The Passavant Memorial Area Hospital Association v. Lancaster Pollard & Co. et al
Filing
83
OPINION entered by Magistrate Judge Byron G. Cudmore on 4/2/2012. Passavant Memorial Area Hospital Association's Motion for Leave to File a Third Amended Complaint, d/e 80 is ALLOWED. Defendants are directed to file their responsive pleadings by April 20, 2012. (MAS, ilcd)
E-FILED
Tuesday, 03 April, 2012 02:35:47 PM
Clerk, U.S. District Court, ILCD
IN THE UNITED STATES DISTRICT COURT
FOR THE CENTRAL DISTRICT OF ILLINOIS
SPRINGFIELD DIVISION
THE PASSAVANT MEMORIAL
AREA HOSPITAL ASSOCIATION,
an Illinois not-for-profit corporation,
Plaintiff,
v.
LANCASTER POLLARD & CO.,
an Ohio corporation;
LANCASTER POLLARD
ASSET MANAGEMENT, LLC,
an Ohio limited liability company; and
STEVEN W. KENNEDY, JR.,
Defendants and
Third Party Plaintiffs,
v.
JASON L. GEORGE and PECK,
SHAFFER & WILLIAMS, LLP,
Third Party
Defendants.
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No. 11-CV-3116
OPINION
BYRON G. CUDMORE, U.S. MAGISTRATE JUDGE:
This matter comes before the Court on Plaintiff, The Passavant
Memorial Area Hospital Association’s (Passavant) Motion for Leave to File
a Third Amended Complaint (d/e 80) (Motion). Passavant seeks to add
direct claims against third party Defendants Peck, Shaffer & Williams, LLP
Page 1 of 20
(Peck, Shaffer), and Jason L. George. Peck, Shaffer oppose the Motion on
the grounds that the amendment would be futile and that the amendment is
an improper attempt to add Peck, Shaffer as a non-diverse party that would
destroy diversity jurisdiction. Peck, Shaffer disputes whether its joinder
would destroy diversity, but argues that if the Court would so find, then the
joinder is improper. Passavant argues that the claims against George and
Peck, Shaffer are not futile and that joinder is proper even though joinder
will destroy diversity jurisdiction. As explained below, Passavant’s claims
against George and Peck, Shaffer are not futile, and Peck, Shaffer’s joinder
will not destroy diversity. Thus, the Motion is ALLOWED.
BACKGROUND
A
Original Complaint
Passavant’s original Complaint alleges claims against Defendants
Lancaster Pollard & Co., Lancaster Pollard Asset Management LLC
(collectively Lancaster), and Steven Kennedy. Notice of Removal (d/e 1),
Exhibit 1, Complaint and Request for Jury Trial (Complaint). Passavant
alleges that it is a not-for-profit corporation located in Jacksonville, Illinois.
Complaint, ¶ 1. Lancaster provides financial advisory and bond
underwriting services. Lancaster is located in Columbus, Ohio. Kennedy
is a Vice President and investment banker at Lancaster. Kennedy is a
resident of Ohio.
Page 2 of 20
Passavant alleges that the Defendants acted as Passavant’s financial
advisor and bond underwriter. Attached to the Complaint is the Investment
Advisory Agreement between Lancaster and Passavant. Complaint,
Exhibit E, Lancaster Pollard Investment Advisory Group Investment
Advisory Agreement dated December 14, 2006 (Lancaster Agreement).
Under the Lancaster Agreement, Lancaster provided financial advisory and
asset management services to Passavant. Lancaster Agreement, ¶ 1.1
The Lancaster Agreement set forth Lancaster’s fiduciary relationship with
Passavant:
7.
Fiduciary Responsibilities. It is agreed that the sole
standard of care imposed upon [Lancaster’s Investment
Advisory Group] by this Agreement is to act with care, skill,
prudence, and diligence under the circumstances then
prevailing that a prudent investor acting in a like capacity and
familiar with such matters would use in the conduct of an
enterprise of a like character with like aims.
Lancaster Agreement, ¶ 7. Defendant Kennedy managed Lancaster’s
relationship with Passavant. Complaint, ¶ 5.
