DTCI: Contact Tracing in the Removal Context

Baldwin

By Steven A. Baldwin and Scott J. Preston

Unincorporated entities to satisfy diversity jurisdiction

A common practice in employment law is the removal of state court actions to federal court based on federal question jurisdiction under 28 U.S.C. § 1331. More complicated removal issues arise when there are no federal claims asserted in the complaint, but there is potentially diversity of citizenship and the amount in controversy exceeds $75,000 under 28 U.S.C. § 1332. This article explores two such scenarios: one, when one or more named defendants are unincorporated entities, such as a limited or general partnership, especially where the defendant is venture backed by additional unincorporated nonparty entities. And two, where the plaintiff fails to allege his citizenship in the complaint. In both cases, “removing first” and “conducting discovery second” will result not only in remand of the action but also in an award of attorney fees to the non-removing plaintiff.

Overview of federal diversity jurisdiction

Preston

Federal diversity jurisdiction requires that the dispute both involve more than $75,000 and that there be complete diversity. 28 U.S.C. § 1332. While corporations are deemed to be citizens of the jurisdiction of incorporation and the jurisdiction in which the corporation’s principal place of business is located, an unincorporated entity such as a limited liability company, limited partnership, or partnership, is deemed to be a citizen in which any of its partners or members are citizens. A defendant seeking to remove an action to federal court is required to plead facts demonstrating that diversity exists. This obligation can be at best difficult to satisfy when the membership of partnerships and LLCs is not a matter of public record.

When faced with a case involving unincorporated business entities, a defendant must carefully consider whether the requirements for diversity jurisdiction are satisfied before filing its notice of removal. Failure to do so could result an adverse award of attorney fees on a motion for remand, or the district court sua sponte remanding the case to state court upon discovery that it lacks subject matter jurisdiction over the action.

Amount in controversy

The plaintiff’s claim must be worth more than $75,000 exclusive of interest and costs before a district court can exercise federal subject matter jurisdiction in diversity. See 28 U.S.C. § 1332(a); LM Ins. Corp. v. Spaulding Enters. Inc., 533 F.3d 542, 548 (7th Cir. 2008) (recognizing that “it is the case, rather than the claim, to which the $75,000 minimum applies” under section 1332(a)). The “amount in controversy is the amount required to satisfy the plaintiff’s demands in full on the day the suit begins, or in the event of removal, on the day the suit was removed.” Oshana v. Coca-Cola Co., 472 F.3d 506, 511 (7th Cir. 2006). When the complaint does not establish the amount in controversy, “a good-faith estimate of the stakes is acceptable if it is plausible and supported by a preponderance of the evidence.” Id. at 511. The Seventh Circuit has suggested several ways to accomplish this such as “by contention interrogatories or admissions in state court; by calculation from the complaint’s allegations; by reference to the plaintiff’s informal estimates or settlement demands; or by introducing evidence, in the form of affidavits from the defendant’s experts, about how much it would cost to satisfy the plaintiff’s demands.” L.D. ex rel. Deter v. Meijer, Inc., No. 1:09-cv-45, 2009 U.S. Dist. LEXIS 37380, at *5 (N.D. Ind. April 30, 2009).

Diversity of citizenship

For a case to be removed to federal court on diversity grounds, there must be “complete diversity of citizenship.” This generally means that “none of the parties on either side of the litigation may be a citizen of the state of which a party on the other side is a citizen.” Howell v. Tribune Entm’t Co., 106 F.3d 215, 217 (7th Cir. 1997).

For diversity purposes, a corporation is considered a citizen of its state of incorporation as well as its “principal place of business.” 28 U.S.C. § 1332(c)(1). The phrase “principal place of business” means the corporation’s “nerve center,” or “the place where the corporation’s high level officers direct, control, and coordinate the corporation’s activities.” Hertz Corp. v. Friend, 559 U.S. 77, 80-81 (2010). The Supreme Court also added that a corporation’s “nerve center” typically will be the corporation’s headquarters. Id.

