Diversity Jurisdiction and the GMBH

Diversity Jurisdiction and the GMBH

            A recent decision from Alabama highlights the problems which arise when a suit in Federal Court on the basis of diversity jurisdiction involves a foreign (i.e., non-US) business organization.  Keshock v. Metabowerke GMBH, Civ. Act. No. 15-00345-N, 2015 WL 4458858 (S.D. Ala. July 21, 2015).

            A defendant in the lawsuit was a German GMBH.  The defendants, in support of removal, described the entity as being a “foreign corporation” and then pled its citizenship accordingly, namely jurisdiction of organization and of the principal place of business. In not so many words, “not so fast” said the District Court.

            Rather, it was directed that the defendants demonstrate whether a GMBH should be treated as incorporated or in the alternative an unincorporated structure.  This direction was provided even as it was acknowledged through citation to prior cases that this question of taxonomy can be quite difficult.

The Final Gasp of Alphonse in Federal Court

The Final Gasp of Alphonse in Federal Court

            For a number of years the Alphonse case has been litigated in the Louisiana Federal District Court an in the Fifth Circuit Court of Appeals.  For most of that time the most interesting (at least to me) aspect of the case has involved the treatment of the series to which Alphonse’s mortgage had been associated.  Those issues were reviewed in Rutledge, The Internal Affairs Doctrine and Series Limited Liability – Never the Twain to Meet?, 17 Bus. Entities 4 (March/April 2015).   HERE IS A LINK TO THAT ARTICLE.

            Most recently, the Fifth Circuit confirmed that there was no diversity jurisdiction even though the non-diverse Louisiana resident was remote from Arch Bay.  Alphonse v. Arch Bay Holdings, L.L.C., No. 14-31320, __Fed. App. __, 2015 WL 4187585 (5^th Cir. July 13, 2015).

            The District Court had determined that diversity jurisdiction was lacking in that ultimately Arch Bay had a member domiciled in Louisiana.  While Alphonse did not challenge that determination of citizenship, he challenged the use of a person with a remote interest in Arch Bay to determine its citizenship.

Alphonse does not contest these facts or offer any evidence that the member is not a citizen of Louisiana. Instead, he argues that the standard established in Harvey “can be stretched to an illogical absurdity.” He claims that such an absurdity exists in this case because the non-diverse member is in fact a member of a member of one of Arch Bay’s members, is a limited partner with no managerial responsibilities, and was difficult to locate. Id. at *2.

 

Explaining why this position is “unpersuasive,” the Fifth Circuit wrote:

The Supreme Court has explicitly “reject[ed] the contention that to determine, for diversity purposes, the citizenship of an artificial entity, the court may consult the citizenship of less than all of the entity’s members.” Applying Carden, this court, as well as all other circuits to address the issue, have held that “the citizenship of a LLC is determined by the citizenship of all of its members.”  Moreover, no case law has suggested that this conclusion may be disregarded when one of the LLC’s members is an artificial entity comprised of additional entities. Indeed, we have observed that the “appropriate tests for citizenship” involve “tracing [entities’] citizenships down the various organizational layers where necessary....” Accordingly, we reject Alphonse’s contention that less than all of an LLC’s members may be considered when determining its citizenship. Id. (citations omitted).

 

            This ruling follows from similar determinations that there is no de minimus exception to the requirements of diversity jurisdiction.

Basic Principle of Parent/Subsidiary Separation Applied to Strike Claims Under Alien Tort Claims Act

Basic Principle of Parent/Subsidiary
Separation Applied to Strike Claims Under Alien Tort
Claims Act

       Earlier this week the Second Circuit Court of Appeals handed down a decision to the effect that the U.S. parent corporations of foreign subsidiaries who were alleged to have facilitated apartheid in South Africa could not be sued under the Alien Tort Claims Act.  Balintulo v. Ford Motor Co., 2015 BL 238790 (2^nd Cir. July 27, 2015).

