Lincoln Prop. Co. v. Roche (04-712)
Appealed from: United States Court of Appeals, Fourth Circuit
Oral argument: October 11, 2005
Although plaintiffs initially decide whether to sue in state or federal courts, per Article III, Section 2 of the Constitution, 28 U.S.C. § 1441(b) allows defendants to remove cases to federal court if opposing parties are citizens of different states. Christophe and Juanita Roche discovered toxic mold in the apartment they were leasing. The Roches filed a complaint in Virginia state court, naming property owners State of Wisconsin Investment Board (“SWIB”) and managers Lincoln Property Company (“Lincoln”) as defendants. SWIB and Lincoln later removed the case to federal district court based on diversity jurisdiction, claiming Wisconsin and Texas citizenship, respectively. After the district court granted Lincoln summary judgment, Roche challenged the court's jurisdiction on the grounds that Lincoln was a partnership with one of its partners residing in Virginia, claiming that Lincoln manipulated federal diversity jurisdiction by litigating the case in the name of another one of the companies in the Lincoln group. The district court ruled in favor of Lincoln, but the Fourth Circuit Court of Appeals reversed, finding that Lincoln had failed to prove its diversity from Roche. In deciding whether the Fourth Circuit erred in its holding, the Supreme Court will determine when Federal Courts can require proof of the diversity of parties not named in the complaint. The Court will also decide whether the Fourth Circuit announced a new and valid rule for determining the citizenship of a limited partnership for diversity jurisdiction purposes.
1. Whether an entity not named or joined as a defendant in the lawsuit can nonetheless be deemed a "real party in interest" to destroy complete diversity of citizenship in a case removed from state court under 28 U.S.C. ? 1441(b).
2. Whether a limited partnership's citizenship for diversity subject-matter jurisdiction purposes is determined not by the citizenship of its partners, but by whether its business activities establish a "very close nexus" with the state
Whether a court can demand proof of the citizenship of an unnamed corporate entity affiliated with a named party when it deems that corporate entity to be the “real party in interest;” and whether, for diversity purposes, a court must consider a limited partnership as a citizen of any state with which the limited partnership has a “very close nexus,” as well as any state of which a partner is a citizen.
In March 2001, Christophe and Juanita Roche (“Roche”) entered into a lease for Unit 104 in the Westfield Village Apartments. Pet'r Lincoln's Br. at 2. Roche later discovered toxic mold in the apartment, and on August 22, 2002 Roche filed an eleven-count complaint in Virginia state court alleging that the mold adversely affected the family's health and personal property. Id. at 3. The complaint named the State of Wisconsin Investment Board (“SWIB”) and Lincoln Property Company (“Lincoln”) as defendants. Id.
SWIB owns the Westfield Village Apartments (“Westfield”) and Lincoln is its authorized agent. Pet'r Lincoln's Br. at 2. Lincoln is a corporation with corporate headquarters in Dallas, Texas and is one of the largest real estate firms in the United States. Id. at 4. Lincoln employs over 4,000 people and has an established presence in over 100 markets in nineteen states. Id. Lincoln manages over 120 million square feet of commercial property which is valued at over 6.4 billion dollars. Id.
Roche chose to file his complaint in Virginia state court because of Virginia state practice and procedures. Resp't Roche's Br. at 3. SWIB and Lincoln later removed the case to the United States District Court for the Eastern District of Virginia based on diversity jurisdiction. Pet'r Lincoln's Br. at 4. Although plaintiffs initially decide whether to sue in state or federal courts, 28 U.S.C. ? 1441(b) allows defendants to remove cases to a federal court under certain circumstances. In this case, Lincoln invoked the federal courts' diversity jurisdiction, which allows a federal court to hear a case if opposing parties are citizens of different states. Id. at 4. Since Lincoln is a Texas corporation, SWIB is a Wisconsin citizen, and the Roches are citizens and domiciliaries of Virginia, Lincoln asserted that complete diversity existed. Id. at 5. At the time of removal, Roche did not object to the district court's use of its jurisdictional authority. Id. Once in federal court, Lincoln filed a motion for summary judgment, which the court granted six days later. Id. at 6. Roche filed his own motion, seeking to remand the case to state court. Id. Roche contended that diversity was lacking, since Lincoln was a partnership with one of its partners residing in Virginia. Id. at 6–7.
