Lefkovitz v. Wagner, 03-4171.

• Decision Date: 18 January 2005
• Docket Number: No. 03-4194.,No. 03-4171.,No. 03-4173.,No. 03-4175.,03-4171.,03-4173.,03-4175.,03-4194.
• Citation: 395 F.3d 773
• Parties: Sigmund LEFKOVITZ, et al., Plaintiffs-Appellees, Cross-Appellants, v. Nathan WAGNER, et al., Defendants-Appellants, and Jarnis United Properties Co., Proposed Intervenor-Appellant, and Grippo & Elden, et al., Cross-Appellees, and 29-31 Associates, Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

395 F.3d 773

Sigmund LEFKOVITZ, et al., Plaintiffs-Appellees, Cross-Appellants, v. Nathan WAGNER, et al., Defendants-Appellants, and Jarnis United Properties Co., Proposed Intervenor-Appellant, and Grippo & Elden, et al., Cross-Appellees, and 29-31 Associates, Appellant.

No. 03-4171.

No. 03-4173.

No. 03-4175.

No. 03-4194.

United States Court of Appeals, Seventh Circuit.

Argued November 10, 2004.

Decided January 18, 2005.

COPYRIGHT MATERIAL OMITTED

Richard L. Fenton (argued), Sonnenschein, Nath & Rosenthal, Chicago, IL, for Plaintiffs-Appellees.

Philip C. Stahl (argued), Grippo & Elden, Chicago, IL, for Defendants-Appellants.

Jeffrey W. Sarles, Mayer, Brown, Rowe & Maw, Chicago, IL, for Intervenor-Appellant Jarnis United Properties Co.

Philip C. Stahl, Grippo & Elden, Chicago, IL, for Intervenor-Appellant 29-31 Associates.

Gregory C. Jones, Grippo & Elden, Chicago, IL, for Appellees Grippo & Elden, Philip Stahl and Gary Miller.

Before POSNER, WOOD, and EVANS, Circuit Judges.

POSNER, Circuit Judge.

Before us is a multifaceted challenge to the confirmation of an arbitration award. We omit many details in the interest of simplicity. In 1990, six individuals who had been working together for many years in the real estate business created a partnership that they called "Jarnis." Each took an equal share in the partnership, although each one-sixth share was divided in turn among the active member of the partnership, members of his family, and trusts for the benefit of the family members. The partners (by which we mean, unless otherwise indicated, the active members) later had a falling out. Four of them ganged up against the other two, the Lefkovitzes, who in 1997, joined by their family trusts, brought this suit against their four oppressors plus four companies controlled by the latter. The suit charges that the defendants, in violation of RICO, the Jarnis partnership agreement, and fiduciary obligations arising from the partnership, diverted to themselves partnership income in which the plaintiffs as co-partners were entitled to share. The defendants had done this, the plaintiffs alleged, by paying themselves inflated compensation for services that they had rendered or purported to have rendered to the partnership.

Although Jarnis was not a party to the suit, the suit might seem to be really a derivative suit on the partnership's behalf, charging that the defendants looted it. "When a corporation is injured by a wrongful act but the board of directors refuses to seek legal relief, a shareholder can sue the wrongdoer on behalf of the corporation. Such a suit is known as a derivative suit, and is an asset of the corporation." Kennedy v. Venrock Associates, 348 F.3d 584, 589 (7th Cir.2003). Although most derivative suits are brought on behalf of corporations, a derivative suit can be brought on behalf of a partnership or other unincorporated firm. Fed.R.Civ.P. 23.1. No party has sought to have this case litigated as a derivative suit; but if individual partners sue to enforce rights belonging to a nonconsenting third party, namely the partnership, the court must dismiss the suit. See Fieldturf, Inc. v. Southwest Recreational Industries, Inc., 357 F.3d 1266, 1268 (Fed.Cir.2004); Paradise Creations, Inc. v. UV Sales, Inc., 315 F.3d 1304, 1309 (Fed.Cir.2003); Enzo APA & Son, Inc. v. Geapag A.G., 134 F.3d 1090, 1093-94 (Fed.Cir.1998). One cannot sue, other than in a representative capacity, to enforce a right that belongs to someone else. Cf. People Organized for Welfare & Employment Rights (P.O.W.E.R.) v. Thompson, 727 F.2d 167, 173 (7th Cir.1984). Thus — to bring the point closer to home — shareholders cannot maintain a RICO suit for injury to their corporation. Sears v. Likens, 912 F.2d 889, 892 (7th Cir.1990); Mid-State Fertilizer Co. v. Exchange National Bank, 877 F.2d 1333, 1335-37 (7th Cir.1989); In re Sunrise Securities Litigation, 916 F.2d 874, 887-88 (3d Cir.1990).

