UNITED STATES DISTRICT COURT, SOUTHERN DISTRICT OF NEW YORK
June 7, 1982
CUNARD LINE LIMITED, Plaintiff,
Michael D. ABNEY, et al., individually and as Co-Partners doing business under the firm name of Coopers & Lybrand, Defendants
The opinion of the court was delivered by: KNAPP
MEMORANDUM AND ORDER
The case is before us on defendant's motion to dismiss the amended complaint.
The plaintiff, Cunard Line Limited (Cunard), is a corporation incorporated in Great Britain. On July 27, 1981, invoking the Court's diversity jurisdiction, Cunard filed a complaint against Coopers & Lybrand (Coopers), one of the so-called "big eight" national partnerships of certified public accountants. The allegations in the complaint tell of much that had gone awry with the design and installation of a computer system which Coopers had agreed to develop for Cunard. The details of the underlying dispute are not germane to this motion, except that the complaint stated a claim for breach of contract (the contract claim), one for fraud, and one for professional malpractice (the tort claims). Several million dollars in damages were sought.
On September 14, 1981 Coopers moved to dismiss for lack of subject matter jurisdiction on the ground that one of its partners was an alien. Consequently-defendant argued-Coopers was also an alien for jurisdictional purposes and, there being an alien corporation and an alien partnership on either side of the controversy, diversity jurisdiction was lacking. A few days later, on September 17, 1981, Cunard started a "parallel action" against Coopers in New York State Supreme Court.
At oral argument on the motion to dismiss the original complaint, plaintiff observed that defendant's jurisdictional objections could be obviated by the expedient of filing an amended complaint which did not name the partnership as defendant, but named as individual defendants all Coopers' partners except the alien. Consequently, on October 2, 1981 we granted the motion to dismiss the original complaint, without prejudice to the filing of an amended one.
Such amended complaint was filed the very same day, and is identical in substance to the original one. However, rather than naming Coopers as a defendant, it named several hundred individual partners believed by Cunard to be United States citizens, purporting to sue them "individually and as co-partners doing business" under the name of Coopers. Now before us is defendant's motion to dismiss the amended complaint.
On December 18, 1981 we heard oral argument on this second motion. Coopers then contended that Cunard was, for jurisdictional purposes, not only an alien corporation but also a citizen of New York State because it had "its principal place of business" in New York City. See 28 U.S.C. § 1332(c). Consequently, jurisdiction would be lacking on the additional ground that there would be a controversy between New York citizens: a New York corporate plaintiff against a partnership with New York members. The plaintiff argued, on the other hand, that the facts showed that Cunard had its principal place of business in England and that, in any event, Cunard could only be a citizen of Great Britain since the "dual citizenship" provision, 28 U.S.C. § 1332(c), did not apply to alien corporations. Without ruling, we suggested from the Bench that, at least as to the legal question, the better view appeared to be the one advocated by defendant. Thereupon plaintiff announced that it would cut this legal Gordian knot by doing, again, what it had done once before: file yet another amended complaint naming as defendants only those partners of Coopers who were neither aliens nor citizens of New York. Therefore we could dispense, there and then, with any legal argument about the applicability of the "dual citizenship" statute to foreign corporations and with any factual inquiry about the extent of Cunard's contacts with New York State. Thus poised, the motion was taken under advisement.
These preliminary skirmishes have not hindered pre-trial discovery, which continues on the understanding that its fruits will be available whether the litigation ultimately proceeds in this Court or in the "parallel" state action.
The motion to dismiss the amended complaint raises three distinct questions: (a) do the tort claims state viable causes of action against the individual defendants named in the complaint? (b) does the contract claim state a cause of action against such defendants? and (c) may the partnership itself be sued in this Court by the device of individually suing fewer than all of its members?
The first of these questions is easily answered by a simple "Yes": we have subject matter jurisdiction over the named partners (at least as to those several hundred who are not New York citizens), and the complaint states a tort claim against them. With respect to the remaining two questions, however, the answer is "No." For reasons we shall separately discuss, we conclude that whereas we have subject matter jurisdiction over the diverse individual partners, as to them the contract claim must be dismissed for failure to state facts giving rise to relief under New York law; and that we have no subject matter jurisdiction over any action-in tort or contract-against the partnership itself.
