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Pathfinder Transport, LLC v. Pinnacle Propane, LLC

United States District Court, W.D. Arkansas, Fayetteville Division

May 3, 2017

PATHFINDER TRANSPORT, LLC PLAINTIFF
v.
PINNACLE PROPANE, LLC DEFENDANT

          OPINION AND ORDER

          TIMOTHY L. BROOKS UNITED STATES DISTRICT JUDGE

         Defendant Pinnacle Propane, LLC ("Pinnacle") removed the above-captioned case to this Court on January 17, 2017, after Plaintiff Pathfinder Transport, LLC ("Pathfinder") sued it for breach of contract in the Circuit Court of Benton County, Arkansas. During the parties' March 27, 2017 case management hearing, the Court sua sponte raised a concern about its subject-matter jurisdiction, and requested briefing on the matter. Pinnacle filed its Brief (Doc. 13) on April 14, 2017, contending that the Court can properly exercise diversity jurisdiction pursuant to 28 U.S.C. § 1332. Pathfinder filed its adverse Response (Doc. 15) on April 24, 2017, and Pinnacle filed a Reply (Doc. 16) on May 1, 2017. Having reviewed the parties' briefings, the Court finds that it lacks subject-matter jurisdiction over this case, and therefore REMANDS the case to the Circuit Court of Benton County, Arkansas.

         I. DISCUSSION

         Article III of the Constitution vests the federal courts with jurisdiction to hear "controversies . . . between citizens of different states." U.S. Const, art. Ill. § 2, cl. 1. Congress has since granted "[t]he district courts . . . original jurisdiction of all civil actions where the matter in controversy exceeds the sum or value of $75, 000 . .. and is between .. . citizens of different States." 28 U.S.C. § 1332(a)(1). To determine the "citizenship" of an LLC, like Pinnacle, the Court looks to the citizenship(s) of its underlying member(s). See GMAC Commercial Credit LLC v. Diliard Dep't Stores, Inc., 357 F.3d 827 (8th Cir. 2004). On the parties' Joint Rule 26(f) Report, Pinnacle reported that its sole member is a master limited partnership ("MLP") called JP Energy Partners, LP ("JP Energy"). (Doc. 10, p. 5).[1]

         An MLP is an artificial entity that bears some characteristics of a limited partnership, and some characteristics of a corporation. "MLPs are similar to limited partnerships, " on the one hand, "in that they have general partners who manage the partnership's affairs and limited partners (called 'unitholders') who provide capital." Grynberg v. Kinder Morgan Energy Partners, LP., 805 F.3d 901, 904 (10th Cir. 2015), cert, denied, 136 S.Ct. 1714 (2016). On the other hand, ownership units of MLPs are publicly traded, like shares of a corporation. Id. Federal law treats MLPs as partnerships for tax purposes, allowing them to benefit from "pass through" taxation, when they meet certain conditions. See 26 U.S.C. § 7704; Grynberg, 805 F.3d at 904. MLPs realize this benefit when "90 percent or more of the [MLPs] gross income . . . consists of qualifying income." 26 U.S.C. § 7704(c)(2). "Qualifying income" includes, in relevant part, "income and gains derived from the exploration, development, mining or production, processing, refining, transportation, or the marketing of any mineral or natural resource, industrial source of carbon dioxide, or the transportation or storage of [certain fuels]." Id. at (d)(1)(E) (parentheticals omitted).

         This case raises the question of whether the citizenship of an MLP should be determined based on the citizenship of its partners-like other non-incorporated artificial entities-or based on the place of its chartering and headquarters-like corporations. If JP Energy is treated like a corporation, then the Court can exercise its diversity jurisdiction because Pinnacle would not be a "citizen" of Arkansas. If JP Energy's citizenship depends on the citizenship of its partners, then the Court lacks subject-matter jurisdiction; Pinnacle has stipulated that JP Energy has at least one limited partner in Arkansas. (Doc. 13, p. 3).

         Though the Supreme Court has not directly addressed this issue, it has repeatedly found that the citizenship of other forms of non-incorporated entities must be determined by reference to the citizenships of their members. For example, in Chapman v. Barney, the Supreme Court reversed and remanded a case where the citizenship of a "joint-stock company"-a form of partnership-was alleged to be New York. 129 U.S. 677, 682 (1889). Even though "the company may have been organized under the laws of the state of New York, and may be doing business in that state, ... all the members of it may not be citizens of that state." Id. Accordingly, diversity jurisdiction could not be established unless it was shown that none of the company's members were citizens of Illinois, the state of the defendant's citizenship. Id.

