Lny 5003 LLC v. Zurich Am. Ins. Co.
| Decision Date | 03 September 2021 |
| Docket Number | Civil Action No. 4:20-cv-02992 |
| Parties | LNY 5003 LLC, Plaintiff, v. ZURICH AMERICAN INSURANCE COMPANY, Defendant. |
| Court | U.S. District Court — Southern District of Texas |
John Zavitsanos, Kelsi Stayart White, Foster Calhoun Johnson, Patrick Kevin Leyendecker, Ahmad, Zavitsanos, et al., Houston, TX, for Plaintiff.
Alicia G. Curran, Donnie Mike Apodaca, II, Cozen O'Connor, Dallas, TX, for Defendant.
The motion by Plaintiff LNY 5003, LLC to remand this action to Texas state court is denied. Dkt 11. The motion by Defendant Zurich American Insurance Company to conduct jurisdictional discovery is denied as moot. Dkt 18.
The caption in this action suggests that it's a coverage dispute between a company and its insurance carrier. But LNY is actually a recently created and relatively minor entity nestled within a vast, complex corporate structure atop which sits Fertitta Entertainment, Inc and Fertitta Hospitality, LLC. These two Fertitta entities are the actual insureds under the subject policy. LNY proceeds here by a putative assignment from them that purportedly allows this coverage dispute with Zurich to be litigated in state court what diversity jurisdiction would otherwise require the Fertitta entities to litigate in federal court.
LNY, as the party at the top of the caption, has citizenship in Texas and Illinois. Dkt 1-2 at ¶ 2. But to understand why that is so requires a bit of explanation.
Tilman J. Fertitta is a global leader in the dining, hospitality, entertainment, and gaming industries. From Houston, he's the sole shareholder, chairman, and chief executive officer of Fertitta Entertainment, Inc, which is a Texas corporation with its principal place of business in Texas. Dkt 1 at 2; Dkt 14-1 at 149, 164. Mr Fertitta is also the president of Fertitta Hospitality, LLC, a Texas limited liability corporation. For purposes of federal diversity jurisdiction, an LLC is a citizen of the state where it's organized or of the states of which its members are citizens. Harvey v. Grey Wolf Drilling Co. , 542 F.3d 1077, 1078 (5th Cir. 2008). The record in that regard establishes that, in addition to Mr Fertitta, the directors of Fertitta Hospitality include Paige Fertitta (his former wife) and an individual named Kelly Roberts, all of whom appear to be Texas residents. Dkt 1-9 (2018 franchise tax public information report).
Fertitta Entertainment is also the parent company of (among many other entities) the Houston Rockets, Landry's Inc, the Golden Nugget Casinos, and—important here—the steakhouse chain of Morton's of Chicago, Inc. Dkt 14-1 at 164; Dkt 11-3 at ¶ 3. Morton's is an Illinois corporation with its principal place of business in Texas. Dkt 11-3 at ¶ 3. Also somewhere else below Fertitta Entertainment is LNY, a Texas LLC formed in February 2020. Dkt 14-1 at 173. And Morton's is the sole member of LNY, which thus also gives LNY Illinois citizenship. Dkt 1-2 at ¶ 2.
Zurich, as the party at the bottom of the caption, can be understood in a much more transparent and straightforward manner. It's a New York corporation with its principal place of business in Illinois. Dkt 1-2 at ¶ 3.
Behind the caption is an international insurance-coverage dispute arising from the COVID-19 pandemic. Zurich issued an insurance policy to Fertitta Entertainment and Fertitta Hospitality with an effective date from May 2019 through May 2020. Dkt 14-1 at 11, 149 (insurance policy). The policy covered seventeen restaurants, most of which are owned by Morton's. Of the covered restaurants, seven are in Canada, three are in China, three are in Hong Kong, and one is in each of Taiwan, Macau, Singapore, and Mexico. Dkt 11-2 at 4. The policy admonishes the Fertitta enterprises in relevant part that:
Your rights and duties under this policy may not be transferred without our written consent except in the case of death of an individual Named Insured.
LNY observes in its briefing, "In late 2019, the COVID-19 virus was first identified in Wuhan, China and subsequently spread across the globe." Dkt 19 at 3. All are well aware of the extreme, global slowdown in business that came with reaction to the COVID-19 pandemic in March 2020. Restaurants were surely among the hardest hit industries, with many experiencing an abrupt stoppage that lasted for months. Given their operations in Asia (and China in particular), Fertitta Entertainment and Fertitta Hospitality appear to have anticipated those potential consequences even before reaction reached its onerous, global scale. And so, LNY was formed as a Texas LLC in February 2020 as noted above.
