Carden v. Arkoma Associates/Dissent O'Connor

by Sandra Day O'Connor

Justice O'CONNOR, with whom Justice BRENNAN, Justice MARSHALL, and Justice BLACKMUN join, dissenting.

The only potentially nondiverse party in this case is a limited partner. All other parties, including the general partners and the limited partnership itself, assuming it is a citizen, are diverse. Thus, the Court has before it a single question-whether the citizenship of a limited partner must be counted for purposes of diversity jurisdiction. The Court first addresses whether the limited partnership is a "citizen." I do not consider that issue, because even if we were to hold that a limited partnership is a citizen, we are still required to consider which, if any, of the other citizens before the Court as members of Arkoma Associates are real parties to the controversy, i.e., which parties have control over the subject of and litigation over the controversy. See Marshall v. Baltimore & Ohio R. Co., 16 How. 314, 328, 14 L.Ed. 953 (1854). Application of that test leads me to conclude that limited partners are not real parties to the controversy and, therefore, should not be counted for purposes of diversity jurisdiction.

* The Court asserts that "[w]e have long since decided" to leave to Congress the issue of the proper treatment of unincorporated associations for diversity purposes, because the issue of which business association "is entitled to be considered a 'citizen' for diversity purposes, and which of their members' citizenship is to be consulted, are questions more readily resolved by legislative prescription than by legal reasoning." Ante, at 197. That assertion is insupportable in light of Navarro Savings Assn. v. Lee, 446 U.S. 458, 100 S.Ct. 1779, 64 L.Ed.2d 425 (1980) (determination of which members of unincorporated business trust must be considered for purposes of diversity jurisdic tion), and even Steelworkers v. R.H. Bouligny, Inc., 382 U.S. 145, 86 S.Ct. 272, 15 L.Ed.2d 217 (1965) (determination of proper treatment of union for diversity jurisdiction purposes according to settled law; Congress has power to change result), on which the Court relies. Ante, at 196. Indeed, the Court in this case does not leave the issue to Congress, but rather decides the issue and then invokes deference to Congress to justify its newly formulated rule that the Court will, without analysis of the particular entity before it, count every member of an unincorporated association for purposes of diversity jurisdiction. In my view, the Court properly tackles the issue, because "application of statutes to situations not anticipated by the legislature is a pre-eminently judicial function." Currie, Federal Courts and the American Law Institute, 36 U.Chi.L.Rev. 1, 35 (1968); see also Bank of United States v. Deveaux, 5 Cranch 61, 87, 3 L.Ed. 38 (1809) ("The duties of this [C]ourt, to exercise jurisdiction where it is conferred, and not to usurp it where it is not conferred, are of equal obligation. The constitution, therefore, and the law, are to be expounded, without a leaning the one way or the other, according to those general principles which usually govern in the construction of fundamental or other laws").

The starting point for any analysis of who must be counted for purposes of diversity jurisdiction is Strawbridge v. Curtiss, 3 Cranch 267, 2 L.Ed. 435 (1806), in which the Court held that "complete diversity" is required among "citizens" of different States. Complete diversity, however, is not constitutionally mandated. See State Farm Fire & Casualty Co. v. Tashire, 386 U.S. 523, 530-531, 87 S.Ct. 1199, 1203-04, 18 L.Ed.2d 270 (1967) (statutory interpleader need not satisfy complete diversity requirement as long as there is diversity between two or more claimants); see also American Law Institute, Study of the Division of Jurisdiction Between State and Federal Courts § 1301(b)(2), Supporting Memorandum A, pp. 426-436 (1969). For example, in a class action authorized pursuant to Federal Rule of Civil Procedure 23, only the citizenship of the named representatives of the class is considered, without regard to whether the citizenship of other members of the class would destroy complete diversity or to the class members' particular stake in the controversy. See Snyder v. Harris, 394 U.S. 332, 340, 89 S.Ct. 1053, 1058, 22 L.Ed.2d 319 (1969); C. Wright, Law of Federal Courts 484 (4th ed. 1983); see also Owen Equipment & Erection Co. v. Kroger, 437 U.S. 365, 375, and n. 18, 98 S.Ct. 2396, 2403, and n. 18, 57 L.Ed.2d 274 (1978) (citizenship of parties joined under ancillary jurisdiction not taken into account for purposes of determining diversity jurisdiction); Wright, supra, at 28 (same).

