987 F.2d 57 (1st Cir. 1993), 92-1921, Taber Partners, I v. Merit Builders, Inc.

Docket Nº:92-1921, 92-1922.
Citation:987 F.2d 57
Party Name:TABER PARTNERS, I, a New York General Partnership, Plaintiff, Appellant, v. MERIT BUILDERS, INC., a Puerto Rico Corp., et al., Defendants, Appellees. TABER PARTNERS, I, a New York General Partnership, Plaintiff, Appellee, v. MERIT BUILDERS, INC., a Puerto Rico Corp., Defendant, Appellant.
Case Date:March 03, 1993
Court:United States Courts of Appeals, Court of Appeals for the First Circuit

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987 F.2d 57 (1st Cir. 1993)

TABER PARTNERS, I, a New York General Partnership,

Plaintiff, Appellant,


MERIT BUILDERS, INC., a Puerto Rico Corp., et al.,

Defendants, Appellees.

TABER PARTNERS, I, a New York General Partnership, Plaintiff, Appellee,


MERIT BUILDERS, INC., a Puerto Rico Corp., Defendant, Appellant.

Nos. 92-1921, 92-1922.

United States Court of Appeals, First Circuit

March 3, 1993

Heard Dec. 9, 1992.

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Harvey B. Nachman, Santurce, PR, with whom Joan Schlump Peters, New York City, was on brief, for Merit Builders, Inc.

Arch Stokes with whom John R. Hunt, Stokes and Murphy, Atlanta, GA, Ruben T. Nigaglioni and Ledesma, Palou & Miranda, Hato Rey, PR, were on brief, for Taber Partners I.

Jay A. Garcia-Gregory with whom Rafael R. Vizcarrondo, Humberto Guzman-Rodriguez and Fiddler, Gonzalez & Rodriguez, San Juan, PR, were on brief, for appellees.

Before SELYA, Circuit Judge, COFFIN, Senior Circuit Judge, and STAHL, Circuit Judge.

STAHL, Circuit Judge.

This appeal requires us to decide whether, for purposes of diversity jurisdiction, a partnership's business activities should be considered in determining the principal place of business of each of its corporate partners. We hold that, in the absence of evidence that the partnership and its corporate partners failed to maintain their separate identities, the partnership's activities ordinarily should not be considered for this purpose.



Plaintiff Taber Partners I ("Taber"), a New York general partnership whose sole partners are two New York corporations, Lerfer San Juan Corp. ("Lerfer"), and Calumet Corp. ("Calumet"), owns and operates the Ambassador Plaza Hotel & Casino ("Hotel") in San Juan, Puerto Rico. Defendants Merit Builders, Inc., and Merit Builders, S.E. (hereinafter referred to collectively as "Merit") are Puerto Rico-based construction companies. Beginning in March 1988, Taber and Merit entered into a series of consulting and construction contracts involving the renovation and expansion of the Hotel. Disputes arose during the course of the project, and in February 1991, Taber commenced a diversity action against Merit in the United States District Court for the District of Puerto Rico asserting, inter alia, breach of contract, fraud, and negligence. Merit responded with several counterclaims against Taber and filed third-party complaints against appellees Victor Torres & Associates ("VTA"), the inspecting architect, and Desarrollos Metropolitanos, Inc. ("Desarrollos"), one of the project subcontractors. Like Merit, both VTA and Desarrollos are citizens of Puerto Rico.

On the eve of trial, VTA and Desarrollos moved to dismiss, asserting that--because Taber was also a citizen of Puerto Rico--diversity of citizenship was lacking. As the citizenship of Taber depends upon the citizenship of its partners, Lerfer and Calumet, the district court first had to determine Lerfer's and Calumet's citizenship. See Carden v. Arkoma Assocs., 494 U.S. 185, 195-96, 110 S.Ct. 1015, 1021-22, 108 L.Ed.2d 157 (1990) (reaffirming the "oft-repeated rule that diversity jurisdiction in a suit by or against [a partnership] depends on the citizenship of 'all the [partners]' ...") (quoting Chapman v. Barney, 129 U.S. 677, 682, 9 S.Ct. 426, 427-28, 32 L.Ed. 800 (1889)). As Lerfer and Calumet are both incorporated in New York, the sole issue before the district court was the principal place of business of both corporations. See 28 U.S.C. § 1332(c)(1) ("For the purposes of [diversity,] ... a corporation shall be deemed to be a citizen of any [s]tate by which it has been incorporated and of the [s]tate where it has its principal place of business") (emphasis supplied). The district court ultimately agreed with VTA's and Desarrollos' argument that the principal place of business of both Lerfer and Calumet was Puerto Rico. Thus, on July 8,

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1992, the district court granted their motion and dismissed the case for lack of subject matter jurisdiction. See Taber Partners I v. Insurance Co. of North America, Inc., 798 F.Supp. 904, 912 (D.P.R.1992).