Defendants also provided bond underwriting services in connection
with a bond issue in 2006. Id. ¶ 8. As part of the bond issue, and upon
Kennedy’s advice, Passavant entered into a bond interest rate swap
agreement (Passavant Swap Agreement) with Lehman Brothers Special
1
Lancaster Investment Advisory Group is a registered trade name of Defendant
Lancaster. Complaint, ¶ 4.
Page 3 of 20
Financing, Inc. (Lehman), on September 21, 2006. The Swap Agreement
was a hedge agreement that limited Passavant’s exposure to changes in
interest rates. Id. ¶¶ 11-12.
On September 15, 2008, Lehman filed bankruptcy. On October 1,
2008, Lancaster and Kennedy allegedly prepared letters for Passavant’s
signature giving Lehman notice that the filing of bankruptcy constituted a
default under the Passavant Swap Agreement. Lancaster and Kennedy
allegedly instructed Passavant to sign the prepared letter and to send the
letter by facsimile transmission (fax) to Lehman. Passavant did so.
Id. ¶ 20.
On October 21, 2008, Lancaster and Kennedy allegedly prepared a
letter for Passavant’s signature notifying Lehman that the Passavant Swap
Agreement was terminated due to the default. Id. ¶ 22. Lancaster and
Kennedy allegedly instructed Passavant to sign the prepared letters and
fax the letter to Lehman. Passavant did so. Id. ¶ 22.
On March 30, 2009, Lehman asserted that it had no record of receipt
of a notice from Passavant terminating the Passavant Swap Agreement.
Lehman asserted that notice by fax was improper because the Passavant
Swap Agreement stated that notices must be mailed and cannot be sent by
fax. Id. ¶¶ 27-31. Passavant settled the dispute with Lehman by paying
$2,975, 000.00. Id. ¶ 36. Passavant’s original Complaint sought to
Page 4 of 20
recover the $2,975,000.00, plus punitive damages, from Lancaster and
Kennedy under various theories. Id. Counts I-V.
B.
Procedural History
Passavant filed this action in Morgan County, Illinois, Circuit Court
against Defendants Lancaster and Kennedy. The Lancaster Defendants
removed this matter to this Court under this Court’s diversity removal
jurisdiction. Notice of Removal (d/e 1), Exhibit 1, Complaint and Request
for Jury Trial (Complaint). Lancaster and Kennedy then filed a third party
action against their attorneys Peck, Shaffer and George. George is a
partner in Peck, Shaffer. Third-Party Complaint and Jury Demand (d/e 7)
(Third-Party Complaint).2 George is a resident of Ohio.
Peck, Shaffer has several offices, including one in Chicago, Illinois.
In 2011, Peck, Shaffer had two “contract partners” at the Chicago office,
George D. Buzard and Thomas C. Smith. As contract partners, Buzard
and Smith owned no equity interest in the partnership, they did not share in
the profits or losses of the partnership, they had no authority to participate
in the management of the partnership, and they were paid income fixed by
contract. Memorandum of Peck, Shaffer & Williams LLP and Jason L.
George, Esq. Opposing the Motion of the Passavant Memorial Area
2
The Third-Party Complaint also named Peck, Shaffer associate Allison Binkley
as a defendant. The claims against her have been dismissed. Agreed Order
Dismissing Third-Party Defendant Allison M. Binkley Without Prejudice (d/e 59).
Page 5 of 20
Hospital Association to File Third Amended Complaint (d/e 82) (Response),
Attached Affidavit of Thomas Freeman, ¶¶ 6-7. Smith became an equity
partner on January 1, 2012. Response, at 13 n.7.
On August 1, 2011, Passavant filed an Amended Complaint in which
Passavant asserted claims directly against Peck, Shaffer and George.
Amended Complaint and Request for Jury Trial (d/e 30). George and
Peck, Shaffer moved to strike the Amended Complaint because the time to
amend as of right had passed, and Passavant did not secure leave to
amend. Motion of Peck, Shaffer & Williams LLP to Strike the Amended
Complaint (d/e 31) (Motion to Strike); see Fed. R. Civ. P. 15(a). The Court
allowed the Motion to Strike because Passavant failed to secure leave to
amend, but the Court gave Passavant leave to file its Amended Complaint.
