Amicus Curiae Brief — Lincoln Property Co. v. Roche

No. 04-712 MAY 16 2295

IN THE nl

Supreme Court of the Anited State

LINCOLN PROPERTY COMPANY, ef al.,

Petitioners,

Vv.

CHRISTOPHER ROCHE, ef ux.,

Respondents.

On Writ of Certiorari to the

United States Court of Appeals

for the Fourth Circuit

BRIEF AMICI CURIAE FOR THE REAL ESTATE

ROUNDTABLE, NATIONAL MULTI HOUSING

COUNCIL, AMERICAN HOTEL & LODGING

ASSOCIATION, AMERICAN RESORT DEVELOPMENT

ASSOCIATION, BUILDING OWNERS AND MANAGERS

ASSOCIATION, INSTITUTE OF REAL ESTATE

MANAGEMENT, INTERNATIONAL COUNCIL OF

SHOPPING CENTERS, NATIONAL APARTMENT

ASSOCIATION, NATIONAL ASSOCIATION OF

HOMEBUILDERS, NATIONAL ASSOCIATION OF

INDUSTRIAL AND OFFICE PROPERTIES, NATIONAL

ASSOCIATION OF REAL ESTATE INVESTMENT

TRUSTS, AND NATIONAL ASSOCIATION OF

REALTORS IN SUPPORT OF PETITIONERS

STEPHEN M. RENNA BRUCE E. PARMLEY

THE REAL ESTATE GREGORY G. GARRE*

ROUNDTABLE JESSICA L. ELLSWORTH

1420 New York Avenue, N.W. HOGAN & HARTSON L.L.P.

Suite 1100 555 Thirteenth Street, N.W.

Washington, D.C. 20005 Washington, D.C. 20004

(202) 639-8400 (202) 637-5665

*Counsel of Record Counsel for Amici Curiae

WILSON-EPES PRINTING CO., INC. — (202) 789-0096 -— WASHINGTON, D. C. 20001

TABLE OF CONTENTS

Page

TABLE GP AU THRUIRIE Bibi ecccccccccccscccssvscesccscsccceesenecee il

STATEMENT OF INTEREST OF

Ee UE sosttcitiennncetaneacenccsepevtsnnsenseseneennesess |

SUMMARY OF ARGUMENT.............cccccssseseseeeeeees 4

FEI denersenseinsonnnsenenesiesveentevommmeneeninercrcenees 6

I. IN THE REAL ESTATE INDUSTRY,

BUSINESSES ROUTINELY OPERATE ©

IN MULTIPLE STATES THROUGH

AFFILIATED ENTITIES ...........cccsccccsssesseeees 6

Il. THE FOURTH CIRCUIT’S DECISION

INVITES JURISDICTIONAL DISORDER

FOR BUSINESSES THAT OPERATE

THROUGH AFFILIATED ENTITIES IN

lige BF AD EEA 8 MP ccvcccessecesevecssesesenccsnssccsonese 13

Ill. THE FOURTH CIRCUIT’S JURIS-

DICTIONAL ANALYSIS IS FUNDA-

MENTALLY FLAWED ........ccccccsccsscrsseossoeeseees 18

IV.THE FOURTH CIRCUIT’S DECISION

WILL IMPROPERLY DEPRIVE BUS-

INESSES OF THEIR STATUTORY

PRET Pile TENIEEE cxccerssesssvessessessreensensconsecsees 28

SIS cccseccrcmescscreatescrsenncsremenmsensnscseenniinenne 30

ADDENDUM: DESCRIPTION OF AMICI CURIAE

(i)

il

TABLE OF AUTHORITIES

Page

CASES:

Burford v. Sun Oil Co., 319 U.S. 315 (1943)........... 29

Burnham v. Superior Court of Cal.,

GIS U.S. GBS (ID BGD ncccesesecstssvenssiuananee 13

Carden v. Arkoma Assocs.,494 U.S. 185

( COGEP wecccssessenvinidengmenaiaaa 4,5, 14, 16, 18, 19, 22, 23, 24

Caterpillar Inc. v. Lewis,

DED U.S. 68 (BODE) ..cccccoscossssevsssienaiauanaeae 29

Caterpillar Inc. v. Williams, 482 U.S. 386

(1) ee NT 5, 23

Coal Co. v. Blatchford, 78 U.S. (11 Wall.)

NL 5) | 19

ConnTech Dev. Co. v. University of Conn.

Educ. Properties, Inc., 102 F.3d 677

Le | NR s 27

E.R. Squibb & Sons, Inc. v. Accident & Cas.

Ins. Co., 160 F.3d 925 (2d Cir. 1998) ........0.00000 24

Ford Motor Co. v. Beauchamp,

308 U.S. 331 (1939).......... ececcoveeseunsenessenigneniiindlind 12

FW/PBS, Inc. v. City of Dallas, 493 U.S. 215

( FDBG) ....ccoccsesssesensensesaneniasstsiniasiiiamne 25

Great S. Fire Proof Hotel Co. v. Jones,

EDS U.S. FSS (BGBS) .2cccccessesecensennssannsmunaaaaaae 28

Grupo Dataflux v. Atlas Global Group, LP,

536 &. Ce. SSBB CABG .cccsnscccennenennnaia 5, 13, 16, 17, 26

iii

TABLE OF AUTHORITIES—Continued

Page

Holmes Group, Inc. v. Vornado Air Circula-

tion Sys., Inc., 535 U.S. 826 (2002) ...........000+ 23

lowa Pub. Serv. Co. v. Medicine Bow Coal

Co., 556 F.2d 400 (8th Cir. 1977) ................00000. 19

Jerome B. Grubart, Inc. v. Great Lakes

Dredge & Dock Co., 513 U.S. 527

Ee 13

Lehigh Mining & Mfg. v. Kelly, 160 U.S. 327

ITA tacicestineeneenenenesnennencencsccsnscccesesecs 7

Louisville, C. & C. R.R. v. Letson,

aisha rerrepnesnnnnencnnnencencces 14

Lumbermen's Mut. Cas. Co. v. Elbert,

orcas nectnaenepennannnennncnnessseesses 22, 23

Marshall v. Baltimore & Ohio R.R.,

TTR 29

McNutt v. Bland, 43 U.S. (2 How.) 9 (1844)........... 19

National Union Fire Ins. Co. v. Rite Aid of

S.C., Inc., 210 F.3d 246 (4th Cir. 2000).............. 24

Navarro Sav. Ass'n v. Lee,

446 U.S. 458 (1980)................. 1, 13, 17, 18, 19, 22, 23

Provident Tradesmens Bank & Trust Co. v.

Patterson, 390 U.S. 102 (1968) .............ccccccccee 24

Prudential Oil Corp. v. Phillips Petroleum

Co., 546 F.2d 469 (2d Cir. 1976) ...........cccccccecees 7

iv

TABLE OF AUTHORITIES—Continued

Reuters Ltd. v. Tax Appeals Tribunal,

623 N.E.2d 1145 (N.Y. 1993),

cert. denied, 512 U.S. 1235 (1994) .........0.0000000..

Sisson v. Ruby, 497 U.S. 358 (1990)....0000....ccccceeee

Strawbridge v. Curtiss, 7 U.S. (3 Cranch)

I CT wesceneentnetenncsiniemnpiateannantebentaniitianinesemenpeie

Taber Partners, | v. Merit Builders, Inc..,

987 F.2d 57 (ist Cir.), cert. denied,

8 Ee a

United States v. Bestfoods,

es OO Qe cnrerenmnnsemsnennnetneemnents

Wilson v. Oswego, TP, 151 U.S. 56 (1894) ............

Wilson v. Republic Iron & Steel Co., 257

ee

Wood v. Davis, 59 U.S. (18 How.) 467

Wormley v. Wormley, 21 U.S. (8 Wheat.)

Te

CONSTITUTION:

ee ae

STATUTES:

BD ie & GD cecscnseensensesseneseenmnnemem

a

ee ee

Vv

TABLE OF AUTHORITIES—Continued

Page

ET a ee 18, 21

pS ee 1, 5, 18, 21, 29

ef ee 25

Judiciary Act of 1789, ch. 20, § 11, 1 Stat. 78......... 28

RULE:

Supreme Court Rule 37.3(a).............-cessesseeesersnenees l

Supreme Coust Rule 37. ............c.cccccccscccscccssccssecseee l

8 RF ae ee 19

RR.) Oe 5, 24

RE CO 24

RS: YO 24

en, Be, GEOR, Be Bi cctnesscennesmensensensnrsnanensinnainianenteenaiein 23

OTHER:

Alvin L. Arnold and Marshall Tract, Con-

struction & Development Financing

>) 9

David Currie, The Federal Courts and the

American Law Institute, Part 1, 36 U.

