Carden v. Arkoma Associates – Oral Argument – November 07, 1989

Media for Carden v. Arkoma Associates

Audio Transcription for Opinion Announcement – February 27, 1990 in Carden v. Arkoma Associates

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William H. Rehnquist:

We’ll hear argument first this afternoon on No. 88-1476, C. T. Carden v. Arkoma Associates.

Mr. Ingolia, you may proceed.

Richard K. Ingolia:

Mr. Chief Justice, and may it please the Court:

The Fifth Circuit held that in determining the presence or absence of diversity jurisdiction in a case involving a limited partnership it would consider only the citizenship of the general partners as being relevant to the determination of that question.

If the citizenship of the general partners and that of the opposing parties was diverse, the Fifth Circuit regards jurisdiction as having been established.

They are wrong for several reasons.

First, the decision conflicts with the Supreme Court precedent in Navarro and Great Southern.

Second, instead of consulting the appropriate state law, which in this case is Arizona, it ignored that law, which is contrary to the Erie decision.

And lastly, it ignored the interests of the limited partners who owned 99 percent of the partnership and in effect held that they had no interest in the outcome of the suit.

Now, the rationale adopted by this Court in Navarro pointed out that it had never made an analogy between a trust and a business organization for the purposes of diversity jurisdiction.

That is what the Fifth Circuit is doing here.

In addition, they did not take into consideration the differences between a trust and a limited partnership.

Principally, in a trust 100 percent of the legal ownership is vested in the trustees.

The beneficiaries have no legal ownership at all.

In a limited partnership, the general partners have only management of the entity and that ownership which they either pay for or earn by virtue of their services.

They do not own 100 percent of the assets of the partnership, as do the trustees in an express trust.

And even the question of management in this case was not entirely vested in the limited partners.

Twenty percent of the… on the general partners, pardon me.

Twenty percent of the limited partners could prevent the sale of the assets of the partnership and the limiteds could also prevent the reinvestment in drilling rigs, which were the only assets of the partnership.

That condition does not exist in the trust situation.

At least since the time of the decision in Great Southern v. Jones, this Court has maintained that a limited partnership’s citizenship is determined by that of all of the members of the partnership.

There is no distinction made on a jurisdictional basis… on a jurisdictional basis by distinguishing between the classes of partnership.

William H. Rehnquist:

Did the Fifth Circuit opinion treat the Great Southern case at all?

Richard K. Ingolia:

No, sir, it did not.

It based its decision entirely on their decision in the Mesa case, Mesa v. Louisiana Interstate Pipeline.

William H. Rehnquist:

Did you cite the Great Southern in your case… in your brief to the Fifth Circuit?

Richard K. Ingolia:

Yes, we did, Your Honor.

The Fifth Circuit is apparently of the opinion that… imagine that this opinion arose from the Colonial Realty Case decided in the Second Circuit, which was based on Section 26 of the Uniform Limited Partnership Act.

In that case, Judge Friendly, I believe, as the argument of the court, held that he would not consider the citizenship of the limited partners because Section 26 of the Uniform Limited Partnership Act provided that they were not proper parties to a suit unless their own interests were before the Court.

I think that conflicts with what this Court has said in Navarro, particularly in its footnote 9 where it compared the decision in United Steelworkers case to, I believe it was Section 17(a) of Federal Rules.

Richard K. Ingolia:

They pointed out that while, yes, it’s true that perhaps a labor union may file suit in its name and it is a real party at interest, but that’s a question separate and apart from diversity jurisdiction, determined based solely on the membership of the union.

It not having been incorporated, the court concluded that it must consider the citizenship of all members of the union in arriving at a decision on the question of diversity jurisdiction.

One of the interesting things done in the United Steelworkers case was this Court distinguished the earlier Puerto Rico case where, in that case, a civil law, sociedad en comandita, as they referred to it, was considered to have jurisdiction of the… of Puerto Rico because it was created under Puerto Rico law… Puerto Rican law, rather.

In Puerto Rico, as in any other civilian jurisdiction, a partnership is a juridical person and has been for centuries.

They would not extend that principle… or, this Court would not extend that principle to the labor union case, because the labor union was not something created under a system of law providing for judicial… juridical personality being vested in the labor union.

I suggest that the same reasoning should apply here.

The partnership at issue is an Arizona partnership.

Therefore, it’s a common law partnership and the Great Southern case should cover that situation.

It decided the issue against diversity.

Antonin Scalia:

Is it clear that that business organization under the Puerto Rican law was a… was a legal person?

Richard K. Ingolia:

Yes, Your Honor.

I assume that the laws of Puerto Rico are similar to those of Louisiana and their common civilian heritage provides that a partnership is a juridical person, as a corporation is.

That provision is absent in Arizona law.

The Arizona courts hold that a partnership is not a juridical person; it’s a collection of individuals.

I suggest that that is the law that should have been followed because the court was sitting in a diversity case and it should have felt itself bound by the Erie decision and its progeny.

It did not do so, but it did feel that it would maintain the position that it had taken in the two previous cases it had decided.

Antonin Scalia:

Do you mean you think it should have… that this decision would have been correct if the court had been sitting in Louisiana?

Richard K. Ingolia:

No, sir, I do not.

The court was sitting in Louisiana, but it had to apply Arizona law in determining the nature of the entity before it, an Arizona limited partnership.

It cannot apply the Louisiana law to an Arizona partnership any more than an Arizona court would apply Louisiana law.

Antonin Scalia:

So what you’re saying is the case would be different if you were dealing with a Louisiana partnership?

Richard K. Ingolia:

Yes, sir.

Antonin Scalia:

Or if Arizona chose to denominate its partnerships’ legal entities?

Richard K. Ingolia:

Yes.

I concede that.

Antonin Scalia:

Although even in that case, I suppose, you wouldn’t look to the citizenship then of he unlimited partners.

You would rather look to the citizenship of–

Richard K. Ingolia:

Right.

Of the–

Antonin Scalia:

–the partnership.

Richard K. Ingolia:

–as an entity, as you would with a corporation.

Anthony M. Kennedy:

Is it consistent with the Uniform Limited Partnership Act that a limited partnership can be a juridical person?

Can a state enact the Uniform Limited Partnership Act and then at its option either declare it a juridical person or not?