But it is the law of the jurisdiction under which a partnership is organized that determines who has a legally enforceable right to sue to prevent or correct an improper diversion of partnership income. Kamen v. Kemper Financial Services Inc., 500 U.S. 90, 111 S.Ct. 1711, 114 L.Ed.2d 152 (1991); In re Abbott Laboratories Derivative Shareholders Litigation, 325 F.3d 795, 803-04 (7th Cir.2003). Jarnis is a Florida general partnership, and under Florida law the partners in a general partnership owe fiduciary obligations to each other. Fla. Stat. Ann. § 620.8404; see id., § 620.8405; Hallock v. Holiday Isle Resort & Marina, Inc., 885 So.2d 459, 462-63 (Fla.App.2004); Lundstrom Realty Advisors, Inc. v. Schickedanz Bros.-Riviera Ltd., 856 So.2d 1117, 1121-22 (Fla.App.2003). (This is the general rule, not anything peculiar to Florida. See, e.g., Meinhard v. Salmon, 249 N.Y. 458, 164 N.E. 545, 546 (1928) (Cardozo, J.); ARTRA Group, Inc. v. Salomon Bros. Holding Co., 288 Ill.App.3d 467, 223 Ill.Dec. 819, 680 N.E.2d 769, 772 (1997); McSweeney v. Buti, 263 Ill.App.3d 955, 201 Ill.Dec. 831, 637 N.E.2d 420, 424 (1994).) So the plaintiffs were not required to file this as a derivative, or any kind of representative, suit. The plaintiffs could sue, and are suing, on their own behalf rather than on behalf of the partnership.

This point is fogged up by the fact that, as we shall see, Jarnis received an award from the arbitrator. This has no practical significance; the award was no different from awarding two-thirds of the amount of it to the defendants (and entities controlled by them to which they had transferred fractions of their shares) and the other third to the plaintiffs. Similarly, although the corporation or other entity on whose behalf a suit is brought, being the owner of the claim sued upon, normally is an indispensable party, Koster v. (American) Lumbermens Mutual Casualty Co., 330 U.S. 518, 523 n. 2, 67 S.Ct. 828, 91 L.Ed. 1067 (1947); Bagdon v. Bridgestone/Firestone, Inc., 916 F.2d 379, 382 (7th Cir.1990); Fogade v. ENB Revocable Trust, 263 F.3d 1274, 1289 (11th Cir.2001), this observation is inapplicable to a suit such as the present one in which the partner (or shareholder) is allowed to sue in an individual rather than representative capacity. The next step, which however we declined to take in Frank v. Hadesman & Frank, Inc., 83 F.3d 158, 161-62 (7th Cir.1996), would be to allow a derivative suit to be brought instead as an individual suit whenever the corporation (the usual entity on behalf of which a derivative suit is brought) is closely held, at least where, as in this case (were Jarnis a corporation), all the shareholders are before the court, so that there are no merely represented shareholders.

But by virtue of the principles of partnership law, the plaintiffs in this case had and exercised an option to sue as individuals rather than on behalf of the partnership. The analogy is to a suit by a minority shareholder against the majority shareholder, claiming that the latter has violated the fiduciary duty that such a shareholder, especially in a closely held corporation, owes to minority shareholders. Kennedy v. Venrock Associates, supra, 348 F.3d at 589; Strougo v. Bassini, 282 F.3d 162, 173 (2d Cir.2002); see also United States v. Byrum, 408 U.S. 125, 137-38, 92 S.Ct. 2382, 33 L.Ed.2d 238 (1972); Lawton v. Nyman, 327 F.3d 30, 40-41 (1st Cir.2003); Hollis v. Hill, 232 F.3d 460, 468 (5th Cir.2000); but see Combs v. PriceWaterhouse Coopers LLP, 382 F.3d 1196, 1200 (10th Cir.2004).

So we can proceed to the merits of the appeal. The defendants demanded arbitration pursuant to the arbitration clause in the Jarnis partnership agreement. The plaintiffs resisted on the ground that some of the entities that they had joined as defendants along with the four active members of Jarnis that they were suing had not signed arbitration agreements. But the four assured the court that they controlled those entities, together with Jarnis itself, because they controlled two-thirds of the voting power in the partnership. They owned less than two-thirds, but that was only because they had transferred some of their partnership interests to relatives and family trusts; and both the relatives and the trusts were under their thumb.

The court ordered arbitration. That was in 1998. The proceedings before the arbitrator — which swelled when the arbitration was consolidated with two other arbitrations between the parties — were protracted, but finally ended in 2003 with an award that among other things ordered the defendants to repay Jarnis more than $7 million and ordered Jarnis to reimburse the plaintiffs for $1.8 million in attorneys' fees. The district court confirmed the award in its entirety, and the flurry of appeals here consolidated for decision followed.

One of the appeals is by Jarnis itself, from the district court's refusal to allow it to intervene in the confirmation proceeding on the ground that it should have sought intervention earlier. The civil rules authorize the grant of intervention only "upon timely application" for it. Fed.R.Civ.P. 24; NAACP v. New York, 413 U.S. 345, 365-66, 93 S.Ct. 2591, 37 L.Ed.2d 648 (1973). The aim is "to prevent a tardy intervenor from derailing a lawsuit within sight of the terminal;" and so "as soon as a prospective intervenor knows or has reason to know that his interests might be adversely affected by the outcome of the litigation he must move promptly to intervene." United States v. South Bend Community School Corp., 710 F.2d 394, 396 (7th Cir.1983); see also Reid L. v. Illinois State Board of Education, 289 F.3d 1009, 1017-18 (7th Cir.2002); Sokaogon Chippewa Community v. Babbitt, 214 F.3d 941, 949 (7th Cir.2000). Jarnis argues that since it was not a party to the proceedings before the arbitrator it had no reason to intervene until the arbitrator unexpectedly ordered it to pay the plaintiffs' attorneys' fees. And it is certainly unusual — so unusual as to be unforeseeable — for a nonparty to a...