SHR Ltd. Partnership v. Braun, 88-2281

• Decision Date: 30 October 1989
• Docket Number: No. 88-2281,88-2281
• Citation: 888 F.2d 455
• Parties: SHR LIMITED PARTNERSHIP, a West Virginia Limited Partnership; Joburg Limited Partnership, a West Virginia Limited Partnership, Plaintiffs-Appellees, v. Ella H. BRAUN; Ernest S. Cornwell, Jr.; Charles A. Coryell, Jr.; Melvin K. Nielson; Dale M. Nielson, individually and as Trustees or Agents of the Salling Hanson Company Trust, and Johannesburg Manufacturing Company Trust, both Michigan Trusts, Defendants-Appellants.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 455

888 F.2d 455

58 USLW 2279

SHR LIMITED PARTNERSHIP, a West Virginia Limited Partnership; Joburg Limited Partnership, a West Virginia Limited Partnership, Plaintiffs-Appellees, v. Ella H. BRAUN; Ernest S. Cornwell, Jr.; Charles A Coryell, Jr.; Melvin K. Nielson; Dale M. Nielson individually and as Trustees or Agents of the Salling Hanson Company Trust, and Johannesburg Manufacturing Company Trust both Michigan Trusts, Defendants-Appellants.

No. 88-2281.

United States Court of Appeals Sixth Circuit.

Argued Oct. 3, 1989.

Decided Oct. 30, 1989.

William K. Holmes (argued), Warner, Norcross & Judd, Grand Rapids, Mich., for plaintiffs-appellees.

Edward R. Post (argued), Miller, Johnson, Snell & Cummiskey, Grand Haven, Mich., for defendants-appellants.

Before MARTIN and MILBURN, Circuit Judges, and CONTIE, Senior Circuit Judge.

CONTIE, Senior Circuit Judge.

Plaintiffs-Appellees are two West Virginia limited partnerships formed by some of the beneficiaries of two liquidating trusts. Defendants-Appellants are the trustees and are Michigan domiciliaries. Although all of appellees' general partners are non-Michigan residents, many of appellees' limited partners are Michigan residents. The limited partnerships filed this action seeking an accounting, removal of the trustees and damages for trust mismanagement. This action was filed in the United States District Court for the Western District of Michigan pursuant to 28 U.S.C. Sec. 1332, diversity jurisdiction. The trustees, arguing that the citizenship of the limited partners must be taken into consideration when determining diversity jurisdiction, moved to dismiss this action for lack of complete diversity. The district court denied appellants' motion. Appellants sought the district court's certification of the issue for an interlocutory appeal pursuant to 28 U.S.C. Sec. 1292(b). The district court, noting that the issue concerned a controlling issue of law upon which there is substantial ground for differences of opinion, granted appellants' motion and certified the issue for an interlocutory appeal. This court granted appellants' petition for leave to appeal the order denying their motion to dismiss for lack of diversity jurisdiction. ¹

I.

The Salling Hanson Company Trust and the Johannesburg Manufacturing Company Trust were formed in the 1930's to liquidate and distribute the assets of two timber companies. The proceeds from the liquidations were to be distributed to the trusts' beneficiaries. The trustees, appellants, claim that "substantially all" of the assets were distributed, whereas the appellees maintain that, despite the trusts' express dissolution purpose, the assets have yet to be distributed. The Internal Revenue Service, alleging that the trustees were not operating the entities as liquidating trusts, brought an action against the trusts. This action resulted in a substantial tax penalty and an agreement by the trustees to distribute all trust assets. Nevertheless, the appellees argue that the appellants refused to distribute the trust assets unless the beneficiaries waived all potential claims for damages. The beneficiaries refused whereupon the appellants filed an action in the Ostego County, Michigan, state court seeking approval of their activities in a declaratory judgment action. That action was later dismissed without prejudice.

Shortly thereafter appellees filed this action in the Federal District Court for the Western District of Michigan alleging mismanagement of the trusts. Diversity jurisdiction was claimed pursuant to 28 U.S.C. Sec. 1332. The appellants are domiciliaries of Michigan. The appellees' general partners are all non-Michigan residents. Some of the appellees' limited partners, however, are Michigan residents. The appellants, claiming that diversity has been destroyed by the limited partners residing in Michigan, argue that the district court lacks diversity jurisdiction. The district court denied appellants' motion to dismiss. The district court certified the issue of diversity jurisdiction for interlocutory appeal to this court. This court granted appellants' petition for leave to appeal the order denying their motion to dismiss for lack of diversity.

II.