In this appeal, Taber and Merit, adversaries below, mount a joint challenge to the district court's dismissal of their case. In so doing, they argue that, in light of the undisputed evidence that Lerfer's and Calumet's corporate activities occurred almost exclusively in New York, the district court's selection of Puerto Rico as the principal place of business of both corporations is clearly erroneous. Before addressing appellants' argument, we sketch the relevant facts.



In December 1986, Mr. F. Eugene Romano and Ms. Linda E. Romano, citizens of New York, incorporated Lerfer and Calumet in New York. At all relevant times, 1 Eugene Romano owned all the outstanding shares of Lerfer, and Linda Romano owned all the outstanding shares of Calumet. Linda Romano and Mrs. Jeanne Romano served as the officers of Lerfer, while Eugene Romano and Jeanne Romano served as the officers of Calumet. The same three individuals also served as the directors of both corporations.

Lerfer and Calumet are "Subchapter S" corporations, a status entitling them to favorable tax treatment under both federal law, see generally 26 U.S.C. § 1361 et seq., and state law. See generally New York Tax Law § 660(a) (McKinney 1987). See also Taber Partners I, 798 F.Supp. at 907-09 (explaining the legal and practical underpinnings of an "S Corporation"). The Certificates of Incorporation of both companies contain a broad declaration of corporate purpose "to engage in any lawful acts or activities for which corporations may be organized under the Business Corporation Law of the State of New York...."

The headquarters (and sole office) of both corporations is located at 501 Main Street, Utica, New York. All corporate books and records are maintained at the headquarters, and all accounting, auditing, and legal work is handled for both corporations in the state of New York by New York accountants and attorneys. Both corporations maintain their bank accounts in New York, and Lerfer also maintains a working capital account with an investment firm in New York. Each files federal income tax returns from New York and state income tax returns in New York. Neither files income tax returns in Puerto Rico.

On December 29, 1986, shortly after their incorporation, Lerfer and Calumet entered into a partnership agreement ("the Agreement") that formed Taber. The Agreement lists New York, or "such other place or places as the [p]artners may determine[,]" as Taber's principal place of business. 2 Under the Agreement, Lerfer obtained a 99% ownership interest in Taber, and Calumet obtained a 1% ownership interest. Lerfer and Calumet agreed to share in Taber's net profits and losses under a formula which mirrored their respective ownership interests.

Article IV of the Agreement states: "The primary and specific purpose of [Taber] is to acquire, own, operate and manage [the Hotel in Puerto Rico]." Pursuant to section 7.01 of the Agreement, Lerfer and Calumet delegated the day-to-day management of Taber to Eugene Romano, as executive director, and Linda Romano, as

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assistant director. All responsibilities not enumerated in section 7.01 were delegated to the partnership generally. The Agreement specifically granted Taber the authority, inter alia, to borrow money, enter into contracts, bring and defend legal actions, and "[d]o any and all other acts and things necessary or proper in furtherance of the [p]artnership business."

Since their incorporation in 1986, Lerfer and Calumet have both described themselves on their federal and state tax returns as "holding compan[ies]." Eugene and Linda Romano testified in their depositions that each corporation's sole function is to hold or administer its respective interest in Taber. To this end, Lerfer and Calumet employ a "control-group" of twelve individuals to maintain their corporate records and financial accounts. All such maintenance occurs exclusively in New York. An example of the type of New York-centered activity in which Lerfer and Calumet engage is their management of loan transactions designed to secure their ownership interests in Taber. For instance, Eugene Romano has made substantial loans (totalling approximately $8,000,000) to Lerfer, which, in turn, reloaned these funds to Taber. Each of these loans consisted of funds that originated in New York and were evidenced by promissory notes prepared, executed, and delivered in New York.

The record reveals that all policy decisions for Lerfer and Calumet are made in New York. For example, the decision to invest in Taber was made in New York. The election of corporate officers and the appointment of accountants occur at the annual Board of Directors meetings held in New York. Indeed, the record contains almost no evidence of corporate activity on the part of either Lerfer or Calumet taking place outside of New York. 3

Despite these uncontroverted facts, the district court concluded that the principal place of business of both Lerfer and Calumet was Puerto Rico. In so doing, the court rejected appellants' characterization of Lerfer and Calumet as "passive" holding companies and found that their raison d'etre included the operation of the Hotel:

Only a[n] unrealistically narrow view of the orientation of the corporations and their partnership could yield such a conclusion. The corporations were formed to act as owners of the [Hotel]. They devote almost all of their corporate activity to administer their assets in the partnership. They actively authorized the formation of Taber and the obtaining of a bond to assist in the financing of the projects. They have loaned substantial amounts of...

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