The Citizenship, For Purposes of Diversity Jurisdiction, of a Securitization Trust

The Citizenship, For Purposes of Diversity Jurisdiction, of a Securitization Trust

       In a recent decision from Texas, it was held that, where the plaintiff brought suit against Deutsche Bank in its capacity as trustee for a securitization trust and specifically a series thereof, it would be the citizenship of the trustee, and not of all of the trust’s participants/beneficial owners, that would control for purposes of diversity jurisdiction.  Dorman v. PHH Mortgage Corporation and Deutsche Bank National Trust Company, as Trustee for Securitized Asset Backed Receivables LLC Trust 2007-NC1, Mortgage Pass-Through Certificates, Series 2007-NC1 and Deutsche Bank Securities Inc., 2020 WL 4904266 (N.D. Tex., 2020).

      Dorman brought her suit in state court alleging a variety of claims relating, it may be inferred, to a foreclosure on her house. PHH Mortgage Corporation, the loan servicer, removed the action to federal court. This decision came in response to Dorman’s efforts to remand the case back to state court, the basis for the remand to be the failure to demonstrate diversity of citizenship. Essentially, Dorman wanted to argue that the citizenship of every participant in the securitization trust should be considered, she making that argument on the basis of Americold Realty Trust v. ConAgra Foods, Inc., 136 S. Ct. 1012 (2016). HERE IS A LINK TO MY REVIEW of that decision. In contrast, Deutsche Bank would argue that this case be decided under the principles of Navarro Savings Association v. Lee, 446, U.S. 458 (1980). In the Americold Realty decision, the US Supreme Court held that, for purposes of diversity jurisdiction, a business/statutory trust, sued as the trust, would be deemed to have the citizenship of every one of its beneficial owners. The Navarro Savings decision, in contrast, held that when the trustees of the trust are sued as the trustees, it is the citizenship of the trustees, and not the beneficiaries of the trust, that is relevant for purposes of assessing whether or not diversity jurisdiction is present.

      In this decision, in that Deutsche Bank had been sued in its capacity as the trustee, and suit had not been brought directly against the trust, the rule of Navarro Savings would apply, and only the citizenship of the trust’s trustees would be relevant.

      As there was diversity between the plaintiff and the trustees, and the citizenship of the other defendants was likewise diverse from that of the plaintiff, the suit has been allowed to proceed in federal court.

Diversity Jurisdiction: You Have to Try

Diversity Jurisdiction: You Have to Try

      In a recent decision from Nebraska, persons seeking to bring a suit in federal court based upon diversity jurisdiction, where the suit involves LLCs, are reminded of the efforts that must be undertaken in order to show, at least initially, that diversity is present. Ag Navigator, LLC v. Top Gun Ag LLC, 2020 WL 3316106 (D. Neb. June 18, 2020). 

      Navigator filed suit against Top Gun in state court, and Top Gun removed the action to federal court, asserting that diversity jurisdiction (28 U.S.C. § 1332) existed. After removal, Top Gun sought to dismiss the lawsuit on the basis that the court lacked personal jurisdiction over the defendants. In response, Navigator asserted that the initial removal was improper and that diversity jurisdiction was not present: 

Defendants’ notice [of removal] was defective, as it failed to allege the citizenship of each member of each party-LLC. Without that information, Plaintiff's argue, the court cannot determine from the notice whether there is complete diversity, and Defendants have therefore failed to carry their burden of proof.

      The magistrate judge would ultimately agree with that determination.

       After reciting the settled law that the citizenship of an LLC is determined by that of its members, the court noted that: 

That said, this case highlights a quandary faced by state court defendants sued by plaintiff LLCs: It is often difficult to determine whether the case can be removed to federal court based on diversity jurisdiction. Here, and in most complaints filed by LLCs, there are no allegations in the complaint related to the identity (much less the citizenship) of each plaintiff LLCs’ members. This puts defendants in a tough spot. The membership of LLCs and other unincorporated entities are often not publicly accessible. And the deadline to remove a case to federal court is typically 30 days after service – undoubtedly limiting the amount of investigation and discovery a defendant can do prior to filing a notice of removal. Thus, defendants are placed in the precarious position of having to include in their notices of removal allegations regarding the members of entities despite having little or no initial access to the entities’ membership documents. 2020 WL 3316106, *2.