Ge, ©. BE, 1B Ga ircrscesnsscneennse 17

The Federalist No. 80 (Alexander Hamilton)

(Jacob E. Cooke ed, 1961) .............ccccccccceeeeeeeees 28

vi

TABLE OF AUTHORITIES—Continued

Steven G. Horowitz and Kimberly B. Black-

low, Use of Single Member Limited Li-

ability Companies in Real Estate Finance

Transactions, Practicing Law Institute,

OO

Richard D. Jones and Richard A. Bendit,

Practical Advice on the Preparation of

the Substantive Non-Consolidation Opin-

ion in Real Estate Transactions, Ameri-

can Law Institute, SHO96 ALI-ABA 469

Judicial Business of the United States Courts

2003, Table S-7 (available at

www.uscourts. gov/jubus2003/

Eee cenereceeninemenseennsetsennenmmnennsnensastenceniess

Legal Criteria for U.S. Structured Finance

Transactions, Standard & Poor's, ch.3

Kathleen O. McKune, Special Purpose Enti-

ties—Who, What, Why, Where, When,

and How ?, Practical Real Estate Lawyer,

20 No. 6 Prac. Real Estate Law 7 (2004)...........

6A Charles Alan Wright et al., Federal

Practice and Procedure (2005)................c000000«»

14B Charles Alan Wright et al., Federal

Practice and Procedure (3d ed. 1998)...............

10

STATEMENT OF INTEREST OF AMICI CURIAE

This case presents basic jurisdictional issues of exceptional

importance to businesses—such as those in the commercial

and residential real estate industry—that operate in multiple

states through affiliated entities, including partnerships.' The

overriding question concerns the manner in which federal

courts should assess a business defendant’s citizenship for

purposes of establishing diversity jurisdiction. 28 U.S.C.

§ 1332(a). That question, in tum, governs the ability of

business defendants to invoke their right under 28 U.S.C.

§ 1441(b) to remove an action to a federal forum. That

removal right has long played a vital role in ensuring that,

where federal jurisdiction exists, non-resident defendants

may access federal courts and, more to the point, “a tribunal

free from local prejudice.” Pet. App. 15a-16a.

A case is removable if “none of the parties in interest prop-

erly joined and served as defendants is a citizen of the State.

in which such action is brought.” 28 U.S.C. § 1441(b). This

case was filed in Virginia state court. The only parties

“properly joined and served as defendants” are petitioners

Lincoln Property Company (Lincoln), a Texas corporation

with its principal place of business in Texas, and State of

Wisconsin Investment Board (SWIB), a Wisconsin entity. It

is undisputed that neither defendant is a citizen of Virginia,

as are respondents, and that the named parties are therefore

diverse pursuant to 28 U.S.C. § 1332(a). Petitioners removed

the case from state court to federal court pursuant to Section

1441(b), and the district court entered summary judgment in

their favor. Pet. App. 39a, 88a. The Fourth Circuit, how-

ever, reversed and remanded with instructions that the case

' Pursuant to this Court’s Rule 37.6, amici notes that no part of

this brief was authored by counsel for any party, and no person or

entity other than amici made any monetary contribution to the

preparation or submission of the brief. This brief is filed with the

written consent of all parties pursuant to Rule 37.3(a).

2

be returned to state court on the ground that defendants had

“failed to carry their burden of proof with respect to their

allegedly diverse citizenship.” /d. at 2a.

In at least two critical respects, the Fourth Circuit’s deci-

sion disrupts the settled framework for determining the

citizenship of business defendants. First, the decision

instructs courts to look beyond the citizenship of the defen-

dant named in the complaint and to identify non-named

affiliates that may destroy diversity under a “real parties in

interest” analysis. Pet. App. 14a. Second, the decision

concludes that the citizenship of a non-named limited part-

nership may be based on its “nexus” to the state in which the

lawsuit is filed, as opposed to the citizenship of its partners.

Id. at 16a. The decision thus transforms a basic jurisdictional

determination into a free-wheeling, fact-intensive inquiry that

considers the existence of non-named entities such as part-

nerships that might have a connection to a named defendant

or the events at issue, and then gauges the “nexus” among

any such affiliated entities, the parties named in the com-

plaint, and the forum state. For businesses that operate in

multiple states through various affiliates, the Fourth Circuit’s

decision is a recipe for uncertainty and wasteful litigation

over a threshold jurisdictional determination made in thou-

sands of cases each year—in the Fourth Circuit alone.

Amici have a direct and substantial interest in the proper

resolution of the smportant jurisdictional issues presented by

this case. Amici are The Real Estate Roundtable, National

Multi Housing Council, American Hotel & Lodging Associa-

tion, American Resort Development Association, Building

Owners and Managers Association, Institute of Real Estate

Management, International Council of Shopping Centers,

National Apartment Association, National Association of

Homebuilders, National Association of Industrial and Office

Properties, National Association of Real Estate Investment

Trusts, and National Association of Realtors. Lincoln is a

member of the National Multi Housing Council and the

3

International Council of Shopping Centers. A description of

the mission, organization, and activities of each of the amici

associations is set forth in the addendum to this brief.

Amici represent a broad spectrum of commercial and resi-

dential real estate interests present in virtually every county

in America. Amici’s members include owners and lessors of

commercial property such as office buildings, shopping

centers, apartments, industrial and distribution facilities,

hotels, and resorts. Their members also include developers,

property managers, brokers, homebuilders, Realtors, Real

Estate Investment Trusts, financial institutions, investment

advisors, and individual and institutional investors. Amici’s

members routinely operate through separate legal entities

including subsidiaries, trusts, partnerships, and limited

liability companies in owning properties, conducting opera-

tions, and providing specific real estate services with respect

to multiple properties in different states. The multi-faceted

structure of such enterprises is based on legitimate business

considerations discussed below, and reflects the practical

challenges of doing business in the real estate industry.

The Fourth Circuit’s decision is not only legally un-

founded, but creates the potential for enormous uncertainty

for amici’s members with respect to a crucial jurisdictional

determination. Even when, as here, a plaintiff has named as

a defendant a business entity that is undeniably diverse, the

Fourth Circuit’s decision may require a court to question the

existence of diversity jurisdiction and require the defendant

to disprove a connection between non-named affiliates and

the events at issue or the forum state. In addition, the Fourth

Circuit’s decision creates uncertainty as to the citizenship of

partnerships and other entities—through which amici’s

members routinely operate—for purposes of establishing

diversity by holding that citizenship may be based on a

partnership’s purported “nexus” (Pet. App. 16a) to a state

rather than the citizenship of its partners. The Fourth Cir-

cuit’s analysis will increase the costs of removing such suits

4

to federal court by generating collateral litigation over a

threshold jurisdictional determination. Moreover, the Fourth

Circuit’s decision will create business and investment

uncertainty to the extent that it deprives businesses of their

statutory right to remove a case to federal court.

SUMMARY OF ARGUMENT

The Fourth Circuit’s decision holds that, in determining

citizenship for purposes of diversity jurisdiction, a court

should look beyond the citizenship of a defendant named in

the complaint and impose on the defendant a burden to prove

that the citizenship of affiliates not named in the complaint

does not destroy diversity under a factbound and indetermi-

nate “real party in interest” analysis. Applying that analysis,

the Fourth Circuit reversed an extensively litigated judgment

for petitioners on the merits and ordered that the case be sent

back to state court to begin anew. The court did so on the

ground that one of Lincoln’s affiliates—a limited partnership

that was not named as a defendant in the original complaint,

joined in an amended complaint, or deemed a necessary and

indispensable party—was “probably” a “real party in inter-

est,” and that the affiliate would destroy diversity based on

its purported “nexus” to Virginia. Pet. App. 15a, 16a. That

jurisdictional analysis is fundamentally flawed.

In the jurisdiction context, the “real party” concept was

designed to inquire into the citizenship or legitimacy of the

parties before the court and ensures that the named parties

have a genuine stake in the case and thus may be counted in

determining diversity. See Carden v. Arkoma Assoc., 494

U.S. 185, 188 n.1 (1990); Navarro Sav. Ass'n v. Lee, 446

U.S. 458, 460-461 (1980). The Fourth Circuit’s decision

dramatically expands that concept by employing it to look

beyond the parties named in the complaint and then obligat-

ing a defendant to establish that other entities are not a “real

party in interest,” even though the plaintiff has not named

such entities in its complaint or argued that they were neces-

5

sary and indispensable under Fed. R. Civ. P. 19. The Fourth

Circuit’s free-ranging “real party in interest” inquiry contra-

venes the terms of the removal statute, which explicitly place

the focus on the citizenship of the “parties in interest prop-

erly joined and served as defendants,” 28 U.S.C. § 1441(b)

(emphasis added); departs from this Court’s own precedents,

which establish a “ ‘real party to the controversy’ test,”

Carden, 494 U.S. at 188 n.1 (emphasis added); and ignores

the time-honored rule that the plaintiff is “master of the

complaint,” Caterpillar Inc. v. Williams, 482 U.S. 386, 398-

399 (1987). In short, with no justification, the Fourth Circuit

has turned the settled diversity of citizenship analysis into a

formula for uncertainty and—particularly for entities that

operate in multiple states through various affiliates—an

engine for destroying diversity jurisdiction.