The district court ruled in favor of Lincoln, and Roche appealed to the Fourth Circuit Court of Appeals. Pet'r Lincoln's Br. at 8–9. The Court of Appeals reversed the lower court, explaining that Lincoln failed to carry their burden of proof regarding their alleged diversity. Resp't Roche's Br. at 11. The Court found that complete diversity of the real parties in interest to the case could not be attained because Lincoln “failed to show that one member of the Lincoln group of companies doing business in Virginia” was not a citizen of Virginia. Pet'r Lincoln's Br. at 11. In other words, the court believed Lincoln manipulated federal diversity jurisdiction by litigating the case in the name of another one of the companies in the Lincoln group, where the “real party in interest” may not have been diverse had it been a named party. Resp't Roche's Br. at 11.
Since state and federal courts often follow different rules regarding evidence and procedure, the choice of forum can spell victory or defeat before a trial even begins. In Lincoln, for example, the federal district court did not permit the testimony of Roche's medical expert, but the Virginia state court might well have allowed it. Because the citizenship question often determines whether a case is heard in federal or state court, the parties will often litigate diversity questions as vigorously as they do the actual merits of the case. The dispute over how a federal court determines the citizenship of certain parties forms the core issue of Lincoln Prop. Co. v. Roche.
The Supreme Court's decision in this case may alter a corporation or partnership's ability to sue or be sued in federal court on the basis of diversity jurisdiction. The Court must answer two important questions. First, how much scrutiny should a court use in order to determine the citizenship of an intricately structured corporate litigant? Second, must a court look only at the citizenship of the corporation named in the complaint, or should it also investigate the citizenship of affiliated corporations and partnerships involved in the disputed events? Since these legal entities may be considered citizens of more than one state, and affiliated entities may also be citizens of different states than that of the parent company, a broader inquiry into the citizenship of the parties will likely decrease a corporate litigant's ability to avail itself of diversity jurisdiction.
Lincoln argues that such an inquiry would introduce unnecessary uncertainty into the diversity calculation. Lincoln maintains that it will give plaintiffs an unfair tactical advantage over corporate defendants, in that these plaintiffs would be able to sue corporations in federal court, and if they lose, they would be able to claim that their “true opponent” was a related, non-diverse partnership of the company named in the complaint. Since a court's judgment will be void if a jurisdictional defect is discovered at any point in the proceedings, a plaintiff could then have the case remanded to state court, giving the plaintiff a second chance to try the case. Should the Supreme Court allow this broader inquiry into the diversity of the parties, the judicial system as well as the litigants may see a dramatic increase in the costs of judicial administration and litigation because many cases may be required to be heard more than once.
On the other hand, Roche argues that some cases demand a broader inquiry in order to prevent improper jurisdictional manipulation. Roche contends that Lincoln attempted to “game” the federal courts, using its complex network of partnerships to manufacture diversity and force the federal courts to try a case that actually belonged in Virginia state court. If the Supreme Court decides to allow sophisticated entities to “game” the system in this manner and create diversity of jurisdiction where none should exist, the purposes of diversity jurisdiction may be thwarted and these sophisticated parties may gain an unfair advantage that was not intended by the diversity jurisdiction statute. Corporate entities and partnerships may then be able to forum shop to find the most conducive court to hear their case.
The Supreme Court will also decide whether the Fourth Circuit announced a new test for determining the citizenship of a limited partnership (the “very close nexus” test), and if so, whether other federal courts should adopt it. If Lincoln's view is correct, this new test would mark a drastic departure from precedent, and partnerships could find themselves dragged into state court in situations they may not have reasonably anticipated. However, Roche argues that such fears are unfounded, stating that the Fourth Circuit found diversity lacking using time-tested methods, and it merely used the “nexus” language to reemphasize that the case should be heard in state court.
