Mungo v. Minnesota Life Ins. Co., No.: 0:11-464-JFA, 2011 WL 2516934 (D.S.C. June 23, 2011).

A District Court in South Carolina held that because Federal credit unions are incorporated under federal law, Congress has chosen not to define the citizenship of these institutions; however, the district courts in the Fourth Circuit have used the “localization test” to determine their citizenship.

The plaintiff, Mary Mungo (whose name reminds us of Mongo (played by Alex Karras) in Blazing Saddles), filed a proposed class action in the court of Common Pleas concerning a credit insurance policy dispute against Founders Federal Credit Union and Minnesota Life Insurance Company (“MLIC”) alleging violations of the South Carolina Consumer Protection Code, conversion, and unjust enrichment against both defendants. Mungo asserted additional claims against Founders, including breach of fiduciary duty, breach of contract, negligence and gross negligence.

In 2001, Mungo purchased a credit life and disability insurance policy from CUNA Mutual Insurance Company in connection with a $20,000 loan she received from Founders. According to the plaintiff, the terms of the credit insurance policy entitled Mungo to monthly benefits up to 120 months or $50,000 should she suffer a covered disability. Mungo alleged that in 2007 Founders, unilaterally and without her knowledge, replaced the credit insurance product for which she was paying with a payment protection program. When Mungo became totally disabled in July 2009, she applied for the benefits on her loan. In September 2010, MLIC — the administrator of Founders’ payment protection programs, informed Mungo that her benefits were exhausted after 12 months of benefit payments.

The defendants removed the action to the federal court citing jurisdiction, inter alia, under CAFA. 

Mungo sought remand under CAFA’s local controversy exception, 28 U.S.C. § 1332(d)(4)(A), which the District Court denied.

First, the Court found that Mungo failed to show that two-thirds of the members of the proposed class were citizens of South Carolina. The complaint defined the class as consumers “who were provided by MLIC with a credit life or credit accident and health insurance product issued or administered by MLIC within South Carolina on or after July 1, 2007 …” The plaintiff attempted to rely on the high percentage of Founders’ members that live in South Carolina, 89%, to make her showing. However, the class definition did not mention Founders. It was not until the definition of the first subclass that Founders’ members were included, and it was defined as “South Carolina consumers who had a consumer loan with Founders prior to August 1, 2007, who elected to purchase credit insurance in connection with said consumer loan, and who continued to pay monthly premiums for credit insurance coverage after August 1, 2007.” 

The Court noted that because it is rudimentary that a subclass cannot encompass more than the initially defined class itself, the plaintiff herself had limited the universe of potential class members not to Founders’ customers at large, but to those persons who purchased credit insurance administered by MLIC. It seemed to the Court that two-thirds of the class, even as the plaintiff chose to define it, would include two-thirds South Carolina citizens. The Court, however, found that the plaintiff had not yet made such a showing, and that she could not rely on the citizenship of Founders’ entire customer base to do so.

Next, regarding the citizenship of the defendants, the Court noted thatMLIC is a citizen of Minnesota for purposes of diversity, and Founders is headquartered in Lancaster, South Carolina, and has 24 of 25 branches in South Carolina. 

The Court noted that Federal credit unions are incorporated under federal law, not under any state’s laws, and Congress has chosen not to define the citizenship of these institutions. Therefore, they are usually not considered citizens of any particular state for diversity purposes. The courts, however, have found that when a credit union maintains localized operations, it can be treated as a citizen of the state in which it operates. The plaintiff accordingly urged the Court to treat Founders as a citizen of South Carolina because its operations are primarily focused in that state.

Neither the Supreme Court nor the Fourth Circuit has expressly adopted this judicially-created exception. Several district courts in the Fourth Circuit, however, have used the localization test. 

The Court noted that over 90% of Founders’ members, branches, and operations are located in South Carolina. The defendants argued that although a small percentage of its business is conducted outside of South Carolina, that percentage consists of a large amount of business. The 10% of members that live outside of South Carolina adds up to 20,000 people. Also, it has a number of business partners in North Carolina and it extends eligibility to employees of those business partners. The defendants also pointed out that Founders’ initial charter authorized it to do business in four states.

After weighing the arguments of both parties, the Court concluded that although Congress has not defined the citizenship of federal credit unions and Founders is authorized to expand its business to other states, its operations remain highly centralized in South Carolina, such that it should be considered a citizen of South Carolina for purposes of diversity. In addition, the Court found that the plaintiff sought actual, statutory, and punitive damages from Founders, indicating that Founders was a significant defendant.

Because the plaintiff failed to establish that at least two-thirds of the members of the proposed class are citizens of South Carolina, the Court denied the plaintiff’s motion to remand to state court with permission to re-file.