Kenworthy v. Hargrove

• Decision Date: 10 June 1994
• Docket Number: Civ. A. No. 92-7416,93-1699.
• Parties: Hugh KENWORTHY, III and W. Thomas Tither, Jr., individually; and Hugh Kenworthy, III, W. Thomas Tither, Jr., William Dimeling and John C. Tuten, Jr., trading and doing business as Tobias Knoblauch Private Bank, Plaintiffs, v. Sarah W. HARGROVE, Secretary of Banking of the Commonwealth of Pennsylvania; John Brine, Peter Smith, Eleni Pournaras, Maureen McCullough, John White, individually and in their capacities as officers of Knoblauch State Bank; Thomas Foley, Secretary of Labor and Industry of the Commonwealth of Pennsylvania; and Ronald E. Chronister, former Acting Insurance Commissioner of the Commonwealth of Pennsylvania and former Acting Director of the State Workman's Insurance Fund, Defendants. Anthony N. DINNOCENTI, Ronald N. Dinnocenti, George Connell, C. Meade Geisel, Thomas J. Keaveney, Pennmark Group, Inc., T. Brandon Weidner, W. Phelps Riley, Henry L. Serra, and Frank A. Serra, Plaintiffs, v. Sarah W. HARGROVE, individually and in her Capacity as Secretary of Banking, Sarah W. Hargrove, acting in her Capacity as Receiver for the Pennsylvania Deposit Insurance Corporation, Sarah W. Hargrove, acting in her Capacity as Receiver for Tobias Knoblauch Private Bank, Department of Banking of the Commonwealth of Pennsylvania, Knoblauch State Bank, Maureen H. McCullough, John F. White, Jr., Eleni A. Pournaras, Peter J. Smith, John J. Brine, State Worker's Insurance Fund, Marian State Bank, and Thomas J. Foley, Defendants.
• Court: U.S. District Court — Eastern District of Pennsylvania

855 F. Supp. 101

Hugh KENWORTHY, III and W. Thomas Tither, Jr., individually; and Hugh Kenworthy, III, W. Thomas Tither, Jr., William Dimeling and John C. Tuten, Jr., trading and doing business as Tobias Knoblauch Private Bank, Plaintiffs, v. Sarah W. HARGROVE, Secretary of Banking of the Commonwealth of Pennsylvania; John Brine, Peter Smith, Eleni Pournaras, Maureen McCullough, John White, individually and in their capacities as officers of Knoblauch State Bank; Thomas Foley, Secretary of Labor and Industry of the Commonwealth of Pennsylvania; and Ronald E. Chronister, former Acting Insurance Commissioner of the Commonwealth of Pennsylvania and former Acting Director of the State Workman's Insurance Fund, Defendants.

Anthony N. DINNOCENTI, Ronald N. Dinnocenti, George Connell, C. Meade Geisel, Thomas J. Keaveney, Pennmark Group, Inc., T. Brandon Weidner, W. Phelps Riley, Henry L. Serra, and Frank A. Serra, Plaintiffs, v. Sarah W. HARGROVE, individually and in her Capacity as Secretary of Banking, Sarah W. Hargrove, acting in her Capacity as Receiver for the Pennsylvania Deposit Insurance Corporation, Sarah W. Hargrove, acting in her Capacity as Receiver for Tobias Knoblauch Private Bank, Department of Banking of the Commonwealth of Pennsylvania, Knoblauch

State Bank, Maureen H. McCullough, John F. White, Jr., Eleni A. Pournaras, Peter J. Smith, John J. Brine, State Worker's Insurance Fund, Marian State Bank, and Thomas J. Foley, Defendants.

Civ. A. Nos. 92-7416, 93-1699.

United States District Court, E.D. Pennsylvania.

June 10, 1994.

Robert W. Lentz, and John C. Snyder, Reading, PA, for Dinnocenti plaintiffs.

Elizabeth C. Detwiler, Harrisburg, PA and Michael R. Bucci, Jr., Pittsburgh, PA, for defendant Hargrove.

