Ambac Assurance Corporation v. Fort Leavenworth Frontier Heritage Communities, II, LLC

Filing 96

MEMORANDUM AND ORDER granting 46 Motion for Leave to File Sur-reply; granting 35 Motion to Dismiss. This case is dismissed without prejudice. Signed by District Judge Daniel D. Crabtree on 3/17/2017. (ht)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF KANSAS

AMBAC ASSURANCE
CORPORATION,
Plaintiff,
v.

Case No. 15-cv-9596-DDC-JPO

FORT LEAVENWORTH FRONTIER
HERITAGE COMMUNITIES, II, LLC,
Defendant.

MEMORANDUM AND ORDER
This matter comes before the court on defendant’s Motion to Dismiss Plaintiff’s
Amended Complaint (Doc. 35) and plaintiff’s Motion for Leave to File Sur-reply in Opposition
to Defendant’s Motion to Dismiss (Doc. 46). Both parties have responded and replied to the
motions. For reasons explained below, the court grants plaintiff’s Motion for Leave to File SurReply and grants defendant’s Motion to Dismiss.
I.

Plaintiff’s Motion for Leave to File Sur-reply
The court begins with plaintiff’s Motion for Leave to File Sur-reply before turning to the

parties’ extensive briefing on the Motion to Dismiss.
Plaintiff has moved for leave to file a sur-reply to defendant’s Motion to Dismiss. The
District of Kansas Local Rules authorize a response and a reply memoranda to a motion. D.
Kan. Rule 7.1. The court may authorize a sur-reply. Mike v. Dymon, Inc., No. 95-2405-EEO,
1996 WL 427761, at *2 (D. Kan. July 25, 1996). But, “the court generally grants leave to file a
sur-reply only in ‘extraordinary circumstances after a showing of good cause.’” Id. (citation

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omitted). Good cause exists, for example, when a reply brief improperly makes new arguments.
Id.
The court grants plaintiff leave to file a sur-reply for good cause shown. Defendant raises
new arguments in its Reply supporting its Motion to Dismiss plaintiff’s Amended Complaint and
its Supplement to Reply. Unless the court permitted a sur-reply, plaintiff would have no
opportunity to respond to those new arguments. For these reasons, the court grants plaintiff’s
Motion for Leave to File Sur-reply and considers plaintiff’s Sur-reply (Doc. 46-1) when deciding
defendant’s Motion to Dismiss.
II.

Defendant’s Motion to Dismiss
A. Background
All the papers filed on this motion narrow to one simple question: Does the court have

diversity subject matter jurisdiction over this case? Typically, the court determines the answer to
this question with little inquiry. Is it a civil case involving an amount in controversy that exceeds
$75,000? Are the parties citizens of different states? When the answer to both questions is yes,
the federal courts have subject matter jurisdiction to decide the case. See 28 U.S.C. § 1332. But
when the answer to either question is no, the court must dismiss the case for lack of jurisdiction.
See Basso v. Utah Power & Light Co., 495 F.2d 906, 909 (10th Cir. 1974) (“A court lacking
jurisdiction cannot render judgment but must dismiss the cause at any stage of the proceedings in
which it becomes apparent that jurisdiction is lacking.”). Here, there is no dispute that the matter
in controversy exceeds $75,000. So, to determine whether diversity subject matter jurisdiction
exists, the court needs only to decide whether the parties are citizens of the same state.
When the dispute is between business organizations, the court’s inquiry becomes a little
more complicated. For corporations, the citizenship determination, at least most of the time, is

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straightforward. A corporation is a citizen of its state of incorporation and the place where its
principal place of business is located. Grynberg v. Kinder Morgan Energy Partners, L.P., 805
F.3d 901, 905 (10th Cir. 2015); see also 28 U.S.C. § 1332(c)(1). Unincorporated associations,
such as limited liability companies (“LLC”) and partnerships, present bigger challenges. Those
entities are citizens of their members/partners’ states of citizenship. Grynberg, 805 F.3d at 906.
Here, the defendant is an LLC, so the court must determine its citizenship under these rules.
The parties do not dispute plaintiff’s citizenship. Plaintiff is an insurance corporation, so
its citizenship is determined by its state of incorporation and principal place of business.
Plaintiff was incorporated in Wisconsin and its principal place of business is in New York. For
subject matter jurisdiction purposes, then, plaintiff is a citizen of Wisconsin and New York.
With that half of the caption decided, solving the jurisdiction equation only requires the
court to determine whether defendant, an LLC, is a citizen of Wisconsin or New York.
Defendant’s LLC is comprised of just two members: Fort Leavenworth-Michaels Private, LLC”
(“FLMP, LLC”) and Marlton Developers Holdings Co., LLC (“MDHC, LLC”). So, the court
must determine the citizenship of FLMP, LLC and MDHC, LLC to decide whether subject
matter jurisdiction exists. And, because both members are LLCs themselves, the court also must
determine their members’ states of citizenship. See Siloam Springs Hotel LLC v. Century Sur.
Co., 781 F.3d 1233, 1237–38 (10th Cir. 2015) (“[I]n determining the citizenship of an
unincorporated association for purposes of diversity, federal courts must include all the entities’
members”); see also Birdsong v. Westglen Endoscopy Ctr., LLC, 176 F. Supp. 2d 1245, 1249 (D.
Kan. 2001) (finding that an LLC is a citizen, for diversity purposes, of each state where its
members are citizens).

