RES-NC Settlers Edge, LLC et al vs Settlers Edge Holding Company, LLC et al

Filing 37

ORDER that the [Doc. 29] Memorandum and Recommendations is REJECTED, the Defendants Objection [Doc. 30] is SUSTAINED, and the Defendants [Doc.14] Motion to Dismiss for Lack of Jurisdiction is GRANTED, and this matter is DISMISSED for lack of subject matter jurisdiction. Signed by District Judge Martin Reidinger on 9/3/11. (siw)

THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF NORTH CAROLINA
ASHEVILLE DIVISION
CIVIL CASE NO. 1:10cv173

RES-NC SETTLERS EDGE, LLC, a Florida
limited liability company,

)
)
)
Plaintiff,
)
)
vs.
)
)
SETTLERS EDGE HOLDING COMPANY, LLC,
)
a North Carolina limited liability company;
)
MOUNTAIN AIR DEVELOPMENT CORPORATION,)
a North Carolina corporation; VIRGINIA A. BANKS, )
an individual; WILLIAM R. BANKS, an individual;
)
JEANI H. BANKS, an individual; MICHAEL R.
)
WATSON, an individual; SHEREE B. WATSON,
)
an individual; MORRIS ATKINS, in his capacity
)
as TRUSTEE OF WILLIAM A. BANKS
)
REVOCABLE TRUST, AS AMENDED AND
)
RESTATED; MORRIS ATKINS in his capacity as
)
TRUSTEE OF WILLIAM BANKS FAMILY
)
IRREVOCABLE TRUST NUMBER 1; and MORRIS )
ATKINS, in his capacity as TRUSTEE OF
)
WILLIAMS BANKS FAMILY IRREVOCABLE
)
TRUST NUMBER 2,
)
)
Defendants.
)
)

ORDER

THIS MATTER is before the Court on the Defendants’ Motion to Dismiss
for Lack of Subject Matter Jurisdiction [Doc. 14], the Memorandum and
Recommendation of the Magistrate Judge as to that Motion [Doc. 29], and the

Defendants’ Objection thereto. [Doc. 30].
Pursuant to 28 U.S.C. § 636(b) and the Standing Orders of Designation
of this Court, United States Magistrate Judge David C. Keesler was
designated to consider the motion and to submit recommendations for its
disposition.
On February 16, 2011, the Magistrate Judge filed a Memorandum and
Recommendation in which he recommended denying the motion to dismiss.
[Doc. 29]. The Defendants timely filed objections to that recommendation.
[Doc. 30].
STANDARD OF REVIEW
A district court reviews specific objections to a Memorandum and
Recommendation under a de novo standard. 28 U.S.C. §636(b). "Parties
filing objections must specifically identify those findings objected to." Battle
v. United States Parole Commission, 834 F.2d 419, 421 (5th Cir.1987),
overruled on other grounds Douglass v. United Ervs. Auto. Ass’n, 79 F.3d
1415 (5 th Cir. 1996). If a party makes only general objections, de novo review
is not required. Wells v. Shriners Hospital, 109 F.3d 198, 200 (4th Cir. 1997)
(boilerplate objections will not avoid the consequences of failing to object
altogether). “Section 636(b)(1) does not countenance a form of generalized

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objection to cover all issues addressed by the magistrate judge; it
contemplates that a party’s objection to a magistrate judge’s report be specific
and particularized, as the statute directs the district court to review only those
portions of the report or specified proposed findings or recommendations to
which objection is made.” United States v. Midgette, 478 F.3d 616, 621 (4 th
Cir.), cert. denied 551 U.S. 1157, 127 S.Ct. 3032, 168 L.Ed.2d 749 (2007)
(emphasis in original).
A motion pursuant to Federal Rule of Civil Procedure 12(b)(1)
challenges the court’s jurisdiction over the subject matter of the plaintiff’s
complaint. Richmond, Fredericksburg & Potomac R. Co. v. United States, 945
F.2d 765, 768 (4 th Cir. 1991), cert. denied 503 U.S. 984, 112 S.Ct. 1667, 118
L.Ed.2d 388 (1992). The Plaintiff has the burden of proving that subject
matter jurisdiction exists. Piney Run Preservation Ass’n v. County Com’rs of
Carroll County, Md., 523 F.3d 453, 459 (4 th Cir.), cert. denied 129 S.Ct. 258,
172 L.Ed.2d 146 (2008) (citation omitted).
“When presented with a Rule 12(b)(1) motion, district courts are
permitted to consider materials outside the pleadings and the [parties]
presented such materials in this case.” Id. at 459 n.6, citing Suter v. United
States, 441 F.3d 306, 310 (4 th Cir.), cert. denied 549 U.S. 887, 127 S.Ct. 273,