Richard K. Ingolia:

I should think so, Your Honor.

If the legislature of the state chose to make a partnership a juridical person, I should think it has that option.

Anthony M. Kennedy:

There’s nothing in the Uniform Limited Partnership Act that speaks–

Richard K. Ingolia:

It does not do that.

Anthony M. Kennedy:

–to that issue one way or the other?

Richard K. Ingolia:

I assume that the Uniform Limited Partnership Act follows the class of common law and treats partnerships as if they were collections of individuals, as if they were contracts, as in fact they are.

Anthony M. Kennedy:

Do many states in the United States, or any other than perhaps Louisiana, xx a limited partnership as a juridical person?

Richard K. Ingolia:

Not that I know of, Your Honor.

The only state that I’m aware of that treats a limited partnership as a juridical person… rather, any partnership, not just a limited partnership, is Louisiana.

From what I’ve read of the Puerto Rican law, they follow the same principle which, of course, I imagine reflects a common history.

However, the common law decisions are to the contract and every common law jurisdiction with which I’m familiar treats a partnership as if it were simply a contract in which several individuals bind themselves to do certain things.

But in any case, I think since we are dealing with a diversity case, the court should have turned to state law, pertinent state law to determine the attributes of the party before it.

And if it had done that and applied Arizona law, they would have seen that the decisions in Arizona hold that partnerships are not juridical persons if they are collections of individuals.

Byron R. White:

Suppose a bank has loaned some money to a partnership that was organized and operating in the same state as the bank and the bank then wants to collect a debt from the partnership and in that state a partnership is not a juridical entity.

So you sue… who do you sue?

Richard K. Ingolia:

Well, first, you’d have to determine–

Byron R. White:

It wants to… who do you sue?

Richard K. Ingolia:

–Well, you’d sue the partnership and the partners if you expect it to execute a judgment against the partners personally.

Byron R. White:

Well, suppose the partnership is in… suppose the bank loaned the money to a partnership in another state and the partnership defaulted and you brought a suit in the federal court.

Who would you name?

All the partners?

Richard K. Ingolia:

Well, I think if you were in a state where the local law permitted naming simply the partnership, you would name just the partnership.

Byron R. White:

Yeah.

All right.

But, now, what if you’re in a state that you do not just name the partnership?

Richard K. Ingolia:

Well, then you’d have to name them all.

But–

Byron R. White:

All right.

What if it were a limited partner… partnership?

You certainly don’t name the limited partners, do you?

Richard K. Ingolia:

–Well, if you want to execute a judgment against them you certainly do.

Byron R. White:

Are they liable for the debts of the partnership?

Richard K. Ingolia:

Not unless they assume personal liability.

Byron R. White:

Well, that’s… so, let’s just assume it’s an ordinary limited partnership; they haven’t assumed any personal liability.

Richard K. Ingolia:

Well, I think then the bank would be limited to recovery out of the assets of the partnership.

Byron R. White:

But they can’t sue the limited partners as persons, as individuals?

Richard K. Ingolia:

No, but that’s–

Byron R. White:

Would that… would that destroy… could you bring a diversity action then–

Richard K. Ingolia:

–Well, you’d have–

Byron R. White:

–against them?

Against the partnership or against anybody there?

Richard K. Ingolia:

–It would depend on the citizenship of all of the partners.

If all of the partners–

Byron R. White:

Even though… even though the limited partners… you cannot get a judgment against the limited partners?

Richard K. Ingolia:

–Yes, I think so, because we’re dealing with two different things, standing to sue and… and how do you determine the citizenship of this entity before the court.

I think those are two different things and you can’t confuse the two, and this Court differentiated those two different things in its Navarro decision in footnote 9 by its reference to the United Steelworkers case.

In the United Steelworkers case, of course, the plaintiff in that case tried to rely on the Puerto Rico case, and the court clearly said we’re not going to let you do that here.

And you’re citing to us the… juridical personality of a creature that we don’t know anything about.

That’s something these civilians do.

We’re a common law system; we’re going to decide this case in accordance with the common law.

I think that reasoning leads you to Arizona and how Arizona treats limited partnership or any kind of partnership.

When you do that, you find that Arizona holds that they’re not juridical persons.

William H. Rehnquist:

You say, then, a plaintiff suing a limited partnership, even though the plaintiff asserts no claim against the limited partners… even though he could not recover against any of the limited partners still has to name them all as defendants and they must all be treated as separate defendants for diversity purposes?

Richard K. Ingolia:

He may not have to name them all, depending on the local law.

But a federal court in determining whether or not diversity of citizenship exists must test that by the citizenship of all of the members.

William H. Rehnquist:

But why does that make sense, really, if there is no possibility of any judgment against the limited partners?

Richard K. Ingolia:

Well, that makes sense because it fits into the scheme of jurisprudence that this court has developed over the years.

William H. Rehnquist:

That may be a reflection on the scheme of jurisprudence.

[Laughter]

In other words, you say that the jurisprudence of the court does not differentiate on the basis of whom you’re seeking relief from?

Richard K. Ingolia:

No.

The specific issue here was the absence of Section 26 from the Arizona Limited Partnership Act.

They had repealed Section 26 so there was no basis in Arizona law for making the distinction between the limited partners and the general partners based on the Limited Partnership Act of Arizona.

Antonin Scalia:

I don’t understand that.

Had… had that section still be in existence, what difference–

Richard K. Ingolia:

I don’t think it would have made a difference because, as this Court held in Navarro, you test diversity jurisdiction based on the citizenship of all of the members of an unincorporated entity.

Antonin Scalia:

–Uh-huh.

Richard K. Ingolia:

There is no basis in the law for treating a partnership as if it were a juridical person, absent a provision in the law of its creation.

Antonin Scalia:

What does it mean to be a juridical person?

I mean, if you can–

Richard K. Ingolia:

Oh, a corporation is a juridical person.

Antonin Scalia:

–Well, I understand, but–

Richard K. Ingolia:

–recognized as an entity separate and apart from its members.

Antonin Scalia:

–Well, this is in a way, too, isn’t it?

I mean, if you say that the partnership can sue… I mean, the partnership here is suing in its own name, Arkoma Associates.

Judgment is rendered against… would rendered against it in its own name, would it, or in the names of only the unlimited partners, the general partners?