      From there, the court noted the various approaches taken by courts as to the availability of jurisdictional discovery in order to confirm (or not) the existence of diversity jurisdiction but having provided that review, the decision continues that is not necessary to select amongst the various test in that Top Gun, who would remove the case to federal court, had “not even attempted” to demonstrate that diversity jurisdiction existed. Having recited the jurisdictional portion of the notice of removal, it was observed: 

Defendants’ notice does not indicate that they performed any due diligence regarding member-citizenship. In their brief in opposition to remand, Defendants claim they did not have access to important documents that would reveal the membership of the plaintiff-entities. As noted above, the court is sympathetic to that plight. The Defendants did not alert the court to those issues in their notice. Or plead that they believed that the evidence would bear out that all members were citizens of different states. In fact, Defendants’ notice does not indicate that they understood that LLC citizenship would have any effect on the jurisdictional question. This is highlighted by the fact that they did not include in their notice of membership of the defendant LLC - Top Gun Ag, LLC - whose membership they clearly knew. Id., *3.

      The court would go on to review some of the limited information, finding that it indicated that diversity jurisdiction did not, factually, exist.

        The court went on to find that the notice of removal was not objectively reasonable, and set forth the procedures by which attorneys’ fees could be awarded to Navigator for having to successfully challenge the removal.

Either Yes or No: Court Rejects Efforts to Change Positions as to Diversity Jurisdiction

Either Yes or No: Court Rejects Efforts to Change Positions as to Diversity Jurisdiction

            In a decision of the Sixth Circuit Court of Appeals from this January, it was held that judicial estoppel prevented a party from reversing its position to afford it another bite at the apple.  Han v. Hankook Tire Co., Ltd., 799 Fed App’x 347 (6^th Cir. 2020).

            In the first lawsuit, Han filed suit against Hankook Tire.  Joining her as a plaintiff was Peninsula Asset Management (Cayman), Ltd., a Caymen Islands company.  The trial court awarded Hankook Tire a summary judgment on her complaint. Han appealed, and in an earlier decision the Sixth Circuit determined that diversity jurisdiction was lacking in that there were foreign corporations on both sides of the dispute.  509 F.3d 271 (6^th Cir. 2007). On that basis the case was remanded to the trial court. On remand Hankook argued that Peninsula Management was a “nominal” or dispensable” party who should be dismissed, allowing the summary judgment against Han’s claim to remain in place. Part of that position was based upon the fact that Peninsula Management had ceased doing business and was being wound-down.  Han would argue that Peninsula Management was “essential” to the case and that it could no be dismissed. The trial court agreed with Han, and in February, 2008, the case was dismissed for lack of jurisdiction.

            Now a decade later, Han refiled the action against Hankook Tire, both for herself and as the “real party in interest” of the now dissolved Peninsula Management, described by Han as being “defunct.” 

As the district court was analyzing Hankook’s motion to dismiss, it discovered that Han avoided summary judgment in the prior case by arguing that her claims could not proceed without Peninsula. Based on that fact, the district judge concluded that “allowing Han to proceed on this action without the presence of Peninsula would give Han the unfair advantage of essentially having a second bite of the apple.” To prevent that “unseemly maneuver,” the court applied the doctrine of judicial estoppel and dismissed Han’s claims with prejudice. Han filed a motion for reconsideration, which the court denied. 799 Fed. App’x at 349 (citations omitted).

From there the Sixth Circuit would review the elements of judicial estoppel (a later position that is “clearly inconsistent” with the prior position, having prevailed in the prior argument such that if they prevailed again “judicial acceptance of an inconsistent position in a later proceeding would create ‘the perception that either the first or the second court was misled,’” and unfair advantage) and found that Han’s position fell within each element.  On that basis the trial court’s dismissal of the complaint was affirmed.

Pleading the Factual Basis for Diversity Jurisdiction

Pleading the Factual Basis for Diversity Jurisdiction

      A pair of recent decisions stand for the proposition that facts are necessary in order to plead diversity jurisdiction or, from the other perspective, speculation is not sufficient. Those decisions are Platinum-Montaur Life Sciences, LLC v. Navidea Biopharmaceuticals, Inc., Docket No. 18-3535-CV, 2019 WL 6258632 (2^nd Cir. Nov. 25, 2019) and Alanazi v. Avco Corporation, Case No. 6:19-CV-2230-ORL-28 LRH, 2019 WL 6324007 (M.D. Fl. Nov. 26, 2019).

