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West Charleston Lofts III, LLC v. Farina

United States District Court, D. Nevada

May 19, 2017

West Charleston Lofts III, LLC; SAVWCL III, LLC, Plaintiffs
v.
John Farina and Tina Farina, in their capacities as co-trustees of the Farina Living Trust, Defendants

          ORDER GRANTING DEFENDANTS' MOTION TO DISMISS [ECF NOS. 1, 25, 35]

          Jennifer Dorsey United-States District Judge.

         This case stems from one of the many Las Vegas real estate ventures that fell victim to the recession. In 2006, the parties planned to build an exciting, modern residential community in Las Vegas, Nevada, called the West Charleston Lofts. But shortly after they purchased their land in 2007, the real estate market crashed, the project flopped, and the parties looked to liquidate. Plaintiffs West Charleston Lofts III, LLC and SAVWCL III, LLC represent most of the investors and developers; the defendants John and Tina Farina are smaller investors who disagree with how the venture's assets have been liquidated. The plaintiffs brought this case in an effort to compel the defendants to arbitrate their dispute.

         The defendants argue that I lack jurisdiction in the first place because the plaintiffs filed this case under diversity jurisdiction and one them, SAVWCL, is a resident of the same state that the defendants reside in. I agree. Because SAVWCL is an LLC, for purposes of diversity, it is a citizen of each state in which one of its members reside. And one of SAVWCL's members, the Farina Living Trust, resides in California-where the defendants reside. The parties are therefore not diverse.

         The plaintiffs urge me to adopt a rule that would ignore the Farina Living Trust's citizenship because it has only a small interest in, and little control over, the LLC. They say that a member of an LLC that holds only a “fractional” interest “with no independent power to control” the LLC “are never considered in the diversity analysis.”[1] But the Ninth Circuit disagrees: “the character of [an LLC's] membership interest is irrelevant to the determination of its citizenship” regardless of whether members “vote on or otherwise dictate” control of the company.[2] Because the parties are not diverse, I have no subject matter jurisdiction and therefore dismiss this case.

         Background

         In 2006, the Farina Living Trust and other investors loaned money to West Charleston Lofts III, LLC to build a new residential development near what is now the Downtown Summerlin area. When the real estate market crashed in late 2007, the Lofts could no longer afford the loan but they believed the project was still viable. So they approached Farina and the other investors with a deal: the investors could convert their debt into equity in the project and forgive the Loft's loan. The investors agreed to the arrangement, and an agreement was drafted to establish everyone's interests in the new venture.[3]

         This agreement called for a new LLC to be created-SAVWCL III, LLC (one of the plaintiffs in this case)-that would inherit the real estate and take over the project's development.[4] SAVWCL III was to be made up of three groups of LLC members: Class A members, Class B members, and Class C members. Class B included new investors who were injecting capital into the project, and Class C was the Charleston Lofts itself.[5]

         Class A is more complicated. This class was to be made up of all the original investors, including the Farina Trust. The plan was to create a new trust, the SAV Trust, to collectively act as the Class A member on behalf of these investors.[6] But the agreement explained that the original investors had to opt in-they could either be a member of the SAV Trust, or they could opt out of the new trust and remain “separate Class A members” of the LLC on their own.[7] The downside was that-because a majority of investors opted into the SAV Trust-if one remained outside, the non-trust member would have little control over how the Class A membership voted or controlled SAVWCL.[8] The SAV Trust ran the show.

         The Farina Trust declined to join the SAV Trust, so it remains a general Class A member of SAVWCL.[9] Because it is outside of the SAV Trust, and the SAV Trust has majority control of Class A, the Farina Trust has little power over SAVWCL. It is basically left to rely on the SAV Trust to make decisions for it and the rest of the Class A members.[10]

         Neither party disputes that both the defendants and the Farina Trust are all citizens of California. Thus, if the Farina Trust's citizenship is imputed to SAVWCL for purposes of diversity, the parties are not diverse and the federal court has no jurisdiction over this dispute.

         Discussion

         A. Motion-to-dismiss standards for failure to establish diversity jurisdiction.

         Plaintiffs allege that I have diversity jurisdiction, which requires complete diversity of citizenship between the parties and an amount in controversy exceeding $75, 000.[11] Complete diversity means that all of the plaintiffs are of a different citizenship than all of the defendants.[12]Thus, if even one plaintiff is a citizen of the same state as one defendant, jurisdiction is defeated.[13]

         Plaintiffs “bear the burden of proving by a preponderance of the evidence that each of the requirements for subject-matter jurisdiction has been met.”[14] Defendants can challenge jurisdiction facially, based on the allegations in the complaint, or factually, based on evidence.[15] Either way, the burden of proving jurisdiction remains with the plaintiffs.

         B. There is no diversity jurisdiction here because plaintiff SAVWCL is a citizen of the same state that the defendants reside in.

         The parties' dispute crystalizes into a single question: is plaintiff SAVWCL a citizen of California (where the defendants reside)? If so, the parties agree there is no jurisdiction for me to hear this case. SAVWCL is an LLC, so for purposes of diversity jurisdiction, an LLC “is a citizen of every state of which its []members are citizens.”[16] The Farina Trust is a Class A member of SAVWCL, and the Farina Trust is ...


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