The Fourth Circuit’s other conclusion is equally problem-

atic from the standpoint of the plethora of multi-faceted

business enterprises prevalent in today’s economy—and just

as misguided as a matter of law.- As this Court recently

reaffirmed, the “accepted rule” is that a partnership “is a

citizen of each state * * * of which any of its partners is a

citizen.” Grupo Dataflux v. Atlas Global Group LP, 124 S.

Ct. 1920, 1923 (2004). The Fourth Circuit, however, con-

cluded that a partnership may be a citizen of a state for

purposes of diversity jurisdiction if it has “a very close

nexus” to a state, even if none of its partners is a citizen of

that state. Pet. App. 16a. That kind of inquiry may be

appropriate in determining whether a court has personal

jurisdiction with respect to a partnership, but it has no place

in the calculation whether diversity jurisdiction exists. The

Fourth Circuit’s decision throws into potential disarray the

citizenship of hundreds, if not thousands, of partnerships that

operate or own property in the Fourth Circuit. Even if the

Court concludes that the Fourth Circuit erred in looking

beyond the defendants named in the complaint, the Court

6

should reaffirm that the citizenship of a partnership is based

on the citizenship of its partners, not a “nexus” test.

Clear jurisdictional rules are vitally important for the

proper functioning of the federal courts and the reliance

interests of thousands of American businesses, including

those in the real estate industry. The Fourth Circuit’s unprin-

cipled and unwieldy jurisdictional ruling should be reversed.

ARGUMENT

I. IN THE REAL ESTATE INDUSTRY, BUSIN-

ESSES ROUTINELY OPERATE IN MULTIPLE

STATES THROUGH AFFILIATED ENTITIES

The jurisdictional issues presented by this case arise be-

cause of the corporate structure employed by Lincoln—the

lead defendant named in the complaint. In the real estate

industry, businesses such as Lincoln often choose to operate

in multiple states through affiliated entities for widely

accepted business considerations, including to limit their

liability and to bring local investors and special service

providers into a real estate venture or project. The Fourth

Circuit not only failed to appreciate the appropriate reasons

for doing business through such affiliates, but appeared to

fault Lincoln for choosing to operate in that fashion. A

proper understanding of the real estate industry is essential to

the correct resolution of the jurisdictional issues presented.

1. There are thousands of businesses in the real estate

industry across the county. Many of those businesses

comprise separate affiliated entities that, in turn, provide real

estate-related services or own property in multiple states. It

is not uncommon for such enterprises to have complex

structures, such as Lincoln’s, with numerous legal entities.

See Pet. App. 96a (chart of Lincoln-related entities). The

Fourth Circuit observed that it found “the manner in which

Lincoln conducts business (using many different structures)”

to be “confusi[ng].” Jd. at 16a n.16; see id. at 13a n.11.

What is more, the court appeared to fault Lincoln for its

7

decision to do business through different entities. See id. at

14a (“[T]}he citizenship of the real parties in interest escapes

us because of the confusing structure of the Lincoln group of

enterprises”). There is, however, nothing unusual or im-

proper about Lincoln’s multi-faceted business structure.

Real estate companies routinely do business in multiple

states through separate entities created for particular proper-

ties, projects, or services. These subsidiaries, partnerships,

and limited liability companies are created to be separate

from a parent entity and from each other. It is critical that

courts respect each entity’s separate legal existence. That is

just as true when it comes to determining citizenship for

purposes of diversity jurisdiction as it is in making other

legal determinations as to such entities. Cf United States v.

Bestfoods, 524 U.S. 51, 61 (1998) (“It is a general principle

of corporate law deeply ‘ingrained in our economic and legal

systems’ that a parent corporation (so-called because of

control through ownership of another corporation’s stock) is

not liable for the acts of its subsidiaries.”) (citation omitted);

Prudential Oil Corp. v. Phillips Petroleum Co., 546 F.2d

469, 475(2d Cir. 1976) (“an intercorporate assignment

between a parent and its subsidiary should be treated as

presumptively ineffective for jurisdictional purposes”’) (citing

Lehigh Mining & Mfg. v. Kelly, 160 U.S. 327 (1895)).

2. It is standard practice in the real estate industry for

parent companies to create separate legal entities to own,

lease, finance, manage, construct, or develop a single prop-

erty. This entity is often referred to as a Special Purpose

Entity, or SPE, and its “special purpose” is to own, lease,

finance, manage, construct, or develop the single asset it

holds. An SPE is also often created to undertake one specific

service, such as property management, with respect to a

number of properties owned by others, including other SPEs.

With respect to a site-specific SPE, the property may be a

tract of single-family homes, an apartment complex, an office

8

park, a shopping mall, or a resort. The SPE is an entity that

has no debts or obligations other than those related to that

single property. A site-specific SPE conducts no business

that does not relate to the specific property—it does not

guarantee or assume the debts of any other person or entity, it

does not co-mingle funds with those of any other person or

entity, and it holds itself out as being a separate legal entity

from any other person or entity. See generally Steven G.

Horowitz and Kimberly B. Blacklow, Use of Single Member

Limited Liability Companies in Real Estate Finance Transac-.

tions, Practicing Law Institute, 501 PLI/Real 157 (2004).

By way of example, consider a hypothetical parent corpora-

tion that desires to invest in 50 properties, one in each state

across the country, and assume that these properties include

urban office buildings, suburban office parks, urban apart-

ment buildings, suburban retail shopping centers, and indus-

trial facilities. The parent entity is likely to set up a separate

business entity—for example, a partnership or limited

liability company—for each of the individual properties. The

precise structure chosen for each separate business entity will

be based on the type of investment being made by the parent

corporation and by any additional investors in the venture.

The partnership structure gives the parties the flexibility to

share in the economics of the transaction based on considera-

tions such as capital contributed, risk tolerance, and expected

yield. Although the parent will be affiliated with each of

these entities in some fashion, none of the properties will be

held directly by the parent and each of the affiliates will

therefore have a separate legal existence.

Real estate businesses also provide services to different

properties throughout the country through different partner-

ships, limited liabilities companies, or other entities. For

example, a parent corporation with multiple properties owned

by separate SPEs might form a number of partnerships with

local service providers to offer services such as property

management (/.e., maintenance, cleaning, concierge, security,

9

parking), property development (i.e., obtaining entitlements

and permits, and designing the property), construction (i.e.,

new construction or renovations), or structured financing

(i.e., loaning funds directly or arranging loans with banks and

other lenders). Sometimes parent companies will venture

together with other businesses that provide such real estate

services and form SPEs for such a purpose.

3. There are four primary reasons for creating separate

legal entities to invest in separate properties or undertake

services with respect to multiple properties: financing,

flexibility in structure, limitation of liability, and taxation.

Financing. Nearly all commercial real estate transactions,

like nearly all residential real estate transactions, involve

borrowing money from an institutional lender. Today’s

lenders typically require a business entity that owns or is

developing a property to be an SPE with no assets or opera-

tions other than the particular project securing the loan. By

requiring that the property be held by an SPE, the institu-

tional lender is better able to assess the risks involved in

making the loan and better able to ensure that the loan’s

performance will be impacted solely by the quality and

operation of the mortgaged property, not other factors.”

? Commercial mortgages are increasingly bundled together and

sold as commercial mortgage-backed securities in a national

market to private investors. The credit rating for such securitized

loans is based primarily, if not solely, on the property involved, not

the creditworthiness of the borrowers. See Kathleen O. McKune,

Special Purpose Entities—Who, What, Why, Where, When, and

How?, Practical Real Estate Lawyer, 20 No. 6 Prac. Real Estate

-Law 7 (2004); Legal Criteria for U.S. Structured Finance Trans-

actions, Standard & Poor’s, ch.3 (2004). Moreover, some lenders

will make commercial mortgaged-backed loans only if the prop-

erty owner agrees to limit its obligations to the single property.

See Alvin L. Arnold and Marshall Tract, Construction & Devel-

opment Financing § 5:45.50 (3d ed. 2004).

10

An institutional lender providing financing for a suburban

retail shopping center can underwrite the loan by analyzing

the risks of financing that specific shopping center—

including the likely business viability, revenue, operating

costs, and value—based on the geographic location and the

particular sector of the real estate market involved. But it is

more difficult for the lender to analyze and predict the risk of

the loan if it must attempt to evaluate the potential perform-

ance of 49 other properties spread across multiple urban and

suburban landscapes and varied sectors of the real estate

market.

