The opinion of the court was delivered by: Sand, District Judge.
This diversity case involves state law tort and contract
claims asserted against the principal members of a partnership
known as Sanwa-BGK Securities Co., L.P. ("the Partnership").
Plaintiff, Ronald Ryan ("Ryan"), is a former employee of the
Partnership. Defendants Giles Brophy, Kenneth Gestal and John
Knight are limited partners in the Partnership (collectively,
"the Partners"). Defendant Sanwa Bank, Ltd. ("Sanwa") is the
corporate parent of a wholly owned subsidiary, Sanwa
Securities, Inc., which is the Partnership's sole general
Ryan's Amended Complaint asserts contract claims only against
the Partners and tort claims against both the Partners and
Sanwa. Presently before this Court is the Partners' motion to
dismiss Ryan's contract claims, which are set forth in the
first and third causes of action in the Amended Complaint,
pursuant to F.R.Civ.P. 12(b)(6) and 12(c) for failure to state
a cause of action.*fn1 For the reasons given below, the
Partners' motion is granted and plaintiff's first and third
causes of action are dismissed.
Ryan was hired by the Partnership, a bond trading firm, in
1982 to establish and manage a financial strategy division. At
that time the Partnership was known as Refco Partners, L.P. and
the three individual defendants named herein were general
partners.*fn2 Ryan's employment was governed by a Divisional
Management Agreement between himself and the Partnership dated
September 16, 1982. Ryan continued in the Partnership's employ
until February, 1988, at which time he was dismissed. The
contract claims at issue on this motion arise from Ryan's
dismissal by the Partnership and are based on his alleged
rights under the Divisional Management Agreement.
At the time of the 1988 transaction, it was clear to Sanwa
and the members of the Partnership that Ryan was likely to
bring suit as a result of his termination. Consequently, a
clause was inserted into the Acquisition Agreement to deal with
that contingency. Section 8.07(c) of the Acquisition Agreement
("the Indemnity Clause") provided that Sanwa would be
"indemnified and held harmless" by the then partners of the
Partnership "in respect to any and all losses, liabilities,
damages, deficiencies, judgments or settlements" arising out of
litigation with Ryan.
Ryan brought this action in early 1989, naming as defendants
the Partnership, the Partners and Sanwa Bank. Jurisdiction was
premised upon diversity of citizenship. Based upon the law of
this Circuit at that time, Ryan believed that diversity existed
as to the Partnership even though one of the Partnership's
limited partners is a citizen of the same state as Ryan.
However, in Carden v. Arkoma Assocs., ___ U.S. ___, 110 S.Ct.
1015, 1021, 108 L.Ed.2d 157 (1990), the Supreme Court pulled
the jurisdictional rug out from under Ryan by making it clear
that a limited partner's residence must be considered for
purposes of diversity. As a result of Carden, Ryan dismissed
his claims against the Partnership by stipulation in November,
In their motion to dismiss, the Partners argue that because
the Partnership is no longer a named defendant, Ryan cannot
maintain his contract claims against them. The Partners assert
that under New York law, an action for breach of contract
against a partnership may not be asserted directly against the
partners unless the partnership is insolvent, which is not
alleged here. Ryan counters that the general rule of New York
law cited by the Partners is inapplicable in this case because
of the Indemnity Clause contained in the Acquisition Agreement.
In deciding the Partners' motion to dismiss, this Court is
required to accept Ryan's allegations as true and to construe
those allegations in the light most favorable to Ryan. See
Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 1686, 40
L.Ed.2d 90 (1974). The complaint will be dismissed only if Ryan
can prove no set of facts that would entitle him to relief. See
Goldman v. Belden, 754 F.2d 1059, 1065 (2d Cir. 1985).
The first issue to be decided is which state's law governs in
this case. In their motion papers and briefs, the parties have
assumed that New York law applies. It appears that the Partners
are citizens of New York and that the Partnership has its
principal place of business here. Amended Complaint ¶¶ 2-5.
Moreover, the employment contract between Ryan and the
Partnership, which forms the basis of his claims in this suit,
contains a choice of law provision directing the application of
New York law. See Divisional Management Agreement (Exhibit A to
Defendant's Motion to Dismiss), ¶ 8.4. In view of these
factors, this Court agrees with the parties that New York
Having determined the applicable body of law, the next issue
is whether the contract claims asserted in the Amended
Complaint state a cause of action. Under New York law, partners
in a partnership are jointly and severally liable for tort
claims against the partnership, but only jointly liable for
contract claims against the partnership. N.Y. Partnership Law
§ 26 (McKinney 1988). The result of this distinction is that
while tort claims may be asserted against the individual
partners in the first instance, contract claims must be
asserted first against the partnership itself, and not the
individual partners, unless the partnership is insolvent or
to pay its debts. See Meyer v. Park S. Assocs., 159 A.D.2d 337,
337, 552 N.Y.S.2d 614, 616 (App. Div. 1990); Helmsley v. Cohen,
56 A.D.2d 519, 519-20, 391 N.Y.S.2d 522, 523 (App. Div. 1977).
The policy underlying this distinction seems to be that in
ordinary contract disputes, partners should be protected from
individual liability and the resultant need to seek
contribution from each other if the partnership has sufficient
assets to satisfy the judgment.
In this case, there is no allegation by Ryan that the
Partnership is insolvent or would be unable to pay any judgment
he might obtain as a result of his contract claims. Thus if the
general rule against initial liability for partners applies,
Ryan may not assert his contract claims directly against the
Partners and therefore those ...