If the Court's decision does alter how federal courts determine a partnership's citizenship, any potential litigant hoping to sue a complex corporate entity in federal court may be affected. The effect will be particularly profound in industries—such as real estate development—where almost every new project involves the creation of new legal entities. Formerly, such entities helped companies allocate legal and tax liability on a project-by-project basis. For example, a group that frequently does business with Lincoln Property, but opted out of a particular project, would have no legal connection to the corporation or partnership created to carry out that project. At the very least, such companies will pay lawyers to determine whether any change announced by the court will affect the relationships among existing partnerships, resulting in unforeseen legal and organizational costs. The decision will also determine whether Roche can try this particular claim in Virginia state court.
The decision may also add fuel to the ongoing debate about the virtues of diversity jurisdiction. Advocates of diversity argue that it allows out-of-state litigants to try their claims in a more neutral federal court, instead of a state court that might be biased against foreign parties. Critics, on the other hand, say that diversity jurisdiction has outlived its usefulness. These critics argue that most litigants use diversity to gain procedural advantages unrelated to bias, and unnecessarily flood federal dockets with local disputes that are more properly heard in state court.
The Diversity Dispute
Roche's initial complaint listed “Lincoln Property Company t/a Lincoln Property Company ECW, Inc.” as the defendant. Pet'r Lincoln's Br. at 3. Lincoln first argues that this makes an exclusive party of Lincoln Property Co., a Texas corporation with its principal place of business in Texas. Id. at 15. Further, Lincoln insists that since this named defendant is thus indisputably diverse from the Virginia plaintiffs, the district court properly found diversity jurisdiction. Id.
However, Lincoln, as a parent company, has legal connections to a number of partnerships and corporations with some variation of “Lincoln” or “Lincoln Property” in their names. One such entity, EQR/Lincoln Limited Partnership (EQR), apparently collected the management fees for Roche's apartment. Id. at 7. Lincoln first argues that EQR's citizenship is irrelevant, since Roche did not name EQR in the complaint, or join them as a defendant. Id. Alternatively, Lincoln contends that diversity exists even if the Fourth Circuit properly considered EQR/Lincoln Limited Partnership (EQR) a party in interest. Id. at 13. At trial, Lincoln proved, and the district court found, that all of the partners constituting EQR, including Lincoln E.C.W. Property Management Inc. (ECW), were Texas corporations, and, therefore, Texas citizens. Id. at 7–8. Since the citizenship of a partnership is based solely on the citizenship of its partners, EQR must be a Texas citizen, diverse from Roche in order to maintain diversity jurisdiction. Id. at 13.
Roche maintains that he always intended to sue the Lincoln entity “operating out of Virginia and managing [his] Virginia apartment.” Resp't Roche's Br. at 29. As such, the real question before the Court is whether remand was required because Lincoln failed to “carry its burden of rebutting the presumption against federal jurisdiction.” Id. at 2. Roche argues that the entity managing the property in question was neither Lincoln, EQR, nor ECW, but a fourth entity, Lincoln Property Company ECW, Inc. (“ECW I”), the signatory on Roche's lease. Id. at 4. Roche contends that Lincoln failed to introduce any evidence as to ECW I's corporate citizenship or its role “in the management or functioning of Westfield.” Id. at 4–5. Indeed, Roche states that Lincoln endeavored to conceal ECW I's identity throughout the proceedings. Id. at 4. As a result, the Fourth Circuit properly found that Lincoln failed to prove ECW I's citizenship and could not establish diversity jurisdiction. Id. at 16.