Since the early 19th century, one of the benchmarks for determining whether a particular party among those involved in the litigation must be counted for purposes of diversity jurisdiction has been whether the party has a "real interest" in the suit or, in other words, is a "real party" to the controversy. See 6 C. Wright & A. Miller, Federal Practice and Procedure § 1556, p. 711 (1971) (well settled "citizenship rule testing diversity in terms of the real party in interest is grounded in notions of federalism"). See generally Note, Diversity Jurisdiction over Unincorporated Business Entities: The Real Party in Interest as a Jurisdictional Rule, 56 Texas L.Rev. 243, 247-250 (1978). In Wormley v. Wormley, 8 Wheat. 421, 5 L.Ed. 651 (1823), for example, the Court stated:

"This Court will not suffer its jurisdiction to be ousted by the mere joinder or non-joinder of formal parties; but will rather proceed without them, and decide upon the merits of the case between the parties, who have the real interests before it, whenever it can be done without prejudice to the rights of others." Id., at 451 (footnote omitted).

See also Wood v. Davis, 18 How. 467, 469, 15 L.Ed. 460 (1856) ("It has been repeatedly decided by this [C]ourt, that formal parties, or nominal parties, or parties without interest, united with the real parties to the litigation, cannot oust the federal courts of jurisdiction . . .").

The real party to the controversy approach has been implemented by the Court both in its oldest and in its most recent cases examining diversity jurisdiction with respect to business associations. In the Court's first examination of the corporate form to determine who must be counted for purposes of diversity jurisdiction, the Court invoked the real party to the controversy test and concluded that the citizenship of each shareholder must be counted for purposes of diversity jurisdiction. Bank of United States v. Deveaux, 5 Cranch, at 91-92. In Deveaux, the Court recognized that corporations had been considered as possessing "corporeal qualities," id., at 89, but concluded that the actual parties to the controversy were "the members of the corporation . . . who come into court, in this case, under their corporate name." Id., at 91. By 1854, the Court no longer characterized the corporation as merely possessing "corporeal qualities," but rather as a "juridical person," which made an even stronger case for recognizing a corporation as a proper party in its own right before the Court. See Marshall v. Baltimore & Ohio R. Co., 16 How., at 328; see also Louisville, C. & C.R. Co. v. Letson, 2 How. 497, 558-559, 11 L.Ed. 353 (1844) (corporation is a person; shareholders' citizenship will not be counted).

In Marshall, as in Deveaux, however, the determination whether the corporation was a citizen did not signal the end of the diversity jurisdiction inquiry. 16 How., at 328. Rather, the Court engaged in a two-part inquiry: (1) is the corporation a "juridical person" which can serve as a real party to the controversy, see id., at 327-329; and (2) are the shareholders real parties to the controversy. See id., at 328. To determine whether the corporation or the shareholders were real parties to the controversy, the Court considered which citizens held control over the business decisions and assets of the corporation and over the initiation and course of litigation involving the corporation. The corporation, as the representative body of the shareholders, itself had such power. The shareholders did not.

"[F]or all the purposes of acting, contracting, and judicial remedy, [shareholders] can speak, act, and plead, only through their representatives or curators. For the purposes of a suit or controversy, the persons represented by a corporate name can appear only by attorney, appointed by its constitutional organs. . . . [T]hey are not really parties to the suit or controversy." Ibid.

Having concluded that the shareholders were not the real parties to the controversy, the Court held that only the State of incorporation of the corporate entity need be counted for purposes of diversity jurisdiction and that the citizenship of the shareholders would be presumed to be that of the State of incorporation. Id., at 328-329. As the Court makes plain in Marshall, consideration of whether the shareholders were real parties to the controversy was a necessary prerequisite to the creation of the legal fiction that their citizenship would be deemed that of the corporation.

