Court Opinion

ID: 2964474
Source: CourtListenerOpinion
Date Created: 2015-09-21 21:26:13.606139+00
Date Added: 2024-06-11T11:42:56.836380
License: Public Domain

USCA1 Opinion

	

                                [Not For Publication]
                            United States Court of Appeals
                            United States Court of Appeals
                                For the First Circuit
                                For the First Circuit
                                 ____________________

        No. 96-1698

                                  GEORGE A. HIGGINS,

                                Plaintiff, Appellant,

                                          v.

                           ERIC EICHLER AND PETER DILULLO,

                                Defendants, Appellees.

                                 ____________________

                     APPEAL FROM THE UNITED STATES DISTRICT COURT

                          FOR THE DISTRICT OF MASSACHUSETTS

                     [Hon. Robert E. Keeton, U.S. District Judge]
                                             ___________________

                                 ____________________

                                        Before

                           Stahl and Lynch, Circuit Judges,
                                            ______________

                            and Woodlock,* District Judge.
                                           ______________

                                 ____________________

            Douglas G. Moxham, with whom Anthony  E. Kilbridge and Lane Altman
            _________________            _____________________     ___________
        & Owens LLP were on brief, for appellant.
        ___________

            Helen Mandel Braverman,  with whom David L. Braverman,  Fellheimer
            ______________________             __________________   __________
        Eichen  Braverman & Kaskey, Thomas  C. O'Konski, and  Cesari & McKenna
        __________________________  ___________________       ________________
        were on brief, for appellant
                                 ____________________
                                  DECEMBER 17, 1996
                                 ____________________
        ____________________
        *Of the District of Massachusetts, sitting by designation. 

                      LYNCH,   Circuit  Judge.    The  plaintiff,  George
                      LYNCH,   Circuit  Judge.
                               ______________

            Higgins, and the defendants,  Eric Eichler and Peter DiLullo,

            are general partners in a number of real estate partnerships.

            Higgins, a  "national" partner who had been  involved in over

            ninety partnerships,  retired from  active management of  the

            partnerships  in  1988  but  continues to  own  interests  in

            several of the partnerships.   After his retirement, Higgins'

            relationship with Eichler and  DiLullo apparently soured.  In

            August  of 1995,  Higgins  sued his  partners  in the  United

            States District  Court for  the District of  Massachusetts on

            the theory that  they had breached their fiduciary  duties to

            him  by  implementing  a   scheme  to  prevent  Higgins  from

            receiving his  share of the partnerships'  proceeds.  Higgins

            also   sued  Eichler   and  L.P.   Corporation  ("L.P."),   a

            Pennsylvania close corporation formed by the partners for the

            purpose of  performing  accounting functions  and  cash  flow

            management for the various partnerships, in the United States

            District Court for the Eastern District of Pennsylvania.

                      Defendants  moved  to  dismiss   the  Massachusetts

            action,  and asked, in the alternative, for this action to be

            transferred to  the Pennsylvania court pursuant  to 28 U.S.C.

              1404(a).   Defendants argued  that the complaint  should be

            dismissed because, among other defects,  it failed to state a

            claim  upon which  relief  could be  granted.   According  to

            defendants,  the gravamen  of plaintiff's complaint  was that

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            the value  of his Individual Partnership  Account ("IPA") was

            less  than it should  be.  However,  defendants asserted, the

            flow  of funds to Higgins'  IPA was regulated  by a contract,

            the Netting Out Agreement ("NOA"), to which Higgins and  L.P.

            were  the   only  parties.    Therefore,  defendants  argued,

            Higgins' claim could not run against Eichler and  DiLullo, as

            they were not parties to Higgins' NOA.

                      The  Massachusetts court  dismissed the  action for

            failure  to state a  claim.1  See  Fed. R.  Civ. P. 12(b)(6).
                                          ___

            The court found that  the alleged injury was not  "within the

            scope of any particular real estate partnership," and instead

            was caused by the corporation, L.P.  The court opined that no

            claim  for  breach of  fiduciary duty  owed  to Higgins  as a

            partner was stated.  The court indicated that plaintiff might

            have  a breach of contract  action against L.P.,  which was a

            necessary party to such a claim, but noted that plaintiff had

            not offered any evidence that the Massachusetts federal court

            would   have   jurisdiction   over   L.P.,   a   Pennsylvania

                                
            ____________________

            1.  The district court  declined to treat  the motion as  one
            for   summary  judgment   although   the  parties   submitted
            additional materials  and  affidavits.   Plaintiff  complains
            that  the  district  court selectively  chose  certain  facts
            submitted  by  defendants  to  support  the  dismissal, while
            ignoring other  facts in  the supplemental  submissions which
            were favorable to his  claim.  Because we resolve  the issues
            presented on other grounds, we find it unnecessary to resolve
            this claim of procedural error.  Plaintiff does not object to
            this court's consideration of the NOA, which is referenced in
            the complaint  and is central to it.   See Fudge v. Penthouse
                                                   ___ _____    _________
            Int'l,  Ltd., 840 F.2d  1012, 1015 (1st  Cir.), cert. denied,
            ____________                                    ____________
            488 U.S. 821 (1988).

