Young v. Jones, Civ. A. No. 2:92-0308-1.

• Decision Date: 16 October 1992
• Docket Number: Civ. A. No. 2:92-0308-1.
• Citation: 816 F. Supp. 1070
• Parties: Robert H. YOUNG and EDX Holdings, Inc., Plaintiffs, v. Raymond JONES, William Ruth, Alfred Martin, General Bennett, Tom Whelan, Claude Surface, Con Fecher, Ed Hughes, Helen Cork, William Eaxley, Tom Ruhf, George Strickland, Ann Grossheusch, Cathy McGill, other possible officers and directors of Hilton Head Bank and Trust, N.A., after July 1988, not yet ascertained, the Federal Deposit Insurance Corporation in its corporate capacity, and Price Waterhouse, Defendants.
• Court: U.S. District Court — District of South Carolina

816 F. Supp. 1070

Robert H. YOUNG and EDX Holdings, Inc., Plaintiffs, v. Raymond JONES, William Ruth, Alfred Martin, General Bennett, Tom Whelan, Claude Surface, Con Fecher, Ed Hughes, Helen Cork, William Eaxley, Tom Ruhf, George Strickland, Ann Grossheusch, Cathy McGill, other possible officers and directors of Hilton Head Bank and Trust, N.A., after July 1988, not yet ascertained, the Federal Deposit Insurance Corporation in its corporate capacity, and Price Waterhouse, Defendants.

Civ. A. No. 2:92-0308-1.

United States District Court, D. South Carolina, Beaufort Division.

October 16, 1992.

George Hunter McMaster, Thompkins & McMaster, Martin Baron Stanton, Columbia, SC, for plaintiffs.

Michael S. Seekings, Robertson & Sinkler, G. Dana Sinkler, Warren & Sinkler, Charleston, SC, for defendants.

Wistar D. Stuckey, Asst. U.S. Atty., United States Attorney's Office, Columbia, SC, Daniel F. Ross, F.D.I.C., Washington, DC, for F.D.I.C.

Jennings L. Graves, Jr., Love, Thornton, Arnold & Thomason, Greenville, SC, for Price Waterhouse-US.

Thornwell Forrest Sowell, III, Joseph Calhoun Watson, Nelson, Mullins, Riley & Scarborough, P.A., Columbia, SC, for Price Waterhouse-BAHAMAS.

ORDER

HAWKINS, Chief Judge.

This matter is before the court on three motions. Price Waterhouse, Chartered Accountants, a Bahamian partnership (PW-Bahamas), has moved for a dismissal pursuant to Rule 12(b)(2) of the Federal Rules of Civil Procedure¹, alleging that this court lacks personal jurisdiction over it as defendant in this action because PW-Bahamas has insufficient contacts with the forum to meet the constitutional requirements for due process. The PW-Bahamas' motion was filed April 1, 1992.

As a part of its motion to dismiss, PW-Bahamas has moved for judgment on the pleadings as permitted by Rule 12(c). Pursuant to Rule 12(c), if evidence outside the pleadings is considered on a motion for judgment on the pleadings, the motion shall be treated as a motion for summary judgment and disposed of pursuant to Rule 56. The parties herein conducted discovery and submitted evidence on PW-Bahamas' dismissal motion, which the court considered.

Secondly Price Waterhouse-United States (PW-US) filed a motion April 2, 1992, to be dropped as a party pursuant to Rule 21, or, in the alternative, for dismissal for failure to state a claim pursuant to Rule 12(b)(6). In July 1992, PW-US also filed a motion to be dropped as a party because certain members of the U.S. partnership are not diverse from plaintiffs.

The third motion is a motion to amend the complaint, which was filed by plaintiffs to cure the diversity problem. The proposed amendment deletes PW-US as a party defendant, but names three members of the PW-US partnership who reside in South Carolina.

The moving parties and their opponents appeared before the undersigned to present evidence and argument on all three motions on Monday, September 28, 1992.

As background, this suit arises from an investment transaction. Plaintiffs are investors from Texas who deposited over a half-million dollars in a South Carolina bank and the funds have disappeared.

PW-Bahamas issued an unqualified audit letter regarding the financial statement of Swiss American Fidelity and Insurance Guaranty (SAFIG). Plaintiffs aver that on the basis of that financial statement, they deposited $550,000.00 in a South Carolina bank. Other defendants, not involved in the motions herein, allegedly sent the money from the South Carolina Bank to SAFIG. The financial statement of SAFIG was falsified. The plaintiffs' money and its investment potential has been lost to the plaintiffs and it is for these losses that the plaintiffs seek to recover damages.

Plaintiffs' motion to amend the complaint was the last filed of the three before the court, but will be considered first. Plaintiffs contend that if their proposed amendment of parties is granted, it will moot the July motion filed by PW-US to be dropped as a party.

The complaint, as amended, would name as defendants, in relevant part:

Price Waterhouse, Chartered Accountants, a Bahamian general partnership; Lee S. Piper; Herbert C. Schulken, Jr.; Dennis J. Goginsky; and other possible individual partners of Price Waterhouse, a New York general partnership, such as are residents of South Carolina, not yet ascertained.

