BOND v. VEOLIA WATER INDIANAPOLIS, LLC

ENTRY ON JOINT MOTION TO REMAND

DAVID F. HAMILTON, Chief Judge.

Plaintiffs Jason Bond and David Lear seek to represent a class of customers of the public utility that provides water service in Indianapolis. Plaintiffs filed the action in state court, and plaintiff Leslie Bridges then filed a parallel action in state court. Defendants removed both cases to federal court based on the Class Action Fairness Act of 2005 ("CAFA"), codified in part as 28 U.S.C. § 1332(d), which dramatically expanded federal diversity jurisdiction over class actions. Plaintiffs have moved to remand both cases to state court. The briefing for both cases has been done in this case. Plaintiffs rely on the local controversy, home state controversy, and interests of justice exceptions to CAFA in section 1332(d)(4)(A), (d)(4)(B), and (d)(3), respectively. The applicability of all three exceptions ultimately turns on only one issue—the citizenship of defendant Veolia Water Indianapolis, LLC. As explained below, that defendant is a citizen of both Indiana and Delaware for purposes of CAFA, so plaintiffs' motion to remand is granted.

I. The Parties and the Claims

In 2002, the City of Indianapolis acquired the assets of what had been a privately owned public water utility serving the Indianapolis area. The city entered into a twenty-year management agreement with a predecessor of defendant Veolia Water North America Operating Services, LLC, for the operation and maintenance of the water utility, including meter-reading, billing, and collection functions. That entity assigned the Indianapolis contract to defendant Veolia Water Indianapolis, LLC. Pl. Ex. G at 4.

Plaintiffs Jason Bond and David Lear are retail customers served by the Indianapolis water works operated by Veolia Water Indianapolis under the management agreement. They allege that the management agreement requires defendants to read meters at least every two months so that bills are based on actual water usage. Plaintiffs allege further that defendants have deliberately chosen to read meters less often and to over-estimate water use, so that bills are based for several months at a time on excessive estimates of water use. The effect of this practice, according to plaintiffs, is that defendants save on operating expenses and receive small interest-free loans from all of their customers. Plaintiffs' complaint alleges claims arising under state law: for breach of contract, negligence, violations of the Indiana deceptive practices act, Ind.Code § 24-5-0.5-3, and constructive fraud. No class has been certified at this point.1

The complaint names three defendants, but one no longer exists. (The court has modified the caption as above to reflect only the two defendants.) Defendant Veolia Water Indianapolis, LLC ("Veolia Indianapolis") is a limited liability company. Veolia Indianapolis has its headquarters and operations in Indianapolis. Its sole business is operation of the Indianapolis water works under the management agreement with the city. Pl. Ex. B, ¶ 10. Veolia Indianapolis' sole member is defendant Veolia Water North America Operating Services, LLC ("Veolia North America"), also a limited liability company. Veolia North America says that it has its headquarters in Illinois, and it has a much broader business purpose: to design, build, operate and manage various types of water service facilities, programs, and systems in a number of different locations in North America. See id., ¶ 9.

Tracing ownership further upstream, Veolia North America's sole member is another limited liability company, Veolia Water America, LLC, whose sole member is yet another limited liability company, WASCO, LLC. WASCO has only one member, Veolia Environnement North America Operations, Inc., which is a Delaware corporation with its principal place of business in Delaware. That Delaware corporation's parent company is Veolia Environnement, SA, whose stock is traded publicly on Euronext Paris and on the New York Stock Exchange. Additional facts about the defendants are discussed below where relevant.

II. The Class Action Fairness Act

The parties agree that the case fits all the requirements for CAFA jurisdiction set forth in 28 U.S.C. § 1332(d)(2)(A). The matter in controversy exceeds five million dollars and at least one member of the putative class is a citizen of a state different from at least one defendant.

