Dominium Austin Partners, L.L.C. v. Emerson ( 2001 )

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
___________
No. 00-2226
___________
Dominium Austin Partners, L.L.C., *
a Minnesota limited liability company; *
Dominium Iowa One, L.L.C., *
a Minnesota limited liability company; *
Dominium Kansas One, L.L.C., *
a Minnesota limited liability company; *
Dominium Wisconsin Five, L.L.C., *
a Minnesota limited liability company; *
Dominium Wisconsin Seven, L.L.C., *
a Minnesota limited liability company; *
Dominium Management Services, Inc., *
a Minnesota corporation; General *
Mills, Inc., a Delaware corporation; * Appeal from the United States
Minnesota Mining and Manufacturing * District Court for the
Company, a Delaware corporation; * District of Minnesota.
H B Fuller Company, a Minnesota *
corporation; Deluxe Corporation, *
a Minnesota corporation; KLT *
Investments, Inc., a Missouri *
corporation, *
*
Plaintiffs - Appellees, *
*
v. *
*
M. J. Emerson; Nancy Emerson; *
Richard Triplett; Susan Triplett, *
*
Defendants - Appellants. *
___________
Submitted: March 16, 2001
Filed: May 1, 2001
___________
Before MURPHY, LAY, and BYE, Circuit Judges.
___________
MURPHY, Circuit Judge.
This diversity case involves disagreements between certain limited partners and
other partnership entities who invested in low income housing. The case was brought
by a number of companies, who are citizens of Minnesota, Delaware, and Missouri, to
compel arbitration under the Federal Arbitration Act (FAA), 9 U.S.C. §§ 1-16, and to
enjoin further proceedings in a California class action brought by defendants.
Defendants, all residents of Iowa, then joined Minnesota resident Joel Lindquist as a
class representative in their California action and moved the district court to dismiss
this case for failure to join an indispensable party under Fed. R. Civ. P. 12(b)(7) , for
lack of personal jurisdiction, and for improper venue. In the alternative, defendants
moved for permission to arbitrate on behalf of the class alleged in California. The
district court1 denied the motion to dismiss, ordered defendants to arbitrate as
individuals, and enjoined the California proceedings. They appeal, and we affirm.
I.
Appellants M.J. and Nancy Emerson and Richard and Susan Triplett are
residents of Iowa who became limited partners by investing in some Operating Limited
1
The Honorable Donovan W. Frank, United States District Judge for the District
of Minnesota.
-2-
Partnerships (Operating Partnerships).2 Forty Operating Partnerships were formed
between 1991 and 1996 under California law to own and operate low income housing
projects through general partners Nationwide Housing Group, Inc. and Nationwide
Development Group, L.P. (collectively NHG). Each partnership adopted an agreement
which provided that the limited partners would have voting rights in proportion to their
investment, that the agreement could be amended by a 51% vote of the limited partners,
that the replacement of a general partner required a unanimous vote of the limited
partners, and that any dispute would be submitted to an arbitrator who would resolve
the issue by applying California law.
NHG Institutional Fund, L.P. (the Institutional Fund) was a limited partner in
twelve of the Operating Partnerships, including all but one of the partnerships in which
appellants had invested. The Institutional Fund invested a total of $50 million in these
twelve Operating Partnerships, giving the Institutional Fund a controlling vote in each.
The Institutional Fund was comprised of appellees General Mills, Inc., Minnesota
Mining and Manufacturing Company, H.B. Fuller Company, Deluxe Corporation, and
KLT Investments, Inc. (the corporate parties), and five other companies not involved
in this lawsuit.
The appellants allege that in early 1996, NHG informed the Institutional Fund
that the Operating Partnerships and NHG were experiencing financial difficulties. The
corporate parties were concerned about their investments, and they allegedly took on
an active role in the management of the partnerships by influencing NHG and
restructuring the partnerships to the detriment of the individual limited partners. Part
of the restructuring involved the replacement of NHG as general partner without the
unanimous vote of the limited partners.