B. The Contract Claim Against Individual Partners
Section 26(2) of the New York Partnership Law makes partners jointly liable for the performance of contracts entered into by the partnership. The joint nature of the obligation does not imply that the joint obligor is immune from being sued individually. Caplan v. Caplan (1935) 268 N.Y. 445, 448, 198 N.E. 23. It only gives the joint obligor the right to insist that the plaintiff join other such obligors if joinder be possible.
Jones Knitting v. A. M. Pullen & Co. (S.D.N.Y.1970), 50 F.R.D. 311 at 315. And, upon following a prescribed procedure, see New York Civil Practice Law § 5201; Detrio v. United States (5th Cir. 1959) 264 F.2d 658, 661, a plaintiff may hold a joint obligor personally liable on a joint obligation.
This general rule applies to individual partners since they are a genus in the wider family of joint obligors. However, for partners there is, under New York law, a prerequisite to individual liability on a joint partnership obligation: "resort may be had against them only if the joint or partnership property is insufficient to pay the firm debts or it appears there can be no effective remedy without resort to individual property." Wisnouse v. Telsey (S.D.N.Y.1973) (Weinfeld, J.), 367 F. Supp. 855, 859, and cases there cited at note 7. Indeed, a complaint that fails to allege that a partnership is insolvent and unable to pay its debts is insufficient to state a claim for breach of contract against the partners as individuals. Pine Plains Lumber Corp. v. Messina (3rd Dep't 1981) 78 A.D.2d 271, 435 N.Y.S.2d 381, 384. See also Helmsley v. Cohen (1st Dep't 1977) 56 A.D.2d 519, 391 N.Y.S.2d 522, 523.
No such allegation was made in this case, and it clearly seems unwarranted. Indeed, the plaintiff specifically observed that the possibility that this partnership-one of the "big eight" national accounting firms-might not be able to satisfy a judgment was an "unlikely event." See Tr. of Hearing of December 18, 1981 at 28. Cf. Pine Plains Lumber Corp. v. Messina, supra, 435 N.Y.S.2d at 384 (allowing amendment to complaint to plead insolvency). It follows that the complaint states insufficient facts to entitle plaintiff to relief on the contract claims against any of the defendants as individuals.
C. The Claims Against the Partnership
In light of the impossibility of fastening contractual liability upon any defendant in his individual capacity, it becomes vital to determine whether there is a way, in this forum, to reach the assets of the partnership. The question is simply this: Do we have subject matter jurisdiction over the partnership?
We start our inquiry with a hoary, basic, and well-established proposition: for purposes of diversity, a partnership is a citizen of each jurisdiction of which a partner is a citizen. Great Southern Fire Proof Hotel Co. v. Jones (1900) 177 U.S. 449, 456, 20 S. Ct. 690, 693, 44 L. Ed. 842; Lewis v. Odell (2d Cir. 1974) (Hays, C. J.) 503 F.2d 445, 446; Woodward v. D. H. Overmyer Co. (2d Cir. 1970) (Friendly, C. J.) 428 F.2d 880, 883, cert. denied, 400 U.S. 993, 91 S. Ct. 460, 27 L. Ed. 2d 441 (1971); Coopers & Lybrand v. Cocklereece (S.D.N.Y.1981) 506 F. Supp. 587, 588; Lucido v. Cravath, Swaine & Moore (S.D.N.Y.1977) 425 F. Supp. 123, 125, n.2 (no jurisdiction over defendant partnership with non-diverse members); Boise Cascade Corp. v. Wheeler (S.D.N.Y.1976) 419 F. Supp. 98, 100 (no jurisdiction over defendant partnership with non-diverse members), aff'd mem. (2d Cir. 1977), 556 F.2d 554; Molasky v. Garfinkle (S.D.N.Y.1974) 380 F. Supp. 549, 553 (no jurisdiction over defendant partnership with non-diverse members); David Crystal, Inc. v. Cunard S. S. Co. (S.D.N.Y.1963) 223 F. Supp. 273, 289 (no jurisdiction over defendant partnership with non-diverse members), aff'd, (2d Cir. 1964) 339 F.2d 295, cert. denied (1965), 380 U.S. 976, 85 S. Ct. 1339, 14 L. Ed. 2d 271; Joscar Co. v. Consolidated Sun Ray, Inc. (E.D.N.Y.1963) 212 F. Supp. 634, 636; Eastern Metals Corp. v. Martin (S.D.N.Y.1960) 191 F. Supp. 