Ferrell v. Express Check Advance of SC LLC, 591 F.3d 698 (4th Cir. (S.C.) Jan. 08, 2010) (No. 09-2401).

The Fourth Circuit affirmed the order of the district court that for purposes of determining subject matter jurisdiction under CAFA,  a limited liability compain is an "unincorporated association" as that term is used in § 1332(d)(10), and, therefore is a citizen of the State under whose laws it is organized and the State where it has its principal place of business.  You can stop reading now, but if you get off on the law, particularly CAFA, then we have prepared a nice summary for you.

Carl Ferrell, a borrower, brought class action against lenders, Express Check Advance of South Carolina, LLC, and others, in South Carolina state court, alleging that lenders violated South Carolina law in making payday loans.  

Express Check removed the action to the federal court alleging minimal diversity because it, as a limited liability company, was a citizen of Missouri and Kansas based on the citizenship of its sole member, a Missouri corporation with its principal place of business in Kansas. Alternatively, it argued that if it was deemed an “unincorporated association” within the meaning of CAFA’s 28 U.S.C. § 1332(d)(10), it was nonetheless a citizen of Tennessee, under whose laws it was organized, and of Kansas, where it had its principal place of business.  

The district court remanded the action to state court finding that for the purpose of CAFA, a limited liability company is an “unincorporated association”, thus its citizenship is determined based on the state law upon which it is organized and its place of business. As Express Check does the business solely in South Carolina, the District Court held that Express Check’s principal place of business is in South Carolina, not Kansas. 

Upon Express Check’s appeal, the Fourth Circuit affirmed the order. The Fourth Circuit noted that under the traditional jurisprudence as stated in Marshall v. Baltimore & Ohio Railroad Co., 57 U.S. (16 How.) 314, 327-29 (1854), “corporations” were deemed to be citizens of the State in which they were incorporated, and as developed in a line of cases beginning with Chapman v. Barney, 129 U.S. 677, 682 (1889), and maintained in United Steelworkers of America, AFL-CIO v. R.H. Bouligny, Inc., 382 U.S. 145, 149-53 (1965) and Carden v. Arkoma Assocs., 494 U.S. 185 (1990), all other business enterprises were referred to as “unincorporated associations” and treated effectively as citizens of the States of which their members were citizens.  

In 1958, § 1332(c) was enacted to modify the traditional rule with respect to “corporations” by expanding the citizenship of a corporation to include not only the state of incorporation but also the state where it has its principal place of business.  

In 2005, § 1332(d)(10) was enacted as a part of CAFA so that the citizenship of all “unincorporated associations” is determined by the dtate under whose laws the unincorporated association is organized and the state where it has its principal place of business.  Given the categorical distinction, the Supreme Court created in Chapman and maintained in Bouligny and Carden, the Fourth Circuit observed that the specific language of § 1332(d)(10) indicates that a limited liability company, if not a corporation, is an unincorporated association, employing “unincorporated” as the counterpart to “incorporated.”  Accordingly, the Fourth Circuit found that under § 1332(d)(10), Express Check’s citizenship for purposes of CAFA is that of the dtate under whose laws it is organized and the state where it has its principal place of business. 

Express Check, however, referring to the language “a corporation or other form of business enterprise” used in §§ 1332(d)(9)(B) and 1453(d)(2), argued that Congress employed this language when it wanted to refer to all non-corporate entities, thus, the term “unincorporated association” in § 1332(d)(10) refers to only a narrower subset of non-corporate business forms, a class that excludes entities having a distinct legal identity under the law of the State in which they are organized. 

The Fourth Circuit disagreed holding that Congress intended the exception in §§ 1332(d)(9)(B) and 1453(d)(2) referring to the class of all business entities for the purpose of excluding from CAFA disputes over their internal affairs and governance. By using “or other,” Congress, in a broader term, included “corporation” as an example form of “business enterprise,” so that the term “business enterprise” itself includes both “corporations” and any other form of non-corporate entities. When using “unincorporated association” in § 1332(d)(10), therefore, Congress needed to use a term narrower than “business enterprise,” because the term “business enterprise” also includes corporations. 

Second, the phrase “unincorporated association” distinguishes itself linguistically from incorporated associations, thereby suggesting two mutually exclusive classes of business enterprises–those that are incorporated, i.e., corporations, and those that are not.

Next, based on some language contained in Navarro Savings Ass’n v. Lee, 446 U.S. 458, 461 (1980), Express Check argued that “unincorporated association” as used in § 1332(d)(10) was limited to only entities that lacked a distinct legal identity such as ‘mere collections of individuals,’ and because it was organized under Tennessee law, it was a legal entity distinct from its members. The Fourth Circuit observed that such distinction was not there in Navarro, and Navarro merely restated Chapman’s rule that, for diversity purposes, “unincorporated associations remain mere collections of individuals,” even though corporations are deemed citizens. 

Finally, Express Check contended that although its operations were conducted in South Carolina, they were controlled by four officers in Kansas, thus establishing it as a Kansas citizen, as well as a citizen of Tennessee under whose laws it is organized. The Fourth Circuit concluded that when a company has all of its physical operations for doing business in a given State and its four top officers in another, the “place of operations test” as described in Peterson v. Cooley, 142 F.3d 181, 184 (4th Cir.1998) should be applied to most accurately reflect its principal place of business; in this case, South Carolina.