ZB Holdings, Inc. v. White

144 F.R.D. 42, 1992 U.S. Dist. LEXIS 14637, 1992 WL 241258
CourtDistrict Court, S.D. New York
DecidedSeptember 25, 1992
DocketNo. 92 Civ. 1041 (LBS)
StatusPublished
Cited by18 cases

This text of 144 F.R.D. 42 (ZB Holdings, Inc. v. White) is published on Counsel Stack Legal Research, covering District Court, S.D. New York primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
ZB Holdings, Inc. v. White, 144 F.R.D. 42, 1992 U.S. Dist. LEXIS 14637, 1992 WL 241258 (S.D.N.Y. 1992).

Opinion

OPINION

SAND, District Judge.

The derivative complaint here at issue relates to a 1989 stock purchase transaction whereby defendant BBA Group PLC (“BBA”) acquired an eighty percent interest in IGH, Inc (“IGH”), a closely held corporation owned by two individuals, Jerry Zucker and James G. Boyd. The plaintiff in this action, ZB Holdings, Inc. (“ZB Holdings”), is a corporation formed by Zucker and Boyd which is the depository of Zucker and Boyd’s twenty percent interest in IGH. Plaintiff alleges various injuries to IGH based on the post-acquisition operation of the corporation, and asserts claims sounding in common law fraud and misrepresentation.1 Plaintiff names as defendants BBA Group PLC (“BBA”), BBA In[44]*44dustrial Textiles, Inc., Guthrie North America, Inc, and various individuals.2

Jurisdiction for this action is based solely on diversity of citizenship. 28 U.S.C. § 1332. Plaintiff ZB Holdings is a South Carolina corporation which has its principal place of business in South Carolina. None of the defendants named in the complaint is a citizen of South Carolina.3 IGH, the corporation on whose behalf plaintiff purports to sue, was neither named as a party in this action nor served with process.4

On April 6, 1992, defendants moved to dismiss the derivative complaint for lack of subject matter jurisdiction. Fed.R.Civ.P. 12(b)(1). Defendants contended that IGH was an indispensable party whose joinder was required by Fed.R.Civ.P. 19(b) and that IGH should have been aligned as a defendant in the action because of the antagonism that existed between plaintiff and the management of IGH. Since both IGH and the plaintiff are South Carolina corporations, plaintiff concluded that joinder would destroy diversity of citizenship and this Court’s subject matter jurisdiction. This Court denied defendants' motion by memorandum endorsement on the theory that even if the joinder of IGH destroyed diversity, the Court had authority to assert supplemental jurisdiction over IGH pursuant to subdivision (a) of the new supplemental jurisdiction statute, 28 U.S.C. § 1367.

In the motion presently before the Court, the defendants once again have moved to join IGH as a party defendant, this time pursuant to Fed.R.Civ.P. 19(a). If the defendants prevail, the result will be the dismissal of the complaint for lack of subject matter jurisdiction. This motion is essentially a renewal of defendants’ previous motion to dismiss, for the defendants’ arguments on this motion are identical to those made during the previous motion, with one exception. This time around the defendants argue that subdivision (b) of § 1367 would bar this Court from exercising supplemental jurisdiction over the derivative claims. In defendants’ initial motion papers at the April 6th motion date, § 1367 was not cited at all, and although § 1367(a) received attention in defendants’ reply brief, the applicability of § 1367(b) was neither briefed nor discussed during oral argument.

Upon consideration of all of the parties’ submissions from this and the previous motion, this Court finds that it erred when it denied defendants’ previous motion to dismiss. Accordingly, for the reasons stated below, this Court grants the defendants’ motion to join IGH as a defendant pursuant to Fed.R.Civ.P. 19. Because such joinder will destroy complete diversity, this Court dismisses the derivative complaint in its entirety for lack of subject matter jurisdiction.

DISCUSSION

A. Joinder of IGH as an Indispensable Party

The first question this Court must consider is whether IGH is an indispensable party under Rule 19(b).5 Although [45]*45plaintiff purports to sue derivatively on behalf of IGH, IGH was not named as a party to the action. This is rather suspicious considering the well established rule that requires the joinder of the corporation on whose behalf a derivative suit is brought. See Ross v. Bernhard, 396 U.S. 531, 538, 90 S.Ct. 733, 738, 24 L.Ed.2d 729 (1970) (“The corporation is a necessary party to the action; without it the case cannot proceed.”); Liddy v. Urbanek, 707 F.2d 1222, 1224 (11th Cir.1983) (“There is no question that a corporation is an indispensable party in a derivative action brought by one of its shareholders.”) The reason for this rule is straightforward: without the presence of the corporation complete relief cannot be achieved, and the corporation’s interests cannot be protected.6 Therefore, this Court finds that IGH is an indispensable party under Rule 19(b) and accordingly must be made a party to this lawsuit.

B. Party Alignment in Derivative Actions

The determination that IGH must be made a party to this suit does not end this Court’s inquiry: this Court must also determine whether IGH should be joined as a plaintiff or as a defendant. Alignment is crucial in the present suit because both the plaintiff and IGH are South Carolina corporations. If IGH is aligned as a party plaintiff, as plaintiff argues it should be, then this Court will have subject matter jurisdiction over the suit based on diversity. On the other hand, if IGH is aligned as a defendant, diversity of citizenship will disappear, and with it this Court’s subject matter jurisdiction over the dispute.

The Court begins by noting that the general rule is that the corporation in a derivative suit should be aligned as a plaintiff since it is the real party in interest. Duffey v. D.C. Wheeler, 820 F.2d 1161, 1163 (11th Cir.1987). However, an exception to this rule has been carved out for situations where aligning the corporation as a plaintiff would not provide a “real collision” of interests. Smith v. Sperling, 354 U.S. 91, 97, 77 S.Ct. 1112, 1116, 1 L.Ed.2d 1205 (1957). In other words, “the final alignment of the parties should reflect the actual antagonisms between the plaintiffs, the corporation, and the directors.” Liddy, 707 F.2d at 1224. As the Supreme Court noted in Smith, this is a practical, and not a mechanical, determination which must be resolved by the pleadings and the nature of the dispute. Smith, 354 U.S. at 97, 77 S.Ct. at 1116. The requisite antagonism has been found where management refuses to take action to undo a business transaction, or whenever it so solidly approves it that any demand would be futile. Smith, 354 U.S. at 97, 77 S.Ct. at 1116; Rogers v. Valentine, 426 F.2d 1361, 1363 (2d Cir.1970) (antagonism present where management had refused to initiate suit on behalf of corporation);

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Cite This Page — Counsel Stack

Bluebook (online)
144 F.R.D. 42, 1992 U.S. Dist. LEXIS 14637, 1992 WL 241258, Counsel Stack Legal Research, https://law.counselstack.com/opinion/zb-holdings-inc-v-white-nysd-1992.