Institutional lenders also prefer individual properties held

in isolation from other properties to protect themselves from

the potential bankruptcy of any business organization affili-

ated with the borrower. They do not want the poor perform-

ance of any other property owned by the borrower, its

sponsors, or its affiliates to jeopardize their loan. In other

words, institutional lenders require that the property they are

financing be isolated from any other debts or obligations

related to any other asset. A lender that is financing the

development of an apartment complex in midtown Atlanta,

or construction of a tract of single-family homes in suburban

Denver, for example, might require that its financing not be

used toward the management of an office building in Man-

hattan or land speculation in California’s Central Valley. By

requiring use of an SPE, banks can insulate their loan from

dependence on the success or failure of other properties.”

> The concept of structurally isolating the legal ownership of an

asset through an SPE is known as being “bankruptcy-remote” and

protects lenders against “substantive consolidation,” a judge-made

doctrine that allows the bankruptcy court to treat multiple eatities

as a single debtor. See generally Richard D. Jones and Richard A.

Bendit, Practical Advice on the Preparation of the Substantive

Non-Consolidation Opinion in Real Estate Transactions, Ameri-

can Law Institute, SHO96 ALI-ABA 469 (2003).

11

Flexibility. Utilizing an SPE for each individual property

provides real estate businesses with needed flexibility. A real

estate company is rarely the only entity involved in a real

estate venture; rather, it partners with different investors on a

property-by-property or group-of-properties basis. Some-

times the real estate business will need a financial partner,

such as a pension fund, foundation, endowment, individual

investor, or investment fund. Other times the real estate

business will need to partner with a local contractor or a

special service provider like a golf course developer.

These partners, whether financial investors, local contrac-

tors, or special service providers, insist on having an interest

in only one specific property—the one with which they are

involved. Holding the property in an SPE is the industry-

accepted way to provide these venture partners with an

ownership interest that reflects their investment. For exam-

ple, a financial partner who contributes 25 percent of the

equity required to build an office park in suburban Chicago

wants that office park held in a legal structure that accurately

reflects his interest and is isolated from other ventures

undertaken by the developer. And, likewise, a golf course

developer partnering with a homebuilder to incorporate a golf

course into a retirement community in western North Caro-

lina wants the property held by a legal structure that reflects

the parties’ interests with respect to that venture alone. If the

property wei. held by the parent entity, along with all the

other properties in which neither the office park investor nor

the golf course developer has any interest, the structure

would fail to reflect the actual contribution of these specific

partners and would increase the risks of their investment.

Limitation of Liability. Real estate entities also use SPEs to

limit liability to that business entity’s assets. The investor

described above who is willing to invest in a suburban office

park in one state wants to avoid any potential liabil.ty for a

tenant dispute or property damage claim in a retail shopping

center in another state with which the investor has no in-

12

volvenient, contributed no investment, and analyzed no risks.

By creating SPEs that hold single assets, the parent and its

transaction partners or affiliates may avoid the risk of preex-

isting liabilities and insulate each property from liability

problems involving other property. Real estate investors are

particularly concerned atout potential uninsured property

liabilities such as tenant fa:iures or environmental hazards.

In addition, by creating SPEs to perform specific services, a

parent company and its partners may limit their exposure

from liability that may arise from other real estate operations.

Taxation. Nearly all states impose taxes for carrying on or

doing business in that state. If all 50 of the properties in the

hypothetical example above were held together by one

corporation or one unincorporated entity, each state could

make its own calculation of the proper allotment of net

income from all 50 properties to that state—rather than

taxing precisely the business that was done in that state. See,

e.g., Ford Motor Co. v. Beauchamp, 308 U.S. 331, 335

(1939) (state tax for privilege of doing business in state can

be based on net income and is not limited to income from

business within that state); Reuters Lid. v. Tax Appeals

Tribunal, 623 N.E.2d 1145, 1147 (N.Y. 1993) (international

corporation doing business in 80 countries required to pay

New York corporate franchise tax based on apportionment of

worldwide net income), cert. denied, 512 U.S. 1235 (1994).

By using separate business entities to conduct and carry on

business in separate states, real estate companies may sim-

plify their tax assessment administration and, at the same

time, more fairly and accurately allocate their tax liability.

The successful functioning of the real estate industry—a

critical sector of the United States economy—depends in

large measure on giving effect to these separate business

structures, which may take a variety of forms that include the

elements discussed above. Moreover, the proper functioning

of the real estate market is key to the growth and stability of

financial markets that provide mortgage loans, real-estate

13

backed securities, and investment capital. The Fourth Circuit

overlooked these important considerations, faulted Lincoln

for operating in an industry-accepted fashion, and created a

jurisdictional rule that is likely to upset this vital market.

Il. THE FOURTH CIRCUIT’S DECISION INVITES

JURISDICTIONAL DISORDER FOR BUS-

INESSES THAT OPERATE THROUGH

AFFILIATED ENTITIES IN MULTIPLE STATES

Clarity is a matter “ ‘of first importance’ ” (Navarro, 446

U.S. at 464 n.13) (citation omitted) in fashioning basic

jurisdictional rules. The Fourth Circuit’s decision throws

into disarray the settled framework for determining diversity

of citizenship. If it is allowed to stand, it will generate

uncertainty for the hundreds, if not thousands, of real estate

firms that operate in multiple states through affiliated entities

concerning the fundamental question whether diversity

jurisdiction exists and the related—and equally important—

question whether a case is removable to federal court. The

confusion that that is likely to be generated by the Fourth

Circuit’s analysis is reason alone to reject that analysis.

1. As this Court recently emphasized, “{uJncertainty re-

garding the question of jurisdiction is particularly undesir-

able, and collateral litigation on the point particularly waste-

ful.” Grupo Dataflux, 124 S. Ct. at 1930; see also Jerome B.

Grubart, Inc. v. Great Lakes Dredge & Dock Co., 513 U.S.

527, 547 (1995) (jurisdictional rules should not depend on

fact-specific inquires that are “hard to apply, jettison{]

relative predictability for the open-ended rough-and-tumble

of factors,” and “invite{] complex argument in a trial court

and a virtually inevitable appeal”); Burnham v. Superior

Court of Cal., 495 U.S. 604, 626 (1990) (plurality opinion)

(jurisdictional rules have long been designed “to avoid * * *

uncertainty and litigation over the preliminary issue of the

forum’s competence”); Sisson v. Ruby, 497 U.S. 358, 375

(1990) (Scalia, J., concurring). The Fourth Circuit’s decision

creates uncertainty over a basic jurisdictional determination

14

undertaken by federal courts thousands of times each year.

Such uncertainty leads to business risks which create new

costs. Lenders, investors, and other market participants in

the real estate industry accordingly abhor unnecessary risks.

2. The stark contrast between the district court’s diversity

analysis and the Fourth Circuit’s analysis underscores the

uncertainty that is likely to be fostered by the decision below.

The district court’s jurisdictional inquiry was clear and

straightforward. It looked to the complaint and determined

the citizenship of the defendants that respondents— Virginia

citizens—had chosen to sue. See Pet. App. 84a-85a, 87a-88a,

92a-93a. Respondents sued (1) Lincoln, which is indisputa-

bly a Texas citizen, because it is a Texas corporation with its

principal place of business in Texas, see Louisville, C. & C.

RR. v. Letson, 43 U.S. 497, 558 (1844); 28 U.S.C.

§ 1332(c\(1) (citizenship of corporation is the place of

incorporation and its principal place of business); and

(2) SWIB, a Wisconsin entity. Based on the citizenship of

Lincoln and SWIB—2.e., the named defendants—diversity of

citizenship undeniably exists. Those defendants, moreover,

have a direct interest in this case. See Pet. 11.*

By contrast, the Fourth Circuit held that “the citizenship of

the nominal parties listed on the Complaint is in no way

dispositive of subject matter jurisdiction.” Pet. App. 17a

(emphasis added). Thus, although the Fourth Circuit did not

“In addressing respondents’ post-judgment motion for remand,

the district court also considered the citizenship of one of Lin-

coln’s affiliates, EQR/Lincoln Limited Partnership (EQR). The

district court found that EQR is a citizen of Texas, because its

partners are citizens of Texas. See Pet. App. 87a-88a, 92a-93a;

Carden, 494 U.S. at 192-193, discussed infra. The district court

did not hold that it was necessary to consider the citizenship of

EQR im determining whether diversity jurisdiction exists. But

rather in disposing of respondents’ motion, the court simply

explained that jurisdiction would exist “even assuming” that EQR

had been named as a defendant. Pet. App. 88a.

15

question that diversity exists with respect to the parties

named in the complaint, the court held that it was necessary

to look beyond the defendants named in the complaint and to

ascertain the citizenship of any purported “real parties in

interest.” Jd. at 14a. In applying that analysis, the court

attempted to canvass Lincoln’s business affiliates and

ascertain how they were related to the action. /d. at 1 la-14a.

The court openly acknowledged that it had difficulty in

understanding Lincoln’s business structure and described it

as “confusing.” /d. at 14a; see id. at 13an.11.