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Simple questions do not always beget simple answers, and this is where the endeavor gets
more difficult. 1 Originally, defendant asserted that FLMP, LLC has only one member, Michael
J. Levitt. Mr. Levitt is a citizen of New Jersey. Nothing about Mr. Levitt’s citizenship negates
diversity subject matter jurisdiction because Mr. Levitt is not a citizen of Wisconsin or New
York. So far, so good. But, in a Supplemental Reply, defendant contends that Mr. Levitt
transferred some of his interests in this LLC to another entity—the Michaels DJA Partnership
(“MDJAP”)—before this action was filed.2 Defendant thus contends MDJAP was a member of
FLMP, LLC at the operative time—when plaintiff filed its Complaint—so the court must
consider MDJAP’s citizenship when deciding whether diversity jurisdiction exists. Defendant
also asserts that MDJAP’s involvement matters, for one of MDJAP’s partners, Andrew
Bocchino, is, like plaintiff, a citizen of New York.3

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Plaintiff’s briefing implies that when it comes to the citizenship facts, defendant has played a game of hide the ball.
See, e.g., Doc. 62 at 1. While the controlling facts have emerged gradually, the court cannot discern whether this
resulted from gamesmanship, or, instead, the modern complexities of corporate structures. The jurisdictional
decision does not require the court to decide between these alternatives. Still, the record should explain the chain of
events that prolonged this process.
In brief, defendant asserted in its Motion to Dismiss that plaintiff’s Amended Complaint failed to properly plead
diversity subject matter jurisdiction because plaintiff incorrectly identified “Fort Leavenworth-Michaels JV, LLC”
as a member of defendant’s limited liability company instead of the correct entity—FLMP, LLC. Doc. 36 at 1–2.
Plaintiff rectified this error in its Second Amended Complaint. Doc. 37-1. Then, in its Reply, defendant asserted for
the first time that Mr. Levitt had transferred some of his interest in FLMP, LLC to MDJAP. Doc. 39. And
defendant also asserted that FLMP, LLC includes at least one other limited liability company. Doc. 39 at 5. But,
defendant explains that the identity of FLMP, LLC’s members is not known publicly and so it did not disclose their
citizenship. Doc. 39 at 5. Then, in its Supplemental Reply, defendant confirmed that Michaels DNJ Partnership
holds a membership interest in FLMP, LLC. Doc. 40 at 1. Still, in this round of briefing, defendant did not assert
the citizenship of any of its members.
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Defendant’s Supplemental Reply refers to this partnership as “Michaels DNJ Partnership.” Doc. 40 at 1. In its
Opposition to Plaintiff’s Motion for Leave to File Sur-reply, defendant refers to this partnership as “Michaels DJA
Partnership,” and this is consistent with the name listed in defendant’s exhibits. So, the court refers to this
partnership as “Michaels DJA Partnership” (“MDJAP”).
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Defendant did not disclose Mr. Bocchino as a partner in MDJAP in its Motion to Dismiss briefing. Defendant
identified Mr. Bocchino first in its brief opposing plaintiff’s Motion for Leave to File Sur-reply. Doc. 46 at 1–2.
Plaintiff now has filed a Supplemental Brief in Opposition to Defendant’s Second Motion to Dismiss for Purported
Lack of Subject Matter Jurisdiction (Doc. 62). Plaintiff asserts that since its last filing, it has deposed Mr. Bocchino
and defendant’s corporate representative, and that this deposition testimony revealed that MDJAP is not a member