      The Platinum-Montaur case arose out of an alleged breach of contract. After the plaintiff filed suit in Florida, the defendant removed the action to the Federal District Court for the Southern District of New York. While the parties engaged in “limited informal jurisdictional discovery,” Platinum-Montaur’s citizenship was never conclusively determined. The District Court, however, proceeded on the merits on the basis that “it had no ‘good faith basis to believe there is not complete diversity.’” That basis would be reversed by the Second Circuit Court of Appeals

      It was noted that one of Platinum-Montaur’s members (the other two being natural persons) was an investment fund organized as a limited partnership based in the Cayman Islands. As such, the citizenship of each of the partners, limited and general, in that limited partnership would be attributed to Platinum-Montaur in determining its citizenship. One of the limited partners in that partnership was in turn another limited partnership with some 220 limited partners, most if not all of whom would be in the United States. It was not possible, however, to determine the citizenship of each of those persons.   

      Noting that the diversity jurisdiction of the federal courts is limited and that questions as to removability of suit are to be resolved against removal, the Second Circuit wrote that: 

A District Court may not assume subject-matter jurisdiction when the record does not contain the necessary prerequisites for its existence. Here, the District Court erred by exercising diversity jurisdiction on the basis that it did not have a “good faith basis to believe” that the parties before it were not completely diverse.

* * *

At this stage, the District Court had two options. First, it could have remanded the case to state court because Navidea had failed to allege complete diversity of citizenship or to establish diversity through discovery. Second, the District Court could have exercised its discretion to order further discovery to determine whether there was complete diversity of citizenship. ….

Here, none of the underlying state-court pleadings, the notice of removal, or the record as a whole reflected that the parties were completely diverse. Thus, the District Court erred in proceeding on the merits of this case. We therefore re-manned so that the District Court can exercise its discretion to conduct further proceedings, if any, as it deems appropriate. 2019 WL 6258632, *4 (citations omitted).

      In the Alanazi decision, the plaintiff, an individual, filed an action in state court against the nine defendants, of whom three were LLCs. The defendants then removed to federal court on the basis of diversity jurisdiction. The court would remand the case because the removing defendant had failed to specify the citizenship of the plaintiff. In addition, the pleading of the citizenship of the various LLC defendants was deficient. It asserted that none of the members of those LLCs was a citizen of Florida, that being the presumptive citizenship of the plaintiff. That was rejected on the basis that “pleading that none of the members as a citizen of Florida is not sufficient to establish diversity; affirmative pleading of citizenship is required.” The court went on to write that “The citizenship of each member of each LLC must be alleged.”

      In the course of its decision, the court cited an earlier opinion rendered in Wilkins v. Stapleton, 2017 WL 11219132 (M.D. Fla. Aug. 1, 2017) for the following admonition (the emphasis being in the original): 

DO not allege jurisdictional facts “on information and belief.”

Complicated Organizational Structure of Defendant Precludes Finding of Diversity Jurisdiction

Complicated Organizational Structure of Defendant Precludes Finding of Diversity Jurisdiction

      In a recent decision from the Federal District Court for the District of Columbia, it remanded a case to state court where, after removal by the defendant, that defendant’s citizenship could not be affirmatively ascertained so that the court could confirm that, in fact, diversity jurisdiction existed. C.F. Folks, Ltd. v. MCP II Jefferson, LLC, Civ. Act. No. 1:19-CV-01024 (CJN), 2019 WL 6464975 (D. D.C. Dec. 2, 2019).

