New York Life Ins. Co. v. Ramco Holding Corp.

• Decision Date: 11 July 1996
• Docket Number: No. 93-C-1049-H.,93-C-1049-H.
• Citation: 938 F. Supp. 754
• Court: U.S. District Court — Northern District of Oklahoma
• Parties: NEW YORK LIFE INSURANCE COMPANY, Plaintiff, v. RAMCO HOLDING CORPORATION; Ramco Oil & Gas, Inc.; Ram Reserve Consolidation, Inc.; and RB Operation Company, Defendants.

938 F. Supp. 754

NEW YORK LIFE INSURANCE COMPANY, Plaintiff, v. RAMCO HOLDING CORPORATION; Ramco Oil & Gas, Inc.; Ram Reserve Consolidation, Inc.; and RB Operation Company, Defendants.

No. 93-C-1049-H.

United States District Court, N.D. Oklahoma.

July 11, 1996.

Kevin Morris Abel, J. Warren Jackman, Pray Walker Jackman Williamson & Marlar, Tulsa, OK, for plaintiff.

John N. Hermes, Drew D. Webb, McAfee & Taft, Oklahoma City, OK, for defendants.

ORDER

HOLMES, District Judge.

This matter comes before the Court on Defendants' Motion on Non-Waivable Jurisdictional Issues (Docket # 163). The Court construes this motion as a motion to dismiss for lack of subject matter jurisdiction. The Court heard arguments on this motion at a hearing on April 5, 1996.

On October 26, 1987, Plaintiff New York Life Insurance Company ("NYL") and Defendants RAMCO Holding Corporation ("RHC") and Oklahoma Double R. Corporation ("DRC") executed an Agreement of Limited Partnership (the "Partnership Agreement") for the RAMCO-NYL 1987 Limited Partnership (the "Partnership"). The Partnership was formed under the Texas Revised Uniform Limited Partnership Act. Tex.Rev. Civ.Stat.Ann. Art. 6132a-1 et seq. (West Supp.1994). Pursuant to the terms of the Partnership Agreement, NYL is the 96.5% limited partner, and RHC and DRC collectively own 3.5% of the Partnership. RHC, which subsequently became RAMCO Operating Company ("RAMCO"), is the managing general partner of the Partnership.

NYL brought this action, alleging multiple breaches of the Partnership Agreement and the fiduciary duties owed by the managing general partner, RAMCO. Among other remedies, NYL seeks dissolution of the Partnership and an accounting of Partnership funds. NYL contends that this Court has jurisdiction over the matter because diversity of citizenship exists between the parties and the amount in controversy exceeds the sum of fifty thousand dollars. See 28 U.S.C. § 1332(a)(1).

A non-jury trial in this matter was scheduled to begin on April 15, 1996. One month prior to this date, on March 15, 1996, RAMCO filed the instant motion, challenging the basis for the Court's jurisdiction. RAMCO alleges that the Partnership itself is an indispensable party to this action and that, once the Partnership is joined, complete diversity of citizenship will be destroyed. NYL characterizes this motion as an "eleventh hour `tail gunner'" attempt to derail the scheduled trial. Pl.'s Answer Br. at 1. However, the Court notes that subject matter jurisdiction may be challenged at any time and objections to such jurisdiction cannot be waived. The Tenth Circuit has stated that "`subject matter jurisdiction is not a matter of equity or of conscience or of efficiency,' but is a matter of the `lack of judicial power to decide a controversy.'" Laughlin v. Kmart Corp., 50 F.3d 871, 874 (10th Cir. 1995) (citation omitted). The Court therefore heard arguments on this motion at the April 5, 1996, pretrial conference and continued the trial date at that time. At the Court's request, the parties have submitted additional briefs on the issue of subject matter jurisdiction.¹

For purposes of diversity jurisdiction, a limited partnership shares the citizenship of each of its partners, both general and limited. Carden v. Arkoma Assocs., 494 U.S. 185, 195-96, 110 S.Ct. 1015, 1021-22, 108 L.Ed.2d 157 (1990); Bankston v. Burch, 27 F.3d 164, 166 (5th Cir.1994). NYL is a New York corporation with its principal place of business in New York. Each of ROC and DRC is a Delaware corporation with its principal place of business in Oklahoma. Thus, for diversity purposes, the Partnership is also a citizen of New York and Oklahoma. Therefore, if the Partnership is an indispensable party to this action, complete diversity of citizenship cannot exist.