The Scope of the Diversity Inquiry
Lincoln contends that a court must end its diversity inquiry once it establishes the citizenship of the named parties. See Pet'r Lincoln's Br. at 14–16. Lincoln bases this view on an interpretation of the removal statute, 28 U.S.C. § 1441(b), which only requires that all parties “properly joined and served as defendants” be diverse from the plaintiffs. Id. at 14. Stated as such, the court would have no authority to conduct a “wide-ranging, sua sponte inquiry into the citizenship of entities not named in the plaintiff's complaint in determining whether diversity jurisdiction exists” after Lincoln proved the diversity of the named parties. Id. at 12. Thus, Lincoln argues that the Fourth Circuit had no authority to declare an unnamed defendant the “real party in interest,” and require Lincoln to prove this entity's diversity because such a requirement would be an improper inquiry. See Id. at 24–28.
In Lincoln's view, authorizing such an inquiry would effectively give parties like Roche two bites at the apple when litigating against complicated partnerships under diversity jurisdiction. Because courts may notice jurisdictional defects at any stage in the proceedings and remand the case to the proper court, litigants could initially try their case on the merits in federal court, but if unsuccessful, they could then cast about for an affiliated, non-diverse entity with some interest in the proceedings, declare this entity the true party in interest, move for a jurisdictional remand, and start fresh in state court. Id. at 13.
Alternatively, Roche argues that an inquiry into the status of unnamed parties is appropriate in jurisdictional disputes. Roche notes that the Supreme Court often evaluates claims to determine the “real party to the controversy,” and uses that party's citizenship to determine diversity, just as the Fourth Circuit did in this case. Resp't Roche's Br. at 23. Nor does the language in 28 U.S.C. § 1441(b), relied on by Lincoln, bar such an inquiry—indeed it cannot, since nothing in this part of the statute confers jurisdiction. Id. at 19. According to Roche, this portion of the statute merely states the “Forum Defendant Rule,” an exception to removal triggered when a defendant is a citizen of the forum state. Id. at 18–19. Since this exception only applies after jurisdiction has otherwise been deemed proper, it is wholly irrelevant. Id.
Roche also notes that the Supreme Court has expressed concern about artificial entities using affiliates to create otherwise non-existent diversity, the same concern that motivated the Fourth Circuit's scrutiny. Resp't Roche's Br. at 24–25. The real risk, therefore, is not that some parties will get two bites at the apple, but rather that companies like Lincoln will use their “organization opacity” to manufacture unnecessary and improper diversity. Id. at 1.
The “Very Close Nexus” Test
Lincoln also takes issue with the Fourth Circuit's reference to Lincoln's “very close nexus” with Virginia. Pet'r Lincoln's Br. at 41. In Lincoln's view, this language improperly creates an additional basis for determining a limited partnership's citizenship. Id. at 41. Affirming the decision, then, would make a partnership a citizen not only of any partner's state of citizenship, but also of any state with whom the partnership has a “very close nexus.” Id. Since such a test has no precedential support, and would require a “far-reaching, indeterminate, and unpredictable inquiry” into nexus whenever a limited partnership is involved in a diversity suit, the court of appeals should be reversed. Id. at 13. Roche responds simply that the Fourth Circuit's “nexus” language merely demonstrates Lincoln's obfuscation—the fact that some Lincoln entity owned land and did substantial business in Virginia simply suggests that Lincoln would be unable to establish that the real parties in interest were not both Virginia citizens. Resp't Roche's Br. at 40.
The Supreme Court will likely not use Lincoln Prop. Co. v. Roche to announce a new, nexus-based test for determining the citizenship of a limited partnership—as both parties agree, such a test has no precedential, statutory, or constitutional basis. However, the Court will have to clarify the proper scope of a federal court's diversity jurisdiction inquiry. The real question may be whether the Court can decide the case in a way that will avoid similar disputes in the future. Thus, if the Supreme Court finds for Lincoln, can it do so in a way that will keep purely local, state-law disputes out of federal court in the future? Similarly, will a victory for Roche encourage future diversity parties to wastefully litigate jurisdictional questions to the hilt? In that sense, the real import of the case will be in how the court decides, and not simply what it decides.
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