* District Judge of the Eastern District of Texas, sitting by

designation.

1 United States Court of Appeals,

Fifth Circuit.

No. 93-1596.

James G. BANKSTON, Independent Executor of the Estate of W.O.
Bankston, substituted in place and stead of W.O. Bankst on, deceased, Plaintiff-Appellee,

v.

William L. BURCH, Individually and as general partner of The Kona Hills Estates, a Hawaii Limited Partnership, Defendant-Appellant.

July 29, 1994.

Appeal from the Uni ted States District Court for the Northern

District of Texas.

Before WISDOM and JONES, Circuit Judges, and COBB, * District Judge.

WISDOM, Circuit Judge:

The general partner of a limited partnership appeals from the

district court's judgment in a derivative lawsuit brought by a

limited partner. Because the claims the limited partner pleaded

derive from the partnership's rights, the partnership's citizenship

must be considered in determining whether federal diversity

jurisdiction exists. When the partnership's citizenship is taken

into account, there is no complet e diversity of citizenship.

Therefore, the district court lacked subject matter jurisdiction.

We REVERSE and REMAND and direct the district court to remand the

case to the state court from which it was removed.

I.

Only a few of the complex facts in this case are pertinent to1 W.O. Bankston died after the commencement of this lawsuit.

James G. Bankston, the executor of W.O. Bankston's estate, has been substituted on this appeal as the named plaintiff. All subsequent references to "Bankston" in this opinion refer to W.O.

Bankston.

2 See Carden v. Arkoma Assocs., 494 U.S. 185, 195-96, 110 S.Ct. 1015, 1021, 108 L.Ed.2d 157 (1990); Whalen v. Carter, 954 F.2d 1087, 1094-95 (5th Cir.1992).

2 this appeal. Plaintiff/appellee W.O. Bankston 1 is one of fourteen

limited partn ers in The Kona Hills Estates, a Hawaii limited

partnership ("Kona Hills" or "the partnership").

Defendant/appellant William L. Burch is the general partner. The

partnership was formed for the purpose of purchasing and developing

real estate in Hawaii. Bankston is a citizen of Texas; Burch, of

California. For purposes of federal diversity jurisdiction, the

partnership itself is considered a citizen of every state of which

a general or a limited partner is a citizen. 2

In 1990, Bankston sued Burch in Texas state court. Bankston's

original peti t ion stated claims for fraud or negligent

misrepresentation, breach of fiduciary duty, mismanagement and

waste of partnership assets, and breach of contract. Bankston also

sought an acc ounting, dissolution of the partnership, removal of

Burch as general partner, a temporary injunction against Burch's

further dissipation of partnership assets, a declaratory judgment

that some of Burch's expenditures were improperly charged against

the partnership, and punitive da mages. Bankston's original

complaint pleaded all causes of action as personal to Bankston

himself; Bankston's petition never represented that he brought any

claims on behalf of, or as a representative of, the partnership.3

On October 9, 1990, Burch removed the case to the United

States District Court for the Northern District of Texas based on

the diversity of citizenship between himself and Bankston. The

parties proceeded with discovery, and the case was set for trial.

Trial was scheduled to begin October 1, 1991.

The day before trial , Burch filed a motion to dismiss

Bankston's claims on the grounds that federal subject matter

jurisdiction was lacking, Fed.R.Civ.P. 12(b)(1). Burch first

alleged that Bankston lacked standing under the applicable Hawaii

statutes to press the claims pleaded against Burch. Burch also

argued that Bankston had "failed to join the Limited Partnership

and the individual limited partners in this action.... as

indispensable parties" under Fed.R.Civ.P. 19 and 12(b)(7).

The district judge considered Burch's motion in chambers on

September 30, 1991. Obviously troubled by the presentation of the

motion literally on the eve of trial, the district judge decided to

carry the motion with the case and proceeded to trial.

The case was tried to a jury October 1-3, 1991. The jury

verdict was for Burch on Bankston's claims that Burch reduced his

partnership interest and unreasonably refused to consent to

Bankston's proposed sale of his interest. The jury found that

Burch had charged a total of $623,050. 50 in personal or

unreasonable and excessive expenses to the partnership. It also

found that Burch had sent false and fraudulent statem ents to

Bankston in Texas and that Burch should be removed as general

partner. The jury found that Bankston's claims against Burch3 Specifically, the motion alleged that "Bankston's Original

Petition requested certain relief be awarded to Bankston for wrongs done to both him and the partnership." 2 Rec. 479. That sentence inaccurately characterizes Bankston's original petition. Until the filing of his Motion for Judgment, nothing in the record suggests that Bankston regarded the claims he asserted as derivative of the partnership's own rights.

4 Id. at 480; see also id. at 481 n. 3.

5 Fed.R.Civ.P. 12(h)(3).

4 accrued for limitations purposes in March 1986. Finally, the jury

found that Bankston was entitled to $250,000 in punitive damages.