      This case involved a dispute between a restaurant, Folks, and its landlord, Jefferson. Folks was a District of Columbia corporation, and therefore a citizen of DC. As such, diversity jurisdiction could exist only if Jefferson was not a citizen of the District of Columbia (the other requirement, namely that the amount in dispute exceeded $75,000, was not at issue). After having ordered two rounds of briefing on the question, the court was not able to come to a final conclusion as to Jefferson’s citizenship rather: 

MCP, however, is an LLC. As noted above, LLCs are citizens of all states of which their members are citizens. MCP’s sole member happens to be another LLC, the sole member of which is a Maryland real estate investment trust (“REIT”). A Maryland REIT is a citizen of all states of which its trustees and its shareholders are citizens.  This particular REIT has (A) trustees who are all Massachusetts citizens and (B) shareholders who own two classes of stock, one type of which is wholly owned by a limited partnership. The general partner of that partnership is an LLC, and that LLC’s two members are a Massachusetts corporation and yet another LLC.

In turn, that LLC—which is five ownership steps removed from MCP—has several dozen members, including individual investors, pension funds, major universities, and other institutional investors. But among that group, the Court counts at least sixteen trusts and ten LLCs. On top of that, the other class of the Maryland REIT’s shareholders is comprised of 125 individuals, among whom number at least nine trusts.

The Court therefore faces a situation in which, to determine whether diversity exists between a tenant and its landlord …, it must investigate the membership of more than a half dozen layers of unincorporated associations and their members, partners, trustees, and shareholders. But that inquiry has simply yielded more unincorporated associations. While each has a mailing address somewhere other than the District of Columbia, it is nearly impossible to determine where the inquiry ends. So far, it appears that for diversity purposes MCP is a citizen of at least Massachusetts, Delaware, Maryland, Ohio, Tennessee, Pennsylvania, New York, Connecticut, New Hampshire, North Carolina, Florida, Illinois, Colorado, Rhode Island, New Jersey, and Oklahoma. Every LLC yields yet another LLC as its member; every trust yields yet another trustee or beneficiary, and they themselves turn out to be more trusts and LLCs. 2019 WL 6464975, *3 (citations omitted).

      On the basis that Jefferson, the removing party, could not affirmatively demonstrate that the diversity jurisdiction existed, the suit was remanded to state court.

Retailers, Premises Liability and Federal Diversity Jurisdiction

Retailers, Premises Liability and Federal Diversity Jurisdiction

       Just before Thanksgiving, a decision was handed down by the Federal District Court for the Eastern District of Kentucky (Judge Van Tatenhove) addressing what would otherwise appear to be a run-of-the-mill premises liability claim. However, in this decision, the potential liability was expanded beyond the big-box home improvement store to include, as an individual, the store manager. Justice v. Lowe’s Home Centers LLC, Civ. No: 7:19-CV-00051-GFVT, 2019 WL 6310724 (E.D. Ky Nov. 25, 2019). 

      The plaintiff, Justice, alleged that he was injured when, apparently, a door or doors fell on him at the Lowe’s store in Pikeville Kentucky. Justice filed suit against not only Lowe’s, but also James Little, the store manager. Specifically, he alleged that the defendants “permitted an unreasonably unsafe hazard or condition to exist upon the premises … when it failed to secure doors on the shelves or left unattended unsecured doors on the shelves without a posted notice or warning.” In addition, it was alleged that Little, the store manager and a certain unknown employees were guilty of “creating an unreasonable risk of harm to customers of the store and failing to otherwise exercise due care.”

      The suit was originally filed in state court, and Lowe’s removed it to Federal Court on the basis of diversity jurisdiction. In the course thereof, Lowe’s alleged that Little was improperly joined in the lawsuit on the basis that he could not be held liable for Justice’s injuries. This decision was rendered in the course of Judge Van Tatenhove granting a motion to remand, which involved necessarily a determination that Little was not improperly joined.

      In reliance upon Grubb v. Smith, 523 S.W.3d 409 (Ky. 2017), it was observed that “Kentucky law has long recognized that an employee who, in the course of employment, breaches his or her independent tort duty to a third-party can be held liable for resulting injuries.” In this instance, it was alleged that Little and the as of yet unidentified other employees of Lowe’s created the condition that that led to the plaintiff's injury. As such, recovery against Little is conceivable, and his joinder was not improper.

      On that basis, diversity jurisdiction was absent, and the case was remanded to state court for further consideration.

      With this decision, plaintiffs, who typically desire to keep their suits in state court rather than have them either filed in or removed to federal court, have more of a roadmap as to what allegations may be made against defendants with Kentucky citizenship, thereby precluding removal.

Might Diversity Jurisdiction be Simplified?

