Northern Trust Co. v. Bunge Corp.

• Decision Date: 25 May 1990
• Docket Number: No. 88-2595,88-2595
• Citation: 899 F.2d 591
• Parties: The NORTHERN TRUST COMPANY, an Illinois corporation, Plaintiff-Appellant, v. BUNGE CORPORATION, a New York corporation, Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 591

899 F.2d 591

16 Fed.R.Serv.3d 165

The NORTHERN TRUST COMPANY, an Illinois corporation Plaintiff-Appellant, v. BUNGE CORPORATION, a New York corporation, Defendant-Appellee.

No. 88-2595.

United States Court of Appeals Seventh Circuit.

Argued Jan. 16, 1990.

Decided March 30, 1990.

Rehearing and Rehearing En Banc Denied May 25, 1990.

Mark A. Rabinowitz, Stephen C. Sandels, McDermott, Will & Emery, Chicago, Ill., for plaintiff-appellant.

Stephen R. Patton, Jonathan B. Newcomb, David T. Erie, Kirkland & Ellis, Washington, D.C., for defendant-appellee.

Before CUMMINGS and EASTERBROOK, Circuit Judges, and ESCHBACH, Senior Circuit Judge.

CUMMINGS, Circuit Judge.

In this action to construe the coverage of a warranty in a Stock Purchase Agreement the district court entered a judgment for $648,000 plus prejudgment interest in favor of the purchaser of the stock, the Bunge Corporation ("Bunge"). After determining that diversity jurisdiction in this case must be satisfied on the basis of the citizenship and the amounts in controversy of the individual sellers of the stock and not that of their appointed representative, we hold that the district court was without subject matter jurisdiction to entertain this suit. We therefore vacate the judgment of the district court and dismiss the suit without prejudice.

I. Factual Background

On October 5, 1978, Bunge entered into a Stock Purchase Agreement (the "Agreement") under which it purchased all of the shares of the Lauhoff Corporation ("Lauhoff") from Lauhoff's 77 shareholders. The Agreement includes various warranties among which is one that Lauhoff owned or was permitted to use under license "all formulae, secret processes, know-how, patents, patent applications, trademarks, trade names and copyrights" in use at the time of the sale of the shares. The Agreement also provides that the purchase price of the shares will be adjusted on a pro rata basis for, inter alia, "any liabilities of or claims" arising out of the breach of any of the warranties. In other words, the Agreement contemplates a per share adjustment in the sales proceeds in the event that a breach in a warranty causes the value of the shares in Bunge's hands to be lower than anticipated. Finally, the Agreement provides that each of the individual shareholders of the Lauhoff stock "appoints the Northern Trust Company, Chicago, Illinois, as the Seller's true and lawful agent and attorney with respect to all matters arising in connection with this agreement * * *." The Northern Trust Company ("Northern") is listed in the Agreement as the party to receive, on behalf of the sellers, any "notices, requests, instructions, or other documents" pursuant to the performance of the Agreement.

By letter dated May 6, 1981, the Ralston Purina Company ("Ralston") notified Lauhoff, which had then been owned and operated by Bunge for over two years, that Lauhoff had for some years been infringing one of Ralston's patents, and that Ralston intended to prosecute. Bunge promptly sent a copy of this letter to Northern advising that the Ralston action might give rise to a purchase price adjustment under the Stock Purchase Agreement. Ralston filed an action against Lauhoff on November 4, 1985, and Lauhoff settled the suit on May 9, 1986, by paying Ralston $1.2 million. Bunge invited Northern to participate in the settlement negotiations but Northern declined.

On May 22, 1986, Bunge wrote to Northern demanding $648,000, pursuant to the price adjustment provision in the Agreement. ¹ Shortly thereafter, on July 2, 1986, Northern, acting in its capacity as agent and attorney for the sellers, filed a complaint in federal district court seeking a declaration that the purchase price adjustment provision of the Stock Purchase Agreement did not entitle Bunge to be reimbursed by the former Lauhoff shareholders for the Ralston settlement. The complaint recited that federal jurisdiction was based on diversity, Bunge being a corporation organized under the laws of the State of New York with its principal place of business in New York and Northern being a corporation organized under the laws of the State of Illinois with its principal place of business in Illinois, and the amount in controversy being in excess of $10,000. Bunge immediately filed a counterclaim against Northern, "as representative of Sellers under the Stock Purchase Agreement," asserting breach of the warranty contained in the Agreement and requesting a refund of $648,000 of the purchase price of the shares.