2
The Emersons invested in the limited partnerships known as Wisconsin V and
Kansas I, and the Tripletts invested in Iowa I, Kansas I, and Wisconsin VII.
-3-
Appellee Dominium Management Services, Inc., acted as general partner for
some or all of the Operating Partnerships in 1996, but the corporate parties eventually
placed each Operating Partnership under the control of separate general partners.
Appellees Dominium Iowa One, L.L.C., Dominium Kansas One, L.L.C., Dominium
Wisconsin Five, L.L.C., and Dominium Wisconsin Seven, L.L.C., were all general
partners in Operating Partnerships in which one or more of the appellants invested.
The appellants allege that the corporate parties continued to control the
partnerships through the general partners, received information not available to the
individual investors, made misrepresentations to the individual investors, and diluted
their interests. In 1997, over 80% of the limited partners of each Operating Partnership
adopted amendments to their partnership agreements. Richard and Susan Triplett voted
for adoption of the amendments, but M.J. and Nancy Emerson voted against adoption.
Among the provisions of the amended agreements was one that provided that all
disputes arising out of the partnerships would be submitted to an arbitrator in
Minnesota who would resolve the issues under Minnesota law. The appellants claim
that the amendments would not have been adopted had the corporate parties not made
certain misrepresentations to the individual limited partners.
In September 1999, appellants filed a class action in California state court
against the corporate parties, NHG, and Dominium Management Services, Inc.
Appellants also sued the general partners who replaced NHG as a class, naming
Dominium Austin Partners, L.L.C. as class representative. Among the causes of action
the complaint alleged were breach of fiduciary duty by the general partners, for
allowing themselves to be controlled by the corporate parties, and breach of fiduciary
duty by the corporate parties, for diluting the interests of the individual investors while
acting in the capacity of de facto general partners. After the complaint was filed in
California, appellees filed a petition with the American Arbitration Association,
demanding arbitration. Appellants refused to arbitrate. Appellees then brought this
diversity action, requesting that appellants be compelled to arbitrate their dispute in
-4-
Minnesota under the FAA, that appellants be precluded from arbitrating as a class, and
that further proceedings in the California case be enjoined. After this federal action
was filed, appellants joined Joel Lindquist as a class representative in their California
lawsuit.
Lindquist is a Minnesota resident who had invested in the Dakota II limited
partnership, and appellees petitioned the American Arbitration Association with a
demand that he submit his claim to arbitration. He refused, and appellees sued in
Minnesota District Court to compel him to arbitrate. After the appellate briefs in this
case were submitted, the state court granted appellees' motion to compel Lindquist to
submit to arbitration. It also enjoined him from arbitrating on behalf of a class and from
bringing further proceedings related to this dispute in any forum other than binding
arbitration in Minnesota. Lindquist's appeal from that decision is pending in the
Minnesota Court of Appeals. Meanwhile, the California Superior Court granted
appellees' motion to stay the California case. No class has yet been certified in that
action.
In the appeal now before the court, appellants claim that the federal district court
erred in dismissing this case and denying their request to arbitrate as a class. The
district court held that Lindquist was not indispensable because he was not a named
party at the time this action was filed. Since he was not indispensable, the court had
diversity jurisdiction. Personal jurisdiction was not lacking because appellants had
consented to personal jurisdiction by the agreement to arbitrate in Minnesota. Venue
was proper in Minnesota because it was not inconvenient to the parties, and some of
the conduct at issue had occurred in the state. Appellants contest all these points and
also argue that the district court should have abstained in favor of the California court
since the case there was filed first.
The FAA confers jurisdiction on federal courts over actions to compel arbitration
only to the extent that the court would otherwise have jurisdiction. See 9 U.S.C. § 4;
-5-
Moses H. Cone Mem. Hosp. v. Mercury Constr. Co., 460 U.S. 1, 25 n.32 (1983). The
asserted basis for subject matter jurisdiction in this case is diversity of citizenship, see
28 U.S.C. § 1332, which requires complete diversity among the parties. See Carden
v. Arkoma Assocs., 494 U.S. 185, 187 (1990). Appellants argue that Lindquist is an
indispensable party because he is necessary for a just resolution of this case. His
joinder would deprive the court of diversity jurisdiction since he and some of the
plaintiffs are citizens of Minnesota.