245, 249-53 (no jurisdiction over defendant partnership with non-diverse members). Cf. Plechner v. Widener College, Inc. (3d Cir. 1977) 569 F.2d 1250, 1260-61 (same rule for unincorporated associations). Even those who disagree with the wisdom of the rule concede that it is, by now, a dependable statement of the generally accepted law of federal jurisdiction. See 3A Moore's Federal Practice P 17.25 at 259-64; 2A Moore's Federal Practice P 8.10 at 68. Consequently, the conceded existence of an alien partner of Coopers' deprives this Court of subject matter jurisdiction over the partnership. It would be "a suit by an alien against a partnership with an alien partner, (and consequently) federal jurisdiction would not exist, because diversity jurisdiction does not extend to controversies between aliens." 1 Fed.Proc., L. Ed. § 1:189. See also Corporation Venezolana de Fomento v. Vintero Sales (2d Cir. 1980) 629 F.2d 786, 790, cert. denied (1981) 449 U.S. 1080, 101 S. Ct. 863, 66 L. Ed. 2d 804; IIT v. Vencap, Ltd. (2d Cir. 1975) 519 F.2d 1001, 1015.
This would seem to require the granting of defendant's motion to dismiss but for the fact that in Hamond v. Clapp (S.D.N.Y.1978) (Knapp, J.) 452 F. Supp. 885, following the reasoning of Jones Knitting Corp. v. A. M. Pullen & Co. (S.D.N.Y.1970) 50 F.R.D. 311, we ruled that the consequence of these well-settled principles of federal jurisdiction could be avoided by dropping from the action any non-diverse partner whose citizenship would oust the court of jurisdiction over the partnership. We now find that decision, as well as the one in Jones Knitting, to have been unsound.
The opinions in Hamond and in Jones Knitting concerned themselves primarily with the question of whether, under Fed.R.Civ.P. 19, individual members of a partnership were all "indispensable" to an action against any of them, or were merely "necessary", allowing-in the latter case-for the non-diverse among them to be dropped under Fed.R.Civ.P. 21 to preserve diversity over the remaining individual partners. Both in Hamond and in Jones Knitting it was first established that partners-as joint obligors- are not indispensable parties to a suit against individual partners upon a joint partnership obligation. Consequently, non-diverse individual partners could be dropped to preserve jurisdiction over the diverse ones, as can all individual defendants who are "non-indispensable." From the premise that jurisdiction over the diverse partners as individuals could thus be salvaged, it was concluded that diversity jurisdiction over the partnership itself could be preserved by dropping non-diverse partners. See Jones Knitting, supra, 50 F.R.D. at 315.
We now find that this crucial jurisdictional conclusion does not follow from its premises.
The citizenship of a partnership is that of all its partners, irrespective of whether any of them-as "non-indispensable" individual defendants-may be dropped to preserve jurisdiction in an action against the individual partners to enforce a joint partnership obligation.
Two appellate cases, Kerr v. Compagnie De Ultramar (2d Cir. 1958) 250 F.2d 860 and Weaver v. Marcus (4th Cir. 1948) 165 F.2d 862, were relied upon in support of the jurisdictional conclusion that citizenship of a partnership could be limited to that of its members actually made parties to a suit. See 50 F.R.D. at 315 n.11. Upon re-examination, neither of the cases appears to support the conclusion. Kerr does not deal at all with a suit against a partnership, but is merely an illustration of the rule that jointly and severally liable individual defendants are not indispensable and may, thus, be dropped to preserve jurisdiction. In Weaver, although there was, to be sure, a partnership involved, the Fourth Circuit concentrated on the liability of the individual partners. It held that the District Court should have granted plaintiff's motion to drop a non-diverse partner to preserve jurisdiction over the diverse ones, but it didn't consider the question of jurisdiction over the partnership itself.
