Opinion ID: 726572
Heading Depth: 3
Heading Rank: 2

Heading: The Immateriality of the Characterization of this Suit

Text: 37
38 For purposes of this appeal, we need not decide, however, whether, under state law, the HB entities are suing derivatively, directly on behalf of the Partnership, or directly as individuals. 5 As far as Rule 19 is concerned, state law is relevant only in determining the interests of those affected by the litigation. See Provident Tradesmens Bank & Trust Co. v. Patterson, 390 U.S. 102, 125 n. 22, 88 S.Ct. 733, 746 n. 22, 19 L.Ed.2d 936 (1968); Hertz v. Record Publishing Co., 219 F.2d 397, 399-400 (3d Cir.), cert. denied, 349 U.S. 912, 75 S.Ct. 601, 99 L.Ed. 1247 (1955). Once these interests are determined, federal law governs the balancing of interests in determining indispensability. See Patterson, 390 U.S. at 125 n. 22, 88 S.Ct. at 746 n. 22; Hertz, 219 F.2d at 400. Thus, even if the relevant state law requires joinder of a partnership in derivative actions and actions on behalf of the partnership in cases brought in the state's courts, that will not affect the balancing of interests under Rule 19. See Hertz, 219 F.2d at 399-400 (Even if, in a suit in a Pennsylvania court, such officers are indispensable as a procedural requirement, they are not necessarily indispensable in a federal court.). 39 Moreover, the characterization of this action as derivative or on behalf of the Partnership has no impact on our earlier analysis of the interests of the Partnership and the partners. The only significant consequence of such a characterization for determining the relevant interests is that the Partnership itself has a cause of action. But we considered the Partnership's potential cause of action and its implications in that earlier analysis. 40 We recognize that the Supreme Court has stated, in the corporations context, that the corporation is an indispensable party in stockholder derivative actions. See Ross v. Bernhard, 396 U.S. 531, 538, 90 S.Ct. 733, 738, 24 L.Ed.2d 729 (1970); Koster v. Lumbermens Mut. Casualty Co., 330 U.S. 518, 522 n. 2, 67 S.Ct. 828, 831 n. 2, 91 L.Ed. 1067 (1947); Davenport v. Dows, 85 U.S. (18 Wall.) 626, 627, 21 L.Ed. 938 (1873); see also Guerrino v. Ohio Casualty Insurance Co., 423 F.2d 419, 422 (3d Cir.1970). If meant as a general rule, this statement is in tension with the Court's admonitions that Whether a person is 'indispensable,' that is, whether a particular lawsuit must be dismissed in the absence of that person, can only be determined in the context of particular litigation, and that [t]here is no prescribed formula for determining in every case whether a person ... is an indispensable party. Provident Tradesmens Bank & Trust Co. v. Patterson, 390 U.S. 102, 118 & n. 14, 88 S.Ct. 733, 742 & n. 14, 19 L.Ed.2d 936 (1968) (citations and internal quotation marks omitted). But even if it is the rule that the corporation is indispensable in a shareholder's derivative action, the partnership context in general, and this case in particular, are distinguishable. 41 Unlike partnerships, the corporation's status as a distinct jural entity is deeply rooted in our law; the bright lines that come with this status are one of the corporate form's major attractions. Thus, a clear rule for joinder may be uniquely appropriate for the corporation context. And, generally, shares in corporations are much more quickly and easily transferred than partnership interests, making a determination of whether the aggregation of stockholder's interests sufficiently represents the corporation extremely difficult. Partnerships lack consistent entity-treatment, and, at least for small partnerships, the determination of whether the partners' interests align with those of the partnership is not difficult. In this case, the Partnership consists of essentially two (though formally three) members, and we are easily able to determine that the individual partners effectively represent the Partnership. 42
43 Of course, the state-law characterization of an action as derivative or on behalf of another might affect joinder via Rule 17. 6 Rule 17(a) states that [e]very action shall be prosecuted in the name of the real party in interest, and that an action shall be dismissed if the real party in interest is not substituted or joined. The Supreme Court, in stating that the corporation is an indispensable party in a stockholder's derivative action, stated that the corporation is the real party in interest. Ross v. Bernhard, 396 U.S. 531, 538, 90 S.Ct. 733, 738, 24 L.Ed.2d 729 (1970). We conclude, however, that Rule 17 does not require the Partnership's joinder even if the HB entities' claims are derivative or otherwise on behalf of the Partnership. 44 The real party in interest rule ensures that under the governing substantive law, the plaintiffs are entitled to enforce the claim at issue. See Lubbock Feed Lots, Inc. v. Iowa Beef Processors, Inc., 630 F.2d 250, 256-57 (5th Cir.1980); Virginia Elec. & Power Co. v. Westinghouse Elec. Corp., 485 F.2d 78, 83 (4th Cir.1973), cert. denied, 415 U.S. 935, 94 S.Ct. 1450, 39 L.Ed.2d 493, and cert. denied sub nom. Stone & Webster Engineering Corp. v. Virginia Elec. & Power Co., 415 U.S. 935, 94 S.Ct. 1450, 39 L.Ed.2d 493 (1974); 6A Charles Alan Wright, Arthur R. Miller & Mary Kay Kane, Federal Practice and Procedure § 1543, at 334 (2d ed. 1990). There may be multiple real parties in interest for a given claim, and if the plaintiffs are real parties in interest, Rule 17(a) does not require the addition of other parties also fitting that description. See Wright et al. supra, at 340; see also, e.g., Fed.R.Civ.P. 17(a) (An executor, administrator, guardian, bailee, trustee of an express trust, a party with whom or in whose name a contract has been made for the benefit of another, or a party authorized by statute may sue in that person's own name without joining the party for whose benefit the action is brought....). Thus, insofar as the HB entities are authorized to bring suit under Delaware law--even derivatively or otherwise on behalf of the Partnership--they are also real parties in interest. 