In a series of three cases considering the citizenship of business associations following Marshall, the Court was not called upon to determine which of the citizens before it were the real parties to the controversy because the business associations were not citizens themselves and the members of each association held equivalent power and control over the association's assets, business, and litigation. In Chapman v. Barney, 129 U.S. 677, 9 S.Ct. 426, 32 L.Ed. 800 (1889), the Court addressed the issue whether a joint stock company was a citizen for purposes of diversity jurisdiction. A joint stock company, now a historical anomaly, see A. Bromberg, Crane and Bromberg on Partnership 178, and n. 16 (1968), had several features of the corporate form, e.g., centralized management and transferability of shares, but was more like a general partnership in that each partner was personally liable and there was only one class of partners. See Comment, Limited Partnerships and Federal Diversity Jurisdiction, 45 U.Chi.L.Rev. 384, 389, and n. 32 (1978). Each "partner" had equal power over the conduct of the business by virtue of his power to elect and control the company's managers. Bromberg, supra, at 179, n. 19. The Court held that a joint stock company was a "mere partnership" and therefore not sufficiently similar to a corporation to justify designating it as a citizen. 129 U.S., at 682, 9 S.Ct., at 427. Hence, the citizenship of each owner had to be counted for purposes of diversity jurisdiction. Because the joint stock company owners were similarly situated in terms of power and control over the company and possessed all of the power that could be exercised over the company's business and litigation, and the company itself was not a citizen, the Court was not called upon to determine which of the citizens before it were the real parties to the controversy.

The Court applied a similar approach in Great Southern Fire Proof Hotel Co. v. Jones, 177 U.S. 449, 20 S.Ct. 690, 44 L.Ed. 842 (1900), when it examined a limited partnership association. Quite unlike the modern limited partnership, the limited partnership association at issue in Great Southern, recognized by very few States, Comment, 45 U.Chi.L.Rev., supra, at 389, n. 36, was a species of business association involving a single class of partners with limited liability who exercised control over the operation of the business by annually electing the managers of the association. See, e.g., 1874 Pa. Laws, Act. No. 153, §§ 2, 5; Comment, 45 U.Chi.L.Rev., supra, at 389, n. 36. Not surprisingly, the Court viewed such an organization as more like a partnership than a corporation. See F. Burdick, Law of Partnership 361-362 (1899) (limited partnership association like corporation in some respects, but generally treated by the courts as a general partnership). As in the case of the joint stock company, because all partners were similarly situated in terms of power and control over the company, there was no reason for the Court to inquire who, among the partners, were the real parties to the controversy.

In Steelworkers v. R.H. Bouligny, Inc., 382 U.S. 145, 86 S.Ct. 272, 15 L.Ed.2d 217 (1965), the Court addressed whether a labor union could be treated as an entity for purposes of diversity jurisdiction. The Court held that a labor union is not a juridical person and, therefore, not a citizen for purposes of diversity jurisdiction. See Mesa Operating Limited Partnership v. Louisiana Intrastate Gas Corp., 797 F.2d 238, 240-241 (CA5 1986) (union in Bouligny failed to meet party to controversy test). There was no indication that any of the union members had any greater power over the litigation or the union's business and assets than any other member, and, therefore, as in Chapman and Great Southern, the Court was not called upon to decide which of the citizens before it were real parties to the controversy.

In the next case, in which application of the real party to the controversy test was appropriate, the Court unanimously applied it. See Navarro Savings Assn. v. Lee, 446 U.S., at 460, 464-465, 100 S.Ct., at 1781, 1783-84; id., at 469, 475, 100 S.Ct., at 1786, 1789 (BLACKMUN, J., dissenting). In that case, the Court addressed the question whether the beneficiaries' citizenship must be counted when the trustees brought suit involving the assets of the trust. See id., at 458, 100 S.Ct., at 1780. Because the trust beneficiaries lacked both control over the conduct of the business and the ability to initiate or control the course of litigation, the Court held that the citizenship of the trust beneficiaries should not be counted. Id., at 464-465, 100 S.Ct., at 1783-84.

