Summary
explaining that a limited liability company takes the citizenship of each of its members
Summary of this case from Wilmington Sav. Fund Soc'y v. BernashOpinion
21-cv-1316 (BMC)
2021-03-23
OCEAN UNITS LLC, Plaintiff, v. ILLINOIS UNION INSURANCE COMPANY and Chubb Insurance, Defendants.
Jeffrey Adam Sunshine, Jericho, NY, for Plaintiff. Ashley Vicere, Charles J. Rocco, Foran Glennon Palandech Ponzi & Rudloff PC, New York, NY, for Defendant Illinois Union Insurance Company. Charles J. Rocco, Foran Glennon Palandech Ponzi & Rudloff PC, New York, NY, for Defendant Chubb Insurance.
Jeffrey Adam Sunshine, Jericho, NY, for Plaintiff.
Ashley Vicere, Charles J. Rocco, Foran Glennon Palandech Ponzi & Rudloff PC, New York, NY, for Defendant Illinois Union Insurance Company.
Charles J. Rocco, Foran Glennon Palandech Ponzi & Rudloff PC, New York, NY, for Defendant Chubb Insurance.
ORDER TO SHOW CAUSE
COGAN, District Judge.
Plaintiff Ocean Units LLC commenced this action in the Supreme Court of the State of New York, Kings County, for failure to pay on an insurance claim. Defendant Illinois Union Insurance Company filed a notice of removal based on alleged diversity of citizenship between the parties. Defendant, however, did not allege plaintiff's citizenship in the notice of removal. Instead, it alleged:
Although plaintiff has named two defendants, I will refer to "defendant" because Illinois Union contends that "Chubb Insurance" is "not a known entity," was not a party to the insurance policy at issue, and was fraudulently joined. Accordingly, Chubb Insurance did not appear in state court and did not join in the removal.
Upon information and belief, [p]laintiff Ocean Units LLC is a New York limited liability company with its principal place of business in Brooklyn, New York....
The citizenship(s) of [p]laintiff's member(s) is unknown. As such, pursuant to Local Civil Rule 81.1, Illinois Union hereby requests that [p]laintiff provide a statement of the omitted information within 21 days after removal.
With this statement, defendant properly invoked Local Civil Rule 81.1, which provides:
Removal of Cases from State Courts
If the Court's jurisdiction is based upon diversity of citizenship, and regardless of whether or not service of process has been effected on all parties, the notice of removal shall set forth (1) in the case of each individual named as a party, that party's residence and domicile and any state or other jurisdiction of which that party is a citizen for purposes of 28 U.S.C. § 1332 ; (2) in the case of each party that is a partnership, limited liability partnership, limited liability company, or other unincorporated association, like information for all of its partners or members, as well as the state or other jurisdiction of its formation; (3) in the case of each party that is a corporation, its state or other jurisdiction of incorporation, principal place of business, and any state or other jurisdiction of which that party is a citizen for purposes of 28 U.S.C. § 1332 ; (4) in the case of an assigned claim, corresponding information for each original owner of the claim and for each assignee; and (5) the date on which each party that has been served was served. If such information or a designated part is unknown to the removing party, the removing party may so state, and in that case plaintiff within twenty-one (21) days after removal shall file in the office of the Clerk a statement of the omitted information.
Loc. Civ. R. 81.1 (emphasis added).
Local Civil Rule 26.1 requires a party to provide the same information, but a case never gets to Federal Rule of Civil Procedure 26 or Local Civil Rule 26.1 unless the court has already established subject matter jurisdiction.
My view is that the last sentence of this rule is unenforceable because it exceeds the local-rule-making power of the district court. In effect, it permits the removal of cases over which a federal court lacks subject matter jurisdiction, contrary to the fundamental requirements set forth by Congress in the Judicial Code. See 28 U.S.C. § 1332(a). Because adherence to Local Civil Rule 81.1 would require me to preside over a case where I lack subject matter jurisdiction, I must address the issue sua sponte. See Hertz Corp. v. Friend, 559 U.S. 77, 94, 130 S.Ct. 1181, 175 L.Ed.2d 1029 (2010) ; United Republic Ins. Co. v. Chase Manhattan Bank, 315 F.3d 168, 170 (2d Cir. 2003) (per curiam); 12 Wright & Miller, Federal Practice & Procedure § 3153 (3d ed. 2020) ("a local rule has the force of law only if it is valid" and that "[a]n invalid rule should be disregarded by a judge sitting in the district or by an appellate court") (citing Johnson v. Manhattan Ry. Co., 289 U.S. 479, 503, 53 S.Ct. 721, 77 L.Ed. 1331 (1933) ).