Richard K. Ingolia:

Well–

Antonin Scalia:

How would judgment be rendered?

Richard K. Ingolia:

–I don’t think it would be… in the sense that it was sitting in Louisiana, and by the law of Louisiana a partnership can sue in its own name and the judgment would be rendered against Arkoma.

But Arkoma is not a person separate and apart from its members.

It’s simply a contract.

Antonin Scalia:

Well, let’s assume suit isn’t brought in Louisiana, it’s brought somewhere else.

And you get a judgment… you can’t get a judgment against Arkoma.

Then who do you get a judgment against?

Richard K. Ingolia:

Well, you’d get… you’d get your judgment, of course, against the partnership.

Antonin Scalia:

Against… in its name?

Richard K. Ingolia:

Yes.

Richard K. Ingolia:

But–

Antonin Scalia:

How do you execute that against the general partners?

Richard K. Ingolia:

–I’m sorry?

Antonin Scalia:

How do you execute that judgment against the general partners?

I assume you would first execute against the assets of a partnership and if that was insufficient, you would execute against the general partners.

So the judgment runs against the general partners.

By name or–

Richard K. Ingolia:

I would think so.

William H. Rehnquist:

–But only after a marshalling of assets?

Richard K. Ingolia:

Yes.

Yes, Your Honor, I believe that’s correct.

That you would first satisfy the judgment against the partnership assets and then against the general partners.

But those considerations really are not determinative of diversity jurisdiction.

If we’re going to give effect to the jurisprudence of the court as it presently exists, you turn to the citizenship of the people who make up the partnership in deciding that issue.

Byron R. White:

Well, I suppose if you get a judgment against the partnership, you’d first exhaust the partnership assets I take it.

Richard K. Ingolia:

Yes, sir, I think you do.

Byron R. White:

And then you can… if that isn’t sufficient, you can get a judgment against the… levy against the general partner?

Richard K. Ingolia:

Yes, sir.

But meanwhile, in… taking the partnership assets, marshalling them, you certainly take any interest that the limited partners have in the partnership?

Oh, yes.

Certainly.

That would–

Byron R. White:

So they’re… they’re more than a little parties in interest?

Richard K. Ingolia:

–Certainly.

Certainly.

William H. Rehnquist:

And they have a property interest in those partnership assets?

Richard K. Ingolia:

Oh, yes, sir.

They own 99 percent of the partnership assets.

So, in any suit that the partnership lost, 99 percent of the loss was theirs, not the general partners.

So I think it’s quite unrealistic to treat limited partners as if they had no interest–

Byron R. White:

If the partnership–

Richard K. Ingolia:

–in the partnership.

Byron R. White:

–suddenly dissolved and they didn’t owe any debts or anything, the limited partners would get 99 percent of the assets?

Richard K. Ingolia:

That is correct, Your Honor.

Antonin Scalia:

Of course, you could say the same about a corporation.

In fact, you could say 100 percent.

That you shouldn’t go by the state of incorporation of the corporation but in point of fact 100 percent of the assets are owned by stockholders who are all around the country.

And should it dissolve immediately, they would get all of the assets.

And realistically it’s coming out of their pockets if you get a judgment against the corporation.

Richard K. Ingolia:

Yes, Justice–

Antonin Scalia:

It doesn’t seem to me that’s very persuasive.

You could say that equally about a partnership or a corporation.

I mean, you know, who pays the bill?

It’s ultimately going to be… in the case of a corporation… the shareholder.

Richard K. Ingolia:

–That’s quite true.

However, the choice of form… the form in which you are going to do business as a business entity has consequences.

If you choose to do business as a partnership, you should be willing to accept not just the advantages of your choice, but you should also be willing to accept the detriments.

Antonin Scalia:

I understand that when you’re talking about a normal partnership because, you see… I guess maybe I don’t know what we mean by a juridical person.

We have sort of strange animal now, this limited partnership, where in fact the judgment doesn’t run against the limited partners.

It only runs against the juridical entity that consists of the partnership assets as far as they’re concerned.

And then, if that is insufficient, against the general partners personally.

But it never runs against the limited partners personally.

And I don’t know whether this is some… maybe this is a juridical person.

Richard K. Ingolia:

Well, it would have to… juridical persons are creatures of legislation.

They are created by legislatures.

They bring… the statutes bring them into existence because they have this quality known as juridical personality.

Certain facts and consequences flow from that.

But that’s not something different from anything else that we do in the legal field.

Every time we enter into a contract to form a trust, to form a corporation, we’re making choices.

And those choices have consequences.

Richard K. Ingolia:

If they wanted to preserve a juridical personality in this case, they could have formed the partnership in Louisiana or Puerto Rico.

It would have had juridical personality.

If that was what they were interested in.

Antonin Scalia:

But maybe the only… you’re right that those choices have consequences, but maybe the only consequence that is relevant for purposes of the decision we have before us today… that is, whether diversity exists or not… perhaps the only consequence relevant is whether you can be sued in your own name or not.

Richard K. Ingolia:

I don’t think so, Your Honor.

I think there’s a difference between suing in a name and the citizenship of that name, whatever that might be.

The citizenship of a name is something acquired from a law, from a statute, passed either by the Congress or a state legislature.

That quality was not breathed into the limited partnership in Arizona.

And if we… if we are going to adhere to the Erie line of cases and the consequences flowing from that, then we must turn to some source of law to find out what it is that we’re dealing with and what kind of characteristics, including citizenship, that this entity may have.

I think it’s just that simple.

It’s likely to vary from state to state.

But that isn’t a different situation from any other diversity question in which the Erie line of cases is at issue.

The… probably the most extreme example of an application of Erie that I can think of is Woods v. Interstate realty where this Court has held that a state statute denying access to state courts was binding on a federal court because the federal court was sitting in diversity.

That’s a far more extreme example, I believe, than what we have here before us.

All we’re asking you to do here is to look at the citizenship of the people who made up this entity and draw conclusions from that based on your jurisprudence.

Byron R. White:

Judge Friendly certainly didn’t agree with you, did he?

Richard K. Ingolia:

No, sir, he didn’t.

Byron R. White:

And he… he didn’t pass over Great Southern.

Richard K. Ingolia:

No.

He apparently felt that it was dated.