If subject matter jurisdiction exists at the time the action is commenced, it will
generally not be divested by subsequent events. See Freeport-McMoRan, Inc. v. KN
Energy, Inc., 498 U.S. 426, 428 (1991) (per curiam). The exception is where a
nondiverse party must be joined because the party was indispensable at the time the
complaint was filed. See Estate of Alvarez v. Donaldson Co., Inc., 213 F.3d 993, 994
(7th Cir. 2000); Whalen v. Carter, 954 F.2d 1087, 1096 (5th Cir. 1992).
The first step in determining whether a party is indispensable is to determine
whether it is a necessary party. A party is necessary if:
(1) in the person's absence complete relief cannot be accorded among
those already parties, or (2) the person claims an interest relating to
the subject of the action and is so situated that the disposition of the
action in the person's absence may (i) as a practical matter impair or
impede the person's ability to protect that interest or (ii) leave any of
the persons already parties subject to a substantial risk of incurring
double, multiple, or otherwise inconsistent obligations by reason of the
claimed interest.
Fed. R. Civ. P. 19(a).
At the time the appellees filed this case, Lindquist was not a necessary party.
Appellants do not assert that complete relief could not be afforded among the existing
-6-
parties in his absence, and Lindquist's interests would not have been prejudiced by
adjudication of the claims. Appellees sought to compel no one but the appellants to
arbitrate, and they did not seek to preclude anyone else from suing in another forum.3
Lindquist's rights would have been unaffected by the resolution of this case. Moreover,
at the time the federal lawsuit was filed, there was little risk of inconsistent judgments.
Lindquist was not a named plaintiff in the California lawsuit, and there was no
indication appellees planned to bring any action against him. Lindquist was therefore
not a necessary or indispensable party, and the district court did not err by denying
appellants' motion to dismiss under Fed. R. Civ. P. 12(b)(7).4
The appellants also argue that they are not subject to personal jurisdiction in
Minnesota because their action does not fall within its long arm statute. Nonresidents
are subject to personal jurisdiction to the extent that state law allows. See Fed. R. Civ.
P. 4(e). Minn. Stat. § 543.19 has been interpreted to confer personal jurisdiction over
nonresident defendants to the maximum extent allowed by due process. See Valspar
Corp. v. Lukken Color Corp., 495 N.W.2d 408, 411 (Minn. 1992). Due process is
satisfied when a defendant consents to personal jurisdiction by entering into a contract
3
Appellants rely on Owens-Illinois, Inc. v. Meade, 186 F.3d 435, 438-39 (4th
Cir. 1999), in which some of the plaintiffs in a state lawsuit were not named as
defendants in a subsequent federal action because the filers wanted to obtain diversity
jurisdiction (which would have been destroyed by including all of the state plaintiffs).
The decision of the district court to dismiss the Owens-Illinois case was affirmed
because the appellate court concluded that the omitted parties were necessary and
indispensable. The factual background here is very different because Lindquist was
not a party in the state case at the time this federal action was filed. He was only added
as a plaintiff in the state case after this action commenced with diversity jurisdiction.
Since the cases are factually distinct, we need not examine the question of whether
Owens-Illinois is consistent with the federal policy favoring arbitration.
4
Appellants also argue that there are other unidentified class members in the
California action who are Minnesota residents and indispensable parties, but there is
no showing that these unnamed individuals would be either necessary or indispensable.
-7-
that contains a valid forum selection clause. See Burger King Corp. v. Rudzewicz, 471
U.S. 462, 472 n.14 (1985); M/S Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 15
(1972). The partnership amendments adopted by each Operating Partnership in 1997
provided: "All arbitration hearings will be held in Minneapolis, Minnesota." Such a
forum selection clause is enforceable unless it is invalid or enforcement would be
unreasonable and unjust. See M/S Bremen, 407 U.S. at 15.