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166 L.Ed.2d 152 (2006). A motion to dismiss for lack of subject matter
jurisdiction should be granted “only if the material jurisdictional facts are not
in dispute and the moving party is entitled to prevail as a matter of law.”
Evans v. B.F. Perkins, Inc., 166 F.3d 642 (4 th Cir. 1999), quoting Richmond,
Fredericksburg & Potomac R.Co., 945 F.2d at 768.
DISCUSSION
The Magistrate Judge concluded that this Court has subject matter
jurisdiction based on diversity of citizenship. It is to this conclusion that the
Defendants object.
The jurisdiction of federal courts is limited to that set out by the
Constitution or by statute. “It 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.” Kokkonen v. Guardian Life Ins. Co., 511 U.S. 375,
377 (1994). Plaintiff asserts that this Court has jurisdiction pursuant to 28
U.S.C. §1332 and 12 U.S.C. §1819(b)(2).
The citizenship of the respective parties is quite convoluted, but the
salient facts are as follows. The Federal Deposit Insurance Corporation
(FDIC) is a member and 60% owner of a limited liability company (LLC), which
LLC is the sole owner of the Plaintiff. FDIC assumed that ownership position

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as the receiver for Integrity Bank, a Georgia corporation. The citizenship of
the other members lies in Florida and Delaware.1 The citizenship of all the
Defendants lies in North Carolina and South Carolina.2 On these facts, there
is diversity of citizenship to support Federal jurisdiction, unless the presence
and ownership interest of FDIC destroys diversity.
The Plaintiff argues and the Magistrate Judge concluded that FDIC

1

The Plaintiff, Settlers Edge, is a Florida limited liability company which is solely
owned by Multibank, a Delaware limited liability company. [Doc. 23, at 1]. Multibank
has two owners: (1) RL RES 2009-1 Investments, LLC, a Delaware limited liability
company located in Florida, which owns 40% of the equity in Multibank; and (2) the
FDIC, which owns 60% of the equity in Multibank. [Id.]. RL RES 2009-1 Investments,
LLC is wholly owned by RL RES 2009-1, LLC (the Parent), a Delaware limited liability
company located in Florida. [Id., at 2]. The Parent has two owners: (1) Rialto RL RES
2009-1, LLC (the Grandparent), a Delaware limited liability company located in Florida;
and (2) Lennar Distressed Investments, LLC, a Delaware limited liability company
located in Florida. [Id.]. The sole owner of the Grandparent is Rialto Capital Holdings,
LLC, a Delaware limited liability company located in Florida. [Id.]. The sole owner of
Lennar Distressed Investments, LLC is Lennar Corporation, a Delaware corporation
doing business in Florida. [Id.]. The sole owner of Rialto Capital Holdings, LLC is Rialto
Capital Management, LLC, a Delaware limited liability company located in Florida, and
the sole owner of Rialto Capital Management, LLC is Jeffrey Krasnoff, a Florida
resident. [Id., at 3].
2

The Defendants have the following citizenships: (1) Settlers Edge Holding
Company, LLC (Holding) is a North Carolina limited liability company; (2) Mountain Air
Development Corporation (Mountain Air) is a North Carolina corporation which solely
owns Holding; (3) The individual Defendants are all domiciled in North North Carolina.
(4) Morris Atkins, the Trustee of the trusts at issue, is a South Carolina resident. [Doc. 1,
at 2-3; Doc. 23, at 3]. A trust’s citizenship is that of the trustee, rather than the
beneficiary, for purposes of diversity. Erlich v. Ouellette, Labonte, Roberge and Allen,
P.A., 637 F.3d 32, 34 n.2 (1st Cir. 2011) (a trust is a citizen of whatever states its
trustees are citizens); Grede v. Bank of New York Mellon, 598 F.3d 899, 901 (7th Cir.
2010), cert. denied 131 S.Ct. 418, 178 L.Ed.2d 323 (2010); Ritter v. Ritter, 396
Fed.Appx. 30 (4th Cir. 2010), cert. denied
S.Ct. , 2011 WL 766637 (2011);
Wachovia Mortgage Corp. v. Poindexter, 2010 WL 2180851 (W.D.N.C. 2010).
5

