Emerald Investors v. Gaunt Parsippany Partners

• Decision Date: 13 June 2007
• Docket Number: No. 05-3706.,No. 05-4134.,05-3706.,05-4134.
• Citation: 492 F.3d 192
• Parties: EMERALD INVESTORS TRUST v. GAUNT PARSIPPANY PARTNERS; 119 Cherry Hill Associates, L.L.C.; 99 Cherry Hill Associates, L.P.; Horseheads Commercial Development Partners, L.P.; Reckson Operating Partnership, L.P.; John Does 1 Through 10. Gaunt Parsippany Partners; 119 Cherry Hill Associates, L.L.C.; 99 Cherry Hill Associates, L.P.; Horseheads Commercial Development Partners, L.P.; Reckson Operating Partnership, L.P., Appellants in No. 05-3706. Emerald Investors Trust, Appellant in No. 05-4134 v. Gaunt Parsippany Partners; 119 Cherry Hill Associates, L.L.C.; 99 Cherry Hill Associates L.P.; Horseheads Commercial Development Partners, L.P.; Reckson Operating Partnership, L.P.; John Does 1 Through 10.
• Court: U.S. Court of Appeals — Third Circuit

492 F.3d 192

EMERALD INVESTORS TRUST v. GAUNT PARSIPPANY PARTNERS; 119 Cherry Hill Associates, L.L.C.; 99 Cherry Hill Associates, L.P.; Horseheads Commercial Development Partners, L.P.; Reckson Operating Partnership, L.P.; John Does 1 Through 10.

Gaunt Parsippany Partners; 119 Cherry Hill Associates, L.L.C.; 99 Cherry Hill Associates, L.P.; Horseheads Commercial Development Partners, L.P.; Reckson Operating Partnership, L.P., Appellants in No. 05-3706.

Emerald Investors Trust, Appellant in No. 05-4134 v. Gaunt Parsippany Partners; 119 Cherry Hill Associates, L.L.C.; 99 Cherry Hill Associates L.P.; Horseheads Commercial Development Partners, L.P.; Reckson Operating Partnership, L.P.; John Does 1 Through 10.

No. 05-3706.

No. 05-4134.

United States Court of Appeals, Third Circuit.

Argued November 8, 2006.

Filed: June 13, 2007.

W. James Cousins (argued), McGowan & Cousins, Litchfield, CT, Attorneys for Appellants in No. 05-3706 and Appellees in No. 05-4134.

Kenneth L. Leiby, Jr. (argued), Richard J. Shackleton, Shackleton & Hazeltine, Millburn, NJ, Attorneys for Appellant in No. 05-4134 and Appellee in No. 05-3706.

Before: SLOVITER, CHAGARES, and GREENBERG, Circuit Judges.

OPINION OF THE COURT

GREENBERG, Circuit Judge.

I. INTRODUCTION

The parties appeal and cross-appeal from a judgment and orders in this action that Emerald Investors Trust ("Emerald Trust") brought, predicated on the district court's asserted diversity of citizenship jurisdiction, seeking recovery on two unpaid promissory notes and foreclosure of the mortgages securing the notes. The district court, over the defendants' objection, held that it had diversity of citizenship jurisdiction because the sole beneficiary of Emerald Trust was Emerald Investors Ltd. ("Emerald Ltd."), a corporation incorporated in the British Virgin Islands where it had its principal place of business, and the defendant partnerships, all of which are undoubtedly citizens of states within the United States, are not citizens of the British Virgin Islands.

As always, after we are satisfied of our own jurisdiction,¹ the threshold, and, indeed, as it turns out, the only issue on this appeal is whether the district court had subject matter jurisdiction. Inasmuch as we cannot determine if the district court had diversity of citizenship jurisdiction and there is no other basis for it to have exercised jurisdiction, we do not reach the merits of the case. Rather, we will remand the matter to the district court to resolve the jurisdictional issue after allowing discovery and conducting any hearing that it deems necessary.

II. FACTS AND PROCEDURAL HISTORY

Defendants, Gaunt Parsippany Partners, 119 Cherry Hill Associates, L.L.C., 99 Cherry Hill Associates, L.P., and Horseheads Commercial Development Partners, L.P., whose three principal owners and partners were Newby Toms, Mitchell Wolff, and Joel Hoffman (the "partners"), were in the business of owning and operating office buildings. Though the three partners conducted their business through these four entities, Horseheads was the only one existing at the time that Emerald Trust filed the complaint in this case. Nevertheless, all of the four entities, along within Reckson Operating Partnership, L.P., have been defendants in this case and all five entities filed the first, and as it turns out, the principal appeal after completion of the district court proceedings.