Appellants argue that they did not consent to be sued in Minnesota, even though
their partnerships adopted an amendment naming the state in a forum selection clause.
The Emersons say they voted against the amendments but even had they voted for
them, they were unenforceable because they were contracts of adhesion. Although the
Emersons voted against the amendments, they and the Tripletts agreed in their original
contracts that the partnership agreements could be modified by a 51% vote of the
limited partners. Because they agreed to the procedure by which the agreements were
later modified, they cannot now argue that they did not consent to be bound by the
modifications. Appellants have also offered no evidence that the partnership
amendments were contracts of adhesion. Their bare assertion that the amendments
were offered on a "take it or leave it" basis is not sufficient as a matter of law to
establish adhesion. We conclude that appellants consented to personal jurisdiction in
Minnesota, and the district court did not err when it found that it had personal
jurisdiction over them.
Appellants argue that the forum is so inconvenient as to make the enforcement
of the forum selection clause unjust. Since it may be assumed that parties consider the
inconvenience of the forum at the time they enter a contract, it is "incumbent on the
party seeking to escape his contract to show that [proceeding] in the contractual forum
will be so gravely difficult and inconvenient that he will for all practical purposes be
deprived of his day in court." See id. at 18. As the district court noted, appellants are
Iowa residents, closer to Minnesota than California. That attorneys, witnesses, and
evidence might have to travel to Minnesota from California is not inconvenience of the
-8-
magnitude contemplated by M/S Bremen. Enforcement of the forum selection clause
is not unjust under these circumstances.5
Decisions on possible abstention are reviewed for abuse of discretion. See
Beavers v. Ark. State Bd. of Dental Exam'rs, 151 F.3d 838, 840 (8th Cir. 1998). A
federal court should decline jurisdiction only under exceptional circumstances, giving
consideration to the inconvenience of the forum, the order in which jurisdiction was
obtained by the fora, and the desirability of avoiding piecemeal litigation. See
Colorado River Water Conservation Dist. v. United States, 424 U.S. 800, 818-19
(1976). The balance of these factors should be weighted heavily in favor of deciding
the case. See Moses H. Cone, 460 U.S. at 16. Here, none of the factors weighs in
favor of abstention. There is little evidence that litigating in Minnesota is inconvenient
to the parties. Although the California lawsuit was brought first, the real question is
which case has progressed further. See id. at 22-23. Little has been done in the state
case because it was stayed before a class was certified or the defendants filed an
answer. Finally, the strong federal policy in favor of arbitration requires giving full
effect to arbitration clauses, even where that might lead to piecemeal litigation. See id.
at 20.
Congress demonstrated a strong national policy in favor of arbitration when it
enacted the FAA. See Dobbins v. Hawk's Enters., 198 F.3d 715, 717 (8th Cir. 1999).
"From this strong policy flows a 'broad principle of enforceability' of arbitration
provisions." Id. (quoting Southland Corp. v. Keating, 465 U.S. 1, 11 (1983)).
Arbitrability is reviewed de novo to the extent that it depends on contract interpretation,
5
The appellants argue in a footnote that the district court abused its discretion in
denying their motion to dismiss for improper venue. The California complaint alleges
that a significant number of fraudulent acts occurred in Minnesota. Moreover, a forum
selection clause may be viewed as a waiver of a defendant's right to object to venue.
See Marra v. Papandreou, 216 F.3d 1119, 1123 (D.C. Cir. 2000); Northwestern Nat'l
Ins. Co. v. Donovan, 916 F.2d 372, 378 (7th Cir.1990).
-9-
but the court's fact findings are reviewed for clear error. See PCS Nitrogen Fertilizer,
L.P. v. The Christy Refractories, L.L.C., 225 F.3d 974, 978 (8th Cir. 2000).
