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The Federal Courts Jurisdiction and Venue Clarification Act

The Federal Courts Jurisdiction and Venue Clarification Act of 2011, which took effect in January, revised law pertaining to the removal of cases to federal court and venue. The Act also clarified some jurisdictional questions. The following addresses some, but not all, of those changes.

            With respect to jurisdiction, the Act clarifies corporate and insurer jurisdiction. While some courts have interpreted the definition of “state” as applied to the place of incorporation and principal place of business (corporations are citizens in both places if these are different states) as the 50 United States, others interpreted “state” to include foreign nations. The Act provides that a corporation will be treated as a citizen of every U.S. state or every foreign state in which it is incorporated and every U.S. state or foreign state in which it has its principal place of business. In direct actions against insurers, where the insured is not a named party, the amendment clarifies that an insurer is deemed a resident of any U.S. state or foreign state in which (1) the insured is a citizen, (2) the insurer is incorporated, or (3) where it has its principal place of business.

            In addition, substantive changes to removal were made in the Act. 28 USC § 1441 has controlled removal of both civil and criminal cases, but now removal of criminal cases is governed solely by 28 USC § 1454. § 1441(b) and (c) were also changed to distinguish between cases removed on the basis of diversity and federal question jurisdiction. The predominant change is to federal question jurisdiction – when cases contain claims removable under 28 USC § 1331 (the general federal question jurisdictional statute) and those do not arise under federal law, purely state law claims. Courts now are permitted to remove the entire case if a portion presents a federal question, but the district court must sever the claims outside its jurisdiction and remand the severed claims to state court, instead of simply remanding and depriving a defendant of the right to litigate a federal question in a federal court.

            The Act codifies the “rule of unanimity,” which means all defendants properly joined and served must join in or consent to removal under 28 USC § 1446(b)(2)(A). 1446(b)(2)(B) provides each defendant the opportunity to remove within 30 days of receipt of service. 1446(b)(2)(C) adds any earlier served defendant may consent to a latter-served defendant’s removal, even if they did not remove in the first place. 1446(c) allows the pre-existing one year removal based on diversity citizenship within one year to be extended by the court if it finds the plaintiff has acted in “bad faith in order to prevent a defendant from removing the action.” 1446(c)(2) has new rules pertaining to the jurisdictional amount (currently $75,000 must be in dispute to remove a diversity action). A good faith demand in the complaint for an amount will be deemed the amount in controversy. If injunctive or other nonmonetary relief is sought, or state law prohibits the demand of a certain amount, an amount in controversy can be asserted in the notice of removal. Removal is deemed proper when the court finds, by a preponderance of the evidence, the amount exceeds the minimum set forth in 28 USC § 1332. If removal cannot occur initially because not enough money is in controversy, 1446(c)(3)(A) provides the amount in controversy in the state case record or obtained in state court discovery sufficiently permits removal based on “other paper” after the expiration of the 30-day removal period. A deliberate failure to disclose the actual amount in controversy to defeat removal is bad faith which permits removal more than a year after commencement, under the previously described 1446(c)(1).

            The most significant changes pertain to federal venue statues, including the general definition at 28 USC § 1390(a), distinguishing the geographic specification of the appropriate forum (venue) from other federal law provisions which restrict subject-matter jurisdiction. Subject-matter jurisdiction restrictions include geographic terms, but the subject-matter restrictions cannot be waived by the parties.

            The change also abolish the distinction in venue between “local” and “transitory” actions. The local action rule had limited certain kinds of actions involving real property to the district where the property was located, creating problems in disputes over property suits because a court could not exercise personal jurisdiction over the defendant in the place where the property was located. Changes to 1391(a)(2) clarify that only subject-matter and personal jurisdiction restrictions apply to such actions and repeals 28 USC § 1392.

Revisions are also intended to eliminate the distinction between diversity and federal question action venue to a “unitary” approach. It establishes that, regardless of how subject-matter jurisdiction is obtained, § 1391 is the general venue statute, and venues is based on residence of the defendant(s), where the loss/event occurred giving rise to the action, and fallback venue can be used if there is no other district in which the case may be brought. The new fallback provision directs that venue for both diversity and federal question matters fall on the district “in which any defendant is subject to the court’s personal jurisdiction with respect to such action.” The new subsection of 1391(c)(1) also clarifies that “resides” should have the same meaning as domicile, and a natural person is deemed to reside in the judicial district where they are domiciled (some courts had read the term broadly enough to include other places where the defendant may have a home or spend time).

Venue treatment for unincorporated associations like partnerships and unions is now the same as for corporations, under newly codified § 1391(c)(2). The association is now a resident in any judicial district where subject to the court’s personal jurisdiction and, if the plaintiff, only in the district where it maintains its principal place of business.

Further, the Act allows for transfer of venue to any district, with the consent of all parties. 28 USC § 1404(a) had previously only permitted transfer to a venue where the action could be brought, now those transfers are possible when all parties agree and the court determines it is for the convenience of the parties and witnesses and in the interest of justice.

