CIBC Bank USA v. JH Portfolio Debt Equities, LLC et al
Filing
202
MEMORANDUM Opinion and Order Signed by the Honorable John Z. Lee on 10/1/20.Mailed notice(ca, )
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
CIBC Bank USA f/k/a The PrivateBank )
And Trust Company, as Administrative )
Agent,
)
)
Plaintiff,
)
v.
)
JH Portfolio Debt Equities, LLC; JH
)
Portfolio Debt Equities 2, LLC; JH
)
Portfolio Debt Equities 4, LLC; and JH )
Receiver LLC;
)
)
Defendants.
)
No. 18 C 3964
Judge John Z. Lee
MEMORANDUM OPINION AND ORDER
CIBC Bank (“CIBC”) filed this suit in its capacity as an administrative agent
representing itself and seven other financial institutions (“the Lenders”).
CIBC
claims that the Defendants, which are a number of affiliated business entities
(collectively, “JH”), breached the terms of a credit agreement that they entered into
with the Lenders. JH now moves to dismiss the complaint under Federal Rule of
Civil Procedure 12(b)(1), arguing that CIBC has not alleged that each of the eight
Lenders is diverse from JH, thereby failing to establish diversity jurisdiction. CIBC,
in turn, argues that so long as its citizenship is diverse from that of JH, the
requirements of diversity jurisdiction are met. For the following reasons, CIBC’s
reasoning is incorrect, and the Defendants’ motion is granted.
I.
Background
CIBC and the other Lenders seek to recover principal owed by JH, a diffuse
corporation that purchases and collects on various third-party loans. Compl. at 1,
ECF No. 1. In 2017, the Lenders and JH entered into an agreement, whereby the
Lenders agreed to provide a revolving credit line to JH (“the Credit Agreement” or
“Agreement”). Id. at 5. In return, JH promised, among other things, to grant the
Lenders with a first-priority security interest in various collateral, including some of
its loan portfolios. Id. at 6. Using its credit line, JH borrowed approximately $182
million from the Lenders; CIBC provided JH with $45 million of the total amount.
Id. at 5.
As part of the Agreement, the parties agreed that, in the event that JH
defaulted, CIBC would act as the administrative agent of all eight Lenders, and CIBC
was granted the exclusive right to enforce any claims that the Lenders may have had
against JH. Credit Agreement § 9.01, ECF No. 1-1. Furthermore, the Agreement
granted a certain subset of the Lenders the ability to force CIBC to sue JH for
violating the Agreement as well as the ability to forbid CIBC from filing such a suit.
Id. § 8.02.
In June 2018, CIBC filed a complaint in its capacity as the administrative
agent of all eight Lenders, alleging that JH had breached the Agreement in various
ways. Compl. at 15. In sum, CIBC claims that JH owes the Lenders $172.5 million
in principal, along with attorney’s fees, costs, and expenses. Id. at 17.
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The complaint also asserts that the case is properly in federal court based upon
federal diversity jurisdiction. Id. at 3; see 28 U.S.C. 1332(a). For support, CIBC
represents that that it is an Illinois bank with its principal place of business in
Chicago, while JH’s various members and branches are based in California,
Delaware, and Florida. Compl. at 2–3. The complaint is silent as to the citizenship
of the seven remaining Lenders.
In February 2020, JH filed a motion to dismiss. ECF No. 184. JH argues that
by failing to provide the citizenship of the remaining Lenders, CIBC has not met its
burden of demonstrating that complete diversity of the parties exists in this case. Id.
at 2.
II.
Legal Standard
An objection to a federal court’s subject matter jurisdiction may be raised at
any time in litigation by a party, or by the court sua sponte. Arbaugh v. YH Corp.,
546 U.S. 500, 506 (2006). When moving to dismiss a complaint for lack of subject
matter jurisdiction, see Fed. R. Civ. P. 12(b)(1), a defendant may launch either
a facial or factual attack on jurisdiction. Stroman Realty, Inc. v. Grillo, 438 F.
