The Court will also hear arguments tomorrow in Lincoln Property Co. v. Roche, No. 04-712, a landlord-tenant dispute that has bloomed two cert-worthy questions about diversity subject-matter jurisdiction when entities seek to have cases in which they are defendants removed to federal court. The Court agreed to consider first whether, in calculating the complete diversity between parties that removal requires, federal courts can look beyond the papers to consider whether a nondiverse, unnamed party is a ”real party in interest” sufficient to defeat diversity jurisdiction. The Court is also considering a second question posed by the petitioners: whether a limited partnership is a citizen of a state for removal diversity jurisdiction purposes if its business activities establish a “very close nexus” with the state.

David C. Frederick will argue the case for petitioners. Gregory P. Joseph will argue for respondents. Find the merits briefs here.

As in most procedural disputes, the relevant facts are simple but the procedure is complex. Respondents Christophe and Juanita Roche, Virginia citizens both, leased an apartment in Virginia from petitioner State of Wisconsin Investment Board [“SWIB”], the owner of the apartment complex. The complex was managed by Lincoln Property Company ECW, Inc., which executed the lease on SWIB’s behalf. In August 2002, respondents sued SWIB and Lincoln in Virginia state court, bringing state-law claims alleging (inter alia) the presence of toxic mold in the apartment. Petitioners removed the case to the United States District Court for the Eastern District of Virginia, asserting complete diversity between the parties because SWIB was a Wisconsin citizen and “Lincoln is a Texas corporation with its principal place of business in Texas.”

During discovery, three important pieces of jurisdiction-related evidence emerged: (1) a Lincoln Senior VP testified three times that Lincoln was a partnership, rather than a corporation; (2) another Lincoln deponent identified Jeff E. Franzen, the “highest ranking officer” in Lincoln’s Herndon, Virginia office, as a “Senior Vice President/Partner”; and (3) Lincoln’s counsel offered stipulations about “financial information concerning” another entity – “EQR/Lincoln Limited Partnership [“EQR LLP”], the entity that receives the management fees for Westfield Village Apartments.”

Discovery closed. The district court entered an order indicating that it would grant petitioners’ motions for summary judgment and their Daubert motion to exclude respondents’ medical causation expert. Before the judgment was filed, however, respondents moved to remand the action to state court based on a lack of diversity jurisdiction.

Respondents argued that the Lincoln it had sued was not a Texas corporation at all. Respondents alleged, inter alia, that the named party, “Lincoln Property Co.,” was not authorized to transact business in Virginia, while EQR LLP was so authorized, and that Mr. Franzen was both an “Operating Partner” of Lincoln and a Virginia resident. In response, petitioner Lincoln submitted declarations that Lincoln really was a Texas corporation with its principal place of business in Texas, that there were actually five relevant Lincoln-related entities, and that Franzen was not a partner of EQR LLP but of “several” unrelated “Texas limited partnerships.”

The district court denied respondents’ remand motion, holding that there was complete diversity because Lincoln Property Co., a Texas citizen, was the only named defendant. The district court further held that even if the citizenship of EQR LLP were relevant, EQR LLP would not defeat diversity because it was not a citizen of Virginia, being registered and operated in Delaware and having only Texas entities as its partners.

The jurisdictional issue was not briefed on appeal. Nevertheless, the Fourth Circuit reversed the district court, holding that petitioner Lincoln had “failed to carry their burden of proof with respect to their allegedly diverse citizenship.” Ruling that entities were not entitled to “manipulate” diversity jurisdiction by concealing a nondiverse “real party in interest,” the court pointed to the three pieces of jurisdiction-related evidence uncovered in discovery as indicating that Lincoln had “fail[ed] to disclose all of the necessary jurisdictional facts” relating to EQR LLP’s citizenship. The court found the evidence to suggest that EQR LLP had a “very close nexus” with Virginia. The court dismissed Lincoln’s declarations to the contrary as “self-serving.” “The negative inferences resulting from [Lincoln’s] obscurities,” the court held, “must be borne by Lincoln.” The Fourth Circuit ordered a remand to state court.

The first question for the Supreme Court concerns whether the Fourth Circuit erred in using a “real party in interest” analysis when calculating whether Lincoln had met its burden of proving complete diversity.

Petitioners and respondents fight it out on at least six different fronts.

First, petitioners contend that the language of the removal statute, 28 U.S.C. 1441, forbids courts from looking beyond the named defendants in determining diversity. Section 1441(b) permits diversity-based removal only when none of the “parties in interest properly joined and served as defendants” is a local citizen. Petitioners conclude that the statute does not allow courts to consider “parties in interest” not joined or served. Respondents counter that removal jurisdiction is conferred by Section 1441(a) (which allows removal for “any civil action” over which the federal court has “original jurisdiction”), not Section 1441(b). The “properly joined and served as defendants” language of Section 1441(b), respondents claim, just states the forum defendant exception to removal; it does not supply a broader necessary condition for the diversity jurisdiction of all defendants. Respondents conclude that the statutory language does not prohibit courts from looking to unnamed defendants in removal contexts.

