In the

United States Court of Appeals

For the Seventh Circuit ____________

Nos. 03-4171, 03-4173, 03-4175, 03-4194

SIGMUND LEFKOVITZ, et al.,

Plaintiffs-Appellees, Cross-Appellants,

v.

NATHAN WAGNER, et al.,

Defendants-Appellants,

and

JARNIS UNITED PROPERTIES CO.,

Proposed Intervenor-Appellant,

and

GRIPPO & ELDEN, et al.,

Cross-Appellees,

and

29-31 ASSOCIATES,

Appellant.

____________

Appeals from the United States District Court for

the Northern District of Illinois, Eastern Division.

No. 97 C 7555—Elaine E. Bucklo, Judge.

____________

ARGUED NOVEMBER 10, 2004—DECIDED JANUARY 18, 2005

____________
2 Nos. 03-4171, 03-4173, 03-4175, 03-4194

Before POSNER, WOOD, and EVANS, Circuit Judges.

POSNER, Circuit Judge. Before us is a multifaceted challenge to the confirmation of an arbitration award. We omit

many details in the interest of simplicity. In 1990, six

individuals who had been working together for many years

in the real estate business created a partnership that they

called “Jarnis.” Each took an equal share in the partnership,

although each one-sixth share was divided in turn among

the active member of the partnership, members of his family, and trusts for the benefit of the family members. The

partners (by which we mean, unless otherwise indicated,

the active members) later had a falling out. Four of them

ganged up against the other two, the Lefkovitzes, who in

1997, joined by their family trusts, brought this suit against

their four oppressors plus four companies controlled by the

latter. The suit charges that the defendants, in violation of

RICO, the Jarnis partnership agreement, and fiduciary obligations arising from the partnership, diverted to themselves

partnership income in which the plaintiffs as co-partners

were entitled to share. The defendants had done this, the

plaintiffs alleged, by paying themselves inflated compensation for services that they had rendered or purported to have

rendered to the partnership.

Although Jarnis was not a party to the suit, the suit might

seem to be really a derivative suit on the partnership’s

behalf, charging that the defendants looted it. “When a

corporation is injured by a wrongful act but the board of

directors refuses to seek legal relief, a shareholder can sue

the wrongdoer on behalf of the corporation. Such a suit is

known as a derivative suit, and is an asset of the corporation.” Kennedy v. Venrock Associates, 348 F.3d 584, 589 (7th

Cir. 2003). Although most derivative suits are brought on

behalf of corporations, a derivative suit can be brought on

behalf of a partnership or other unincorporated firm. Fed. R.
Nos. 03-4171, 03-4173, 03-4175, 03-4194 3

Civ. P. 23.1. No party has sought to have this case litigated

as a derivative suit; but if individual partners sue to enforce

rights belonging to a nonconsenting third party, namely the

partnership, the court must dismiss the suit. See Fieldturf,

Inc. v. Southwest Recreational Industries, Inc., 357 F.3d 1266,

1268 (Fed. Cir. 2004); Paradise Creations, Inc. v. UV Sales, Inc.,

315 F.3d 1304, 1309 (Fed. Cir. 2003); Enzo APA & Son, Inc. v.

Geapag A.G., 134 F.3d 1090, 1093-94 (Fed. Cir. 1998). One

cannot sue, other than in a representative capacity, to

enforce a right that belongs to someone else. Cf. People

Organized for Welfare & Employment Rights (P.O.W.E.R.) v.

Thompson, 727 F.2d 167, 173 (7th Cir. 1984). Thus—to bring

the point closer to home—shareholders cannot maintain a

RICO suit for injury to their corporation. Sears v. Likens, 912

F.2d 889, 892 (7th Cir. 1990); Mid-State Fertilizer Co. v. Exchange National Bank, 877 F.2d 1333, 1335-37 (7th Cir. 1989);

In re Sunrise Securities Litigation, 916 F.2d 874, 887-88 (3d Cir.

1990).