Byron R. White:

He thought that–

Richard K. Ingolia:

But until–

Byron R. White:

–He thought that because under New York law the partnership–

Richard K. Ingolia:

–Yes, sir.

Byron R. White:

–the general partners couldn’t be sued… couldn’t sue or be sued unless… except under some–

Richard K. Ingolia:

Section 26.

And Section 26 does not exist in Arizona.

Byron R. White:

–Do you think that would be enough, if Section 26 did?

Richard K. Ingolia:

No, sir, Your Honor.

I think that–

Byron R. White:

I wouldn’t think so.

Richard K. Ingolia:

–I think that the controlling decision is Navarro where this Court made the distinction between the citizenship of a labor union and the question of whether or not being able to sue in a name changed that.

The Court held that the ability to sue in a particular name had nothing to do with diversity, that that would be determined from the citizenship of the members, and in effect we urge that you… you follow that decision.

William H. Rehnquist:

Thank you, Mr. Ingolia.

Your time will be reserved.

Mr. Hoffman.

Mitchell J. Hoffman:

Mr. Chief Justice, may it please the Court:

I will first, if I may, respond to a couple of the questions that were raised in Mr. Ingolia’s argument.

The first one was by Justice Rehnquist as to whether or not the court of appeals, Fifth Circuit, addressed the Great Southern issue.

And not in our particular case, but the initial case, Mesa operating partnership, the Fifth Circuit did address the Great Southern case and basically dismissed it on two grounds.

One, that it dealt with an old 1900s, 18… 19th century limited partnership association that did not have separate classes of members.

That limited partnership association, although deemed termed a limited partnership, is not the same as the modern-day limited partnership that we have today… only one class of member.

Secondly, it was an old case and the Fifth Circuit said that it would be applied only to those particular entities.

So, yes, the Fifth Circuit has addressed the–

John Paul Stevens:

Yes, but may I just ask you.

The fact that it’s been on the books since 1900, which way does that cut?

Mitchell J. Hoffman:

–Well–

John Paul Stevens:

The law has apparently been settled for 89 years until this Mesa case came along.

Mitchell J. Hoffman:

–Well, it was settled for the limited partnership association that the court had before it.

John Paul Stevens:

Well, does the opinion in the Great Southern case say anything about the particular characteristics of the limited partnership or does it say, as I read it, corporations are an exception from the general rule that everything else you look at the individual citizenship?

Mitchell J. Hoffman:

As I recall the case, it didn’t say that–

John Paul Stevens:

It doesn’t even mention–

Mitchell J. Hoffman:

–we’re only talking about–

John Paul Stevens:

–It doesn’t even mention the single class of citizenship.

Mitchell J. Hoffman:

–Well, it doesn’t, but then that was the only thing before it at the time.

So, unless the Court was just out there looking for something to talk about–

John Paul Stevens:

Well, it talked about a number of other limited partnership cases that it cited and seemed to think they were all… you know, limited partnerships are limited partnerships.

It did not draw the distinction that you say clearly distinguishes it is all I’m suggesting.

Mitchell J. Hoffman:

–No, the court did not, sir.

But I think that just looking at the case and what the holding of the case was it can only be applied unless you all intend to–

John Paul Stevens:

Well, is it not true that people generally… lawyers generally for… ever since 1900 have assumed that in a limited partnership you look at the citizenship of the whole… of all partners?

Mitchell J. Hoffman:

–Well, I don’t think that that’s entirely true, Your Honor.

John Paul Stevens:

At least three circuits have so held.

Mitchell J. Hoffman:

Well, we have two on one side and a couple on the other side.

Yeah.

Mitchell J. Hoffman:

Judge Friendly in 1960… I think it was ’65… in the Colonial Realty case was the first time the modern limited partnership was considered.

And when it came through the New York courts, the Second Circuit, you know, they looked at… the courts looked at what they were dealing with.

And they felt… obviously, I think… they felt that there was a distinction between the entity with which they were dealing in 1965 and the entity which this Court dealt with in 1900.

And I think it was a valid distinction.

John Paul Stevens:

It was not exactly a tiny partner.

It was Jones and Laughlin Steel Company who was the party in that case, wasn’t it?

Mitchell J. Hoffman:

In the Great Southern case.

Yes, sir.

John Paul Stevens:

Yeah.

Mitchell J. Hoffman:

It certainly was.

Antonin Scalia:

What was the major difference between the two?

Mitchell J. Hoffman:

The two types of partnerships?

Antonin Scalia:

Right.

Mitchell J. Hoffman:

In the modern-day limited partnership you have two distinct classes of members.

The Uniform Limited Partnership Act adopted by 49 states… and Louisiana adopted some but not inconsistent provisions… sets out a scheme of running the business.

And that is that you have one class of partners that control the business of the partnership.

You have another class of partner that is simply an investor.

It does not… that class does not have any control function.

It has no responsibility, no power under any state law to perform any acts for the partnership.

William H. Rehnquist:

Okay.

That’s the modern partnership.

Mitchell J. Hoffman:

Yes, sir.

William H. Rehnquist:

How does that differ from the partnership as described in Great Southern?

Mitchell J. Hoffman:

In Great Southern, as I recall, you had one class of limited partner.

They were all liable equally.

Mitchell J. Hoffman:

They could all, with the exception of some of their management functions which they by contract… not statute, by contract… gave to the president, they could participate.

They had statutorily no restriction as to what they could do for the partnership.

Antonin Scalia:

In what respect was it a limited partnership then?

Mitchell J. Hoffman:

They just called it a limited partnership association back then simply, I think, because they had this president who could bring an action on behalf of the partnership.

Antonin Scalia:

All right.

It must have been limited in some respect.

Wherein was it a limited partnership?

I don’t understand it.

Richard K. Ingolia:

Your Honor, I can’t recall all the… you know, all these facts of that case other than–

John Paul Stevens:

The opinion says it’s authorized pursuant to an act authorizing the formation of a partnership and so forth in which the capital subscribed shall alone be responsible for the debts of the association except under certain limited circumstances.

So basically it was limited in the sense that the partners did not have unlimited liability, which is exactly what is true of the limited partners in xx two-class limited partnership today.

Mitchell J. Hoffman:

Well, with one distinction.

The liability side, apparently, was limited back in the Great Southern-type partnership and the modern-day partnership.