On October 11, Bankston moved for entry of judgment and for

judgment notwithstanding the verdict on those claims rejected by

the jury. In this motion, Bankston for the first time acknowledged

that some of his claims were derivative in nature. 3 Bankston also

for the first time disclaimed an exclusive personal interest in the

damage awa rd, conceding that "any money or judgment received by

Bankston, in his name, for partnership claims would be held by him

as trustee or agent of the partnership". 4 Bankston's motion

represented, inaccurately, that his pleadings had involved

deriv ative claims all along. That attempted feat of legerdemain

would have allowed Bankston to rech aracterize Burch's pretrial

motion to dis miss—again, not accurately—as merely a challenge to

Bankston's capaci ty to bring derivative claims on behalf of the

partnership, rather than his standing to sue. The distinction is

important because objections to capac ity may be waived if not

timely asserted, but objections to standing are jurisdictional in

nature and can be raised at any time. 5

The district court accepted Bankston's reformulation of the6 Lenz v. Associated Inns & Restaurants Co. of Am., 833

F.Supp. 362, 379 (S.D.N.Y.1993). Bankston's original complaint included a demand for an accounting. The district court's final judgment which is before us for review, however, makes no mention of an accounting, and the parties' briefs do not discuss it. Plainly the derivative claims overwhelm any individual claim for an accounting in this case.

7 See, e.g., Haw.Rev.Stat. § 425D-1001. See generally 4 Alan R. Bromberg & Larry E. Ribstein, Bromberg & Ribstein on Partnership § 15.05 (1994); Debra E. Wax, Annotation, Right of

Limited Partner to Maintain Derivative Action on Behalf of Partnership, 26 A.L.R.4th 264 (1983).

5 case. It granted Bankston's motion for judgment, finding that

Burch had "confuse[d] the issue of standing with the defense of a

lack of capacity to sue", and ruled that Burch's " "improper

capacity' defense", even if valid, had been waived.

Burch appealed to this Court. He contends that the district

court had no subject matter jurisdiction to enter judgment on a

derivative claim. We agree.

II.

A. Derivative Claims by Limited Partners

Limited partners have less management responsibility for the

partnership than its general partners. With that reduced

responsibility and reduce d exposure to liability come reduced

individual rights. "It is well-settled," a New York federal court

recently obse rved, "that the only direct lawsuit against general

partners that a limited partner can bring in an individual,

non-r epresentative capacity consists of an action for an

accounting." 6

Limited partners can, if permitted by statute, sue

derivatively to enforce righ ts belonging to the partnership. 7 In8 Phillips v. Kula 200 II, 667 P.2d 261, 265

(Haw.Ct.App.1983). "A statutory authorization of derivative suits implies that limited partners may enforce partnership rights only

through a derivative suit." 4 Bromberg & Ribstein § 15.05(g)(7) (emphasis added).

9 See 6A Charles A. Wright, Arthur R. Miller & Mary K. Kane, Federal Practice & Procedure § 1542 (2d ed. 1990); cf. Fed.R.Civ.P. 17(a).

10 See 4 Bromberg & Ribstein § 15.05(g)(7), commenting that a limited "partnership is usually an indispensable party but may be named as a nominal defendant in a derivative suit" brought by a limited partner; 3B James W. Moore & John E. Kennedy, Moore's Federal Practice ¶ 23.1.21[1] (2d ed. 1994), noting that in a derivative lawsuit brought against a corporation, "the corporation is indispensable and must be joined as a party". In Buckley v. Control Data Corp., 923 F.2d 96, 98 (8th Cir.1991), a partnership case, the court, citing Moore, noted that "[i]t is well established that an entity on whose behalf a derivative claim is asserted is a necessary defendant in the derivative

action."

11 954 F.2d 1087 (5th Cir.1992).

6 such derivative lawsuits, the form of the lawsuit does not obscure

its substance: it is the p artnership's rights, not the limited

partner's, that the lawsuit seeks to vin dicate. 8 Because the

partn ership possesses the right sought to be enforced, the

partnership is, at a minimum, the real party in interest in a

derivative lawsuit. 9

B. Indispensability of the Partnership

In this case, the par tnership is even more than the real

party in interest—it is an indispensable party without whom the

lawsuit should not have gone forward. 10

In Whalen v. Carter, 11 we confronted the question whether a

partnership was an indispensable party in a lawsuit brought by

limited partners charging the managing pa rtners of a partnership12 Id. at 1096.

13 In Whalen, we also rejected the argument Bankston advanced at oral argument in this case based on Freeport-McMoRan, Inc. v.
K N Energy, Inc., 498 U.S. 426, 111 S.Ct. 858, 112 L.Ed.2d 951 (1991). Bankston argued that addition of a non-diverse party (the partnership) now would not destroy diversity jurisdiction because complete diversity existed among the named parties when the lawsuit was initially filed. The Freeport-McMoRan rule, however, requires that jurisdiction be proper "at the time [the]

action is commenced". Id. at 428, 111 S.Ct. at 859-60. Here, as

in Whalen, it was not; accordingly, Freeport-McMoRan has no application in this case.