The principles of federal jurisdiction compel my conclusion. First, as defendant seems to recognize, the citizenship of an unincorporated association like a limited liability company is not tied to the state in which it is formed or has its principal place of business; rather, a limited liability company takes the citizenship of each of its members. See, e.g., Bayerische Landesbank, N.Y. Branch v. Aladdin Cap. Mgmt. LLC, 692 F.3d 42, 49 (2d Cir. 2012) (citing Handelsman v. Bedford Vill. Assocs. Ltd. P'ship, 213 F.3d 48, 51–52 (2d Cir. 2000) ). Although defendant recognizes this principle, it nevertheless alleges plaintiff's state of formation and principal place of business in its notice of removal. But those allegations are immaterial to plaintiff's citizenship.
Second, in invoking the subject matter jurisdiction of the district court, a notice of removal must be held to the same standard as a complaint. The language of 28 U.S.C. § 1446, requiring "a short and plain statement of the grounds for removal," is so similar to the language of Federal Rule of Civil Procedure 8(a), requiring "a short and plain statement of the grounds for the court's jurisdiction," that they must be read in pari materia. See Agyin v. Razmzan, 986 F.3d 168, 180 (2d Cir. 2021) (the pleading requirement set forth in § 1446 was "borrowed from the pleading requirement set forth in Federal Civil Rule 8(a)" (quoting 14C Wright & Miller, Federal Practice & Procedure § 3733 (rev. 4th ed. 2020) )). Although this pleading requirement has been phrased as "liberal," id., that is a relative term. If the allegations in defendant's notice of removal appeared in a complaint, no one would contend that they adequately invoked the court's subject matter jurisdiction.
Yet that is precisely what the last sentence in Local Civil Rule 81.1 purports to allow. It authorizes the removal of cases that may well have no jurisdictional basis. It is equivalent to a local rule allowing a plaintiff to sue an unincorporated association without knowing whether there is diversity of citizenship and to conduct discovery just to find out. The last sentence of Local Civil Rule 81.1 is thus in derogation of the rule that the right to remove should be narrowly construed. See Shamrock Oil & Gas Corp. v. Sheets, 313 U.S. 100, 108, 61 S.Ct. 868, 85 L.Ed. 1214 (1941).
The rule is also inconsistent with the cases holding that a complaint or notice of removal is defective if it fails to name the identity and citizenship of the members of an unincorporated association. As the Second Circuit observed in Carter v. HealthPort Technologies, LLC, 822 F.3d 47, 60 (2d Cir. 2016), an allegation that an LLC "is a citizen of a different state" than the plaintiff "is insufficient to show that the diversity requirement is met because, standing alone, it is entirely conclusory." District courts in this Circuit regularly hold that allegations that a party is a citizen of a different state, or that none of the members of a defendant limited liability company are citizens of the same state as the plaintiff, are insufficient to invoke diversity jurisdiction. See Go Farm Hemp, LLC v. Canopy Growth USA, LLC, No. 19-cv-1370, 2019 WL 5842908, at *2 (W.D.N.Y. Nov. 7, 2019) ; Axalta Coating Sys., LLC v. Atl. Auto Body of Freeport, LLC, No. 18-cv-3521, 2019 WL 1491959, at *2 (E.D.N.Y. Apr. 4, 2019) ; see also Tutor Perini Bldg. Corp. v. N.Y.C. Reg'l Ctr., LLC, No. 20-cv-731, 2020 WL 7711629, at *2 (S.D.N.Y. Dec. 29, 2020) (collecting cases). Allegations like these do not meet the plausibility standard for substantive allegations under Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009), and Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007), and there is no reason why jurisdictional allegations – the fundamental building blocks on which the power of the federal courts rests – should be treated more casually. Not only does the last sentence of Local Civil Rule 81.1 grant a type of temporary subject matter jurisdiction absent any reason to believe that it exists, the rule also removes a court's discretion as to whether to allow discovery on that issue. It is true that some courts allow discovery any time that their subject matter jurisdiction is questioned. See, e.g., Ayyash v. Bank Al-Madina, No. 04-cv-920, 2006 WL 587342, at *6 (S.D.N.Y. March 9, 2006). The better view, however, is that discovery should be limited to situations where facts have been alleged that, if true, would either confirm or refute subject matter jurisdiction. See, e.g., Aleph Towers, LLC v. Ambit Texas, LLC, No. 12-cv-3488, 2013 WL 4517278, at *4 (E.D.N.Y. Aug. 23, 2013) (allowing discovery where the parties disputed a defendant LLC's membership). Discovery is not a substitute for a guess, or a hope, or the absence of knowledge as to the ownership interests of an unincorporated party. See Lettman v. Bayview Loan Servicing, LLC, No. 19-cv-3204, 2019 WL 2504015, at *2 (E.D.N.Y. June 17, 2019).
