E-Alert Case Updates

Federal Credit Union Not Entitled to Removal Based on Diversity of Citizenship

Northern Virginia Foot & Ankle Associates, LLC, et al. v. Pentagon Federal Credit Union
Case No. RWT 10cv1640 (D. Md. 2011)
By Eric M. Leppo, Associate
Semmes, Bowen & Semmes (www.semmes.com)

In this recently issued opinion from the U.S. District Court for the District of Maryland, authored by Judge Roger W. Titus, the Court found that it did not have subject matter jurisdiction on the basis of diversity of citizenship. Specifically, the Court determined that Pentagon Federal Credit Union (“PenFed”) was not entitled to be considered a Virginia entity for diversity of citizenship purposes.

The Plaintiffs, Northern Virginia Foot & Ankle Associates, LLC and its two members whose business offered podiatry services, filed suit against PenFed in the Circuit Court of Maryland for Montgomery County. PenFed, a federally-chartered credit union, removed the action to Federal Court on the basis that it was a Virginia citizen due to its principal place of business. Despite its name, Northern Virginia Foot & Ankle is not a Virginia resident, and therefore diversity would exist if PenFed was considered a citizen of Virginia.

PenFed filed a Motion to Dismiss the Plaintiffs’ Complaint, but at oral argument, the Court raised the issue of subject matter jurisdiction sua sponte, questioning whether a federally-chartered credit union such as PenFed can claim state citizenship in a diversity of citizenship context. Pursuant to 28 U.S.C. § 1332(a), Federal Courts have jurisdiction over any dispute in which the amount in controversy is in excess of $75,000 if the dispute is between citizens of different states. Pursuant to 28 U.S.C. § 1332(c)(1), corporations are deemed to be citizens in the state in which they are incorporated, as well as in the state they have their principal place of business (which may be one in the same).

The Court noted that in Bankers’ Trust Co. v. Texas & Pacific Railway Co., 241 U.S. 295, 309-10 (1916), the Supreme Court held that a federally-chartered railroad was not a citizen of any state for diversity purposes. However, in Feuchtwanger Corp. v. Lake Hiawatha Federal Credit Union. 272 F. 2d 453 (3d Cir. 1959) a narrow exception to this rule was created. The Feuchtwanger decision, in an effort to effectuate the purpose of diversity jurisdiction (protect entities from local bias), stated that a federally-chartered corporation could be deemed a citizen of a given state if its corporate activities were so “localized” that the entity was essentially a “local institution.” Id. at 454-55.

In addition to its Virginia headquarters, PenFed has service centers in Eugene, Oregon and Omaha, Nebraska, and has branch locations worldwide including two in Texas; two in New
York; one in Puerto Rico; one in Guam; one in Turkey; one in Portugal; and one in Japan. There is little question that PenFed would not meet the Feuchtwanger test for being a local institution. It argued, therefore, that the Supreme Court’s recent decision in Hertz Corp. v. Friend, 130 S. Ct. 1181 (2010) required the Feuchtwanger test to be rejected or modified.

In Hertz, the Supreme Court held that a state-chartered corporation’s “principal place of business,” is the “place where a corporation’s officers direct, control, and coordinate the
corporation’s activities.” Hertz Corp., 130 S. Ct. at 1192. PenFed argued that Hertz can be read to do away with complex tests to establish citizenship.

The Court noted, however, that Hertz was not concerned with the issue of federally-chartered corporations, and never spoke to the Feuchtwanger test in any way. The Court stated that the Supreme Court or Legislature was free to modify the law with regard to federally-chartered credit unions, but neither has yet done so. The Court noted that PenFed’s extensive nation and worldwide operations do not equate to a localized institution, and remanded the matter to the Circuit Court of Maryland.