Taber Partners v. Insurance Co. of North America, Civ. No. 91-1220 (JP).

• Decision Date: 08 July 1992
• Docket Number: Civ. No. 91-1220 (JP).
• Parties: TABER PARTNERS I, Plaintiff, v. INSURANCE COMPANY OF NORTH AMERICA, INC., Defendant. MERIT BUILDERS, INC., Defendant, Counterclaimant, and Third-Party Plaintiff, v. VICTOR TORRES & ASSOCIATES, and Desarrollos Metropolitanos, Inc., Third-Party Defendants.
• Court: U.S. District Court — District of Puerto Rico

798 F. Supp. 904

TABER PARTNERS I, Plaintiff, v. INSURANCE COMPANY OF NORTH AMERICA, INC., Defendant.

MERIT BUILDERS, INC., Defendant, Counterclaimant, and Third-Party Plaintiff, v. VICTOR TORRES & ASSOCIATES, and Desarrollos Metropolitanos, Inc., Third-Party Defendants.

Civ. No. 91-1220 (JP).

United States District Court, D. Puerto Rico.

July 8, 1992.

Rubén T. Nigaglioni, Ledesma, Palou & Miranda, Hato Rey, P.R., for plaintiff.

Harvey B. Nachman, Nachman & Fernández Seín, Santurce, P.R., for defendant.

Edilberto Berríos Pérez, Hato Rey, P.R., for Victor Torres.

Humberto Guzmán Rodríguez, Fiddler, González & Rodríguez, San Juan, P.R., for Desarrollos.

OPINION & ORDER

PIERAS, District Judge.

The Court has before it the Motion to Dismiss filed by third-party defendant Desarrollos Metropolitanos, Inc. (hereinafter "Desarrollos") on March 12, 1992, and the supplemental Motion to Dismiss filed by third-party defendant Victor Torres and Associates ("VTA") on April 1, 1992. For the reasons set forth below, the motions are hereby GRANTED.

I. Factual and Procedural Background

Plaintiff Taber Partners I ("Taber") is a New York General Partnership whose only partners are two Subchapter S corporations incorporated in New York—Lerfer San Juan Corporation ("Lerfer"), which holds a ninety nine percent (99%) interest in Taber, and Calumet Corporation ("Calumet"), which holds a one percent (1%) interest in Taber. Taber is the owner and operator of the Ambassador Plaza Hotel & Casino ("Ambassador Plaza") in Condado, Santurce, Puerto Rico. Defendant Merit Builders, Inc. ("Merit") is a corporation organized and existing under the laws of Puerto Rico. Beginning in January 1989, Taber and Merit entered into a series of construction contracts for renovations and expansion of the Ambassador Plaza. Taber brought this action seeking recovery of damages caused by alleged delays, substandard workmanship, and loss of profits resulting from alleged breaches of contract, fraud, and negligence by Merit. Merit filed a counterclaim which seeks recovery on the contracts and for the alleged destruction of its ability to operate in the marketplace. The jurisdiction of this Court is predicated on diversity of citizenship. Accord 28 U.S.C. § 1332. Merit filed third-party complaints against VTA, Taber's inspecting architect, asserting that they conspired with Taber to officially deny substantial completion of the projects, and Desarrollos, the subcontractor hired to build the basic structures, asserting that it is entitled to indemnification under the subcontract agreement for any damages sustained by Taber as a result of Desarrollos' improper construction.¹

Desarrollos and VTA seek dismissal of this action on grounds that this Court is without subject matter jurisdiction because diversity of citizenship between Merit and Taber does not exist. These motions were filed on the eve of trial, after months of extended and costly discovery; however, Rule 12(h)(3) of the Federal Rules of Civil Procedure provides that "whenever it appears by suggestion of the parties or otherwise that the court lacks jurisdiction over the subject matter, the court shall dismiss the action" (emphasis added). Cf. Rule 12(c) (other non-waivable jurisdictional defenses may be brought to the court's attention after the time for filing motions to dismiss has passed by way of a motion for judgment on the pleadings, but such motion must be made "within such time as not to delay the trial.") The motions have been opposed by both the plaintiff and the defendant, who argue that diversity exists between them; however, as Judge Selya noted in a similar context, "subject matter jurisdiction is a bit like pregnancy; it either exists or it does not. If the latter, jurisdiction cannot be conferred by agreement or concession of the parties." Northeast Federal Credit Union v. Neves, 837 F.2d 531, 532 n. 2 (1st Cir.1988) (citations omitted). Given the complicated issues presented on these motions, the Court finds it unfortunate that Judge Selya's colorful analogy cannot be extended so that the Court might, instead of having to sift through these difficult issues, simply wait nine months to see how everything turns out.

The material facts underlying the jurisdictional issues raised by movants are not in dispute. In 1986, Mr. F. Eugene Romano and Ms. Linda E. Romano, both citizens of New York, incorporated Lerfer and Calumet in New York. Mr. Romano owns all the outstanding shares of Lerfer, in exchange for which he paid $479,300.00. He acts as its president and treasurer. Ms. Romano owns all the outstanding shares of Calumet, in exchange for which she paid $300.00. She acts as its president and treasurer. The directors of both Lerfer and Calumet are Mr. Romano, Ms. Romano, and Mrs. Jeanne Romano. Mrs. Jeanne Romano serves as secretary for both corporations.

