Big Shoulders Capital LLC v. San Luis & Rio Grande R.R., Inc.

• Decision Date: 03 September 2021
• Docket Number: Nos. 19-3234,19-3516,19-3428,20-1053 & 20-1503,s. 19-3234
• Citation: 13 F.4th 560
• Parties: BIG SHOULDERS CAPITAL LLC, Plaintiff-Appellee, v. SAN LUIS & RIO GRANDE RAILROAD, INC. and Mt. Hood Railroad Co., Defendants-Appellees. Appeals of: Sandton Rail Company LLC, San Luis Central Railroad Co., Ralco LLC, South Middle Creek Road Association, the Board of Commissioners, Rio Grande County, Railworks Track Services, Inc., and Railworks Signals, Communications, Inc., and The Ad Hoc Committee of the Unsecured Creditors and Cross-Appeal of: Novo Advisors and Fox Rothschild, LLP.
• Court: U.S. Court of Appeals — Seventh Circuit

13 F.4th 560

BIG SHOULDERS CAPITAL LLC, Plaintiff-Appellee,

v. SAN LUIS & RIO GRANDE RAILROAD, INC. and Mt. Hood Railroad Co., Defendants-Appellees.Appeals of: Sandton Rail Company LLC, San Luis Central Railroad Co., Ralco LLC, South Middle Creek Road Association, the Board of Commissioners, Rio Grande County, Railworks Track Services, Inc., and Railworks Signals, Communications, Inc., and The Ad Hoc Committee of the Unsecured CreditorsandCross-Appeal of: Novo Advisors and Fox Rothschild, LLP.

Nos. 19-3234

19-3428

19-3516

20-1053 & 20-1503

United States Court of Appeals, Seventh Circuit.

Argued February 18, 2021

Decided September 3, 2021

Rehearing and Rehearing En Banc Denied October 27, 2021

Eric S. Prezant, Steve Gordon Trubac, Attorney, Brenton W. Vincent, Attorney, Bryan Cave Leighton Paisner LLP, Chicago, IL, David M. Unseth, Bryan Cave Leighton Paisner LLP, St. Louis, MO, for Plaintiff-Appellee.

Andrew M. Goldsmith, Pryor Cashman LLP, New York, NY, James S. O'Brien, Jr., Attorney, Ronald S. Beacher, Attorney, Pryor Cashman LLP, New York, NY, Robert Radasevich, Attorney, Neal, Gerber & Eisenberg LLP, Chicago, IL, for Appellant.

Richard Michael Kates, I, Attorney, Law Office of Richard M. Kates, Chicago, IL, for Defendant-Appellee.

Matthew A. Jacober, Attorney, Lathrop GPM LLP, St. Louis, MO, Peter John Roberts, Attorney, Cozen O'Connor, Chicago, IL, for Party-in-Interest-Appellee.

Before Brennan, Scudder, and Kirsch, Circuit Judges.

Brennan, Circuit Judge.

This labyrinth of appeals stems from a breach of contract claim brought by Big Shoulders Capital LLC against San Luis & Rio Grande Railroad Inc. (SLRG) and Mt. Hood Railroad Co., with federal jurisdiction ostensibly based on diversity of citizenship. In its complaint, Big Shoulders requested that the district court appoint a receiver to handle SLRG's assets. That court did so, which brought the case to the attention of the several creditors who have interests in entities in the same corporate group as SLRG and Mt. Hood. One of these parties, Sandton Rail Company LLC, intervened and challenged the appointment of the receiver as well as the district court's jurisdiction. Sandton alleged that Big Shoulders failed to join necessary parties who, if added, would destroy diversity of citizenship.

Meanwhile, other creditors—referred to here as Petitioning Creditors—filed an involuntary bankruptcy petition on behalf of SLRG in federal bankruptcy court in Colorado. The receiver objected. Because the judicially approved receivership agreement contained an anti-litigation injunction, the district court initially concluded that the bankruptcy petition was void. On reconsideration, however, the district court determined that it did not have authority to enjoin the bankruptcy. So the bankruptcy continued, and after Big Shoulders refused to continue to fund the receivership, the district court approved its termination.

Out of these circumstances come several appeals. Sandton brings the main appeal which claims the district court lacked subject matter jurisdiction over the entire contract dispute because—contrary to the original pleadings—Big Shoulders, SLRG, and Mt. Hood all have Illinois citizenship. The other appeals relate to the bankruptcy petition and the district court's decision to first enforce the anti-litigation injunction but then to allow the bankruptcy to proceed. In another layer of complexity, each appeal also involves questions of standing or mootness.

In the end, those justiciability questions require us to dismiss all but Sandton's appeal. As for Sandton's argument that diversity jurisdiction is lacking, we remand to the district court for an application in the first instance of the "nerve center test" to determine if SLRG and Mt. Hood are citizens of Illinois.

I. Background

This procedural maze started with a breach of contract action, made its first turn with the appointment of receiver, banked left when the petitioning creditors filed an involuntary bankruptcy for SLRG, and ended with the termination of the receivership.