“steps into the shoes” of Integrity Bank as its receiver, and thus is counted in
the diversity calculus as having Georgia citizenship. Based thereon both the
Plaintiff and the Magistrate Judge concluded that there is complete diversity
and therefore this Court has jurisdiction. [Docs. 29, 36]. The Magistrate
Judge relied on 12 U.S.C. §1819(b)(2)(E), as construed in Demars v. First
Service Bank for Sav., 907 F.2d 1237 (1 st Cir. 1990), and Federal Deposit Ins.
Corp. v. Lindquist & Vennum, 702 F.Supp. 749 (D.Minn. 1989), to reach his
conclusion.
Section 1819 reads in pertinent part:
(2) Federal court jurisdiction
(A) In general
Except as provided in subparagraph (D), all suits of a civil nature
at common law or in equity to which the [FDIC], in any capacity,
is a party shall be deemed to arise under the laws of the United
States.
...
(D) State actions
Except as provided in subparagraph (E), any action -(i) to which the [FDIC], in [its] capacity as receiver of a State
insured depository institution by the exclusive appointment by
State authorities, is a party other than as a plaintiff;
...
shall not be deemed to arise under the laws of the United States.
...
(E) Rule of construction
6

Subparagraph (D) shall not be construed as limiting the right of
the [FDIC] to invoke the jurisdiction of any United States district
court in any action descibed in such subparagraph if the institution
of which the [FDIC] has been appointed receiver could have
invoked the jurisdiction of such court.
The Court in Demars held that “[t]he above language makes it plain that the
‘state action’ exception does not limit the FDIC’s right to invoke the jurisdiction
of the district court, since First Service, as the ‘institution of which the [FDIC]
has been appointed receiver’ could have ‘invoked the [diversity] jurisdiction’
of the district court.” Demars, 907 F.2d at 1241-42.
The language of §1819(b)(2), however, does not support extending that
conclusion to the facts of this case. In subpart (A) the statute advises that “all
suits of a civil nature . . . to which the [FDIC], in any capacity is a party shall
be deemed to arise under the laws of the United States.” 12 U.S.C.
§1819(b)(2)(A). In other words, if FDIC is a party to a civil action, there is a
conclusive presumption that a federal question is presented. This is, of
course, a legal fiction, because the disputes presented in such suits can
ordinarily be matters of state law.
Subsection (D) provides an exception to this rule regarding the
imputation of a federal question. It reads “any action . . . to which the [FDIC]
in [its] capacity as receiver . . . is a party other than plaintiff, . . . shall not be

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deemed to arise under the laws of the United States.” 12 U.S.C.
§1819(b)(2)(D). In other words, if the FDIC is a party, but not a plaintiff, and
it is acting as receiver, then there is no special conclusive presumption that
a federal question is presented.
Subsection (E) provides an exception - to the exception. The statute
specifically identifies this subsection as a “Rule of construction.” 12 U.S.C.
§1819(b)(2)(E). It reads: “Subsection (D) shall not be construed as limiting
the right of [FDIC] to invoke the jurisdiction of any United States district court
in any action described in such subparagraph if the institution of which the
[FDIC] has been appointed receiver could have invoked the jurisdiction of
such court.” Id. (emphasis added).

This makes clear that the rule of

construction applies to allow FDIC to “step into the shoes” of the banking
institution only where 1) FDIC is a party, 2) FDIC is not a plaintiff, and 3) FDIC
is serving as receiver. Here, the second and third elements are arguably
met.3

The first element, however, is clearly not.