Second, petitioners appeal to a logical extension of the principle that plaintiffs are the masters of their complaint for jurisdictional purposes. Petitioners point to Lumbermen’s Mutual Casualty Co. v. Elbert, a 1954 case that established that plaintiffs can elect not to sue a nondiverse potential defendant without damaging diversity jurisdiction. Precedent also allows plaintiffs to dismiss a nondiverse defendant to create diversity jurisdiction. So plaintiffs enjoy the jurisdictional advantages of having their choice of whom to sue respected. Petitioners contend that they must bear the disadvantages of the principle too.

Respondents reply that the “master of the complaint” principle and its logical consequences do not apply to their case because the principle only covers plaintiffs who make a knowing choice of defendants. Respondents allege that petitioners concealed the existence of EQR LLP from them to gain diversity, and that they should not have to bear the disadvantage of that concealment. Respondents find support in language of the Court expressing concern that entities will use “affiliates to manufacture otherwise non-existent diversity.” Respondents claim that if only the citizenship of entities named in a case is considered, entities will be able to “trump” a plaintiff’s choice of state court venue when federal courts have more favorable procedural rules.

Third, petitioners argue that the “real party in interest” analysis has no support in statute or precedent. They claim that Section 1441(b)’s reference to “parties in interest” is about fraudulent or collusive joinder (for which the Court looks only to named parties), and that the Court has limited Federal Rule Of Civil Procedure 17(a)’s “real party in interest” analysis to plaintiffs (its purpose being to protect defendants against relitigation). Petitioners attempt to distinguish Navarro Savings Ass’n v. Lee, relied upon by the Fourth Circuit (and respondents) for the command that defendants must be “real and substantial parties” to the suit for diversity purposes. Petitioners assert that Navarro’s “real party in interest” analysis was not defendant-focused, but rather was focused upon third-party beneficiaries of a trust to see if they could be proper plaintiffs.

Beyond Navarro Savings, respondents find additional support for the “real party in interest” method in the willingness of courts to consider unnamed parties to the controversy in other contexts, including diversity jurisdiction cases involving public entities and Eleventh Amendment cases.

Fourth, petitioners argue that a “real party in interest” analysis makes Federal Rule of Civil Procedure 19, the rule governing joinder of parties for a just adjudication, useless. (Petitioners run a lengthy Rule 19 analysis and conclude that EQR LLP is neither “necessary” nor “indispensable.”) Respondents counter that Rule 19 was not implicated in or abrogated by the Fourth Circuit’s ruling, the issue of jurisdiction being “antecedent” to Rule 19 issues.

Fifth, petitioners point to problems inherent in looking beyond the named defendants to discover the “real parties in interest.” In addition to slippery slope and uncertainty issues, they argue that looking beyond the complaint sets up perverse incentives for plaintiffs who lose on the merits to cast about for a viable local putative defendant who can defeat jurisdiction. Indeed, petitioners suggest that respondents did just this, whether for “dilatory” or “strategic” reasons, in order to relitigate their failed case in state court. Result? “[R]e-litigation catastrophe.”

Respondents argue that the Fourth Circuit’s method, limited to the narrow context of nonpublic entity defendants such as Lincoln, presents none of the policy horribles paraded by petitioners. They claim that Lincoln merely failed to dispel the court of appeals’ “doubts” about the jurisdiction of an entity that tried to mislead the court, doubts raised by evidence produced during discovery, sufficient to overcome “the presumption against federal jurisdiction.” If the Fourth Circuit’s rule is limited to cases in which entity defendants try to conceal their structure to invoke jurisdiction, there will be no fishing for new defendants, no slippery slope problem, no litigation explosion, and little uncertainty.

Finally, petitioners claim that they had no notice of the Fourth Circuit’s ruling on the unbriefed jurisdictional ruling, could not be heard to argue the issue, and therefore were deprived of their due process. Respondents contend that the due process issue is not before the Court, since the Court did not grant certiorari on the issue, and argue that petitioners had notice of the jurisdiction issue in any case.

The Court also agreed to consider whether a limited partnership’s citizenship can be based upon whether it has a “very close nexus” with a state. The parties disagree whether this issue is squarely presented to the Court. Petitioners claim that the Fourth Circuit held that the nexus test was a sufficient basis for defeating Lincoln’s diversity jurisdiction. Respondents claim that the Circuit’s reference to the nexus was merely part of its larger evidentiary analysis into whether petitioners had met their burden of proof of complete diversity. Respondents devote no space in their brief to arguing for the “nexus” test. Petitioners argue that the test is contrary to precedent, that it would create massive uncertainty, and that even if the test applies EQR LLP is in fact diverse.