The Fourth Circuit focused on EQR/Lincoln Limited Part-

nership (EQR), which was not named as a defendant, though

it speculated that there may also be other non-named entities

that could destroy diversity. Pet. App. 15a-l6a. EQR is a

Lincoln affiliate that manages the property underlying

petitioners’ claim. As the district court explained, EQR was

formed in Delaware and is a Texas citizen for purposes of

determining diversity jurisdiction because its partners are

Texas citizens. /d. at 87a-88a; see note 4, supra. The Fourth

Circuit acknowledged that EQR’s listed partners are Texas

citizens and that the record does not establish that any EQR

partner is a citizen of Virginia. Pet. App. 12a-13a. Nonethe-

less, the court held that EQR was probably a “real and

substantial party in interest” based on EQR’s activities in

managing the apartment complex where respondents lived;

that EQR effectively must be regarded as a citizen of Vir-

ginia because it “owns land and operates a substantial part of

its business in Virginia, thus establishing a very close nexus

with the Commonwealth”; that EQR would destroy “com-

plete diversity” if the action had been “maintained” against it

or if EQR had been “joined”; and that the case therefore

“should be remanded” to state court. /d. at 16a-17a.

3. The Fourth Circuit’s jurisdictional analysis is the an-

tithesis of a clear and predictable rule. Under the Fourth

Circuit’s analysis, a business defendant with multiple affili-

ates cannot be assured that the citizenship determination will

16

be based on its own legal citizenship. Instead, the defendant

may be asked to prove that one of its affiliates is not a real

party in interest to the case, even though the affiliate was not

named as a defendant. That “real party in interest” inquiry is

inherently fact-bound and indeterminate. For example, in

this case, the Fourth Circuit demanded “evidence” concern-

ing whether, or to what extent, non-named affiliates “are

distinct or uninvolved” in the “business enterprises” of the

named defendant and “property holdings.” Pet. App. 1 la.

The Fourth Circuit’s analysis also obligates federal judges to

unravel complex business structures that go beyond the

parties before the court. The upshot is that a business

defendant may not predict with any certainty whether it will

be able to establish diversity, and thus will not be able to

predict whether a case is removable from state court to

federal court. In addition, federal courts will be required to

make potentially complex factual determinations just to

determine whether a case is removable in the first place.

Furthermore, the Fourth Circuit’s analysis of the citizen-

ship of EQR—the non-named affiliate that the court deemed

to probably be “the real party in interest”—will generate

uncertainty as to the citizenship of partnerships for diversity

purposes. As explained below, the “accepted rule” is that a

limited partnership (or partnership) “is a citizen of each state

or foreign country of which any of its partners is a citizen.”

Grupo Dataflux, 124 S. Ct. at 1923 (citing Carden, 494 U.S.

at 192-195). The Fourth Circuit, however, did not base its

determination that EQR destroyed diversity on the citizen-

ship of EQR’s partners (which are Texas citizens, see note 4,

supra), but rather on the notion that EQR has “a very close

nexus with the Commonwealth, which is much stronger than

any nexus to Texas made apparent by the record.” Pet. App.

16a. That “nexus” analysis creates great uncertainty for

partnerships—many of which are engaged in the real estate

business—because they can no longer assume that they can

establish diversity based on the citizenship of their partners

17

and, instead, are left to guess as to whether a court will find

that their purported “nexus” with a particular state is suffi-

cient to destroy (or support) diversity jurisdiction.

4. The uncertainty created by the Fourth Circuit analysis

will generate “wasteful” (Grupo Dataflux, 124 S. Ct. at

1929) litigation. In this case, for example, respondents sued

Lincoln because its trade name was used in connection with

the management of the property underlying the suit. Pet. 11.

Lincoln answered the complaint fully prepared to satisfy any

award against it, removed the case to federal court based on

the diversity of the parties named in the complaint, and

litigated the case to a judgment in its favor. Yet, on appeal,

the federal courts determined—for the first time—that a non-

named affiliate of Lincoln was a “real party in interest,” and

that the affiliate was a citizen of Virginia based on its

“nexus” to the state. Even though the plaintiffs had not

named the affiliate as a defendant, or even attempted to join

the affiliate as a party, the Fourth Circuit reversed the judg-

ment in respondents’ favor and ordered that the case be

remanded to state court for the litigation to begin over again.

Neither the federal courts nor litigants (whether plaintiffs

or defendants) are well-served by such a haphazard and

duplicative approach to such a threshold jurisdictional

determination. As this Court has already recognized,

“{j]Jurisdiction should be as self-regulated as breathing, ce

litigation over whether the case is in the right court is essen-

tially a waste of time and resources.” Navarro, 446 U.S. at

464 n.13 (quoting David Currie, The Federal Courts and the

American Law Institute, Part I, 36 U. Chi. L. Rev. 1 (1968)).

Accordingly, the “policy goal” is to “minimize(e) litigation

over jurisdiction,” Grupo Dataflux, 124 S. Ct. 1929, not to

foster it. The litigation and uncertainty that is almost certain

to be generated by the Fourth Circuit’s decision counsels

strongly, if not decisively, against adopting that analysis.

18

111.THE FOURTH CIRCUIT’S JURISDICTIONAL

ANALYSIS IS FUNDAMENTALLY FLAWED

In concluding that diversity jurisdiction is lacking, the

Fourth Circuit committed two fundamental errors. First, the

court looked beyond the citizenship of the parties named in

the complaint for non-named affiliates that might destroy

diversity under a “real parties in interest” analysis. Pet. App.

14a. Second, the court concluded that the citizenship of a

non-named limited partnership may be based solely on its

factual “nexus” to the state in which the lawsuit was filed.

Id. at 16a. Each of those errors requires reversal.

l.a. The overriding question in this case is whether Con-

gress has conferred subject matter jurisdiction over respon-

dents’ action. Section 1332(a)(1) of title 28 grants federal

jurisdiction over certain controversies between “citizens of

different States.” See also U.S. Const. art. III, § 2. Jurisdic-

tion is not conferred unless there is “complete diversity”

among all plaintiffs and defendants. Strawbridge v. Curtiss,

7 U.S. (3 Cranch) 267 (1806). The removal statute provides

that “any civil action brought in a State court of which the

district courts of the United States have original jurisdic-

tion” — including diversity jurisdiction—“may be removed by

the defendant” to federal district court. 28 U.S.C. § 1441(a).

The statute further provides that diversity cases “shall be

removable only if none of the parties in interest properly

joined and served as defendants is a citizen of the State in

which such action is brought.” 28 U.S.C. § 1441(b).

In determining whether complete diversity—and therefore

federal diversity jurisdiction—exists, this Court has held

“that the ‘citizens’ upon whose diversity a plaintiff grounds

jurisdiction must be real and substantial parties to the contro-

versy.” Navarro, 446 U.S. at 460. Thus, federal courts have

long applied a “‘real party to the controversy’ test” to

determine “which of various parties before the Court should

be considered for purposes of determining whether there is

complete diversity of citizenship.” Carden, 494 U.S. at 188

19

n.1 (emphasis added); see id. at 200 (“[O]ne of the bench-

marks for determining whether a particular party among

those involved in the litigation must be counted for purposes

of diversity jurisdiction has been whether the party has a ‘real

interest’ in the suit or, in other words, is a ‘real party’ to the

controversy.”) (O’Connor, J., joined by Brennan, Marshall,

and Blackmun, JJ., dissenting) (emphasis added).

Rule 17(a) of the Federal Rules of Civil Procedure embod-

ies that line of decisions and provides that “[e]very action

shall be prosecuted in the name of the real party in interest.”

Fed. R. Civ. P. 17(a). Rule 17(a) further specifies that certain

individuals, such as a “trustee of an express trust,” “may sue

in the person’s own name without joining the party for whose

benefit the action is brought.” Jbid. Although the two

inquiries are not identical, this Court has observed that

“{t]here 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 the real parties to

the controversy.” Navarro, 446 U.S. at 463 n.9.

The “ ‘real party to the controversy’ test” (Carden, 494

U.S. at 188 n.1) has been most commonly applied in the case

of plaintiffs, i.e., the situation addressed by Rule 17(a). In

determining plaintiffs’ citizenship, federal courts look to

whether the party bringing the action has a real and substan-

tial interest in the case or is instead merely a nominal party

suing on another’s behalf. See, e.g., Navarro, 446 U.S. at

465-466; Coal Co. v. Blatchford, 78 U.S. (11 Wall.) 172, I] 77

(1871); McNutt v. Bland, 43 U.S. (2 How.) 9 (1844). Like-

wise, courts will prevent a nominal or fraudulently joined co-

plaintiff from destroying complete diversity by disregarding

that party in determining diversity of citizenship. See, e.g.,

Iowa Public Serv. Co. v. Medicine Bow Coal Co., 556 F 2d

400, 404 (8th Cir. 1977) (“[I]f the ‘nondiverse’ plaintiff is

not a real party in interest, and is purely a formal or nominal

party, his or its presence in the case may be ignored in

determining jurisdiction.”); 14B Charles Alan Wright et al.,

20

Federal Practice and Procedure § 3723 (3d ed. 1998) (“{I}t

is well-settled that the district court will not allow removal

jurisdiction to be defeated by the plaintiff's destruction of

complete diversity of citizenship by the collusive or improper

joinder of parties or the assignment of claims.”).