But it is the law of the jurisdiction under which a partnership is organized that determines who has a legally enforceable right to sue to prevent or correct an improper

diversion of partnership income. Kamen v. Kemper Financial

Services, Inc., 500 U.S. 90 (1991); In re Abbott Laboratories

Derivative Shareholders Litigation, 325 F.3d 795, 803-04 (7th

Cir. 2003). Jarnis is a Florida general partnership, and under

Florida law the partners in a general partnership owe fiduciary obligations to each other. Fla. Stat. Ann. § 620.8404; see

id., § 620.8405; Hallock v. Holiday Isle Resort & Marina, Inc.,

885 So. 2d 459, 462-63 (Fla. App. 2004); Lundstrom Realty

Advisors, Inc. v. Schickedanz Bros.-Riviera Ltd., 856 So. 2d

1117, 1121-22 (Fla. App. 2003). (This is the general rule, not

anything peculiar to Florida. See, e.g., Meinhard v. Salmon,

164 N.E. 545, 546 (N.Y. 1928) (Cardozo, J.); RTRA Group, Inc.

v. Salomon Bros. Holding Co., 680 N.E.2d 769, 772 (Ill. App.
4 Nos. 03-4171, 03-4173, 03-4175, 03-4194

1997); McSweeney v. Buti, 637 N.E.2d 420, 424 (Ill. App.

1994).) So the plaintiffs were not required to file this as a

derivative, or any kind of representative, suit. The plaintiffs

could sue, and are suing, on their own behalf rather than on

behalf of the partnership.

This point is fogged up by the fact that, as we shall see,

Jarnis received an award from the arbitrator. This has no

practical significance; the award was no different from

awarding two-thirds of the amount of it to the defendants

(and entities controlled by them to which they had transferred fractions of their shares) and the other third to the

plaintiffs. Similarly, although the corporation or other entity

on whose behalf a suit is brought, being the owner of the

claim sued upon, normally is an indispensable party, Koster

v. (American) Lumbermens Mutual Casualty Co., 330 U.S. 518,

523 n. 2 (1947); Bagdon v. Bridgestone/Firestone, Inc., 916 F.2d

379, 382 (7th Cir. 1990); Fogade v. ENB Revocable Trust, 263

F.3d 1274, 1289 (11th Cir. 2001), this observation is inapplicable to a suit such as the present one in which the partner

(or shareholder) is allowed to sue in an individual rather

than representative capacity. The next step, which however

we declined to take in Frank v. Hadesman & Frank, Inc., 83

F.3d 158, 161-62 (7th Cir. 1996), would be to allow a derivative suit to be brought instead as an individual suit whenever the corporation (the usual entity on behalf of which a

derivative suit is brought) is closely held, at least where, as

in this case (were Jarnis a corporation), all the shareholders

are before the court, so that there are no merely represented

shareholders.

But by virtue of the principles of partnership law, the

plaintiffs in this case had and exercised an option to sue as

individuals rather than on behalf of the partnership. The

analogy is to a suit by a minority shareholder against the

majority shareholder, claiming that the latter has violated
Nos. 03-4171, 03-4173, 03-4175, 03-4194 5

the fiduciary duty that such a shareholder, especially in a

closely held corporation, owes to minority shareholders.

Kennedy v. Venrock Associates, supra, 348 F.3d at 589; Strougo

v. Bassini, 282 F.3d 162, 173 (2d Cir. 2002); see also United

States v. Byrum, 408 U.S. 125, 137-38 (1972); Lawton v. Nyman,

327 F.3d 30, 40-41 (1st Cir. 2003); Hollis v. Hill, 232 F.3d 460,

468 (5th Cir. 2000); but see Combs v. PricewaterhouseCoopers

LLP, 382 F.3d 1196, 1200 (10th Cir. 2004).

So we can proceed to the merits of the appeal. The

defendants demanded arbitration pursuant to the arbitration

clause in the Jarnis partnership agreement. The plaintiffs

resisted on the ground that some of the entities that they

had joined as defendants along with the four active members

of Jarnis that they were suing had not signed arbitration

agreements. But the four assured the court that they controlled those entities, together with Jarnis itself, because they

controlled two-thirds of the voting power in the partnership. They owned less than two-thirds, but that was only

because they had transferred some of their partnership interests to relatives and family trusts; and both the relatives and

the trusts were under their thumb.