An individual is considered “a citizen of a state, with such citizenship being determined … by the state where the person is domiciled, that is, physically present with an intent to remain in that state indefinitely.” Ball v. Ball, No. 09-405-GPM, 2009 U.S. Dist. LEXIS 50175, at *3 (S.D. Ill. June, 2009); see also Tylka v. Gerber Prods. Co., 211 F.3d 445, 448-49 (7th Cir. 2000) (reversing summary judgment in favor of defendant because counsel failed to correct the notice of removal, which indicated individual’s “residence,” not “citizenship,” and remanded the case with instructions to further remand the case to state court for lack of subject matter jurisdiction).

With respect to limited liability companies and limited partnerships, principal place of business is not sufficient. Rather, the removing party must trace the lineage of these noncorporate entities to each member or partner to determine the citizenship of each. See Hukic v. Aurora Loan Servs., 588 F.3d 420, 427 (7th Cir. 2009) (“for diversity jurisdiction purposes, the citizenship of a limited liability company is the citizenship of each of its members”); Cosgrove v. Bartolotta, 150 F.3d 729, 731 (7th Cir. 1998) (“[t]he citizenship of a partnership is the citizenship of the partners, even if they are limited partners, so that even if one of the partners (general or limited) is a citizen of the same state as the plaintiff, the suit cannot be maintained as a diversity suit”). A removing defendant must trace the citizenship through however many layers of partners or members there may be, as anything less can result in a remand for failure to establish jurisdiction. See Jones v. Dollar, No. 2:20-cv-247-pps-jpk, 2020 U.S. Dist. LEXIS 119601, at *4 (N.D. Ind. July 8, 2020). For example, if a member of an LLC is itself another LLC or a partnership, citizenship must be tracked through all layers until natural persons or corporations are reached.

Finally, citizenship of a trust is determined by the citizenship of the trustee or trustees unless the law under which the trust is organized permits the trust to sue and be sued in its own name. See, e.g., America’s Best Inns, Inc. v. Best Inns of Abeline, L.P., 980 F.2d 1072, 1074 (7th Cir. 1992) (“no trust is a ‘resident’ of [a state]. The citizenship of a trust is the citizenship of the trustee or trustees”). In such a case, the citizenship of the trust includes both the trustee and the beneficiaries of the trust itself. See Yount v. Shashek, 472 F. Supp. 2d 1055, 1058 n.1 (S.D. Ill. 2006) (“[a] trust is not treated as a corporation for diversity purposes, and instead the citizenship of a trust is the citizenship of its trustee or trustees, unless the law under which the trust is organized permits the trust to sue and be sued in its own name, in which case the citizenship of the trust for diversity purposes [includes] its beneficiaries”).

The traps of federal diversity of jurisdiction over unincorporated entities

One issue that defendants are facing more frequently is tracing citizenship of limited or general partners, especially where one of the entities is owned by a nonparty, venture capital fund. If the ownership interest is owned by the venture capital firm, then the removing defendant may identify the firm by its corporate status if that firm is a corporation. More likely, however, the interest is held in a fund owned by the venture capital firm. Those funds are often limited partnerships, which requires the venture capital firm to cooperate with its partner-defendant to provide the information. This can prove to be exceedingly difficult, especially where the venture firm has the majority ownership and would rather hold its members in confidence than disclose them publicly to facilitate removal to district court.

This issue was addressed recently by the Southern District of Indiana in VPG Group Holdings LLC v. Nat’l Union Fire Ins. Co., No. 1:20-cv-01505-JRS-TAB, 2020 U.S. Dist. LEXIS 200207 (S.D. Ind. Oct. 20, 2020). While this case focused on the plaintiff’s corporate structure, it is instructional for the challenges faced by the defendant in removing actions with complex ownership structures. In VPG Group Holdings, the plaintiff, VPG Holdings, sued defendants National Union Fire Insurance Company of Pittsburgh, PA, (“National Union”) and AIG Claims, Inc. (“AIG Claims”) in Indiana state court. National Union subsequently removed the case to federal court based on diversity jurisdiction. Citing lack of jurisdiction, VPG moved to remand and requested attorney fees and costs under 28 U.S.C. § 1447 (“[a]n order remanding the case may require payment of just costs and any actual expenses, including attorney fees, incurred as a result of the removal”). Id. at * 1.