The seventeen restaurants insured under the pertinent policy then suffered business-interruption losses due to pandemic-related shutdowns. Fertitta Entertainment submitted claims under the policy to Zurich in April 2020. Dkt 11 at 2; Dkt 14 at 8. Zurich denied those claims at some point later that month or the next. Dkt 11 at 2.
Fertitta Entertainment and Fertitta Hospitality purported to assign their claims under the policy to LNY on July 6, 2020 for the nominal sum of ten dollars. Dkt 11-1 at 1. The at-issue assignment was executed by Steven L. Scheinthal on behalf of the Fertitta entities and by Richard H. Liem on behalf of LNY. Id at 3. Scheinthal is an executive vice president and the general counsel of Fertitta Entertainment, as well as the vice president and secretary of Fertitta Hospitality. Dkt 14-1 at 164–65; Dkt 11-2 at 3. But he's also the managing member of LNY. Dkt 1-10. Liem is the vice president and managing member of Morton's (who, it must be remembered, is in turn the sole member of LNY). Dkt 11-2 at 1, 3. But he's also an executive vice president and the chief financial officer of Fertitta Entertainment. Dkt 14-1 at 164.
In other words, this was no arm's-length assignment for value. The signatories of both Fertitta Entertainment and Fertitta Hospitality (as the assignors) and LNY (as the assignee) were each directly affiliated with each other. And LNY affirmed at hearing that Fertitta Entertainment is the "ultimate parent" of and retained a financial interest in LNY. Dkt 22 at 38.
Eighteen days after the putative assignment, LNY brought action against Zurich in Texas state court for breach of contract, breach of the duty of good faith and fair dealing, and violations of the Texas Insurance Code. LNY's complaint makes clear that it asserts claims on its own behalf. For instance, it alleges:
Dkt 1-2 at ¶¶ 14–15 (emphasis added). Although unable to provide an exact figure at hearing, counsel for LNY asserted that "multi-millions" in damages are here at stake. Dkt 22 at 39.
Zurich answered the petition in August 2020 and amended its answer two days later. Dkts 1-4, 1-5. It raises several affirmative defenses, primarily arguing that LNY doesn't have standing to bring the claims at issue because it isn't insured under the policy. Dkt 1-5 at ¶ 1.
Zurich also promptly removed the action, asserting diversity jurisdiction under 28 USC §§ 1332 and 1441. Dkt 1 at ¶ 8. LNY moved to remand, arguing that diversity doesn't exist between it and Zurich because they're both citizens of Illinois. Dkt 11 at 1.
The Court heard argument at hearing in December 2020. Dkt 22. The parties were allowed supplemental filings based on arguments and cases discussed at hearing. Dkts 24–26.
Article III, § 2 of the United States Constitution vests federal courts with jurisdiction over controversies between "Citizens of different States." This is given statutory effect by 28 USC § 1332(a)(1). Where a plaintiff elects to sue a defendant in state court even though "original jurisdiction" also exists in federal court, 28 USC § 1441(a) permits that defendant to remove the action from state court. But the action must be remanded under 28 USC § 1447(c) if "at any time before final judgment it appears that the district court lacks subject matter jurisdiction."
The removing party "has the burden of proving by a preponderance of the evidence that subject matter jurisdiction exists." New Orleans & Gulf Coast Railway Co v. Barrois , 533 F.3d 321, 327 (5th Cir. 2008) (citations omitted); see also Charles Alan Wright and Arthur R. Miller, Federal Practice and Procedure § 43 (West 2d ed April 2019 update). This is no easy lift. The removal statute is strictly construed in favor of remand. Manguno v. Prudential Property & Casualty Insurance , 276 F.3d 720, 723 (5th Cir. 2002). And a presumption exists against subject matter jurisdiction, which "must be rebutted by the party bringing an action to federal court." Coury v. Prot , 85 F.3d 244, 248 (5th Cir. 1996) (citation omitted). The Fifth Circuit holds that any "doubts regarding whether removal jurisdiction is proper should be resolved against federal jurisdiction." Acuna v. Brown & Root, Inc. , 200 F.3d 335, 339 (5th Cir. 2000).
The existence of federal subject matter jurisdiction is determined at the time of removal. See In re Bissonnet Investments LLC , 320 F.3d 520, 525 (5th Cir. 2003), citing Arnold v. Garlock , 278 F.3d 426 434 (5th Cir. 2002). This includes consideration of "the claims in the state court petition as they existed at the time of removal." Manguno , 276 F.3d at 723 (citation omitted).
With respect to diversity jurisdiction, the Supreme Court holds that "the citizens upon whose diversity a plaintiff grounds jurisdiction must be real and...
To continue reading
Request your trial