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United Central Bank v. Kanan Fashions

February 18, 2011

UNITED CENTRAL BANK, PLAINTIFF,
v.
KANAN FASHIONS, INC., CREATIVE WAREHOUSING (CHICAGO), LLC, KANAN CRUISES, INC., KANAN HOLDINGS, LLC, VARSHA SHAH, AND MEHUL SHAH, DEFENDANTS.



The opinion of the court was delivered by: Judge Feinerman

MEMORANDUM OPINION AND ORDER

Plaintiff United Central Bank ("United") brought this action against four entities-Kanan Fashions, Inc. ("Fashions"), Creative Warehousing (Chicago), LLC ("Creative"), Kanan Cruises, Inc. ("Cruises"), and Kanan Holdings, LLC ("Holdings")-and two individuals-Varsha Shah and Mehul Shah-alleging breach of contract and replevin. The case concerns four loans issued by United's predecessor, Mutual Bank, to the entity defendants (collectively, "Borrowers"). Loan No. 1, for $26.5 million, was made to Fashions on June 26, 2006, for the purpose of maintaining working capital. Loan No. 2, for $591,000, was made to Creative and Fashions on June 23, 2004, for the purpose of building out Creative's warehouse. Loan No. 3, for $1,776,000, was made to Creative and Fashions on June 23, 2004, for the purpose of purchasing equipment for Creative's warehouse. Loan No. 4, for $2,320,000, was made to Holdings and Cruises on March 8, 2005, for the purpose of funding the purchase of a cruise ship.

Count I of the complaint alleges that the Borrowers" defaulted on the loans by failing to make payments when due. The answer admits that the Borrowers failed to make payments on Loan Nos. 2-4, but as an affirmative defense alleges that United materially breached its obligations under Loan No. 1, thereby excusing the Borrowers' alleged default on Loan Nos. 2-4. The Borrowers also brought counterclaims, including for United's alleged breach of Loan No.1. United has moved under Fed. R. Civ. P. 12(c) for partial judgment on the pleadings on Count I, solely as it pertains to Loan Nos. 2-4, and on the counterclaims. Defendants since have voluntarily dismissed their counterclaims, so all that remains of United's motion is the request for partial judgment on Count I.

Before addressing that motion, it is necessary to resolve Defendants' challenge to subject matter jurisdiction. The complaint invokes the diversity statute, 28 U.S.C. § 1332, alleging that the amount in controversy exceeds $75,000 and that the parties are diverse, with United being a Texas citizen and Defendants being Illinois citizens. See Doc. 4, ¶¶ 1, 3-10. Because the complaint did not properly allege the citizenship of Creative and Holdings, which are limited liability companies, the court gave United the opportunity to file an addendum making the proper jurisdictional allegations. See Doc. 203. United filed an addendum (Doc. 214) that identified the members of Creative and Holdings and alleged that the members are citizens of Illinois. See Wise v. Wachovia Sec., LLC, 450 F.3d 265, 267 (7th Cir. 2006) (for diversity purposes, the citizenship of an LLC is the citizenship of its members).

Although United's addendum properly alleged Creative's and Holdings's citizenship, Defendants have moved to dismiss for lack of subject matter jurisdiction under Fed. R. Civ. P. 12(b)(1) on a different ground-that United is a citizen of both Texas and Illinois, and thus not diverse from Defendants. United has responded on the merits, and for good measure has moved to amend its complaint to provide further detail supporting its position that it is a citizen of Texas and not Illinois.

Defendants' motion rests on the premise that United is an "association," not a corporation. From that premise, Defendants maintain that the citizenship of an association is the citizenship of its members; that a bank association is a citizen of any state where it has a branch; that United has branches in Illinois; and therefore that United is a citizen of Illinois as well as of Texas. United retorts that although it is a "banking association," Texas law deems a "banking association" to be a "corporation," and that because United is organized under Texas law and has its principal place of business in Texas, it is a Texas citizen only. See 28 U.S.C. § 1332(c)(1) ("a corporation shall be deemed to be a citizen of any State by which it has been incorporated and of the State where it has its principal place of business," with exceptions not pertinent here).