As Navarro makes clear, the nature of the named party does not settle the question of who are the real parties to the controversy. In fact, if the Court's characterization of the issue before us were correct, ante, at 187-188, n. 1, then we seriously erred in Navarro Savings Assn. v. Lee, supra, at 464-466, 100 S.Ct., at 1783-84, when we considered whether the trust beneficiaries were the real parties to the controversy, in light of the fact that they were not named parties to the litigation.

The Court attempts to distinguish Navarro on the ground that it involved not a juridical person, but rather the "distinctive common-law institution of trustees." Ante, at 194. Such a view is consonant with the Court's new diversity jurisdiction analysis announced in this case, but fails to take into account the actual language and analysis in Navarro. If the nature of the institution of trustees was sufficient to answer the question of which parties to count for diversity jurisdiction purposes in that case, the Court's discussion of whether the trust beneficiaries were real parties to the controversy would have been wholly superfluous. Given that the Court granted certiorari in that case on the very issue whether the citizenship of trust beneficiaries must be counted, and then unanimously applied the real parties to the controversy test, the discussion clearly was not superfluous.

Application of the parties to the controversy test to the limited partnership yields the conclusion that limited partners should not be considered for purposes of diversity jurisdiction. Like the trust beneficiary in Navarro, the limited partner "can neither control the disposition of this action nor intervene in the affairs of the trust except in the most extraordinary situations." Navarro, supra, at 464-465, 100 S.Ct., at 1783-84. See Uniform Limited Partnership Act § 26, 6 U.L.A. 614 (1969) (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"); Uniform Limited Partnership Act § 1001, 6 U.L.A. 371 (Supp.1989) (derivative actions); Ariz.Rev.Stat.Ann. § 29-324 (1989) (general partners of limited partnership have duties and obligations of partners to general partnership); § 29-209 (general partner is agent of partnership); § 29-356 (limited partners limited to derivative actions); Arkoma Associates Partnership Agreement, Art. VI, § 6.1 (general partners have "exclusive and complete control of the operations"); id., § 7.1 (limited partners "shall not take any part in the control or management of . . . Partnership"). And like the shareholder in Marshall, "for all the purposes of acting, contracting, and judicial remedy, [limited partners] can speak, act, and plead, only through [others]." Marshall, 16 How., at 328. In fact, the limited partner has even less power in the limited partnership than the shareholder does in a corporation. "[T]he shareholder . . . retain[s] some measure of control over management through his voting power, while the more restricted role of the limited partner permits restraint [of management] only by his refusal to concur in certain acts for which his consent is required by law." See Note, Standing of Limited Partners to Sue Derivatively, 65 Colum.L.Rev. 1463, 1478 (1965). Without the power to "control . . . the assets" or to initiate or "control the litigation," Navarro, supra, 446 U.S., at 465, 100 S.Ct., at 1784, the limited partner is not a real party to the controversy and, therefore, should not be counted for purposes of diversity jurisdiction. Because the majority of States have adopted the Uniform Limited Partnership Act, this rule would result in uniform treatment of limited partners for purposes of diversity jurisdiction. See Uniform Limited Partnership Act, 6 U.L.A. 172, 220 (Supp.1989).

The commentators are in agreement that the party to the controversy test is the appropriate test to be applied to determine diversity jurisdiction with respect to limited partnerships and that the citizenship of limited partners should not be counted. See, e.g., Comment, 45 U.Chi.L.Rev., at 418 (citizenship of limited partners should not be counted for purposes of diversity jurisdiction); Note, Who Are the Real Parties In Interest for Purposes of Determining Diversity Jurisdiction for Limited Partnerships?, 61 Wash.U.L.Q. 1051, 1066-1067 (1984) (same); Note, 56 Texas L.Rev., at 250-251 (real party in interest test should be applied to unincorporated business associations to determine whom to count for diversity); see also Colonial Realty Corp. v. Bache & Co., 358 F.2d 178, 183 (1966) (Friendly, J.) (citizenship of limited partner should not be counted where state law declares partner is not "proper party to proceedings by or against a partnership").

