United States Court of Appeals,
Fifth Circuit.
No. 93-1596.
James G. BANKSTON, Independent Executor of the Estate of W.O.
Bankston, substituted in place and stead of W.O. Bankston,
deceased, Plaintiff-Appellee,
v.
William L. BURCH, Individually and as general partner of The Kona
Hills Estates, a Hawaii Limited Partnership, Defendant-Appellant.
July 29, 1994.
Appeal from the United States District Court for the Northern
District of Texas.
Before WISDOM and JONES, Circuit Judges, and COBB,* District Judge.
WISDOM, Circuit Judge:
The general partner of a limited partnership appeals from the
district court's judgment in a derivative lawsuit brought by a
limited partner. Because the claims the limited partner pleaded
derive from the partnership's rights, the partnership's citizenship
must be considered in determining whether federal diversity
jurisdiction exists. When the partnership's citizenship is taken
into account, there is no complete diversity of citizenship.
Therefore, the district court lacked subject matter jurisdiction.
We REVERSE and REMAND and direct the district court to remand the
case to the state court from which it was removed.
I.
Only a few of the complex facts in this case are pertinent to
*
District Judge of the Eastern District of Texas, sitting by
designation.
1
this appeal. Plaintiff/appellee W.O. Bankston1 is one of fourteen
limited partners in The Kona Hills Estates, a Hawaii limited
partnership ("Kona Hills" or "the partnership").
Defendant/appellant William L. Burch is the general partner. The
partnership was formed for the purpose of purchasing and developing
real estate in Hawaii. Bankston is a citizen of Texas; Burch, of
California. For purposes of federal diversity jurisdiction, the
partnership itself is considered a citizen of every state of which
a general or a limited partner is a citizen.2
In 1990, Bankston sued Burch in Texas state court. Bankston's
original petition stated claims for fraud or negligent
misrepresentation, breach of fiduciary duty, mismanagement and
waste of partnership assets, and breach of contract. Bankston also
sought an accounting, dissolution of the partnership, removal of
Burch as general partner, a temporary injunction against Burch's
further dissipation of partnership assets, a declaratory judgment
that some of Burch's expenditures were improperly charged against
the partnership, and punitive damages. Bankston's original
complaint pleaded all causes of action as personal to Bankston
himself; Bankston's petition never represented that he brought any
claims on behalf of, or as a representative of, the partnership.
1
W.O. Bankston died after the commencement of this lawsuit.
James G. Bankston, the executor of W.O. Bankston's estate, has
been substituted on this appeal as the named plaintiff. All
subsequent references to "Bankston" in this opinion refer to W.O.
Bankston.
2
See Carden v. Arkoma Assocs., 494 U.S. 185, 195-96, 110
S.Ct. 1015, 1021, 108 L.Ed.2d 157 (1990); Whalen v. Carter, 954
F.2d 1087, 1094-95 (5th Cir.1992).
2
On October 9, 1990, Burch removed the case to the United
States District Court for the Northern District of Texas based on
the diversity of citizenship between himself and Bankston. The
parties proceeded with discovery, and the case was set for trial.
Trial was scheduled to begin October 1, 1991.
The day before trial, Burch filed a motion to dismiss
Bankston's claims on the grounds that federal subject matter
jurisdiction was lacking, Fed.R.Civ.P. 12(b)(1). Burch first
alleged that Bankston lacked standing under the applicable Hawaii
statutes to press the claims pleaded against Burch. Burch also
argued that Bankston had "failed to join the Limited Partnership
and the individual limited partners in this action.... as
indispensable parties" under Fed.R.Civ.P. 19 and 12(b)(7).
The district judge considered Burch's motion in chambers on
September 30, 1991. Obviously troubled by the presentation of the
motion literally on the eve of trial, the district judge decided to
carry the motion with the case and proceeded to trial.
The case was tried to a jury October 1-3, 1991. The jury
verdict was for Burch on Bankston's claims that Burch reduced his
partnership interest and unreasonably refused to consent to
Bankston's proposed sale of his interest. The jury found that
Burch had charged a total of $623,050.50 in personal or
unreasonable and excessive expenses to the partnership. It also
found that Burch had sent false and fraudulent statements to
Bankston in Texas and that Burch should be removed as general
partner. The jury found that Bankston's claims against Burch
3
accrued for limitations purposes in March 1986. Finally, the jury
found that Bankston was entitled to $250,000 in punitive damages.