On the flip side, the responsibility and power side, that responsibility was not limited back in 1900.

John Paul Stevens:

No, but the liability which is the main–

–How about the president?

Didn’t he have some authority that the limited partners didn’t have?

Mitchell J. Hoffman:

By contract, yes.

Yes, he did.

We have now, however, the Limited Partnership Acts that have been amended a few times and now the most recent amendment in 1985, you know, basically establishes, as I indicated before, a very clear-cut distinction between the two classes of partners.

Again, one being in control, one not being in control.

You cannot, no matter what you do as a limited partner in a modern limited partnership… you cannot become a general partner.

No matter if you assume more responsibility than you’re entitled to or you’re supposed to.

The only penalty there is that you may lose your limited liability status, but you cannot usurp the power of the general partners simply by doing something you’re not supposed to.

And that’s important for this reason.

When you look at real party to the controversy, as that term has been used in Navarro and a number of other cases that we’ve cited in our brief, the power of the partners, the power of the individuals to act for the partnership to control the business, to sue on behalf of the partnership, is vested only in the general partners.

And no matter what the limited does, he can’t take that power.

He can’t take control and he can’t usurp that power from the general partners.

Antonin Scalia:

Is that the crucial power?

I mean, I suppose states could create all sorts of different limited partnership laws allowing the general partners to have all sorts of variance of powers.

Antonin Scalia:

Which is the single crucial power possessed by the general partner and not by the limited partners which you think makes this a case different from Southern?

Mitchell J. Hoffman:

I would in… I would say that based on the real party to the controversy analysis, if you’re looking… if you want an answer to that question based on that type of analysis, the most important power is the power to control the business of the association, of the partnership.

You are the… that person is the one who can direct what happens to the partnership, can contract for it, can bind it.

The other people can’t.

Antonin Scalia:

But you can have varying state laws that say he can… the general partners can do everything except and then make a whole… you can have all sorts of different exceptions from state to state.

Mitchell J. Hoffman:

Yes, you can.

Now, they’re pretty well regulated for–

Antonin Scalia:

What about any contract more than $200,000?

Would that be enough?

Mitchell J. Hoffman:

–Your Honor, I suppose you could the state legislature could do that.

But they haven’t because we’ve got the Uniform Limited Partnership Act.

Antonin Scalia:

But if they should, we would have to go through each individual state partnership law and decide whether somehow or other the powers conferred only upon the general partner are significant enough to come within the principle that you’re urging.

Mitchell J. Hoffman:

That’s a possibility, although I think that the type of legislation that exists in the Uniform Limited Partnership Act speaks against that and will not cause that to be a concern, although I will… I will admit that any state legislature could do that.

William H. Rehnquist:

Well, in Great Southern the president had rights to conduct business, did he not?

Mitchell J. Hoffman:

Yes.

William H. Rehnquist:

So how do you… you say it’s… is the main distinction you see?

Because it was by contract there and it’s by statute?

That doesn’t sound very sensible.

Mitchell J. Hoffman:

Well, it is and it isn’t because if you look at… if you get into this analysis of juridical person that Mr. Ingolia did, then it becomes important whether it’s statute or contract.

I think that for Great Southern the difference between Great Southern and the modern-day limited partnership is mostly involving the control and liability and the access to the responsibility for the actions of the partnership.

Yes, the president by contract was given certain rights, but that did not foreclose the other what they called limited partners since they were all limited partners and they were all treated the same way… that would not foreclose these people from becoming more active and doing something and be authorized by the state statute to do that.

And I think that is the key because you have a distinct class.

Byron R. White:

Supposing Louisiana… this suit had been against Arkoma… is it Arkoma?

Mitchell J. Hoffman:

Yes, Arkoma.

Byron R. White:

Arkoma Associates and the complaint named the limited partners as well as Arkoma and all the general partners, could you get the suit dismissed against the general partners under… without… against the limited partners?

Mitchell J. Hoffman:

I think you could.

First of all… and for several reasons.

Byron R. White:

Would it be kind of… you know, in New York Friendly said that under the law the limited partners couldn’t be sued in a case like this.

Mitchell J. Hoffman:

Well, Louisiana–

Byron R. White:

Is that true in Louisiana?

Mitchell J. Hoffman:

–Well, essentially yes.

The partnership is the primary party.

The general partners are a secondary partner… party under the Louisiana Partnership Articles which are not the Uniform Limited Partnership Act but kind of track it.

They were not really proper parties to the proceeding.

They could be dismissed, unless there are certain allegations that they have gone beyond what the limited partner is permitted to do.

Only in that case would they be able to be maintained.

I might point out to the court that in our particular case, Arkoma was the Plaintiff.

A counterclaim was filed against Arkoma and the four general partners.

They didn’t add the limited partners because obviously in Louisiana you couldn’t do that unless you wanted to make an allegation that some of the limited partners, whom they didn’t even know, exceeded their statutory or jurisprudential powers.

So I will say in Louisiana, of course… and that’s obviously where the case was tried… I might say that–

Antonin Scalia:

Excuse me.

You really have lost me.

Why… why are we talking about the Louisiana Partnership Act?

This is–

Mitchell J. Hoffman:

–I was responding to Justice White’s question as to–

Antonin Scalia:

–Well, but this is an Arizona–

Mitchell J. Hoffman:

–what would happen–

Antonin Scalia:

–partnership we’re talking about here.

You say that–

Mitchell J. Hoffman:

–Right.

But for procedural capacity to sue in the courts of Louisiana, Rule 17(b) says look at the state law, look at the forum law.

So we were… we were in Louisiana, we started there… 17(a) and 17(b).

I think that–

Antonin Scalia:

–Capacity… capacity to sue include… is that right?

Mitchell J. Hoffman:

–Well, yes, sir.

I–

Antonin Scalia:

If Louisiana said that the individual shareholders of a corporation could be sued individually?

Mitchell J. Hoffman:

–Well, that’s a different story because that 1332(c) directly addresses corporations.

And, yes, Louisiana and I think all states have separate statutes concerning the ability to sue a shareholder in a corporate context.

You have to make allegations of piercing the corporate veil, usurpation of the corporate psyche and things like that.

Antonin Scalia:

But you say in theory it doesn’t matter what kind of a partnership law Arizona enacts, Louisiana can override it and allow partners to be held liable?