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            corporation.  We  reverse and  remand to  the district  court

            with  instructions  to  transfer  the  case  to  the  Eastern

            District of Pennsylvania.

                      Our review of the allowance of a motion to  dismiss

            for  failure to  state  a claim  is  plenary.   See  Barrios-
                                                            ___  ________

            Velasquez  v. Asociacion  de Empleados,  84 F.3d  487, 489-90
            _________     ________________________

            (1st  Cir. 1996).  The allegations of the complaint are taken

            as true and all  reasonable inferences are drawn in  favor of

            Higgins.   See id.  We  will affirm the dismissal  only if it
                       ___ ___

            appears, to a certainty,  that there is no set  of facts upon

            which plaintiff may recover.  See Roma Constr. Co. v. aRusso,
                                          ___ ________________    ______

            96 F.3d 566, 569 (1st Cir. 1996).   

                      The  parties have largely argued Massachusetts law,

            without  a  full  briefing  as to  whether  Massachusetts  or

            Pennsylvania law  applies.  Because the parties  have pointed

            to no  material differences between the  law of Massachusetts

            and  the  law  of  Pennsylvania  as  to  partners'  fiduciary

            obligations, we look primarily to Massachusetts law.  

                      It is abundantly clear that partners owe each other

            a fiduciary duty.  See Wartski v. Bedford, 926 F.2d 11, 13-14
                               ___ _______    _______

            (1st Cir. 1991) (surveying  Massachusetts law).  The question

            here goes to  the extent of that duty.   "[P]artners owe each

            other  a  fiduciary  duty  of  'the  utmost  good  faith  and

            loyalty.'"   Id. at 13  (quoting Meehan  v. Shaughnessy,  535
                         __                  ______     ___________

            N.E.2d 1255, 1263 (Mass. 1989)).  "'As a fiduciary, a partner

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            must consider his or her partners'  welfare, and refrain from

            acting  for purely  private gain.'"    Id. at  13-14 (quoting
                                                   ___

            Meehan, 535 N.E.2d at 1263).
            ______

                      Provisions of the Uniform Partnership Act have been

            adopted by Massachusetts, notably that:

                      Every   partner   must  account   to  the
                      partnership for any benefit, and  hold as
                      trustee for it any profits derived by him
                      without the consent of the other partners
                      from any transaction  connected with  the
                      formation, conduct or liquidation  of the
                      partnership or from any use by him of its
                      property.

            Mass. Gen. L. ch. 108A,   21(1).2

                      Against   these  standards,  we  review  the  facts

            alleged, drawing all reasonable inferences for the plaintiff.

            We discuss only those facts alleged necessary to test whether

            a claim  has  been stated.     From  the allegations  of  the

            complaint, it would be reasonable to infer that the myriad of

            various  real  estate  partnerships   in  which  the  parties

            invested were treated, for some purposes, as a single  entity

            and that  the participants  regarded each other  as partners.

            Higgins alleges  that Eichler,  as chairman of  the partners'

            "Executive Committee," and assisted by DiLullo, exercised  de

            facto  control  over   the  partnerships.     The  accounting

            functions of  the partnerships in toto were performed by L.P,
                                           __ ____

            a corporation created for  that purpose under the NOA.   Each

                                
            ____________________

            2.  Pennsylvania law contains an identical provision.  See 15
                                                                   ___
            Pa. Cons. Stat. Ann.   8334(a).

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            partner  entered into a separate  NOA with L.P.   Pursuant to

            the NOA, partnership proceeds  were paid into partners' IPAs.

                      In  1993, Eichler  and DiLullo,  as members  of the

            Executive Committee,  implemented a  program called the  "IPA

            Cleanup Program."  The Cleanup Program generally operated for

            the benefit of active  -- as opposed to retired  -- partners.

            Under  the  program, uncollectible  debts  owed  by insolvent

            partners to the partnerships were forgiven, and the resulting

            losses were allocated to  the IPAs of solvent  partners, thus

            allowing the active solvent  partners to take tax deductions.

            Additional  debt  forgiveness  adjustments were  made  to the

            partners' IPAs in 1994.

                      Higgins  did not  consent  to these  changes.   The

            Cleanup Program  was implemented  anyway and $1.8  million in

            losses  was  allocated to  Higgins'  account.   As  a result,

            Higgins, rather than having a positive balance in his IPA and

            receiving  income  from  his  investments, was  left  with  a

            negative balance and did not receive any partnership draws.

                      Higgins' complaint  alleges  that the  IPA  Cleanup

            Program was a self-dealing scheme  by Eichler and DiLullo and

            constitutes  a breach  of their  fiduciary duty  as partners.

            Defendants contend that their fiduciary duties ended when the

            partnership income  was transferred  to L.P. and  that, while

            plaintiff may have a cause of  action against L.P., he has no

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            claim of breach of fiduciary duty against them.  The district

            court  agreed   with   the  defendants,   holding  that   the

            defendants' actions were outside the scope of the partnership

            because  the  relevant  acts,  even if  attributable  to  the

            defendants, were performed in their role as officers of L.P.,

            an entity  separate, in the  district court's view,  from the

            partnerships.

