Newport Ltd. v. Sears, Roebuck and Co.

• Citation: 941 F.2d 302
• Decision Date: 26 August 1991
• Docket Number: No. 90-3559,90-3559
• Parties: RICO Bus.Disp.Guide 7842 NEWPORT LIMITED, A Partnership in Commendam, Plaintiff-Appellee Cross-Appellant, v. SEARS, ROEBUCK AND CO., Defendant-Appellant Cross-Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (5th Circuit)

Page 302

941 F.2d 302

RICO Bus.Disp.Guide 7842

NEWPORT LIMITED, A Partnership in Commendam, Plaintiff-Appellee Cross-Appellant, v. SEARS, ROEBUCK AND CO., Defendant-Appellant Cross-Appellee.

No. 90-3559.

United States Court of Appeals, Fifth Circuit.

Aug. 26, 1991.

Rehearing and Rehearing En Banc

Denied Sept. 24, 1991.

Harry McCall, Jr., Paul A. Nalty, Jonathan C. McCall, Rebecca A. Stulb, W. Anthony Toups, III, Charles P. Blanchard, Chaffe, McCall, Phillips, Toler & Sarpy, New Orleans, La., for defendant-appellant cross-appellee.

George C. Freeman, III, Stephen H. Kupperman, Philip A. Wittman, Stone, Pigman, Walther, Wittmann & Hutchinson, New Orleans, La., for plaintiff-appellee cross-appellant.

Appeals from the United States District Court for the Eastern District of Louisiana.

Before REAVLEY, POLITZ, and JOLLY, Circuit Judges.

POLITZ, Circuit Judge:

Newport Limited, a Louisiana partnership in commendam, brought suit against Sears, Roebuck and Co. alleging civil RICO violations, state-law fraud, and unfair trade practice claims. The district court dismissed the RICO claim and, declining to exercise pendent jurisdiction, dismissed without prejudice the state-law claims. Newport Ltd. v. Sears, Roebuck & Co., 739 F.Supp. 1078 (E.D.La.1990). In a brief ruling after oral argument we affirmed the dismissal of the RICO claim but reversed the decision to decline to hear the state-law claims. 937 F.2d 605 (5th Cir.1991) (Table). We now assign reasons for that ruling and address the remaining issues.

Background

The facts surrounding this litigation are detailed in the district court opinion; we relate only those facts pertinent to today's disposition. Newport owned a large tract of land in New Orleans suitable for industrial development. It hoped to make Sears its first--and centerpiece--tenant by constructing and leasing to Sears a warehouse facility. The parties began negotiations in the fall of 1983 regarding such items as the size of the warehouse and the annual rental per square foot; they differ as to the details actually agreed upon. Newport was to handle the local and federal regulatory requirements, including applications for urban development grants. In a November 1984 letter, and in a January 9, 1985 "duplication" of that earlier letter, the parties agreed to agree:

It is understood that the matters contained in this letter will form the basis of a much more detailed document, the terms and conditions of which are subject to the mutual agreement of the parties. It is not intended to be a comprehensive statement of our respective rights, duties and obligations which will be fully set forth in said document.

In the succeeding 18 or so months no more specific agreement was reached. Newport insists this failure was the result of a calculated strategy by Sears representatives to withdraw from the transaction because of a perceived change in its warehousing needs. This strategy purportedly was guided by a four-option memorandum drafted by Sears' in-house counsel, D. Charles Houk, the gist of which was to stonewall so staunchly during negotiations, and to provide such minimal technical assistance, that Newport, rather than Sears, would lose interest and eventually withdraw from the project, taking the blame for its collapse.

Sears indicates that after a change in corporate leadership some of its priorities changed, but that it was still willing to continue the project in some form, albeit with some delay. According to Sears, the project collapsed because of Newport's resistance to changes, general uncooperativeness, and unrealistic expectations. The parties also disagree on whether a $2.48 per square foot per annum lease rate was agreed upon as a fixed rate or as a platform for adjustment based on unspecified formulae.

Newport filed suit in June 1986, asserting diversity of citizenship as the basis for jurisdiction. According to Sears, the lawsuit came without any warning or notice that the negotiations had terminated. As finally amended Newport's complaint alleged a RICO violation, together with Louisiana law claims of failure to perform in good faith and violation of the state Unfair Trade Practices and Consumer Protection Law. Sears moved to dismiss the RICO claim and sought summary judgment on the state-law claims; Newport responded to both motions. The district court dismissed the RICO claim on the merits and dismissed without prejudice the pendent state claims, ruling that in light of the Supreme Court's recent decision in Carden v. Arkoma Associates, 494 U.S. 185, 110 S.Ct. 1015, 108 L.Ed.2d 157 (1990), there was no diversity jurisdiction because Sears' state of incorporation, and the domicile of one of Newport's limited partners, was New York. ¹ Both sides timely appealed.