14 923 F.2d 96 (8th Cir.1991).

7 wit h fraud. We concluded that it was. We first noted the four

factors identified in Fed .R.Civ.P. 19(b) as relevant to the

determination whether a party is indispensable:

(1) to what extent a judgment rendered in the party's absence might be prejudicial to that party or others in the lawsuit;
(2) the extent to which, by protective provisions in the judgment, by th e shaping of relief, or other measures, the prejudice can be lessened or avoided; (3) whether a judgment

rendered in the party's absence will be adequate; and (4)

whether the plaintiff will have an adequate remedy if the party cannot be joined. 12

We concluded that, on balance, the test favored holding the

partnership an indispensable party . We noted that the judgment

would prejudice the partnership's rights and that shaping the

relief provided inadequate protection to the partnership's

interest. We consider the reasoning of W halen sound and we follow

it today in holding that Kona Hills was an indispensable party in

Bankston's derivative lawsuit. 13

The Eighth Circuit reached a similar result in Buckley v.

Control Data Corp., 14 a case we find persuasive. In B uckley,

lim ited partners sued a general partner, alleging various15 See 13B Charles A. Wright, Arthur R. Miller & Edward H.

Cooper, Federal Practice & Procedure § 3606 (2d ed. 1984).

16 494 U.S. 185, 110 S.Ct. 1015 (1990).

17 Id. at 195-96, 111 S.Ct. at 1021.

8 derivative causes of action. The court ruled that the limited

partnership, as the holder of the rights from which the limited

partner s' claims derived, was an indispensable party to the

litigation. Although B uckley turned in part on the particularities

of Minnesota partnership law, its reasoning is of sound general

applicability and harmonious with the applicable Hawaii statutes in

this case.

It is undisputed that the partnership itself was never named

as a party in this case, either in state or federal court. That

does not control our jurisdictional inquiry, however. The inquiry

into the existence of complete diversity requires considering the

citizenship even of absent indispensable parties. 15 The parties may

not manufacture diversity jurisdiction by failing to join a

non-diverse indispensable party.

C. Diversity Jurisdiction and Limited Partnerships After Carden

The clear law after the Supreme Court's decision in Carden v.

Arkoma Associates 16 is that the citizenship of all partners, limited

as well as general, controls the citizenship of the limited

partnership itself. 17 Bankston suggests that we distinguish C arden,

because this case is in federal court on removal, rather than

having been originally filed in federal court. We find C arden

controlling. We have resisted attempts to carve exceptions from18 See Whalen, 954 F.2d at 1095, in which we stated:

Whalen.... complain[s] that if partnerships are always
to be considered citizens of the same states in which their partners are citizens, then partners could never assert diversity jurisdiction in a suit against the partnership.... [We] refuse to recognize ... an exception.

Other decisions declining to make exceptions to the general

rule of Carden include Temple Drilling Co. v. Louisiana Ins.

Guar. Ass'n, 946 F.2d 390, 393 (5th Cir.1991); Newport Ltd.
v. Sears, Roebuck & Co., 941 F.2d 302, 306-07 (5th Cir.), reh'g en banc denied, 946 F.2d 893 (5th Cir.1991), cert. denied, --- U.S. ----, 112 S.Ct. 1175, 117 L.Ed.2d 420
(1992).

19 See Strawbridge v. Curtiss, 7 U.S. (3 Cranch) 267, 2 L.Ed.
435 (1806).

20 Warren G. Kleban Eng'g Corp. v. Caldwell, 490 F.2d 800, 803 (5th Cir.1974).

9 Carden, even though we acknowledged that the decision effectively

closes the doors of the federal courts to many lawsuits among

partners or by partners against a partnership. 18

Under Carden, Kona Hills is a citizen of, at a minimum, Texas

and California. Because Bankston is a citizen of Texas, and

because Kona Hills is an indisp ensable party defendant for

Bankston's derivative claims, there is no complete diversity of

citizenship. 19 Accordingly, the district court lacked subject

matter jurisdiction over the claims Bankston asserted. We must,

therefore, reverse the district court's judgment and remand to the

district court with instructions to remand this case to the state

court from which it was removed. 20

III.

Bankston, anticipating our holding today, re quests that in21 Bankston relies on 28 U.S.C. § 1447(c), which provides in

part: "An order remanding the case may require payment of just costs and any actual expenses, including attorney fees, incurred

as a result of the removal."

10 the event of a remand we make an award of costs and attorneys' fees

in his favor. 21 Bankston argues that Burch's "dilatory" conduct in

removing the case to federal court cost Bankston three years of

fruitless effort.

We decline to make the requested award. Bankston himself

bears a substantial share of the responsibility for this case's

lengthy but futile sojourn in the federal courts. Had Bankston

pleaded hi s derivative claims as derivative claims, rather than

attem pting to cast them as personal to himself, the

indispensability of the partnership as a party would have been

immediately apparent.

We REVERSE the district court's judgment and REMAND the case

to the district court with instructions to remand the case to state

court.