Supp. 2d 929, 932 (N.D. Ill. 2006).
When making a facial attack, as JH does here, a defendant contends that
the allegations in the pleadings are insufficient on their face to support
federal jurisdiction.
See Continental Automotive GmbH v. iBiquity Digital
Corporation, No. 14 C 1799, 2015 WL 859569, at *2 (N.D. Ill. Feb. 26, 2015). In such
circumstances,
the
“allegations
[in
the
3
complaint]
are
taken
as
true
and construed in a light most favorable to the complainant.” Cedars–Sinai Med.
Ctr. v. Watkins, 11 F.3d 1573, 1583 (Fed. Cir. 1993). And, as always, the party
seeking to invoke subject matter jurisdiction bears the burden of establishing
it. See DaimlerChrysler Corp. v. Cuno, 547 U.S. 332, 342 n.3 (2006).
III.
Analysis
To get to the point, by failing to plead the citizenship of the other seven
Lenders, CIBC has not met its burden to establish diversity jurisdiction. The Court
first will review the relevant principles of diversity jurisdiction and then apply them
here.
A.
Section 1332(a) Diversity Jurisdiction
Federal courts have original jurisdiction over, among other things, suits
between “citizens of different States” where the amount in controversy exceeds
$75,000. 28 U.S.C. § 1332(a)(1). But the parties in the action must be completely
diverse; that is, the citizenship of each and every plaintiff must be diverse from the
citizenship of each and every defendant. If there is an overlap in citizenship, diversity
jurisdiction is lacking. Kreuger v. Cartwright, 996 F.2d 928, 931 (7th Cir. 1993).
Where there are multiple parties on either side, or where a party represents
others in the suit, the Supreme Court has held that a court should “disregard nominal
or formal parties and rest jurisdiction only upon the citizenship of real parties to the
controversy.” Navarro Sav. Ass’n v. Lee, 446 U.S. 458, 461 (1980). The citizenship of
such “real parties in interest” is relevant for jurisdictional purposes because “a
primarily local controversy should be tried in the appropriate state forum.” 6A
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Charles Alan Wright and Arthur R. Miller, Federal Practice and Procedure § 1556
(3d ed. 2020); see id. (explaining that “nominal or formal parties” should not be able
to use their citizenship to create diversity jurisdiction where the affected parties are
not diverse). And, indeed, courts have applied this rule to prevent parties from
manufacturing jurisdiction by suing through a representative. See CCC Info. Servs.,
Inc. v. American Salvage Pool Ass’n, 230 F.3d 342, 346 (7th Cir. 2000) (noting that
“the citizenship of the real party in interest is determinative when deciding whether
the district court has diversity jurisdiction. This is because a party who has no real
interest in the outcome of the litigation should not be able to use its citizenship to
transform a local controversy into a federal case.”) (internal citations omitted).
The Seventh Circuit has adopted this principle on numerous occasions. For
instance, in National Ass’n of Realters v. National Real Estate Ass’n, Inc., 894 F.2d
937, 940 (7th Cir. 1990), a trade association sued on behalf of its members who were
allegedly misled into purchasing malpractice insurance. The court held that, because
it was the members who had suffered the injury and not the association itself, the
citizenship of the members is what counted in determining diversity jurisdiction. See
id. (“The members were in the front line. They received the blow.
[And the
association’s] counsel conceded at argument that if [it] ever obtains any damages on
its members’ behalf[,] . . . it will turn those damages over to the members.”). See also
Northern Trust Co. v. Bunge Corp., 899 F.2d 591, 595 (7th Cir. 1990) (noting the
“general policy of testing diversity by the citizenship of the parties represented rather
than the citizenship of the representative”).
