Psalms Creative LLC v. Beacon Investment Holdings LLC

Background

Psalms Creative, LLC and Ariel Ovadia sued Beacon Investment Holdings LLC and Bakul Nath in the Supreme Court of the State of New York, New York County. Plaintiffs alleged that Ovadia and Nath agreed that Ovadia would use his market knowledge to execute trades through Defendants’ accounts, and that Psalms Creative would receive 20 percent of the profits. Plaintiffs asserted claims including breach of contract, unjust enrichment, promissory estoppel, account stated, quantum meruit, and declaratory judgment.

Defendants removed the action to federal court based only on diversity jurisdiction under 28 U.S.C. § 1332. Plaintiffs moved to remand, arguing that Defendants had not adequately shown the citizenship of the trusts connected to Beacon Investment Holdings. Plaintiffs also requested jurisdictional discovery and attorney’s fees and costs related to the removal.

Jurisdictional Analysis

For diversity jurisdiction, an LLC is a citizen of every state of which its members are citizens. Courts must trace the citizenship of an LLC’s members through any additional LLCs, partnerships, or trusts in the ownership structure. For a traditional trust, which is a fiduciary arrangement that generally cannot sue or be sued in its own name, citizenship is based on the citizenship of its trustees. For a nontraditional trust that is a separate legal entity, citizenship generally includes the citizenship of its members, including beneficiaries.

The court found that Psalms Creative and Ovadia were citizens of New York. Nath was a citizen of Malta. The disputed issue was the citizenship of Beacon Investment Holdings. Beacon was an LLC whose sole member was the Open Eagle Trust. The Open Eagle Trust’s trustee was Bundy Management LLC, whose sole member was the Bundy Management Purpose Trust. Bundy Management LLC was also the trustee of the Bundy Management Purpose Trust.

The court treated the Open Eagle Trust as a traditional trust and therefore examined the citizenship of its trustee rather than its beneficiaries. The resulting structure created an endless loop: Bundy Management LLC’s citizenship depended on the citizenship of the Bundy Management Purpose Trust, while the purpose trust’s citizenship depended on Bundy Management LLC as its trustee. The court concluded that this made Bundy Management LLC stateless for diversity purposes. Because Beacon Investment Holdings had a stateless member, Beacon was also stateless, which destroyed complete diversity.

The court also explained that, even if it considered the beneficiaries of the trusts, Defendants had not provided enough information to establish complete diversity. The court rejected Defendants’ argument that Bundy Management LLC should be treated as a Wyoming citizen merely because it was registered there. An LLC’s citizenship depends on its members, not its place of registration or business.

Attorney’s Fees and Costs

The court declined to award Plaintiffs attorney’s fees and costs under 28 U.S.C. § 1447(c). Such an award generally requires that the removing party lacked an objectively reasonable basis for removal. The court found that the Second Circuit had recognized that trust citizenship was unsettled and that the ownership structure here was complex. It therefore did not find Defendants’ removal wholly frivolous or unreasonable.

Disposition

Judge Jennifer L. Rochon granted Plaintiffs’ motion to remand. The action was remanded to the Supreme Court for New York County. The court also directed the Clerk of Court to terminate the motions at Dockets 7 and 11. The opinion did not decide the merits of Plaintiffs’ claims for unpaid profits or any of their other asserted causes of action.