Toste Farm Corp. v. Hadbury, Inc.

• Decision Date: 05 April 1995
• Docket Number: Civ. A. No. 93-0015 P.
• Citation: 882 F. Supp. 240
• Parties: TOSTE FARM CORPORATION and PaineWebber, Inc., Custodian/Trustee of IRA FBO Carl Acebes, account numbered #JG12642-69, Plaintiffs, v. HADBURY, INC., Richard N. Morash and Raymond C. Holland, Jr., as Escrow Agent, Defendants.
• Court: U.S. District Court — District of Rhode Island

882 F. Supp. 240

TOSTE FARM CORPORATION and PaineWebber, Inc., Custodian/Trustee of IRA FBO Carl Acebes, account numbered #JG12642-69, Plaintiffs, v. HADBURY, INC., Richard N. Morash and Raymond C. Holland, Jr., as Escrow Agent, Defendants.

Civ. A. No. 93-0015 P.

United States District Court, D. Rhode Island.

April 5, 1995.

COPYRIGHT MATERIAL OMITTED

John H. Blish, Blish & Cavanagh, Providence, RI, for plaintiffs.

John W. Ranucci, Providence, RI, for defendants.

OPINION AND ORDER

(JURISDICTION)

PETTINE, Senior District Judge.

The plaintiffs bring this Declaratory Judgment action pursuant to 28 U.S.C. §§ 2201-2202 and Rule 57 of the Federal Rules of Civil Procedure. They seek a declaration of the parties' rights and duties under a Limited Partnership Agreement ("Agreement"), the Toste Farm Limited Partnership, effective November 4, 1991.

The defendants deny that the Court has subject matter jurisdiction. In their answer to the complaint, they move that the action be dismissed and counterclaim for damages and injunctive relief. For the reasons that follow, the Court dismisses the plaintiffs' claim and the defendants' counterclaim for lack of jurisdiction.

I.

The parties and entities involved in the controversy are Toste Farm Corporation, Inc. ("TFCI"), a Rhode Island corporation; Toste Farm Corporation ("TFC"), a New York corporation; PaineWebber, Inc. ("PaineWebber"), a Delaware corporation with a principal place of business in New York; Hadbury, Inc. ("Hadbury"), a Rhode Island corporation; Raymond C. Holland, Jr. ("Holland"), a Rhode Island citizen; Richard N. Morash ("Morash"), a Massachusetts citizen; and Carl Acebes ("Acebes"), a New York citizen.

On November 4, 1991, PaineWebber, as the custodian/trustee of Acebes' IRA Account, and TFCI (collectively "Acebes partners") entered into a limited partnership with Hadbury and Morash (collectively "Morash partners") for the purpose of acquiring and developing certain property located in Rhode Island.

In July 1991, pursuant to the terms of the partnership agreement, Acebes announced that he wished to retire from the Agreement. On September 8, 1992, as provided in the Agreement, a buy-sell procedure was conducted between the parties at the office of Raymond C. Holland, Jr., a Rhode Island attorney and named escrow agent under the Agreement, whereby each could bid for the partnership interest of the other. The bidding ended in a dispute which need not be discussed for the purpose of resolving this threshold issue of jurisdiction; it suffices to say each party claimed to have acquired ownership of the other's partnership interest.

On October 7, 1992, TFC was incorporated as a New York corporation with PaineWebber as the trustee and sole shareholder. To resolve their bidding dispute, on November 5, 1992, the Acebes partners, in the form of TFCI and PaineWebber as Trustee, filed an action in this Court against the Morash partners and Holland, as escrow agent. In response, the Morash partners filed a motion to dismiss under Fed.R.Civ.P. 12 for lack of diversity jurisdiction, contending that TFCI was a Rhode Island corporation. Soon thereafter, TFCI and PaineWebber filed a notice of voluntary dismissal under Fed. R.Civ.P. 41(a), and dismissal was entered by this Court.

On December 10, 1992, TFCI was merged into TFC and a Certificate of Merger was filed with the New York Department of State. On January 6, 1993, a Certificate of Merger of TFCI, as filed in New York, was filed with the Office of the Rhode Island Secretary of State. The plaintiffs allege, "TFC was the surviving corporation and the separate existence of TFCI ceased as of December 11, 1992. All of the assets of TFCI were merged with and vested in TFC." Pls.' Mem. of Law on the Issue of Diversity Jurisdiction at 3.

As accurately recited by the defendants, "on January 12, 1993, Acebes refiled his action in this Court, this time in the form of Toste Farm Corporation and PaineWebber, alleging Plaintiff Toste Farm Corporation to be a New York corporation and successor by merger to Toste Farm Corporation, Inc., and again alleging jurisdiction to lie with this Court under diversity of citizenship." Post Trial Br. of Defs. on Issues of Jurisdiction at 2. The defendants filed a counterclaim. As it now stands, the plaintiffs are Toste Farm Corporation, a New York corporation, and PaineWebber, as the custodian/trustee of Acebes' account, a Delaware corporation, with a principal place of business in the State of New York. The defendants are Hadbury, Inc., a Rhode Island corporation; Morash, a Massachusetts citizen; and Holland, a Rhode Island citizen. There is no question that the amount in controversy exceeds the sum or value of $50,000, exclusive of interest and costs. If diversity jurisdiction does indeed exist, the parties do not question that Rhode Island is a proper forum for this litigation.

