HB GENERAL CORP.; HB Limited Realty Corp., Appellants, v. MANCHESTER PARTNERS, L.P., Defendant/Third-Party Plaintiff, v. H.B. PARTNERS, L.P. and Vanderbilt Development Corporation, Third-Party Defendants.
No. 95-5396
United States Court of Appeals, Third Circuit
Decided Sept. 13, 1996.
1185 | 95 F.3d 1185
Argued March 21, 1996.
Before: BECKER, McKEE, Circuit Judges, and POLLAK, District Judge.*
OPINION OF THE COURT
BECKER, Circuit Judge.
This is a diversity suit arising out of a dispute among the members of a small limited partnership, HB Partners, L.P. Plaintiffs HB General Corp. and HB Limited Corp., brought suit in the district court against the third partner, Manchester Partners, L.P., seeking a declaratory judgment that Manchester had breached the Partnership Agreement. Although there is complete diversity among the three partners, Manchester argues that the Partnership itself—which shares the citizenship of all of the parties—is an indispensable party whose joinder destroys diversity jurisdiction. The district court agreed with Manchester and dismissed the case. Resolution of the other partners’ appeal turns on the interplay between the “technical, precedent-bound” rule that, for diversity jurisdiction purposes, a limited partner is considered a citizen of each state in which its partners are citizens, and the flexible, pragmatic federal procedural rules of joinder.
We reverse. Applying the joinder rules pragmatically, we hold that, because all of the partners of this small limited partnership are before the district court, joinder of the partnership entity is not required. Specifically, we conclude that, given proper protective provisions in the judgment, proceeding in the absence of the Partnership will cause no prejudice to Manchester; that the Partnership is effectively represented by the partners and consequently suffers no prejudice from its exclusion; that whether or not the plaintiffs’ claims are “derivative” is immaterial; and that Manchester’s counterclaims can be heard in this federal court action and thus there is no risk of piecemeal litigation. For these reasons, the requisites of
I. Facts and Procedural History
HB Partners, L.P. (the Partnership) was formed in October 1991, to develop three properties in Manchester, Vermont for commercial leasing. At its inception, the Partnership consisted of one general partner, plaintiff HB General Corp., and two limited partners, plaintiff HB Limited Realty Corp. and defendant Manchester Partners, L.P. HB General and HB Limited (the HB entities) are controlled by Ben Hauben, a major developer of retail stores in Vermont. They are both Delaware corporations with their principal places of business in Vermont. Manchester is organized under New Jersey law and all of its partners are New Jersey residents. The Partnership was formed under Delaware law, and Delaware law governs construction of the Partnership Agreement.
Under that Agreement, Manchester was to provide the bulk of the Partnership’s capital. It contributed $990,000 at the Partnership’s formation and was to provide additional capital up to a total of $1,980,000 in response to capital calls made by the general partner, HB General. The Partnership Agreement provides that HB General may call for additional contributions of capital whenever the Partnership will hold less than $500,000 in cash or cash equivalents in the ensuing thirty days. Each capital call can be for up to $500,000, of which ninety-nine percent is to be paid by Manchester and one percent by HB General.
HB General made a series of capital calls which were met by Manchester without incident. However, problems arose in the summer of 1994. On June 10, 1994, HB General
The Partnership Agreement provides that if Manchester fails to make a requested capital contribution, it will be considered to have withdrawn from the Partnership and shall have no further rights as a partner. In such event, Manchester becomes a subordinated creditor of the Partnership and is entitled only to a return of its capital contributions at a specified time in the future. The HB entities assert that Manchester’s failure to meet the August 11 capital call has triggered this provision. They brought this declaratory judgment action in the district court, seeking a declaration that Manchester has lost its status as a limited partner and is now a subordinated creditor. Federal jurisdiction was asserted on the basis of diversity of citizenship.
According to Manchester, however, the parties’ dispute is much more complicated than whether Manchester failed to meet a simple capital call. Manchester asserts that at the time of the August 11 capital call, the Partnership was significantly behind schedule in developing the Vermont properties, and that HB General had failed to meet numerous requirements of the Partnership Agreement. Manchester claims that because of these problems, it had informed HB General—prior to the final capital call—that it would exercise its “redemption option.” This option, provided for in the Partnership Agreement, allows Manchester to have its Partnership interest “redeemed” at a price specified by formula in the event that the Partnership fails to commence construction on two of the three properties (the Manchester Square II Property and the Riverbend Property) by October 10, 1994. The agreement states that if the Partnership does not pay the redemption price, Manchester’s sole remedy is to compel a sale of any undeveloped parcels then owned by the Partnership.