To support remand, plaintiffs rely on several exceptions to CAFA. The interests of justice exception in § 1332(d)(3) allows a court to remand a class action in which more than one-third but fewer than two-thirds of the members of the proposed plaintiff classes and "the primary defendants" are citizens of the forum state, based on consideration of the nature of the claims, whether state law governs, and several other factors. The local controversy exception in § 1332(d)(4)(A) requires a district court to remand a case in which:

The home-state controversy exception in § 1332(d)(4)(B) requires a district court to remand a case in which "two-thirds or more of the members of all proposed plaintiff classes in the aggregate, and the primary defendants, are citizens of the State in which the action was originally filed." These exceptions to CAFA were an important part of the legislative compromise between federal and state court power. See S.Rep. No. 109-14, at 27-28 (2005), reprinted in 2005 U.S.C.C.A.N. 3, 27-28. Under CAFA, the burden is on plaintiffs to show that one or more of these exceptions apply. Hart v. FedEx Ground Package System Inc., 457 F.3d 675, 680 (7th Cir.2006).

A suit by local utility customers asserting only state law claims against the local utility would seem to be a good candidate for these exceptions. In fact the parties' briefs show that they disagree on only one element of each of the three exceptions: whether any defendant is a citizen of the forum state, Indiana. The only candidate is Veolia Water Indianapolis, LLC, so the remand decision depends on the citizenship of that entity. Its citizenship presents two issues. The first is purely legal. The second is a mixed question of law and fact.

First, Veolia Indianapolis is a limited liability company. Defendants argue that Veolia Indianapolis thus takes on the citizenship of its members pursuant to Cosgrove v. Bartolotta, 150 F.3d 729 (7th Cir. 1998), and its progeny. Tracing back through multiple layers of LLCs, one eventually winds up with a Delaware corporation with its principal place of business in Delaware. Under the Cosgrove approach, Veolia Indianapolis would not be deemed a citizen of Indiana and the cases would stay in federal court under CAFA.

Plaintiffs rely on the CAFA provision codified in 28 U.S.C. § 1332(d)(10): "For purposes of this subsection and section 1453, an unincorporated association shall be deemed to be a citizen of the State where it has its principal place of business and the State under whose laws it is organized." Plaintiffs contend that subsection (d)(10) is a limited legislative modification of the rule applied in Cosgrove and other cases, and that Congress thus chose to treat partnerships and limited liability companies and other business entities like corporations for purposes of determining citizenship under CAFA. As explained below, the court agrees with plaintiffs on this issue.

That leads to the second question. Plaintiffs acknowledge that Veolia Indianapolis is organized under Delaware law and thus is a citizen of Delaware. Plaintiffs contend that its principal place of business is in Indiana, thus making it also a citizen of Indiana, so that the court should remand under all three of the available exceptions to CAFA. Defendants contend that, even though all Veolia Indianapolis executives, employees, and operations are located in Indiana, the "nerve center" of Veolia Indianapolis, and thus its principal place of business, is in Illinois, where its parent Veolia North America has its offices. If that is correct, the cases must stay in federal court.

III. Citizenship of Unincorporated Associations under CAFA

The court concludes that § 1332(d)(10) applies to Veolia Indianapolis, so that its citizenship must be determined as if it were a corporation, making it a citizen of the state under whose laws it is organized and of the state where its principal place of business is located. To address the issue in terms of statutory language, the issue is whether the phrase "unincorporated association" in section 1332(d)(10) means whatever the phrase means under the relevant state's law or whether it carries the broader meaning used by the Supreme Court in deciding the citizenship of entities other than corporations. The larger context and purpose of CAFA and the case law to which it responded show clearly that "unincorporated association" was intended to carry the broader meaning to address perceived anomalies in federal diversity jurisdiction.

Congress enacted CAFA to expand federal diversity jurisdiction to include broad categories of class actions in which minimal diversity is present (where at least one member of the plaintiff class has a citizenship different from at least one defendant) and more than five million dollars is at issue. See S.Rep. No. 109-14, at 27-28. As part of CAFA, Congress chose to modify existing case law concerning the citizenship of unincorporated associations. Section 1332(d)(10) provides: "For purposes of this subsection and section 1453, an unincorporated association shall be deemed to be a citizen of the State where it has its principal place of business and the State under whose laws it is organized." That provision modifies case law dealing with a number of business forms other than conventional corporations. E.g., Kitson v. Bank of Edwardsville, No. 06-528, 2006 WL 3392752, at *7 n. 3 (S.D.Ill. Nov. 22, 2006) (recognizing legislative modification of earlier court precedents). The Supreme Court has held that a limited partnership takes on the citizenships of all of its partners, both general and limited. Carden v. Arkoma Associates, 494 U.S. 185, 195-96, 110 S.Ct. 1015, 108 L.Ed.2d 157 (1990). The Seventh Circuit has followed Carden to hold that limited liability companies are also unincorporated associations that also take on the citizenships of all of their members. See Cosgrove, 150 F.3d at 731, followed in Thomas v. Guardsmark, LLC, 487 F.3d 531, 534 (7th Cir.2007), and Intec USA, LLC v. Engle, 467 F.3d 1038, 1041 (7th Cir.2006), among others.