Likewise, with respect to defendants, the “real party to the

controversy” test prevents a plaintiff from defeating diversity

or removal jurisdiction by naming a non-diverse defendant

with no real interest in the case. If a named defendant lacks

any real and substantial interest in the controversy, a court

should ignore that defendant’s citizenship and only examine

the citizenship of other named defendants in determining

whether complete diversity exists. See, e.g., Wood v. Davis,

59 U.S. (18 How.) 467, 469 (1856) (“It has been repeatedly

decided by this court, that formal parties, or nominal parties,

or parties without interest, united with the real parties to the

litigation, cannot oust the federal courts of jurisdiction.”’);

Wilson v. Oswego, TP, 151 U.S. 56, 62-65 (1882) (consider-

ing whether certain named defendants were “purely formal

and unnecessary parties” whose citizenship should be ig-

nored). Similarly, jurisdiction may not be “defeated by a

fraudulent joinder of a resident defendant having no real

connection with the controversy.” Wilson v. Republic Iron &

Steel Co., 257 U.S. 92, 97 (1921); see also Wormley v.

Wormley, 21 U.S. (8 Wheat.) 421, 451 (1823). The “real

party to the controversy” test thus ensures that the diversity

calculation is based only on those parties involved in the

action that have a real interest in the action.

b. Here, the Fourth Circuit did not dispute that complete

diversity exists among the parties before the court: respon-

dents (from Virginia), Lincoln (from Texas), and SWIB

(from Wisconsin). Nor did the court dispute that the named

parties—including Lincoln, which showed up to defend

against this action and secured a judgment in its favor after

extensive litigation—were proper parties. Instead, in deter-

mining whether diversity jurisdiction exists, the court looked

21

beyond the parties named in the complaint; concluded that a

separate affiliate of Lincoln—not named in the complaint—

“probably” was a real party in interest, Pet. App. 15a; con-

cluded that “both” Lincoln and the separate entity “should be

parties,” id. at 16a (emphasis added); and held that complete

diversity is lacking on the ground that the non-named affili-

ate was a citizen of the same state as respondents. For

several reasons, that analysis is fundamentally flawed.

First, the Fourth Circuit’s analysis contravenes the terms of

the removal statute, which governs diversity actions, such as

this case, that are initially filed in state court. As noted, the

removal statute specifies that a civil action brought in state

court may be removed by a defendant on the basis of diver-

sity jurisdiction “only if none of the parties in interest

properly joined and served as defendants is a citizen of the

State in which such action is brought.” 28 U.S.C. § 1441(b)

(emphasis added). According to the plain language of the

statute, the only parties whose citizenship is relevant for

purposes of considering whether jurisdiction exists are those

who were “properly joined and served as defendants”—here,

Lincoln and SWIB. Nothing in the removal statute author-

izes a federal court to look beyond the parties “properly

joined and served as defendants” to defeat removal on the

basis of the citizenship of entities not named in the complaint

or parties to the case. Furthermore, the language that Con-

gress used in the removal statute is consistent with a proper

understanding of this Court’s “real party to the controversy”

case law, which, as discussed next, focuses the citizenship

inquiry on the parties before the court.

> The removal statute also provides that, “[flor purposes of

removal under this chapter, the citizenship of defendants sued

under fictitious names shall be disregarded.” 28 U.S.C. § 1441(a).

The focus on the “defendants sued” in Section 1441(a) squares

with Congress’s focus in Section 1441(b) on only those defendants

“properly joined and served as defendants.”

22

Second, the Fourth Circuit’s decision is based on a misap-

plication of this Court’s precedents. As discussed above, in

applying the “real party to the controversy” test, this Court

has focused on “which of various parties before the Court

should be considered for purposes of determining whether

there is complete diversity of citizenship.” Carden, 494 U.S.

at 188 n.1 (emphasis added). After all, it is a “ ‘real party to

the controversy’ test.” Ibid. (emphasis added). For example,

the Court has looked to whether the named plaintiff has a real

and substantial interest in the controversy, see, e.g., Navarro,

446 U.S. at 465, or whether the plaintiff has joined a sham

defendant in order to defeat jurisdiction, see, e.g., Wilson,

257 U.S. at 97. In this case, by contrast, the Fourth Circuit

looked outside of the parties named in the complaint and held

that complete diversity was destroyed by a separate entity

that was not named in the complaint. We are not aware of

any case in which this Court has applied the “real party to the

controversy” test to destroy diversity jurisdiction by invoking

the citizenship of a non-named, potential defendant.

To the contrary, this Court has recognized that the presence

of potential defendants that might have a real interest in the

case if named or joined does not destroy the diversity juris-

diction that exists with respect to the parties before the court.

See, e.g., Lumbermen’s Mut. Cas. Co. v. Elbert, 348 U.S. 48

(1954). In Elbert, this Court held that diversity jurisdiction

existed where a Louisianan who had been injured in a car

accident brought suit directly against the Illinois insurer of

the driver of the car, another Louisianan. The Court recog-

nized that both the injured plaintiff and the insurer defendant

were real parties in interest, and that diversity existed be-

tween those parties. The fact that the tortfeasor/insured—

who was not named in the complaint—also had a real interest

in the controversy did not destroy diversity jurisdiction

between the actual parties in the case. /d. at 51-52.

Nothing in this Court’s decision in Navarro, on which the

court of appeals relied (Pet. App. 3a-4a), supports the conclu-

23

sion that a court is obligated to look beyond the defendants

named in a complaint to determine whether there are any real

parties in interest that, if joined, would destroy diversity

jurisdiction. Rather, as this Court recently emphasized in

Carden, 494 U.S. at 191, the Court in Navarro examined

whether the named plaintiffs who brought the lawsuit—i.e.,

the individual trustees of a business trust—were the “real

parties to the controversy.” Navarro, 446 U.S. at 460-461.

The Court’s decision answering that question in the affirma-

tive in no way supports the Fourth Circuit’s conclusion that it

was obligated to look outside of the complaint for potential

defendants that, if joined, would destroy diversity.

Third, the Fourth Circuit’s analysis is inconsistent with the

time-honored rule that the plaintiff is the “master of the

complaint.” Holmes Group, Inc. v. Vornado Air Circulation

Sys., Inc., 535 U.S. 826, 831 (2002). As “master of the

complaint,” a plaintiff not only may “eschew(] claims based

on federal law * * * to have the cause heard in state court,”

ibid. (quoting Caterpillar Inc., 482 U.S. at 398-399), but also

may forego litigation or claims against potential defendants

with a real and substantial interest in the case, see Lumber-

men's Mutual Casualty Co., 348 U.S. 48 (permitting plaintiff

to sue diverse insurer in federal court by not naming non-

diverse tortfeasor). Indeed, plaintiffs routinely choose to

forego litigation against potential defendants for strategic

reasons or other considerations. In addition, plaintiffs may

seek to join additional defendants when new facts come to

light during the course of litigation. See Fed. R. Civ. P. 20.

Respondents—the plaintiffs in this case—chose to name

only two defendants: Lincoln and SWIB. Pet. App. 85a. It

is undisputed that those parties are citizens of different states

than respondents, and that complete jurisdiction therefore

exists among the parties before the court. The Fourth Circuit

speculated that another entity—‘“probably” EQR—was a

citizen of Virginia and has an interest in this case. Pet. App.

15a-16a. However, respondents—the master of their com-

24

plaint—chose not to name, join, or serve EQR. The Fourth

Circuit’s reliance on its own speculation to find a lack of

complete diversity exceeded the scope of the court’s author-

ity; the court found a lack of complete diversity based on the

theoretical citizenship of an entity that is not a defendant and

may or may not have an interest in the litigation.

Even if a non-diverse, putative defendant exists, courts

“regularly exercise diversity jurisdiction in cases where

nondiverse individuals or groups who are not direct parties to

the litigation nevertheless have a crucial interest in its

outcome.” E.R. Squibb & Sons, Inc. v. Accident & Cas. Ins.

Co., 160 F.3d 925, 936 (2d Cir. 1998). For purposes of

determining whether diversity of citizenship exists, the focus

must be on the parties that the plaintiff has chosen to name.

Fourth, the Fourth Circuit’s jurisdictional analysis also

unnecessarily intrudes on the province of Rule 19 of the

Federal Rules of Civil Procedure. Rule 19 carves out a

narrow circumstance in which federal courts do have author-

ity to consider the existence of non-named entities whom the

plaintiff could have—but chose not to—name in an action.