On October 11, Bankston moved for entry of judgment and for
judgment notwithstanding the verdict on those claims rejected by
the jury. In this motion, Bankston for the first time acknowledged
that some of his claims were derivative in nature.3 Bankston also
for the first time disclaimed an exclusive personal interest in the
damage award, conceding that "any money or judgment received by
Bankston, in his name, for partnership claims would be held by him
as trustee or agent of the partnership".4 Bankston's motion
represented, inaccurately, that his pleadings had involved
derivative claims all along. That attempted feat of legerdemain
would have allowed Bankston to recharacterize Burch's pretrial
motion to dismiss—again, not accurately—as merely a challenge to
Bankston's capacity to bring derivative claims on behalf of the
partnership, rather than his standing to sue. The distinction is
important because objections to capacity may be waived if not
timely asserted, but objections to standing are jurisdictional in
nature and can be raised at any time.5
The district court accepted Bankston's reformulation of the
3
Specifically, the motion alleged that "Bankston's Original
Petition requested certain relief be awarded to Bankston for
wrongs done to both him and the partnership." 2 Rec. 479. That
sentence inaccurately characterizes Bankston's original petition.
Until the filing of his Motion for Judgment, nothing in the
record suggests that Bankston regarded the claims he asserted as
derivative of the partnership's own rights.
4
Id. at 480; see also id. at 481 n. 3.
5
Fed.R.Civ.P. 12(h)(3).
4
case. It granted Bankston's motion for judgment, finding that
Burch had "confuse[d] the issue of standing with the defense of a
lack of capacity to sue", and ruled that Burch's " "improper
capacity' defense", even if valid, had been waived.
Burch appealed to this Court. He contends that the district
court had no subject matter jurisdiction to enter judgment on a
derivative claim. We agree.
II.
A. Derivative Claims by Limited Partners
Limited partners have less management responsibility for the
partnership than its general partners. With that reduced
responsibility and reduced exposure to liability come reduced
individual rights. "It is well-settled," a New York federal court
recently observed, "that the only direct lawsuit against general
partners that a limited partner can bring in an individual,
non-representative capacity consists of an action for an
accounting."6
Limited partners can, if permitted by statute, sue
derivatively to enforce rights belonging to the partnership.7 In
6
Lenz v. Associated Inns & Restaurants Co. of Am., 833
F.Supp. 362, 379 (S.D.N.Y.1993). Bankston's original complaint
included a demand for an accounting. The district court's final
judgment which is before us for review, however, makes no mention
of an accounting, and the parties' briefs do not discuss it.
Plainly the derivative claims overwhelm any individual claim for
an accounting in this case.
7
See, e.g., Haw.Rev.Stat. § 425D-1001. See generally 4 Alan
R. Bromberg & Larry E. Ribstein, Bromberg & Ribstein on
Partnership § 15.05 (1994); Debra E. Wax, Annotation, Right of
Limited Partner to Maintain Derivative Action on Behalf of
Partnership, 26 A.L.R.4th 264 (1983).
5
such derivative lawsuits, the form of the lawsuit does not obscure
its substance: it is the partnership's rights, not the limited
partner's, that the lawsuit seeks to vindicate.8 Because the
partnership possesses the right sought to be enforced, the
partnership is, at a minimum, the real party in interest in a
derivative lawsuit.9
B. Indispensability of the Partnership
In this case, the partnership is even more than the real
party in interest—it is an indispensable party without whom the
lawsuit should not have gone forward.10
In Whalen v. Carter,11 we confronted the question whether a
partnership was an indispensable party in a lawsuit brought by
limited partners charging the managing partners of a partnership
8
Phillips v. Kula 200 II, 667 P.2d 261, 265
(Haw.Ct.App.1983). "A statutory authorization of derivative
suits implies that limited partners may enforce partnership
rights only through a derivative suit." 4 Bromberg & Ribstein §
15.05(g)(7) (emphasis added).
9
See 6A Charles A. Wright, Arthur R. Miller & Mary K. Kane,
Federal Practice & Procedure § 1542 (2d ed. 1990); cf.
Fed.R.Civ.P. 17(a).
10
See 4 Bromberg & Ribstein § 15.05(g)(7), commenting that a
limited "partnership is usually an indispensable party but may be
named as a nominal defendant in a derivative suit" brought by a
limited partner; 3B James W. Moore & John E. Kennedy, Moore's
Federal Practice ¶ 23.1.21[1] (2d ed. 1994), noting that in a
derivative lawsuit brought against a corporation, "the
corporation is indispensable and must be joined as a party". In
Buckley v. Control Data Corp., 923 F.2d 96, 98 (8th Cir.1991), a
partnership case, the court, citing Moore, noted that "[i]t is
well established that an entity on whose behalf a derivative
claim is asserted is a necessary defendant in the derivative
action."
11
954 F.2d 1087 (5th Cir.1992).
6
with fraud. We concluded that it was. We first noted the four
factors identified in Fed.R.Civ.P. 19(b) as relevant to the
determination whether a party is indispensable:
(1) to what extent a judgment rendered in the party's absence
might be prejudicial to that party or others in the lawsuit;
(2) 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; (3) whether a judgment
rendered in the party's absence will be adequate; and (4)
whether the plaintiff will have an adequate remedy if the
party cannot be joined.12
We concluded that, on balance, the test favored holding the
partnership an indispensable party. We noted that the judgment
would prejudice the partnership's rights and that shaping the
relief provided inadequate protection to the partnership's
interest. We consider the reasoning of Whalen sound and we follow
it today in holding that Kona Hills was an indispensable party in
Bankston's derivative lawsuit.13
The Eighth Circuit reached a similar result in Buckley v.