Text Order entered September 30, 3011 (Text Order). Passavant filed its
Second Amended Complaint and Request for Jury Trial (d/e 60) (Second
Amended Complaint) on November 21, 2011.
On December 5, 2011, Peck, Shaffer and George moved to
reconsider the Text Order because Peck, Shaffer wished to oppose
granting Passavant leave to amend. Motion of Peck, Shaffer & Williams
LLP and Jason L. George, Esq. to Reconsider the September 30, 2011
Text Order Granting Leave for the Passavant Memorial Area Hospital
Association to File an Amended Complaint Adding Peck, Shaffer &
Page 6 of 20
Williams LLP and Jason L. George Esq., as Defendants (d/e 65) (Motion to
Reconsider).
On January 20, 2012, the Court allowed the Motion to Reconsider
and struck the Second Amended Complaint. The Court granted Passavant
leave to file a motion for leave to file an amended complaint. Opinion
entered January 20, 2012 (d/e 78), at 8. Passavant has now filed the
Motion. Peck, Shaffer and George have filed their opposition to the Motion.
Memorandum of Peck, Shaffer & Williams LLP and Jason L. George., Esq.
Opposing the Motion of the Passavant Memorial Area Hospital Association
to File a Third Amended Complaint (d/e 82). The Lancaster Defendants
have elected not to respond to the Motion and so are deemed to have no
opposition to the Motion. Local Rule 7.1(B)(2).
C.
Proposed Third Amended Complaint
Passavant seeks to amend the Complaint to add claims against
Peck, Shaffer and George. The proposed Third Amended Complaint
alleges that George contacted Lancaster to provide legal advice to
Lancaster’s clients, including Passavant, related to terminating swap
agreements with Lehman including the Passavant Swap Agreement.
Motion, Exhibit A, Third Amended Complaint and Request for Jury Trial
(Third Amended Complaint), Count VI. The Third Amended Complaint
alleges that George developed the notices and the procedure used to send
Page 7 of 20
notice of termination to Lehman Brothers. The Third Amended Complaint
alleges that George knew that his advice was intended to benefit
Passavant as a client of Lancaster and that Passavant would likely rely on
that advice. The Third Amended Complaint alleges that Passavant knew
that the advice came from Lancaster’s attorney. The Third Amended
Complaint alleges that Passavant paid Lancaster $5,000.00 for the
termination notice and advice, and Lancaster, in turn, paid the $5,000.00 to
Peck, Shaffer. Third Amended Complaint, ¶¶ 82-89.
The Third Amended Complaint alleges that Passavant knew it was
paying for legal advice and that it relied on that advice. The Third
Amended Complaint alleges that George knew that the advice would be
relied upon by Passavant. The Third Amended Complaint alleges that, as
a result, Passavant had an attorney-client relationship with George. The
Third Amended Complaint alleges that George breached the duty of care
in giving incorrect advice on the correct manner to send notice of
termination to Lehman, and that as a result of that breach, Passavant
suffered damages by having to pay Lehman $2,975, 000.00. Third
Amended Complaint, ¶¶ 91-95. The proposed Third Amended Complaint
alleges a claim against Peck, Shaffer on a theory of principal-agency
liability because George is a partner in Peck, Shaffer. Third Amended
Complaint, Count VII.
Page 8 of 20
ANALYSIS
Leave to amend pleadings is to be freely given when justice so
requires. Fed. R. Civ. P. 15(a)(2). The Court may deny leave to file an
amendment to a complaint when the amendment would be futile.
Foman v. Davis, 371 U.S. 178, 182 (1962). In this case, the amendment
does not appear to be futile.
To allege a claim for legal malpractice, Passavant must allege: (1) an
attorney-client relationship; (2) a professional duty arising from that
relationship; (3) breach of that duty; (4) proximate cause; and (5) damages.
Shoemaker v. Gindlesberger, 118 Ohio St.3d 226, 228, 887 N.E.2d 1167,
1169-70 (Ohio 2008); Belden v. Emmerman, 203 Ill.App.3d 265, 268, 560
N.E.2d 1180, 1181 (Ill.App. 1st Dist. 1990). Passavant sufficiently alleges
an attorney-client relationship between itself and George. George provided
the advice directly to Lancaster, which in turn, transmitted the advice to
Passavant. Passavant paid Lancaster, which in turn, paid George.