        The plaintiffs sought to hold Ford and IBM responsible for having, through their foreign subsidiaries, facilitated apartheid.  Pursuing the claims and the jurisdictional requirements of the ATCA, it was found that they were deficient.  While, in the case of Ford, a South African subsidiary may have done so via the assembly of vehicles and by the S.A. Defense Forces, it was not Ford which did so.

[H]olding Ford to be directly responsible for the actions of its South African subsidiary, as plaintiffs would have us do, would ignore well-settled principles of corporate law, which treats parent corporations and their subsidiaries as legally distinct entities. (citation omitted).

       The Court of Appeals continued with a discussion of piercing the veil, noting it is done only in “extraordinary circumstances” and that the plaintiff had not plead any basis for doing so.

Fraudulent Joinder Found, No Remand to State Court

Fraudulent Joinder Found, No Remand to State Court

            Debra Walker sued Northwestern Mutual Life Insurance Company for its alleged failure to pay on a disability insurance policy she had purchased.  She also sued Executive Benefits Specialists of Kentucky, LLC, of which Hugh Hines was apparently the sole member.  Northwestern, whose citizenship is Wisconsin, removed the case to federal court, asserting that Executive had been named as a party fraudulently in an effort to defeat diversity jurisdiction.  Walker v. Northwestern Mutual Life Insurance Co., Civ. Case No. 5:15-cv-79-JMH, 2015 WL 4373362 (E.D. Ky. July 14, 2015).

 

            A party has been “fraudulently joined” if “it is clear that there can be no recovery under the law of the state on the cause alleged or on the facts in view of the law.  Id., quoting Casias v. Wal-Mart Stores, Inc., 695 F.3d 428, 432-33 (6^th Cir. 2012).

 

            In this case it was determined that Hines’ actions were undertaken in his capacity as an agent of Northwestern and not on behalf of Executive.  Further, it was determined that Executive (i) had no involvement in Walker’s purchase of the Northwestern disability insurance policy and (ii) Executive was focused solely on a different type of insurance that is not sold to individuals.  On that basis it was determined that Executive was fraudulently joined. The claims against Executive were dismissed, and the motion to remand was denied.

Sixth Circuit Court of Appeal Affirms MERS System, Rejects Class Action Challenge

Sixth Circuit Court of Appeal Affirms MERS System, Rejects Class Action Challenge

      In the decision authored by Judge Rogers rendered last Thursday, the Sixth Circuit Court of Appeals rejected a challenge to the MERS system and the assertion that it’s operation violated Kentucky law with respect to recording mortgage assignments. The Sixth Circuit held that, while the assignment of a mortgage may, under Kentucky law, be required to be of record with the county clerk, there is no parallel requirement for recording assignments of the related promissory notes. Higgins v. BAC Home Loan Servicing, LP, __F.3d __, 2015 WL 4289804 (6^th Cir. July 16, 2015).

      Under the MERS system, when a home is financed through a note and mortgage, the lender on the note is identified as the issuing bank. In turn, the mortgagee is identified as MERS, as nominee of the mortgagee and its successors. When in turn the note and the related mortgage are sold or resold, such as takes place during securitization, no further recordation is made with the county clerk. Rather, the note is transferred to the purchaser thereof, and assuming they are a member of the MERS system the related interest in the mortgage is assigned to the acquirers benefit.

      Or at least that is how it was intended to operate. The plaintiffs in this case alleged that the MERS system was improper in that it violated KRS § 382.360(3) which requires that “When a mortgage is assigned to another person, the assignation will file the assignment for recording with the county clerk within thirty (30) days of the assignment.” Certain penalties are imposed upon an assignee who fails to make this required recording. In that the assignment in the MERS system of the promissory notes carried with it an interest in the related mortgage, the plaintiffs posited that damages were owing because the transfers of those interests in the mortgages were never recorded with the county clerk.

      The trial court denied the motion for summary judgment filed by the banks and other lending institutions named as defendants, finding, inter alia, that the transfer of the notes which were secured by the mortgages in effect constituted an assignment of the underlying mortgage, and that assignment required a filing with the County Clerk. The Sixth Circuit granted an interlocutory appeal to that determination.