Diversity Jurisdiction in Federal Court for Lloyd's Syndicates

Historically, it was assumed that Lloyds Syndicates were citizens of the United Kingdom for purposes of diversity jurisdiction in federal court.  Ruling in 1990 that unincorporated associations have the citizenship of each of its members, the Supreme Court of the United States (Carden v. Arkoma Associates, 494 U.S. 185 (1990)) drastically changed this sleepy area of the law for Lloyd’s syndicates.  As a practical matter, this ruling meant Lloyds could not sue or be sued in federal court in most cases.  Since the ruling, various federal appellate courts and district dourts have issued opinions further muddying the waters; Lloyd’s, meanwhile, continues to evolve at a far greater pace than these courts have recognized.  It is this evolution from individual to corporate ownership which now may have re-opened the doors to federal court.


 For nearly twenty years, the Carden decision compelled many courts to conclude Lloyds syndicates were simply inappropriate parties in federal court.  The reason for this lies in a prerequisite for federal jurisdiction: only citizens of different states can bring suit under diversity jurisdiction in federal court. (Diversity jurisdiction is the most likely type of jurisdictional basis for a Lloyds syndicate.)  Since each of the Lloyd’s Names are considered by several courts to be citizens of the states in which they live, given the thousands of Names historically, it was rather simple for an adverse party to find a Name with the same citizenship and thereby defeat federal diversity jurisdiction.  Suit would then have to be filed in state court. 


Suit under diversity jurisdiction in federal court was difficult to trigger, even where Lloyd’s syndicates sought federal court litigation, such as in a declaratory action or perhaps a subrogation matter.  Indeed, because improper jurisdiction can be raised at any time, even on appeal, adverse parties – or judges themselves - can object to the inclusion of Lloyd’s in federal court.  (In Indiana Gas Company v Home Insurance, 141 F.3d 317 (7th Cir. 1998), after three years of litigation, the federal court of appeals on its own dismissed the case for lack of diversity jurisdiction which the court first raised at appellate oral argument.)  Thus, after thousands of man-hours and significant costs, the case was dismissed because at least one of the Names shared citizenship with an adverse party (even though the adverse party itself did not raise this objection).  When it came to Lloyd’s syndicates, diversity jurisdiction in federal court had proven to be rather risky.


 Now, however, with the vast influx of corporate capital in recent years, the number of individual Names in the Lloyd’s market has dropped dramatically. Less than 800 individual Names now participate at Lloyd’s, providing less than 5% of capital - with the vast remainder provided by major insurance groups, financial institutions and companies (www.lloyds.com/newscentre).  Since there are less Names, there is less likelihood for the adverse party to have the same citizenship as a Lloyds Syndicate.  Diversity jurisdiction is much more possible and it may become even more available as corporate capital continues to flow into the Lloyd’s marketplace.  
However, the evolution of Lloyd’s with greater corporate capital is no magic bullet in eliminating the risks of diversity jurisdiction.  While the significant reduction of Names means federal court diversity jurisdiction may be more available to the London market as a general principal, there are questions that must be answered and risks appreciated before a Syndicate can safely sue or be sued in Federal court.


First, one must still determine if any one of the syndicates has a Name that shares citizenship with an adverse party.  If so, diversity jurisdiction will most likely not be available.  Second, the risks and benefits of federal court, from a strategic perspective, must be evaluated.  This is a multi-faceted analysis consisting of judicial, procedural and juror-driven considerations.  Thirdly, if federal court is the right court, staying there may be an uphill battle. Some courts are now of the opinion that a Lloyd’s syndicate is only a citizen of the state in which its lead underwriter is a citizen; many federal district courts remain skeptical and bogged down by old law – e.g., old rulings that misunderstand the nature of Lloyd’s as a marketplace.  Thus, even if the initial analysis shows federal court is jurisdictionally appropriate, counsel for Lloyds will perhaps still need to prove that fact to the trial court.
Regardless, the ongoing influx of corporate ownership of Lloyds has begun to re-open the doors to federal court.  Whether the Lloyd’s market on a loss should take the opportunity to walk through those doors is best determined only after a thorough analysis of legal and strategic factors, including the citizenship of any remaining Names for syndicates involved in the loss. 

Update on Minnesota's Joint and Several Liability Law

The Minnesota Supreme Court recently held that, when a jury attributes 50% of the negligence to the sole defendant in a lawsuit and 50% to someone who is not a party in the lawsuit, the defendant needs only to contribute 50% of the award.  This is a different interpretation of the Minnesota Joint and Several Liability Statute which previously made that sole defendant responsible for the entire award.  Staab v. Diocese of St. Cloud, 2012 WL 1317768

In view of this decision by the Minnesota Supreme Court, failure to join all potential tortfeasors in a lawsuit gives the defendant the chance to put blame on non-parties and avoid responsibility for the entire award.

 

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