Wyndham Hotel Grp. Can. v. Ostrander

1

WYNDHAM HOTEL GROUP CANADA, ULC and SUPER 8 WORLDWIDE, INC., Plaintiffs, v. BRIAN OSTRANDER, Defendant.

Civ. No. 21-16333 (KM)(MAH)

United States District Court, D. New Jersey

October 31, 2022

OPINION

KEVIN McNULTY, U.S.D.J.

This matter comes before the Court on a motion for default judgment by plaintiffs Wyndham Hotel Group Canada, ULC (“WHGC”) and Super 8 Worldwide, Inc. (“S8WI”). (DE 14.)^[1] Plaintiffs commenced this action for breach of a franchise agreement regarding the operation of a guest lodging facility in Canada. (Compl ¶¶11, 28-29). The defendant, Brian Ostrander, is named as a principal of the corporate franchisee and as a guarantor of the franchisee's obligations under the agreement. In light of Ostrander's failure to answer or otherwise respond to the complaint, the Clerk of the Court entered default as to him. (DE 14.)

In considering the plaintiffs' motion for default judgment the Court examined its subject-matter jurisdiction sua sponte, as is its obligation. See Fed. R. Civ P. 12(h)(3) (“If the court determines at any time that it lacks subject-matter jurisdiction, the court must dismiss the action.”). See also The Prudential Ins. Co. of Am. v. Bramlett, No. CIV.A. 08-119, 2010 WL 2696459, at *1 (D.N.J. July 6, 2010) (“Before entering default judgment, the Court must address the threshold issue of whether it has personal jurisdiction and subject matter jurisdiction over the parties.”). Noting an unusual configuration of the parties' citizenships, I issued an order directing the plaintiffs to show cause in writing why the action should not be dismissed for lack of jurisdiction. (DE 15.) Because it appears, upon consideration of the plaintiffs' response to the order to show cause, that subject-matter jurisdiction is not established, the case must be dismissed. The motion for default judgment is therefore DENIED without prejudice.

I. Background

To summarize briefly, the complaint alleges that WHGC, a subsidiary of Wyndham Hotel Group, LLC is itself a subsidiary of Wyndham Hotels & Resorts, Inc. WHGC is authorized by an affiliate, S8WI, to grant franchises in Canada to independent, third-party franchisees to own and operate guest lodging facilities using the Super 8® System and the Super 8® marks. (Compl. ¶¶1-5.) WHGC entered into one such franchise agreement with a Canadian corporation, 1885731 Alberta Ltd., on June 23, 2015. (Id. at ¶¶6-11.)

Defendant Ostrander is alleged to be a principal of 1885731 Alberta Ltd. (Id. at ¶7.) As such, Ostrander provided WHGC with a guarantee of the corporation's obligations under the agreement. (Id. at ¶¶7, 22.) Plaintiffs allege that 1885731 Alberta Ltd. violated the terms of the agreement in November 2019 by unilaterally terminating it and failing to pay the required liquidated damages and outstanding fees. (Id. at ¶¶25-26.)

The complaint, filed in August 2021, states that this Court has subjectmatter jurisdiction over the action by virtue of the federal diversity jurisdiction statute, 28 U.S.C. § 1332. (Compl. ¶8.) Pursuant to § 1332(a), district courts have jurisdiction over all civil actions wherein the matter in controversy exceeds $75,000 and is between “(1) citizens of different States; (2) citizens of a State and citizens or subjects of a foreign state . . . (3) citizens of different States and in which citizens or subjects of a foreign state are additional parties; and (4) a foreign state . . . as plaintiff and citizens of a State or of different States.”

The complaint states the following about the citizenship of the parties: Plaintiff WHGC is “an unlimited liability corporation organized and existing under the laws of the Province of Nova Scotia,” with its principal place of business in New Jersey; plaintiff S8WI is a South Dakota corporation with a principal place of business also in New Jersey; and defendant Ostrander is a Canadian citizen living in Alberta, Canada. (Id. at ¶¶1, 4, 7.)

In their response to the order to show cause, the plaintiffs specify that the Court's jurisdiction arises under 28 U.S.C. § 1332(a)(2), because the lawsuit is between “citizens of a State and citizens or subjects of a foreign state.” (OSC Resp. 2.) They state that WHGC is a citizen of both Canada and New Jersey, but argue that, for purposes of diversity jurisdiction, only its U.S. citizenship is recognized. (Id.) Because the lone defendant, Ostrander, is a citizen of Canada, and S8WI is a citizen of South Dakota and New Jersey, the plaintiffs maintain that this case is brought by two corporations, who are citizens of the United States, against a foreign individual. (Id.) Thus, the argument runs, there is complete diversity between the parties, and the Court has jurisdiction pursuant to 28 U.S.C. § 1332(a)(2). I disagree for the reasons set forth below.