OPINION AND ORDER

VAN ANTWERPEN, District Judge.

This 42 U.S.C. § 1983 action arises out of the summary seizure and subsequent reconstitution of the Tobias Knoblauch Private Bank. In an Order dated June 29, 1993 in Dinnocenti v. Hargrove, Civ. No. 93-1699 (E.D.Pa.1993), this court consolidated the above-captioned matters pursuant to Federal Rule of Civil Procedure 42(a). Defendant Sarah W. Hargrove has now moved for partial summary judgment against the plaintiffs in the Dinnocenti case (hereinafter "Limited Partners") on all but one Count of their Complaint.¹ We first review the facts that gave rise to the underlying dispute and present a concise outline of the already extensive procedural history of this litigation.

I. FACTUAL AND PROCEDURAL HISTORY

The plaintiffs in the action originally docketed as Dinnocenti v. Hargrove, Civil No. 93-1699 (E.D.Pa.1993), which has since been consolidated with Kenworthy v. Hargrove, Civil No. 92-7416 (E.D.Pa.1992), are ten limited partners of the Tobias Knoblauch Private Bank ("Private Bank"), a limited partnership which operated formerly as a private bank² in Pennsylvania. Limited Partners' Complaint, ¶¶ 1, 20. On April 17, 1992, Pennsylvania's Secretary of Banking, Sarah W. Hargrove ("Secretary Hargrove"), seized the Private Bank, its assets, and its deposits.³ Limited Partners' Complaint, ¶ 62. On that same day, Secretary Hargrove filed a certificate of possession on the Private Bank, thereby becoming its statutory receiver.⁴ Limited Partners' Complaint, ¶ 63. Also on April 17, 1992, the Court of Common Pleas of Berks County, Pennsylvania entered two Orders confirming Secretary Hargrove as receiver of the Private Bank and approving the sale of the Private Bank's assets and the transfer of its liabilities to a newly chartered institution, defendant Knoblauch State Bank. Limited Partners' Complaint, ¶ 67.

The Limited Partner Plaintiffs now challenge the propriety of Secretary Hargrove's seizure of the Private Bank and her subsequent transfer of certain assets and deposit liabilities to Knoblauch State Bank. In addition to Secretary Hargrove, the Limited Partners also bring claims against the Department of Banking; Knoblauch State Bank and its directors; Marian State Bank; the State Workmen's Insurance Fund ("SWIF"); and Thomas Foley, the Director of SWIF at times relevant to the activities alleged in Limited Partners' Complaint. Limited Partners' Complaint, ¶¶ 8-18.

The Limited Partners also have brought a state court action against these same defendants over the same perceived misconduct with regard to the seizure of the Private Bank. This state court action, begun by writ of summons, was filed on October 16, 1992 in the Court of Common Pleas of Berks County, Pennsylvania, and remains pending.

The Limited Partner Plaintiffs filed their Complaint in this court on March 31, 1993. The Complaint sets forth ten causes of action listed in separate Counts numbered I through X. In short, the Counts include:

Count I — Violation of Civil Rights under 42 U.S.C. § 1983 (procedural due process);

Count II — Violation of Civil Rights under 42 U.S.C. § 1983 (substantive due process);

Count III — Violation of Pennsylvania's Banking Code;

Count IV — Taking of Property;

Count V — Negligence;

Count VI — Conspiracy;

Count VII — Conversion;

Count VIII — Fraudulent Misrepresentation;

Count IX — Intentional Interference with Prospective Economic Relationships;

Count X — Injunctive Relief (procedural due process).

In response to Plaintiffs' Complaint, on or about May 19, 1993, Defendant Hargrove moved to dismiss or stay the federal action. This court then issued an Order on June 29, 1993, in which we declined to grant the relief requested by defendant in her motion.

Defendant Hargrove now moves for partial summary judgment with regard to Counts I through VII, IX and X of Limited Partners' Complaint, maintaining that all of these Counts, in the case of each plaintiff, set forth causes of action which are derivative in nature and, therefore, Limited Partner Plaintiffs lack standing to maintain them.⁵ We now review defendant's claims.

