657 F.2d 29 (3rd Cir. 1981), 80-2612, Trent Realty Associates v. First Federal Sav. and Loan Ass'n of Philadelphia

Docket Nº:80-2612.
Citation:657 F.2d 29
Party Name:TRENT REALTY ASSOCIATES, a partnership and Norstar Realty Corp., a New Jersey Corporation, Appellants, v. FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF PHILADELPHIA.
Case Date:August 17, 1981
Court:United States Courts of Appeals, Court of Appeals for the Third Circuit

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657 F.2d 29 (3rd Cir. 1981)

TRENT REALTY ASSOCIATES, a partnership and Norstar Realty

Corp., a New Jersey Corporation, Appellants,



No. 80-2612.

United States Court of Appeals, Third Circuit

August 17, 1981

Argued June 10, 1981.

As Amended Aug. 26, 1981.

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Barry I. Fredericks (argued), Fredericks & Messinger, Hackensack, N.J., for appellants; Goldschmidt, Fredericks, Kurzman & Oshatz, New York City, of counsel.

John F. Stoviak (argued), Dilworth, Paxson, Kalish & Levy, Richard J. Green, Philadelphia, Pa., for appellee.

Before ALDISERT, WEIS and SLOVITER, Circuit Judges.


SLOVITER, Circuit Judge.

Plaintiffs appeal from the entry of summary judgment for defendant savings and loan association. Because our review of the record indicates that there is no federal jurisdiction, we will not address the merits of the summary judgment but will direct that the action be remanded to the state court after an opportunity is given to defendant savings and loan association to verify the allegation on jurisdiction made before us.


In light of our disposition of the case we need review the facts only briefly. Plaintiff Trent Realty Associates is a limited partnership and current owner of property in New Jersey which until 1978 was subject to a mortgage held by defendant First Federal Savings and Loan Association of Philadelphia (hereinafter First Federal). The other plaintiff, Norstar Realty, a New Jersey corporation, is the current mortgagee of the property. Plaintiffs will be referred to jointly as "Trent." When the prior owner of the property, the Mutual Life Insurance Company of New York, sought First Federal's permission to convey the property to Trent, First Federal initially refused for reasons which the parties dispute. When the transfer was made without its consent, First Federal accelerated the principal of the mortgage and claimed that the mortgage's "due-on-sale" clause authorizing this acceleration also entitled First Federal to a penalty of interest at 93/4% for 180 days on

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the remaining principal. Under threat of foreclosure, Trent agreed to pay off the principal obligation and to place the claimed penalty amount into escrow pending "a civil action in a court of competent jurisdiction relative to the issue of the transfer of title" to Trent. If the outcome were favorable to Trent, the escrow fund would be returned to its current mortgagee, now Norstar, which had advanced the amount in escrow.

Trent, which was the party obligated under the escrow agreement to commence the action, filed suit in New Jersey state court seeking in one count a declaratory judgment that the penalty was unenforceable and in the other the return of certain payments made to First Federal. First Federal removed the action to the federal district court for the District of New Jersey on the basis of diversity of citizenship, and also alleged that the complaint raises substantial issues of federal law. Trent moved to remand on the ground that First Federal had agreed by the escrow agreement to have the action tried in any competent court of Trent's choosing. The district court denied the motion to remand on this ground. Thereafter, in its answer First Federal included an affirmative defense that the escrow agreement limited the issues to be tried to the enforceability of the penalty provision in the due-on-sale clause, a provision which it alleged was authorized by federal law. First Federal also interposed a counterclaim demanding an accounting of the payments made to it.

Cross-motions for summary judgment were filed by the parties after completion of discovery. The district court granted summary judgment for First Federal, holding that the issue to be decided was limited to the enforceability of the penalty provision. The court rejected Trent's claim that the penalty provision was removed from the mortgage agreement. In determining that the penalty provision was enforceable, the court held that federal law applied and superseded state law, and that the penalty provision was authorized under federal law by an explicit regulation of the Federal Home Loan Bank Board. The court also held that if New Jersey law were applicable, it was not to the contrary. Trent thereafter appealed.


