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HB General Corp. v. Manchester Partners

September 13, 1996









On Appeal From the United States District Court For the District of New Jersey (D.C. Civ. No. 94-cv-05160)

Before: BECKER, McKEE, Circuit Judges, and POLLAK, District Judge. *fn*

BECKER, Circuit Judge.

Argued: March 21, 1996

Filed September 13, 1996)


This is a diversity suit arising out of a dispute among the members of a small limited partnership, HB Partners, L.P. Plaintiffs HB General Corp. and HB Limited Corp., brought suit in the district court against the third partner, Manchester Partners, L.P., seeking a declaratory judgment that Manchester had breached the Partnership Agreement. Although there is complete diversity among the three partners, Manchester argues that the Partnership itself -- which shares the citizenship of all of the parties -- is an indispensable party whose joinder destroys diversity jurisdiction. The district court agreed with Manchester and dismissed the case. Resolution of the other partners' appeal turns on the interplay between the "technical, precedent-bound" rule that, for diversity jurisdiction purposes, a limited partner is considered a citizen of each state in which its partners are citizens, and the flexible, pragmatic federal procedural rules of joinder.

We reverse. Applying the joinder rules pragmatically, we hold that, because all of the partners of this small limited partnership are before the district court, joinder of the partnership entity is not required. Specifically, we conclude that, given proper protective provisions in the judgment, proceeding in the absence of the Partnership will cause no prejudice to Manchester; that the Partnership is effectively represented by the partners and consequently suffers no prejudice from its exclusion; that whether or not the plaintiffs' claims are "derivative" is immaterial; and that Manchester's counterclaims can be heard in this federal court action and thus there is no risk of piecemeal litigation. For these reasons, the requisites of Federal Rule of Civil Procedure 19 are satisfied. We also hold that under Delaware law, the source of any cause of action plaintiffs have for breach of the Partnership Agreement, they are real parties in interest within the meaning of Federal Rule of Civil Procedure 17.

I. Facts and Procedural History

HB Partners, L.P. (the Partnership) was formed in October 1991, to develop three properties in Manchester, Vermont for commercial leasing. At its inception, the Partnership consisted of one general partner, plaintiff HB General Corp., and two limited partners, plaintiff HB Limited Realty Corp. and defendant Manchester Partners, L.P.. HB General and HB Limited (the HB entities) are controlled by Ben Hauben, a major developer of retail stores in Vermont. They are both Delaware corporations with their principal places of business in Vermont. Manchester is organized under New Jersey law and all of its partners are New Jersey residents. The Partnership was formed under Delaware law, and Delaware law governs construction of the Partnership Agreement.

Under that Agreement, Manchester was to provide the bulk of the Partnership's capital. It contributed $990,000 at the Partnership's formation and was to provide additional capital up to a total of $1,980,000 in response to capital calls made by the general partner, HB General. The Partnership Agreement provides that HB General may call for additional contributions of capital whenever the Partnership will hold less than $500,000 in cash or cash equivalents in the ensuing thirty days. Each capital call can be for up to $500,000, of which ninety-nine percent is to be paid by Manchester and one percent by HB General.

HB General made a series of capital calls which were met by Manchester without incident. However, problems arose in the summer of 1994. On June 10, 1994, HB General made a capital call for $250,000, of which Manchester's share was $247,500. Manchester sent a check for this amount, but placed conditions on its use, demanding that the funds be held in escrow until all building permits and required approvals were obtained. HB General found these conditions improper and returned the check to Manchester. On August 11, 1994, HB General again made a capital call, this time for $400,000, $396,000 of which was due from Manchester. Manchester notified HB General by letter dated September 13, 1994, that it would not make the capital contribution.

The Partnership Agreement provides that if Manchester fails to make a requested capital contribution, it will be considered to have withdrawn from the Partnership and shall have no further rights as a partner. In such event, Manchester becomes a subordinated creditor of the Partnership and is entitled only to a return of its capital contributions at a specified time in the future. The HB entities assert that Manchester's failure to meet the August 11 capital call has triggered this provision. They brought this declaratory judgment action in the district court, seeking a declaration that Manchester has lost its status as a limited partner and is now a subordinated creditor. Federal jurisdiction was asserted on the basis of diversity of citizenship.