                      This  is, in our  estimation, too narrow  a view of

            the  allegations,  as the  record  now  stands unfocussed  by

            factual  development, and the law.  It is reasonable to infer

            that  the  functions   performed  by  L.P.   were  accounting

            functions   previously   performed   by    the   partnerships

            themselves; that L.P. was established for the sole purpose of

            administering those  functions; that L.P. simply  received in

            partnership income and then distributed it out; and that L.P.

            was merely an  agent of the  partnerships.  These  inferences

            are supported by the NOA  itself, which states that  "Partner

            and Participants have selected  [L.P.] as the business entity

            to  conduct  day  to   day  operations,  perform   accounting

            functions  and  to assist  in  cash  planning  and cash  flow

            management  for  the  Enterprises."  Higgins'  NOA,  although

            executed  only  by  Higgins   and  L.P.,  is  also  expressly

            conditioned  on  all  of  the  participants  in  the  various

            partnerships  signing identical  agreements, and  states that

            these agreements  "shall be  for the  mutual benefit of  such

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            executing Participants, Agent, Partner and  the other parties

            to  such agreements."   Plaintiff also alleges  that L.P. was

            under the control of the defendants and did what they wanted.

            The NOA  itself can be read  to suggest that L.P.  on its own

            had no authority  to execute a scheme such as the IPA Cleanup

            Program.   It was pursuant to that scheme that plaintiff was,

            he alleges, deprived of  partnership income owed to him.   It

            thus  may  be inferred  that L.P.,  rather  than acting  as a

            separate entity with regard to the alleged scheme, was merely

            an arm or instrumentality of the partnerships.

                      The   Supreme   Judicial  Court   of  Massachusetts

            recently  upheld a jury verdict  in a case  involving a claim

            that two  law partners had deprived the  plaintiff partner of

            his  fair share  of partnership  proceeds by  choosing unfair

            methods  of accounting  for  partnership profits.   Starr  v.
                                                                _____

            Fordham, 648 N.E.2d  1261 (Mass. 1995).  The court recognized
            _______

            the  potential for  self-dealing  where certain  partners  in

            essence control the distributions to another partner:

                      The  founding  partners were  responsible
                      for  dividing  the partnership's  profits
                      and   assigning   to  each   partner  his
                      respective share of  the profits.   Thus,
                      the  founding  partners  had  some  self-
                      interest  in  designating each  partner's
                      respective share of  the profits  because
                      the percentage of profits which they were
                      assigning to  the  other partners  had  a
                      direct  effect on their own percentage of
                      the profits.

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            Id. at 1265.   Accordingly,  the court placed  the burden  of
            ___

            proving  that the  distribution of  profits  was fair  on the

            defendants.  Id.
                         ___

                      We  are  unprepared to  say,  in the  context  of a

            motion  to   dismiss,  that  Massachusetts  law  would  never

            recognize  a claim  for  breach of  fiduciary duty  where, as

            described above, the  instrument used to deprive a partner of

            his partnership income was simply an arm  of the partnership,

            and was under the control of the defendant partners.

                      We think it better that the  questions in this case

            be resolved  in the  context of further  factual development.

            As Justice  Frankfurter stated in  SEC v. Chenery  Corp., 318
                                               ___    _____________

            U.S. 80 (1943):

                           [To] say  that a man is  a fiduciary only
                           begins the analysis;  it gives  direction
                           to  further inquiry.    To whom  is he  a
                           fiduciary?  What obligations does  he owe
                           as a  fiduciary?  In what  respect has he
                           failed  to  discharge these  obligations?
                           And  what  are  the  consequences  of his
                           deviation from duty?

            Id. at  85-86.   Therefore, we  reverse the  district court's
            __

            grant of defendants' motion to dismiss.

                      Plaintiff now joins defendants in asking that  this

            case be transferred to the Pennsylvania district  court.  The

            action  filed by  Higgins in  that court against  Eichler and

            L.P. is substantially  related to the  present action.   "The

            pendency of related  litigation in another forum is  a proper

            factor  to  be  considered   in  resolving  choice  of  venue

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            questions," Codex  Corp. v. Milgo Electronic  Corp., 553 F.2d
                        ____________    _______________________

            735, 739 (1st Cir.),  cert. denied, 434 U.S. 860  (1977), and
                                  ____________

            may  be  decisive  where,   as  here,  neither  party  raises

            convenience objections.  See id.  Additionally, transfer will
                                     ___ ___

            resolve  the   various   jurisdictional  issues   raised   by

            defendants in their motion to dismiss.

                      Accordingly, on remand,  the district court  should

            transfer this action to the United States  District Court for

            the Eastern District of  Pennsylvania as a companion case  to

            the suit Higgins has already filed there.

                      Reversed and remanded with instructions. 
                      ________________________________________

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