         Just more than a decade later, the Supreme Court held that a Pennsylvania "limited partnership association" could not be treated as a corporation for diversity jurisdiction purposes. Great S. Fire Proof Hotel Co. v. Jones, 177 U.S. 449 (1900). Though the rule that "a corporation [is] to be deemed a citizen of the state creating it[] has long been recognized, " no such rule "has been applied to partnership associations Id. at 456. This was so even though Pennsylvania recognized that limited partnership associations had "some characteristics of a corporation, " and could even be categorized as a "quasi corporation." Id. at 457. Such similarities were not "sufficient reason for regarding [the limited partnership association] as a corporation within the jurisdictional rule .... That rule must not be extended." Id.

         In 1965, the Supreme Court held that an unincorporated union's citizenship must be determined based on the citizenships of its members. United Steelworkers of Am., AFL-CIO v. R. H. Bouligny, Inc., 382 U.S. 145 (1965). This was so despite the fact, pointed out by courts and commentators, that "many voluntary associations and labor unions are indistinguishable from corporations in terms of the reality of function and structure." Id. at 149-50. Though criticism of the formalistic distinction made by the Supreme Court between incorporated and unincorporated entities was "with considerable merit, " that criticism was "addressed to an inappropriate forum." Id. at 150. "[P]leas for extension of the diversity jurisdiction to hitherto uncovered broad categories of litigants ought to be made to the Congress and not the courts." Id. at 150-151.

         Consistent with the Bouligny Court's deferential position, in Carden v. Arkoma Associates, 494 U.S. 185 (1990), the Supreme Court held that the citizenship of limited partners in a limited partnership had to be taken into account in evaluating diversity jurisdiction. Once again, the Supreme Court recognized the formalistic nature of its holding, admitting that it "can validly be characterized as technical, precedent-bound, and unresponsive to policy considerations raised by the changing realities of business organization." Id. at 196. And, once again, the Court decided that these criticisms were properly addressed to Congress. Id.

         The one anomalous case in the Supreme Court's jurisprudence is Puerto Rico v. Russell & Co., 288 U.S. 476 (1933). That case involved a type of Puerto Rican entity known as a "socieded en comandita." Id. at 477. An "exotic creation of the civil law, " Bouligny, 382 U.S. at 151, the sociedad en comandita was "consistently regarded as a juridical person" by "the law of its creation." Russell & Co., 288 U.S. at 481. Its juridical personality was "so complete in contemplation of the law of Puerto Rico" that the Supreme Court could "see no adequate reason for holding that the sociedad has a different status for purposes of federal jurisdiction than a corporation organized under that law." Id. at 482.

         Both the Bouligny and Carden Courts have categorized Russell as being, essentially, sui generis. The problem presented by Russell, "was that of fitting an exotic creation of the civil law . . . into a federal scheme which knew it not." Bouligny, 382 U.S. at 151; see also Carden, 494 U.S. at 190 (rejecting a litigant's reliance on Russell as being foreclosed by Bouligny's characterization of the case). For this reason, Russell does not supply precedent for "look[ing] beyond the incorporated/unincorporated dichotomy." Carden, 494 U.S. at 190 (quoting the respondent's brief). It is instead a unique exception to the Supreme Court's otherwise consistent policy of deferring to Congress in extending juridical personhood to non-corporate entities.

         This observation is undoubtedly why every federal court (to this Court's knowledge) asked to decide whether to treat MLPs as corporations for jurisdictional purposes has answered that question in the negative. E.g., Grynberg, 805 F.3d at 901; Markwest Liberty Midstream & Res., LLC. v. Biifinger Westcon, inc., 2016 WL 6553591 (N.D. W.Va. Nov. 4, 2016); Cabrera v. Aboytes-Munis, 2015 WL 5093230 (S.D. Tex. Aug. 7, 2015), R&R adopted, 2015 WL 5093234 (S.D. Tex. Aug. 28, 2015); LL & E Royalty Trust ex rel. Parsons v. Quantum Res. Mgmt, LLC, 2015 WL 4274987 (E.D. Mich. July 14, 2015); Great Lakes Gas Transmission Ltd. P'ship v. Essar Steel Minn., LLC, 103 F.Supp.3d 1000 (D. Minn. 2015), vacated on other grounds, 843 F.3d 325 (8th Cir. 2016); Trafigura AG v. Enter. Prod. Operating LLC, 995 F.Supp.2d 641 (S.D. Tex. 2014); see also Doc. 15, p. 4 (collecting additional cases).

         Pinnacle's contention that the Court should deviate from this apparently unanimous approach rests on unfounded justifications. Most notably, Pinnacle contends that this case is distinguishable from Bouligny and Carden. It posits that the Carden Court "circumscribed Bouligny, " (Doc. 13, p. 7), by describing that Court's holding as applying "at least [to] common-law entities, " which, according to Pinnacle, means that statutory creatures like MLPs fall outside the scope of those cases. Carden, 494 U.S. at 190. The Court disagrees with this entire premise. First, to suggest that Carden circumscribed Bouligny is an incorrect reading of the former case. Carden heartily reaffirmed the two central premises of Bouligny: (i) that Russell was an outlier; and (ii) that "further adjustments" to "the field of ...


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