National Ass'n of Realtors v. National Real Estate Ass'n, Inc.

• Decision Date: 06 February 1990
• Docket Number: No. 89-1013,89-1013
• Citation: 894 F.2d 937
• Parties: NATIONAL ASSOCIATION OF REALTORS, Plaintiff-Appellant, v. NATIONAL REAL ESTATE ASSOCIATION, INC., et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 937

894 F.2d 937

58 USLW 2482

NATIONAL ASSOCIATION OF REALTORS, Plaintiff-Appellant, v. NATIONAL REAL ESTATE ASSOCIATION, INC., et al., Defendants-Appellees.

No. 89-1013.

United States Court of Appeals, Seventh Circuit.

Argued Nov. 2, 1989.

Decided Feb. 6, 1990.

Matthew J. Iverson (argued), Burditt, Bowles, Radzius & Ruberry, Chicago, Ill., for plaintiff-appellant.

Terrance J. Coughlin (argued), Chicago, Ill., for defendants-appellees.

Before CUDAHY, POSNER, and MANION, Circuit Judges.

POSNER, Circuit Judge.

The National Association of Realtors (NAR) appeals from the dismissal, for want of subject-matter jurisdiction, of its diversity suit against a rival trade association, the National Real Estate Association, Inc. (NREA), and several insurance companies. 699 F.Supp. 678 (N.D.Ill.1988). An Illinois not-for-profit corporation, NAR is a national association of real estate agents. The agents are the association's members, corresponding to shareholders in a for-profit corporation; Illinois not-for-profit corporations are forbidden to issue stock, and therefore have no shares and no shareholders. Ill.Rev.Stat. ch. 32, pp 106.05, 106.10, 107.03. Defendant NREA, a rival association that is an Ohio not-for-profit corporation, schemed with the defendant insurance companies (none of them citizens of Illinois) to offer "errors and omissions" policies--a form of malpractice insurance--to real estate agents who join NREA. Among the real estate agents solicited were members of NAR in Illinois and other states. The solicitation materials contained misrepresentations concerning the licensure and capitalization of the defendant insurance companies. (All these "facts" are from the complaint, the only pleading in the case; they may not be true.)

The suit--which although not a class action or other recognized form of representative action purports to be on behalf of NAR's members as well as on behalf of the association itself--charges the defendants in Count I of the complaint with fraud that has injured the reputation of the association and the pocketbooks of those of its members who have bought insurance from the defendants. An injunction is sought against the defendants' soliciting or selling errors-and-omissions policies anywhere in the United States unless the insurance-company defendants are properly licensed. Counts II and III are carbon copies of Count I except that instead of charging fraud Count II charges negligent misrepresentation and Count III charges violation of Illinois' version of the Uniform Deceptive Trade Practices Act, Ill.Rev.Stat. ch. 121 1/2, pp 311 et seq. Count IV charges the same scheme as a violation of the Illinois Consumer Fraud and Deceptive Business Practices Act, Ill.Rev.Stat. ch. 121 1/2, pp 261 et seq., but instead of asking for an injunction, as the other counts do, asks the court to "award plaintiff all damages it and its members have suffered by reason of defendants['] violation."

The district judge held that the real parties in interest on the plaintiff's side of the case are NAR's members, not NAR, and since some of them are conceded to be citizens of Ohio, the requirement of complete diversity of citizenship (Newman-Green, Inc. v. Alfonso-Larrain, --- U.S. ----, 109 S.Ct. 2218, 2221, 104 L.Ed.2d 893 (1989)) is not satisfied. NAR, while conceding as it must that the citizenship of the real parties in interest is what counts for diversity purposes, Navarro Savings Ass'n v. Lee, 446 U.S. 458, 461-62 & n. 9, 100 S.Ct. 1779, 1782-83 n. 9, 64 L.Ed.2d 425 (1980); F. & H.R. Farman-Farmaian Consulting Engineers Firm v. Harza Engineering Co., 882 F.2d 281, 284 (7th Cir.1989); Spartech Corp. v. Opper, 890 F.2d 949, 952-53 (7th Cir.1989), denies that its members are the real parties in interest rather than itself, and in addition offers to cure the jurisdictional defect, if there is one, by dropping its claim for damages. The defendants argue that this will not do the trick.

NAR is a corporation, and for purposes of diversity jurisdiction the relevant citizenship is that of the corporation rather than that of its shareholders. F. & H.R. Farman-Farmaian Consulting Engineers Firm v. Harza Engineering Co., supra, 882 F.2d at 284. It is true that none of the cases asserting this rule concerns a non-share corporation--a corporation with members rather than shareholders. But Cote v. Wadel, 796 F.2d 981, 983 (7th Cir.1986), and Saxe, Bacon & Bolan, P.C. v. Martindale-Hubbell, Inc., 710 F.2d 87, 89 (2d Cir.1983), which assimilate professional corporations to ordinary corporations for diversity purposes, are close; for, realistically, the professional corporation's "shareholders" are not owners of equity capital but members of a partnership. We can think of no reason why the rule should be different for a formally shareless corporation. We hold that it is the same. The relevant citizenship is that of NAR rather than that of its members.

