Tuesday, October 27, 2015

LLPs and Diversity Jurisdiction

LLPs and Diversity Jurisdiction

      While the discussion may ultimately be dicta, a recent decision out of Indiana reinforces the rule as to assessing, for purposes of diversity jurisdiction, a limited liability partnership. Scholastic Services, Inc. v First Midwest Bancorp, Inc., No. 2:15-CV-211, 2015 WL 5772526 (N. D. Ind. Sept. 30, 2015).
      Scholastic Services fell behind on its loan obligations to First Midwest Bancorp. Negotiations were commenced as to a re-amortization of the loans.  While Scholastic apparently believed an agreement as to re-amortization was in place, the bank declared the note to be in default.  When Scholastic challenge that determination, the bank's counsel, Krieg DeVault, LLP, contacted scholastic and its principles, reaffirming the alleged default and seeking a forbearance agreement Scholastic brought suit against the bank on a variety of state law claims, and alleged as well that Krieg DeVault (“KN”) had violated the Federal Fair Debt Collection Practices Act (“FDCPA”).  The suit, filed in state court, was then removed to the Federal District Court.  That removal was allegedly on the basis of federal question jurisdiction over the FDCPA claim against KN, with supplemental jurisdiction over the state law claims against the bank.  The removal asserted as well diversity jurisdiction over the claims brought against the bank.

       While, ultimately, this may all be dicta, the court noted that the assertion of diversity jurisdiction was flawed.  Initially, with respect to the point the diversity jurisdiction existed over the state law claims, looking at that aspect of the lawsuit is simply being between Scholastic and First Midwest, the court explained that diversity jurisdiction must exist as between all defendants and all plaintiffs; diversity jurisdiction is not assessed on a claim by claim basis, but rather must exist over the entire case.  2015 WL 5772526, *1, n. 2.  Rather:
The parties’ briefs with respect to diversity jurisdiction overlook a key component.  Both parties omit the simple fact that even if the Plaintiffs are citizens of Indiana and the Defendants have shown by competent proof that the bank is not a citizen of Indiana (which it is not), then nonetheless, KG can destroy diversity if any of its members are a citizen of Indiana.  In other words, because Plaintiffs named KD as a defendant (even if with respect to only the federal claim alleged), then absent severance KD cannot be a citizen of Indiana in order to maintain diversity.  ….  Therefore, to properly allege citizenship, Defendants must identify every partner of KD, and must further allege the citizenship of every one of those partners.  If any of the partners are themselves LLCs or partnerships, the Defendants must do likewise for them.  Because the amended notice of removal fails to properly plead the citizenship of all of the parties named as Defendants, it fails to invoke this Courts subject matter jurisdiction over the entire case based on diversity of citizenship.  
2015 WL 5772526, *2 (footnote omitted, citation to record omitted).
      The court would go on to acknowledge that the claim under the FDCPA gives rise to federal question jurisdiction (28 USC § 1331), and the counts against the bank are based upon a common nucleus of operative facts, giving rise to supplemental jurisdiction.

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