A. Breach of Contract

This case began when Big Shoulders sued SLRG and Mt. Hood, alleging a breach of contract and more than $4.6 million in damages. That contract was a loan agreement between Big Shoulders, the defendants, and Iowa Pacific Holdings LLC, as well as several of its subsidiaries. Iowa Pacific is the ultimate parent company of SLRG and Mt. Hood, along with several other entities.¹ As relevant here, SLRG and Mt. Hood, operators of various railroads in the United States, are financially distressed.

In its complaint, Big Shoulders contended that federal jurisdiction existed because there was complete diversity of citizenship between the parties. See 28 U.S.C. § 1332. As a limited liability company, Iowa Pacific is the citizen of the states where its owning members are citizens. See West v. Louisville Gas & Elec. Co. , 951 F.3d 827, 829 (7th Cir. 2020). One of its members is a citizen of Illinois, and Big Shoulders is also a citizen of Illinois. So if Big Shoulders sued Iowa Pacific, there would not be complete diversity. But according to Big Shoulders, the entities that it sued—SLRG and Mt. Hood—are citizens of Colorado and Delaware, and Oregon, respectively, making jurisdiction facially proper.

For relief, Big Shoulders also asked the district court to appoint Novo Advisors as a receiver. Big Shoulders agreed to fund the receivership to keep the railroads operational during the lawsuit. It argued that without a receiver, the railroad might not have enough assets to cover a judgment in Big Shoulders’ breach of contract case. The district court granted the motion. But since filing its complaint, Big Shoulders has taken no steps to prosecute the breach of contract action. SLRG and Mt. Hood have not responded to the complaint, either.

B. Receiver's Activities

Five days after appointment by the district court, the receiver asked to expand the receivership. The district court agreed. The Petitioning Creditors,² the Ad Hoc Committee,³ and Sandton had interests in several entities within the expanded receivership. These new receivership entities, like SLRG and Mt. Hood, are subsidiaries of Iowa Pacific. Some of these entities—such as Heritage Rail Leasing, LLC (Heritage)—are citizens of Illinois. But expanding a receivership to include non-parties that are not diverse from the plaintiff does not necessarily destroy diversity jurisdiction. Cf. Alonso v. Weiss , 932 F.3d 995, 1002 (7th Cir. 2019) (noting that the district court has ancillary jurisdiction over claims in a receivership, including those that neither contain a federal question nor involve completely diverse parties). All in all, the receivership eventually included more than 20 companies.⁴

The receivership agreements, approved by the district court, also contained language barring any party from "commencing, prosecuting, continuing or enforcing any suit or proceeding against or affecting Defendants or any part of the Receivership Assets."

When the district court appointed the receiver, Sandton moved to intervene and to dismiss for lack of subject matter jurisdiction. Sandton's request to intervene was based on its wish to preserve its right to a $3.2 million consent judgment against various receivership entities. In its motion to dismiss, Sandton argued that Big Shoulders failed to join necessary parties, particularly several Iowa Pacific subsidiaries that would destroy diversity jurisdiction. The district court granted the motion to intervene but denied the motion to dismiss. Under Illinois contract law, the district court explained, a party suing for breach of contract may sue any one of the obligated parties and need not sue all of them. According to the district court, this meant that Big Shoulders could choose to sue SLRG and Mt. Hood but not Iowa Pacific. Sandton does not contest that holding on appeal.

After the district court dealt with Sandton's motions, the receiver entered into an agreement with the Internal Revenue Service. That agreement allowed the IRS to treat Iowa Pacific Holdings and its subsidiaries as one enterprise for tax purposes. To enter into the IRS agreement, the receiver submitted an affidavit from Iowa Pacific's general counsel, David Michaud—referred to as the Michaud Declaration—concerning the corporate practices of its subsidiaries.

The Michaud Declaration described the receivership entities as a "single enterprise" and averred that Iowa Pacific made all decisions for its subsidiaries. According to this declaration, these subsidiaries did not maintain separate books and records and did not transact with each other at arm's length. Concerning corporate governance, the declaration stated that only the interests of Iowa Pacific were considered and not the individual interests of the subsidiaries. The declaration further noted that most of the receivership entities were headquartered in Chicago, shared management, and failed to hold separate board meetings for several years. This document is central to Sandton's appeal.

In another action related to Sandton's appeal, the receiver rejected a lease that Sandton had with Heritage to provide railcars and other track equipment. The receivership agreement gave the receiver the power to formally reject the lease.

C. The Bankruptcy Petition

At the same time, despite the anti-litigation provision in the receivership agreements, the Petitioning Creditors⁵ filed an involuntary bankruptcy petition against SLRG in the District of Colorado. They asserted their rights as entities interested in the continued operation of SLRG. Due to SLRG's financial distress, the bankruptcy court granted the request for relief. After learning of the petition, the receiver made an emergency motion in the Northern District of Illinois district court to consider the effect of the receivership agreement injunction on the SLRG bankruptcy. Initially, the district court determined that the petition was void because it violated the injunction. The...