The defendants were easily able to establish their own jurisdiction. National Union is a company incorporated in Pennsylvania with a principal place of business in New York. AIG Claims is a company incorporated in Delaware, also with a principal place of business in New York. Id. at * 3.

VPG’s citizenship was more difficult to establish. VPG is a limited liability corporation with four member LLCs. In turn, these member LLCs each comprise sub-members, many of which are other LLCs. In its Notice of Removal, National Union set forth what it believed was the citizenship of all the members and sub-members of VPG based on publicly available filings. Ultimately, National Union was wrong. National Union’s Notice of Removal did not account for every member, sub-member, and so forth making up VPG’s web. In fact, VPG has so many layers that the company itself was “unable to verify” the membership and citizenship of its member LLCs. Id. at *3-4.

Addressing plaintiff’s motion to remand, the Southern District remanded the case to state court and awarded plaintiff its costs and attorney fees related to remanding the case. The Court described National Union’s efforts as a “remove-first-and-examine-whether-complete-diversity-exists-later approach” to jurisdiction. Id. at *8. Even though National Union claimed that it did the best job it could to ascertain VPG’s membership and citizenship given what was available in public records about VPG’s “byzantine corporate structure,” the Court found that National Union failed to consult VPG about VPG’s citizenship before removal, it failed to account for the citizenship of numerous VPG-associated limited partners, and it misidentified several VPG sub-members. Id. at *6-9.

Takeaways

Defense counsel should have two takeaways from VPG Group Holdings. First, it is necessary that defendants verify that diversity jurisdiction exists before proceeding with removal. This will require drilling down through multiple layers of unincorporated entities until citizenship information can be obtained.

Second, if the case is not removable within 30 days of defendant being properly joined and served, Murphy Bros., Inc., v. Mitchell Pipe Stringing, Inc., 526 U.S. 344, 354, 119 S. Ct. 1332, 1339, 143 L. Ed. 488 (1999), the case may still become removable within 30 days once the basis for removal is established, Circle Ctr. Mall LLC v. Zurich Am. Ins. Co., No. 1:14-cv-01160-JMS-MJD, 2014 U.S. Dist. LEXIS 127210, at *14 (S.D. Ind. Sept. 11, 2014), so long as one year has not passed since the case was filed, 28 U.S.C. § 1446(c)(1). Defendants are encouraged to seek leave of court to request immediate jurisdictional-based discovery, through requests for admissions, interrogatories, or depositions to establish whether there is a jurisdictional basis for removal.

As the Seventh Circuit has noted, unincorporated entities have become a “notorious source of jurisdictional complications,” McMahon v. Bunn-O-Matic Corp., 150 F.3d 651, 653 (7th Cir. 1998), in which “mistakes concerning the existence of diversity jurisdiction are most common,” Market Street Assocs. Ltd. P’ship v. Frey, 941 F.2d 588, 590 (7th Cir. 1991). VPG Group Holdings serves as a reminder that defendants wishing to litigate in federal court must be able to establish complete diversity of citizenship of unincorporated entities before filing a notice of removal. “Hurriedly seeking removal on … shaky grounds was not reasonable, and the Court concludes that VPG is entitled to an award of attorney fees and costs under § 1447(c).” VPG Group Holdings 2020 U.S. Dist. LEXIS at *9.•

Steven Baldwin is an associate and Scott Preston is a shareholder in the Indianapolis office of Ogletree Deakins. The opinions expressed in this article are those of the authors.

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