Curley v. Brignoli, Curley & Roberts AssociatesCurley v. Brignoli, Curley & Roberts Associates
This appeal is taken from a judgment of the United States District Court for the Southern District of New York, Milton Pollack, Judge, ordering dissolution of a limited partnership, the removal of its general partner, and awarding damages occasioned by the misappropriation of an asset of the partnership.
During the pendency of this appeal, the Supreme Court determined, in Carden v. Arkoma Associates, — U.S. -,
BACKGROUND
A. The Parties.
Brignoli, Curley & Roberts Associates (“BCR”) is a Delaware limited partnership with its principal place of business in New York. The sole general partner of BCR is defendant Brignoli & Curley, Inc. (“BCI”), a Delaware corporation whose principal place of business is also in New York. On December 14, 1987, defendant Richard Brignoli (“Brignoli”) became chief executive officer of BCI and assumed control of the day-to-day business operations of BCR. Brignoli’s citizenship was disputed below; plaintiffs claim that he is a citizen of New York, while defendants attribute Connecticut citizenship to him.
The limited partners of BCR include Cur-ley and plaintiff James Karanfilian (“Kar-anfilian”), both citizens of New Jersey, former plaintiff Duane Roberts (“Roberts”),
B. The Proceedings Below.
Curley, Karanfilian, and Roberts commenced this action on July 29, 1988, invoking diversity of citizenship as the basis of federal subject matter jurisdiction. They alleged various breaches of fiduciary duty by BCI as the general partner of BCR and by Brignoli as the person in control of BCI, and sought: (1) removal of BCI as general partner of BCR or, in the alternative, the dissolution of BCR; (2) judgment against Brignoli and BCI in favor of BCR for damages in compensation for breaches of fiduciary duty by Brignoli and BCI; and (8) an accounting as to BCR. BCR, BCI, and Brignoli were named as defendants.
Following a bench trial, the district court found that BCI and Brignoli had indeed engaged in improper self-dealing. Among the findings were that BCI and Brignoli wrongfully refused plaintiffs access to BCR’s books and records, and that Brignoli misappropriated a $175,000 certificate of deposit from BCR, pledging it to secure a loan to BMI. Pursuant to its opinion dated August 4, 1989,
This appeal followed.
DISCUSSION
A. The Diversity Problem.
The merits of this appeal need not detain us. The district court’s thorough opinion convincingly resolves the questions of fiduciary duty and self-dealing tendered by the parties, and there is no need for an appellate rehash of those fact-specific issues.
A significant question of subject matter jurisdiction (indeed, the only question addressed in the oral argument of this appeal), however, is posed by a decision of the Supreme Court, Carden v. Arkoma Associates, — U.S. -,
Since we must decide this appeal on the basis of the law existing at the time of our decision, see Griffith v. Kentucky,
That question arises against the background of the complete-diversity rule first articulated in Strawbridge v. Curtis,
This rule was stated in Colonial as follows:
[T]he citizenship of a limited partnership was not sufficiently made out for diversity purposes by alleging the state of its organization, even though state law permitted the partnership to sue or be sued in the firm name. But ... where, as here, there was diversity between the plaintiff and all the general partners of the defendant, identity of citizenship between the plaintiff and a limited partner was not fatal because under the applicable New York statute a limited partner “is not a proper party to proceedings by or against a partnership, except where the object is to enforce a limited partner’s right against or liability to the partnership.” N.Y. Partnership Law § 115. In the absence of a claim of insolvency of the partnership, a suit brought against a New York partnership must thus be considered to be against the general partners only and identity of citizenship between a limited partner and the plaintiff does not destoy [sic] diversity.
