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January 23, 1991


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 partner.

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, 1990.

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 controls.

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 otherwise unable 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 ...

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