In Carden v. Arkoma Associates, the Supreme Court made clear that Congress is principally responsible for adapting federal jurisdiction to the wide assortment of artificial entities created under state law: "the course we take today does not so much disregard the policy of accommodating our diversity jurisdiction to the changing realities of commercial organization, as it honors the more important policy of leaving that to the people's elected representatives." 494 U.S. at 197, 110 S.Ct. 1015. The Court acknowledged that it had long ago carved out a special jurisdictional rule for corporations, but in other respects had left the issue to Congress. Id.

For purposes of this case, the issue is whether the Veolia Indianapolis limited liability company is an "unincorporated association" within the meaning of section 1332(d)(10). Under Carden and Cosgrove, the answer is yes, for the statutory language was chosen to address that body of case law. See S.Rep. No. 109-14, at 45-46. The foundation of first Carden and then Cosgrove is that artificial business entities other than corporations are all treated as unincorporated associations until Congress provides otherwise:

Carden, 494 U.S. at 197, 110 S.Ct. 1015; accord, Cosgrove, 150 F.3d at 731 ("Given the resemblance between an LLC and a limited partnership, and what seems to have crystallized as a principle that members of associations are citizens for diversity purposes unless Congress provides otherwise, ... we conclude that the citizenship of an LLC for purposes of the diversity jurisdiction is the citizenship of its members.") (citations omitted). That rule applies to general partnerships, limited partnerships, limited liability companies, and any other species in the menagerie of modern business organizations—so long as they are not called some type of "corporation." See Hoagland v. Sandberg, Phoenix & von Gontard, P.C., 385 F.3d 737, 738-39 (7th Cir.2004) (holding that a "professional corporation" is treated as a corporation for diversity purposes).

Defendants derive from the cases a different point, that the court should look to the law of the state of organization to determine how an organization should be treated for diversity jurisdiction purposes. Hoagland provides some superficial support for that argument. In holding that a Missouri professional corporation should be treated as a corporation, the Seventh Circuit chose to defer to the state law's label of "corporation" as controlling. Defendants argue that Delaware law, under which Veolia Indianapolis organized as a limited liability company, distinguishes between limited liability companies and unincorporated associations. Compare Del. Code Ann. title 6, § 18-201(a), (c) (filing requirements for limited liability companies), with Del.Code Ann. title 6, § 3104 (different filing requirements for an "unincorporated association of persons" transacting business). Defendants reason that whatever else Veolia Indianapolis might be, it is definitely not, under Delaware law, an unincorporated association, so that it should not be subject to CAFA's special rule in section 1332(d)(10).

Adopting the narrower state-law meaning of the phrase would produce an interesting paradox. It would also unduly complicate diversity jurisdiction decisions under CAFA and undermine the congressional effort to simplify matters in subsection (d)(10).

The paradox is this: Under defendants' reasoning, Veolia Indianapolis is not an unincorporated association under Delaware law, so its citizenship should be determined under the general law applicable to limited liability companies—i.e., Cosgrove and its progeny, which hold that the LLC takes on the citizenships of all members. But if we apply the law of Cosgrove, we are applying the general rule for determining the citizenship of all kinds of unincorporated associations. That's the rule applied in Carden v. Arkoma Associates and Cosgrove and their progeny. See Belleville Catering Co. v. Champaign Market Place, LLC, 350 F.3d 691, 692 (7th Cir.2003) (holding that Delaware limited liability company was unincorporated enterprise like a partnership for purposes of diversity jurisdiction). In other words, defendants' argument would require the court to conclude first that Veolia Indianapolis is not an unincorporated association for purposes of subsection (d)(10), but then to determine its citizenship under Cosgrove because it is an unincorporated association for purposes of diversity jurisdiction.

