# Amicus Curiae Brief — Lincoln Property Co. v. Roche

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URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385016_0055%3A08

## Record

- **Collection:** Supreme Court brief
- **Document type:** Amicus Curiae Brief
- **Published:** January 1, 2005
- **Citation:** 546 U.S. 81

## Text

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.

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385016_0055%3A08. Public record. Not legal advice.