State law determines whether an entity is a "corporation" for diversity purposes. See Mut. Serv. Cas. Ins. Co. v. Country Life Ins., 859 F.2d 548, 550 (7th Cir. 1988). A "banking association," which United alleges itself to be (see Doc. 377 at 2; Doc. 377-1 at 3), is an entity recognized by the Texas Finance Code. See V.T.C.A., Fin. Code § 32.001(a) ("One or more persons, a majority of whom are residents of this state, may organize a state bank as a banking association or a limited banking association."). Defendants fixate on the word "association," but the Code defines "banking association" to be "a state bank that is organized under this subtitle as a corporation, authorized to issue shares of stock, and controlled by its shareholders." Id. § 31.002(a)(5) (emphasis added). The Code adds that "[f]or purposes of other state law, a banking association is considered a corporation," that "[t]o the extent consistent with this subtitle, a banking association may exercise the powers of a Texas business corporation," and that with inapplicable exceptions, "[t]he [Texas] Business Organizations Code applies to a banking association as if it were a for-profit corporation." Id. §§ 32.001(c), 32.008(a). Consistent with these statutory provisions, United's predecessor's "Articles of Association" repeatedly refers to the entity as "the corporation" and states that the document's purposes include "incorporating and operating the [entity] under and by virtue of the laws of the State of Texas." Doc. 377-1 at 6, 9, 11, 16.

Texas law, then, deems United to be a corporation, which means that United is a citizen of its state of incorporation (Texas) and the state of its principal place of business (also Texas), not of the states where it maintains branches. See Mut. Serv. Cas. Ins. Co., 859 F.2d at 550 (holding that Minnesota insurance entity is a "corporation" because Minnesota law considers it to be a corporation). This conclusion is fully consistent with Wachovia Bank v. Schmidt, 546 U.S. 303 (2006), where the Supreme Court observed:

A business organized as a corporation, for diversity jurisdiction purposes, is "deemed to be a citizen of any State by which it is incorporated" and, since 1958, also "of the state where it has its principal place of business." § 1332(c)(1). State banks, usually chartered as corporate bodies by a particular State, ordinarily fit comfortably within this prescription.

Id. at 306. After articulating this understanding of the citizenship of state banks, the Court rejected the notion that "a national bank" should be deemed "a citizen of every State in which it has established a branch," reasoning that if the notion were accepted, "the access of a federally chartered bank to a federal forum would be drastically curtailed in comparison to the access afforded state banks and other state-incorporated entities." Id. at 307.

The principle underlying Wachovia Bank is that a state bank is a citizen of its state of incorporation and its principal place of business, not of the states where its branches are located. In setting forth this principle, Wachovia Bank ratified what appears to have been the unanimous consensus among federal courts. See, e.g., Horton v. Bank One, N.A., 387 F.3d 426, 431 (5th Cir. 2004) ("a state bank, under 28 U.S.C. § 1332(c)(1), may be a citizen of no more than two states-the state where its principal place of business is located and its state of incorporation");

First Ala. Bank of Montgomery, N.A. v. First State Ins. Co., Inc., 899 F.2d 1045, 1049 n.1 (11th Cir. 1990) ("First Alabama Bank is a state banking association with its principal place of business in Montgomery, Alabama."); Johnson Bank v. George Korbakes & Co., LLP, 2005 WL 4983515, at *1 (N.D. Ill. Aug. 3, 2005) ("The Bank is a state banking association, chartered pursuant to Chapter 221 of the Wisconsin Statutes . [and] maintains its principal place of business in Racine, Wisconsin."); RDC Funding Corp. v. Wachovia Bank, N.A., 2004 WL 717111, at *6 (D. Conn. Mar. 31, 2004) ("The location of branch banks does not control the citizenship of state banks; instead, as with any other diversity question, citizenship is determined by the bank's organizational structure. Thus, if a state bank is a corporation, then its citizenship would be its principal place of business and place of incorporation."); U.S. Shoe Corp. v. Beard, 463 F. Supp. 754, 755 (S.D. Ala. 1979) ("Defendant Wilcox County Bank was at all times relevant to the events leading up to the institution of this lawsuit a state banking association organized under the laws of the State of Alabama with its principal place of business in Alabama."); see also Heil v. Iron Cnty., 376 Fed. Appx. 868, 871 (10th Cir. 2010) (in finding diversity jurisdiction, noting that "the Bank was formed pursuant to Utah's banking laws and had its principal place of business in Utah").

Defendants cite no case law to the contrary. Instead, they invoke Section 5-116 of the Uniform Commercial ...


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