The defendants' position is that Toste Farm Corporation lacks standing to sue because the merger of the Rhode Island corporation into the New York corporation constitutes a breach of Section 11.2 of the Agreement. This section prohibits a partner from selling, transferring or disposing of any part or all of his partnership interest to a third party without first notifying the other partners in writing, setting forth all the details of the proposed transfer or sale. The defendants further contend that the merger was effectuated solely to manufacture diversity and "that the purposeful bringing of this action though sic manufactured diversity constitutes maintenance as well as a fraud upon this Court, and that Acebes, through entities under his control, was guilty of bad faith in the formation and the performance of his agreement with Morash." Post Trial Br. of Defs. on Issues of Jurisdiction at 2-3.

The plaintiffs concede that one of the purposes of the merger was to create diversity between the parties to this action. However, they also state another motivation was to serve the administrative convenience of Carl Acebes, "whose other businesses and the professionals who service them, were all citizens of New York. (Testimony of Carl Acebes, Sept. 20, 1994, pp. 23-24). See also testimony of Peter Olberg, Sept. 13, 1994, p. 173 (`It was considered wise to move the situs of the corporation to New York as other corporations that Mr. Acebes owns are.')." Pls.' Mem. of Law on the Issue of Diversity Jurisdiction at 4.

Because there is so little First Circuit case law directly relevant to the jurisdictional issues discussed in this Opinion and Order, I originally issued a tentative opinion and submitted it to the parties for further briefing. I have carefully analyzed the briefs and amended the tentative opinion accordingly.

II.

The plaintiffs' argument is simple and straightforward. The plaintiffs acknowledge that TFCI, the non-diverse corporation, was merged into TFC, the New York corporation to create diversity among the parties. However, they contend that the diversity issue raised by the defendants is irrelevant because effecting a merger for the exclusive purpose of bringing a diversity action in this Court is not a proscribed procedure. See Greater Development Co. v. Amelung, 471 F.2d 338 (1st Cir.1973) (per curiam). See also Rodriguez-Diaz v. Sierra-Martinez, 853 F.2d 1027, 1029 (1st Cir.1988). The plaintiffs note that the valid merger of two corporate entities destroys the existence of one and creates an entirely separate entity in the form of the consolidated or surviving corporation; in other words, one is "completely absorbed" into the other. See Sheldon v. Kimberly-Clark Corp., 105 A.D.2d 273, 276, 482 N.Y.S.2d 867 (N.Y.App.Div.1984). The end result is that the surviving corporation becomes a citizen of the merger state; the non-survivor ceases to exist. See Hoefferle Truck Sales, Inc. v. Divco-Wayne Corp., 523 F.2d 543, 548 (7th Cir.1975) (noting that "the proposition that separate corporations lose their separate identity after merger is too evident for much discussion"). See also Meadows v. Bicrodyne Corp., 785 F.2d 670, 671 (9th Cir.1986); Exxon Corp. v. Duval County Ranch Co., 406 F.Supp. 1367, 1369 (S.D.Tx.1975). Because the facts existing at the time of the commencement of the action govern the determination of diversity of citizenship, and because the plaintiffs brought this action after the merger, the plaintiffs conclude that diversity exists. See Taber Partners I. v. Merit Builders, Inc., 987 F.2d 57, 59 n. 1 (1st Cir.), cert. denied, ___ U.S. ___, 114 S.Ct. 82, 126 L.Ed.2d 50 (1993); Media Duplication Servs. v. H.D.G. Software, 928 F.2d 1228, 1236 (1st Cir.1991); Lundquist v. Precision Valley Aviation, Inc., 946 F.2d 8, 10 (1st Cir.1991).

The defendants, of course, argue that the merger did not create valid diversity jurisdiction. Certainly 28 U.S.C. § 1332(a) provides, in pertinent part, as follows:

(a) The district court shall have original jurisdiction of all civil actions where the matter in controversy exceeds the sum or value of $50,000, exclusive of interest and costs, and is between —

(1) citizens of different states....

However, 28 U.S.C. § 1359 states:

A district court shall not have jurisdiction of a civil action in which any party, by assignment or otherwise has been improperly or collusively made or joined to invoke the jurisdiction of such court.

The defendants build their opposition to a finding of diversity jurisdiction on the language recited in Prudential Oil Corp. v. Phillips Petroleum Co., 546 F.2d 469 (2d Cir.1976):

Section 1359 should be construed broadly to bar any improper attempt to create federal diversity jurisdiction. The scrutiny normally applied to transfers or assignments of claims which have the effect of creating diversity must be doubled in the case of assignments between related or affiliated corporations since common ownership or the control by one of the other only serves to increase the possibility of collusion and compound the difficulty

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