After eighteen months of discovery and extensive briefing the district judge resolved cross-motions for summary judgment in favor of Bunge and against Northern. On May 23, 1988, the district judge entered a final judgment against Northern in the amount of $648,000, together with prejudgment interest at the Illinois statutory rate. On June 7, 1988, Northern filed a motion to alter or amend judgment seeking a declaration that Northern was not liable for the judgment in its individual capacity. In a Memorandum Opinion and Order dated July 29, 1988, the district judge denied Northern's motion to alter or amend the judgment, concluding that "any judgment entered against Northern in its individual capacity is proper and will eventually be satisfied by the individual sellers who will indemnify Northern for the purchase price refund * * *."

Northern has appealed from the district judge's grant of summary judgment to Bunge on the merits and the district judge's denial of Northern's motion to alter or amend the judgment. At oral argument before this Court the panel inquired whether one or more of the sellers of the Lauhoff stock may have had a common domicile with Bunge in New York at the time the suit was filed, and whether such a common domicile would preclude diversity jurisdiction in this case. The Court then requested that both parties file supplemental briefs to address that question. In these supplemental briefs the parties have each argued that federal jurisdiction was proper. We are not persuaded by those arguments and accordingly we must dismiss this case for lack of subject matter jurisdiction.

II. Jurisdiction

The federal courts are courts of limited jurisdiction. Bender v. Williamsport Area School District, 475 U.S. 534, 541, 106 S.Ct. 1326, 1331, 89 L.Ed.2d 501 (1986). Federal jurisdiction here has been premised on diversity of citizenship. The current version of the diversity statute restricts federal jurisdiction to "all civil actions where the matter in controversy exceeds the sum or value of $50,000, exclusive of interest and costs, and is between (1) citizens of different states * * *." 28 U.S.C. Sec. 1332. ² In Strawbridge v. Curtiss, 3 Cranch 267, 2 L.Ed. 435 (1806), the Supreme Court held that the diversity requirement is satisfied only if there is "complete diversity" among the plaintiffs and the defendants.

Determining whether complete diversity exists in a lawsuit between two individuals is generally straightforward. When a lawsuit involves groups of individuals or parties representing groups of individuals, however, the determination is more complicated. This is because such suits require a determination of which entities can be considered citizens for diversity purposes, and also whose citizenship is pertinent in testing diversity. The Supreme Court has established that the relevant citizens for diversity purposes must be "real and substantial parties to the controversy." Navarro Savings Association v. Lee, 446 U.S. 458, 460, 100 S.Ct. 1779, 1781, 64 L.Ed.2d 425 (1980), citing McNutt v. Bland, 2 How. 9, 15, 11 L.Ed. 159 (1844); Marshall v. Baltimore & Ohio R. Co., 16 How. 314, 328-329, 14 L.Ed. 953 (1854); Coal Co. v. Blatchford, 11 Wall. 172, 177, 20 L.Ed. 179 (1871).

As a result, it has generally been held that federal courts must look to the individuals being represented rather than their collective representative to determine whether diversity of citizenship exists. For example, two provisions of the diversity statute, one long-standing and the other applicable to all civil suits filed on or after May 18, 1989, require the courts to look to represented parties to determine if diversity is satisfied. The long-standing provision, 28 U.S.C. Sec. 1332(c)(1), establishes that in direct actions against insurers--whether incorporated or unincorporated--in which the insured is not joined as a party-defendant, such insurers are deemed to be citizens of the same state as their insureds, as well as the state in which they are incorporated and the state in which they have their principal place of business. For suits filed on or after May 18, 1989, legal representatives of estates of decedents, infants, or incompetents are deemed to be citizens of the same state as the decedents, the infants, or the incompetents. 28 U.S.C. Sec. 1332(c)(2). In addition to these statutorily mandated instances, partnerships and limited partnerships are not considered citizens of any state for diversity purposes. Great Southern Fire Proof Hotel Co. v. Jones, 177 U.S. 449, 20 S.Ct. 690, 44 L.Ed. 842 (1900) (partnership); Carden v. Arkoma Associates, --- U.S. ----, 110 S.Ct. 1015, 108 L.Ed.2d 157 (1990) (limited partnership). Consequently, in cases involving such unincorporated business associations the relevant citizenship is that of the individual partners. Id.

There are, however, exceptions that allow the citizenship of a single individual or entity to provide the basis for complete diversity for an entire group of interested individuals. For example, corporations have the status of citizens and they are deemed to be citizens of the state in which they are incorporated and of the state in which they have their principal place of business. 28 U.S.C. Sec. 1332(c)(1). Shareholders who bring derivative suits can establish diversity based on their own citizenship even though they are suing on behalf of the corporation. Fed.R.Civ.P. 23.1; Doctor v. Harrington, 196...