The court ordered arbitration. That was in 1998. The

proceedings before the arbitrator—which swelled when the

arbitration was consolidated with two other arbitrations between the parties—were protracted, but finally ended in

2003 with an award that among other things ordered the

defendants to repay Jarnis more than $7 million and ordered

Jarnis to reimburse the plaintiffs for $1.8 million in attorneys’

fees. The district court confirmed the award in its entirety,

and the flurry of appeals here consolidated for decision followed.

One of the appeals is by Jarnis itself, from the district

court’s refusal to allow it to intervene in the confirmation

proceeding on the ground that it should have sought in-
6 Nos. 03-4171, 03-4173, 03-4175, 03-4194

tervention earlier. The civil rules authorize the grant of

intervention only “upon timely application” for it. Fed. R.

Civ. P. 24; NAACP v. New York, 413 U.S. 345, 365-66 (1973).

The aim is “to prevent a tardy intervenor from derailing a

lawsuit within sight of the terminal;” and so “as soon as a

prospective intervenor knows or has reason to know that his

interests might be adversely affected by the outcome of the

litigation he must move promptly to intervene.” United

States v. South Bend Community School Corp., 710 F.2d 394,

396 (7th Cir. 1983); see also Reid L. v. Illinois State Board of

Education, 289 F.3d 1009, 1017-18 (7th Cir. 2002); Sokaogon

Chippewa Community v. Babbitt, 214 F.3d 941, 949 (7th Cir.

2000). Jarnis argues that since it was not a party to the proceedings before the arbitrator it had no reason to intervene

until the arbitrator unexpectedly ordered it to pay the

plaintiffs’ attorneys’ fees. And it is certainly unusual—so unusual as to be unforeseeable—for a nonparty to a litigation

to be treated as Jarnis was, namely as a defendant (with

respect to the attorneys’ fees). It was not until the arbitrator

made the award against Jarnis that it had a ground for intervention—unless it wanted more than the $7 million that

it was awarded, but it did not.

This discussion may seem to be leading ineluctably to the

conclusion that Jarnis was entitled to intervene in the district

court; more fundamentally, and without need to invoke Rule

24, because someone against whom a judgment is entered is

entitled to the rights of a party. Motorola Credit Corp. v. Uzan,

388 F.3d 39, 61-62 (2d Cir. 2004); Alemite Mfg. Corp. v. Staff,

42 F.2d 832, 832-33 (2d Cir. 1930) (L. Hand, J.); cf. Devlin v.

Scardelletti, 536 U.S. 1, 7-8 (2002); In re Bridgestone/ Firestone,

Inc., Tires Products Liability Litigation, 333 F.3d 763, 768 (7th

Cir. 2003); Cordoza v. Pacific States Steel Corp., 320 F.3d 989,

995-96 (9th Cir. 2003). And ordinarily the award of relief

against a nonparty would be just the kind of ultra vires act
Nos. 03-4171, 03-4173, 03-4175, 03-4194 7

by an arbitrator that would justify judicial intervention. 9

U.S.C. § 10(a)(4); BEM I, L.L.C. v. Anthropologie, Inc., 301 F.3d

548, 554-55 (7th Cir. 2002); Lindland v. U.S. Wrestling Ass’n,

Inc., 227 F.3d 1000, 1003 (7th Cir. 2000); Katz v. Feinberg, 290

F.3d 95, 97-98 (2d Cir. 2002); Coady v. Ashcraft & Gerel, 223

F.3d 1, 9 (1st Cir. 2000). But not here. The only plausible

motivation for Jarnis’s arguing against its being included in

the award is that the defendants, who control Jarnis, are

trying to derail the arbitration because they are dissatisfied

with its outcome. Cf. Dighello v. Busconi, 673 F. Supp. 85, 88-

89 (D. Conn. 1987). As we noted earlier, a judgment that

Jarnis pay the plaintiffs $1.8 million has exactly the same

consequence as a judgment that the defendants pay them

$1.2 million (two-thirds of $ 1.8 million), because the

defendants and their dependents own two-thirds of Jarnis.