Passavant alleges that George performed the services knowing that the
advice would be communicated to Lancaster’s clients, including Passavant.
The sufficiency of these allegations depend to some degree on
whether Ohio or Illinois law applies to the question of whether an attorney-
Page 9 of 20
client relationship exists.3 Under Illinois law, an attorney owes a duty to a
third party, such as Passavant, when “the primary purpose and intent of the
attorney-client relationship itself was to benefit or influence the third party.”
Pelham v. Gresheimer, 92 Ill.2d 13, 21, 440 N.E.2d 96, 100 (Ill. 1982). The
Illinois Supreme Court specifically rejected the requirement that the third
party demonstrate that it was in privity with the direct client of the attorney.
Pelham, 440 N.E.2d at 99. Passavant alleges that Lancaster hired George
to provide advice on how to terminate swap agreements for the benefit of
Lancaster’s clients including Passavant. Under the Illinois Supreme
Court’s decision in Pelham, Passavant sufficiently alleges that George’s
attorney-client relationship with Lancaster extended to Passavant.
Ohio requires privity between the attorney’s client (in this case,
Lancaster) and the third party (in this case, Passavant), to extend the
attorney-client relationship to the third party,
[A]n attorney may not be held liable by third parties as a result
of having performed services on behalf of a client, in good faith,
3
The parties disagree on the applicable law. See Memorandum of Peck, Shaffer
& Williams LLP and Jason L. George, Esq. Opposing the Motion of Passavant Memorial
Area Hsopital Association to File a Third Amendd Complaint (d/e 82) (Peck, Shaffer
Response) , 6; Plaintiff, The Passavant Memorial Area Hospital Association’s Response
to Third-Party Defendants, Jason L. George and Peck Shaffer & Williams, LLP’s Motion
to Dismiss the Second Amended Complaint (d/e 75), at 7 n.3. The Court does not
address the conflicts of law issue at this stage because the parties have not briefed the
issue, and the issue does not affect the outcome of the Motion. The differences in
Illinois and Ohio law regarding establishing an attorney-client relationship, however,
may affect the outcome of the claim later in the proceeding.
Page 10 of 20
unless the third party is in privity with the client for whom the
legal services were performed.
Simon v. Zipperstein, 32 Ohio St.3d 74, 76, 512 N.E.2d 636, 638
(Ohio 1987).
The facts alleged, when read favorably to Passavant, plausibly show
that Passavant was in privity with Lancaster because Lancaster owed
Passavant a fiduciary duty as its financial advisor. An attorney’s client and
a third party to whom the client owes a fiduciary duty, “are in privity . . .
such that an attorney-client relationship established with the fiduciary
extends to those in privity therewith regarding matters to which the fiduciary
duty relates.” Arpadi v. First MSP Corp., 68 Ohio St.3d 453, 458, 628
N.E.2d 1335, 1339 (Ohio 1994).4 Paragraph 7 of the Lancaster
Agreement, quoted above, sets forth the standard of care Lancaster was
required to meet in fulfilling its fiduciary duty to Passavant.5 Thus, the
Third Amended Complaint plausibly alleges that the attorney-client
relationship between Lancaster and George extended to Passavant by
4
The cases on which Peck, Shaffer and George rely do not address the issue of
fiduciary relationships establishing privity between the client and the third party. See
e.g., New Destiny Treatment Center, Inc. v. Wheeler, 129 Ohio St.3d 39, 44, 950
N.E.2d 157, 162 (Ohio 2011); Landis v. Hunt, 80 Ohio App.3d 662, 672, 610 N.E.2d
554, 560 (Ohio App. 10th Dist. 1992).
5
The Third Amended Complaint incorporates the Lancaster Agreement by
reference. Third Amended Complaint, ¶ _13, Exhibit E. The Lancaster Agreement,
thus, is part of the Third Amended Complaint for all purpose. Fed. R. Civ. P. 10(c).
Page 11 of 20
virtue of Lancaster’s fiduciary obligations to Passavant under the Lancaster
Agreement.
