CURRENT MONTH (February 2019)
Partnership Deemed Dispensable Party for Complete Diversity Requirement in Subject-Matter Jurisdiction Challenge
In Moss v. Princip, 913 F.3d 508 (5th Cir. 2019), the United States Court of Appeals for the Fifth Circuit affirmed a district court’s ruling that a non-diverse partnership was a dispensable party, thereby preserving the district court’s subject-matter jurisdiction. In this case, two partners in a four-person partnership brought several causes of action against the two other partners. When plaintiffs moved for entry of judgment, however, defendants moved to dismiss the case for lack of subject-matter jurisdiction. Defendants argued that while the four individual partners in the litigation were citizens of different states, there was incomplete diversity because the partnership was included as a defendant and destroyed complete diversity. The Fifth Circuit analyzed Federal Rule of Civil Procedure 19, which requires a court to determine whether a party is “merely necessary” to the litigation, or “indispensable.” If a party is indispensable, courts are required to join the party, even if such an action would destroy complete diversity. The Fifth Circuit acknowledged though that Rule 19 “requires courts to be flexible and pragmatic in evaluating a party’s indispensability.” In analyzing various other Circuits’ rulings on this issue, the Fifth Circuit ultimately found that the partnership would not be prejudiced were it found to be dispensable because its interests were fully represented by each of its partners, who were parties to the litigation. This outcome is especially noteworthy for corporate attorneys seeking to bring a partnership case in federal court while simultaneously seeking to maintain proper subject-matter jurisdiction.
Ohio Supreme Court Affirms a Writ of Quo Warranto to Dissolve a Clashing Corporation
In State ex rel. DeWine v. Omar Ibn El Khattab Mosque, Inc., No. 2018-Ohio-5112, the Supreme Court of Ohio affirmed the judgment of the court of appeals granting a writ of quo warranto sought by the attorney general and ordering the dissolution of Omar Ibn El Khattab Mosque, Inc.
Upon its formation in 2007, seven individuals were named to serve as the initial board of directors for the Omar Ibn El Khattab Mosque for a term ending on December 31, 2009. However, the initial board vastly exceeded this term and retained its authority by failing to hold annual elections. To gain control of the corporation, opponents of the initial board formed a second board in 2011 and drafted a resolution granting it control of the corporation’s bank accounts. This exacerbated tensions between the boards and ultimately resulted in the funds being frozen when the initial board filed a formal complaint with the bank.
In 2015, the attorney general brought an action seeking a writ of quo warranto to dissolve the corporation for failing to maintain a record of its members as required by R.C. 1702.13(A), failing to maintain accurate and complete accounts and minutes under R.C. 1702.15, and failing to hold an annual or special meeting in 2009 and 2010 for the election of directors to serve in 2010 and 2011, as required by R.C. 1702.16. The court of appeals found that the corporation had failed to maintain ownership records or hold annual meetings for the election of directors, and held that these violations led to the rise in competing boards and the subsequent inability to reclaim the corporation’s funds.
The Supreme Court of Ohio affirmed the court of appeals’ holding. The corporation argued that because its articles of incorporation did not specifically require annual meetings to hold elections, it was not obligated to do so. The court flatly rejected this argument, stating that because R.C. 1702.16 plainly requires such annual meetings, corporations may not circumvent the statute by omitting election directives from the articles of incorporation. The court further found that the corporation had violated the record keeping requirements of R.C. 1702.13(a) and 1702.15, and that all three violations resulted in the frozen funds. Granting the attorney general’s writ of quo warranto to dissolve the corporation, the court noted that if the corporation had adhered to the requisite formalities, there would have been a mechanism in place for addressing concerns, leadership would have been clearly established, and there would have been no question as to who had control over the funds.
This decision underscores the importance of strictly adhering to corporate formalities, and illustrates that the consequences of deviating from such rules can be grave.