Merit Tat International, Ltd. v. Wynnchurch Capital Partners

Citations: 689 F. Supp. 2d 1088; 2010 U.S. Dist. LEXIS 16970; 2010 WL 724924Docket: Case 06 C 3137

Court: District Court, N.D. Illinois; February 25, 2010; Federal District Court

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In the case Merit Tat International, Ltd. v. Wynnchurch Capital Partners, the U.S. District Court for the Northern District of Illinois addressed a motion for summary judgment filed by the Wynnchurch Defendants against the plaintiff, Merit Tat. The court's jurisdiction was based on diversity of citizenship under 28 U.S.C. 1332. Merit Tat, a foreign corporation from China, originally filed a complaint against multiple defendants, including Wormser Company, which later went bankrupt, leading to its dismissal. Merit Tat subsequently amended its complaint to drop some defendants and add the Wynnchurch Defendants, seeking to pierce the corporate veil for a debt allegedly owed by Wormser Company.

In reviewing the Wynnchurch Defendants' motion for summary judgment, the court required Merit Tat to demonstrate why the case should not be dismissed for lack of jurisdiction. Merit Tat failed to respond by the deadline. The court found that the partners of the Wynnchurch Defendants included both U.S. and foreign citizens, which negated the basis for federal jurisdiction. Consequently, the case was dismissed without prejudice due to a lack of subject matter jurisdiction.

Federal courts possess limited jurisdiction and cannot act without it. They must diligently monitor their jurisdictional boundaries and cannot expand their jurisdiction through interpretation or by consent of the parties involved. Under 28 U.S.C. § 1332(a), federal courts have original jurisdiction in diversity cases where the matter exceeds $75,000 and involves parties from different states or between a citizen of a state and a foreign citizen. Initially, the court had jurisdiction because the plaintiff, Merit Tat, a foreign citizen, was suing U.S. citizen defendants. However, upon Merit Tat amending the complaint to add limited partnerships as defendants—who are considered citizens of every state where their partners reside—the jurisdictional landscape changed. These new defendants include foreign partners, resulting in a situation where the case now involves a foreign citizen plaintiff and defendants who are citizens of both foreign states and the U.S. Consequently, the court must evaluate whether it maintains jurisdiction given the current composition of the parties and whether the original diversity jurisdiction is affected by the amendment. Specifically, the court must assess if there is still diversity of citizenship, noting that the original diversity (between a citizen of a state and a foreign citizen) is no longer applicable with the new defendants.

Subpart (3) is inapplicable as the case does not involve "citizens of different States and in which citizens or subjects of a foreign state are additional parties." Although Merit Tat is a citizen of a foreign state, it is the sole plaintiff and not an "additional party." Likewise, subpart (4) does not apply since it does not involve "a foreign state as plaintiff and citizens of a State or of different States." The Wynnchurch Defendants include both citizens of a State and citizens of foreign states, while Merit Tat, being a citizen of a foreign state, does not qualify as a "foreign state." Consequently, there is no diversity of citizenship under 28 U.S.C. 1332(a), supported by case law indicating that diversity jurisdiction is lacking when one side comprises only foreign parties and the other includes both foreign and domestic parties.

The jurisdictional question arises regarding whether it can be divested despite existing diversity at the time of filing. The Supreme Court in Freeport-McMoRan reaffirmed that diversity is assessed when the action is filed and cannot be divested by later events. If complete diversity is present at filing, subsequent changes do not affect jurisdiction. However, in Freeport-McMoRan, the party added later was not "indispensable" at the time of filing, which the Court noted in maintaining diversity jurisdiction. The decision did not overrule prior case law prohibiting plaintiffs from circumventing the complete diversity requirement by suing only diverse defendants initially and later introducing non-diverse defendants. Further interpretations by various courts indicate that while post-filing transfers of interest do not divest jurisdiction, adding non-diverse parties can affect it.

Costain Coal Holdings, Inc. v. Resource Invest. Corp. establishes that substituting a non-diverse defendant eliminates diversity jurisdiction. Ackerman v. Northwestern Mutual Life Ins. Co. upheld a denial to amend a complaint to include non-diverse parties, citing that doing so would destroy complete diversity and necessitate dismissal after two years. In American Fiber, the plaintiff, a Delaware corporation, amended its complaint to replace a defendant with a limited partnership that included a Delaware partner, thus destroying diversity. Although the defendant did not challenge the amendment and the case progressed to summary judgment, the plaintiff later sought to vacate the judgment upon realizing the lack of diversity. The court reiterated that complete diversity is essential for federal jurisdiction and found that the case lacked diversity from the moment the amendment was made. The court could not dismiss the non-diverse defendant to remedy the jurisdictional defect because it was deemed indispensable. Consequently, the court vacated the judgment for lack of jurisdiction, noting the unsettling nature of the outcome, as the plaintiff had invoked a self-created jurisdictional issue to avoid the judgment. Similarly, in the current case, Merit Tat cannot cure the diversity defect since it is indispensable and both Wynnchurch Defendants have foreign partners, necessitating their dismissal, which would leave no defendants. Although the initial complaint named diverse parties, the original defendants were not proper, and Merit Tat's amendment to include the Wynnchurch Defendants did not alter the jurisdictional issue, as the suit would not have been viable in federal court had the Wynnchurch Defendants been named from the start.

Merit Tat's attempt to establish federal jurisdiction by initially suing the wrong parties and subsequently amending to substitute non-diverse parties is rejected, as this would allow a two-step process to obscure the lack of federal jurisdiction, contrary to Seventh Circuit precedents. The original diversity among parties does not preserve jurisdiction, leading to the conclusion that there is no federal subject matter jurisdiction. Consequently, the case is dismissed without prejudice. 

The amended complaint identifies Wynnchurch Capital Partners Canada, L.P., an Alberta limited partnership with its principal place of business in Illinois, and Wynnchurch Capital Partners, L.P., which is inaccurately labeled as a corporation but is also an Illinois-based limited partnership. Merit Tat is classified as a foreign corporation with its principal place of business in China, making it solely a citizen of a foreign state. Although the citizenship of the original individual defendants is not explicitly stated, their roles imply they are U.S. citizens; however, this is not critical to the ruling. Merit Tat does not qualify as a "foreign state" under the relevant legal definitions. The court notes that while exceptions to complete diversity exist, none were applicable in this case. The reference to the Wynnchurch Defendants merely identifies them as the appropriate parties without implying any opinion on the merits of Merit Tat's claims.