Appellants say they should not be compelled to submit their claim to arbitration
because the arbitration clause was invalid and unenforceable.6 They claim that
appellees convinced the individual limited partners to vote for the modification of the
partnership agreements by making the fraudulent statement that they would "lose
everything" if they did not. An allegation of fraudulent inducement to adopt an
arbitration clause would be a question for the court, see Prima Paint Corp. v. Flood &
Conklin Mfg. Co., 388 U.S. 395, 403-04 (1967), but appellants argue that they were
fraudulently induced to adopt the entire package of amendments to the partnership
agreement and such an issue is for the arbitrator. See id. Appellants also claim that
appellees waived their right to arbitration because they did not submit a timely demand
to arbitrate. That too is an issue to be decided in arbitration. See Stroh Container Co.
v. Delphi Indus., Inc., 783 F.2d 743, 748 (8th Cir. 1986).
The appellants also argue that the arbitration clause cannot be enforced because
some of the appellees are not parties to the same partnership agreements as appellants.
For example, Dominium Austin Partners, L.L.C., Dominium Management Services,
Inc., General Mills, Inc., Minnesota Mining and Manufacturing Co., Deluxe Corp., and
KLT Investments are not parties to any of the partnership agreements signed by the
appellants. In their class action case, however, appellants made allegations which treat
all these parties as though they were signatories to the agreements. Appellants alleged
6
The appellants also state in a footnote that the district court erred in enjoining
the California action because it was barred from doing so by the Anti-Injunction Act,
28 U.S.C. § 2283. They have not cited any authority to support that argument,
however.
-10-
in California that all general partners7 and the corporate parties owed them a fiduciary
duty, and they repeatedly referred to the corporate parties as limited partners. See, e.g.,
Appendix at 389, 395, 396. The complaint also alleged jurisdiction and venue in
California based on choice of law and forum selection clauses in the original
partnership agreements.8 See id. at 393-94. It would be inequitable to allow appellants
to claim that these parties are liable for failure to perform under a contract and at the
same time to deny that they are contractual parties in order to avoid enforcement of the
arbitration clause. See Hughes Masonry Co., Inc. v. Greater Clark County Sch. Bldg.
Corp., 659 F.2d 836, 838-39 (7th Cir. 1981); McBro Planning & Dev. Co. v. Triangle
Elec. Constr. Co., Inc., 741 F.2d 342, 344 (11th Cir. 1984).
Finally, we note that the goal of the FAA is to enforce the agreement of the
parties, not to effect the most expeditious resolution of claims. See Baesler v. Cont'l
Grain Co., 900 F.2d 1193, 1195 (8th Cir. 1990). As such, an arbitration agreement
should be enforced "in accordance with its terms." Id. (quotation marks and citations
omitted). Because appellants have not shown the arbitration clauses were invalid or
unenforceable and because the partnership agreements make no provision for
arbitration as a class, the district court did not err by compelling appellants to submit
7
Appellees Dominium Iowa One, L.L.C., Dominium Kansas One, L.L.C.,
Dominium Wisconsin Five, L.L.C., and Dominium Wisconsin Seven, L.L.C. were not
named individually in the California class action. Instead, most of the general partners
were sued as a class, with Dominium Austin Partners, L.L.C. named as class
representative. Each of these listed would have been included in the defendant class
because each was a general partner in one of the partnerships in which one or more of
the named plaintiffs had invested. See supra, note 2.
8
Appellants make a brief argument that they should not be forced to arbitrate in
Minnesota because they have made allegations in the California case related to the
original agreements. Some of the defendants in the California case did not even exist
until shortly before the amendments were adopted, however, and any claims against
them could only arise under the amended agreements.
-11-
their claims to arbitration as individuals. Cf. id. (district court was without power to
consolidate arbitration proceedings when arbitration agreements were silent on the
issue).9
For these reasons, we affirm the judgment of the district court.
A true copy.
Attest:
CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT.
9
Appellants argue that the question of whether they should be allowed to
arbitrate on behalf of a class should be decided under Minnesota or California law,
rather than under the FAA, because of the contractual choice of law provisions. The
construction of an agreement to arbitrate is governed by the FAA unless the agreement
expressly provides that state law should govern. See UHC Mgmt. Co., Inc. v.
Computer Scis. Corp., 148 F.3d 992, 997 (8th Cir. 1998). Here, there is no such
express provision in the arbitration clauses.
-12-