Such mental gymnastics are not unknown to students of federal jurisdiction, of course, but the contradiction is a bright caution sign. The more fundamental problem is that defendants' position would complicate what Congress explicitly tried to simplify and would prevent subsection (d)(10) from achieving its clear purpose. In Carden, the Supreme Court had acknowledged that its decisions in this field could be criticized as "technical, precedentbound, and unresponsive to policy considerations raised by the changing realities of business organization." 494 U.S. at 196, 110 S.Ct. 1015. That prediction was correct. Subsection (d)(10) was the result, drafted to respond to the Supreme Court's broad rule applied to a wide variety of unincorporated associations, stemming from cases such as United Steelworkers of America v. R.H. Bouligny, Inc., 382 U.S. 145, 86 S.Ct. 272, 15 L.Ed.2d 217 (1965), and followed in Carden. The Senate committee report on CAFA explained:

S.Rep. No. 109-14, at 45-46 (emphasis added; footnotes 130-32 omitted). This passage shows that Congress used the phrase "unincorporated associations" as broadly as the Supreme Court had used it in the case law. In a footnote to the quoted passage of the report, the Senate committee cited criticism of the case law based on the anomaly that associations treated under state law as distinct juridical entities were treated as unincorporated associations by the federal courts. Id. at n. 131, citing 14 A.L.R. Fed. 849 (2004).2

For subsection (d)(10) to solve the problems it was intended to solve, the court must reject defendants' argument and must apply the term "unincorporated associations" as broadly as the Supreme Court had applied it in creating the problems Congress wanted to solve. Congress and the courts recognized that state law treated a wide range of unincorporated associations as juridical entities for purposes of state law, including limited liability companies. In enacting subsection (d)(10) as part of CAFA, Congress directed the courts to treat all such entities like corporations for purposes of CAFA jurisdictional issues. It is difficult to think of language that could have expressed that intention any more clearly than to use the same phrase that the Supreme Court had used in Carden and United Steelworkers of America v. R.H. Bouligny, Inc. See, e.g., Firstar Bank, N.A. v. Faul, 253 F.3d 982, 988 (7th Cir.2001) (observing that where Congress uses phrase that has taken on clear meaning through judicial interpretation, Congress presumably intends phrase to have the same meaning).

By comparison, if the courts were to accept defendants' argument here, the result would be a multiplication of different rules that would undermine the evident purpose of subsection (d)(10). Through CAFA, Congress directed the courts to change the rules established by case law for a wide range of unincorporated associations that are organized in some fashion under state law and have an identifiable principal place of business. If the courts were to accept defendants' argument here, the courts would have to exclude from that treatment all entities that state law does not treat, for different purposes, as unincorporated associations. The courts would then decide issues regarding the citizenship of all of those entities under the older case law, with all of its anomalies that Congress was trying to change with subsection (d)(10). In other words, the courts would undo subsection (d)(10).

The better approach here is the simpler one, which is more consistent with the language and purpose of CAFA. The court treats the term "unincorporated associations" in subsection (d)(10) as broadly as the Supreme Court had treated it in United Steelworkers of America v. R.H. Bouligny, Inc. and Carden, so that subsection (d)(10) applies to the limited liability company Veolia Indianapolis in this case.3

IV. The Principal Place of Business of Veolia Indianapolis

A. Statutory Standard

Under subsection (d)(10), Veolia Indianapolis is a citizen of Delaware because it is organized under Delaware law, and it is also a citizen of the state where its "principal place of business" is located. By adopting the same language that applies to corporations under 28 U.S.C. § 1332(c), CAFA calls upon courts to apply the same test that applies to corporations.