Admittedly, there existed some doubt as to whether the Colonial rule governed derivative suits brought by limited partners against their limited partnership. Compare Pappas v. Arfaras,
Curley and Karanfilian, citizens of New Jersey, shared citizenship with neither BCI (the sole general partner of BCR), of Delaware and New York, nor Brignoli, of either New York or Connecticut. BCR was also named as a defendant, but so long as BCR could be deemed to have the citizenship of its general partner only, diversity would exist. If, on the other hand, the citizenship of BCR’s limited partners were attributable to BCR as well, diversity would be lacking, because the New Jersey citizenship of Cur-ley and Karanfilian would then be present on both sides of the case. See, e.g., Phillips v. Kula 200,
In a prejudgment attack on the district court’s assertion of diversity jurisdiction, defendants never sought to attribute the limited partners’ New Jersey citizenship to defendant BCR. See supra note 1. At the oral argument of this appeal, however, defendants invoked Carden, correctly contending that Carden destroys plaintiffs’ diversity scenario because plaintiffs' New Jersey citizenship is also attributed to defendant BCR.
The invalidity of plaintiffs’ theory of diversity, however, does not end our inquiry. This court must liberally construe plaintiffs’ complaint “to determine whether the facts set forth justify taking jurisdiction on grounds other than those most artistically pleaded.” New York State Wa
Recognizing our “obligation to explore any promising avenue to the District Court’s jurisdiction, whether or not it is suggested by the parties,” Association of Am. Medical Colleges v. Califano,
B. The Availability of a Class Action.
As previously discussed, BCR’s diversity-breaking role as a party to this action is occasioned by the derivative nature of the action brought by the limited partner plaintiffs. Curley and Karanfilian could have avoided joining BCR by bringing their claim as plaintiffs suing on behalf of a class of limited partners of BCR. Fed. R.Civ.P. 23.2 provides in pertinent part:
An action brought by or against the members of an unincorporated association as a class by naming certain members as representative parties may be maintained only if it appears that the representative parties will fairly and adequately protect the interests of the association and its members.
The language of rule 23.2 specifies only one prerequisite to class treatment, fair and adequate representation. The gravamen of the complaint in this case, amply supported by the trial record, is that the general partner, BCI, and its controlling shareholder, Brignoli, looted BCR for Brig-noli’s benefit. All of the limited partners have an identical interest, as does BCR, in terminating that course of conduct and obtaining recompense from BCI and Brignoli for the harm done by them to BCR. Cur-ley, Karanfilian and Roberts (until his dismissal as a plaintiff) not only were capable of fairly and adequately representing that interest; they in fact did so.
BMI is the only limited partner that could arguably disclaim their representation. BMI, however, a corporation of which Brignoli was the principal, was part and parcel of the scheme to plunder BCR for Brignoli’s benefit. It would be ludicrous to read rule 23.2 to disqualify the plaintiffs here as proper representatives of the BCR limited partners because they do not fairly represent a limited partner participating in a scheme for the spoilation of BCR at the expense of the class (excluding BMI) of limited partners.
This issue was addressed in Lefebvre v. Kelly, No. 83 CV 3211 (ERK),
Defendants also contend that a class action cannot be certified in this case because the interests of the designated class representatives are antagonistic to those of the individual defendants who claim to continue to be members of the Society. While it is obvious that such antagonism exists by virtue of the fact that the individual defendants have been sued by the plaintiff class, this will not defeat the class action procedure on the facts of this ease.
The purpose underlying the requirement that class representatives fairly and adequately represent the interests of those not appearing is to afford the protection to absent parties which due process requires. Hansberry v. Lee,311 U.S. 32 [61 S.Ct. 115 ,85 L.Ed. 22 ] (1940). There can be no question in this case but that the interests of the individual defendants are adequately protected. In addition to being named in an individual capacity, the individual defendants serve as directors of the various corporate defendants in this case. When the interests of antagonistic class members are adequately represented by the class’ opponents, the requirements of due process are satisfied such that a class can be certified. Horton v. Goose Creek Independent School District,677 F.2d 471 (5th Cir.1982); Dierks v. Thompson,414 F.2d 453 (1st Cir.1969); Stolz v. United Brotherhood of Carpenters and Joiners,620 F.Supp. 396 (D.Nev.1985).
Id., slip op. at 8-9.
