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SHLOMCHIK v. RICHMOND 103 EQUITIES CO.

April 16, 1991

SEYMOUR SHLOMCHIK, A LIMITED PARTNER IN RICHMOND 103 EQUITIES CO., A NEW YORK LIMITED PARTNERSHIP, FOR HIMSELF AND ON BEHALF OF THE PARTNERSHIP, PLAINTIFF,
v.
RICHMOND 103 EQUITIES CO., A NEW YORK LIMITED PARTNERSHIP, AND WILLIAM S. HACK AND PEARL H. HACK, INDIVIDUALLY AND AS GENERAL PARTNERS OF RICHMOND 103 EQUITIES, A NEW YORK LIMITED PARTNERSHIP, DEFENDANTS.



The opinion of the court was delivered by: Newman, Senior Judge

OPINION, FINDINGS OF FACT AND CONCLUSIONS OF LAW

United States Court of International Trade, sitting as a United States District Court Judge by designation:

INTRODUCTION

This is an action brought by Seymour Shlomchik, one of nine limited partners in Richmond 103 Equities Co. ("R 103), a New York limited partnership, individually and derivatively on behalf of R 103, against the partnership and William S. Hack and his wife, Pearl H. Hack, individually and as general partners of R 103. Plaintiff seeks recovery of compensatory and punitive damages and other relief for inter alia, various breaches of fiduciary duty by the general partners, waste, improper self-dealing, fraud and securities laws violations. An interlocutory order, discussed infra, was entered by the court on April 23, 1987.

Presently before the court are three matters for resolution prior to the entry of a final judgment: (1) the issue of jurisdiction, reargued in supplemental briefs submitted by the parties at the request of this court; (2) the Magistrate's Report*fn1 and Recommendations of December 6, 1990 on the audit and accounting directed by the interlocutory order; and (3) plaintiff's application for an award of expenses and counsel fee, in accordance with the interlocutory order.

BACKGROUND

Shlomchik's thirty-one page twelve count complaint, filed on January 4, 1984, alleges both state law and federal question claims, the latter arising under the securities laws (see § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) and § 78aa and Rule 10b(5)); and the Racketeer Influenced and Corrupt Organizations Act ("RICO") (see 18 U.S.C. § 1961 et seq.). See also 28 U.S.C. § 1331.

Defendants' answer was filed on March 29, 1984, and on May 1, 1984 this case was reassigned from Chief Judge Constance Baker Motley to Judge Gerard L. Goettel. Thereafter, in July 1984, plaintiff sought class action certification under Fed.R.Civ.P. 23.2 (which was denied without prejudice to renewal) and filed several discovery motions.

On January 6, 1986 the case was reassigned from Judge Goettel to the writer. After holding a pretrial conference and receiving pretrial memoranda of law, proposed findings and conclusions, a bench trial was conducted on June 9, 10 and 11 1986. Decision was reserved.

Following completion of the filing of post-trial proposed findings, conclusions and memoranda of law by the parties on October 31, 1986, this court rendered its decision and opinion on December 15, 1986, 662 F. Supp. 365. The decision, inter alia, rejected defendants' jurisdictional challenge, sustained plaintiff's derivative causes of action for breach of fiduciary duty, improper self-dealing, etc. and awarded damages in the aggregate sum of $203,332.87, expenses, including counsel fees, and directed an audit and accounting of certain records of defendants by a United States Magistrate acting as a Special Master to hear and report in accordance with 28 U.S.C. § 636(b)(2).

On January 27, 1987 a judgment in conformance with the decision of December 15, 1986, final as to an award of damages in the aggregate sum of $203,332.87 on certain derivative causes of action and interlocutory as to other matters, was entered pursuant to Fed.R.Civ.P. 54(b). The judgment entered on January 27, 1987 was interlocutory respecting the award of expenses and attorney's fees to plaintiff's counsel and the audit and accounting of the partnership's checkbook stubs referred to the Magistrate.

In accordance with the January 27, 1987 judgment, the District Court Executive referred the audit and accounting to Honorable Sharon E. Grubin, United States Magistrate.

In February 1987, the parties filed cross-appeals concerning the final aspects of the January 27, 1987 judgment, essentially the award of damages on the derivative causes of action.

As requested by the parties' joint motion of April 7, 1987, on April 23, 1987 this court issued an order that, inter alia, vacated the partially final judgment entered on January 27, 1987, including the Rule 54(b) Certification, and in lieu thereof granted the following interlocutory relief: an audit and accounting of the transactions between R 103 and Shawnee Equities recorded in the partnership's checkbook stubs by a Magistrate serving as a Special Master (28 U.S.C. § 636(b)(2)) to hear and report to the court as to any further sums that should be awarded to R 103; an award to plaintiff's counsel of reasonable fees and expenses, for which application could be made after completion of the accounting proceedings; and entry of a judgment for Shlomchik in his derivative capacity on behalf of the limited partnership against the defendant general partners, jointly and severally, in an aggregate sum of $203,332.87, plus interest.