The exact scope of Lancaster’s duties under the Lancaster
Agreement is a factual issue. At this point, the allegations plausibly show
that Lancaster’s fiduciary obligations extended to advising Passavant on
the proper procedures to terminate the Passavant Swap Agreement when
Lehman filed bankruptcy. As a result, the Third Amended Complaint
alleges an attorney-client relationship between Passavant and George
under either Illinois or Ohio law.6
Passavant alleges the remaining elements of its claim against
George. Passavant alleges that George had a duty to provide proper
advice; George breached that duty by incorrectly advising Passavant to
give notice by fax; the breach of duty was the proximate cause of failure of
Passavant’s attempt to terminate the Passavant Swap Agreement; and
Passavant suffered injury thereby.
Peck, Shaffer and George argue that George’s alleged breach of duty
did not cause any injury. They argue that, under applicable New York law,
the notice was effective upon receipt regardless of the terms of the
Passavant Swap Agreement. They further argue that notice by fax was
6
The Court does not mean to preclude the possibility that privity may also be
established on some other basis.
Page 12 of 20
proper for termination under a separate clause in the Passavant Swap
Agreement unrelated to the default clauses.
Both of these arguments assume that Lehman actually received the
fax notice. The cases cited by Peck, Shaffer and George hold that actual
notice is sufficient even if the notice does not comply with a contractual
notice provision. Rockland Exposition, Inc. v. Alliance of Automotive
Service Providers of New Jersey, 706 F. Supp.2d 350,360 (S.D.N.Y. 2009).
The Passavant Swap Agreement also allows notice by fax in
circumstances other than notices of default and termination based on
default. Notice by fax, however, is effective upon receipt by the
“responsible employee” and the sender has the burden to prove receipt
and that burden “will not be met by a transmission report generated by the
sender’s facsimile machine.” Complaint, Exhibit B, ISDA Master
Agreement, ¶ 10(a)(iii). Lehman denied ever receiving the faxed notices
from Passavant. Third Amended Complaint, ¶¶ 31-32, 35. Thus, the Third
Amended Complaint plausibly alleges that the notice to Lehman was not
effective under any circumstances, and the ineffective notice was the
proximate cause of Passavant’s injury.7 The Third Amended Complaint is
not futile.
7
The Third Amended Complaint also alleges that the notices were notice of
default and notices of termination for default. Third Amended Complaint, ¶¶ 24-29.
These allegations plausibly show that the notices were subject to the provisions in the
Passavant Swap Agreement that did not allow notice by fax. These allegations, if true,
could plausibly show that the notice was ineffective regardless of the other termination
provisions in the Passavant Swap Agreement.
Page 13 of 20
The Court may still deny the Motion under certain circumstances if
joinder of Peck, Shaffer and George as defendants would destroy diversity.
When joinder of a nondiverse party would destroy removal diversity subject
matter jurisdiction, this Court may either deny joinder or permit joinder and
remand the case to state court. 28 U.S.C. § 1447(e); Schur v. L.A. Weight
Loss Centers, Inc., 577 F.3d 752, 759 (7th Cir. 2009). Passavant argues
that the proposed Third Amended Complaint would destroy diversity
because Passavant and Peck, Shaffer are both citizens of Illinois for
purposes of diversity jurisdiction. Passavant argues that the Court should
nonetheless allow joinder under the relevant considerations and remand
the case. See Schur, 577 F.3d at 759.
This Court has carefully considered the matter and concludes that
joinder will not destroy diversity. The relevant point in time to determine
whether adding a party will destroy diversity is the date that the amended
pleading is filed adding the party as a defendant. Lewis v. Lewis, 358 F.2d
495, 501-02 (9th Cir. 1966); China Basin Properties, Ltd. v. Allendale Mut.