Under Rule 19(a), if a court concludes that a plaintiff has

failed to join a necessary party, the court may order the

joinder of that party. Rule 19(a) does not apply if joinder

would “deprive the court of jurisdiction over the subject

matter of the action,” Fed. R. Civ. Proc. 19(a), such as where

jurisdiction is founded on diversity and the necessary party

would destroy diversity. Under Rule 19(b), however, if the

court concludes that a missing person that may not be made a

party under Rule 19(a) is “indispensable,” the court may

order that the case be dismissed. See, e.g., Provident

Tradesmens Bank & Trust Co. v. Patterson, 390 U.S. 102

(1968) (a federal court should dismiss an action under Rule

19 only if a non-named, non-diverse party is both necessary

and indispensable); National Union Fire Ins. Co. v. Rite Aid

of S.C., Inc., 210 F.3d 246, 254 (4th Cir. 2000) (dismissing

25

case for lack of subject matter jurisdiction because non-

diverse party was necessary and indispensable).

Rule 19 therefore provides an established mechanism for

addressing the rare case in which diversity jurisdiction exists

based on the parties named in the complaint, but the plaintiff

has failed to name a necessary and indispensable party that, if

joined, would destroy diversity. The Fourth Circuit below

acknowledged Rule 19, but did not conclude that EQR or any

other non-named entity or affiliate of Lincoln was a neces-

sary and indispensable party. See Pet. App. 7a n.5. Indeed,

the Fourth Circuit did not engage in any formal Rule 19

analysis in this case, and there is no reason to conclude that

EQR would qualify as a necessary and indispensable party

under Rule 19. Instead, the Fourth Circuit applied a watered

down—and inappropriate—quasi-Rule 19 inquiry in holding

that diversity jurisdiction was lacking, and that the case

should be dismissed, based on its conclusion that a non-

named entity was a real party in interest. See Pet. App. 16a.

Finally, the Fourth Circuit’s analysis creates an unmanage-

able and inefficient regime. Federal courts are obligated

continuously to ensure that subject matter jurisdiction exists

in the cases before them. See FW/PBS, Inc. v. City of Dallas,

493 U.S. 215, 230-231 (1990); see also Pet. App. 7a; 28

U.S.C. § 1447(c). Especially in complex litigation involving

sophisticated business entities, the Fourth Circuit’s rule

creates a ticking time bomb that may derail a case founded

on diversity jurisdiction because a party may at any juncture

assert that a non-named entity is in fact a real party in interest

that, if joined, would destroy diversity of citizenship, and it

will be necessary for courts—including appellate courts—to

keep a constant look-out for potential non-diverse affiliates

of corporate defendants. Indeed, in this case, the Fourth

Circuit sua sponte plunged into its misguided “real party in

interest” analysis, even though respondents had not directly

challenged on appeal the district court’s ruling that removal

based on diversity of citizenship was proper.

26

The “real party to the controversy” test is inherently fact-

bound. But, as this case illustrates, the free-wheeling ap- .

proach adopted by the Fourth Circuit may compel a court of

appeals to engage in factual speculation about unnamed

persons or entities to assure itself that diversity jurisdiction

exists. By contrast, a rule that makes clear that the “real

party” analysis is limited to the parties named in the com-

plaint ensures that any potential jurisdictional pitfalls are

identified at the outset of litigation on the basis of a straight-

forward analysis—before both the parties and the courts

invest substantial resources in litigating the case, and in a

setting in which factual development is plausible.

2. The Fourth Circuit committed another fundamental

error in concluding that diversity jurisdiction was lacking.

Even if this Court concludes that the Fourth Circuit properly

looked beyond the named defendants to determine whether

jurisdiction exists, the court of appeals erred insofar as it held

that the citizenship of a non-named limited partnership may

be based on its purported factual “nexus” to a state, as

opposed to the citizenship of its partners.

After looking beyond the parties named in the complaint to

determine whether complete diversity existed, the Fourth

Circuit held that a non-named Lincoln affiliate—“probably”

EQR, a limited partnership—was a real party in interest, and

that the entity must be deemed a citizen of Virginia based on

its allegedly “very close nexus” to the state. Pet. App. 15a,

16a. That conclusion, too, is erroneous. A corporation is a

citizen of its principal place of business and its place of

incorporation—regardless of where it may conduct business,

or of the nexus that it might have with a state. 28 U.S.C.

§ 1332(c)(1). And the “accepted rule” is that a partnership is

a citizen of each state of which its partners is a citizen—

regardless of its activities in other states. Grupo Dataflux,

124 S. Ct. at 1923 (citing Carden, 494 U.S. at 192-195).

27

At least outside the Fourth Circuit, the courts of appeals

that have addressed the issue have hewed to the rule that the

location in which a partnership does business does not effect

its citizenship for purposes of diversity. These courts have

held that a partnership’s business activities may not be

considered in determining a partnership’s citizenship. For

example, in Conntech Development Co. v. University of

Connecticut Educational Properties, Inc., 102 F.3d 677 (2d

Cir. 1996), the Second Circuit determined that a partnership

was a citizen of New Jersey and Ohio—which is where its

corporate partners were citizens—even though the partner-

ship conducted business wholly within Connecticut. /d. at

681. Likewise, in Taber Partners, I v. Merit Builders, Inc.,

987 F.2d 57 (ist Cir. 1993), the First Circuit held that a

partnership comprised of two New York corporations, whose

principal places of business were New York, was only a

citizen of New York——even though the partnership’s purpose

was to manage property in Puerto Rico. /d. at 63-64.

By contrast, the Fourth Circuit held that a limited partner-

ship may qualify as a citizen of a state if it has “a very close

nexus” with the state. Pet. App. 16a. In this case, for

example, the court pointed to evidence “that the property at

issue is in Virginia, the mold abatement services contracted

for were in Virginia by a Virginia company, Lincoln main-

tains several rental properties in Virginia other than the one

at issue here, Lincoln has a regional office in Virginia, and

all of the correspondence and communication related to this

controversy occurred in Virginia.” Jd. at 15a; see id. at 16a

(the non-named entity “owns land and operates a substantial

part of its business in Virginia”). The court thus transformed

the clear and predictable Carden rule that a partnership is a

citizen of each of the states in which its partners are citizens

into an indeterminate and fact-intensive “nexus” test.

Even if this Court concludes that the Fourth Circuit erred

as a threshold matter in looking beyond the parties named in

the complaint to determine diversity of citizenship, amici

28

urge this Court to make clear that the Fourth Circuit further

erred in concluding that the citizenship of a partnership may

be established by its nexus to a state, rather than the citizen-

ship of its partners. As discussed above, if left undisturbed

by this Court, that aspect of the Fourth Circuit’s ruling could

generate enormous uncertainty for the hundreds, if not

thousands, of real estate partnerships that have some nexus to

a state in the Fourth Circuit, but nevertheless are not a citizen

of that state under the settled rule recognized in Carden.

Accordingly, it is vital that the Court make clear that the

Fourth Circuit’s “nexus” analysis is unfounded as well.

IV.THE FOURTH CIRCUIT’S DECISION WILL

IMPROPERLY DEPRIVE BUSINESSES OF

THEIR STATUTORY REMOVAL RIGHT

The Fourth Circuit’s decision creates a diversity-destroying

rule that will improperly deprive business defendants of their

statutory right to remove a case to federal court where

diversity jurisdiction properly exists if they cannot establish

diversity under the Fourth Circuit’s open-ended analysis.

That is all the more reason to reverse the decision below.

Diversity jurisdiction has been a fundamental component of

federal court jurisdiction since the founding. See U.S. Const.

art. III, § 2; Judiciary Act of 1789, ch. 20, § 11, 1 Stat. 78. It

serves a vital policy objective. As this Court has explained,

“the very object of giving to the national courts jurisdiction

to administer the laws of the states in controversies between

citizens of different states was to institute independent

tribunals, which it might be supposed would be unaffected by

local prejudices and sectional views.” Great S. Fire Proof

Hotel Co. v. Jones, 193 U.S. 532, 544 (1904); see also 6A

Charles Alan Wright et al., Federal Practice and Procedure

§ 1556 (2005) (“basic purpose of diversity jurisdiction is

thought to be the protection of out-of-state parties from the

possible prejudice of local courts”); The Federalist No. 80, at

534 (Alexander Hamilton) (Jacob E. Cooke ed., 1961) (“the

national judiciary ought to preside in all cases in which one

29

state or its citizens are opposed to another state or its citi-

zens” because “having no local attachments” it wil! be

impartial and unbiased); Burford v. Sun Oil Co., 319 U.S.

315, 336 (1943) (Frankfurter, J., dissenting) (access to a

“wholly impartial tribunal, namely, the federal court sitting in

that state” is necessary because “consciously or otherwise,

the courts of a state may favor their own citizens”).