The Second Circuit's recent decision in Agyin v. Razmzan, 986 F.3d 168 (2d Cir. 2021), is not to the contrary. The issue there was whether a removing defendant had sufficiently plead the basis for officer-removal jurisdiction. The he notice of removal went into considerable detail about the nature of his relationship with the federal government and why that permitted him to remove the action.
This principle stems from the fundamental need to adequately allege subject matter jurisdiction. As Chief Justice Marshall explained: "The decisions of [the Supreme Court] require, that the averment of jurisdiction shall be positive, that the declaration shall state expressly the fact on which jurisdiction depends. It is not sufficient that jurisdiction may be inferred, argumentatively, from its averments." Brown v. Keene, 33 U.S. 112, 114, 8 Pet. 112, 8 L.Ed. 885 (1834). That principle still holds true today. See, e.g., Lettman, 2019 WL 2504015, at *1 (citing Brown, 33 U.S. at 114 ).
No doubt, the combination of the statutory requirements for diversity jurisdiction and the lack of public information about ownership of unincorporated associations often makes it difficult to proceed in federal court when a case involves a limited liability company. States generally do not require disclosure of ownership interests in a limited liability company or a limited partnership, unlike their treatment of a corporation's state of incorporation or its principal place of business. Indeed, one reason that individuals entering a business may choose an unincorporated form is to avoid disclosure of ownership interests. See generally The Opaque World of Ownership by L.L.C., N.Y. Times, May 1, 2018, at B1.
A version of this article appears online. See Emily Badger, Anonymous Owner, L.L.C.: Why It Has Become So Easy to Hide in the Housing Market, N.Y. Times, Apr. 30, 2018, https://www.nytimes.com/2018/04/30/upshot/anonymous-owner-llc-why-it-has-become-so-easy-to-hide-in-the-housing-market.html.
But at least when it comes to citizenship for diversity purposes, that is the way Congress wants it. Congress granted a special citizenship status to corporations that could be ascertained from public records and observation of their principal place of business, and despite the increasing use of unincorporated entities as business vehicles over the last 30 years, Congress has not amended the diversity statute to treat such entities the same way as corporations for general diversity purposes. It is not up to the courts to amend the statute to increase the reach of federal jurisdiction where Congress has not.
In fact, Congress has determined to treat limited liability companies like corporations for diversity purposes in one instance – under the Class Action Fairness Act. See Pub. L. No. 109-2, § 4(a), 119 Stat. 4, 9 (2005) (adding a new § 1332(d) and stating that, for purposes of that section, "an unincorporated association shall be deemed to be a citizen of the State where it has its principal place of business and the State under whose laws it is organized"). The fact that Congress has done it there but has not chosen to do it generally emphasizes the point that courts should not step into that gap.
This Court does not believe that Local Civil Rule 81.1 enables defendant to remove this case from state court. Defendant is therefore ORDERED TO SHOW CAUSE within 7 days why this case should not be remanded to the Supreme Court of the State of New York, Kings County.