtain a protective order regarding a stipulation to

judgment in the Aubin case, for the purpose of misleading the

Sheppards as to the nature of the Aubin settlement, to scare the

Sheppards into paying on the defendants' counterclaims in this

case. While the issuance of a protective order plainly involves

the exercise of the court's powers, see Long, 136 N.H. at 31, it

is far from clear that issuing a protective order covering a

stipulation to judgment in one case is an exercise of the court's

powers over a litigant in a second case who was not a party to

the first. In other words, it would not appear that the court's

protective order in Aubin constitutes legal process directed

against the Sheppards.

In 5 69, the Sheppards charge the Asches with various

discovery abuses. These allegations fail to mention any exercise

20 of power by the court and, on that basis, could not survive a

Rule 12(b) (6) motion. See Long, 136 N.H. at 31 (adopting the

rule that "where a court's authority is not used, there is no

'process'") .

In 5 70, the Sheppards claim that "[t]he Asches directed

River Valley Fitness One, to countersue Ms. Sheppard, despite

clear warning [from whom, the Sheppards do not say] that such

suit should be considered unlawful retaliation for the purpose of

intimidating Plaintiffs and trying to get them to drop their

claims." As the Sheppards themselves readily acknowledge, the

counterclaim against them was filed by RVC. If the counterclaim

constituted an abuse of process, the proper defendant would be

the party that filed the counterclaim, RVC. However, as a result

of the bankruptcy stay, the Sheppards cannot bring an abuse of

process claim against RVC in this court.4 Unavailability of the

proper defendant does not give rise to an abuse of process claim

4 Interestingly, the conduct underlying the abuse of process claim in 5 70 of the Third Amended Complaint - filing the counterclaim - is the same conduct asserted in 5 53 of the Second Amended Complaint, which is part of Count II, Ms. Sheppard's Title VII retaliation claim. Thus, it would appear that 5 70 in the Sheppards' proposed abuse of process claim is also an attempt to rescue Ms. Sheppard's retaliation claim from the operation of the bankruptcy stay.

21 against third parties, such as the Asches, who did not initiate

the disputed legal process.5 Because the Asches did not

counterclaim against the Sheppards, the Sheppards' abuse of

process claim against the Asches, based upon RVC's counterclaims,

would not survive a Rule 12(b) (6) motion.

In 5 71, the Sheppards claim that "[t]he Asches directed

their GP entities to file bankruptcy the afternoon before trial

was scheduled to begin for the sole purpose of delaying the trial

and/or avoiding potential personal liability for the Title VII

claims." While the Sheppards may well have been inconvenienced

by the timing of the bankruptcy filing, the court cannot, on this

record, characterize a bankruptcy filing by RVFA and the LLC as a

legal process used by the Asches against the Sheppards.

Moreover, while an automatic stay of Ms. Sheppard's Title VII

claims necessarily followed the GP defendants' bankruptcy

filings, the record before the court suggests that the GP

defendants filed for bankruptcy for precisely the purpose

5 The Sheppards do claim that while RVC filed the counterclaim, the Asches directed RVC to do so. However, the Sheppards cannot attribute RVC's conduct to the Asches without piercing RVC's corporate veil, which it cannot do in this court, for reasons given in Section III.

22 bankruptcy is intended to serve. The GP entities faced potential

liability in Ms. Sheppard's Title VII action, and apparently have

assets insufficient to pay their debts, including (but perhaps

even exclusive of) any judgment that might be entered against

them in favor of plaintiffs. To the extent the Sheppards contend

that the GP defendants' bankruptcy filing is somehow frivolous,

determination of the validity of the bankruptcy petition is a

matter committed in the first instance to the bankruptcy court.

See Mason v. Smith, 140 N.H. 696, 700 (1996) (quoting Gonzales v.

Parks, 830 F.2d 1033, 1036 (9th Cir. 1987)) ("Congress'

authorization of certain sanctions for the filing of frivolous

bankruptcy petitions should be read as an implicit rejection of

other penalties, including the kind of substantial damage awards

that might be available in state court tort suits.").

Because the Sheppards' proposed abuse of process claim is

not proper subject matter for a supplemental pleading, because it

would unduly prejudice the Asches, and because it would be

futile, the Sheppards' motion to supplement their complaint, by

adding an abuse of process claim, is denied.