Mitchell J. Hoffman:

Oh, no.

No, no.

Not at all.

All I… and that’s a distinction that I think we may be fudging over today.

What we’re talking about is procedural capacity to sue under Rule 17.

That is completely different than your jurisprudential inquiry with respect to the real parties to the controversy.

We cannot in Louisiana make a substantive rule as to what the liability of those limited partners would be without looking to the Arizona law.

If I said anything to suggest to the contrary, I’m sorry.

But we are strictly… at least at this point in the argument… only talking about procedural capacity.

Now, this Court has held on many occasions, or at least discussed in some of their cases, that you cannot equate the procedural capacity to sue analysis with the jurisprudential and jurisdictional argument of real party to the controversy.

And that they, although they may go hand-in-glove, they’re not necessarily the same.

I cite to the court the Bouligny case in ’65 involving the labor union.

There the labor union had procedural capacity to sue but this Court said, no, we’re not going to give it jurisprudential… I mean, jurisdictional entity status.

And I think that that holding is limited to that particular type of argument.

We are not suggesting necessarily that this court has to adopt an entity theory for limited partnerships.

We don’t think that’s necessary.

I personally think you should, but that notwithstanding that is one option that’s available to this court.

Byron R. White:

A real party in interest analysis won’t help you much, will it?

Mitchell J. Hoffman:

Well, I think it will, Justice White.

And I… the real party in interest, Justice–

Byron R. White:

Well, the limited partners stand to lose their stake.

Mitchell J. Hoffman:

–Well, as did the trust beneficiaries in Navarro.

Byron R. White:

Well, that maybe so.

That may be so but the limited partners stand to lose their stake.

Mitchell J. Hoffman:

Yes, of course.

And I don’t think that that should be the determining factor.

William H. Rehnquist:

Well, they’d stand to lose the stake in which they have an ownership interest.

Mitchell J. Hoffman:

Well, not exactly because I think… if I can refer you back to your question a little while ago, you said… or you asked, do the limited partners have an ownership interest in the assets, and they do not.

The partnership… limited partnership… is a juridical person… and I hesitate to use that word… but it is an entity that can own property according to the state statues.

Mitchell J. Hoffman:

That entity owns the property.

In this case, the oil rigs, the drilling rigs.

The entity owned them.

The limited partners simply are like shareholders; they are equitable or beneficial owners of an interest in this business that this business does own some property.

So, no, they don’t have any of their direct assets at stake except for their financial investment as a shareholder, as any kind of investor has in a corporation.

And I liken this to, if you back up in time to 1957 before Congress enacted the revision of 1332(c)… 28 U.S.C. 1332(c)… that this Court… it was a jurisprudential decision that excepted corporations from the general rule as to complete diversity.

And this Court back in 1840 and then affirmed in 1850 with the Letson case and the Marshall v. Baltimore and Ohio Railroad case made a judicial extension of the diversity jurisdiction argument by permitting corporations to be treated as… as entities.

Now, I submit that you could do the same at this juncture, although I’m not saying that that is the best way to handle this case.

I do believe consistent with the opinion in Navarro where you look to the real parties to the controversy and decided that the trustees in that case who managed the litigation… they held equitable title, they had full control.

The beneficial title, meanwhile, was always in the beneficiaries and not in the trustees.

And I liken the limited partnership to that type of organization.

Antonin Scalia:

Mr. Hoffman, unlike… unlike the Petitioner, you… you assert that the limited partnership is a juridical person?

Mitchell J. Hoffman:

I’d say it doesn’t matter.

It’s a juridical person to the extent–

Antonin Scalia:

Well, just pretend that it matters.

Would you say that it is or that it isn’t?

Mitchell J. Hoffman:

–Well, I would like to see it as a… limited… as a juridical person.

Antonin Scalia:

I don’t care what you’d like to see it as.

Do you believe it is or do you believe it isn’t?

Mitchell J. Hoffman:

Well, yes, I believe it is.

Antonin Scalia:

It is?

Mitchell J. Hoffman:

I believe it is and I believe it should be because it has so many characteristics similar to a corporation that there’s no reason to treat it any differently?

Antonin Scalia:

What’s the test of juridical personhood?

Mitchell J. Hoffman:

Well, that, again, is something in the sociedad case, the Puerto Rico v. Russell case back in 1933, the court looked at all the qualifications and characteristics of the sociedad and compared them to a corporation and found that it’s so very very similar to a corporation and it also had this state with the Puerto Rican sanction as an entity, and it said I’m looking at all… we’re looking at all of those factors and we say, yes, this will be treated as an entity just like corporations.

Now, that you could do with limited partnerships.

And I would suggest that it could be done, but then, again, I think the stronger position for this Court consistent with the whole line of cases that have come up over the years is to look at the real parties to the controversy and see who they are.

And then it becomes a factual analysis which this Court was willing to do in Navarro and say, okay, the trust beneficiaries hold this, this and this powers.

And we’re going to look at that, but we don’t think that those are the kind of powers you want to look to to decide whether they are the real parties to the controversy.

Therefore, we’re going to look at the trustees, and we find all the requisite powers in the trustees that are necessary to give this court the jurisdiction.

Because going way back to the Wormley case and the McDutton case back in the 1820s this Court has consistently held that we’re going to look to the real party to the controversy to decided jurisdictional questions.

Arkoma here was the owner of these rigs?

Mitchell J. Hoffman:

Arkoma was the record, the title owner to the rigs.

Yes, sir.

And they… the title was held in their name?

Mitchell J. Hoffman:

In Arkoma’s name.

Yes, sir.

Yeah.

And the lease was by Arkoma?

Mitchell J. Hoffman:

Yes, sir.

I mean, Arkoma had to appear through an individual–

Yes.

Mitchell J. Hoffman:

–as a corporation would have to do.

Yes.

Mitchell J. Hoffman:

But, yes, for all… for other than diversity jurisdiction purposes, Arkoma is certainly a juridical person because that entity could and did in fact own assets and contracted with various people, including Petitioners for benefit and for… to conduct its business.

So, other than the juridical person idea comes up I think in a faulty context because nobody has ever really asked this Court to assume or to hold that for diversity jurisdiction purposes this limited partnerships or all limited partnerships should be… should be considered an entity.