Jarnis (which is to say the defendants, the puppeteers)

argues that the defendants cannot adequately represent its

interests because, not owning 100 percent of it, they have an

incentive to shift costs from their shoulders to Jarnis. Indeed

so. But then it is the minority owners, namely the plaintiffs,

who should be arguing against the award’s having been

directed against Jarnis rather than the defendants, who have

managed to offload one-third of the award onto the

plaintiffs—who are not complaining. The issue of the

attorneys’ fee award is therefore moot.

The defendants argue that the arbitrator engaged in ex

parte communications and also exhibited bias in favor of the

plaintiffs, and either type of behavior could be a basis for

refusing to confirm an arbitrator’s award. 9 U.S.C.

§ 10(a)(2)-(3); Sphere Drake Ins. Ltd. v. All American Life Ins.

Co., 307 F.3d 617, 619-20 (7th Cir. 2002); Dow Corning Corp.

v. Safety Nat’l Casualty Corp., 335 F.3d 742, 749-52 (8th Cir.

2003). But not in the circumstances of this case.
8 Nos. 03-4171, 03-4173, 03-4175, 03-4194

One of the issues in the arbitration was whether the

defendants had caused Jarnis to overpay them for their services—the motive being, as should be evident from our

previous discussion, that one-third of the overpayment

would be borne by the plaintiffs. The arbitrator hired an

accounting firm to provide neutral expert evidence to assist

him in analyzing that issue. The defendants complain that

the arbitrator met with the firm in their absence. He did,

though it is unclear whether he discussed the overpayment

issue in those meetings. If he did discuss it, still there is no

indication that the discussion had any effect on his rulings.

The issue of bias arises from a hearing at which the arbitrator complained that his fee was in arrears. The plaintiffs’

lawyer clucked his tongue sympathetically and said that the

arbitrator “shouldn’t have to deal” with the issue of fees.

The defendants’ lawyer was silent—because he was planning

to challenge the arbitrator’s fee, and did so a few days later.

Under the rules of the American Arbitration Association,

which governed this arbitration, fees and fee protests are

lodged with the Association, which after resolving any protest remits the fees to the arbitrator. He is not supposed to

learn of the protests. If he wants to complain about a party’s

failure to pay his fee, he is supposed to complain to the

Association rather than raise the matter with the parties.

The defendants argue that by saying what he did the

plaintiffs’ lawyer violated the rule and signaled the arbitrator that the defendants were responsible for the delay in

the payment of his fee. Cf. Sullivan v. Conway, 157 F.3d 1092,

1095-96 (7th Cir. 1998).

The argument is highly conjectural, but there is a little

more. The defendants refused to pay their full share of the

arbitrator’s fee, and the arbitrator learned of this at some

point—we know because his final award required the

defendants to reimburse the plaintiffs for the amount they
Nos. 03-4171, 03-4173, 03-4175, 03-4194 9

had paid in excess of their share of the fee. The defendants

speculate that when the arbitrator learned that they had

challenged his fee, he became furious and resolved to retaliate against the defendants in his award. This is another

stretch. It is not as if the arbitrator were denied his fee. He

got every penny that he thought himself entitled to, and

merely learned that the defendants had wanted him to get

less. It is difficult to see how this is different from any other

case in which a litigant challenges a judge’s ruling. It would

be different if the challenger succeeded in taking money out

of the judge’s, or in this case the arbitrator’s, pocket. But the

challenge failed, thus costing the arbitrator nothing. Liteky

v. United States, 510 U.S. 540, 555-56 (1994); Brokaw v. Mercer

County, 235 F.3d 1000, 1025-26 (7th Cir. 2000); Hepperle v.

Johnston, 590 F.2d 609, 613-14 (5th Cir. 1979). Anyway the

defendants can’t be heard to complain about their own

strategy. If the arbitrator’s knowledge that his fee is being

challenged precludes enforcement of his award, then anyone

who sees that the case is going badly can scuttle the arbitration just by disputing the arbitrator’s fee.

Both allegations of impropriety bespeak a lack of understanding of how arbitration differs from adjudication. Arbitrators are not professional judges; often they are not lawyers

at all, though this one was. Parties that opt for arbitration

trade the formalities of the judicial process for the expertise

and expedition associated with arbitration, a less formal

process of dispute resolution by an umpire who is neither a

generalist judge nor a juror but instead brings to the

assignment knowledge of the commercial setting in which

the dispute arose. Sphere Drake Ins. Ltd. v. All American Life

Ins. Co., supra, 307 F.3d at 620; Merit Ins. Co. v. Leatherby Ins.