II. STANDARD FOR SUMMARY JUDGMENT

To prevail against a motion for summary judgment, the party opposing the motion "must set forth specific facts showing that there is a genuine issue for trial." Federal Rule of Civil Procedure 56(e). "The inquiry performed is the threshold inquiry of determining whether there is the need for trial — whether, in other words, there are any genuine factual issues that probably can be resolved only by a finder of fact because they may reasonably be resolved in favor of either party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250, 106 S.Ct. 2505, 2511, 91 L.Ed.2d 202 (1986). All inferences must be drawn and all doubts resolved in favor of the non-moving party. United States v. Diebold, Inc., 369 U.S. 654, 655, 82 S.Ct. 993, 994, 8 L.Ed.2d 176 (1962); Gans v. Mundy, 762 F.2d 338, 341 (3d Cir.), cert. denied, 474 U.S. 1010, 106 S.Ct. 537, 88 L.Ed.2d 467 (1985).

III. DISCUSSION

A. Standing of the Limited Partner Plaintiffs

Defendant Hargrove's only contention here is that the Limited Partner Plaintiffs lack standing to assert the claims made in their Complaint, with the exception of a single count concerning fraud (Count VIII). Defendant alleges that because these claims are asserted on behalf of the limited partnership Private Bank, and since the Private Bank's general partners have brought these same claims in suits in this and other jurisdictions, Limited Partner Plaintiffs lack standing to sue in their individual capacity. See Memorandum of Law in Support of Motion for Partial Summary Judgment as to Limited Partners' Claims, p. 2.

In order to evaluate defendant's claims, we must review Pennsylvania partnership law. In Pennsylvania, a limited partnership is a creation of the state legislature, through which the state "permits a manner of doing business whereby individuals may invest their money free of the fear of unlimited liability and of the responsibilities of management." Freedman v. Tax Review Board of City of Philadelphia, 212 Pa.Super. 442, 449, 243 A.2d 130, 135 (1968), aff'd, 434 Pa. 282, 258 A.2d 323 (1969). Pennsylvania has adopted the Uniform Limited Partnership Act ("ULPA"), 59 Pa.C.S.A. § 501-569, Act of December 19, 1975 (P.L. 524, No. 155),⁶ which provides in relevant part:

§ 511. Limited Partnership defined

A limited partnership is a partnership formed by two or more persons under the provisions of section 512 (relating to formation), having as members one or more general partners and one or more limited partners. The limited partners as such shall not be bound by the obligations of the partnership.

* * * * * *

§ 545. Parties to actions

A contributor, unless he is general partner, is not a proper party to proceedings by or against a partnership, except where the object is to enforce a limited partner's right against or liability to the partnership.

Accordingly, limited partners surrender the right to participate in the conduct of the partnership in exchange for the benefits of limited liability. The Pennsylvania Supreme Court has expressly noted the restricted role of limited partners:

In exchange for exposure to only limited liability, and the tax advantages available because of the use of the limited partnership entity , the limited partners must abstain from participation in the conduct of the business.

In re Estate of Hall, 517 Pa. 115, 134, 535 A.2d 47, 56 (1987) (emphasis added).

Despite these operational restrictions, federal courts have held that a limited partner may bring a derivative action on behalf of the partnership for malfeasance of the general partners, pursuant to Section 545 of the Pennsylvania ULPA. Engl v. Berg, 511 F.Supp. 1146, 1152-53 (E.D.Pa.1981). See Klebanow v. New York Produce Exchange, 344 F.2d 294, 297-98 (2d Cir.1965) (upholding right to bring derivative action under identical provision of ULPA in New York); Riviera Congress Associates v. Yassky, 18 N.Y.2d 540, 547-48, 223 N.E.2d 876, 879-80, 277 N.Y.S.2d 386, 392 (1966) (confirming Klebanow's prediction of New York law).⁷

In this case, however, Limited Partner Plaintiffs claim that they do not...