The concern perhaps implicit in the Court's holding today is that failure to consider the citizenship of all the members of an unincorporated business association will expand diversity jurisdiction at a time when our federal courts are already seriously overburdened. This concern is more illusory than real in the context of unincorporated business associations. For, despite the Court's holding today, unincorporated associations may gain access to the federal courts by bringing or defending suit as a Rule 23 class action, in which case the citizenship of the members of the class would not be considered. See Federal Diversity Jurisdiction-Citizenship for Unincorporated Associations, 19 Vand.L.Rev. 984, 991-992 (1966). Thus, I see little reason to depart in this case from our long settled practice of applying the real parties to the controversy test.

Because there is complete diversity between petitioners and the limited partnership (assuming that it should be considered a citizen) and each of the general partners, the issue presented by this case is fully resolved by application of the parties to the controversy test.

Even though the case does not directly relate to the issue before us, the Court takes pains to address and distinguish Puerto Rico v. Russell & Co., 288 U.S. 476, 53 S.Ct. 447, 77 L.Ed. 903 (1933). See ante, at 189-190. The issue in Russell was not diversity, but whether the suit against the sociedad en comandita could be removed from the Insular Court to the United States District Court for Puerto Rico on the ground that no party on one side was a citizen of or domiciled in Puerto Rico. See 288 U.S., at 478, 53 S.Ct., at 447. None of the partners were citizens of Puerto Rico, but the Court determined that the sociedad was and, therefore, removal was precluded. Thus, Russell tells us nothing about whether the citizenship of the sociedad § members, unlimited or limited, should be considered for purposes of diversity jurisdiction.

In any event, the Court's attempts to distinguish Russell are seriously flawed. In Russell, the Court examined the Puerto Rican sociedad en comandita, which is the civil law version of the modern limited partnership. The Court delineated a series of factors and concluded that, under civil law, the sociedad was a "juridical person." Id., at 481, 53 S.Ct., at 449. Ironically, the Court in this case endorses the holding of Russell, despite the fact that virtually all of the factors listed are equally applicable to the modern limited partnership. The Court fails to acknowledge that our modern limited partnership, like the sociedad, finds its origins in the civil law. The limited partnership originated in Europe in the middle ages, first appearing in France "[u]nder the name of la Societe en comandite, . . . mention being made of it in the most ancient commercial records, and in the early mercantile regulations of Marseilles and Montpelier." Ames v. Downing, 1 Bradf. Surr. 321, 329 (N.Y.1850). The limited partnership did not find acceptance in the United Kingdom and was not a creature of the common law. F. Burdick, Law of Partnership 384-385 (2d ed. 1906). It was first introduced into this country in Louisiana and then New York. See Note, 65 Colum.L.Rev., at 1464. Although a " 'creation of the civil law,' " the Puerto Rican sociedad was hardly " 'exotic.' " Ante, at 190 (quoting Bouligny, 382 U.S., at 151, 86 S.Ct., at 275). Rather, it is yet one of many forms of the limited partnership descended from the ancient French Societe as is the modern limited partnership adopted in this country. See Ames, supra, at 329-330 (American limited "partnership is, in fact, no novelty, but an institution of considerable antiquity, well known, understood and regulated"). It is hardly an answer to the history of the limited partnership in this country and abroad to assert that it appears 25 years after Steelworkers v. R.H. Bouligny, Inc., 382 U.S. 145, 86 S.Ct. 272, 15 L.Ed.2d 217 (1965). See ante, at 190-191, n. 2. The "admirable consistency of our jurisprudence," ante, at 189, is not blemished by distinguishing between unions and limited partnerships. It is, however, severely marred by holding that an association within the continental United States is not afforded the same treatment as its virtually identical Puerto Rican counterpart. See also ante, at 191, n. 2 ("operative word in both the diversity statute and the removal statute at issue in Russell is 'citizens' "). The Court's decision today, endorsing treatment of a Puerto Rican business association as an entity while refusing to treat as an entity its virtually identical stateside counterpart, is justified neither by our precedents nor by historical and commercial realities.

For the foregoing reasons, I respectfully dissent.

Notes