Before hearing oral argument, we sua sponte raised the question of federal subject matter jurisdiction. Since one of the bases for removal had been alleged to be diversity of citizenship between the parties, we inquired whether there was any evidence in the record to support this allegation of diversity. In response, Trent submitted an affidavit, attaching copies of its Restated Certificate of Limited Partnership and Restated Agreement of Limited Partnership which show that one of the limited partners, Delaware Poultry, has its address listed as "c/o Joseph Goldberg" in Eddystone, Pennsylvania. First Federal, a Pennsylvania based federal savings and loan association, is deemed a citizen of Pennsylvania. See Feuchtwanger Corp. v. Lake Hiawatha Federal Credit Union, 272 F.2d 453, 455-56 (3d Cir. 1959) (federally chartered corporation has citizenship of state where based). As a result, Trent belatedly claimed there is no diversity jurisdiction.

First Federal has not challenged Trent's assertion that one of Trent's limited partners is a citizen of Pennsylvania. Instead First Federal argues that the citizenship of a limited partner should not be considered for diversity purposes. It claims that only the citizenship of the general partners determines citizenship of a limited partnership for purposes of diversity. Since the general partners are diverse from First Federal, it contends there is diversity jurisdiction. In the alternative, First Federal claims that because Trent's complaint raised federal questions, the district court had subject matter jurisdiction pursuant to 28 U.S.C. § 1331(a) (Supp. III 1979).


Diversity of Citizenship

Analysis of the diversity issue must begin with the undisputed proposition that a limited partnership is an unincorporated

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association whose citizenship is deemed to be that of the "persons composing such association." Great Southern Fire Proof Hotel Co. v. Jones, 177 U.S. 449, 456, 20 S.Ct. 690, 698, 44 L.Ed. 842 (1900). Applying that holding to the precise issue raised here, this court held that the citizenship of a limited partner will defeat diversity if it is the same as one of the parties on the opposing side. Carlsberg Resources Corp. v. Cambria Savings & Loan Ass'n, 554 F.2d 1254 (3d Cir. 1977).

First Federal urges us to abandon the holding of Carlsberg Resources on the ground that the subsequent decision of the Supreme Court in Navarro Savings Ass'n v. Lee, 446 U.S. 458, 100 S.Ct. 1779, 64 L.Ed.2d 425 (1980), requires that we apply a "real party in interest" test in determining Trent's citizenship. It argues that under the analysis in Navarro, only the general partners are such parties here. We do not read Navarro to require us to depart from the precedent of Carlsberg Resources.

The question before the Court in Navarro was whether "trustees of a business trust may invoke the diversity jurisdiction of the federal courts on the basis of their own citizenship, rather than that of the trust's beneficial shareholders." 446 U.S. at 458, 100 S.Ct. at 1779. In holding that such trustees may rely on their own citizenship and disregard that of the beneficiaries, the Court stated that its prior decisions established that express trusts are neither unincorporated associations nor corporations and should not be analogized to such business entities for purposes of diversity jurisdiction. Id. at 462, 100 S.Ct. at 1782. The Court cited limited partnerships as one of the class of unincorporated associations which are to be distinguished from express trusts, and referred approvingly to the holding of Great Southern Fire Proof Hotel Co. v. Jones, supra, as governing limited partnerships. Id. at 461, 100 S.Ct. at 1782.

We see nothing in the Court's opinion to support First Federal's position that the Navarro holding compels application of a "real party in interest" test to limited partnership. Even the dissenter, Justice Blackmun, observed that "this case ... express(es) no view on the diversity of citizenship issue that is presented when one of the parties is a limited partnership." Id. at 475 n.6, 100 S.Ct. at 1789. Since the holding of Carlsberg Resources has not been overruled by the Supreme Court's Navarro decision, we are not free to depart from our earlier precedent. See Internal Operating Procedures of the United States Court of Appeals for the Third Circuit 25 (1978). Accordingly, we hold that if the allegation of the citizenship of one of Trent's limited partners is verified, diversity of citizenship is lacking, and there is no basis to sustain federal jurisdiction on that ground.


Federal Question Jurisdiction

First Federal also urges here that the complaint in the state action raised "substantial issues" of federal law because the activities of federal savings and loan associations are governed by the Home Owner's Loan Act of 1933 and because First Federal's "right to assess an acceleration charge" as provided in regulations promulgated pursuant to that Act "is implicitly challenged by Plaintiff's complaint."

Determination of whether a case "arises under" federal law within the scope of 28 U.S.C. 1331(a) (Supp. III 1979) is hardly an easy question. As one of the leading commentators in this field has written "it cannot be said that any clear test has yet been developed to determine which cases 'arise under' the Constitution, laws, or treaties of the United States." C. Wright, Law of Federal Courts 63-64 (3d ed. 1976). Although various tests have been suggested in Supreme Court opinions, the test...

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