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This is where the parties disagree. Defendant contends that Andrew Bocchino is a
partner of MDJAP, and this fact puts a New York citizen on defendant’s half of the caption. If a
New York citizen is chargeable to the defendant’s side of the caption, it nullifies diversity
subject matter jurisdiction because the corporate plaintiff is a New York citizen. Plaintiff, on the
other hand, contends MDJAP never became a member of FLMP, LLC, because FLMP, LLC
never fulfilled the legal formalities required to make MDJAP a member. So, all this means that
the court must determine whether MDJAP is a member of FLMP, LLC.
Defendant’s challenge takes the form of a factual attack because it challenges the facts on
which diversity jurisdiction depends. See Krapes v. Equus Kan. Realty, LLC, No. 11-2696-JARJPO, 2012 WL 1945124, at *1 (D. Kan. May 30, 2012). “When reviewing a factual attack on
subject matter jurisdiction, a district court may not presume the truthfulness of the complaint’s
factual allegations.” Id. The court has “wide discretion to allow affidavits” and other documents
to resolve “disputed jurisdictional facts.” Id.
Because FLMP, LLC is a Kansas LLC, Doc. 62-2, and its Operating Agreement provides
that it is governed by Kansas law, id. at 7, the court turns to Kansas law. After identifying the
controlling legal principles, the court applies them to the agreed facts and exhibits in the next
section.
B. Is MDJAP a Member of FLMP, LLC?
1. Kansas LLC Law
Mr. Levitt assigned MDJAP a 24% limited liability interest in FLMP, LLC effective June
1, 2006. Doc. 62-3. Under the Kansas Revised Limited Liability Company Act, “[a] limited
liability company interest is assignable in whole or in part except as provided in an operating

of FLMP, LLC. Unsurprisingly, defendant responded, asserting that the records reveal that MDJAP is a member of
FLMP, LLC. See Doc. 68 at 1–3.

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agreement.” Kan. Stat. Ann. § 17-76,112(a). And the Operating Agreement of FLMP, LLC
confers authority on FLMP, LLC’s members to “sell, convey, mortgage, grant a security interest
in . . . real, personal, tangible, or intangible property . . . including interests in the company
itself.” Doc. 62-2 at 4. But, the Kansas appellate courts have held that assignment of an interest
in a LLC does not automatically make the assignee a member of the LLC. See Rowe v. Voyager
Hospicecare Holdings, LLC, 231 P.3d 1085, 2010 WL 2502878, at *5 (Kan. Ct. App. June 18,
2010) (holding that “there may be assignments of units by a member that do not result in the
assignee gaining approval as a substituted member” where the operating agreement requires
board approval). Indeed, an LLC’s operating agreement governs how assignees become
members. See Kan. Stat. Ann. § 17-7686 (“[A] person is admitted as a member of the limited
liability company upon . . . the time provided in and upon compliance with the operating
agreement . . . .”).
FLMP, LLC’s operating agreement never specifies how someone becomes a member of
this LLC. See Doc. 68-2. Here, when the operating agreement is silent, the Kansas Revised
Limited Liability Company Act provides that an assignee may become a member of the LLC in
one of two ways: (1) upon the affirmative vote of all members of the LLC, or (2) by securing
written consent of all of the members of the limited liability company. Kan. Stat. Ann. § 1776,114(a)(2). Defendant does not provide, and the court does not find, any evidence that FLMP,
LLC’s members took an affirmative vote making MDJAP a member. So, the court considers
next whether the record contains evidence that all of FLMP,LLC’s members gave their written
consent to admitting MDJAP as a member.

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2. Membership by Written Consent
The only evidence of written consent to membership is the document assigning MDJAP a
24% interest in FLMP, LLC. This Assignment reads: “Assignor agrees to take such further
action as may be required to admit Assignee [MDJAP] as a substitute member in the Company.”
Doc. 62-3. Mr. Levitt, FLMP, LLC’s only member, signed this document.
Some aspects of this Assignment suggest that Mr. Levitt did not intend for that
instrument to manifest his written consent to MDJAP becoming a member of FLMP, LLC. For
example, Mr. Levitt promised “to take such further action” as may be required to make MDJAP
a member. Id. If making MDJAP a member required “further action,” then, arguably, Mr. Levitt
did not mean for the Assignment to manifest his consent to adding another member. But other
credible arguments support the opposite conclusion.
For one thing, the assignment merely provides that Mr. Levitt will “take such further
action as may be required” to admit MDJAP as a member. One fairly could interpret these
words to apply the kind of careful belt-and-suspenders approach corporate drafters are famous
for using. Also favoring this interpretation is Cheryl Hernandez’s testimony. Ms. Hernandez,
designated as a corporate representative to testify for defendant as a person knowledgeable about
FLMP, LLC’s corporate processes, testified that the Assignment assigning MDJAP an interest in
FLMP, LLC also conferred membership status on MDJAP. Doc. 62-1 at 56. But the court
recognizes that such testimony by a representative of a company with an interest in the outcome
is hardly dispositive.
In sum, the intent of the only document that purportedly memorializes unanimous
consent by all of FLMP, LLC’s members to MDJAP’s admission as a member is ambiguous.