Manchester maintains that by August 11, 1994, when HB General made the final capital call, HB General knew both that the Partnership could not commence construction on the Manchester Square II Property and the Riverbend Property by October 10, 1994, and that Manchester intended to exercise its redemption option. Manchester claims that HB General made the capital call in bad faith to force Manchester to choose between infusing a substantial sum of cash into the Partnership just prior to exercising its right of redemption—money that might not be recoverable given the redemption option’s limited remedy—or defaulting on its obligation.
According to Manchester, it intended to file suit to force HB General to recognize Manchester’s right to exercise its redemption option, but before it could do so, the HB entities filed this action. Manchester therefore counterclaimed against HB General and HB Limited, and against third-party defendants, the Partnership itself and Vanderbilt Development Corporation (another entity controlled by Ben Hauben). Manchester complains that because of the Partnership’s failure to commence construction as scheduled and to recognize Manchester’s right to exercise its redemption option, the plaintiffs breached the Partnership Agreement, their fiduciary duties to Manchester, and their covenant of good faith and fair dealing. Manchester seeks, inter alia, the following relief: (a) specific performance of those provisions of the Partnership Agreement giving Manchester the right to exercise its redemption option and to compel the sale of the properties; (b) attachment, foreclosure and sale of the Partnership properties and the other properties for which Partnership funds have been expended; (c) imposition of a constructive trust on all the properties; and (d) damages.
After Manchester unsuccessfully moved to transfer the case to the United States District Court for the District of Vermont, Man-
We review the district court’s
II. Rule 19(a)
We agree with the district court that, pursuant to
(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.
III. Rule 19(b)
A. Introduction
Although
In contrast to Carden’s jurisdictional rule, which the Supreme Court acknowledged to be “technical, precedent-bound, and unresponsive to policy considerations,” Carden, 494 U.S. at 196, whether a person is indispensable depends on “pragmatic considerations,”
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 nonjoinder.
B. Manchester’s Interests
Taking the easiest question first, we conclude that protective provisions in the judgment can effectively avoid any prejudice to Manchester that might be caused by excluding the Partnership from the litigation. We acknowledge that Manchester would be prejudiced if this litigation will not bind the Partnership itself, thus allowing the Partnership to later bring an identical claim. But the Partnership, like a marionette, cannot make a move unless some human being pulls the strings. And all the people who, under the Partnership Agreement, have the power to cause the Partnership to bring suit—probably only HB General, see Partnership Agreement § 5.2, App. 142 (“No Limited Partner in its capacity as Limited Partner shall take part in the conduct or control of the business of the Partnership or have any right or authority to act for or bind the Partnership.”), but in no case people other than the present parties, HB General, HB Limited, and Manchester—are before the court. The court can therefore enjoin all the partners from bringing a subsequent suit on behalf of the Partnership.
Furthermore, the court can require HB General to cause the Partnership to release its claim against Manchester as a condition of
C. The Partnership’s Interests
The district court also decided, and Manchester argues, that exclusion of the Partnership would prejudice the Partnership’s interests. We disagree. Although indispensability under
First we must decide whether, under Delaware law, the Partnership has interests as an entity in this case. Historically, the common law considered partnerships to be collections of individuals rather than distinct jural entities with their own interests. See 1 Bromberg & Ribstein, supra § 1.03, at 1:20; Puerto Rico v. Russell & Co., 288 U.S. 476, 480 (1933); Silliman v. DuPont, 302 A.2d 327, 331 (Del.Super.Ct.1972), aff’d, F.I. Du Pont, Glore, Forgan & Co. v. Silliman, 310 A.2d 128 (Del.1973). However, today there is much ambivalence about the appropriate characterization of partnerships. See 1 Bromberg & Ribstein, supra § 1.03, at 1:19 to 1:20, 1:40. Delaware, like most states, has not adopted either a pure aggregate or pure entity theory of partnerships, but seems to treat partnerships differently for different purposes. See Silliman, 302 A.2d at 332 n. 4 (noting that the evolution of the Uniform Partnership Act has been viewed as a “realistic accommodation of entity theory to aggregate practice which leaves unresolved many problems concerning the legal nature of partnerships ....”). Limited partnerships, with their limitations on limited partner liability and control, are clearly more entity-like than general partnerships, but even these are not treated as entities in all contexts. See 3 Bromberg & Ribstein, supra § 11.03(a), at 11:27; cf. Silliman, 302 A.2d at 327 (recognizing the lack of a coherent view of the nature of partnerships in a case involving a limited partnership).
