The opinion of the court was delivered by: LASKER
Ethel and Abraham Beckerman ("the Beckermans"), two participants in a real estate syndicate, Times Square Associates ("Associates"), bring this diversity action directly on behalf of themselves and all other participants and derivatively on behalf of Associates. They allege breach of trust by defendant, Sands, and diversion of Associates' funds by him to defendant, F.S. Management Corp.
Defendants move to dismiss for lack of jurisdiction. They contend that the Beckermans' non-derivative claim must be dismissed for lack of the jurisdictional amount (28 U.S.C. § 1332) and that the derivative claim must be dismissed for lack of diversity. The Beckermans move for a class action determination and for the appointment of a receiver.
The Beckermans oppose dismissal on several grounds. As to the non-derivative suit, they argue that the requisite jurisdictional amount exists because 1) the suit is either a true or a hybrid class action and, therefore, the claims of the individual members of the class may be aggregated or 2) the amount of the Beckermans' claim taken alone exceeds $10,000. As to the derivative suit, it is claimed that either diversity exists because the suit is a class action or, if diversity is absent, the claim can nevertheless be entertained as pendent to the direct suit.
The Beckermans' position is founded on the thesis that Associates is a partnership, that the action is essentially to compel an accounting by the managing partner, and that joinder of all partners is compulsory and aggregation of their claims permissible. A corollary to the claim that Associates is a partnership is that a derivative action may be brought on its behalf.
Defendants contend that Associates is not a partnership and that, consequently, neither of the above positions is tenable. If no partnership exists, they argue, then the Beckermans must establish the existence of the jurisdictional amount by their individual claim. This, defendants contend, the Beckermans cannot do.
We turn to the central issue whether Associates is a partnership. The starting point of the investigation must necessarily be the Uniform Partnership Law. That act defines a partnership as "an association of two or more persons to carry on as co-owners a business for profit". Partnership Law § 10(1). The act further provides that "[the] receipt by a person of a share of the profits of a business is prima facie evidence that he is a partner in the business." Id. at § 11(4). However, it is clear, if not from the statute itself, at least from its judicial gloss that a partnership agreement is a contract, which cannot come into being without the understanding and consent of all the contracting parties. See, e.g., Manning v. Whalen, 259 App.Div. 490, 20 N.Y.S.2d 364 (1940); Graziani v. Rohan, 195 N.Y.S.2d 156 (S. Ct.1959), rev'd on other grounds, 10 A.D.2d 154, 198 N.Y.S.2d 383, aff'd, 8 N.Y.2d 967, 204 N.Y.S.2d 346, 169 N.E.2d 8 (1960). Such consent is required in part because formation of a partnership constitutes every partner the agent of the partnership for the purpose of its business. Partnership Law § 20(1). Accordingly, "[whether] two or more persons are partners, as between themselves, is determinable chiefly by a reference to their own intention." Salter v. Ham, 31 N.Y. 321, 327 (1865). See also Kent v. Universal Film Mfg. Co., 200 App.Div. 539, 193 N.Y.S. 838 (1922); Fullam v. Peterson, 21 N.Y.S.2d 797 (S. Ct.1940).
With these rudimentary principles in mind, we turn to the agreement itself to determine whether the parties intended to bring into being a partnership and whether they succeeded in doing so. There is no doubt that initially Associates was a partnership consisting of defendant Sands and two other persons (hereinafter called "the partners"). After the formation of their partnership, the partners entered into separate agreements with approximately one hundred and fifty other persons (hereinafter called "the participants"), by which the latter were to invest in the partnership business and to share in its profits and losses. The original partners other than Sands subsequently withdrew from the business. The agreement which is in question here (Complaint, exhibit 2) is that entered into between the partners and the participants, including the Beckermans. It should at this point be noted that each participant entered into a separate agreement with one of the partners, all of the agreements being identical. A careful perusal of these agreements leads us to conclude that a partnership was not and could not have been created by them.
There are a number of reasons for this conclusion. First, it is noteworthy that the agreements are not designated as partnership agreements and at no time refer to the participants as partners. To the contrary, a careful distinction is drawn between the original partners, who are nominated throughout either "partners" or "agents", and the participants, who are not. The documents, in fact, at one point refer to the interest of the participants as "securities", a term which is entirely misplaced in a standard partnership agreement. (Complaint, exhibit 2, Para. (k)). Second, the partnership of which the agreements speak, consisting of the three original partners, is terminable on the death of any one of the three original partners (id. at par. 4). Upon the death of a participant, however, his interest passes to his heirs with the consent of the one partner or "agent" with whom he contracted. (Id., par. 7.) Furthermore, a participant can transfer his interest with the consent of the same partner. (Id., par. 6.) Third, it is clear from the agreements that although each of the three original partners is an agent of the other "partners", none of the participants is authorized to act as such. Fourth, the agreements which, as noted above, were entered into separately by each participant with one partner state that they are to "be binding upon all the Participants." (Id., par. 13.) However, they do not purport to bind the two other partners and their signatures do not appear thereon. Accordingly, although the knowledge and consent of the three original partners to the profit-sharing scheme may be inferred, it is not expressly indicated in the separate agreements. Finally, although the agreements provide that they are to be construed in accordance with the laws of the State of New York, they do not refer to the Partnership Law.
In light of these considerations, we believe that it is highly probable that the parties did not intend the agreements to create a partnership and it is certain that, if they did intend to do so, they failed, because the association which they created did not comply with applicable law. In particular, the fact that none of the partners consented by the agreement to the agency of the participants (as provided by Section 20 of the Partnership Law) and that the participants could transfer their interests with the consent of only one of the partners is inimical to the concept of a partnership, which requires the consent of all the partners to the admission of a new partner, since in a partnership each partner is the agent of the other partners.
Plaintiffs contend, however, that aggregation is proper even if Associates is not a partnership, since all the participants derive their rights from identical contracts with the original partners and all have identical claims against defendants. We do not believe that this represents a correct reading of the law. As the Court stated in Snyder v. Harris, 394 U.S. 332, 335, 89 S. Ct. 1053, 1056, 22 L. Ed. 2d 319 (1969), aggregation is permitted "in cases in which two or more plaintiffs unite to enforce a single title or right in which they have a common and undivided interest" (emphasis added). Here, each participant has rights deriving from his separate contract. This fact critically distinguishes the case from those relied on by the Beckermans.
Since aggregation is impermissible, jurisdiction over the non-derivative suit can be sustained only if the Beckermans' individual claim satisfies the jurisdictional amount. They argue that it does, because the jurisdictional requirement is met both by their claim ...