Starr Indemnity & Liability Company v. i3 Verticals, LLC, 3:16-cv-02832

Background

Starr Indemnity (Texas corp; principal place of business New York) issued a 10/31/2015–10/31/2016 D&O-style policy to i3 Verticals, LLC (Delaware LLC; principal place of business Tennessee).
On 6/14/2016 a class action by merchants was filed against i3 Verticals; i3 sought coverage from Starr on 8/23/2016.
Starr reserved rights, agreed to defend, then sued 11/3/2016 for a declaratory judgment that the Policy provides no coverage; Starr invoked diversity jurisdiction under 28 U.S.C. § 1332.
i3 initially disclosed four individuals as members (three New York residents, one Texas resident) whose citizenship would destroy diversity; Starr sought discovery on whether those individuals were LLC members for jurisdictional purposes.
i3 relied on Class P Unit Agreements to argue those individuals were members; the Operating Agreement required new members to sign a counterpart signature page to be admitted.
The court concluded the Class P Unit Agreements were distinct contracts that did not satisfy the Operating Agreement’s counterpart-signature requirement; therefore the Contested Members were not members for diversity purposes.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether complete diversity exists between Starr and i3	Starr: Contested Members were not validly admitted members under i3’s Operating Agreement, so their citizenship should not be imputed to i3	i3: Contested Members acquired membership via Class P Unit Agreements, which function as counterparts to the Operating Agreement, destroying diversity	Held: No. Class P Unit Agreements are not counterparts and did not satisfy Section 3.3; Contested Members are not members for jurisdictional purposes, so diversity exists
Whether Class P Unit Agreements can bind new members to the Operating Agreement	Starr: The Agreements do not include counterpart signature pages required by Section 3.3 and are separate contracts	i3: Section 17 of the Class P Unit Agreements indicates purchasers "as a Member" have rights/obligations under the Operating Agreement, so membership was conferred	Held: The Agreements are materially different, governed by different law, and expressly may supersede Operating Agreement provisions; they do not function as counterparts and thus do not admit members
Proper interpretive standard for LLC agreements under Delaware law	Starr: Enforce the Operating Agreement’s explicit requirements for admission of members	i3: Contractual intent and Section 17 show admission occurred via Class P Unit Agreements	Held: Under DLLCA and freedom-of-contract principles, the Operating Agreement’s explicit counterpart requirement governs; courts must give effect to the LLC agreement’s terms
Burden of proof for establishing diversity jurisdiction	Starr: As plaintiff asserting jurisdiction, bears burden to show citizenship alignment supports diversity	i3: Challenges sufficiency of Starr’s showing	Held: Starr met its burden after discovery; court finds diversity exists and federal jurisdiction is proper

Key Cases Cited

Kokkonen v. Guardian Life Ins. Co., 511 U.S. 375 (court presumption against federal jurisdiction and plaintiff bears burden to establish jurisdiction)
Jerome–Duncan, Inc. v. Auto–By–Tel, L.L.C., 176 F.3d 904 (6th Cir.) (diversity requires no plaintiff and no defendant share a state citizenship)
Delay v. Rosenthal Collins Grp., LLC, 585 F.3d 1003 (6th Cir.) (LLC takes citizenship of each member for diversity purposes)