Might Diversity Jurisdiction be Simplified?

In any lawsuit involving an unincorporated business organization such as a limited liability company, it can be difficult to determine whether or not the suit may be brought in or removed to federal court on the basis of “diversity jurisdiction.” This difficulty arises from the fact that whether or not diversity jurisdiction is available is dependent in part upon who are the members of the LLC, information that is typically not available. This difficulty in determining the LLC membership (the same problem arises in connection with, for example, general and limited partnerships) has at times led to gamesmanship; essentially, one of the parties asserts “you have to say who all of our members are but we don’t have to tell you.”

Earlier this year that was proposed an amendment to the Federal Rules of Civil Procedure that would require each party to a lawsuit to disclose the information necessary to determine its citizenship. Chris Schaefer and I have recently published a short article on this topic in Business Law Today, that article titled Proposed Change to Federal Rules of Civil Procedure Could Reduce Questions as to Federal Diversity Jurisdiction. HERE IS A LINK to that article. We hope you find it of interest.

Texas Decision Highlights “Fraudulent Joinder” and the Need for an Independent Claim

Texas Decision Highlights “Fraudulent Joinder” and the Need for an Independent Claim

A recent (and short) decision from Texas illustrates the rules with respect to “fraudulent joinder” and diversity jurisdiction. In doing so, it makes clear that a plaintiff must have an independent cause of action against each defendant. Hopkins v. Family Dollar Stores of Texas, L.L.C., Civ. Act. No. 2:19-CV-243, 2019 WL 5293488 (S.D. Tx Oct. 18, 2019).

One basis on which a suit may proceed in federal court is that there is “diversity jurisdiction” under 28 U.S.C. 1332. In order for diversity to exist, not only must the suit seek damages exceeding $75,000, but as well no defendant may have the same citizenship as does any plaintiff. In this decision, the court found that it could ignore the citizenship of one of the defendants because she had been “fraudulently joined.”

The plaintiff, Hopkins, alleged a suit based upon a slip and fall in a Family Dollar Store. She named not only the LLC that owned and operated the store, but also Linda Wright, a Texas citizen who was the store manager. After Hopkins filed her suit in state court, Family Dollar removed it to federal court. The subject of this opinion was Hopkin’s effort to have this suit returned (“remanded’) to the state court in which she had filed it, apparently believing that to be a court system that would be more favorable to her claim.

She alleged that as she is a Texas citizen, and so is Wright, diversity jurisdiction did not exist. That determination would be rejected by the court, and remand was denied. One basis by which a person can be found to be fraudulently joined to a suit is where the plaintiff has no cause of action against them. In this instance, while Hopkins named Wright as a defendant, she failed to identify any basis for a claim against her. Rather, the court wrote that Wright had no duty to Hopkins “separate and apart from her employment and role as manager in control of the store at the time of the events of the lawsuit.” Applying the law to these facts:

In Texas, individual liability against an employee arises only when the employee owes an independent duty of reasonable care to the injured party apart from the employer’s duty of care. …. Because Plaintiff has not alleged facts to implicate a breach of duty by the store employees separate and apart from the duty owed by the store, Linda Wright was improperly joined. Her non-diverse Texas citizenship does not destroy diversity.

The Claim to Be Wrongly Excluded As a Member Precludes Diversity Jurisdiction

The Claim to Be Wrongly Excluded As a Member Precludes Diversity Jurisdiction

In a recent decision from New York, there was considered the consequences, for the purposes of federal diversity jurisdiction, of a claim that the plaintiff had been wrongly excluded as a member in the LLC. Giving credence to that assertion, diversity jurisdiction did not exist and the suit was dismissed. Dykstra v. 6069321 Canada, Inc., 1:19-CV-688-GHW, 2019 WL 4688726 (S.D.N.Y. Sept. 25, 2019).

For purposes of federal diversity jurisdiction, a limited liability company has the citizenship of each of its members. This rule has the effect of keeping most lawsuits involving LLCs out of federal court, particularly when the lawsuit involves an inter-se dispute between the LLC and one of its members. If the plaintiff member is a citizen of jurisdiction X, then the LLC is also a citizen of jurisdiction X, and diversity jurisdiction does not exist.