We consider the prerequisites to class certification contained in Fed.R.Civ.P. 23(a), such as the requirement that the class be “so numerous that joinder of all members is impracticable,” to be inapplicable to a rule 23.2 class action. While there is some disagreement on this point,
We are aware that some courts have adopted the view that a class action under rule 23.2 may be brought only if the state in which the district court sits has denied the association the requisite capacity to be a party to the suit. See, e.g., Northbrook Excess & Surplus Ins. Co. v. Medical Malpractice Joint Underwriting Ass’n of Mass.,
Although an action by or against representatives of the membership of an unincorporated association has often been viewed as a class action, the real or main purpose of this characterization has been to give “entity treatment” to the association when for formal reasons it cannotsue or be sued as a jural person under Rule 17(b).
Fed.R.Civ.P. 23.2 advisory committee’s note.
Rule 17(b) provides in relevant part: [CJapacity to sue or be sued shall be determined by the law of the state in which the district court is held, except (1) that a partnership or other unincorporated association, which has no such capacity by the law of such state, may sue or be sued in its common name for the purpose of enforcing for or against it a substantive right under the Constitution or laws of the United States....
Fed.R.Civ.P. 17(b). Northbrook reads the committee note as an instruction that the sole purpose of rule 23.2 is to provide capacity where none exists under state law. Under this reasoning, rule 23.2 is unavailable to limited partners in a federal district court sitting in New York because the partnership has capacity as an entity under state law. See N.Y.Civ.Prac.L. & R. 1025 (McKinney 1976).
We disagree with this restrictive interpretation. It must be remembered that the class action mechanism provides litigants with important procedural advantages. For example, class status may expand the number of districts where venue is proper, see Appleton Elec. Co. v. Advance-United, Expressways,
Further, even if the drafters felt compelled to grant capacity in an indirect manner, perhaps to avoid Erie problems in circumventing state capacity limitations, a restrictive interpretation of rule 23.2 does not follow. The more reasonable interpretation is that the drafters, having found it necessary to grant advantageous procedures in states which restrict association capacity,
We conclude that plaintiffs could have brought a rule 23.2 class action, rather than a derivative suit, and next examine our authority thus to recharacterize plaintiffs’ action at this stage in the proceedings.
C. Recharacterization of the Derivative Action as a Class Action.
There is no diminution in plaintiffs’ substantive rights against defendants if their claim is characterized as seeking class, rather than derivative, relief. Fed.R.Civ.P. 17(b) provides that in the case of an individual acting in a representative capacity, “ca
The question, then, is whether we can recharacterize their claim at this late date. Under 28 U.S.C. § 1653 (1988), “[defective allegations of jurisdiction may be amended, upon terms, in the trial or appellate courts.” “[Ujsually the section is to be construed liberally to permit the action to be maintained if it is at all possible to determine from the record that jurisdiction does in fact exist.” John Birch Society v. National Broadcasting Co.,
As the Seventh Circuit recently said: When, as here, the merits have already been decided and factual questions do not need to be resolved regarding prejudice to the correctly named defendant, it would be a meaningless gesture to remand so that the plaintiff could amend its pleading under Rule 15 of the Federal Rules of Civil Procedure. Instead the sensible course is for this Court to permit amendment under 28 U.S.C. § 1653.
International Bhd. of Boilermakers v. Local Lodge D354,
The district court tried the issue of the defendants’ wrongful acts, concluding that defendants had engaged in massive breaches of their fiduciary duty to BCR. Defendants are not prejudiced by the proposed amendment, because no substantive or procedural disadvantage attaches to defending against the class of BCR’s limited partners as opposed to defending a derivative suit. Accordingly, we recharacterize plaintiffs’ derivative action as one seeking class relief. We thus reach the final issue: whether, following that recharacterization, BCR may be dismissed as a party at this juncture.
D. Dismissal of BCR as a Party.
Recently, the Supreme Court ratified the predominant view that circuit courts have the power, even after judgment has been rendered below, to dismiss a dispensable party whose presence prevents statutory diversity jurisdiction.
