Marathon CRE 2018-FL1 Issuer, Ltd. v. 257-263 W 34th Street LLC

Background

Marathon CRE 2018-FL1 Issuer, Ltd. filed a commercial foreclosure action in New York Supreme Court against 257-263 W 34th Street LLC and several guarantor defendants. The case concerned three commercial mortgages securing loans totaling $52,000,000 for a real-estate development project. Defendants later removed the case to federal court based on diversity jurisdiction.

Before removal, on November 18, 2021, Marathon assigned the mortgage documents to 263 W 34th Street Lender, LLC. Lender was a limited liability company whose ownership structure included New York members. Marathon had tried to substitute Lender as the plaintiff in the state-court case, but that request remained pending when defendants removed the action.

Marathon moved to amend the complaint to substitute Lender as plaintiff and to remand the case to state court. Defendants did not oppose the amendment itself, but argued that the assignment should not defeat federal jurisdiction. They also argued that Marathon’s statement in the original complaint about having a New York office supported a finding of improper or fraudulent joinder.

Analysis

The court held that Lender was the current holder of the mortgage documents and therefore the proper party to pursue foreclosure. It granted leave to amend under Federal Rule of Civil Procedure 15, which generally allows amendment when justice requires.

The court then considered subject-matter jurisdiction. Diversity jurisdiction requires every plaintiff to be a citizen of a different state from every defendant, and the relevant time for a removed case is generally the time of removal. The court explained that an LLC has the citizenship of each of its members. Because Lender had New York members, substituting Lender as plaintiff destroyed complete diversity.

The court rejected defendants’ fraudulent-joinder argument. It found that Marathon’s statement that it had a New York office was not an outright fraudulent statement about citizenship, because the complaint did not say that New York was Marathon’s principal place of business. The court also concluded that the statement was unrelated to the later assignment and substitution of Lender. Defendants therefore did not establish that Lender’s involvement was fraudulent.

The court found that Lender was an indispensable party at the time of removal. The record showed that Lender held all of the mortgage documents before removal, and the parties agreed that only the holder of the mortgage note could pursue foreclosure. Without Lender, the requested foreclosure relief could not be granted. The court therefore concluded that the federal court lacked subject-matter jurisdiction.

Other Motions and Disposition

The court considered the amendment-and-remand motion first because it concerned jurisdiction. It explained that the state court would be better positioned to address the remaining matters after remand. The court did not decide the merits of the foreclosure claims.

The court’s conclusion states that the plaintiff’s motion to amend and for remand was GRANTED. The Clerk was directed to remand the case to the New York State Supreme Court, New York County. The non-party debtor’s motion to intervene and the receiver’s motion to compel were DENIED without prejudice as to their renewal in state court. The court also stated that it did not reach the merits of the debtor’s motion to intervene.