There is support for plaintiffs' position that joinder of only the South Carolina members of PW-US, and dismissal of non-diverse members of PW-US, will technically cure the defect in the pleadings that joins defendants not diverse to plaintiffs.

In 1948 the Fourth Circuit Court of Appeals opined in Weaver v. Marcus, 165 F.2d 862 (4th Cir.1948), that non-diverse partners may be dropped and the suit maintained against diverse partners alone when liability is joint and several. In Weaver, administrators of Weaver's estate sued members of a partnership, individually and as partners, for the wrongful death of the deceased. Unbeknownst to plaintiffs, one partner, Carl Marcus, was non-diverse. Upon motion to drop Carl Marcus, the court noted that because partners are jointly and severally liable for the negligent acts of agents or employees acting within the apparent scope of their authority, individual partners can be sued without requiring the joinder of other partners.

Plaintiffs also cite South Carolina Electric & Gas Co. v. Ranger Constr. Co., Inc., 539 F.Supp. 578 (D.S.C.1982), as more recent support for the Weaver opinion. However, S.C.E. & G. did not involve a partnership or partners. The S.C.E. & G. case cited Weaver v. Marcus only for the proposition that it is appropriate by Rule 21 motion to drop a non-diverse tortfeasor if liability would be joint and several and the tortfeasor's presence in the suit would destroy diversity. Id., 539 F.Supp. at 580.

More recently the Weaver decision and others similar to Weaver, have been criticized. Cf. Cunard Line Ltd. v. Abney 540 F.Supp. 657 (S.D.N.Y.1982) (criticizes Weaver and other cases cited therein). Cunard Line Ltd. v. Abney points out that permitting suit solely against diverse partners, even if liability is joint and several, is a means to sue the partnership and to circumvent the rule that the citizenship of a partnership is determined by all partners. Therefore, while Weaver may not have been overruled, it is perhaps weak precedent. Furthermore, the Weaver court acknowledged problems not raised by the motion to drop Marcus and not resolved by the opinion:

we do not think it necessary here to consider or decide, if judgment is obtained here by plaintiffs with the non-diverse partner dropped as a party, the extent to which the judgment would be binding on him under the doctrine of res adjudicate, or whether under such a judgment, execution could be levied on all the assets of the partnership.

Weaver v. Marcus, 165 F.2d at 865. These problems have yet to be resolved by case law.

Therefore, this court is not convinced that the assertion of subject matter jurisdiction over the South Carolina partners of PW-US herein would rest on solid ground in light of plaintiffs failure to allege any wrongdoing by any of the partners as individuals, but only against the partnership, vicariously.

The first cause of action alleged in the amended complaint is that the Bahamian accounting firm negligently performed an audit and negligently released an audit letter upon which the plaintiffs relied to their detriment. There are no allegations that PW-US, or any individual U.S. partner who resides in South Carolina, was involved in the subject transaction. The only connection between the allegations of negligence and the U.S. firm are conclusory allegations that the Bahamian partnership and the U.S. partnership operate as a partnership, or in the alternative, are a partnership by estoppel.

PW-US vigorously opposes the amendment because there are no allegations of wrongdoing by any member of the stateside partnership who resides in South Carolina. Additionally, PW-US argues that the amendment would not change the position of PW-US that the pleadings fail to state a claim against PW-US or any of its partners, individually, wherever residing. Defense counsel urged the court to consider its motion for dismissal whether on behalf of PW-US as named in the original complaint or on behalf of the South Carolina partners of PW-US as named in the amended complaint.

In response, plaintiffs' counsel argued at hearing that it would be procedurally irregular to grant the motion to amend but then allow counsel for PW-US to argue for dismissal for failure to state a claim on behalf of the South Carolina partners alone, without requiring the new defendants to assert their own 12(b) motions. Plaintiffs counsel urged the court to amend the pleading but to require PW-US to argue its Rule 12(b)(6) motion at some later date when a "new" motion could be filed on behalf of the South Carolina partners individually.

During hearing plaintiffs' counsel acknowledged that he received discovery on the partnership issues during the first week of August 1992. He did not contradict counsel for PW-US's statement that he had not complained as to the completeness of the response. Plaintiffs' counsel claims that he did not review the discovery on the issue of vicarious liability between the two entities prior to the hearing because a formal dismissal motion on behalf of the South Carolina partners alone had not been filed. The court notes that it was the plaintiffs who first raised this issue of vicarious liability between the two Price Waterhouse entities in response to PW-US and PW-Bahamas' motions in May, 1992 and plaintiffs have had ample time to study the issue. See, Plaintiffs' Request for Enlargement of Time To Respond to Two Price Waterhouse Motions to Dismiss, filed May 7, 1992.

Nonetheless, as a general rule amendment should be liberally granted. Rule 15(a), Federal Rules of Civil Procedure. In this particular case, there seems to be no reason...