Court Opinion

ID: 8902107
Source: CourtListenerOpinion
Date Created: 2022-11-27 01:15:19.843124+00
Date Added: 2024-06-11T17:07:56.264754
License: Public Domain

JAMES HUNTER, III, Circuit Judge,
dissenting:
The issue in this case — whether the citizenship of limited partners should be “counted” when a limited partnership sues or is sued in a diversity action — has never before been examined in depth. The Second Circuit, in Colonial Realty Corp. v. Bache & Co., 358 F.2d 178 (2d Cir.), cert. denied, 385 U.S. 817, 87 S.Ct. 40, 17 L.Ed.2d 56 (1966) (per Friendly, J.), is the only court of appeals even to have addressed the question.1 Commentators have ignored it entirely. Yet the implications of our answer to the problem may be far-reaching indeed: all the states and the Virgin Islands have adopted the Uniform Limited Partnership *1263Act,2 and, if the majority’s view were to prevail, limited partnerships would effectively be foreclosed from federal diversity forums.3 Because I believe the majority’s analysis and result are incorrect, and because the dearth of other decisions on point means that this case may form the starting point for other courts’ analyses of the problem, I must respectfully dissent.
I agree with the majority, of course, that federal courts must have jurisdiction to act and that they should refrain from attempting to increase their own jurisdiction. Nonetheless, federal courts still have jurisdiction in diversity cases,4 and whatever the effect on our docket, I see no responsible alternative but to apply diversity standards in this case.
The majority and I do diverge in our conceptions of a unique business entity, the limited partnership. The majority groups limited partnerships together with general partnerships, while I believe it more appropriate to treat them as peculiar and distinct entities.
In a general partnership, each partner is jointly and equally responsible for the organization’s affairs. Each can sue on behalf of the partnership; Thus when a general partnership brings suit in federal court, alleging diversity jurisdiction, the court turns to state law and determines that each partner is jointly liable and responsible; therefore, each must be “counted” for diversity purposes.
In assimilating the treatment of limited partnerships to that of general partnerships, the majority applies this analysis in what we consider to be reverse order. According to the majority view, the court must examine the parties’ citizenship as a preliminary issue, and only then does capacity to sue become relevant.5 I fail to see, though, how a court knows whose citizenship to count without first determining who the parties are. By “parties” I mean real parties, those who have the capacity to bring suit, and in some cases where the categories diverge, those who are the real parties in interest.6 No one can examine citizenship in vacuo.
*1264Because limited partnerships are unique, albeit popular, creatures of (uniform) state law, I do not see how we can ignore the state law that shapes them. We must use state law on members’ rights and responsibilities before we can rationally decide whom to “count” for diversity. Cf. Miller v. Perry, 456 F.2d 63 (4th Cir. 1972) (deciding that administrator under state law is merely a nominal plaintiff); Bishop v. Hendricks, 495 F.2d 289 (4th Cir.), cert. denied, 419 U.S. 1056, 95 S.Ct. 639, 42 L.Ed.2d 653 (1974) (same). Thus I am not troubled, as the majority purports to be, by Judge Friendly’s decision in Colonial Realty, supra, to engraft “capacity-to-sue rules to the traditional requirements of diversity jurisdiction." Indeed, I can envision no other sensible way to proceed.
The Supreme Court has not even touched upon the topic. Although cases cited by the majority are venerable, they are not relevant. The argument rejected by the Court in Great Southern Fire Proof Hotel Co. v. Jones, 177 U.S. 449, 20 S.Ct. 690, 44 L.Ed. 842 (1900), was that a partnership should be given a separate “entity” status, apart from its individual members, for diversity. Moreover, the partnership, although denommated a limited partnership, was not the modern limited partnership, but was one where all the members had the same status. The Court rightly held that each member should be counted.7
Even as recently as United Steelworkers of America v. R. H. Bouligny, Inc., 382 U.S. 145, 86 S.Ct. 272,'15 L.Ed.2d 217 (1965), the only argument before the Court has been an “entity” argument. In Bouligny, the Court rejected the argument that, for diversity, a labor union could be treated as a “citizen.” The difficulties were legion; the Court would have to fashion, out of whole cloth, a test for ascertaining of which state the labor union, qua entity, would be a citizen; the local and national organization would complicate the matter. In sum, the Court felt such decisions better undertaken by the legislative branch.
Here we have no such problems. Just as with general partnerships it was state law that informed us to count each member’s citizenship, here, too, it is state law that informs us of the nature of these uniform limited partnerships and tells us we should look only to the general partners, since it is the general partners who function as ordi*1265nary partners — the limited partners are a distinct breed.
The purpose of limited partnerships is to allow some contributors of capital to be given a fixed return on their investment without having any voice in the management of the business.8 In return, the limited contributors are protected from the unlimited liability general partners face. As the Official Comments to section one of the Uniform Limited Partnership Act make clear:
[T]he person who contributes the capital, though in accordance with custom [is] called a limited partner, is not in any sense a partner. He is, however, a member of the association.
(Emphasis added).
In keeping with their restricted role, limited partners cannot take part in the management of the business,9 and cannot be included in a suit by or against the partnership. Section 26, adopted nationwide, provides:
A contributor, unless he is a general partner, is not a proper party to proceedings by or against a partnership, except where the object is to enforce a limited partner’s right against or liability to the partnership.
From time to time a limited partner has attempted to sue on behalf of the partnership. The general rule, however, works against them: the suits are dismissed,10 or the limited partner is deprived of his or her limited liability.11 Thus, the majority would have us take cognizance, for diversity purposes, of persons who, under state law, are clearly prohibited from taking part in a suit by or against the partnership. This, to me, appeals neither to logic nor to common sense.
I do not view an approach that will consider the unique nature of partnerships created under the Uniform Limited Partnership Act as an approach that will empower state legislators or courts to determine the perimeters of federal court jurisdiction. On a less grand scale, that “power” is familiar in, for example, cases where state law allows appointment of out-of-state executors.12 In that case, an executor can easily be chosen with diversity jurisdiction in mind. If so, the federal court has appropriate safeguards against “manufactured” jurisdiction.13 Here, it takes some imagina*1266tion to believe that limited partnerships would be created in deliberate anticipation of a need for diversity jurisdiction. But even if that did occur, the federal courts are equipped to deal with it, under 28 U.S.C. § 1359. Cf. Kramer v. Caribbean Mills, 394 U.S. 823, 89 S.Ct. 1487, 23 L.Ed.2d 9 (1969) (application of 28 U.S.C. § 1359 to collusive assignment).
Last, but certainly not least, the policies behind the congressional grant of diversity jurisdiction14 are well served by allowing these limited partnerships access to federal courts when all the general partners are diverse in citizenship from all the opposing parties. They are to the limited partnership what general partners are to traditional partnerships. If the latter are allowed to sue in diversity, the former should be, too.
I do not see this as carving out an exception to the traditional treatment of partnerships. These are not traditional partnerships, and I prefer to treat them as the distinct creatures they are. Thus, I respectfully dissent.