But the rule we have just stated, and have expanded to embrace non-share corporations, presupposes that the wrong is to the corporation rather than to the shareholders or members directly. If the defendants had blown up NAR's corporate headquarters, or broken a contract they had with the association, the wrong would be to the association even though the loss resulting from it would be borne ultimately by the real estate agents who are its members. Cf. American Federation of Technical Engineers v. La Jeunesse, 63 Ill.2d 263, 347 N.E.2d 712 (1976). The law does not lift the corporate veil in search of the ultimate incidence of the corporation's transactions; the tracing out of the incidence of such transactions is too complicated a process to make it a feasible preliminary to establishing federal jurisdiction. But suppose instead that an enraged member of NREA had assaulted a member of NAR. The assaulted member would be the real party in interest, and his citizenship would determine whether a suit for assault could be maintained in federal court under the diversity jurisdiction. He could not avoid the limitations on that jurisdiction by finding someone in a different state to sue on his behalf--such as the Rotary Club, or the Elks, or the Veterans of Foreign Wars, or some other organization of which he might be a member.

Yet that is this case--clearly so, as regards Count IV, which seeks to recover the damages that NAR's members suffered as a result of the defendants' alleged violations of an Illinois statute. If they suffered any damages it was as a result of solicitations and sales made to them directly, not to NAR with a trickle-down effect on them akin to the effect on shareholders of an injury to the corporation. NAR does not suggest that the defendants tried to sell it insurance. It contends that they tried to sell, and in some cases succeeded in selling, insurance to its members. The members were in the front line. They received the blow. NAR's counsel conceded at argument that if the association ever obtains any damages on its members' behalf under Count IV it will turn those damages over to the members. This shows that as regards the claim of damages NAR is a mere conduit for its members. It would not be if it were the injured one rather than they. The effect on shareholders, or members, of an injury to their corporation is indirect, buffered by the network of contractual relations through which costs and benefits incurred or received by a corporation are transmitted to real people.

Since it is the members of NAR who are the real parties in interest so far as the claim for damages on their behalf is concerned, it is their citizenship that counts for diversity purposes. Some of them are Ohioans, and therefore citizens of the same state as one of the defendants, NREA. The requirement of complete diversity of citizenship is indeed not satisfied.

Could the State of Illinois confer on NAR the right to seek redress for injuries to its members? "Congress may enact statutes creating legal rights, the invasion of which creates standing, even though no injury would exist without the statute." Linda R.S. v. Richard D., 410 U.S. 614, 617 n. 3, 93 S.Ct. 1146, 1148 n. 3, 35 L.Ed.2d 536 (1973). For example, it has authorized persons to whom real estate agents make racially motivated misrepresentations concerning the availability of housing to sue the agents under Title VIII of the Civil Rights Act of 1968, 42 U.S.C. Sec. 3604(d). In Havens Realty Corp. v. Coleman, 455 U.S. 363, 374, 102 S.Ct. 1114, 1121-22, 71 L.Ed.2d 214 (1982), the Supreme Court held that "testers" (investigators of housing discrimination) to whom misrepresentations are made have standing to enforce the statute even though not injured by the misrepresentations, as real customers would be. See also Village of Bellwood v. Dwivedi, 895 F.2d 1521, 1525 - 27 (7th Cir. Jan. 30, 1990). Presumably the State of Illinois could do something similar with respect to misrepresentations made to real estate agents (rather than by them, as in section 3604(d)): perhaps make such misrepresentations tortious even when not harmful in any sense currently recognized by tort law. But this would be the conferral of a substantive right, a right to be protected against particular conduct. McClure v. Carter, 513 F.Supp. 265 (D.Idaho) (three-judge court), aff'd without opinion, 454 U.S. 1025, 102 S.Ct. 559, 70 L.Ed.2d 469 (1981), holds that Congress may not circumvent Article III--which has been held, unhistorically but pragmatically, Flast v. Cohen, 392 U.S. 83, 96, 88 S.Ct. 1942, 20 L.Ed.2d 947 (1968); People Organized for Welfare & Employment Rights v. Thompson, 727 F.2d 167, 172-73 (7th Cir.1984), to require that a person wanting to maintain a suit in federal court demonstrate an actual injury that the court can redress, Valley Forge Christian College v. Americans United for Separation of Church and State, Inc., 454 U.S. 464, 472, 102 S.Ct. 752, 758-59, 70 L.Ed.2d 700 (1982)--by authorizing a person whose...