Opinion ID: 3010125
Heading Depth: 2
Heading Rank: 4

Heading: Derivative Actions

Text: The district court and Manchester also attach much significance to whether this action is a derivative action. In their view, the HB entities' action is derivative and they believe this provides a special reason that the Partnership must be joined. They cite to many cases finding the Partnership to be an indispensable party in derivative actions. See, e.g., Bankston v. Burch, 27 F.3d 164, 167-68 (5th Cir. 1994); Buckley v. Control Data Corp., 923 F.2d 96, 98 (8th Cir. 1991).
As a preliminary matter, we are not at all certain that this is a derivative action. It is true that Delaware courts have stated the general rule that whether an action is derivative or direct depends on whether the harm alleged by the plaintiff is independent of harm suffered by the corporation or partnership itself. See Kramer v. Western Pacific Industries, Inc., 546 A.2d 348, 351-52 (Del. 1988); Litman v. Prudential-Bache Properties, Inc., 611 A.2d 12, 15 (Del. Ch. 1992); see also generally 12B Fletcher's Cyclopedia of Corporations § 5911, at 483-84. And here the harm alleged by the HB entities -- breach of Manchester's obligation to provide capital to the Partnership -- was suffered by the partners only through its harm to the Partnership. But, in this case brought by those in control of the Partnership, the action may still not be derivative. The derivative action device, with its attendant demand requirement, was developed to aid investors who have no control over a company redress harms to the company in the face of management's inaction. See Ross v. Bernhard, 396 U.S. 531, 534 (1970); 2 Bromberg & Ribstein, supra s 5.05(a), at 5:35 (The substantive distinction [between direct] enforcement of a partnership right by fewer than all the partners [and a derivative action] is not always clear but seems to be this: In a derivative suit, the plaintiff partner is typically acting against the wishes of those partners who have decisionmaking authority for enforcement of the partnership right . . . .); see also Del. Code Ann. tit. 6, § 17-0001 (stating, in the subchapter entitled Derivative Actions, A limited partner may bring an action in the Court of Chancery in the right of a limited partnership to recover a judgment in its favor if general partners with authority to do so have refused to bring the action or if an effort to cause those general partners to bring the action is not likely to succeed.) (emphasis added). Here, the action was brought in part by the general partner, who has authority to act for the Partnership. In Delaware, general partners have the power to sue directly on behalf of the partnership on the partnership's claims. See Thompson Door Co. v. Haven Fund, 351 A.2d 864, 865 (Del. 1976) (Each [general] partner has the power to use ordinary legal process to enforce obligations owed the partnership and therefore may engage counsel to sue on behalf of the firm.); Partnership Agreement § 6.1, App. 142 (Subject to certain limitations, the General Partner is authorized, in furtherance of the business of the Partnership, to make decisions, take actions and enter into and perform contracts of any kind necessary, proper, convenient or advisable to effectuate the purposes of the Partnership.); 4 Bromberg & Ribstein, supra § 15.02(b), at 15:13, & § 15.02(e), at 15:16 to 15:17. The power to sue on behalf of a partnership does not mean that the partnership itself must be named as a party: although Delaware has a common name statute, allowing partnerships to sue and be sued in the partnership name, see Del. Code Ann. tit. 10, § 3904, its use, although often convenient, is not mandatory. Furek v. University of Delaware, 594 A.2d 506, 513 (Del. 1991); see, e.g., Verlaque v. Charles A. Zonko Builder, Inc., 1989 WL 112029 (Del. Super. Ct. Sept. 11, 1989) (action brought by plaintiff individually and on behalf of a partnership). Thus, the HB entities can sue directly to enforce Manchester's obligation to the Partnership, and do not need to resort to a derivative action. Another reason this action may not be derivative is that the HB entities may have the right to bring suit directly as individuals. The basis for any cause of action here is Manchester's alleged breach of the Partnership Agreement. Both HB General and HB Limited are parties to the agreement, and breach of a Partnership Agreement has been held to constitute an individual as well as a partnership claim. See 4 Bromberg & Ribstein, supra § 15.04(h), at 15:37 & n.35. Thus the HB entities can bring this suit through a number of different means, and the action need not be characterized as derivative. 2. The Immateriality of the Characterization of this Suit
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. 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 (1968); Hertz v. Record Publishing Co., 219 F.2d 397, 399-400 (3d Cir.), cert. denied, 349 U.S. 912 (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; 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.). 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. 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 (1970); Koster v. Lumbermens Mut. Casualty Co., 330 U.S. 518, 522 n.2 (1947); Davenport v. Dows, 85 U.S. (18 Wall.) 626, 627 (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 (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. 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.
Of course, the state-law characterization of an action as derivative or on behalf of another might affect joinder via Rule 17. 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 (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. 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, and cert. denied sub nom. Stone & Webster Engineering Corp. v. Virginia Elec. & Power Co., 415 U.S. 935 (1974); 6A Charles Alan Wright et al., 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. 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. 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.