      Coincidentally, the same day that the District Court (Judge Caldwell) denied the motion for summary judgment, a near identical challenge to the MERS system was considered and rejected in Ellington v. Federal Home Loan Mortgage Corporation, 13 F.Supp.3d 723 (W. D. Ky. 2014) (Judge McKinley). Much of the Sixth Circuit’s analysis in this case would “piggyback” on the Ellington decision.

      The question came down to one of statutory interpretation. Parsing the statute, the Sixth Circuit focused upon statutory distinctions between the treatment of mortgage instruments and promissory notes, particularly focusing on the fact that while assignment of the former must be recorded, recordation of assignments of the latter are merely permissive. Further:

Adopting plaintiffs’ interpretation of the recording statutes would also render the statutory scheme somewhat incoherent. Plaintiffs concede that their interpretation would mandate recording of note assignments. But Kentucky’s recording statutes pointedly distinguish between mortgage assignments - which must be recorded, see KRS 382.360(3) - and note transfers - for which recording is optional, see KRS 382.290(2). If every note transfer operated as a mortgage assignment, and every mortgage assignment must be recorded, then every note transfer would have to be recorded, albeit as a mortgage assignment. It would be strange for Kentucky’s legislature to require recording of note transfers as mortgage assignments while elsewhere in the same statutes providing the note transfers need not be recorded. 2015 WL 4289804,*4.

      Ultimately:

In sum, KRS 382.360(3) applies to those instances in which a transferee fails to record a transfer of a mortgage deed. It does not require recording of transfers of promissory notes. Because it is undisputed that defendants transferred only promissory notes and did not fail to record any transfers of mortgage deeds, defendants did not violate KRS 382.360(3) and the district court should have dismissed plaintiffs’ action on that basis.

No Partnership Amongst Corporate Shareholders

No Partnership Amongst Corporate Shareholders

      In a recent decision from the United States District Court for the Southern District of New York, it found that the rights of participants in a corporation would not be governed by partnership law.  Growblox Sciences, Inc. v. GCMT Administrative Services, LLC, No. 14-CV-2280, 2015 WL 3504208 (S.D.N.Y. June 2, 2015).

      A venture being organized by a group of individuals and entities ultimately broke down. A subset of that group alleged that the other subset had breached obligations existing under an alleged partnership amongst them. Their arguments would run afoul of the fact that the venture had in fact been incorporated. Rather, if a partnership had existed amongst the participants in the venture:

Counterclaimants do not address what impact, if any, the creation of Tumbleweed had on the existence of the alleged partnership. The absence of any facts that show that the alleged partners retained their rights vis-a-vis one another, the Court cannot assume that the partnership - to the extent one existed - did not merge into the corporation.

      In support of this statement, there was cited Sagamore Corp. v. Diamond W. Energy Corp., 806 F.2d 373, 378-79 (2nd Cir. 1986).

Bank Held Liable For Forged Checks Where Customer Acted Promptly

Bank Held Liable For Forged Checks Where Customer Acted Promptly

      In a recent decision from the Kentucky Court of Appeals, on the facts there presented, the bank was held liable on certain forged checks. In this instance, the customer against whose account the forged checks were drawn was prompt in advising the bank that the checks were not authorized. Forcht Bank, NA v. Gribbins, No. 2014-CA-000592-MR (Ky. App. July 2, 2015)  (not to be published).

      Rene Gribbins maintained her checking account at Forcht Bank. Eight checks, which had the effect of completely depleting her account, were prepared and presented by Andy Akers. When contacted by the bank and told that the account had been depleted, Gribbins completed and submitted affidavits of forgery for each of those eight checks. Gribbins was the only authorized signature on the account, and “the signature on the eight checks was clearly not Gribbins’s.”  Slip op. at 3-4.  Ultimately, Akers was charged with eight counts of criminal possession of a forged instrument, to which he pled guilty.