A limited partnership is an indispensable party to any action that includes claims derivative in nature. Bankston, 27 F.3d at 167-68; Buckley v. Control Data Corp., 923 F.2d 96, 98 (8th Cir.1991).² State law determines whether a claim asserted by a limited partner against a general partner is direct or derivative. 7547 Corp. v. Parker & Parsley Dev. Partners, 38 F.3d 211, 221 (5th Cir.1994) (applying Texas law); Bankston, 27 F.3d at 167 (applying Hawaii law); Buckley, 923 F.2d at 98 (applying Minnesota law). All parties to the instant case agree that Texas law governs the Court's inquiry into whether NYL has asserted direct or derivative claims against RAMCO.³

Although the parties cite no Texas state court case defining the distinction between direct and derivative claims in the limited partnership context,⁴ two federal district courts in Texas, applying Texas law, recently have addressed the issue. Moore v. Simon Enter., Inc., 919 F.Supp. 1007 (N.D.Tex.1995); Mallia v. PaineWebber, Inc., 889 F.Supp. 277 (S.D.Tex.1995). Both courts applied the following test in distinguishing between derivative and direct claims:

"In a derivative suit, a shareholder or limited partner sues on behalf of the corporation or partnership for harm done to the corporation or partnership." By contrast, a Plaintiff bringing an individual, direct action "must be injured directly or independently of the corporation or partnership" .... Thus, when a limited partner alleges wrongs to the limited partnership that indirectly damaged a limited partner by rendering his or her interest in the partnership of lesser value, the partner is required to bring the claim derivatively.

Mallia, 889 F.Supp. at 282 (quoting Lenz v. Associated Inns & Restaurants Co. of America, 833 F.Supp. 362, 378 (S.D.N.Y.1993)) (alterations in original); see Moore, 919 F.Supp. at 1010 (quoting Mallia). Accordingly, the Court must determine whether the wrongs alleged by NYL affected NYL independently of its Partnership interest or whether the alleged harm to NYL flowed from harm to the Partnership itself.

Based upon the allegations of NYL contained in the Agreed Pretrial Order ("PTO") entered in this case on April 5, 1996, the Court concludes that NYL's claims are predicated primarily on harms allegedly inflicted on the Partnership. In the PTO, NYL contends in pertinent part as follows:

Confronted with a history of RAMCO's breach of fiduciary duties, resulting in a complete loss of confidence in RAMCO's management, NYL provided notice to RAMCO on June 3, 1993, of NYL's decision to dissolve the Partnership. The dissolution notice was based upon multiple material breaches of the Partnership Agreement, including, but not limited to, the failure to distribute $7.2 million to the partners in 1992-93.

NYL reached an agreement with RAMCO to sell the Partnership properties, subject to the negotiation of a subsequent agreement on the division of the sale proceeds. RAMCO spent $345,000.00 of the Partnership's money on a summer, 1993, "sale" of the Partnership's properties, which was doomed to failure because RAMCO prepared a purchase and sale agreement which excluded operations from the sale of the properties. Without operations, the properties were essentially unmarketable to the oil industry. In structuring and conducting the sale for RAMCO's sole benefit, and in claiming ownership of operations, RAMCO again breached its fiduciary duty. The sale was a sham.

In the absence of any offers to purchase the Partnership assets and in the face of RAMCO's continued assertion of ownership/control of operations, litigation became NYL's sole remaining option. When RAMCO threatened to mortgage the best 50% of the Partnership's properties to "cure" one of its defaults, NYL filed this dissolution action on November 24, 1993.

PTO at 3 (emphasis added). Specifically, NYL alleges that RAMCO breached its fiduciary duties under the Partnership Agreement by "wrongfully overcharging millions of dollars in `tech time,'" PTO at 3, overcharging and miscalculating management fees, id. at 4, and diverting oil sales "service fees" id. at 5. In addition, NYL claims that RAMCO wrongfully retained interest income, id. at 4, the proceeds of oil and gas sales, id. at 5, a "six-figure take-or-pay settlement", id., and a "seven figure `advance to operator,'" id. at 4. NYL further contends that RAMCO commingled Partnership funds with RAMCO funds. Id. at 5. Based upon these and other allegations by NYL, the Court concludes that this is a clear case of a limited partner asserting a derivative claim against a general partner. Any injury incurred by NYL as a result of RAMCO's alleged wrongdoing is merely a by-product of the harm to the Partnership itself.⁵

NYL argues that because this is an action for dissolution and all partners are currently before the Court, the Partnership will not be prejudiced if it is not joined. The Moore court rejected a similar argument in the dissolution context, noting that:

Like a shareholder in a corporation, a limited partner enjoys limited liability because of the legal form of the limited partnership — and its separate legal existence. In exchange for this limited liability, the limited partner surrenders his or her rights to bring claims for damages to the limited partnership itself, and must bring such claims derivatively or on behalf of the limited partnership.

919 F.Supp. at 1012. The Court finds this reasoning persuasive.⁶ The parties chose to structure their business relationship by creating a separate legal entity in the form of a limited partnership. They cannot, at this point, proceed as if it does not exist. Because the alleged injuries are the fruits of that partnership, the Partnership itself is an indispensable party to this litigation.

NYL contends that the rationale underlying Rule 19 dictates that the action should proceed without the Partnership. The Court agrees that Rule 19 contemplates equitable considerations. NYL, however, cites no authority and the Court can identify no holding that Rule 19 does not require the joinder of a limited partnership in a derivative action brought by a limited partner against a general...