In this instance, Dykstra asserted that he was, but had improperly been excluded from, membership in a defendant LLC, Rebound Marketing, LLC. Giving credence to Dykstra’s claim, namely that he should be a member of Rebound Marketing and therefore Rebound Marketing should have Dykstra’s citizenship, it was determined that diversity jurisdiction was lacking and the suit should be dismissed.

In the course of its analysis, it was held that Rebound was not a nominal party to the action, but that genuine and substantial relief had been sought against it.

Jurisdictional Discovery Awarded with Respect to Multi-Tier Limited Partnership

Jurisdictional Discovery Awarded with Respect to Multi-Tier Limited Partnership

In a recent decision from Minnesota, jurisdictional discovery with respect to the citizenship of a defendant limited partnership was awarded. Tim-Menn, Inc. v. Tim Horton’s USA, Inc., Case No. 19-CV-409 (JNE/ECW), 2019 WL 2865600 (D. Minn. July 3, 2019).

The plaintiff in this action, Tim-Menn, is a franchisee and area developer for Tim Horton’s Restaurants in Minnesota. Tim Horton USA, Inc. (“THUSA”) is the franchisor for the US-based franchises of Tim Horton’s. Restaurant Brands International Limited Partnership (“RBI”) is apparently the parent of THUSA. What is the nature of any claims Tim-Menn might have against RBI, the apparent shareholder of THUSA, is not detailed in this decision.

At this juncture, the court had twice directed the plaintiff to file information with respect to the citizenship of RBI. Having, based upon the publicly available information, been unable to identify who are the partners in RBI, and in that one of those partners was in turn a Brazilian/USA investment firm with offices in Rio de Janeiro and New York City, the plaintiff requested a stay and jurisdictional discovery so as to ascertain the citizenship of RBI. That motion was resisted by the defendants, largely on grounds of futility. Finding that the plaintiffs had “exhausted all publicly available avenues to determine the identity of RBI’s partners and their citizenship,” setting aside arguments on whether a valid claim had been made until such time as they are presented on a motion to dismiss, discovery as to RBI’s citizenship was allowed.

The opinion has an undercurrent of criticism of defense counsel, it being suggested that if they would come forward with information showing that the limited partnership has a Minnesota citizen, it would be clear that diversity did not exist and the matter would be dismissed.

While the award of jurisdictional discovery after the plaintiff had made a complete investigation of the publicly available information bears similarities to the analysis undertaken in Lincoln Benefit Life Company v. AEI Life, LLC, 2015 WL 5131423 (3^rd Cir Sept. 2, 2015), that decision was not cited in this opinion. HERE IS A LINK  to my review of the Lincoln Benefit Life decision.

LLC’s Members, and Not Managers, Relevant for Purposes of Diversity Jurisdiction

LLC’s Members, and Not Managers, Relevant for Purposes of Diversity Jurisdiction

In a recent decision from Florida, while assessing conflicting factual statements, it was made clear that the citizenship of the managers of an LLC, as contrasted with that of its members, is not relevant for purposes of determining the LLC’s citizenship for purposes of diversity jurisdiction. Kleiman v. Wright, Case No. 18-CV-80176-Bloom/Reinhart, 2019 WL 3841931 (S. D. Fla. Aug. 15, 2019).

At this juncture of the litigation, there were numerous facially conflicting statements by Wright as the ownership of an LLC involved in this dispute, namely W&K Info Defense Research, LLC. Relevant for this discussion, there was the question as to whether an individual, a citizen of Vietnam whose citizenship in the LLC would have destroy diversity jurisdiction, was in fact a member. Finding the evidence to be that this individual, if anything, was a manager, and not a member, of the LLC, the court found that diversity could not on that basis be determined. Rather:

For purposes of diversity jurisdiction, it is the citizenship of the LLC’s members, not its managers, that is relevant. Silver Crown Investments, LLC v. Team Real Estate MGMT LLC, 349 F.Supp. 3d 1316, 1324 (S.D. Fla. 2018) (Martinez J.) (citing Rolling Greens MHP, L.P.D. Comcast SCH Holdings, L.L.C., 374. F.3d 1020, 1022 (11th Cir. 2004).

