Monday, December 9, 2019

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.

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