45 This conclusion is informed by the fact that the original purpose of the real party in interest rule was permissive--to allow an assignee to sue in his or her own name. Fed.R.Civ.P. 17 Advisory Committee Notes to the 1966 Amendment. The modern function of the rule in its negative aspect is simply to protect the defendant against a subsequent action by the party actually entitled to recover, and to ensure generally that the judgment will have its proper effect as res judicata. Id. As noted above, any doubt as to the preclusive effect of this litigation on the Partnership can be resolved by protective provisions in the judgment. 46 In sum, this action may well not be derivative but, at all events, the characterization of the suit is immaterial to either Rule 19 or Rule 17. E. Manchester's Counterclaims 47 Manchester offers one reason for dismissal not relied on by the district court: that the Partnership is an indispensable party to Manchester's counterclaims but that joinder would destroy subject matter jurisdiction over the counterclaims because Manchester and the Partnership share citizenship in New Jersey. If Manchester cannot pursue its counterclaims without participation of the Partnership and the Partnership must be excluded from the litigation, Manchester would have a strong argument for dismissal. The third factor of Rule 19(b)--whether a judgment rendered in the person's absence will be adequate--considers the extent to which exclusion of an interested person would leave significant matters unadjudicated. See Provident Tradesmens Bank & Trust Co. v. Patterson, 390 U.S. 102, 111, 88 S.Ct. 733, 738-39, 19 L.Ed.2d 936 (1968) (We read the Rule's third criterion ... to refer to this public stake in settling disputes by wholes, whenever possible....). However, as we shall presently explain, the Partnership can be joined as to Manchester's counterclaims, without destroying subject matter jurisdiction. 48 Complete diversity is required only when federal court jurisdiction is exercised under the federal diversity jurisdiction statute, 28 U.S.C. § 1332. See State Farm Fire & Casualty Co. v. Tashire, 386 U.S. 523, 530-31, 87 S.Ct. 1199, 1203-04, 18 L.Ed.2d 270 (1967). Under the Constitution, diversity jurisdiction requires only minimal diversity among the parties, i.e., at least one defendant and one plaintiff need be citizens of different states. Id. Here the district court has statutory authority to exercise jurisdiction over Manchester's counterclaims under the supplemental jurisdiction statute, 28 U.S.C. § 1367. 49 28 U.S.C. § 1367 provides that, in general, if the district court has jurisdiction over one claim, it can maintain jurisdiction over claims that lack an independent basis of jurisdiction if those claims are so related to claims within the court's jurisdiction that they form part of the same case or controversy under Article III of the United States Constitution. 7 The rule applies even to claims asserted by or against additional parties. Id. Although the statute places certain limits on a court's ability to exercise supplemental jurisdiction over claims by or against non-diverse additional parties when the basis for the original claim is diversity jurisdiction, those limits only apply when the additional claims are brought by plaintiffs. See Development Finance Corp. v. Alpha Housing & Health Care, Inc., 54 F.3d 156, 160-61 (3d Cir.1995). 8 Indeed, we have specifically held that in a diversity action, the district court may exercise supplemental jurisdiction over a defendant's counterclaim against non-diverse parties joined as third-party defendants to the counterclaims. See In re Texas Eastern Transmission Corp. PCB Contamination Insurance Coverage Litig., 15 F.3d 1230, 1236-38 (3d Cir.), cert. denied sub nom. Texas Eastern Corp. v. Fidelity & Cas. Ins. Co., 513 U.S. 915, 115 S.Ct. 291, 130 L.Ed.2d 206 (1994). 50 Thus, the only remaining question is whether Manchester's counterclaims are so closely related to [the HB entities' claims] that they form part of the same case or controversy under Article III of the United States Constitution. Claims are part of the same case or controversy if they share significant factual elements. See Sinclair v. Soniform, Inc., 935 F.2d 599, 603 (3d Cir.1991) (Claims are part of the same constitutional case if they 'derive from a common nucleus of operative fact ....' ) (quoting United Mine Workers v. Gibbs, 383 U.S. 715, 725, 86 S.Ct. 1130, 1138, 16 L.Ed.2d 218 (1966)); White v. County of Newberry, 985 F.2d 168, 172 (4th Cir.1993) (The claims need only revolve around a central fact pattern.). 51 Manchester's counterclaims rely on essentially the same facts as does its defense to the HB entities' claims. Manchester's primary defense is that HB General's final capital call was ineffective because the Partnership could not commence construction as scheduled and thus that Manchester appropriately exercised its redemption option before the capital call was due. Manchester's counterclaims are that the Partnership, along with the HB entities and Vanderbilt Development Corporation (a Vermont corporation with its principal place of business in Vermont), breached the Partnership Agreement and the covenant of good faith and fair dealing due to its failure to recognize Manchester's right to redemption and its attempted conversion of Manchester's partnership interest into that of a subordinated creditor. Both the defense and the counterclaims require proof that construction was not commenced as scheduled; that, under the Partnership Agreement, Manchester had the right to exercise the redemption option; and that Manchester did exercise the redemption option. Manchester's counterclaims are thus within the supplemental jurisdiction of the district court. 9 52 In sum, joinder of the Partnership on the counterclaims will not destroy subject matter jurisdiction over the counterclaims even though Manchester and the Partnership share citizenship in New Jersey.