      When Forcht Bank did not return the improperly withdrawn funds to her account, Gribbins filed suit. The trial court granted her summary judgment, which was then appealed by Forcht to the Court of Appeals. Essentially:

The relationship between a customer and a bank is inherently contractual and, thus, it has been held that banks have a duty to act in good faith and to exercise ordinary care in dealing with their customers and accounts. [Citation omitted]. Furthermore, KRS 355.1-203 and KRS 355.4-103 of the Uniform Commercial Code (UCC) also impose a duty of good faith and fair dealing on banks.

Additionally, KRS 355.4-401(1) provides that “[a] an item is properly payable if it is authorized by the customer and is in accordance with any agreement between the customer and bank.” Here, it is not disputed that Forcht Bank improperly made payment on Gribbins’s account on eight forged checks. She established, under KRS 355.4-401, that she did not sign the eight checks and, thus, did not authorize the payment of the instrument. However, despite the forgery and the lack of proper authorization, Forcht Bank paid the checks without hesitation. In doing so, it failed to use ordinary care in the disbursement of Gribbins’s funds resulting in harm to her by the depletion of the deposited funds in the account over the course of 21 days.

The next step in our analysis is to consider Gribbins’s duties as a customer of the bank who had forged checks cashed in her account. The duties are found in KRS 355.4-406. Keep in mind, this statute applies only to claims based on checks with “unauthorized signatures.” [Citations omitted]. These duties are outlined in KRS 355.4-406(3), which elucidates that a customer has a duty to exercise reasonable promptness in examining the bank statement to ascertain whether any payment was unauthorized either because of an alteration or forged signature. If such a discovery is made by a bank customer, the customer must promptly notified the bank of the relevant facts. In the case at bar, Gribbins actually completed the appropriate affidavits of forgery prior to even receiving the bank statement. Thus, she exercised ordinary core as delineated by the statute.

In sum, Forcht Bank failed in its duty to exercise ordinary care to Gribbins when it honored eight forged checks drawn on her account. [Citation omitted]. Under KRS 355.4-406(4), the bank bears the burden of presenting evidence they Gribbins’s conduct, under KRS 355.4-406(3), substantially contributed to its payment or injury from the payment of the forged checks. It cannot do so - Gribbins notified the bank about the forged checks even before the bank statement was issued.

      The Court of Appeals also found that the request in the prayer for relief of Gribbins’s complaint for “all proper relief” encompassed a claim for the award of both prejudgment and postjudgment interest.

A Few Observations on the Reading of the Current Draft of the Series Act Before the Uniform Laws Commission

A Few Observations on the Reading of the Current Draft of the

Series Act Before the Uniform Laws Commission

      On Tuesday and Wednesday of this week, I was at the annual meeting of Uniform Laws Commission where we read the working draft of the series act and took comments thereon.

      Speaking entirely for myself, and setting aside for now remarks dealing with either the technical wording of the act or its scope (i.e., should it be restricted to LLCs or apply to a broader range of unincorporated business), my take on the comments divided them into three inter-related questions:

Initially, why series? Essentially, this question comes down to one of function, namely what is achieved by this organizational form that cannot be achieved with already existing forms?

Second, assuming a valid place for the series in the range of available business organizational forms that should be available, does the statute successfully describe the functions and limitations of the form.

Third, even as the statute describes the series, does it preclude the misuse of the form (i.e., the “shell game” of assets, public disclosure of the existence of the series)?

      Implicit in the third question is the degree to which the broader public recognition of series embodied in a uniform act will serve as a “imprimatur” of the organizational form even when jurisdictions such as Delaware that do not and it must be anticipated will not provide by statute for similar protections.  As to the same point but reversing the point of perspective, to what degree should the uniform act in the states adopting it condition recognition on the series organized in a foreign jurisdiction upon compliance with the domestic state’s rules as to, for example, public filing of the existence of the series, public recordation of the association of titled assets with the series, etc.

      Much work remains to be done, and it is a fascinating project.