Shultz Corp. v. Industrial Indem. Co., Civ. No. 89-621-JU.

• Decision Date: 13 December 1989
• Docket Number: Civ. No. 89-621-JU.
• Citation: 727 F. Supp. 1359
• Parties: SHULTZ CORPORATION, an Oklahoma corporation; Shultz Cattle Breeding, Inc., a Texas corporation; Shultz Cattle Company, Inc., an Oklahoma corporation; Pitchfork Cattle Breeding Herd Limited Partnership, a Texas limited partnership; and Crosbell Cattle Breeding Herd Limited Partnership, a Texas limited partnership, Plaintiffs, v. INDUSTRIAL INDEMNITY CO., a California corporation; CCG Financial Corp., an Oregon corporation; and CCG Consulting, Inc., dba Coast Consulting Group, an Oregon corporation, Defendants.
• Court: U.S. District Court — District of Oregon

727 F. Supp. 1359

SHULTZ CORPORATION, an Oklahoma corporation; Shultz Cattle Breeding, Inc., a Texas corporation; Shultz Cattle Company, Inc., an Oklahoma corporation; Pitchfork Cattle Breeding Herd Limited Partnership, a Texas limited partnership; and Crosbell Cattle Breeding Herd Limited Partnership, a Texas limited partnership, Plaintiffs, v. INDUSTRIAL INDEMNITY CO., a California corporation; CCG Financial Corp., an Oregon corporation; and CCG Consulting, Inc., dba Coast Consulting Group, an Oregon corporation, Defendants.

Civ. No. 89-621-JU.

United States District Court, D. Oregon.

December 13, 1989.

Gerald V. Weigle, Jr. and John D. Luken, Dinsmore & Shohl, Cincinnati, Ohio, and Kim Buckley, Esler, Stephens & Buckley, Portland, Or., for plaintiffs.

David J. Brown and Barbara S. Gaal, Brobeck, Phleger & Harrison, San Francisco, Cal., and R. Erick Johnson and Robert B. Lowry, Bullivant, Houser, Bailey, Pendergrass & Hoffman, Portland, Or., for defendant Industrial Indem. Co.

Peter H. Glade, Markowitz, Herbold, Stafford & Glade, Portland, Or., for defendants CCG Financial Corp. and CCG Consulting, Inc., dba Coast Consulting Group.

OPINION

FRYE, District Judge:

The matters before the court are:

1) the objections of plaintiffs, Shultz Corporation, Shultz Cattle Breeding, Inc., Shultz Cattle Company, Inc. Pitchfork Cattle Breeding Herd Limited Partnership, and Crosbell Cattle Breeding Herd Limited Partnership (the Shultz parties) to the Findings and Recommendation of the Honorable George E. Juba, United States Magistrate, dated September 26, 1989; and

2) the appeal of defendant Industrial Indemnity Co. (Industrial) from the order of Judge Juba dated September 18, 1989.

BACKGROUND

This is an action for rescission and damages brought by a group of related corporations and limited partnerships against Industrial, CCG Financial Corp. (CCG Financial) and CCG Consulting, Inc. (CCG Consulting). The alleged basis for jurisdiction is diversity of citizenship.

Shultz Corporation (Shultz) is an Oklahoma corporation with its principal place of business in the State of Texas. Shultz Cattle Breeding, Inc. (SCBI) is a Texas corporation with its principal place of business in the State of Texas. Shultz Cattle Company, Inc. (SCCI) is an Oklahoma corporation with its principal place of business in the State of Texas. Pitchfork Cattle Breeding Herd Limited Partnership (Pitchfork) is a Texas limited partnership. SCBI is the general partner of Pitchfork. Crosbell Cattle Breeding Herd Limited Partnership (Crosbell) is a Texas limited partnership. SCBI is the general partner of Crosbell. Some of the limited partners in Pitchfork and in Crosbell are citizens of the State of California.

Industrial is a California corporation with its principal place of business in San Francisco, California. CCG Financial is an Oregon corporation with its principal place of business in Portland, Oregon. CCG Consulting is an Oregon corporation with its principal place of business in Portland, Oregon.

The limited partnerships, Pitchfork and Crosbell, were formed in 1983. Each of the limited partners made an investment sufficient to purchase one hundred or more cows. The intent of the limited partnerships was to breed herds of cattle resulting in calf crops that would generate tax benefits and, ultimately, a profitable return on the limited partners' investments.

At the outset, the limited partners each made a cash down payment and borrowed funds for the remainder of their investments. However, as time went on, Pitchfork and Crosbell made financing available to the investors through notes which were secured by financial guarantee bonds. The Shultz parties used CCG Consulting to locate and arrange guarantee bond financing through Industrial. As a condition of the bonds being issued in 1984 and 1985, Industrial required that a trust be created, that CCG Financial be appointed as the trustee, and that certain funds be placed in reserve.

Disputes developed between the Shultz parties, the CCG parties, and Industrial. The breeding operations were not successful, and the Shultz parties experienced difficulties with their investors. The Shultz parties allege that the CCG parties and Industrial committed fraud, misrepresentation, breach of fiduciary duty, breach of contract, and breach of the duty of good faith and fair dealing. The Shultz parties also allege that Industrial committed intentional interference with contractual relations and prospective business advantage.

