August 20, 2014

Tenth Circuit: Creating Diversity Jurisdiction by Collusively Assigning Interest Is Improper

The Tenth Circuit Court of Appeals issued its opinion in National Fitness Holdings, Inc. v. Grand View Corporate Centre, LLC on Thursday, April 24, 2014.

Several Utah citizens sued J. Hoyt Stephenson in the United States District Court for the District of Utah. Stephenson responded with state-law counterclaims and a third-party complaint asserting state-law claims against other Utah citizens. The district court dismissed Stephenson’s counterclaims and third-party claims, finding that Stephenson was a Utah citizen—not a Wyoming citizen—so it lacked diversity jurisdiction to hear Stephenson’s claims. Stephenson then created National Fitness Holdings, Inc. and incorporated it in Wyoming. Stephenson was the sole director, officer, and shareholder. A week after creating National, Stephenson assigned it all his stock in three companies and his interest in Utah real property. Four days after that, National sued Grand View Corporate Centre, LLC in the United States District Court for the District of Utah. Defendants moved to dismiss under F.R.C.P. 12(b)(1), arguing that Stephenson improperly made the assignments to manufacture diversity jurisdiction. The district court agreed and granted defendants’ motion.

The Tenth Circuit affirmed, undergoing a detailed analysis of 28 U.S.C. § 1359 and concluding that the district court properly dismissed the case for lack of diversity jurisdiction.

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