Pappas v. Arfaras

• Decision Date: 11 May 1989
• Docket Number: No. 89 CV 106.,89 CV 106.
• Citation: 712 F. Supp. 307
• Parties: Anthony PAPPAS, Plaintiff, v. George ARFARAS, Irene Arfaras, Cider Mill Farms Limited Partnership, A-C Associates, Inc., Newtown Sports Center Limited Partnership, Newtown Sports Properties Limited Partnership, Defendants.
• Court: U.S. District Court — Eastern District of New York

712 F. Supp. 307

Anthony PAPPAS, Plaintiff, v. George ARFARAS, Irene Arfaras, Cider Mill Farms Limited Partnership, A-C Associates, Inc., Newtown Sports Center Limited Partnership, Newtown Sports Properties Limited Partnership, Defendants.

No. 89 CV 106.

United States District Court, E.D. New York.

May 11, 1989.

Anthony Pappas, pro se.

Schlam Stone & Dolan (Richard H. Dolan, of counsel), New York City, for defendants.

MEMORANDUM AND ORDER

McLAUGHLIN, District Judge.

Defendants move to dismiss the Complaint pursuant to (1) Fed.R.Civ.P. 12(b)(1) and 12(h) on the ground that the Court lacks subject matter jurisdiction; (2) Fed.R. Civ.P. 12(b)(2) on the ground that the Court does not have personal jurisdiction over them; (3) Fed.R.Civ.P. 12(b)(6) on the ground that the Complaint does not state a claim against defendants Irene Arfaras, Newtown Sports Limited Partnership ("Newtown Sports Center"), Newtown Sports Properties Limited Partnership ("Newtown Properties"), and A-C Associates, Inc.; (4) Fed.R.Civ.P. 12(c) and 56 on the ground that the breach of contract, fraud, negligence, conversion and state securities law claims are time-barred or meritless as a matter of law; and (5) Fed.R.Civ. P. 9 on the ground that the fraud and state securities law claims are not pleaded with particularity. Finally, defendants seek pursuant to Fed.R.Civ.P. 12(e) a more definite statement of any claims not dismissed. For the reasons discussed below, the motion to dismiss pursuant to Rule 12(b)(1) and Rule 12(b)(2) is granted.

FACTS

Plaintiff is a citizen of New York and a limited partner of defendant Cider Mill Farms Limited Partnership ("Cider Mill"). The pro se Complaint alleges that defendant George Arfaras is a citizen of Connecticut, a general partner of Cider Mill, Newtown Sports Center and Newtown Property and an officer and controlling shareholder of A-C Associates. Defendant Irene Arfaras, George Arfaras' wife, is also citizen of Connecticut, a limited partner of Cider Mill and Newtown Sports Center and an officer and controlling shareholder of A-C Associates. Defendants Cider Mill, Newtown Sports Center and Newtown Properties are limited partnerships organized under the laws of Connecticut. Defendant A-C Associates is a Connecticut corporation with its principal place of business in Connecticut.

Cider Mill was formed in 1977 for the purpose of purchasing a 93-acre parcel of real property located in Newtown, Connecticut for investment, development and sale. The partnership agreement provides that Cider Mill's existence would terminate in 1987 upon a vote of the partners holding an interest of more than 70 percent. In March 1978, Cider Mill sold two acres of the property. The remaining 91 acres were sold in 1987 to Newtown Estates Limited Partnership ("Newtown Estates"), which simultaneously purchased an adjacent 47-acre parcel of real property from defendant A-C Associates. Plaintiff alleges that he was not informed of this transaction until it was completed. Plaintiff further alleges that in November 1987 he received an uncertified and inadequate accounting, which was the first financial statement he received from Cider Mill since its formation.

Plaintiff brings this diversity action alleging that (1) defendant George Arfaras breached his fiduciary duties as a general partner; (2) defendants George and Irene Arfaras committed various acts of fraud in the formation of the partnership, the preparation of the partnership agreement and the sale of the partnership property; (3) the sale of the limited partnership interest to plaintiff violated N.Y.Gen.Bus.L. Article 23-A and the Uniform Securities Act adopted by Connecticut; (4) defendants "appropriated and used" partnership assets and sold limited partnership interests to certain individuals in violation of the Uniform Limited Partnership Act adopted in Connecticut; (5) defendants were negligent in conducting the affairs of the partnership and thereby violated a duty care owed to plaintiff; (6) plaintiff purchased and retained his interest in the partnership only as a result of defendant George Arfaras' misrepresentations; and (7) defendants breached the partnership agreement.

Plaintiff seeks an accounting, distribution, the removal of defendant George Arfaras as general partner, and compensatory and exemplary damages. Plaintiff also seeks a preliminary injunction barring further disbursements of partnership assets and the imposition of a constructive trust on defendants' assets and properties.