. In spite of the majority’s characterization of the opinion, the Colonial Realty court did more than assume that limited partners’ citizenship need not be considered:
[The district judge] correctly held that where, as here, there was diversity between the plaintiff and all the general partners of the defendant, identity of citizenship between the plaintiff and a limited partner was not fatal because under the applicable New York statute a limited partner “is not a proper party to proceedings by or against a partnership, except where the object is to enforce a limited partner’s right against or liability to the partnership.” In the absence of a claim of insolvency of the partnership, 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 183-84 (citations omitted) (emphasis added).
That this was not some oversight is supported by a subsequent reference, by the Second Circuit, in Woodward v. D. H. Overmyer Co., 428 F.2d 880 (2d Cir. 1970), cert. denied, 400 U.S. 993, 91 S.Ct. 460, 27 L.Ed.2d 441 (1971), where the court did consider the citizenship of each partner in a general partnership, and contrasted Colonial Realty as dealing with a limited partnership. Id. at 883.

. 6 Uniform Laws Annotated (Supp.1977 at 83).

. For instance, the Carlsberg Mobile Home Properties limited partnership has some 1500 limited partners, across the country.

. See Chief Justice Burger’s announcement that the Judicial Conference of the United States will recommend to Congress that diversity jurisdiction be abolished, reported in Public Information Office of the United States Supreme Court release of March 11, 1977.

. The majority implies that the Supreme Court has followed this approach, see majority opinion, footnote 24 and accompanying text, but I read those cases as referring to an entirely different argument — to wit, that an organization need not be afforded “entity” status for diversity purposes merely because state law allows the organization to be pleaded as a party. Here, on the other hand, there is no issue of “entity” status. We are asked only which persons composing the group are to be counted for diversity purposes.