We conclude that, under Delaware law, the Partnership has interests as an entity in this case. Delaware treats partnerships—even general ones—as entities for purposes of owning property, see generally 1 Bromberg & Ribstein, supra § 1.03(c)(1), at 1:23 to 1:25. For example, a partnership can acquire and convey real property in its own name,
That said, we do not believe the Partnership’s interests would, as a practical matter, be prejudiced by excluding it from the action. Even though the Partnership has its own interests, it is an artificial entity: its interests must ultimately derive from the interests of the human beings that are its members (albeit through the medium of other partnerships and corporations). The exact relationship between the Partnership’s interests as an entity and those of the individual partners has not been addressed by the Delaware courts. But, following
We believe that to be the case here. This partnership consists of at most three partners, all of whom are before the court. Although each of the partners may arguably bring to bear some interests (the nature of which no one has identified) that are distinct from those of the Partnership, we have no doubt that the Partnership’s interests in this case are adequately represented by the partners. If the Partnership has a claim against Manchester and the right to retain its real property, these interests will be effectively advanced by the HB entities. And even if the HB entities’ interests are not entirely consistent with those of the Partnership, they are not antagonistic. Furthermore, to the extent the HB entities’ interests diverge from the Partnerships’s interests, Manchester can protect them.2
This case is thus analogous to Delta Financial Corp. v. Paul D. Comanduras & Associates, 973 F.2d 301 (4th Cir.1992). There, the Fourth Circuit stated, in an action between the only two partners of a limited partnership:
Even if the partnership entity may under some circumstances be a necessary or indispensable party to litigation involving the constituent partners, which we do not suggest, we are of opinion that Vanguard [the partnership] is not necessary or indispensable to the instant dispute. This action arises out of a strictly internal conflict between the partners, all of whom, after our decision today, will be before the district court. PDS has failed to establish that Vanguard itself has any interest distinct from the interests of the several partners. Thus, we are satisfied that “complete relief [may] be accorded among those already parties,” and that Vanguard claims no interest different from the interest of the partners that may be impaired by the imposition of the case and that Vanguard’s absence will not “leave any of the persons already parties subject to a substantial risk of incurring double, multiple, or otherwise inconsistent obligations.”
Id. at 303-04 (citations omitted); see also DM II, Ltd. v. Hospital Corp., 130 F.R.D. 469, 473 n. 5 (N.D.Ga.1989) (stating, in an action brought by some but not all partners, “Joinder of each non-party partner would ordinarily satisfy
D. Derivative Actions
The district court and Manchester also attach much significance to whether this action is a derivative action. In their view, the HB entities’ action is derivative and they believe this provides a special reason that the Partnership must be joined. They cite to many cases finding the Partnership to be an indispensable party in derivative actions. See, e.g., Bankston v. Burch, 27 F.3d 164, 167-68 (5th Cir.1994); Buckley v. Control Data Corp., 923 F.2d 96, 98 (8th Cir.1991).
1. Is this Action Derivative?
As a preliminary matter, we are not at all certain that this is a derivative action. It is true that Delaware courts have stated the general rule that whether an action is derivative or direct depends on whether the harm alleged by the plaintiff is independent of harm suffered by the corporation or partnership itself. See Kramer v. Western Pacific Industries, Inc., 546 A.2d 348, 351-52 (Del.1988); Litman v. Prudential-Bache Properties, Inc., 611 A.2d 12, 15 (Del.Ch.1992); see also generally 12B Fletcher’s Cyclopedia of Corporations § 5911, at 483-84. And here the harm alleged by the HB entities—breach of Manchester’s obligation to provide capital to the Partnership—was suffered by the partners only through its harm to the Partnership.