Co., 714 F.2d 673, 679-80 (7th Cir. 1983); ANR Coal Co., Inc.

v. Cogentrix of North Carolina, Inc., 173 F.3d 493, 500 (4th Cir.

1999); Commonwealth Coatings Corp. v. Continental Casualty
10 Nos. 03-4171, 03-4173, 03-4175, 03-4194

Co., 393 U.S. 145, 150-51 (1968) (concurring opinion). Stricter

rules cabin the generalist because he is more apt to be led

astray by the lawyers and witnesses in a matter in which his

only knowledge comes from them. When disputants repose

their trust in a specific individual rather than having to take

the luck of the draw, it is right that they should have to take

the bad with the good unless the individual runs completely

off the rails. The improprieties here, if improprieties they

were, were harmless in the setting of a voluntary arbitration.

The only other issue presented by the defendants that

we need to discuss is the arbitrator’s consolidating separate

arbitration proceedings without the defendants’ express

consent. Selection of the decision maker by or with the consent of the parties is the cornerstone of the arbitral process.

The fact that a party has consented to arbitrate one dispute

before Arbitrator Smith and an unrelated dispute, albeit

with the same antagonist, before Arbitrator Jones doesn’t

mean that he’s agreeable to having Jones arbitrate the first

dispute or Smith the second. Hence the rule that consolidation of arbitrations is permissible only if the arbitration

clauses authorize it. Connecticut General Life Ins. Co. v. Sun

Life Assurance Co., 210 F.3d 771, 773-74 (7th Cir. 2000); Champ

v. Siegel Trading Co., 55 F.3d 269, 274-75 (7th Cir. 1995);

Hartford Accident & Indemnity Co. v. Swiss Reinsurance America

Corp., 246 F.3d 219, 229-30 (2d Cir. 2001).

But that is in general, and this case is special. The suit was

filed in 1997 and the following year the defendants began an

arbitration proceeding against the plaintiffs to resolve a

dispute over one of the Jarnis investments. It was in that

proceeding that the arbitrator to whom we have been referring throughout this opinion (a Chicago lawyer named

Robert Grossman) was selected, with the agreement of the

defendants. When in the present suit the district judge—at

the defendants’ request—ordered arbitration, the plaintiffs
Nos. 03-4171, 03-4173, 03-4175, 03-4194 11

filed the claim on which their suit was based as a counterclaim in the first arbitration proceeding, the one the defendants had initiated, and the arbitrator accepted the filing.

The defendants contend that this was improper because

there were different parties in the two arbitration proceedings and the issues were different as well.

The difference in parties has no significance, since the

additional parties to the counterclaim were under common

control with the parties to the original claim. The defendants

point out that some of these parties are trusts and that trustees

have a fiduciary duty to their beneficiaries. But trustees can

consent to join forces with others in a litigation and delegate

control to one or more of those others, who may have a

larger stake or better counsel. In effect the trustee as principal

hires an agent, and there is no doubt that like other principals a trustee can delegate authority to agents. Illinois

Conference of Teamsters & Employers Welfare Fund v. Mrowicki,

44 F.3d 451, 463 (7th Cir. 1994). If a trustee is careless or

disloyal in delegating, the beneficiaries may have a grievance against him, but parties that represent to the court that

they have been authorized to control the entire litigation, as

the defendants did here, cannot later repudiate their representation in an effort to obtain a favorable judgment; that

would be a fraud on the court. Cf. Jankowski Lee & Associates

v. Cisneros, 91 F.3d 891, 896 n. 2 (7th Cir. 1996); Davenport

Recycling Associates v. Commissioner, 220 F.3d 1255, 1261-62

(11th Cir. 2000).

The issues in the two arbitrations, as far as we can judge,

weren’t different, but if they were, we can’t see why that

should matter when the defendants consented to have

Grossman preside in both arbitrations. Since the parties in

interest were the same, and the arbitrator the same, it made

perfect sense to consolidate the proceedings. The defendants’
12 Nos. 03-4171, 03-4173, 03-4175, 03-4194

objection is understandable only as a tactical effort to derail

an arbitration that they lost.