II. Discussion

Section 1332(a)(2) requires “complete diversity,” meaning that all plaintiffs in an action must be diverse from all defendants. See Dresser Indus., Inc. v. Underwriters at Lloyd's of London, 106 F.3d 494, 499 (3d Cir. 1997). Here, it is apparent that Ostrander is a “citizen . . . of a foreign state” and S8WI is a corporate “citizen[ ] of a State” of the United States. So set that aside; there is diversity between those two parties. The critical issue is whether there is diversity between defendant Ostrander and plaintiff WHGC.

Determining WHGC's citizenship is made somewhat difficult by the fact that it is an unlimited liability corporation (“ULC”)-a business structure that exists only in Canada, and indeed only in three of its provinces (one being Alberta). A ULC is an entity incorporated in the usual manner, possessing the formal characteristics of an ordinary corporation. Its shareholders nevertheless have unlimited liability for any liability, act or default of the unlimited liability corporation. See Alberta Business Corporations Act Part 2.1, “Special Rules Respecting Unlimited Liability Corporations,” available at https://kings-printer.alberta.ca/1266.cfm?page=B09.cfm&leg type=Acts&isbncln=97807797 468n&display=html (visited Oct. 31, 2022); Thomson Reuters, Practical Law, Glossary, Unlimited Liability Company (ULC), https://ca.practicallaw.thomsonreuters.com/w-015-1588?transitionType=Default&contextData=(sc.Default)&firstPage=true (visited Oct. 28, 2022); Investopedia, Business, Types of Corporations, Unlimited Liability Corporation (ULC), https//www.investopedia_icom/terms/u/ulc.asp (visited Oct. 28, 2022). It appears, then, that a ULC shares some of the characteristics of a partnership and a corporation under U.S. law.

Partnerships and corporations receive disparate treatment in the federal jurisdictional analysis. A corporation is a citizen both of the state (or foreign state) where it is incorporated and of the state (or foreign state) where it has its principal place of business. 28 U.S.C. § 1332(c)(1). Corporations, including foreign-based or foreign-chartered corporations, are thus considered dual citizens if their place of incorporation and principal place of business differ. See Herod's Stone Design v. Mediterranean Shipping Co. S.A., No. CV 18-6118, 2018 WL 3062910, at *3 (D.N.J. June 20, 2018) (corporate citizenship provision of 28 U.S.C. § 1332(c)(1) applies to foreign corporations).

Unlike corporations, partnerships and other unincorporated entities are not considered “citizens” in their own right; diversity is analyzed according to the citizenship of such an entity's constituent members. Swiger v. Allegheny Energy, Inc., 540 F.3d 179, 182 (3d. Cir. 2008). Thus the Supreme Court has consistently stated that “courts are to look at the citizenship of all the partners (or members of other unincorporated associations) to determine whether the federal district court has diversity jurisdiction.” Id., citing Lincoln Prop. Co. v. Roche, 546 U.S. 81, 84 n.1 (2005). Thus, in the case of a partnership, diversity jurisdiction exists only where all partners are diverse from all parties on the opposing side. Swiger, supra at 183.

A ULC is an incorporated entity under the law of Alberta, a jurisdiction that shares the Anglo-American legal tradition. The law of diversity jurisdiction has drawn a bright line between incorporated and unincorporated entities in the United States, and that formalistic approach makes sense in relation to a ULC. If nothing else, it has the virtue of predictability and consistency. While the hybrid structure of a ULC entity gives me pause, I observe that alienage diversity jurisdiction also rests on the balancing of policy considerations, some of them unrelated to the liability, or not, of an entity's members. See pp. 6-7, infra.

Jurisdiction, of course, does not arise by estoppel. I nevertheless observe that the plaintiffs themselves presume that WHGC will be treated as a corporation for jurisdictional purposes; in keeping with the diversity rules for corporations, they allege that WHGC is a citizen both of both Canada, where it is incorporated, and of New Jersey, its principal place of business. (OSC Resp. 2.) Accordingly, I will make the plaintiff-favorable assumption that WHGC would be treated as a corporation for purposes of diversity jurisdiction.^[2] That is, I deem WHGC to be a citizen of both Canada and New Jersey.

The consequences of that treatment are not immediately obvious. I turn to the issue of whether, as a matter of law, there is diversity between a Canadian individual (Ostrander) and a corporation that is a citizen of both Canada and the U.S. (WHGC).

That Ostrander and WHGC are both citizens of the same foreign country (or for that matter different foreign countries) standing alone, is of no matter. “When there are alien parties on both sides of the controversy [diversity] will be found lacking even though they are citizens of...