But, in this case brought by those in control of the Partnership, the action may still not be derivative. The derivative action device, with its attendant demand requirement, was developed to aid investors who have no control over a company redress harms to the company in the face of management’s inaction. See Ross v. Bernhard, 396 U.S. 531, 534 (1970); 2 Bromberg & Ribstein, supra § 5.05(a), at 5:35 (“The substantive distinction [between direct] enforcement of a partnership right by fewer than all the partners [and a derivative action] is not always clear but seems to be this: In a derivative suit, the plaintiff partner is typically acting against the wishes of those partners who have decisionmaking authority for enforcement of the partnership right ....”); see also
Here, the action was brought in part by the general partner, who has authority to act for the Partnership. In Delaware, general partners have the power to sue directly on behalf of the partnership on the partnership’s claims. See Thompson Door Co. v. Haven Fund, 351 A.2d 864, 865 (Del.1976) (“Each [general] partner has the power to use ordinary legal process to enforce obligations owed the partnership and therefore may engage counsel to sue on behalf of the firm.”); Partnership Agreement § 6.1, App. 142 (Subject to certain limitations, “the General Partner is authorized, in furtherance of the business of the Partnership, to make decisions, take actions and enter into and perform contracts of any kind necessary, proper, convenient or advisable to effectuate the purposes of the Partnership.”); 4 Bromberg & Ribstein, supra § 15.02(b), at 15:13, & § 15.02(e), at 15:16 to 15:17. The power to sue “on behalf” of a partnership does not mean that the partnership itself must be named as a party: although Delaware has a “common name” statute, allowing partnerships to sue and be sued in the partnership name, see
Another reason this action may not be derivative is that the HB entities may have the right to bring suit directly as individuals. The basis for any cause of action here is Manchester’s alleged breach of the Partnership Agreement. Both HB General and HB Limited are parties to the agreement, and breach of a Partnership Agreement has been held to constitute an individual as well as a partnership claim. See 4 Bromberg & Ribstein, supra § 15.04(h), at 15:37 & n. 35. Thus the HB entities can bring this suit through a number of different means, and the action need not be characterized as derivative.
2. The Immateriality of the Characterization of this Suit
(a) To Rule 19
For purposes of this appeal, we need not decide, however, whether, under state law, the HB entities are suing derivatively, directly on behalf of the Partnership, or directly as individuals.5 As far as
Moreover, the characterization of this action as derivative or on behalf of the Partnership has no impact on our earlier analysis of the interests of the Partnership and the partners. The only significant consequence of such a characterization for determining the
We recognize that the Supreme Court has stated, in the corporations context, that the corporation is an indispensable party in stockholder derivative actions. See Ross v. Bernhard, 396 U.S. 531, 538 (1970); Koster v. Lumbermens Mut. Casualty Co., 330 U.S. 518, 522 n. 2 (1947); Davenport v. Dows, 85 U.S. (18 Wall.) 626, 627 (1873); see also Guerrino v. Ohio Casualty Insurance Co., 423 F.2d 419, 422 (3d Cir.1970). If meant as a general rule, this statement is in tension with the Court’s admonitions that “Whether a person is ‘indispensable,’ that is, whether a particular lawsuit must be dismissed in the absence of that person, can only be determined in the context of particular litigation,” and that “[t]here is no prescribed formula for determining in every case whether a person ... is an indispensable party.” Provident Tradesmens Bank & Trust Co. v. Patterson, 390 U.S. 102, 118 & n. 14 (1968). But even if it is the rule that the corporation is indispensable in a shareholder’s derivative action, the partnership context in general, and this case in particular, are distinguishable.
Unlike partnerships, the corporation’s status as a distinct jural entity is deeply rooted in our law; the bright lines that come with this status are one of the corporate form’s major attractions. Thus, a clear rule for joinder may be uniquely appropriate for the corporation context. And, generally, shares in corporations are much more quickly and easily transferred than partnership interests, making a determination of whether the aggregation of stockholder’s interests sufficiently represents the corporation extremely difficult. Partnerships lack consistent entity-treatment, and, at least for small partnerships, the determination of whether the partners’ interests align with those of the partnership is not difficult. In this case, the partnership consists of essentially two (though formally three) members, and we are easily able to determine that the individual partners effectively represent the Partnership.