2019 WL 3841931, *4.

Court Orders Limited Discovery with Respect to Diversity of Citizenship

Court Orders Limited Discovery with Respect to Diversity of Citizenship

In a recent decision from a federal district court in New Mexico, a defendant in an action was ordered to produce discovery that would either confirm or reject the availability of diversity jurisdiction. Fullerton v. Southland  Royalty Company, LLC, Civ. No. 19-415 WJ/CY, 2019 WL 3304799 (D. N. Mex. July 23, 2019).

The Fullerton's filed this action in federal district court on the basis of diversity jurisdiction, asserting that they are citizens of Colorado and “on information and belief” that the members of the defendant LLC are not citizens of Colorado. In response, the defendant Southland Royalty Company, LLC submitted an affidavit that one of its members is a limited partnership, MorningStar Partners, LP, and that it has as one of its limited partners is a Colorado citizen. On that basis, Southland asserted that diversity jurisdiction was lacking and the suit needed to be dismissed. In support of that motion, it submitted an affidavit providing in part that “at least one limited partner of MorningStar resides in the State of Colorado.” In opposition to this affidavit, the Fullerton's sought discovery as to the membership of Southland.

Initially, the court pointed out that the tendered affidavit was insufficient to address the question. While it set forth the residence of one of the limited partners, it was silent as to citizenship. Residence and citizenship, while related, are distinct concepts. From there:

Plaintiffs are entitled to an opportunity to rebut Defendant’s argument. Without discovery of certain information in Defendant’ possession about the alleged non-diverse member’s citizenship, Plaintiffs will have no meaningful opportunity to do so.” 2019 WL 3304799, *2

Still, while the plaintiffs had sought discovery as to the citizenship of all members of Southland, the court ordered that the discovery be limited to those with citizenship in Colorado as it is that citizenship that, if demonstrated, would destroy diversity jurisdiction.

The defendant’s request that any produced information be subject to a protective order was granted.

Hong Kong Limited Company is a “Corporation” for Diversity Jurisdiction Purposes

Hong Kong Limited Company is a “Corporation” for Diversity Jurisdiction Purposes

In a recent decision from the US Court of Appeals for the 8^th Circuit, it adopted the reasoning employed by the 7^th Circuit and held that a Hong Kong Limited Company would be, for purposes of diversity jurisdiction,  treated as a corporation. Jet Midwest International Co. Ltd v. Jet Midwest Group, LLC, No. 18-1311, 2019 WL 354-0060 (8^th Cir. August 2, 2019).

For purposes of diversity jurisdiction, none of the defendants may have the same citizenship as any of the plaintiffs. With respect to business organizations, there is a significant divide between those that are corporations and those that are not. If an entity is classified as a corporation, only its jurisdiction of incorporation and that of its principal place of business are the citizenships of the entity. Alternatively, if it is an unincorporated organization then the entity has the citizenship of each of the members. This classification problem is especially acute with respect to non-US business entities and the question of whether or not the entity should be treated as being incorporated or unincorporated.

In this dispute, the question was whether Jet Midwest International Co., LTD would or would not be treated as a corporation. This company (“JMI”) is organized as a Hong Kong Limited Company having its principal place of business in Beijing. The defendant in this action challenged whether JMI should be classified as a corporation or as an unincorporated organization.

The 8^th Circuit, acknowledging it had not previously addressed the question, looked to the extensive body of law in the 7^th Circuit Court of Appeals that had touched on the question. Under those decisions a Hong Kong limited company is classified, for purposes of diversity jurisdiction, as a corporation, and in this case that rule was followed.

Pleading Diversity of Citizenship

Pleading Diversity of Citizenship

 

A recent decision from a Federal District Court in Indiana succinctly recited what is required in order to plead that there exists diversity of citizenship when one of the parties to the action is a limited liability company. Smith v. Dodson, Cause No.: 2:17-CV-372-TLS, 2019 WL 2526328 (N.D. Ind. June 19, 2019).

This action, originally filed in state court, was removed to federal court based upon the defendant’s assertion that there existed diversity of citizenship. Finding that the notice of removal was deficient with respect to the identification of the defendant LLCs’ citizenship, the court observed that “the name and citizenship of each member of a limited liability company must be identified to determine diversity jurisdiction.” After noting the rule that, where a member of an LLC is themselves an unincorporated association such as another LLC, the names and citizenship of those second (and higher) tier members must be identified, the court wrote:

 

Although the Notice of Removal alleges generally that the members of Defendant Swift Transportation Co. of Arizona, LLC and Defendant Swift Transportation Services, LLC are citizens of Arizona, the Defendants have not identified each member of the limited liability companies. Thus, the Defendants must identify the name and citizenship of each member of each limited liability company defendant as of September 21, 2017.