23 III. Motion to Add a Veil-Piercing Theory to Counts I and II

As a preliminary matter, the court must determine precisely

how the Sheppards seek to incorporate a veil-piercing theory into

their complaint.6 There appear to be two possibilities, both of

which are given voice in the motion. First, the Sheppards argue

that "piercing the corporate veil is a common law, equitable

remedy" rather than "a claim against the Asches." (Pis.' Mot. to

Amend I 22.) By characterizing their attempted veil piercing as

a remedy rather than a cause of action, the Sheppards might avoid

some problems posed by the statute of limitations. However, at

several points in their motion, the Sheppards appear to

characterize the attempted veil piercing as a claim against the

Asches. (See Mot. to Amend 22, 23, 27, 40, 63.) And, in the

6 The Sheppards suggest that this change may be accomplished either by amending their complaint, under F e d . R. C i v . P. 15(a), or by supplementing it, under F e d . R. C i v . P. 15(d), but the similarity between the legal standards applicable to granting those two forms of relief makes the distinction relatively unimportant. However, if it were required to decide whether the Sheppards must amend their complaint or supplement it, the court would be inclined to view this situation as calling for amendment. While the Sheppards appear to have learned about the GP defendants' alleged undercapitalization after they filed their original complaint, the facts they allege supporting their claim of undercapitalization - a complete lack of assets, past or present - were in existence since the inception of each of the GP entities, and, therefore, were in existence before the Sheppards filed suit.

24 proposed Third Amended Complaint, the Sheppards actually add the

Asches as defendants to Counts I and II. The court need not

determine whether the Sheppards' motion to amend involves the

assertion of a new claim or merely the invocation of an equitable

remedy, because under either theory, the motion fails.7

A. Piercing the Veil as an Equitable Remedy

According to a district court decision relied upon by the

Sheppards,

Piercing the corporate veil is an equitable remedy, Matthews Const. Co., Inc. v. Rosen, 796 S.W.2d 692, 693 (Tex. 1990); Johnson v. Exclusive Properties Unlimited, 720 A.2d 568, 571 (Me. 1998), that allows a court to disregard the corporate entity and award relief against an individual on claims that might otherwise be limited to relief against the corporation. It is not a cause of action in itself. Rosen, 796 S.W.2d at 693 n. 1.

7 The seemingly uncertain status of veil piercing as a remedy, a theory of recovery, or a claim, arises largely from the fact that a veil-piercing theory may be raised, as here, prior to judgment in a plaintiff's suit against a corporate defendant, see Matthews Const. Co. v. Rosen, 796 S.W.2d 692, 693 (Tex. 1990) (citing Gentry v. Credit Plan Corp., 528 S.W.2d 571 (Tex. 1975)), but may also be raised, as in Rosen, after judgment has been rendered against the corporate defendant.

25 Mitsubishi Caterpillar Forklift Am. v. Superior Serv. Assocs.

Inc., 81 F. Supp. 2d 101, 112-13 (D. Me. 1999) (footnote

omitted).8

In Mitsubishi, the plaintiff sought to hold Superior's

president and fifty-percent owner, Craig Burkert (also a named

defendant), liable for various obligations allegedly owed by

Superior. Id. at 112-13. However, after explaining that

piercing the corporate veil is an equitable remedy rather than a

cause of action, id. , the court went on to hold that "[t]he

plaintiff [Mitsubishi] must make a case for recovery against

[Superior] before any consideration may be given to making

Burkert personally liable for that recovery as well." Id. at

113 .

Because any case for recovery against RVFA and the LLC must

be made in an adversary proceeding in the bankruptcy court, that

court is the proper forum for the Sheppards' pre-judgment veil-

piercing attempt, when veil piercing is understood as an

8 According to Rosen, "the mere fact that a corporation operates as an alter ego does not give rise to a separate and independent cause of action . . .," 796 S.W.2d at 693, n.l.

26 equitable remedy that allows a plaintiff to collect a judgment

against a corporation from its alter ego. In other words,

without a Title VII defendant in this court that is not subject

to the bankruptcy stay, plaintiffs currently have no underlying

proceeding in which to make a case for recovery, which, according

to Mitsubishi, is a necessary predicate for piercing the

corporate veil. Before they can attempt to pierce the corporate

veil in search of a remedy, the Sheppards must make their case on

the merits against the entities whose veils they seek to pierce.

But, because the bankruptcy court is the only forum in which they

can seek a judgment against RVFA and the LLC, and because no such

judgment has yet been obtained, the question of veil piercing is

somewhat beside the point in this court at this time.