According to Manchester, however, the parties' dispute is much more complicated than whether Manchester failed to meet a simple capital call. Manchester asserts that at the time of the August 11 capital call, the Partnership was significantly behind schedule in developing the Vermont properties, and that HB General had failed to meet numerous requirements of the Partnership Agreement. Manchester claims that because of these problems, it had informed HB General -- prior to the final capital call -- that it would exercise its "redemption option." This option, provided for in the Partnership Agreement, allows Manchester to have its Partnership interest "redeemed" at a price specified by formula in the event that the Partnership fails to commence construction on two of the three properties (the Manchester Square II Property and the Riverbend Property) by October 10, 1994. The agreement states that if the Partnership does not pay the redemption price, Manchester's sole remedy is to compel a sale of any undeveloped parcels then owned by the Partnership.

Manchester maintains that by August 11, 1994, when HB General made the final capital call, HB General knew both that the Partnership could not commence construction on the Manchester Square II Property and the Riverbend Property by October 10, 1994, and that Manchester intended to exercise its redemption option. Manchester claims that HB General made the capital call in bad faith to force Manchester to choose between infusing a substantial sum of cash into the Partnership just prior to exercising its right of redemption -- money that might not be recoverable given the redemption option's limited remedy -- or defaulting on its obligation.

According to Manchester, it intended to file suit to force HB General to recognize Manchester's right to exercise its redemption option, but before it could do so, the HB entities filed this action. Manchester therefore counterclaimed against HB General and HB Limited, and against third-party defendants, the Partnership itself and Vanderbilt Development Corporation (another entity controlled by Ben Hauben). Manchester complains that because of the Partnership's failure to commence construction as scheduled and to recognize Manchester's right to exercise its redemption option, the plaintiffs breached the Partnership Agreement, their fiduciary duties to Manchester, and their covenant of good faith and fair dealing. Manchester seeks, inter alia, the following relief: (a) specific performance of those provisions of the Partnership Agreement giving Manchester the right to exercise its redemption option and to compel the sale of the properties; (b) attachment, foreclosure and sale of the Partnership properties and the other properties for which Partnership funds have been expended; (c) imposition of a constructive trust on all the properties; and (d) damages.

After Manchester unsuccessfully moved to transfer the case to the United States District Court for the District of Vermont, Manchester filed a parallel action in Vermont state court, seeking essentially the same relief as it seeks in federal court. Manchester then moved to dismiss this federal action on the basis that the Partnership was an indispensable party whose joinder would destroy diversity. The district court granted Manchester's motion. Applying Federal Rule of Civil Procedure 19(a), the court held that the Partnership itself has significant interests in this litigation and should be joined if feasible. The court then concluded under Rule 19(b) that the Partnership is indispensable, even if joinder is not feasible, in view of prejudice to Manchester and to the Partnership that would arise if the Partnership is excluded. Because, for diversity jurisdiction purposes, a limited partnership is considered a citizen of each state in which its partners (both general and limited) are citizens, Carden v. Arkoma Associates, 494 U.S. 185 (1990), joinder of the Partnership would destroy diversity of citizenship. Thus, the district court dismissed the case for lack of subject matter jurisdiction.

We review the district court's Rule 19(a) determination that joinder is required if feasible under a plenary standard to the extent that it rests on conclusions of law and under a clear error standard as to any subsidiary findings of fact. Janney Montgomery Scott, Inc. v. Shepard Niles, Inc., 11 F.3d 399, 404 (3d Cir. 1993). We review for abuse of discretion the court's Rule 19(b) determination that a person is indispensable and that dismissal is required because the person's joinder is not feasible. Id. at 403.

II. Rule 19(a)

Federal Rule of Civil Procedure 19 determines when joinder of a particular person is compulsory. A court must first determine whether the person should be joined pursuant to Rule 19(a). If Rule 19(a) is satisfied but joinder is "not feasible" -- because, inter alia, joinder would destroy diversity jurisdiction -- the court must apply Rule 19(b) to determine whether, "in equity and good conscience," the party is "indispensable." If the court determines that the party is indispensable, the action must be dismissed.

We agree with the district court that, pursuant to Rule 19(a), this Partnership should be joined if feasible. Under Rule ...

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