Ins. Co., 818 F.Supp. 1301, 1303 (N.D. Cal. 1992); Jakes v. MacArthur
Co., 2010 WL 1286403, at *2 (W.D. Wisc. March 26, 2010); Royal Travel,
Inc. v. Shell Management Hawaii, Inc., 2009 WL 2025320, at *2 (D. Hawaii
July 10, 2009). Once the Court has diversity jurisdiction, subsequent
changes in a party’s status will not affect that jurisdiction. FreeportPage 14 of 20
McMoRan, Inc. v. K N Energy, Inc., 498 U.S. 426, 428-29 (1991). In this
case, Passavant properly filed the Second Amended Complaint on
November 21, 2011, pursuant to this Court’s Text Order entered
September 30, 2011. This portion of the September 30, 2011, Text Order
was later vacated, but Passavant was given leave to file this Motion to
pursue the issue. The Court, therefore, did not dismiss the claims entirely,
but retained jurisdiction to decide whether to allow Passavant to proceed
on the claims. The relevant date, therefore, should be November 21, 2011,
the date that Passavant first properly filed the claim against Peck, Shaffer.
On November 21, 2011, Peck, Shaffer was a limited liability
partnership. The citizenship of a partnership for diversity purposes is the
citizenship of every general partner and limited partner. Carden v. Arkoma
Associates, 494 U.S. 185, 187 (1990). Buzard and Smith were contract
partners in the Chicago office. The Court does not consider Smith’s
subsequent change in status to the position of equity partner on January 1,
2012, because the subsequent change in status does not affect diversity
jurisdiction. See Freeport-McMoRan, Inc., 498 U.S. at 428-29.
Peck, Shaffer’s contract partners were not general or limited partners
under either Illinois or Ohio law. General and limited partners share a
basic characteristic–they share in the ownership of the enterprise and in
the profits and losses. The Illinois Supreme Court explains that, “A limited
Page 15 of 20
partnership is in the nature of an investment. Through his contribution, the
limited partner becomes entitled to share in the profits and losses of the
partnership, though his share of the losses will not exceed the amount of
capital initially contributed by him to the enterprise.” Kramer v. McDonald's
System, Inc., 77 Ill.2d 323, 332, 396 N.E.2d 504, 508 (Ill. 1979). The Ohio
limited partnership statute states that a partnership interest, “means a
partner’s share of the profits and losses of a limited partnership and the
right to receive distributions of partnership assets.” Ohio Rev. Code
§ 1782.01(L). Similarly general partners share in the ownership of the
enterprise. Grendell v. Ohio Environmental Protection Agency, 146 Ohio
App.3d 1, 13, 764 N.E.2d 1067, 1077 (Ohio App. 9th Dist.,2001) ; Cook v.
Lauten, 1 Ill.App.2d 255, 259, 117 N.E.2d 414, 415 (Ill. App. 1st Dist. 1954).
General and limited partners share in the risk of ownership. General
partners have unlimited liability while limited partners’ liabilities are limited
to their investments, but both share some risk. Allen v. Amber Manor
Apartments Partnership, 95 Ill.App.3d 541, 547, 420 N.E.2d 440, 445
(Ill.App. 1st Dist. 1981); Heinz v. Steffen, 112 Ohio App.3d 174, 183, 678
N.E.2d 264, 270 (Ohio App. 2d Dist. 1996); Hommel v. Micco, 76 Ohio
App.3d 690, 696, 602 N.E.2d 1259, 1262 (Ohio App. 11th Dist. 1991).
General partners share additional attributes. They participate in the
management of the partnership. They are agents of the partnership and
Page 16 of 20
the other partners, and they owe fiduciary duties to the other partners.
See 805 ILCS 206/401(f) (“each partner has equal rights in the
management and conduct of the partnership business”); Ohio Rev. Code
§ 1776.41(F) (same); Grendell, 146 Ohio App.3d at 13, 764 N.E.2d at 1077
(partners share mutuality of agency and mutuality of control); Hommel v.
Micco, 76 Ohio App.3d 690, 696, 602 N.E.2d 1259, 1263 (Ohio App. 11th
Dist. 1991) (general partners have ultimate control over decisions made in
the ordinary course of business); ARTA Group, Inc. v. Salomon Bros.
Holding Co., Inc., 288 Ill.App.3d 467, 470-71 680 N.E.2d 769, 772 (Ill.App.
2d Dist. 1997) (general partner owes fiduciary duty to partnership); Saballus
v. Timke, 122 Ill.App.3d 109, 116, 460 N.E.2d 755, 760 (Ill. App. 1st Dist.
1983) (partners are mutual agents and fiduciaries of each other).