It is also worth noting that Rosen, the other case relied

upon by the Sheppards for the proposition that piercing the

corporate veil is an equitable remedy rather than a cause of

action, is inapposite. In that case, plaintiff Matthews

Construction had already secured a judgment against Houston Pipe

& Supply Co., Rosen, 796 S.W.2d at 692. With judgment in hand,

the plaintiff sought, in a separate proceeding, to collect that

27 judgment from Houston Pipe's president and sole shareholder,

Harvey Rosen. Id. The issue before the court in Rosen was

whether the plaintiff's alter ego suit against Rosen was barred

by limitations. Id. at 693. That plaintiff, however, had

already established the legal liability of the corporate

defendant, and sought only to enforce its judgment against an

alleged alter ego. Here, however, the legal liability of RVFA

and the LLC has not been established, and cannot be established

in any forum other than the bankruptcy court. Accordingly, under

the Sheppards' equitable remedy theory, until they obtain a

judgment against RVFA and the LLC, they must attempt to pierce

the corporate veil in an adversary action in the bankruptcy

court, and cannot do so now in this court. (And, if the

plaintiffs did obtain a judgment, and if the Asches were held

personally liable to pay the judgment, the recovery would not

necessarily go to plaintiffs in its entirety. Rather, the

newfound "ability to pay" would likely be deemed an asset of the

bankruptcy estate and distributed among all creditors in

accordance with bankruptcy law.)

28 Interestingly, the Sheppards cite Rosen for the proposition

that "a piercing the corporate veil claim may be brought after a

judgment." (Pis.' Mot. to Amend 1 22.) While plaintiffs might

well be able to separately pursue their veil-piercing theory in

this court at the conclusion of a successful adversary proceeding

in the bankruptcy court, based upon the analysis in Rosen, it is

unclear why they would want to do so. More to the point,

however, given the possibility that the Sheppards may not prevail

on the merits in an adversary proceeding against RVC, RVFA, and

the LLC, there is no reason to hear a veil-piercing claim at this

point. And, again, it would seem likely that the trustee in

bankruptcy would be a necessary party if for no other reason than

to protect the interests of other creditors.

B. Piercing the Veil as a Claim Against the Asches

While the Sheppards argue that their attempt to pierce the

veil is nothing more than the pursuit of an equitable remedy (for

collecting a judgment they have yet to be awarded), their Third

Amended Complaint (attached to document no. 151) lists the Asches

as defendants under the two Title VII claims, and sets out

various facts they intend to prove to establish that the

29 corporate veil should be pierced. And, indeed, whether veil

piercing is a remedy, a theory of recovery, or a claim, it seems

beyond question that a plaintiff seeking to pierce a corporate

veil - at any stage in the litigation of an underlying claim

against a corporate defendant - must allege and subsequently

prove a set of facts sufficient to warrant the pierce. See,

e.g., Mitsubishi, 81 F. Supp. 2d at 113 (assessing evidence

submitted by both parties and granting summary judgment to

defendant on veil-piercing claim). In this case, the Sheppards'

veil-piercing claim, as pled in their proposed Third Amended

Complaint, rests upon assertions that: (1) the GP defendants are

"mere empty shells," controlled by the Asches and possessing

insufficient assets to meet anticipated obligations; and (2) the

Asches held themselves out to employees of RVC as the limited

partnership's general partners, operated the GP defendants to

accomplish their own personal goals, and intermingled their own

business transactions with those of the GP defendants.

The motion to add a veil-piercing claim to this case is also

unavailing on grounds of futility. As already noted, a motion to

amend may properly be denied for futility. See Fpman, 371 U.S.

30 at 182. A motion to amend is futile if, among other things, the

amended complaint could not survive a Rule 12(b) (6) motion. See

Sinav, 948 F.2d at 1041 (citations omitted). The proposed veil-

piercing claim would be futile in this case because it would not

survive a Rule 12(b) (6) motion.

The Sheppards frame their claim in terms of state-law veil-

piercing principles, but the validity of that claim must be

decided under federal common law. Because plaintiffs seek to

pierce the veil to hold the Asches liable for a potential

judgment against the GP defendants on Ms. Sheppard's federal

Title VII claims rather than on state-law claims, federal law

controls. See Bhd. of Locomotive Eng'rs v. Springfield Terminal

R v . C o ., 210 F.3d 18, 25-26 (1st Cir. 2000) (citations omitted)

(holding that in federal question case, federal common law of

veil piercing applies when national unity is essential in

interpretation of federal statute). The court notes, in passing,

that the federal veil-piercing standard is generally more

favorable to a party seeking to pierce the veil than the state-

law standard. Id. (quoting Capital Tel. Co. v. FCC, 498 F.2d

734, 738 (B.C. Cir. 1974) ("Federal courts are not bound by 'the

31 strict standards of the common law alter ego doctrine which would

apply in a tort or contract action.'") .