The case may be traced back to January 1994, when the properties the partners owned in Parsippany, New Jersey, which consisted of two sites, the 99 Cherry Hill property and the 119 Cherry Hill property ("the NJ properties"), were performing poorly.² This circumstance caused the partners to refinance these properties with the United Bank of Kuwait ("the United Bank"), an undertaking requiring them to increase the debt on property they owned in Horseheads, New York, by $2 million to be used by the partners for the NJ properties. At that time the partners entered into certain agreements relating to the refinancing.³ First, they agreed to treat the $2 million as a loan from them, rather than from United Bank, to the entities that owned the NJ properties even though United Bank supplied the $2 million. In exchange, each of the two entities owning the NJ properties gave each of the partners a note for $333,333.33 secured by a mortgage that was subordinate to the United Bank's senior mortgage. The notes bore a 12% annual rate of interest and were due on December 31, 1999. The partners created the subordinated mortgages to protect their equity in the properties from partnership creditors. As a result of the subordinated mortgages, the partners appeared to be secured creditors instead of equity owners with respect to the $2 million. The partners also entered into parity agreements that provided that they ranked equally among themselves with respect to payment of or security on the loans.

Thereafter, the relationship among Toms, Wolff, and Hoffman deteriorated leading Toms to seek to withdraw from their business dealings. Accordingly, in 1996 the partners began negotiating the terms of an agreement for Hoffman and Wolff to acquire Toms's interests in the Horseheads and NJ properties. As a result of the negotiations, the partners simultaneously entered into six related agreements.⁴ First, they entered into two mortgage modification agreements modifying the notes and subordinated mortgages so that the sum due on each was increased from $333,333.33 to $583,333.33 with the notes simultaneously becoming non-interest bearing. At the same time the face value of the notes was reduced to $250,000, the reduction being contingent on installment payments on them being timely made. The mortgage modification agreements also provided that repayment was to be made only to the extent that any refinancing or sale of the properties resulted in "net proceeds." The partners also entered into two subordination agreements with United Bank that provided that the partners were not entitled to any payment on their loans until the senior United Bank mortgages were "paid in full." Finally, the partners entered into two second mortgage parity agreements providing for them to share equally in any "net proceeds" realized from a sale of the properties. In August 1997 Toms assigned his notes and mortgages to Emerald Trust, an entity that he controlled.

In August 1998 Reckson, which is completely separate from and independent of the other four defendants, purchased the NJ properties for $19,905,000. As far as we can ascertain this purchase was in an arms-length transaction. At that time, even though approximately $24,000,000 was due to United Bank on the debts its mortgages on the NJ properties secured, it nevertheless accepted $16,459,664.95⁵ on the debts and mortgages and discharged the mortgages, treating them as "satisfied." App. at 201. According to defendants, United Bank discharged its mortgages on the NJ properties for less than was due on them because the approximately $8 million shortfall to satisfy the obligations to United Bank in full was added to the debt that the mortgage United Bank held on the Horseheads property secured.

Wolff and Hoffman also discharged their subordinated mortgages on the NJ properties marking them as "paid and satisfied" upon receipt of $1,202,729.44 in the form of Reckson Operating Units. According to Wolff and Hoffman, they did so because they had no need to retain the mortgages. Emerald Trust, however, did not discharge the subordinated mortgages that Toms had assigned it. Thus, at the closing on the sale of the NJ properties to Reckson all of the mortgages in favor of United Bank, Wolff, and Hoffman on the NJ properties were satisfied, leaving the subordinated mortgages previously held by Toms but since assigned to Emerald Trust as the only outstanding mortgages on the properties.⁶ Inasmuch as Emerald Trust's mortgages remained outstanding, Hoffman and Wolff entered into an indemnity agreement with Reckson's title insurance company for the NJ properties promising to indemnify it should Emerald Trust make any claims on the NJ properties by reason of the liens created by the mortgages that Toms assigned to it. On December 31, 1999, when Emerald Trust's notes secured by the NJ properties came due, none of the defendants nor anyone else paid the notes, defaults that caused Emerald Trust to file this action on April 25, 2002, to recover on the notes and to foreclose its subordinated mortgages on the NJ properties.⁷

Subsequently, Emerald Trust moved for summary judgment seeking a judgment of foreclosure but on August 30, 2004, the district court denied Emerald Trust's motion and on October 29, 2004, the court also denied a motion Emerald Trust filed seeking reconsideration of the August 30, 2004 order. The court thereafter conducted a bench trial on the merits of the controversy in January 2005. Prior to and during the trial the defendants did not raise any issue regarding the court's subject matter jurisdiction which, as we have noted, Emerald Trust predicated on diversity of citizenship between Emerald Trust on one hand and the defendants on the other. The defendants, however, did raise an issue regarding diversity of citizenship in post-trial submissions. To resolve the jurisdictional issue the district court directed the parties to submit affidavits explaining their citizenship following which it heard oral argument regarding the parties' citizenship and the court's diversity jurisdiction. At the oral argument the defendants requested an opportunity to engage in further discovery on the jurisdictional issue but the court rejected that request, though it did permit the parties to submit further briefing on the issue.

Ultimately the court found that Emerald Trust was an unincorporated business trust and it concluded that the law applied in this circuit directs a court to look to the citizenship of the trust's beneficiaries when determining the citizenship of...