3

The “text [of Section

Defendant argues that Plaintiff has presented nothing to the Court to show that
FDIC is the receiver of Integrity Bank. [Doc. 30 at 4 n.2]. Plainitff argues that the
document to which Defendant cites in its argument shows that FDIC is, in fact, such
receiver. [Doc. 36 at 3 n.1]. Defendant’s citation is in a link to a website and the
document is not otherwise in the record. The burden is on the party invoking the
jurisdiction of this Court to present the facts necessary to prove that jurisdiction lies.
Piney Run, 523 F.3d at 459. Hence, it raises an interesting question as to whether
Plaintiff has met this burden by having left it to the Defendant to present such evidence
in a link to a website in the footnote to an objection to the Memorandum and
8

1819(b)(2)] says that it applies in cases where a federal [corporation] ‘is a
party.’ A ‘party’ is ‘[o]ne by or against whom a lawsuit is brought.’” Hukic v.
Aurora Loan Services, 588 F.3d 420, 429 (7 th Cir. 2009). In this case, the
FDIC is not a party; it is merely a part owner of the owner of a party. See also,
Multibank 2009-1 RES-ADC Ventures, LLC v. CRM Ventures, LLC, 2010
U.S.Dist. LEXIS 100939 (D. Colo. 2010).4 Therefore, the special jurisdictional
rule of 12 U.S.C. §1819(b)(2)(E) that would have allowed FDIC to “step into
the shoes” of Integrity Bank does not apply. Citizenship for diversity purposes
must be analyzed considering FDIC, not excluding it.
Plaintiff argues that the statutory analysis on this point is not so clear
cut, and that the Court is presented with a choice between following the
rationale found in Multibank, Id., or that found in Demars, 907 F.2d 1237. The
contrary, however, is true. Those two cases are consistent. In Demars the
FDIC was a party defendant (i.e. a party, but not as plaintiff) and served as
receiver. Hence, under (b)(2)(E), FDIC stepped into the shoes of the bank for
which it was a receiver and diversity jurisdiction was present. In Multibank
FDIC was not a party. Hence the court ruled that (b)(2)(E) did not apply and
Recommendation of the Magistrate Judge. In light of the ruling of the Court herein, that
interesting issue need not be addressed.
4

Multibank, the sole owner of the Plaintiff herein was also the sole
owner/member of the plaintiff in that case.
9

so there was no statutory basis for it stepping into the shoes of the bank, and
diversity was destroyed. Both cases are correctly decided and both cases are
consistent with this Court’s ruling herein.5
Since 12 U.S.C. §1819(b)(2) does not provide any basis on which FDIC
can step into the shoes of Integrity Bank, the Court must now turn to
traditional jurisdictional analysis to determined whether federal jurisdiction lies.
The Plaintiff in this action is a limited liability company of which the FDIC
is a member/owner.6
Under 28 U.S.C. §1332, a federal court has original jurisdiction
over all civil actions where the amount in controversy exceeds
$75,000, exclusive of interest and costs, and is between citizens
of different states.7 With the exception of certain class actions,
Section 1332 requires complete diversity among parties, meaning
that the citizenship of every plaintiff must be different from the
citizenship of every defendant.
For purposes of diversity

5

On this point Plaintiff’s reliance on Lindquist, 702 F.Supp. 749, is misplaced.
That case presents a situation completely different from that found here. In Lindquist
FDIC was a party plaintiff, unlike the present case where FDIC is neither party nor
plaintiff. While it is true that the Lindquist court said that since FDIC was a party and
served as receiver it could step into the shoes of the bank for which it substituted, this
ignored the “other than as plaintiff” requirement of §1819(b)(2)(D). The court therein did
not address the presence of that clause in the statute. However, since FDIC was the
plaintiff in Lindquist, there was imputed federal question under (b)(2)(A). The analysis
regarding “stepping into the shoes” is pure dictum; it had no impact on the outcome of
the case. Lindquist turns on the application of a provision that is not at issue here, i.e.
(b)(2)(A), and therefore that case is not at all instructive to our present circumstances.
6

Actually it is a member/owner of Multibank, which is the member/owner of the
Plaintiff.
7