Turning to the standard that applies in this case, "the rule

in federal cases is founded only on the broad principle that 'a

corporate entity may be disregarded in the interests of public

convenience, fairness and equity.'" Locomotive Eng'rs, 210 F.3d

at 26 (quoting Town of Brookline v. Gorsuch, 667 F.2d 215, 221

(1st Cir. 1981)). Analysis under this standard is "notably

imprecise and fact-intensive." Locomotive Eng'rs, 210 F.3d at 26

(quoting Crane v. Green & Freedman Banking Co., 134 F.3d 17, 21

(1st Cir. 1998)). Among the facts the court may consider is the

"chronology of events." Locomotive Eng'rs, 210 F.3d at 31 (veil

piercing appropriate when company at impasse in labor

negotiations entered into arrangement with alleged alter ego, in

order to exert pressure on labor union). In deciding whether to

pierce the corporate veil, under the federal standard,

courts should consider "the respect paid by the shareholders themselves to [the] separate corporate identity; the fraudulent intent of the [individual defendants]; and the degree of injustice that would be visited on the litigants by recognizing the corporate identity." Alman [v. Danin], 801 F.2d [1,] 4 [(1st Cir. 1986)]. Of these three elements, "a finding of

32 some fraudulent intent is a sine qua non to the remedy's availability." See United Elec., Radio and Machine Workers v. 163 Pleasant Street Corp., 960 F.2d 1080, 1093 (1st Cir. 1992) .

Crane, 134 F.3d at 22. With respect to the question of public

convenience, fairness, and equity, the court must "look closely

to the purpose of the federal statute . . . " Locomotive Eng'rs,

210 F.3d at 26 (quoting Gorsuch, 667 F.2d at 221); see also First

Nat'l City Bank v. Banco Para el Comercio Exterior de Cuba, 4 62

U.S. 611, 630 (1983) ("[T]he Court has consistently refused to

give effect to the corporate form where it is interposed to

defeat legislative policies."); United Elec., Radio & Mach.

Workers, 960 F.2d at 1091 ("in federal question cases, courts are

wary of allowing the corporate form to stymie legislative

policies").

Locomotive Engineers provides a useful example of veil

piercing in a federal case. There, the court allowed a trade

union to pierce the veil of one corporate defendant (Springfield)

when that corporation - which had a collective bargaining

agreement with the trade union - used a second corporation (ABR),

with which it had an almost total overlap of ownership, "as a

33 lever against the Unions, pressuring them to accept lower pay by

changing the status quo in the middle of negotiations," id. at

33, a tactic which the Railway Labor Act ("RLA") was intended to

prevent, i d . In other words, the court pierced Springfield's

corporate veil and attributed ABR's actions to Springfield for

purposes of the union's suit alleging violation of the RLA, and

did so because Springfield attempted to use the corporate form to

thwart the purposes of Railway Labor Act.

Here, by contrast, the Sheppards have alleged no facts to

support a claim that the Asches have attempted, with fraudulent

intent, to use the corporate form to thwart the purposes of Title

VII. Unlike the defendant in Locomotive Engineers, which began

sending work to an alter ego not subject to its collective

bargaining agreement, after it reached an impasse in labor

negotiations, the Asches established the GP defendants before Ms.

Sheppard ever made her Title VII claims. Moreover, alleged

undercapitalization of those entities did not occur as a result

of (or even after) Ms. Sheppard filed her Title VII claims;

according to the Sheppards' own complaint, the GP entities never

had any assets. If the Sheppards had alleged that the Asches had

34 set up the GP entities to siphon assets out of RVC after Ms.

Sheppard filed her claim, or if they had alleged that the Asches

had siphoned assets out of the GP entities after Ms. Sheppard had

filed suit, then perhaps the veil-piercing claim might have

merit. But the facts pled, even when viewed in the light most

favorable to the Sheppards, do nothing more than establish that

the Asches have set up various business entities with an eye

toward limiting liability generally. See Gautschi v. Auto Body

Discount Ctr., 139 N.H. 457, 462 (1995) (quoting Peter R.