The third arbitration, instituted in 1998 by an entity controlled by the defendants (29-31 Associates), sought overdue

rent from a partnership controlled by the plaintiffs. The

issues presented by this claim did not overlap those presented by the other claims. Nor were the parties the same.

But they were all under the control of the parties to the

other arbitrations and to this lawsuit, and once again the

defendants consented to have Grossman arbitrate. Nevertheless, there was neither complete diversity nor a federal

question; and an arbitration award cannot be enforced in

federal court unless the dispute giving rise to the award

would have been within the court’s jurisdiction to resolve

had the dispute given rise to a lawsuit rather than to an

arbitration. Moses H. Cone Memorial Hospital v. Mercury

Construction Corp., 460 U.S. 1, 25 n. 32 (1983).

But there is a wrinkle. The arbitrator awarded several million dollars to the claimant in this third arbitration— which

meant, in effect, to the defendants, who control the

claimant—and having done so he then imposed a lien on

that award to secure payment to the plaintiffs of the amount

that he had awarded them in the other consolidated proceedings. So if, as argued in William A. Fletcher, “ ‘Common

Nucleus of Operative Fact’ and Defensive Set-Off: Beyond

the Gibbs Test,” 74 Ind. L.J. 171, 172-78 (1998); see also United

States for Use and Benefit of D’Agostino Excavators, Inc. v.

Heyward-Robinson Co., 430 F.2d 1077, 1081 n. 1 (2d Cir. 1970);

6 Charles Alan Wright, Arthur R. Miller & Mary Kay Kane,

Federal Practice and Procedure § 1422 (2004 supp.); 3 James

Wm. Moore, Moore’s Federal Practice-Civil § 13.31 (3d ed.,

2004 supp.), a setoff, unlike the usual permissive counterclaim, doesn’t require an independent basis for federal

jurisdiction, jurisdiction over the third arbitration is secure.
Nos. 03-4171, 03-4173, 03-4175, 03-4194 13

Our view is that jurisdiction in such a case is possible but

not automatic, because the jurisdictional issue is governed

by 28 U.S.C. § 1367. That statute defines the supplemental

jurisdiction of the federal courts, which is to say their jurisdiction over matters related to matters over which federal

jurisdiction is explicitly conferred. Channell v. Citicorp Nat’l

Services, Inc., 89 F.3d 379, 384-86 (7th Cir. 1996); Jones v. Ford

Motor Credit Co., 358 F.3d 205, 212-14 (2d Cir. 2004). The

statute makes the exercise of supplemental jurisdiction discretionary with the district court. So if this arbitration were

instead a proceeding before the district court, it would be up

to the judge, subject only to light appellate review, to

determine whether to allow the setoff to be litigated before

him. It seems to us—we cannot find a case on the point—

that where the matter is before an arbitrator, the discretion

should be his to exercise, with due regard for the principle

that the scope of the arbitrator’s authority is defined by the

arbitration clause itself. The discretion was exercised here in

favor of allowing the setoff to be included in the consolidated arbitrations.

The defendants raise other objections to the arbitration

award. But though phrased as challenges to the arbitrator’s

authority, they are really objections to the merits of the

arbitrator’s rulings and thus fall outside the limited scope of

judicial review of arbitration.

The plaintiffs, joined by their lawyers, have cross-appealed

from the district judge’s denial of sanctions. We have nothing to add to her discussion of the issue. The defendants’

arguments, while highly technical and, in part for that reason, unpersuasive, are not frivolous.

29-31 Associates, the claimant in the third arbitration, has

appealed from the ruling that the arbitrator had jurisdiction

over it. It was not a party in the district court and has not

moved for intervention, so it is not a party in this court

either. Its appeal is dismissed.
14 Nos. 03-4171, 03-4173, 03-4175, 03-4194

The district court’s judgment confirming the award and

denying sanctions is

AFFIRMED.

A true Copy:

Teste:

 _____________________________

Clerk of the United States Court of 

Appeals for the Seventh Circuit 

USCA-02-C-0072—1-18-05