As previously mentioned, the issues relating to the Magistrate's Report and Recommendations and the award of expenses and counsel fees are now before the court for resolution.

Nearly four years after the reference on December 6, 1990, this court received the Magistrate's Report and Recommendations on the accounting. Concerned about the inordinate delay during the pendency of the accounting, both this court and plaintiff's counsel made periodic inquiries of the Magistrate and the Magistrate's office about the status of the matter. In a letter of July 9, 1990 from the Magistrate to plaintiff's counsel (attached to plaintiff's memorandum of law), the Magistrate expressed her apology for the delay in completing the accounting proceedings due to the press of other matters and a lengthy trial. The protracted accounting proceedings are of significance in this case regarding the jurisdictional issue because plaintiff now attributes a major portion of the blame for this court's problematical diversity jurisdiction (as discussed infra) on the delay by the Magistrate in the accounting proceedings, during which time there was a change in the law in this Circuit affecting actions by and against limited partnerships.

All of the parties' supplemental memoranda of law regarding the jurisdictional issue were received by March 11, 1991; the parties' submissions concerning plaintiff's application for an award of counsel fees and expenses and the Magistrate's Report and Recommendations were held in abeyance pending the supplemental briefing and review of the critical jurisdictional issue.

JURISDICTION

The issue of jurisdiction is, of course, a threshold matter and was previously raised by defendants in their answer as an affirmative defense, briefed by the parties following the trial and addressed by this court in the decision of December 15, 1986. See, 662 F. Supp. at 370.

Plaintiffs predicate federal court jurisdiction over the state law claims on diversity of citizenship (28 U.S.C. § 1332(a)) and/or as pendent to the alleged federal question causes of action since, as contended by plaintiff, both the federal and state causes of action arise out of a common nucleus of facts.

In its opinion of December 15, 1986 (662 F. Supp. at 370), this court held that it has diversity jurisdiction citing Colonial Realty Corp. v. Bache & Co., 358 F.2d 178 (2d Cir. 1966), cert. denied, 385 U.S. 817, 87 S.Ct. 40, 17 L.Ed.2d 56 (1966); Smith v. Sperling, 354 U.S. 91, 77 S.Ct. 1112, 1 L.Ed.2d 1205 (1957) and Swanson v. Traer, 354 U.S. 114, 77 S.Ct. 1116, 1 L.Ed.2d 1221 (1957). Moreover, this court also agreed with plaintiff's contention that it had federal question jurisdiction in conformity with 28 U.S.C. § 1331 and 15 U.S.C. § 78aa, as to plaintiff's causes of action under 15 U.S.C. § 78j(b) and Rule 10 b-5. In view of the holding favorable to plaintiff with regard to diversity jurisdiction, the court was not required to and did not reach the question of pendent jurisdiction over plaintiff's state law causes of action. See Shlomchik, 662 F. Supp. at 370.

On February 8, 1991, counsel for the parties were contacted by the court and requested to submit supplemental memoranda of law on the issues of diversity jurisdiction in light of the Supreme Court's decision in C.T. Carden v. Arkoma Associates, 494 U.S. 185, 110 S.Ct. 1015, 108 L.Ed.2d 157 (1990), and pendent jurisdiction.

In light of the subsequent decision in Carden, the court must revisit its ruling on December 15, 1986 that diversity jurisdiction exists in this case following the authority of the Second Circuit's holding in Colonial Realty Corp. v. Bache & Co., supra. The court concludes that Carden has overruled Colonial Realty Corp., and consequently we must now consider plaintiff's argument respecting pendent jurisdiction.

Jurisdiction Based on Diversity of Citizenship

At the time this action was filed, tried and decided and its interlocutory order was entered, Colonial Realty stood as a binding precedent in this Circuit with regard to the issue of diversity of citizenship in the case where a limited partnership is a party to the litigation. In Colonial Realty, Judge Friendly writing for the Second Circuit, said "a suit brought against a New York partnership must thus be considered to be against the general partners only and identity of citizenship between a limited partner and the plaintiff does not destroy diversity." 358 F.2d at 184. See also Pappas v. Arfaras, 712 F. Supp. 307, 309 (E.D. N.Y. 1989). Westville Holdings, Inc. v. American Petroleum Partners, 592 F. Supp. 44 (S.D.N.Y. 1984).

Understandably, when Shlomchik chose to bring this action in the District Court in 1984, he relied on Colonial Realty. Unfortunately for plaintiff, by the time this court received the Magistrate's Report and Recommendation concerning the audit and accounting, dated December 6, 1990, some six years after commencement of this action and four years after the reference, the United States Supreme Court had handed down its February 27, 1990 ruling in Carden.

In Carden, Arkoma Associates — a limited partnership organized under Arizona law — sued Carden and another individual, both Louisiana citizens, on a contract dispute in the District Court relying on diversity of citizenship for federal jurisdiction. Defendants moved to dismiss the action on the ground that one of Arkoma's limited partners was also a Louisiana citizen. The District Court denied the motion finding the requisite complete diversity. The Fifth Circuit affirmed, holding with respect to the jurisdictional challenge, that complete diversity ...


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