Analysis

We first address and summarily dispose of the RICO claim. Newport's efforts to apply RICO to the instant commercial dispute are fatally defective. We adopt as our own the insightful holding of the district court on this issue. We must address, however, the issue of diversity jurisdiction and the propriety of the refusal to hear the pendent claims.

Sears vigorously contends that the trial court erred in concluding that there was no diversity between Sears and Newport. Sears' contention focuses on Carden's discussion of Puerto Rico v. Russell & Co., 288 U.S. 476, 53 S.Ct. 447, 77 L.Ed. 903 (1933), and United Steelworkers v. R.H. Bouligny, Inc., 382 U.S. 145, 86 S.Ct. 272, 15 L.Ed.2d 217 (1965). Carden reversed a holding by this court that an Arizona limited partnership is considered for diversity purposes as residing only in the place of residence of its general partners. In reversing, the Supreme Court grouped all partnerships under the unincorporated association rubric and looked to the residence of all partners, general and limited, in determining diversity jurisdiction.

In the earlier Russell case, the Supreme Court had accorded a different treatment to the entity under Puerto Rican law known as a sociedad en comandita, ² which it deemed more closely analogous to a corporation than to a common-law partnership and thus viewed it, "for purposes of federal jurisdiction [no differently] than a corporation organized under that law." 288 U.S. at 482, 53 S.Ct. at 449, 77 L.Ed. at 908. The Court's theory was concisely stated by Justice Stone:

The tradition of the common law is to treat as legal persons only incorporated groups and to assimilate all others to partnerships. The tradition of the civil law, as expressed in the Code of Puerto Rico, is otherwise. Therefore to call the sociedad en comandita a limited partnership in the common law sense, as the respondents and others have done, is to invoke a false analogy. In the law of its creation the sociedad is consistently regarded as a juridical person. It may contract, own property and transact business, sue and be sued in its own name and right.

Id. at 481, 53 S.Ct. at 448-49, 77 L.Ed. at 907-08. ³ The Court then listed additional characteristics of the sociedad akin to traditional aspects of the corporation and its relationship to its stockholders. See infra, note 6.

In 1965, the Court declined to extend for diversity purposes the limited holding of Russell when faced with the issue of the treatment of unincorporated associations in the form of trade unions. In Bouligny, 382 U.S. at 151, 86 S.Ct. at 275, 15 L.Ed.2d at 221, the Court noted that the "problem [Russell ] presented was that of fitting an exotic creation of the civil law, the sociedad en comandita, into a federal scheme which knew it not." The Court also noted that, despite a contrary assertion of the Second Circuit (in Mason v. American Express Co., 334 F.2d 392 (2d Cir.1964)), the effect of Russell was to constrict rather than to broaden diversity jurisdiction. Significantly,

[a]t the time Russell was decided, Puerto Rico was not considered a "State" for purposes of the federal diversity jurisdiction statute. Accordingly a sociedad, although recognized as a citizen of Puerto Rico in Russell, could not avail itself of the general diversity statute.

Bouligny, 382 U.S. at 152 n. 10, 86 S.Ct. at 275 n. 10, 15 L.Ed.2d at 221 n. 10.

In one cryptic paragraph the Carden Court, while neither overruling Russell nor confining it to its facts, stated that it viewed that case as a rare exception to a longstanding rule.

The one exception to the admirable consistency of our jurisprudence on this matter is Puerto Rico v. Russell & Co., which held that the entity known as a sociedad en comandita, created under the civil law of Puerto Rico, could be treated as a citizen of Puerto Rico for purposes of determining federal court jurisdiction. The sociedad 's juridical personality, we said, "is so complete in contemplation of the law of Puerto Rico that we see no adequate reason for holding that the sociedad has a different status for purposes of federal jurisdiction than a corporation organized under that law."

494 U.S. at ----, 110 S.Ct. at 1018, 108 L.Ed.2d at 164-65 (citations and some abridgments omitted).

In its brief, Sears painstakingly points out the parallel, but not precisely identical, ⁴ civil-law origins of the Puerto Rican sociedad en comandita and the Louisiana partnership in commendam. In doing so Sears misperceives the teaching of Carden, which essentially forecloses the characteristic-by-characteristic inquiry which Sears would have us undertake today. ⁵ The partnership in commendam concededly is very similar to the sociedad. But it is also similar to the limited partnerships now extant in common law jurisdictions; indeed, each of the "exotic" characteristics recognized by Russell as inhering in the sociedad is also present in limited partnerships of Louisiana's sister states within the Fifth Circuit, and, indeed, most of the other states of the Union. ⁶ We must note that the Civil Code of Louisiana permits partnerships to characterize themselves as "limited partnerships." Article 2838...