DISCUSSION

Defendants initially challenge this Court's power to hear and decide this action. The Complaint invokes the jurisdiction of this court on the basis of diversity of citizenship, 28 U.S.C. § 1332. No claims arising under federal law are alleged. Defendants argue that the New York citizenship of certain limited partners of Cider Mill destroys diversity jurisdiction.

Judge Friendly penned what remains, characteristically, the controlling authority¹ in this Circuit for determining the citizenship of a partnership:

where ... there is diversity between the plaintiff and all the general partners of the defendant, identity of citizenship between the plaintiff and a limited partner is not fatal because under the applicable New York statute a limited 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." N.Y. Partnership Law § 115. In the absence of a claim of insolvency of the partnership, . . . a suit brought against a New York partnership must thus be considered to be against the general partners only and identity of citizenship between a limited partner and the plaintiff does not destroy diversity.

Colonial Realty Corp. v. Bache & Co., 358 F.2d 178, 183-84 (2d Cir.), cert. denied, 385 U.S. 817, 87 S.Ct. 40, 17 L.Ed.2d 56 (1966) (citations omitted).

Defendants focus on the exception to this rule, arguing that the citizenship of Cider Mill's limited partners must be considered because this action "`seeks to enforce a limited partner's right against ... the partnership.'" Id. (quoting N.Y. Partnership L. § 115). The question is not free from difficulty.

There appears to be no prevailing rule whether in an action by a limited partner against the partnership, other limited partners are indispensable parties when their joinder would destroy diversity jurisdiction. Some courts have concluded that the real parties to the controversy are the general partners and, accordingly, have considered only their citizenship. See, e.g., Shlomchik v. Richmond 103 Equities Co., 662 F.Supp. 365, 370 (S.D.N.Y.1986); Wroblewski v. Brucher, 550 F.Supp. 742, 745 (W.D.Okla. 1982); Sixth Geostratic Energy Drilling Program 1980 v. Ancor Exploration Co., 544 F.Supp. 297, 302 (N.D.Okla.1982); C.P. Robinson Construction Co. v. National Corporation for Housing Partnerships, 375 F.Supp. 446, 449 (M.D.N.C.1974). Other courts, employing an analysis under Fed.R.Civ.P. 19(b), have concluded that the limited partners are necessary parties whose citizenship must be evaluated for diversity purposes. See, e.g., Schmidt v. E.N. Maisel and Associates, 105 F.R.D. 157, 159-61 (N.D.Ill.1985).

Connecticut law does not empower limited partners to sue or be sued on behalf of a limited partnership. See Gilbert Switzer & Associates v. National Housing Partnership, 641 F.Supp. 150, 152 & n. 1 (D.Conn. 1986) (quoting C.G.S. § 34-34a). Section 34-34a of the Connecticut Limited Partnership Act, which was adopted from § 1001 of the Uniform Limited Partnership Act (1976), however, provides that

A limited partner may bring an action in the right of a limited partnership to recover a judgment in its favor if general partners with authority to do so have refused to bring the action or if an effort to cause those general partners to bring the action is not likely to succeed.

C.G.S. § 34-34a.

This section is the appropriate vehicle for bringing an action, similar to the one at bar, for mismanagement, negligence, diversion of assets, actions beyond authority, or failure to perform duties. See Partnership Equities, Inc. v. Marten, 15 Mass. App. 42, 443 N.E.2d 134, 138-39 (1982). It thus appears that an action under § 34-34a fits within the exception to Judge Friendly's rule because—"the object is to enforce a limited partner's right ... against the partnership." Colonial Realty, supra, 358 F.2d at 183-84.

In this context, Gilbert Switzer, supra, 641 F.Supp. at 153, and Westville Holdings Inc. v. American Petroleum Partners, 592 F.Supp. 44, 46 (S.D.N.Y.1984), are readily distinguishable because the actions therein were brought against a partnership by third parties, not by limited partners. Thus, the general rule of excluding the citizenship of the limited partners from the diversity calculus was properly employed.

The Court thus concludes that in this action by a limited partner against a limited partnership for the vindication of his rights as a limited partner, all the partners —general and limited—are necessary parties and furthermore, that the non-diverse citizenship between a limited partner plaintiff and any one limited partner defendant destroys jurisdiction under 28 U.S.C. § 1332. Although, as discussed above, some courts have come to a contrary conclusion, it is apparent that they have reached this conclusion by ignoring the exception that Judge Friendly carved out in Colonial Realty.

Moreover, a correct analysis under Rule 19(b) leads to the same result. See Schmidt, supra, 105 F.R.D. at 159-61; Gottlieb v. Vaicek, 69 F.R.D. 672 (N.D.Ill. 1975), aff'd without opinion, 544 F.2d 523 (7th Cir.1976). The equitable relief plaintiff seeks, specifically, an accounting, requires a determination that would directly affect the rights of all the limited partners. See Weidlich v. Weidlich, 147 Conn. 160, 157 A.2d 910, 913 (1960). The absence of some limited partners may, therefore, subject Cider...