(b) To Rule 17
Of course, the state-law characterization of an action as derivative or on behalf of another might affect joinder via
The real party in interest rule ensures that under the governing substantive law, the plaintiffs are entitled to enforce the claim at issue. See Lubbock Feed Lots, Inc. v. Iowa Beef Processors, Inc., 630 F.2d 250, 256-57 (5th Cir.1980); Virginia Elec. & Power Co. v. Westinghouse Elec. Corp., 485 F.2d 78, 83 (4th Cir.1973), cert. denied, 415 U.S. 935 (1974); 6A Charles Alan Wright, Arthur R. Miller & Mary Kay Kane, Federal Practice and Procedure § 1543, at 334 (2d ed. 1990). There may be multiple real parties in interest for a given claim, and if the plaintiffs are real parties in interest,
This conclusion is informed by the fact that the original purpose of the real party in interest rule was permissive—to allow an assignee to sue in his or her own name.
In sum, this action may well not be derivative but, at all events, the characterization of the suit is immaterial to either
E. Manchester’s Counterclaims
Manchester offers one reason for dismissal not relied on by the district court: that the Partnership is an indispensable party to Manchester’s counterclaims but that joinder would destroy subject matter jurisdiction over the counterclaims because Manchester and the Partnership share citizenship in New Jersey. If Manchester cannot pursue its counterclaims without participation of the Partnership and the Partnership must be excluded from the litigation, Manchester would have a strong argument for dismissal. The third factor of
Complete diversity is required only when federal court jurisdiction is exercised under the federal diversity jurisdiction statute,
Thus, the only remaining question is whether Manchester’s counterclaims are “so closely related to [the HB entities’ claims] that they form part of the same case or controversy under Article III of the United States Constitution.” Claims are part of the same case or controversy if they share significant factual elements. See Sinclair v. Soniform, Inc., 935 F.2d 599, 603 (3d Cir.1991) (“Claims are part of the same constitutional case if they derive from a common nucleus of operative fact ....”) (quoting United Mine Workers v. Gibbs, 383 U.S. 715, 725 (1966)); White v. County of Newberry, S.C., 985 F.2d 168, 172 (4th Cir.1993) (“The claims need only revolve around a central fact pattern.”).
Manchester’s counterclaims rely on essentially the same facts as does its defense to the HB Entities’ claims. Manchester’s primary defense is that HB General’s final capital call was ineffective because the Partnership could not commence construction as scheduled and thus that Manchester appropriately exercised its redemption option before the capital call was due. Manchester’s counterclaims are that the Partnership, along with the HB entities and Vanderbilt Development Corporation (a Vermont corporation with its principal place of business in Vermont), breached the Partnership Agreement and the covenant of good faith and fair dealing due to its failure to recognize Manchester’s right to redemption and its attempted conversion of Manchester’s partnership interest into that of a subordinated creditor. Both the defense and the counterclaims require proof that construction was not commenced as scheduled; that, under the Partnership Agreement, Manchester had the right to exercise the redemption option; and that Manchester did exercise the redemption option. Manchester’s counterclaims are thus within the supplemental jurisdiction of the district court.9
In sum, joinder of the Partnership on the counterclaims will not destroy subject matter jurisdiction over the counterclaims even though Manchester and the Partnership share citizenship in New Jersey.
IV. Conclusion
For the reasons we have explained, the district court’s decision to dismiss this action for failure to join the Partnership was an abuse of discretion. Because all the partners of this small limited partnership are before the court, the exclusion of the Partnership entity causes no prejudice to defendant Manchester or to the Partnership. The presence of all the partners ensures that the district court can fashion protective provisions in the judgment to protect Manchester
Notes
Except as provided in subsections (b) and (c) ... in any civil action of which the district courts have original jurisdiction, the district courts shall have supplemental jurisdiction over all other claims that are so related to claims in the action within such original jurisdiction that they form part of the same case or controversy under Article III of the United States Constitution. Such supplemental jurisdiction shall include claims that involve the joinder or intervention of additional parties.
In any civil action of which the district courts have original jurisdiction founded solely onsection 1332 of this title [diversity jurisdiction], the district courts shall not have supplemental jurisdiction under subsection (a) over claims by plaintiffs against persons made parties under Rule 14, 19, 20, or 24 of the Federal Rules of Civil Procedure, or over claims by persons proposed to be joined as plaintiffs under Rule 19 of such rules, or seeking to intervene as plaintiffs under Rule 24 of such rules, when exercising supplemental jurisdiction over such claims would be inconsistent with the jurisdictional requirements of section 1332.