Therefore, the case again illustrates only the maxim that jointly and severally liable non-diverse individual defendants may be dropped to salvage jurisdiction over the diverse ones.
Turning to authorities which refer to Jones Knitting or to Hamond v. Clapp, we find that these two have been cited in well over a dozen other cases, none of which follow them in holding that the jurisdiction over a partnership can be preserved by not naming the non-diverse partners as defendants.
Finally, plaintiff contends that several provisions of New York law contemplate that a suit against a partnership may be maintained by naming fewer than all its members as individual defendants. We believe this contention to be unsound.
However, even if it were correct as a matter of state law, it would have no bearing on any jurisdictional determination we may make. It is axiomatic that, in determining their own jurisdiction, District Courts of the United States must look only to Article III of the United States Constitution and to congressional grants of jurisdiction. Verlinden B. V. v. Central Bank of Nigeria (2d Cir. 1981) 647 F.2d 320, 324-25, and cases cited therein; B., Inc. v. Miller Brewing (5th Cir. 1981) 663 F.2d 545, 548. They may not look to the acts of state legislatures. "However extensive their power to create and define substantive rights, the states have no power directly to enlarge or contract federal jurisdiction." Duchek v. Jacobi (9th Cir. 1981) 646 F.2d 415, 419 and cases there cited, note 4. See also 1 Fed.Proc., L. Ed. § 1:47; Markham v. City of Newport News (4th Cir. 1961) 292 F.2d 711, 713; TBK Partners v. Western Union (S.D.N.Y.1981) 517 F. Supp. 380, 388; Kanouse v. Westwood Obstetrical and Gynecological Associates (D.N.J.1981) 505 F. Supp. 129, 129; Clark v. Times Square Stores (S.D.N.Y.1979) 469 F. Supp. 654, 655; Prendergast v. Long Island State Park Comm. (E.D.N.Y.1970) 330 F. Supp. 438, 440; Crivello v. Board of Adjustment (D.N.J.1960) 183 F. Supp. 826, 828. Cf. McCahill v. Borough of Fox Chapel (3d Cir. 1971) 438 F.2d 213, 218 (state legislature cannot redefine "case or controversy" under federal constitution); Bekoff v. Clinton (S.D.N.Y.1972) 344 F. Supp. 642, 645 (state courts are without power to divest federal courts of jurisdiction).
As we are free of authority constraining us to do otherwise, we now reach a conclusion that is consistent with the long line of precedent cited at the opening of this part "C." We see no ground to adhere to the view we expressed in Hamond v. Clapp that dropping a non-diverse partner will salvage this Court's jurisdiction over the partnership. The citizenship of a partnership is that of all the partners who compose it, rather than just that of those who happen to be non-diverse. A partnership does not-like a jurisdictional chameleon-change the color of its citizenship to accommodate the choice of a federal forum by a non-diverse opponent. We hold that in this case we-as a court of only limited jurisdiction, Owen Equipment & Erection Co. v. Kroger (1978) 437 U.S. 365, 374, 98 S. Ct. 2396, 2403, 57 L. Ed. 2d 274-lack power over the subject matter of the action against the partnership because Cunard (by virtue of its place of incorporation) and Coopers (by virtue of it having an alien partner) are both aliens. In view of this determination we have no occasion to rule whether Cunard is also a New York citizen for diversity purposes, or-more generally-whether or not 28 U.S.C. § 1332(c) should apply to foreign corporations.
The claims against the partnership are dismissed for lack of jurisdiction without prejudice, of course, to their being raised in an appropriate forum. The contract claims against those individual partners over whom we have subject matter and in personam jurisdiction are dismissed for failure to state a claim under New York law.
A conference will be held in Room 619 on July 7, 1982, at 9:30 A.M. to determine whether the remaining tort claims against diverse individual partners
should be stayed pending the outcome of the New York action.