Diversity jurisdiction attaches only when all parties on one side of the litigation are of a different citizenship from all parties on the other side of the litigation. 28 U.S.C. Sec. 1332(a), (c). Appellants argue that the district court erred by ruling that the citizenship of the limited partners of a limited partnership may be disregarded when determining whether diversity jurisdiction exists.

Neither the Supreme Court nor the Sixth Circuit has directly decided whether the citizenship of limited partners should be considered when determining whether diversity jurisdiction exists. A split of authority exists among the circuits that have considered this issue.

The first line of decisions follows the "real parties to the controversy" test recently restated by the Supreme Court in Navarro Sav. Ass'n v. Lee, 446 U.S. 458, 100 S.Ct. 1779, 64 L.Ed.2d 425 (1980). This test provides that "a federal court must disregard nominal or formal parties and rest jurisdiction only upon the citizenship of real parties to the controversy." Id. at 461, 100 S.Ct. at 1782.

In Navarro, the Supreme Court applied the "real parties to the controversy" test to determine whether, in a business trust organized under Massachusetts law, the citizenship of the trust beneficiaries must be considered as well as the citizenship of the trustees. The Court concluded that the trustees were the "real parties to the controversy." Id. at 465-66, 100 S.Ct. at 1784. As the "real parties to the controversy," the trustees were entitled to invoke the diversity jurisdiction of the federal court without regard to the citizenship of the trust beneficiaries. Id.

Applying the "real party to the controversy" test, both the Second and Fifth Circuits have held that diversity jurisdiction is not defeated by the citizenship of limited partners if the general partners exclusively possess the authority to manage the business assets and control all litigation. See Mesa Operating Ltd. Partnership v. Louisiana Intrastate Gas Corp., 797 F.2d 238 (5th Cir.1986) (followed Navarro after holding that a limited partnership, like a business trust, is neither a corporation nor an association, but is instead a hybrid); Colonial Realty Corp. v. Bache & Co., 358 F.2d 178 (2d Cir.), cert. denied, 385 U.S. 817, 87 S.Ct. 40, 17 L.Ed.2d 56 (1966) (followed Navarro after holding that a strict interpretation of the New York limited partnership statute regards a limited partner as an improper party to proceedings by, or against, the limited partnership). Supporters of this view argue that the Uniform Limited Partnership Act bars limited partners from taking part in actions by, or against, the partnership except in limited circumstances. The supporters, therefore, maintain that only the general partners may be deemed the "real parties to the controversy."

Conversely, the second line of decisions maintains that the residence of all partners, including limited partners, must be considered for diversity jurisdiction purposes. Decisions rendered by the Third, Fourth, Seventh, Eighth and Eleventh Circuits support this view.

In Chapman v. Barney, 129 U.S. 677, 9 S.Ct. 426, 32 L.Ed. 800 (1889), the Supreme Court held that federal jurisdiction could be exercised only if all members of an unincorporated New York joint stock company were of diverse citizenship from all opposing parties. Id. at 681-82, 9 S.Ct. at 427. Over ten years later the Supreme Court refused to extend jurisdiction by way of corporate analogy ² to a Pennsylvania limited partnership association. Great S. Fire Proof Hotel Co. v. Jones, 177 U.S. 449, 20 S.Ct. 690, 44 L.Ed. 842 (1900). The Supreme Court held: "When the question relates to the jurisdiction of a Circuit Court of the United States as resting on the diverse citizenship of the parties we must look in the case of a suit by or against a partnership association to the citizenship of the several persons composing such association." Id. at 456, 20 S.Ct. at 693.

This narrow view of federal diversity jurisdiction over unincorporated associations was challenged, but reaffirmed by the Supreme Court in United Steelworkers v. R.H. Bouligny, Inc., 382 U.S. 145, 86 S.Ct. 272, 15 L.Ed.2d 217 (1965). The Court in Bouligny held that an unincorporated labor union's citizenship for jurisdictional purposes must take into account the citizenship of each of its members and not merely the location of its principal office:

[Courts and commentators] assert with considerable merit, that it is not good judicial administration, nor is it fair, to remit a labor union or other unincorporated association to vagaries of jurisdiction determined by the citizenship of its members and to disregard the fact that unions and associations may exist and have an identity and a local habitation of their own.

... Extending diversity jurisdiction to unions, says petitioner, would make available the advantages of federal procedure, Article III judges less exposed to local pressures than their state court counterparts, juries selected from wider geographical areas, review in appellate courts reflecting a multi-state perspective, and more effective review by this Court.

We are of the view that these arguments, however appealing, are addressed to an inappropriate forum, and that pleas for extension of the diversity jurisdiction to hitherto uncovered broad categories of litigants ought to be made to the Congress and not to the courts.

Id. at 150-51, 86 S.Ct. at 274-75.

The Eighth Circuit, holding that "[a] limited partnership...