112 F. Supp. 3d 850
S.D. Iowa2015Background
- Fairfield Castings, LLC (Delaware LLC, principal place Iowa) sued George and Kay Hofmeister in Iowa state court for conversion, fraud, criminal conduct, and breach of fiduciary duty based on alleged improper salary payments to Kay.
- Fairfield’s membership chain: Fairfield → Spara, LLC (sole member) → Ascalon Enterprises, LLC (sole member of Spara) → three irrevocable trusts (beneficiaries/members of Ascalon). The trusts are governed by Indiana law; trustee is Homer McClarty.
- Defendants (Kentucky citizens) removed the action to federal court asserting diversity jurisdiction under 28 U.S.C. § 1332.
- Defendants argued Spara should be treated like a corporation for diversity purposes (citing tax election and bankruptcy plan effects) to avoid tracing citizenship to the trusts.
- Fairfield moved to remand, contending defendants failed to prove complete diversity because the trusts’ citizenship could make the parties non-diverse.
- The court granted remand, finding defendants did not meet their burden to show complete diversity and declining to award attorneys’ fees.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether federal diversity jurisdiction exists | Defendants failed to prove complete diversity because citizenship of the trusts (beneficiaries) must be considered and is not shown to be diverse | Spara should be treated as a corporation (or otherwise not subject to member-tracing) because (1) statutory language/legislative history, (2) Spara elected corporate tax treatment, and (3) bankruptcy reorganization altered membership | Held: No subject-matter jurisdiction; Spara is treated as an LLC for diversity so citizenship traces to Ascalon and the trusts; defendants failed to prove trusts’ beneficiaries are diverse, so remand required |
| Whether an LLC’s tax election converts it to a corporation for diversity purposes | N/A (argued by defendants) | Tax election does not change entity form for diversity; citizenship depends on actual membership | Held: Tax election irrelevant; Spara remains an LLC for §1332 purposes |
| Whether post-removal bankruptcy plan (confirmed after removal) affects diversity at time of removal | N/A | The reorganization changed membership, preventing flow-back to trusts | Held: Jurisdiction is assessed at time of removal; post-removal plan cannot retroactively alter diversity |
| Whether attorneys’ fees should be awarded under 28 U.S.C. §1447(c) | Fees requested | Removal was objectively reasonable given unsettled law on trust citizenship; no bad faith alleged | Held: Fees denied; removal was not objectively unreasonable |
Key Cases Cited
- Knudson v. Sys. Painters, Inc., 634 F.3d 968 (8th Cir.) (party seeking removal bears burden to prove federal jurisdiction)
- Schubert v. Auto Owners Ins. Co., 649 F.3d 817 (8th Cir.) (jurisdiction measured at time of removal)
- GMAC Commercial Credit LLC v. Dillard Dep’t Stores, Inc., 357 F.3d 827 (8th Cir.) (LLC citizenship determined by citizenship of all members)
- Carden v. Arkoma Assoc., 494 U.S. 185 (U.S.) (treats citizenship of unincorporated entities by membership interests)
- Navarro Savings Ass’n v. Lee, 446 U.S. 458 (U.S.) (trustee-suit rule distinguishing trustee citizenship when trustees sue in own names)
- Martin v. Franklin Capital Corp., 546 U.S. 132 (U.S.) (standard for awarding fees on remand: objective reasonableness of removal)