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The court thus turns to the next source of information about MDJAP’s membership status—
FLMP, LLC’s corporate records.
3. Membership Status as Reflected in Records
Kan. Stat. Ann. § 17-7686 governs the admission of LLC members, generally. It
provides that a person is admitted as a member of a limited liability company upon the later to
occur: “(1) [t]he formation of the limited liability company; or (2) the time provided in and upon
compliance with the operating agreement or, if the operating agreement does not so provide,
when the person’s admission is reflected in the records of the limited liability company.” Kan.
Stat. Ann. § 17-7686. As already explained, FLMP, LLC’s Operating Agreement is silent on this
score. And since MDJAP’s admission as a member occurred—if it occurred at all—sometime
after FLMP, LLC was formed, the court turns to the content of its “records.”
Plaintiff contends that none of FLMP, LLC’s annual reports filed with the Kansas
Secretary of State reflect MDJAP as a member. This is significant because Kansas’ annual
report form explicitly asks the LLC to identify any member who owns 5% or more of the LLC.
See Doc. 62-4. Defendant responds to this omission by emphasizing that other corporate records
show that MDJAP is a member. Namely, FLMP, LLC’s tax records declare that MDJAP is one
of its members. Doc. 72 SEALED at 8. Defendant asserts that this satisfies Kan. Stat. Ann. §
17-786 because the tax records are one aspect of MDJAP’s “corporate records.”
C. On these Facts, has Plaintiff Carried its Burden?
In the real world, facts frequently are cluttered, clunky, and sometimes contradictory.
They simply won’t conform to just one side of questions presenting a simple binary choice. Did
Michael Levitt consent or not consent to making MDJAP a member? Is FLMP, LLC a New

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York citizen, or not? The best the record here can do is to provide the same uncertain answer to
both questions: maybe, but maybe not.
Finding no certainty in the facts, the court takes refuge in the controlling legal standard.
The “[f]ederal courts are courts of limited jurisdiction.” Kokkonen v. Guardian Life Ins. Co. of
Am., 511 U.S. 375, 377 (1994). So, when assessing the existence of subject matter jurisdiction,
“[i]t is to be presumed that a cause lies outside this limited jurisdiction, and the burden of
establishing the contrary rests upon the party asserting jurisdiction.” Id. (citing McNutt v. Gen.
Motors Acceptance Corp., 298 U.S. 178, 182–83 (1936)). Here, that party is plaintiff and the
court finds that plaintiff has not sustained this burden.
One final observation is warranted. To some, it may seem unfair to permit defendant to
argue here that its constituent FLMP, LLC, has admitted MDJAP as a member when that
constituent has not complied with its duty to disclose MDJAP in its mandatory corporate filings
with the Kansas Secretary of State. Certainly, in another setting, the court can imagine that
estoppel principles might preclude defendant from arguing that MDJAP is FLMP, LLC’s
member. That principle does not apply here, for estoppel equities cannot supply the essential
requisites for subject matter jurisdiction. Palafox St. Assocs., L.P. v. United States, 114 Fed. Cl.
773, 785 (Fed. Cl. 2014) (“[I]t is well settled that no action of the parties can confer subjectmatter jurisdiction on a tribunal and that the principles of estoppel do not apply to vest subjectmatter jurisdiction where Congress has not done so.” (citing Dunklebarger v. Merit Sys. Prot.
Bd., 130 F.3d 1476, 1480 (Fed. Cir. 1997))).4

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Lost, but not forgotten is defendant’s second member—MDHC, LLC. Though the parties’ papers never provide
information needed to determine its citizenship, this omission does not matter. It does not matter because the court
has concluded that FLMP, LLC precludes complete diversity. MDHC, LLC’s citizenship, whatever it is, cannot
reverse that conclusion.

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III.

Conclusion
After granting plaintiff’s Motion for Leave to File Sur-reply (Doc. 46), the court holds

that plaintiff has not met its burden to establish that diversity jurisdiction exists.
IT IS THEREFORE ORDERED BY THE COURT THAT plaintiff’s Motion for
Leave to File Sur-reply (Doc. 46) is granted.
IT IS FURTHER ORDERED BY THE COURT THAT defendant’s Motion to
Dismiss (Doc. 35) is granted. This case is dismissed without prejudice.
IT IS SO ORDERED.
Dated this 17th day of March, 2017, at Topeka, Kansas.
s/ Daniel D. Crabtree
Daniel D. Crabtree
United States District Judge

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