. As the majority opinion indicates, in its footnote 24, capacity to sue is a separate problem from that of determining diversity jurisdiction. Nevertheless, capacity to sue — as dictated by state law — generally selects the proper parties, for diversity purposes.
In McSparran v. Weist, 402 F.2d 867 (3d Cir. 1968), cert. denied sub nom. Fritzinger v. Weist, 395 U.S. 903, 89 S.Ct. 1739, 23 L.Ed.2d 217 (1969), the court had to consider an exception to its rule that the party who has the capacity to sue, under state law, is the one whose citizenship will be determinative for diversity, a rule set out in Fallat v. Gouran, 220 F.2d 325 (3d Cir. 1955), discussed in 6 C. Wright and A. Miller, Federal Practice and Procedure § 1566 (1971). The exception in McSparran was “a naked arrangement for the selection of an out-of-state guardian in order to prosecute a diversity suit.” 402 F.2d at 875. Relying on 28 U.S.C. § 1359, this court held the guardian collusively joined, and not the real party in interest. See id. at 874 (“since he is acting in the capacity of a straw party we refuse to recognize his citizenship for purposes of determining diversity jurisdiction”). Thus the court looked to the citizenship of the minor, the real party in interest, for 'diversity citizenship. Fallat was disapproved only to the extent that it indicated approval of “manufactured” diversity. 402 F.2d at 876.
In the other case, Underwood v. Maloney, 256 F.2d 334 (3d Cir.), cert. denied, 358 U.S. 864, 79 S.Ct. 93, 3 L.Ed.2d 97 (1958), this court clearly followed state law as required by Fed.R. Civ.P. 17(b);
In actions brought in a United States district court where jurisdiction is based on diversi*1264ty, the capacity of persons to sue or be sued is determined by the law of the state in which the district court sits.
Id. at 341. State law in that diversity case would allow labor unions to sue or be sued only as an entity, not as a class. Thus the federal court could not allow a class suit; when examined as an “entity” for diversity purposes, each member’s citizenship had to be considered, just as in United Steelworkers of America v. R. H. Bouligny, Inc., 382 U.S. 145, 86 S.Ct. 272, 15 L.Ed.2d 217 (1965). We followed state law:
In states where an unincorporated association can neither sue nor be sued as a class, it necessarily follows that the individual members of an association lack the capacity to sue or to be sued as class representatives of the unincorporated association.
Id. at 342. No argument was made that state law would differentiate among the members, giving only some the capacity to sue.

. Chapman v. Barney, 129 U.S. 677, 9 S.Ct. 426, 32 L.Ed. 800 (1889) also faced, and rejected, an “entity” argument. Nowhere did the Court indicate, as the majority suggests, that an argument had been made that only the president’s citizenship should be considered. The entire discussion is as follows:
On looking into the record we find no satisfactory showing as to the citizenship of the plaintiff. The allegation of the amended petition is, that the United States Express Company is a joint stock company organized under a law of the State of New York, and is a citizen of that State. But the express company cannot be a citizen of New York, within the meaning of the statutes regulating jurisdiction, unless it be a corporation. The allegation that the company was organized under the laws of New York is not an allegation that it is a corporation. In fact, the allegation is, that the company is not a corporation, but a joint-stock company — that is, a mere partnership. And, although it may be authorized by the laws of the State of New York to bring suit in the name of its president, that fact cannot give the company power, by that name, to sue in a Federal court.
Id. at 682, 9 S.Ct. at 428 (final emphasis added). Thus, the Court did not consider an argument that because state law gave only the president the capacity to sue, only the president’s citizenship should matter. The rights and liabilities of the members were not an issue.

. The idea is not new. The Uniform Act is based largely on New York’s limited partnership statute adopted in 1822. That in turn derived from the French Societe en Commandite whose origins may in turn date back to 1166. See generally 65 Colum.L.Rev. 1463 (1965).
Interestingly enough, the civil commandite prototype was given entity status for diversity purposes by the Supreme Court in Puerto Rico v. Russell & Co., 288 U.S. 476, 53 S.Ct. 447, 77 L.Ed. 903 (1933). In Bouiigny the Court refers to this as a problem of “fitting an exotic creation of the civil law, the sociedad en comandita, into a federal scheme which knew it not.” 382 U.S. at 151, 86 S.Ct. at 275.

. Uniform Limited Partnership Act § 7. In fact, the name of a limited partner cannot appear in the partnership name. Uniform Act § 5.

. See, e.g., Riviera Congress Associates v. Yassky, 25 A.D.2d 291, 268 N.Y.S.2d 854, aff'd, 18 N.Y.2d 540, 277 N.Y.S.2d 386, 223 N.E.2d 876 (1966), where the limited partners first instituted the suit in the partnership name, thus exposing each of them to general liability. To avoid that, they changed the caption to include the names of the limited partners, as a class action. But the court held that to be a violation of section 26, saying “[t]he action could not thereafter be maintained.” 25 A.D.2d at 296, 268 N.Y.S.2d at 859.
On appeal, the New York Court of Appeals faced the increasingly problematical issue of limited partners’ rights when the general partners wrongfully refuse to bring suit. New York has authorized derivative suits in those instances. See Riviera, supra, 277 N.Y.S.2d at 391, 223 N.E.2d at 879. That procedure has been adopted by the New York legislature, as well as by Delaware, and is a 1976 proposed revision to the Uniform Limited Partnership Act. If such derivative suit were brought in diversity, then it might be appropriate to look at the citizenship of the limited partners. But that is not our case today.

. See e.g., Bedolla v. Logan & Frazer, 52 Cal.App.3d 118, 128, 125 Cal.Rptr. 59, 66 (1975) (general rule that limited partner cannot sue without becoming liable as a general partner).

. See footnote 5 supra.

. Id.

. I refer in particular to the assurance of impartiality to out-of-state litigants.