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This is true even where the representative also is seeking to represent its own
interests in the suit. For example, in Northern Trust, seventy-seven shareholders of
the Lauhoff Corporation sold their shares to the Bunge Corporation. In the purchase
agreement, the shareholders appointed the Northern Trust Company as their “true
and lawful agent with respect to all matters arising in the connection with [the]
agreement.” Id. at 592. After the transaction, a dispute between the shareholders
(now former shareholders) and Bunge ensued, and the Northern Trust filed a
declaratory judgment action in federal court, claiming that diversity jurisdiction
existed because its citizenship was diverse from that of Bunge. Among its arguments,
the Northern Trust noted that, in addition to its duties as an agent for all former
shareholders, it served as a legal trustee of the proceeds of sixty percent of the sold
stock.
The Seventh Court remained unpersuaded. First, the court noted that the
Northern Trust did not fall within any of the recognized exceptions to the general
rule that the citizenship of the real parties to the controversy is what matters—for
instance, Northern Trust was not a corporation suing for its own injuries; it was not
a shareholder pursuing a derivative action; and it was not a class representative
under Rule 23. See id. at 594–95.
As for the Northern Trust’s contention that it was, in fact, a trustee of some of
the sales proceeds, and thus had a stake in the outcome of the suit, the Seventh
Circuit observed that Northern Trust was not filing suit in its capacity as a trustee,
but rather as a representative of the shareholders. Id. at 595 n.3 (“Northern in its
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capacity as trustee is not, however, before this Court any more than the Northern
Trust Company in its individual capacity is before this Court.”). Therefore, given that
the Northern Trust had “not sued in its own name” but rather as the agent of the
shareholders, the court rejected that an analysis of diversity jurisdiction could be
properly limited, on the plaintiff side, to the citizenship of Northern Trust alone. Id.
at 595.
B.
CIBC and the Other Lenders
With these precedents in mind, the Court concludes that the non-CIBC
Lenders are real parties to the controversy in this case, and their citizenship must be
counted in analyzing diversity jurisdiction.
While CIBC, in its capacity as an
individual bank, holds a financial interest in the outcome of the suit, CIBC appears
before this Court as a representative of all eight Lenders. See, e.g., Civ. Cover Sheet
at 1, ECF No. 2 (declaring that the plaintiff in this case is “CIBC Bank . . . as
Administrative Agent to all Lenders”). That is, CIBC sues to recover damages for the
parties it represents, not for any damages it itself is owed in its role as an
administrative agent, see Compl. at 16–17. Moreover, all eight Lenders “received the
blow” from JH’s alleged breach of contract, and any damages awarded to CIBC in this
suit would presumably be “turn[ed] . . . over” and distributed amongst them. Nat’l
Ass’n of Realtors, 894 F.2d at 940.
CIBC’s arguments to the contrary are unavailing. For example, it notes that
the Credit Agreement vests it with exclusive enforcements rights on behalf of the
Lenders, and then cites RK Co. v. See, 622 F.3d 846 (7th Cir. 2010), for the proposition
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that the “real party in interest” is the one “who possesses the right or interest to be
enforced through litigation.” Id. at 850. But CIBC here confuses a “real party in
interest” under Fed. R. Civ. P. 17(a) with a “real party in controversy” for purposes of
diversity jurisdiction.
The reason underlying Rule 17’s requirement that “an action must be
prosecuted in the name of the real party in interest” is “to protect the defendant
against a subsequent action by the party actually entitled to recover.” Id. at 850
(internal citations omitted).
Thus, “under Rule 17, we are concerned only with
whether an action can be maintained in the plaintiff’s name.”
Rawoof v. Texor
Petroleum Co., Inc., 521 F.3d 750, 757 (7th Cir. 2008) (citation omitted). And, while
there is a “rough symmetry between the real party in interest standard of Rule 17(a)
and the rule that diversity jurisdiction depends upon the citizenship of real parties
in controversy . . . the two rules serve different purposes and need not produce
identical outcomes in all cases.” Navarro, 446 U.S. at 462 n.9 (cleaned up). To put it
another way, “although one serving in a representative capacity is a real party in
interest in the sense that the action is properly maintained in his name, Fed. R. Civ.