The Court warned that this “authority should be exercised sparingly,” and that “the appellate court should carefully consider whether the dismissal of a nondiverse party will prejudice any of the parties in the litigation.”
The question whether a party may be dismissed from an action is essentially governed by Fed.R.Civ.P. 19,
The Supreme Court reversed. The Court noted that “[t]he optimum solution, an adjudication ... that would be binding on all interested persons, was not ‘feasible’ [see the captions of subdivisions (a) and (b) of rule 19], for [the owner of the vehicle] could not be made a defendant without destroying diversity.”
Hence the problem was the one to which Rule 19(b) appears to address itself: in the absence of a person who “should be joined if feasible,” should the court dismiss the action or proceed without him? Since this problem emerged for the first time in the Court of Appeals, there were also two subsidiary questions. First, what was the effect, if any, of the failure of the defendants to raise the matter in the District Court? Second, what was the importance, if any, of the fact that a judgment, binding on the parties although not binding on [the absent defendant], had already been reached after extensive litigation? The three questions prove, on examination, to be interwoven.
We conclude, upon consideration of the record and applying the “equity and good conscience” test of Rule 19(b), that the Court of Appeals erred in not allowing the judgment to stand.
Id. at 108-09,
The Court went on to emphasize that at the appellate stage of a litigation, successful plaintiffs’ “interest in preserving a fully litigated judgment should be overborne only by rather greater opposing considerations than would be required at an earlier stage when the plaintiffs’ only concern was for a federal rather than a state forum,” id. at 112,
Citing Provident Tradesmens, we recently stated:
As an alternative to dismissal, a court should take a flexible approach when deciding what parties need to be present for a just resolution of the suit. Provident Tradesmens Bank & Trust Co. v. Patterson,390 U.S. 102 ,88 S.Ct. 733 ,19 L.Ed.2d 936 (1968). The phrase “good conscience” implies a careful and constructive consideration of those parties that are necessary to the litigation. As a consequence, very few cases should be terminated due to the absence of nondi-verse parties unless there has been a reasoned determination that their non-joinder makes just resolution of the action impossible.
Jaser v. New York Property Ins. Underwriting Ass’n,
Here, as in Provident Tradesmens, BCR is a party which, within the meaning of rule 19(a), should be joined “if feasible,” but whose joinder would destroy diversity. We must therefore apply the teaching of Provident Tradesmens and the criteria of rule 19(b) to the facts presented here to determine whether BCR should be dismissed as a party to preserve diversity of citizenship. Accordingly, we briefly review the four factors which rule 19(b) requires “to be considered,” in the order stated in the rule: (1) a judgment rendered in BCR’s absence will not be prejudicial to BCR or to any of its limited or general partners; (2) the district court can, by shaping the future relief in this action, address and alleviate any anomalies or inconsistencies that would otherwise result from the absence of BCR as a party, especially since all the limited partners (through the class representatives)
We recognize that in Sixth Geostratic Energy Drilling Program 1980 v. Ancor Exploration Co.,
It is noteworthy, however, that in both DM II and Camden Securities, the cases were in a pretrial posture, and the same controversies were the subject of ongoing, parallel state court litigation. In DM II, moreover, the court emphasized its inability to “fashion complete relief in the absence of all partners,”
VMS/PCA Ltd. Partnership v. PCA Partners Ltd. Partnership,
Whitney, the only one of the cited cases to consider the rule 19(b) question in a post-trial posture, is particularly relevant here. Noting that “there would be great prejudice to [plaintiff] to force him to reliti-gate this complex case at great expense, particularly when the court has already found that his rights were wilfully violated by defendants,” slip op. at 11-12, the court concluded that “[t]o dismiss the present action because a dissolved partnership, which holds no meaningful assets and whose partners are all before the court, cannot be joined as a party would be to exalt form over substance and frustrate the intent of Rule 19,” id. at 12.