Two other actions have been filed which concern some of the same parties and circumstances. In Brant v. CCG Financial Corp., Civil No. 87-655-FR (D.Or.), an individual investor who is not a limited partner in Pitchfork or Crosbell sued Industrial and various CCG and Shultz parties.¹ In May, 1989, many of the limited partners of Pitchfork and Crosbell sued Industrial, the CCG parties, and the Shultz parties in courts in the State of Florida. Bowyer v. Shultz Corp., No. CI-89-3583 (9th Jud.Cir. Florida).

This action was filed in June, 1989. Industrial moved to dismiss the action contending that the court lacks subject matter jurisdiction because some of the limited partners of Pitchfork and Crosbell are citizens of the State of California as is Industrial.² In the alternative, Industrial asked this court to abstain from exercising jurisdiction over the claims in this action in favor of the related action pending in the State of Florida.

In his Findings and Recommendation dated September 26, 1989, Judge Juba recommended that Industrial's motion to dismiss be granted because some of the limited partners of Pitchfork and Crosbell are citizens of the same state as Industrial. Judge Juba did not reach the abstention issue. The Shultz parties object to the Findings and Recommendation, arguing that the court should not consider the citizenship of limited partners in determining whether diversity jurisdiction exists. The Shultz parties also argue that they should be allowed to preserve diversity by voluntarily dismissing Pitchfork and Crosbell from the action.

Industrial also appeals from an order entered by Judge Juba on September 18, 1989. On September 7, 1989, Industrial filed a motion objecting to statements concerning the settlement agreement in the Brant action which were made by the Shultz parties in their opposition to Industrial's motion to dismiss. Industrial contended that the Shultz parties violated a confidentiality order which was entered by the Honorable Otto R. Skopil, Jr., United States Circuit Judge, in the Brant action and requested 1) an evidentiary hearing; 2) that proceedings be closed to the public; and 3) that court records be sealed. Judge Juba held a telephone hearing on September 13, 1989. On September 18, 1989, Judge Juba denied Industrial's motion by minute order.

APPLICABLE LAW

When either party objects to any portion of a magistrate's Findings and Recommendation, the district court must make a de novo determination of that portion of the magistrate's report. 28 U.S.C. § 636(b)(1)(B); McDonnell Douglas Corp. v. Commodore Business Machines, Inc., 656 F.2d 1309, 1313 (9th Cir.1981), cert. denied, 455 U.S. 920, 102 S.Ct. 1277, 71 L.Ed.2d 461 (1982).

On an appeal from a non-dispositive order entered by a magistrate, the district court must determine whether the order is clearly erroneous or contrary to law. 28 U.S.C. § 636(b)(1)(A); McDonnell Douglas, supra, 656 F.2d at 1313.

ANALYSIS AND RULING

1. Objections to Findings and Recommendation

The Shultz parties object to Judge Juba's recommendation that this case be dismissed for lack of subject matter jurisdiction. Judge Juba found that diversity of citizenship does not exist between all plaintiffs and all defendants in this case because some of the limited partners are citizens of the State of California, as is Industrial. The Shultz parties contend that only the citizenship of the general partners of a limited partnership should be considered in determining whether there is diversity of citizenship.

There is a split of authority among the circuits on this issue.³ The Second Circuit and the Fifth Circuit have ruled that where an unincorporated association is a party to an action, only the citizenship of the real parties in interest should be considered. Therefore, the Second and Fifth Circuits do not consider the citizenship of limited partners in determining the citizenship of a limited partnership. Mesa Operating Ltd. Partnership v. Louisiana Intrastate Gas Corp., 797 F.2d 238, 240 (5th Cir.1986); 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).

The majority of circuits which have considered the issue have ruled that the citizenship of each member of an unincorporated association, including limited partners, must be considered in determining whether diversity of citizenship exists. See, e.g., Stouffer Corp. v. Breckenridge, 859 F.2d 75, 76-77 (8th Cir.1988); New York State Teachers Retirement System v. Kalkus, 764 F.2d 1015, 1017-19 (4th Cir. 1985); Elston Investment, Ltd. v. David Altman Leasing Corp., 731 F.2d 436 (7th Cir.1984); Carlsberg Resources Corp. v. Cambria Savings and Loan Ass'n, 554 F.2d 1254 (3d Cir.1977).

The Ninth Circuit has not ruled on this issue in the context of a limited partnership. However, the decisions in the Ninth Circuit regarding other forms of un-incorporated association suggest that the Ninth Circuit would follow the majority rule. In Fifty Assocs. v. Prudential Ins. Co. of America, 446 F.2d 1187 (9th Cir. 1970), the Ninth Circuit stated that "the citizenship of each member of an unincorporated association must be alleged, even though the entity might be recognized at state law as having the ability to sue and the liability to be sued." 446 F.2d at 1190.

Two district courts in this circuit have held that the court must consider the citizenship of each member of an unincorporated association...