Diversity Jurisdiction and Corporations

Diversity Jurisdiction and Corporations

      In a recent decision from South Carolina, it was reiterated that the test for the citizenship of a corporation is its jurisdiction of incorporation and of its principal place of business; where its shareholders are located does not matter. Meisner v. Zymogenetics, Inc., Case No. 3:15-3523-CMC-PJG, 2019 WL 2358968 (D. S.C. June 4, 2013).

      In this case, after removal to federal court, the pro se plaintiff alleged that the defendants’ alleged “extrinsic fraud perpetuated ... by [the] defendant” with respect to citizenship. In fact, that pro se plaintiff was incorrect. Specifically, she alleged that an LLC has the citizenship of the shareholders of a corporate member. This assertion was described by the court as “flawed.”

      In this instance, a defendant LLC had, as an upstream member, a publicly traded corporation with presumably shareholders in every state. On this basis, it was asserted that the LLC defendant likewise would have the citizenship of all of those shareholders. This was rejected on the basis of the test set forth in 28 U.S.C.A. § 1332(c), which provides that a corporation is a citizen of the state in which it is incorporated and in which it has its principal place of business. On this basis, the plaintiff’s assertion that the LLC would have citizenship of all of its corporate member’s shareholders was rejected as “it fails the statutory test for determining citizenship of a corporation.”

Did the Sixth Circuit Misstep in a Diversity Analysis?

Did the Sixth Circuit Misstep in a Diversity Analysis?

      Recently, the Sixth Circuit Court of Appeals issued a decision in Kendle v. Whig Enterprises, LLC, 2019 WL 148420 (6^th Cir. Jan. 9, 2019). In this case, the matter before the court was whether or not there existed diversity jurisdiction in a dispute involving an LLC.

       Joshua Fershee, on the Business Law Prof Blog, has posted an analysis in which he indicates that the sixth circuit applied the wrong rules. That posting is titled Sixth Circuit, Why Can’t You Be More Like Your Sister, 11th Circuit?; HERE IS A HERE IS A LINKLINK to his posting.

Non-Equity Partner is Still a Partner For Purposes of Diversity Jurisdiction

Non-Equity Partner is Still a Partner For Purposes of Diversity Jurisdiction

      In a recent decision, the court was called upon to assess whether or not a non-equity partner in a law firm would be treated as a “partner” in the firm when assessing its citizenship for purposes of diversity jurisdiction. EQT Production Co. v. Vorys, Sater,  Seymour & Pase, LLP, 2018 WL 6790486 (E.D. Ky. Dec. 26, 2018).

      In this case, there was no dispute that an LLP has the citizenship of each of its partners.  The question turned upon whether a particular “non-equity partner”, he resident in Pennsylvania, would be attributed to the partnership. The court held that it would be.

      It bears noting that there is not consistency across all of the courts with respect to this question. For example, in Morson v. Kreindler & Kreindler, LLP, 616 F.Supp.2d 171 (D. Mass. 2009), a “contract partner” who had no voting rights in the firm, was compensated on the basis of a Form W-2 and did not share in the profits and losses was a classified as a mere employee whose citizenship would not be attributed to the partnership. Likewise, in Passavant Memorial Area Hospital Ass’n v. Lancaster Pollard & Co., No. 11-CV-3116 (C.D. Ill. (Springfield Div.) April 2, 2012), the citizenship of certain “contract partners” who had no equity interest in the partnership, did not share in the firm’s profits and losses, who did not have voting rights in the partnership, and were paid fixed amount by contract, were not “partners” whose citizenship would be attributed to the partnership.

      See also Rutledge, Unincorporated Business Organizations and Diversity Jurisdiction: Who Is a “Member”?, Business Law Today (February 12, 2019)., available at https://businesslawtoday.org/2019/02/unincorporated-business-organizations-diversity-jurisdiction-member/