P. 17(a), a representative is not necessarily the real party in interest for the purpose
of determining diversity jurisdiction.” Wilsey v. Eddingfield, 780 F.2d 614, 615 (7th
Cir. 1985) (citation omitted).
CIBC’s citations to a few out-of-circuit cases also miss the mark. CIBC points
to Chase Manhattan Bank v. Motorola Inc., 136 F. Supp. 2d 265 (S.D.N.Y. 2001),
where the court held that Chase, which was suing as an administrative agent on
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behalf other lenders in a bank syndicate, was the real party to the controversy for
diversity purposes. See id. at 266. As an initial matter, to the extent the holding in
this case is inconsistent with Seventh Circuit law, it has no force. But, putting that
to the side, Chase is factually distinguishable. In Chase, the court took pains to detail
the substantial control that Chase, as the administrative agent, had over the other
banks when it came to the financial arrangement between the syndicate and the
counterparty, noting that such an arrangement was advantageous to both the
counterparty and the banks, whose union was “often fractious.” See id. at 267–68,
271. For example, Chase, as administrator, possessed full autonomy to sue to enforce
the agreement, or to not sue at all. As a result, the court found that Chase bore all
the hallmarks of a real party to the controversy.
By contrast, here, CIBC’s authority is far less. Just by way of illustration, the
other banks can order CIBC to file a lawsuit to enforce their rights under the
agreement (even if CIBC wishes not to do so), and they can direct CIBC not to file a
lawsuit (even if it desires otherwise). In this way, CIBC’s role as an administrative
agent is more akin to the named plaintiffs in National Ass’n of Realters and Northern
Trust.
For similar reasons, CIBC’s reliance on KeyBank Nat’l Ass’n v. Perkins Rowe
Assocs., et al., No. 09-497-JJB, 2009 WL 4042974 (M.D. La. Nov. 20., 2009), is
misplaced. There, KeyBank and Perkins Rowe entered into a loan agreement that
expressly contemplated that KeyBank would sell and assign portions of the loan to
other lenders. The agreement provided that, upon such sale, KeyBank would act as
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the agent for those lenders while “keeping a dominant percentage of the loan amount
for itself.” Id. at *1. In exchange, Perkins Rowe executed a mortgage in KeyBank’s
favor, and the individual defendant provided KeyBank with a written guaranty.
When Perkins Rowe failed to make payment on the loan, KeyBank sued, and the
defendants filed a motion under Rule 12(b)(1), arguing that the citizenship of the
other lenders must be considered in assessing diversity jurisdiction. Id.
Describing KeyBank’s dominant role in the transaction, the court disagreed.
For example, the court noted that “KeyBank established its leadership role in this
transaction from the beginning when it negotiated the initial loan agreement, drafted
the language in the amended and restated construction loan agreement, and found
the other lenders.” Id. at *4. Moreover, the mortgage and guaranty referenced
KeyBank and did not mention the other lenders. This dominant role relative to the
other lenders—which went beyond contractual language designating KeyBank as
their representative—persuaded the court that KeyBank was undisputedly the
“master of the litigation.” Id. Thus, even if this case were consistent with Seventh
Circuit law, it does not support CIBC’s argument.
In sum, given the “general policy of testing diversity by the citizenship of the
parties represented rather than the citizenship of the representative,” Northern Trust
Co., 899 F.2d at 594–95, CIBC has failed to establish diversity jurisdiction by not
pleading the citizenship of the remaining Lenders.
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IV.
Conclusion
For the reasons stated above, Defendant’s motion to dismiss is granted; CIBC’s
claims are dismissed without prejudice. CIBC will be given thirty days from the date
of this order to file an amended complaint that states the citizenship of all
represented Lenders.
ENTERED: 10/1/20
_________________________________John Z. Lee
United States District Court Judge
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