When applying this statutory standard to corporations, the Seventh Circuit applies the "nerve center" test. See Wisconsin Knife Works v. National Metal Crafters, 781 F.2d 1280, 1282 (7th Cir.1986); Sabo v. Standard Oil Co. of Indiana, 295 F.2d 893, 895 (7th Cir.1961). This nerve center test has been distinguished from the "place of operations" test and the "total activity" test. See generally Amoco Rocmount Co. v. Anschutz Corp., 7 F.3d 909, 914-15 (10th Cir.1993) (reviewing approaches and adopting total activity test). The differences among these tests may be more linguistic than doctrinal. See id. at 915, quoting 13B Charles Alan Wright, Arthur R. Miller, & Edward H. Cooper, Federal Practice and Procedure § 3625, at 625 (2d ed. 1984); accord, J.A. Olson Co. v. City of Winona, 818 F.2d 401, 407-08 (5th Cir.1987) (discussing Seventh Circuit's actual applications of "nerve center" test that take into account the locations of operations as well as headquarters); Topp v. CompAir, Inc., 814 F.2d 830, 834 (1st Cir. 1987) (recognizing three "distinct, but not necessarily inconsistent tests" in the case law); North Star Hotels Corp. v. Mid-City Hotel Associates, 696 F.Supp. 1265, 1270 (D.Minn.1988), quoting Mahoney v. Northwestern Bell Telephone Co., 258 F.Supp. 500, 502 (D.Neb.1966) (describing split of authority as "largely linguistic," since cases applying any test consider location of executive offices, management activity, and operations), aff'd, 377 F.2d 549 (8th Cir. 1967). Under the Seventh Circuit nerve center test, a company may have only one principal place of business. See Metropolitan Life Ins. Co. v. Estate of Cammon, 929 F.2d 1220, 1223 (7th Cir.1991).

In Sabo, the Seventh Circuit held that Standard Oil of Indiana's "nerve center" was in Illinois. The large oil company had extensive operations in fifteen states. Its headquarters was in Illinois, where all officers and department heads resided, where tax returns were filed, where company records and audits were kept, where credit card transactions and collections matters were handled, where the principal bank account was located, and where the board of directors met. 295 F.2d at 893-94. More recently, the Seventh Circuit has described the nerve center as the location of the "corporation's brain," which is ordinarily its headquarters. Wisconsin Knife Works, 781 F.2d at 1282.

When dealing with related corporations, such as parent and subsidiary, the principal place of business test must be applied to the entity that is the relevant party, without confusing the principal places of business of the distinct entities (unless a party shows that one is merely the alter ego of another). See, e.g., Topp, 814 F.2d at 834-35 (finding that district court erred in applying nerve center test by taking into account operations and headquarters of the relevant party's parent corporations and by looking for nerve center of entire conglomerate of affiliated companies); Quaker State Dyeing & Finishing Co. v. ITT Terryphone Corp., 461 F.2d 1140, 1142 (3d Cir.1972) ("where the corporate separation between a parent and subsidiary, `though perhaps merely formal,' is `real' and carefully maintained, the separate place of business of the subsidiary is recognized in determining jurisdiction, even though the parent corporation exerts a high degree of control through ownership or otherwise"); see also de-Walker v. Pueblo Int'l, Inc., 569 F.2d 1169, 1171 (1st Cir.1978) (reversing district court's finding that parent company with headquarters in Puerto Rico had its principal place of business in New York based on activities of separate subsidiary headquartered in New York); Lurie Co. v. Loew's San Francisco Hotel Corp., 315 F.Supp. 405; 410 (N.D.Cal.1970) (holding that defendant operating company had its principal place of business in California, even if its management took direction from parent company with offices in New York: so long as corporate separation is maintained, "the separate place of business of the subsidiary is recognized in determining jurisdiction, even though the parent corporation exerts a high degree of control through corporate ownership or otherwise"), citing, Cannon Mfg. Co. v. Cudahy Packing Co., 267 U.S. 333, 45 S.Ct. 250, 69 L.Ed. 634 (1925).

In Topp v. CompAir, the district court had applied the nerve center test by tracing the corporate decision-making power for the defendant upstream to the chief executive officer of the corporation that owned the corporation that owned the defendant. That was an error, held the First Circuit:

814 F.2d at 835 (emphasis added). As shown below, defendants in this case are inviting the court to make essentially the same error that led to reversal in Topp v. CompAir, by focusing on the headquarters of the parent rather than of the subsidiary, which is the relevant party.4

B. Facts Relevant to the Principal Place of Business

Veolia Indianapolis' business is the operation of the Indianapolis water works, under the management agreement with the City of Indianapolis. Veolia Indianapolis has approximately 375 employees. All work in Indianapolis. All executives of Veolia Indianapolis are located in Indianapolis, including those responsible for operations, production, customer services, field services, labor relations, purchasing, business development, and strategic planning. Pl. Ex. N. All operational activities occur in Indiana, including meter reading, billing, collection, and customer service. Hiring and firing decisions are made in Indiana. Veolia Indianapolis maintains two bank accounts in Indiana for customer payments. Veolia Indianapolis has additional bank accounts in Illinois and Michigan.