Moreover, as noted above, when a plaintiff files an action

in state court over which the federal courts would have

diversity jurisdiction, defendants have a statutory right to

remove the action to federal court, as long as “none of the

parties in interest properly joined and served as defendants is

a citizen of the State in which such action is brought.” 28

U.S.C. § 1441(b); see Caterpillar, Inc. v. Lewis, 519 U.S. 61,

68 (1996). As this Court recognized long ago, “[t]he right of

choosing an impartial tribunal is a privilege of no small

practical importance.” Marshall v. Baltimore & Ohio R.R.,

57 U.S. 314, 329 (1853). Thousands of out-of-state defen-

dants choose to exercise that right each year and remove state

actions to federal courts in order to obtain a potentially more

impartial forum. In 2003, more than 44,000 cases were

removed from state court to federal court (considering all

bases of jurisdiction). Judicial Business of the United States

Courts 2003, Table S-7 (available at www.uscourts.gov/jud-

bus2003/tables/s7.pdf). Out-of-state businesses, in particu-

lar, are often concerned that they may experience local

prejudices by being forced to litigate in a foreign state court.

The Fourth Circuit’s decision may improperly deprive out-

of-state businesses of their statutory right to remove cases to

federal court where diversity jurisdiction exists under a

proper analysis. Indeed, in this case, Lincoln removed the

action to federal court based on the diversity of citizenship

among the parties named in the complaint and obtained a

judgment in its favor in the district court. But the Fourth

Circuit reversed that judgment and ordered that the case be

sent back to state court based on the application of its mis-

30

guided “real party in interest” analysis. Moreover, the Fourth

Circuit concluded that some Lincoln affiliate, “probably” the

limited partnership EQR, was a Virginia citizen based on its

purported “nexus” to Virginia, even though none of EQR’s

partners is a citizen of Virginia. That analysis could deprive

partnerships in the real estate business of their right to

remove a case to federal court in any state in which the

partnership owns, leases, manages, or is developing property.

Because they operate through many entities—including

partnerships—in different states, real estate businesses will

be disproportionately penalized under the Fourth Circuit’s

rule. The decision below creates a potential diversity-

destroying engine for such entities and thus may deprive

businesses of their nght to seek an impartial federal forum.

CONCLUSION

For the foregoing reasons, the judgment below should be

reversed.

Respectfully submitted,

STEPHEN M. RENNA BRUCE E. PARMLEY

THE REAL ESTATE GREGORY G. GARRE*

ROUNDTABLE JESSICA L. ELLSWORTH

1420 New York Avenue, N.W. HOGAN & HARTSON L.L.P.

Suite 1100 555 Thirteenth Street, N.W.

Washington, D.C. 20005 Washington, D.C. 20004

(202) 639-8400 (202) 637-5665

*Counsel of Record Counsel for Amici Curiae

ADDENDUM

DESCRIPTION OF AMICI CURIAE

American Hotel & Lodging Association. The American

Hotel & Lodging Association (AH&LA) is a dual member-

ship association of state and city partner lodging associations

throughout the United States. AH&LA was established in

1911 and is based in Washington, D.C. AH&LA has some

10,000 property members nationwide, representing more than

1.4 million guest rooms. It provides members with advocacy

on Capitol Hill, research and information on the lodging

industry, and other services designed to ensure a positive

business climate for the U.S. lodging industry.

American Resort Development Association. The Ameri-

can Resort Development Association (ARDA) is a Washing-

ton, D.C.-based trade association representing the vacation

ownership and resort development industries. The ARDA

was established in 1969 as the American Land Development

Association and today has nearly 1000 members, ranging

from privately held companies to major corporations, which

are located and do business in the United States and overseas.

Building Owners and Managers Association. The Build-

ing Owners and Managers Association (BOMA) Interna-

tional is an international federation of 108 local associations.

BOMA International’s 19,000 members own or manage more

than nine billion square feet of downtown and suburban

commercial properties and facilities in North America and

abroad. The mission of BOMA International is to advance

the performance of commercial real estate through advocacy,

professional competency, standards and research.

Institute of Real Estate Management. The Institute of

Real Estate Management (IREM) has been the source for

education, resources, information and membership for real

estate management professionals for more than 70 years.

IREM is an affiliate of the National Association of Realtors

2

and is the only professional real estate management associa-

tion serving both the multi-family and commercial real estate

sectors. The IREM has 82 chapters in the United States as

well as eight international chapters. IREM serves as an

advocate on issues affecting the real estate management

industry. Membership includes nearly 16,000 individual

members and 530 corporate members. Collectively, IREM’s

members manage more than 6.5 billion square feet of com-

mercial space and more than 13 million residential units,

totaling more than $848.2 billion in real estate assets.

International Council of Shopping Centers. The Inter-

national Council of Shopping Centers (ICSC) is a global

trade association representing the interests of the shopping

center industry. The ICSC was founded in 1957 and has

more than 50,000 members in the United States and else-

where around the world representing owners, developers,

retailers, lenders, and other professionals. Nearly 45,000 of

the ICSC’s members are in the United States and represent

nearly all the 46,990 shopping centers in the United States.

National Association of Homebuilders. The National

Association of Home Builders (NAHB) is a Washington,

D.C.-based trade association representing more than 220,000

members involved in home building, remodeling, multi-

family construction, property management, subcontracting,

design, housing finance, building product manufacturing, and

other aspects of residential and light commercial construc-

tion. The NAHB is affiliated with more than 800 state and

local home builders associations around the country.

NAHB’s builder members will construct about 80 percent of

the more than 1.84 million new housing units projected for

2005, making housing one of the largest engines of economic

growth in the country.

National Association of Industrial and Office Proper-

ties. The National Association of Industrial and Office

Properties (NAIOP) is the nation’s leading trade association

3

for developers, owners, investors and asset managers in

industrial, office, and related commercial real estate. NAIOP

was founded in 1967 and is comprised of more than 12,000

members in 50 North American chapters. It provides net-

working opportunities, educational programs, research on

trends and innovations and strong legislative representation.

National Association of Real Estate Investment Trusts.

The National Association of Real Estate Investment Trusts

(NAREIT) is the national trade association for REITs and

publicly traded real estate companies with a combined

market capitalization of about $294 billion. Members are

real estate investment trusts (REITs) and other business

entities that own, operate, and finance income-producing real

estate, as well as firms and individuals who advise, study,

and service those businesses. NAREIT’s principal mission is

to communicate about REITs and real estate investment to

members, policymakers nationwide, the investment commu-

nity, the media, and the public. NAREIT regularly represents

the REIT and real estate investment community before

Congress and the Executive Branch, provides research on the

REIT industry, and publishes information about REITs.

National Association of Realtors. The National Associa-

tion of Realtors (NAR) is a non-profit association that

represents more than one million members engaged nation-

wide in all phases of the real estate business, including

brokerage, appraising, management, and counseling. NAR

was created to promote and encourage the highest and best

use of the land, to protect and promote private ownership of

real property, and to promote professional competence.

NAR’s members contribute to such activities as safeguarding

real property rights, promoting equal opportunity in housing,

real estate licensing, neighborhood revitalization, and public

service, and promoting cultural diversity.

National Multi Housing Council and the National

Apartment Association. The National Multi Housing

4

Council and the National Apartment Association (NMHC

and NAA) represent the nation’s leading firms participating

in the multi-family rental housing industry. The combined

memberships of NHMC and NAA are engaged in all aspects

of the apartment industry, including ownership, development,

management, and finance. The NMHC represents the

principal officers of the apartment industry’s largest and most

prominent firms. The NMHC advocates on behalf of rental

housing, conducts apartment-related research, encourages the

exchange of strategic business information, and promotes the

desirability of apartment living. The NAA is the largest

national federation of state and local apartment associations

and is comprised of 164 affiliates and represents more than

31,505 professionals who own and manage more than five

million apartments across the country. NMHC and NAA

jointly operate a federal legislative program and provide a

unified voice for the private apartment industry.

The Real Estate Roundtable. The Real Estate Roundta-

ble (Roundtable) is a federal policy organization comprised

of real estate industry leaders. Its members are the Chair-

men, Presidents, and CEOs of the nation’s 100 leading

commercial and multifamily firms, and the Managing Direc-

tors of major financial institutions. The Roundtable also

includes the elected leaders and executive directors of major

real estate trade organizations. The Roundtable serves as the

vehicle through which industry leaders come together to

identify, analyze, and advocate policy positions on issues

important to the national real estate community. The Round-

table’s business and trade association leaders work collec-

tively to ensure a cohesive industry voice is heard by gov-

ernment officials and the public about relevant real estate

policies. Collectively, Roundtable members hold portfolios

containing over 2.5 billion square feet of developed property

valued at more than $250 billion. Participating trade associa-

tions represent more than one million people involved in

virtually every aspect of the real estate business.