Peck, Shaffer’s contract partners do not share the attributes of a
general or limited partner. They are not owners of Peck, Shaffer. They
have no investment at risk. They do not share in the profits or losses.
They do not participate in management of the partnership. Their
compensation is determined by contract. They are employees or
independent contractors with a title. They are not partners.
An Illinois court has directly addressed the issue. In Davis v. Loftus,
334 Ill.App.3d 761, 778 N.E.2d 1144, 1152 (Ill.App. 1st Dist. 2002), the
Illinois Appellate Court found that an “income partner” in a law firm was not
Page 17 of 20
a partner, and so, had no personal liability for the obligations of the
partnership. The Davis Court explained that Illinois looked to the
substance of the relationship not the form. Id. at 1151. Similar to the
“contract partners” in this case, the “income partner” in Davis did not share
in profits or losses, did not participate in management, and was paid a
salary plus bonus. The Davis court concluded that such an “income
partner” was not a partner. Id. at 1152. Similarly, the contract partners
Buzard and Smith were not partners under Illinois law. Given the
similarities of Illinois and Ohio partnership law, the Court finds that the Ohio
Supreme Court would reach the same conclusion.
The District Court in Massachusetts has specifically addressed
whether a contract partner is a partner for purposes of determining
citizenship for diversity jurisdiction. In Morson v. Kreindler & Kreindler,
LLP, 616 F. Supp. 2d 171, 173 (D. Mass. 2009), the plaintiff Morson
brought an action in Massachusetts state court against the law firm of
Kreindler & Kreindler, LLP (Kreindler). Morson was a citizen of
Massachusetts, and Kreindler was a New York limited liability partnership.
Kreindler removed the case to the District Court of Massachusetts based
on diversity removal jurisdiction. Morson moved to remand because
Kreindler had an office in Boston. Anthony Tarricone was the resident
agent for Kreindler in Massachusetts and a contract partner. Like Buzard
Page 18 of 20
and Smith, Tarricone had no ownership interest in the partnership, no right
to share in profits and losses, no rights to participate in policymaking for the
business. Tarricone was paid a fixed salary. Id. at 172. The Court found
that Tarricone was really an employee, and as an employee, “his
citizenship is irrelevant for purposes of diversity analysis.” Id. at 173. The
Morson Court applied Massachusetts and New York law, but the principals
of New York and Massachusetts partnership law were substantially similar
to the Illinois and Ohio principals discussed above. See Id. at 172-73. This
Court agrees with the analysis in Morson. Buzard and Smith were
employees or contractors, not partners under either Illinois or Ohio law.
Their citizenship is not relevant to determining Peck, Shaffer’s citizenship.
It is conceivable that Peck, Shaffer could be estopped under some
circumstances from denying that Buzard and Smith were partners of the
firm.8 See Morson, 616 F. Supp. 2d at 173. No possibility of estoppel
exists here, however. Passavant did not rely on any representations about
the partnership status of Buzard and Smith; Passavant did not even select
George or Peck, Shaffer to provide legal advice. Furthermore, Passavant’s
theory of liability against Peck, Shaffer is principal, agent liability for the
8
The Court assumes for purposes of argument only that estoppel would be
relevant to determine diversity jurisdiction. The issue has not been briefed by the
parties, and the Court makes not ruling on this question.
Page 19 of 20
actions of George. Buzard and Smith were not involved in the matter so
their status is irrelevant.
Thus, Peck, Shaffer had no partners who were citizens of Illinois on
November 21, 2011. Passavant’s joinder of Peck, Shaffer as an additional
defendant does not destroy diversity. Moreover, as explained above, the
claims in the Third Amended Complaint are not futile. Therefore the Motion
is allowed.
WHEREFORE, Passavant Memorial Area Hospital Association’s
Motion for Leave to File a Third Amended Complaint (d/e 80) is ALLOWED.
The Clerk is directed to file the Third Amended Complaint attached to the
Motion. Defendants are directed to file their responsive pleadings by April
20, 2012.
ENTER: April 2, 2012
s/ Byron G. Cudmore
BYRON G. CUDMORE
UNITED STATES MAGISTRATE JUDGE
Page 20 of 20
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