Although Provident Tradesmens teaches that the proper resolution of a rule 19(b) question “can only be determined in the context of particular litigation,”
We accordingly conclude that BCR may be dropped as a party defendant, confident that the district court, with all the partners before it,
CONCLUSION
For the foregoing reasons, we recharac-terize this lawsuit as a class, rather than a derivative, action, and dismiss BCR as a party. We then confirm the existence of subject matter jurisdiction. Having done so, we affirm the judgments of the district court on the merits for the reasons stated in the opinion of the district court, and remand for further proceedings not inconsistent with this opinion.
Notes
. This issue subsequently became irrelevant in the district court, see infra note 2, and is also irrelevant to our disposition of this appeal.
. Roberts, originally a named plaintiff, was dismissed as a party on plaintiffs’ motion, pursuant to Fed.R.Civ.P. 21, in order to prevent a challenge to diversity jurisdiction based upon Roberts’ Connecticut citizenship. We consider extensively hereinafter the propriety of dismissal of parties in this case pursuant to rule 21.
. In a related case, this court affirmed a summary judgment of the United States District Court for the Southern District of New York that awarded |150,000 plus interest to Curley against BMI, based upon a loan agreement which required BMI to repay $150,000 to Curley on or before June 30, 1989 "out of ... the profits paid” to BMI by BCR. See Curley v. Brignoli Models, Incorporated,
. Compare Management Television Systs. v. National Football League,
. We note in this regard that while New York allows an association or partnership to sue in its own right, see N.Y.Civ.Prac.L. & R. 1025 (McKinney 1976), it also allows limited partners to bring a class action pursuant to id. 1005(a), see Lichtyger v. Franchard Corp.,
. In the absence of BCR, the remaining plaintiffs and defendants would be diverse. Given the recharacterization of the action as a class action, Curley and Karanfilian would then represent the class of limited partners (other than BMI), and the citizenship of the other limited partners therefore would not be taken into account for diversity purposes. See Snyder v. Harris,
. Fed.R.Civ.P. 19 provides:
(a) Persons to be Joined if Feasible. A person who is subject to service of process and whose joinder will not deprive the court of jurisdiction over the subject matter of the action shall be joined as a party in the action if (1) in the person’s absence complete relief cannot be accorded among those already parties, or (2) the person claims an interest relating to the subject of the action and is so situated that the disposition of the action in the person’s absence may (i) as a practical matter impair or impede the person’s ability to protect that interest or (ii) leave any of the persons already parties subject to a substantial risk of incurring double, multiple, or otherwise inconsistent obligations by reason of the claimed interest. If the person has not been so joined, the court shall order that the person be made a party. If the person should join as a plaintiff but refuses to do so, the person may be made a defendant, or, in a proper case, an involuntary plaintiff. If the joined party objects to venue and joinder of that party would render the venue of the action improper, that party shall be dismissed from the action.
(b) Determination by Court Whenever Join-der not Feasible. If a person as described in subdivision (a)(1) — (2) hereof cannot be made a party, the court shall determine whether in equity and good conscience the action should proceed among the parties before it, or should be dismissed, the absent person being thus regarded as indispensable. The factors to be considered by the court include: first, to what extent a judgment rendered in the person’s absence might be prejudicial to the person or those already parties; second, the extent to which, by protective provisions in the judgment, by the shaping of relief, or other measures, the prejudice can be lessened or avoided; third, whether a judgment rendered in the person’s absence will be adequate; fourth, whether the plaintiff will have an adequate remedy if the action is dismissed for nonjoin-der.
(c) Pleading Reasons for Nonjoinder. A pleading asserting a claim for relief shall state the names, if known to the pleader, of any persons as described in subdivision (a)(1) — (2) hereof who are not joined, and the reasons why they are not joined.
(d) Exception of Class Actions. This rule is subject to the provisions of Rule 23.
. As indicated earlier herein, the class representatives do not represent BMI, which is not otherwise a party to this litigation, but BMI’s principal, Brignoli, is a named defendant. BMI joined the notice of appeal filed by BCI and Brignoli herein as "an aggrieved party,” and is accordingly listed in the caption of this appeal as an appellant.
. See supra, note 7.