Veolia Indianapolis also lists its current "principal office" with the Indiana Secretary of State as located in Indianapolis. Under Indiana law, limited liability companies are required to provide that information to the state. For those purposes, "principal office" means "the office, within or outside of Indiana, so designated in the biennial report where the principal executive offices of a domestic of foreign limited liability company are located." Ind.Code § 23-18-1-18 (emphasis added).5

Veolia North America's business is much broader in scope than Veolia Indianapolis. Pl. Ex. B, ¶ 9. Veolia North America's offices are at an undisclosed location in Illinois.6 Veolia Indianapolis' management reports to Veolia North America's management. Veolia North America's management makes major strategic decisions, in consultation with Veolia North America's own parent(s). Def. Ex. 1, ¶ 9. Veolia North America sets parameters for the management of Veolia Indianapolis, so that Veolia North America must give approval to capital projects, contracts, loans, and other transactions above certain dollar thresholds. It appears, however, that Veolia North America does not have direct dealings with the city or its Board of Waterworks.

Defendants assert that Veolia Indianapolis has no general counsel of its own but relies on Veolia North America's general counsel in Illinois. Def. Ex. 2, ¶ 9. Plaintiffs counter with evidence that Veolia Indianapolis has its own inside attorney who works in the Indianapolis headquarters. Pl. Exs. J at 2, K, L at 3.

The court has considered the possibility of an evidentiary hearing to flesh out some additional details, such as the roles of the two attorneys. See, e.g., United Phosphorus, Ltd. v. Angus Chemical Co., 322 F.3d 942, 946 (7th Cir.2003) (en banc) (court is free to weigh evidence to determine whether jurisdiction has been established); Capitol Leasing Co. v. FDIC, 999 F.2d 188, 191 (7th Cir.1993) (in deciding issue of subject matter jurisdiction, district court may hear evidence and make findings of disputed facts).

The court has concluded that a hearing is not necessary. The record presents some questions as whether Veolia North America's headquarters and nerve center has been in Illinois, or Texas, or perhaps very recently in Indiana. But the legally relevant nerve center is that of Veolia Indianapolis, and the evidence shows clearly that its nerve center is in Indiana. The fact that Veolia Indianapolis is owned and supervised by a separate entity located elsewhere does not change the location of its own Indianapolis nerve center. E.g., Topp v. CompAir, Inc., 814 F.2d at 835 (finding that district court erred by holding that subsidiary's principal place of business was location of a parent company's headquarters); accord, Schwartz v. Electronic Data Systems, Inc., 913 F.2d 279, 283 (6th Cir.1990) (holding that when parent and subsidiary maintain formal separation, diversity jurisdiction over subsidiary is determined by its own citizenship and not that of parent); S.W.L., Inc. v. Environtech, Inc., No. 04-C-2984, 2004 WL 1444855, at *2 (N.D.Ill. June 28, 2004) (holding that subsidiary's principal place of business was where most of its executives and operations were located, and not where the parent company and some of the subsidiary's directors and officers were located); Powers v. Fox Television Stations, Inc., 907 F.Supp. 719, 722-23 (S.D.N.Y.1995) (finding diversity jurisdiction based on defendant subsidiary's nerve center, which was different from location of parent company that exerted high degree of control).7

Defendants have not identified any cases finding that a company's nerve center was in a place where the company had no employees, no officers, and no directors. Focusing on the location of the parent entity loses sight of the controlling question: the principal place of business of Veolia Indianapolis itself, and not its parent. Because Veolia Indianapolis has its principal place of business in Indianapolis, it is a citizen of Indiana. All other criteria of CAFA's local controversy, home state controversy, and interests of justice exceptions are satisfied. Accordingly, plaintiffs' joint motion to remand is hereby GRANED and this case is hereby REMANDED to the Marion Superior Court from which it was removed. By separate order, the court is also remanding the companion case.

So ordered.