Previte, Inc. v. McAllister Florist, Inc., 113 N.H. 579, 582

(1973)) ("Certainly one of the desirable and legitimate

attributes of the corporate form of doing business is the

limitation of the liability of the owners to the extent of their

investment.") The Asches business decisions, even if they serve

to disadvantage the Sheppards in this case, do not constitute the

kind of fraudulent conduct, leading to unfairness or inequity,

necessary to pierce the corporate veil under the federal

standard. Because the veil-piercing claim would be futile, the

motion to amend the complaint to include a veil-piercing claim is

denied.

35 As explained, the veil-piercing claim is resolved under

federal law. There is, therefore, no need to conduct a separate

analysis under the more rigorous state-law veil-piercing standard

plaintiffs invoke. Nevertheless, one aspect of plaintiffs'

state-law veil-piercing argument, the allegation of

undercapitalization, merits brief comment.

The Sheppards correctly state the general New Hampshire rule

that "[s]etting up a corporation with insufficient assets or plan

for assets to meet its expected debts and obligations . . . can

justify the remedy of piercing the corporate veil," Terren v.

Butler, 134 N.H. 635, 641 (1991) (citing Directors Guild of Am.,

Inc. v. Garrison Productions, Inc., 733 F. Supp. 755, 762

(S.D.N.Y. 1 990 )). 9 However, that rule is not dispositive because

9 Undercapitalization may justify piercing the corporate veil when the owners of a corporation draw assets from the corporation at the expense of its obligees (customers or creditors), because, in such circumstances, undercapitalization represents (or results from) use of the corporate identity "to promote an injustice or fraud," Terren, 134 N.H. at 639 (citing Drudinq v. Allen, 122 N.H. 823, 827 (1982)). Here, the Sheppards rely upon an allegation that the GP defendants never had any assets, so they would be hard pressed to argue that the Asches improperly siphoned off or converted corporate assets to their own use, or intermingled their own personal assets with those of the GP defendants. Indeed, the only factual allegation supporting a claim of intermingling is that the Asches have paid, or at some future time will pay, the GP defendants' legal fees.

36 an allegation that the GP defendants had no assets, even if

proven, would be insufficient to prove that the GP defendants

were "undercapitalized."

"What is requisite capitalization in the modern credit-

oriented economy depends a great deal on the nature of the

industry involved and on the credit financing alternatives

available." Harman v. Bertholet (In re Cvcle-Rama, Inc.), 91

B.R. 647, 648 n.2 (Bankr. D.N.H. 1988) (applying New Hampshire

law). Plaintiffs argue that the GP defendants were

undercapitalized because they have insufficient assets to pay any

judgment that may be awarded on Ms. Sheppard's Title VII claims.

But the proper measure of the sufficiency of a corporate entity's

capitalization is not whether it can pay a potential judgment in

a lawsuit but, rather, whether it had sufficient assets to meet

the obligations incurred by conducting ordinary business in the

industry in which it operates. Because the Sheppards do not

claim that the GP defendants had insufficient assets to perform

their business functions, and, in fact, do not attempt to

identify the business purposes for which the GP defendants were

That is a far cry from the standard form of intermingling, under which an alter ego treats the corporate assets as his or her own.

37 organized, the assertion that the GP defendants have "no assets,"

without more, is factually insufficient to support a claim that

those entities were undercapitalized for purposes of veil

piercing.10

The claim that the Asches held themselves out as general

partners of RVC faces a similar infirmity. While the Asches may

well have called themselves "general partners" of RVC, Ms.

Sheppard has not alleged that she detrimentally relied upon that

representation in relation to the events giving rise to her

sexual harassment claim. Without reliance by Ms. Sheppard, an

allegation that the Asches held themselves out as "general

partners" of RVC would not subject them to personal liability for

Title VII violations. If the Sheppards' proposed amendment is

intended only to assert representations by the Asches sufficient

to make them Ms. Sheppard's "employer" for Title VII purposes,

then it fails because this court has already ruled that the

Asches were not Ms. Sheppard's employer for purposes of her Title

10 Some corporate entities, such as holding companies, legitimately require few assets to properly fulfill their corporate functions and purposes.

38 VII claims, and that ruling cannot be revisited now on the basis

of an eleventh-hour amendment.

Conclusion

For the reasons given, plaintiffs' Motion for Leave to Amend

and/or Supplement Complaint Pursuant to FRCP 15 (document no.

151) is necessarily denied. The case shall proceed to trial on

the remaining state claims asserted against the Asches in the

SO ORDERED.

Steven J. McAuliffe United States District Judge

January 24, 2002

cc: Lauren S. Irwin, Esq. William E. Whittington, IV, Esq. Joseph F. Daschbach, Esq.