The amount in controversy in this action is not disputed.
10

jurisdiction, the citizenship of a limited liability company (such as
[the Plaintiff]) is determined by the citizenship of all of its
members[.] Further, a corporation ... “shall be deemed to be a
citizen of any State by which it has been incorporated and of the
State where it has its principal place of business ... .”
Central West Virginia Energy Co., Inc. v. Mountain State Carbon, LLC, 636
F.3d 101, 103 (4 th Cir. 2011) (citation omitted). In the present case there is
complete diversity of citizenship among the parties’ owners, other than FDIC.
The problem here is that the FDIC is not incorporated under the laws of any
state because it is a federally chartered corporation.
In contrast to state-chartered corporations, the citizenship of
federally chartered corporations ... [is not] straightforward. The
Supreme Court held in St. Louis & San Francisco Ry. Co. v.
James, 161 U.S. 545, 562, 16 S.Ct. 621, 40 L.Ed. 802 (1896), that
a state-chartered corporation is a citizen of the state in which it
was chartered for diversity jurisdiction purposes. The Court later
held that a corporation chartered pursuant to an Act of Congress
with activities in different states, on the other hand, was not a
citizen of any state for diversity jurisdiction purposes. Bankers’
Trust Co. v. Texas & Pacific Ry. Co., 241 U.S. 295, 309-10, 36
S.Ct. 569, 60 L.Ed. 1010 (1916). ... [U]nless a specific statutory
provision dictates otherwise, a federally chartered [corporation is]
not a citizen of any state, meaning it [is] not eligible for diversity
jurisdiction[.]
Hukic, 588 F.3d at 428; A.I. Trade Finance, Inc. v. Petra Intern. Banking
Corp., 62 F.3d 1454, 1458-59 (D.C. Cir. 1995); Loyola Fed. Sav. Bank v.
Fickling, 58 F.3d 603, 606 (11 th Cir. 1995) (federally chartered corporation not
a citizen of any state for diversity jurisdiction purposes unless corporation’s
11

activities localized within one state); Hancock Financial Corp. v. Federal Sav.
and Loan Ins. Corp., 492 F.2d 1325 9 th Cir. 1974) (noting the FDIC has no
citizenship in any state for diversity purposes); accord, Northern Virginia Foot
& Ankle Associates, LLC v. Pentagon Federal Credit Union, 2011 WL 280983
(D.Md. 2011) (discussing federally chartered corporations).
The citizenship of a limited liability company ... is the citizenship
of each of its members[.] If one member of a limited liability
company is “stateless,” the limited liability company itself is
stateless and jurisdiction cannot be premised on §1332(a)
[diversity].
CTGW, LLC v. GSBS, PC, 2010 W L 2739963 **3 (W.D.Wis. 2010), citing ISI
International, Inc. v. Borden Ladner Gervais LLP, 316 F.3d 731, 733 (7 th Cir
2003), cert. denied 539 U.S. 942, 123 S.Ct. 2608, 156 L.Ed.2d 627 (2003)
(“One of [defendant law firm]’s partners is a U.S. citizen domiciled in Canada;
she has no state citizenship, so diversity jurisdiction is unavailable.”); Swiger
v. Allegheny Energy, Inc., 540 F.3d 179, 184 (3 rd Cir. 2008); Gladys McCoy
Apartments, Ltd. Partnership v. State Farm Fire & Cas. Co., 2010 WL
1838941 **5 (D.Or. 2010) (presence of federally chartered corporation which
was not citizen of any state as one of several partners in limited partnership
destroyed diversity) (other citations omitted).
Here the ownership interest of FDIC renders the Plaintiff LLC a

12

“stateless” party. As such, there is no diversity of citizenship among the
parties to this action and no jurisdiction lies pursuant to 28 U.S.C. §1332.
Further, there is no specially imputed federal question jurisdiction pursuant to
12 U.S.C. §1819(b)(2).

Hence, this Court does not have subject matter

jurisdiction over this case.
IT

IS

THEREFORE

ORDERED

that

the

Memorandum

and

Recommendation [Doc. 29] is REJECTED, the Defendant’s Objection [Doc.
30] is SUSTAINED, and the Defendants’ Motion to Dismiss for Lack of Subject
Matter Jurisdiction [Doc. 14] is GRANTED, and this matter is DISMISSED for
lack of subject matter jurisdiction.
Signed: September 3, 2011

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