If I may get back just one bit to the Navarro case, I find it odd that this Court would put its entire holding in a footnote.

If this Court intended to say that the Navarro analysis of real parties to the controversy was not to apply to any other entity, I would believe that you’d put it in the main part of the decision as opposed to a footnote 9 which simply says that we have never up until now analogized the limited partner… or the business trust to other forms of business entity.

It didn’t even mention limited partnership.

Justice Blackmun, on the other hand, in the dissent, indicated that he found it troublesome that the Court didn’t take the affirmative step and say, hey, this is just like a limited partnership; this is just like other business entities that are out in the commercial world in the 1980s and say take the bull by the horns and decide the issue.

Well, the issue wasn’t exactly in front of the Court at that time because you were dealing with a business trust.

But I dare say the analysis… the five, eight pages of analysis… that you went through would… would not have been necessary had it not been for an opinion of this court or a feeling of this court that the real party to the controversy analysis ought to be maintained.

And I say that because in that Navarro case, a case of Chappadulane, I think… and I may be mispronouncing it… back in 1808 firmly held that that trustees of a trust were the real parties and the citizenship of those trustees were the ones… was the citizenship that counted.

So you wouldn’t have had to go through a difficult analysis if you were simply going to rely on that old case.

Obviously, it seems to me that because the discussion went on that you did feel that the real parties to the controversy analysis ought to be maintained at least now and then left open for discussion for future cases, which I think this case is the prime or a very decent case to look at it.

Now, we’re not asking this Court to interpret the Constitution.

That has been clearly… clearly settled.

The diversity jurisdiction statute is what’s involved; it’s not Article III of the Constitution.

So I think in the case… your recent case in June of this year, Newman Green, you had a footnote in there saying that it’s not a constitutional argument.

So we’re not asking you do to anything–

Byron R. White:

I would think you would… according to your argument, you would say that the… you would say that the citizenship of the general partners isn’t relevant also.

Byron R. White:

You just go by the name of the–

Mitchell J. Hoffman:

–Well, I have two arguments.

Yes, Justice White.

If you’re going to look at the entity theory, which I am not… that’s not my principal argument… yes, I’d say you look at the principal–

Byron R. White:

–I thought… I thought you said the real party in interest was the partnership.

They own the property.

Mitchell J. Hoffman:

–They… they very well could be.

But I’m suggesting there are two alternate ways to look at–

Byron R. White:

But we don’t need to go that far you said?

Mitchell J. Hoffman:

–Pardon me?

Byron R. White:

You don’t need to go that far?

Mitchell J. Hoffman:

Well, you wouldn’t.

But, you know, I looked at the Bouligny case in 1965 and this Court said specifically, we’re not going to create any new entities.

At least, that’s how I read it.

So I don’t want to ask you to do something that you didn’t want to do back in 1965.

Byron R. White:

I know, but you say… you say that the limited partners don’t have any interest because title in the property is in this entity.

Mitchell J. Hoffman:

I don’t say they have no interest.

They are not the real parties to the controversy that’s involved.

The people who manage, the people who control, the people who operate this business as a corporate board of directors, you know that… those people, that is the real party.

Whether it’s the entity or whether it’s the general partners because keep in mind the distinction–

Byron R. White:

Well, the general partners don’t own this property.

Mitchell J. Hoffman:

–No.

But keep in mind, the distinction has to be made between the corporation… one of the differences between a corporation and a limited partnership is that you have this class of partner who are or who is responsible for the debts of the partnership, the general partners.

So they do… you know, there’s an intermediate step between your board of directors, say, and your shareholders in the corporate context from your partnership, your general partners, to the limited partners.

The limited partners are no different than your shareholders.

And prior to Congress in 1958 saying that we’re not going to consider the shareholders and we’re going to create or we’re going to consider corporations as entities, this Court made that determination, and I think this Court can do so now with respect to limited partners.

William H. Rehnquist:

And say that for diversity purposes they are governed by the citizenship of the general partners?

Mitchell J. Hoffman:

Well, under the entity theory you would say, just like a corporation, that it’s the principal place of business or the state of incorporation or state of formation.

That would be the entity theory.

Yes.

Mitchell J. Hoffman:

That’s how you would argue that.

On the flip side, if you say, no, we’re not going to create any new entities, we’re going to look at real parties to the controversy, yes, then it’s the general partners who are the real parties to the controversy because they are alone that class of partners, the class of people within this partnership who control, manage and conduct the litigation.

William H. Rehnquist:

But do they lose any more by a judgment against the partnership than the limited partners do?

Mitchell J. Hoffman:

Indeed they do because they are responsible.

They are liable to the full extent of partnership obligations.

The general are, not the limiteds.

So they could get hit… for instance, if petitioners were successful, which they were not, on their counterclaim for some millions of dollars, the general partners would have had to respond.

Byron R. White:

Yes, but what if–

Mitchell J. Hoffman:

The limiteds would not.

Byron R. White:

–What if the amount of the judgment exactly equal to the partnership assets?

Mitchell J. Hoffman:

Pardon me?

What if it was?

Uh-huh.

Mitchell J. Hoffman:

If that was the case, then, fortunately for the general partners, they would be okay.

But–

Byron R. White:

And then unfortunately for the limited partners, they wouldn’t.

Mitchell J. Hoffman:

–Well, everybody would have lost their investment, yes.

Byron R. White:

Exactly.

Mitchell J. Hoffman:

Everybody would have lost.

But I might point in this particular case the value of the rigs in an oil recession is not great.

Byron R. White:

Yes.

Mitchell J. Hoffman:

And so they–

Byron R. White:

Up to the extent of the partnership assets the limited partners are at risk?

Mitchell J. Hoffman:

–Yes.

Byron R. White:

Just like the–

Mitchell J. Hoffman:

Yeah, like any investor.

Like a corporate shareholder.

Byron R. White:

–But no more and no less so than the generals?

Mitchell J. Hoffman:

Up to the value… well, yes, up to the value.

Antonin Scalia:

Your real argument–

Mitchell J. Hoffman:

When it goes beyond the value, then the generals have more to lose.

Antonin Scalia:

–I think your real argument is that the limited partnership should be treated like a partnership with respect to only the general partners.

If we just had a regular partnership, not a limited partnership,–

Mitchell J. Hoffman:

Yes?