Both Lerfer and Calumet are Subchapter S corporations under 26 U.S.C. § 1361 et seq. and New York Tax Law § 660(a) (McKinney's 1987). Both have their headquarters at 501 Main Street, Utica, New York. Both file federal income tax returns from New York and state income tax returns in New York. Neither files income tax returns from or in Puerto Rico.² Both maintain their corporate books in New York. Both have entered into contracts establishing bank accounts, lending and borrowing money, and establishing working capital accounts in New York. The Certificates of Incorporation of both Lerfer and Calumet contain general declarations that their purpose is to engage in all lawful acts or activities under New York law.

Lerfer and Calumet entered into a partnership agreement that formed Taber. The agreement delegated operation of the partnership to an executive director, Mr. Romano, and an assistant director, Ms. Romano. It also granted the partnership the authority to borrow money, enter into contracts and "do any and all other acts necessary or proper in the furtherance of the partnership business." Agreement at § 4.04. Taber's business is the operation and management of the Ambassador Plaza.

II. Discussion

A. Controlling Legal Principles

District courts have original jurisdiction over all civil actions in which the amount in controversy exceeds $50,000.00 and the dispute is between "citizens of different States." 28 U.S.C. § 1332(a)(1). Once jurisdictional allegations are challenged, the party asserting diversity has the burden of establishing the allegations with competent proof. Media Duplication Services v. HDG Software, 928 F.2d 1228, 1235 (1st Cir.1991) (citing Thomson v. Gaskill, 315 U.S. 442, 446, 62 S.Ct. 673, 675, 86 L.Ed. 951 (1942); Topp v. CompAir Inc., 814 F.2d 830, 839 (1st Cir.1987); de Walker v. Pueblo International, Inc., 569 F.2d 1169, 1172 n. 4 (1st Cir.1978)).

The Supreme Court has held that general partnerships, like Taber, as well as other types of unincorporated associations, are not "citizens" for purposes of jurisdiction under Section 1332. Accord Great Southern Fire Proof Hotel Co. v. Jones, 177 U.S. 449, 20 S.Ct. 690, 44 L.Ed. 842 (1900); Chapman v. Barney, 129 U.S. 677, 9 S.Ct. 426, 32 L.Ed. 800 (1889). To determine the citizenship of such entities for diversity purposes, the citizenship of their constituent partners or members must be consulted. Accord Carden v. Arkoma Associates, 494 U.S. 185, 195-96, 110 S.Ct. 1015, 1021, 108 L.Ed.2d 157 (1990) (citations omitted) ("... diversity jurisdiction in a suit by or against the unincorporated entity depends on the citizenship of `all the members,' `the several persons composing such association,' `each of its members.'") In this case, therefore, the citizenship of Taber can be established by considering the citizenship of Lerfer and Calumet.

Pursuant to 28 U.S.C. § 1332(c)(1), "a corporation shall be deemed to be a citizen of any State by which it has been incorporated and of the State where it has its principle place of business." See also 28 U.S.C. § 1332(d) (the word "state" in Section 1332 includes the Commonwealth of Puerto Rico). The movants acknowledge that Lerfer and Calumet are incorporated in New York but argue that their principle place of business is in Puerto Rico, thereby establishing dual citizenship for both corporations and defeating diversity jurisdiction in this case. See Chemical Transportation Corp. v. Metropolitan Petroleum Corp., 246 F.Supp. 563 (S.D.N.Y.1964) (the purpose of Section 1332(c)(1), which gives dual, not alternative, citizenship to a corporation whose principal place of business is located in a state different from the state of its incorporation, is to restrict the diversity jurisdiction of the federal courts).

Several techniques can be used to establish the principle place of business of a corporation. In Topp v. CompAir Inc., 814 F.2d 830 (1st Cir.1987), the First Circuit explained:

This court has recognized that there are three distinct, but not necessarily inconsistent tests for determining a corporation's principal place of business. de Walker v. Pueblo International, Inc., 569 F.2d 1169, (1st Cir.1978). One is the "nerve center" test which searches for the location from where the activities of the corporation are controlled and directed, Lugo-Vina v. Pueblo International, Inc., 574 F.2d 41, 43 (1st Cir.1978). The other two tests are the "center of corporate activities" test, i.e., where the corporation's day-to-day management takes place, de Walker, 569 F.2d at 1172; Kelly v. United States Steel Corp., 284 F.2d 850, 854 (3d Cir.1960); and the "locus of the operations of the corporation" test, i.e., where the bulk of the corporation's actual physical operations are located, Inland Rubber Corp. v. Triple A Tire Service, Inc., 220 F.Supp. 490 (S.D.N.Y. 1963)....

The nerve center test was developed in the context of corporations with "complex and farflung activities." de Walker, 569 F.2d at 1172. See Scot Typewriter Co. v. Underwood Corp., 170 F.Supp. 862 (S.D.N.Y.1959). The nerve center is described as "the

...