Lack of Diversity Jurisdiction Sets Aside Negotiated Settlement Agreement

Lack of Diversity Jurisdiction Sets Aside Negotiated Settlement Agreement

      In a decision rendered just last week, the Federal District Court in Pennsylvania set aside the settlement of a lawsuit brought in federal court on the basis that diversity jurisdiction was actually lacking and, for that reason, the court never had jurisdiction over the dispute. GBForefront, L.P. v. Forefront Management Group, LLC, Civ. Act. No. 11-7732 (E.D. Pa. Sept. 21, 2016).

     This, as described by the court, “relatively straight-forward breach of contract action” involved not less than four years of “contentious litigation.” Ultimately, GBForefront accepted an offer of judgment from the defendants. Thereafter, on April 28, 2015, the court entered a final judgment and the case was closed. There was some subsequent back and forth with respect to the proper parties to the settlement agreement and efforts to compel its enforcement by GBForefront. In the midst of those efforts, new counsel for the defendants alerted the court that diversity jurisdiction had never been adequately pled in the matter and in fact never truly existed. On that basis, they sought to have the settlement agreement set aside.

      Whether diversity jurisdiction did or did not exist would depend upon how the citizenship of certain common-law trusts is assessed. GBForefront, seeking to preserve the settlement agreement, would argue, following Navarro Savings Association v. Lee, that only the citizenship of the trustees should be considered. The defendants responded, in reliance upon the decision of the US Supreme Court of earlier this year in Americold Realty Trust v. ConAgra Foods, Inc. and the earlier decision of the Third Circuit in Emerald Investors Trust v. Gaunt Parsippany Partners, that the citizenship of a trust is based upon that of the trustees and the beneficiaries. Adopting the reasoning of the defendants, the court determined:

I conclude that, in determining the citizenship of a trust for diversity purposes, the citizenship of both trustees and beneficiaries control.

      Disposing of alternative arguments including enforcement of a settlement, estoppel and transfer, the amended judgment was vacated and the matter was dismissed for lack of subject matter jurisdiction.