Antonin Scalia:

–we would use the citizenship of the partners, right?

Mitchell J. Hoffman:

Because they would all be general partners and all have the same rights, responsibilities and powers.

Antonin Scalia:

And in Great Southern we were confronted with the choice of either… since they were all limited partners, we had to allow you to look to the citizenship of all the partners, or the only alternative was to create a new entity.

Mitchell J. Hoffman:

Yes, sir.

Antonin Scalia:

Which we refused to do.

And you say here we’re not faced with that stark alternative.

We could go halfway and say instead of creating a new entity we’re just going to treat the general partners like a partnership.

Mitchell J. Hoffman:

Yes.

Similar to the analysis with the business trust in Navarro, you’re going to look to the people who control.

And we may argue as to who controls.

Antonin Scalia:

Well, I wouldn’t say… why the people who control?

The general partners, just like the partners in a partnership.

I don’t think you look to a partnership to see how many of the partners act… I mean, the partners could contract one with another that one of them will do all the management.

We wouldn’t alter our citizenship requirements, would we, simply because one of the partners in an ordinary partnership is a managing partner?

I don’t think so.

Mitchell J. Hoffman:

No, you wouldn’t.

But it would be the similar analysis that each of those general partners has the same power.

But you wouldn’t have to get there under your scenario.

Now, we’re not asking this Court to overrule the Strawbridge case back in 1806, Chapman v. Barney which involved a joint stock association, or the Great Southern case because I believe that the Great Southern case and those other cases, although they dealt with unincorporated associations, as that term can be broadly defined, did not deal with the entity or the type of business organization that we are dealing with today.

I think that it could be very well distinguished.

The Fifth Circuit made the distinction that–

John Paul Stevens:

It could be distinguished on the ground that it’s more like a corporation than the one we have today.

Mitchell J. Hoffman:

–Which one?

John Paul Stevens:

Great Southern.

Mitchell J. Hoffman:

Well, I don’t… I don’t believe so.

I think Great Southern was less like a corporation than the–

John Paul Stevens:

Well, what’s the difference between it and a corporation?

Mitchell J. Hoffman:

–Well, the corporation, of course, has statutory board of directors authority and what not.

The Great Partner… the Great Southern Limited Partnership Association, as it was then called, I think was just simply a contract between the people allocating some responsibilities.

But all the limited–

John Paul Stevens:

With the same kind of limited liability the shareholders of a corporation have.

Mitchell J. Hoffman:

–Yes, right.

To that extent it is.

John Paul Stevens:

Yeah.

Whereas there’s no… whereas in the modern limited partnership somebody has unlimited liability.

Mitchell J. Hoffman:

Yes, sir.

John Paul Stevens:

So in that respect it’s–

Mitchell J. Hoffman:

Okay.

There is a distinction in that respect.

Now, the term, the operation of the modern-day limited partnership, I think tracks very closely with the operation of corporations, particularly when you get into these master limited partners… partnerships that are created and sold on the public market where you’ve got thousands of shareholders where you don’t really care who the other limited partners are, you just purchase… you invest in this business operation and you’ve got essentially a board of directors, i.e., the general partners, controlling the whole… the whole works.

And I think that whatever rule you decide today has to be applicable to not only the partnership that we have in question, which is a 44-member limited partnership with only one Louisiana limited partner.

And but it would be applicable to these mass of master limited partnerships that could cause, you know, a pretty big stink in the securities industry.

You know, I’m not suggesting that the people invest in these master limited partnerships simply to use diversity jurisdiction.

Not at all.

But it would be unfair to preclude the master limited partnerships from diversity jurisdiction because in all likelihood you’ll never be able to get diversity if you’re a member of one of these master limited partners.

John Paul Stevens:

–No, but to the extent you rely on securities problems, you get federal quest in jurisdiction, I suppose.

Mitchell J. Hoffman:

Well, if it’s a question within the partnership itself.

But if it’s a simple debt or creditor relationship where the partnership is a debtor, then the security problems really don’t come into play.

And I might say that diversity of jurisdiction is still here.

Some people don’t like it, but we still have it and we have to live with it and I dare say that in my practice in south Louisiana and in southern Texas I will always file in federal court with an out-of-state plaintiff and I will always remove with an out-of-state defendant in any of those state courts over there.

It may be awhile since any of you have tried something down there, but I can tell you that there is a reason for diversity jurisdiction still existing.

[Laughter]

Antonin Scalia:

It’s called home cooking.

Mitchell J. Hoffman:

Well, it’s been called worse.

[Laughter]

I might point out… I see I’m out of time.

Mitchell J. Hoffman:

Thank you, Your Honors.

William H. Rehnquist:

Thank you, Mr. Hoffman.

Mr. Ingolia, you have two minutes remaining.

Richard K. Ingolia:

Thank you, Your Honor.

The problem with the Fifth Circuit’s decision is you can’t tell who is in control.

Someone who appears of record as a limited partner may very well be the managing controller of the business.

And someone from the outside looking in with nothing but the record to look at doesn’t know that.

To… if we’re going to consistently apply the Fifth Circuit’s test, then we’re going to have an enormous amount of in limine litigation and discovery to determine who among the limited partners, if any, have engaged in the management of the partnership.

If that–

Antonin Scalia:

I agree that control is pretty bad.

It’s sort of hard to figure out who has how much.

But what about a test that says, look, what we’re confronted with is an animal that is in between a partnership, a regular partnership in which there’s unlimited liability on the part of all of the partners and a limited partnership of the sort that was involved in Great Southern in which there was no personal liability on… on behalf of any of the partners.

Here you have one right in the middle.

You have some of the partners who have personal liability and others who don’t.

So the choice is whether you treat it… you know, which way do you flop.

And why can’t you say so long as you have some partners who have unlimited personal liability you’ll treat it as a partnership involving those partners?

Richard K. Ingolia:

–Well, that’s certainly an argument, Justice Scalia.

However, if simplicity of operation in the administration of justice is a test, following the current jurisprudence of the Court is a far simpler matter than trying to delve into these questions of who among the 44 limited partners may have involved himself in management, if he did.

I don’t see how even under Mr. Hoffman’s test you can ignore that.

William H. Rehnquist:

Thank you, Mr. Ingolia.