Control Data Corp.,14 a case we find persuasive. In Buckley,
limited partners sued a general partner, alleging various
12
Id. at 1096.
13
In Whalen, we also rejected the argument Bankston advanced
at oral argument in this case based on Freeport-McMoRan, Inc. v.
K N Energy, Inc., 498 U.S. 426, 111 S.Ct. 858, 112 L.Ed.2d 951
(1991). Bankston argued that addition of a non-diverse party
(the partnership) now would not destroy diversity jurisdiction
because complete diversity existed among the named parties when
the lawsuit was initially filed. The Freeport-McMoRan rule,
however, requires that jurisdiction be proper "at the time [the]
action is commenced". Id. at 428, 111 S.Ct. at 859-60. Here, as
in Whalen, it was not; accordingly, Freeport-McMoRan has no
application in this case.
14
923 F.2d 96 (8th Cir.1991).
7
derivative causes of action. The court ruled that the limited
partnership, as the holder of the rights from which the limited
partners' claims derived, was an indispensable party to the
litigation. Although Buckley turned in part on the particularities
of Minnesota partnership law, its reasoning is of sound general
applicability and harmonious with the applicable Hawaii statutes in
this case.
It is undisputed that the partnership itself was never named
as a party in this case, either in state or federal court. That
does not control our jurisdictional inquiry, however. The inquiry
into the existence of complete diversity requires considering the
citizenship even of absent indispensable parties.15 The parties may
not manufacture diversity jurisdiction by failing to join a
non-diverse indispensable party.
C. Diversity Jurisdiction and Limited Partnerships After Carden
The clear law after the Supreme Court's decision in Carden v.
Arkoma Associates16 is that the citizenship of all partners, limited
as well as general, controls the citizenship of the limited
partnership itself.17 Bankston suggests that we distinguish Carden,
because this case is in federal court on removal, rather than
having been originally filed in federal court. We find Carden
controlling. We have resisted attempts to carve exceptions from
15
See 13B Charles A. Wright, Arthur R. Miller & Edward H.
Cooper, Federal Practice & Procedure § 3606 (2d ed. 1984).
16
494 U.S. 185, 110 S.Ct. 1015 (1990).
17
Id. at 195-96, 111 S.Ct. at 1021.
8
Carden, even though we acknowledged that the decision effectively
closes the doors of the federal courts to many lawsuits among
partners or by partners against a partnership.18
Under Carden, Kona Hills is a citizen of, at a minimum, Texas
and California. Because Bankston is a citizen of Texas, and
because Kona Hills is an indispensable party defendant for
Bankston's derivative claims, there is no complete diversity of
citizenship.19 Accordingly, the district court lacked subject
matter jurisdiction over the claims Bankston asserted. We must,
therefore, reverse the district court's judgment and remand to the
district court with instructions to remand this case to the state
court from which it was removed.20
III.
Bankston, anticipating our holding today, requests that in
18
See Whalen, 954 F.2d at 1095, in which we stated:
Whalen.... complain[s] that if partnerships are always
to be considered citizens of the same states in which
their partners are citizens, then partners could never
assert diversity jurisdiction in a suit against the
partnership.... [We] refuse to recognize ... an
exception.
Other decisions declining to make exceptions to the general
rule of Carden include Temple Drilling Co. v. Louisiana Ins.
Guar. Ass'n, 946 F.2d 390, 393 (5th Cir.1991); Newport Ltd.
v. Sears, Roebuck & Co., 941 F.2d 302, 306-07 (5th Cir.),
reh'g en banc denied, 946 F.2d 893 (5th Cir.1991), cert.
denied, --- U.S. ----, 112 S.Ct. 1175, 117 L.Ed.2d 420
(1992).
19
See Strawbridge v. Curtiss, 7 U.S. (3 Cranch) 267, 2 L.Ed.
435 (1806).
20
Warren G. Kleban Eng'g Corp. v. Caldwell, 490 F.2d 800,
803 (5th Cir.1974).
9
the event of a remand we make an award of costs and attorneys' fees
in his favor.21 Bankston argues that Burch's "dilatory" conduct in
removing the case to federal court cost Bankston three years of
fruitless effort.
We decline to make the requested award. Bankston himself
bears a substantial share of the responsibility for this case's
lengthy but futile sojourn in the federal courts. Had Bankston
pleaded his derivative claims as derivative claims, rather than
attempting to cast them as personal to himself, the
indispensability of the partnership as a party would have been
immediately apparent.
We REVERSE the district court's judgment and REMAND the case
to the district court with instructions to remand the case to state
court.
21
Bankston relies on 28 U.S.C. § 1447(c), which provides in
part: "An order remanding the case may require payment of just
costs and any actual expenses, including attorney fees, incurred
as a result of the removal."
10