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Abu Dhabi Commercial Bank v. Morgan Stanley & Co. Inc.

United States District Court, S.D. New York

February 1, 2013

ABU DHABI COMMERCIAL BANK, et al., Plaintiffs,
MORGAN STANLEY & CO. INC., Morgan Stanley & Co. International Ltd., Moody's Investors Service, Inc., Moody's Investors Service Ltd., Standard and Poor's Ratings Services and The McGraw Hill Companies, Inc., Defendants.

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Patrick J. Coughlin, Esq., Daniel S. Drosman, Esq., Jessica T. Shinnefield, Esq., Jarrett S. Charo, Esq., Darryl J. Alvarado, Esq., Robbins Geller Rudman & Dowd LLP, San Diego, CA, Samuel H. Rudman, Esq., Robbins Geller Rudman & Dowd LLP, Melville, NY, Luke O. Brooks, Esq., Jason C. Davis, Esq., Robbins Geller Rudman & Dowd LLP, San Francisco, CA, for Plaintiffs.

Marc I. Gross, Esq., Tamar A. Weinrib, Esq., Pomertantz Haudek Grossman & Gross LLP, New York, NY, for Plaintiff State Board of Administration of Florida.

James P. Rouhandeh, Esq., Antonio J. Perez-Marques, Esq., William R. Miller, Jr., Esq., Davis Polk & Wardwell LLP, New York, NY, for Defendants Morgan Stanley & Co. Incorporated and Morgan Stanley & Co. International Limited.

Joshua M. Rubins, Esq., James J. Coster, Esq., Mario Aieta, Esq., James I. Doty, Esq., Satterlee Stephens Burke & Burke LLP, New York, NY, Mark A. Kirsch, Esq., Christopher M. Joralemon, Esq., Joel M. Cohen, Esq., Lawrence J. Zweifach, Esq., Mary K. Dunning, Esq., Gibson, Dunn & Crutcher, LLP, New York, NY, for Defendants Moody's Investors Service, Incorporated and Moody's Investors Service Limited.

Floyd Abrams, Esq., Dean I. Ringel, Esq., Charles A. Gilman, Esq., Tammy L. Roy, Esq., Jason M. Hall, Esq., Cahill Gordon & Reindel LLP, New York, NY, for Defendants Standard & Poor's Rating Services and The McGraw-Hill Companies, Incorporated.


SHIRA A. SCHEINDLIN, District Judge.


Defendants challenge this Court's subject matter jurisdiction under 28 U.S.C. § 1332[1] on the ground that joinder of the Commonwealth of Pennsylvania Public School Employees' Retirement System

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(" PSERS" ) and the State Board of Administration of Florida (" FSBA" ) destroys diversity jurisdiction because PSERS and FSBA are arms of their respective States, and not citizens of any state.[2] Plaintiffs argue that the Court has supplemental jurisdiction over the claims of non-diverse parties joined under Federal Rule of Civil Procedure 20 and, moreover, that entities which are citizens of no state do not destroy diversity. In addition they argue that FSBA is not an arm of the state of Florida. I conclude that joinder of an arm of the State under Rule 20 destroys diversity jurisdiction, but that only PSERS is an arm of the state requiring dismissal in order to preserve this Court's jurisdiction.[3]


A. Supplemental Jurisdiction

Section 1367(a) provides in relevant part that:

Except as provided in subsections (b) and (c) ... in any civil action of which the district courts have original jurisdiction, the district courts shall have supplemental jurisdiction over all other claims that ... form part of the same case or controversy under Article III of the United States Constitution. Such supplemental jurisdiction shall include claims that involve the joinder or intervention of additional parties.[5]

Subsections (b) and (c) expressly foreclose supplemental jurisdiction over claims of non-diverse plaintiffs joined under Rule 19 (for necessary parties), claims of a non-diverse absentee seeking to intervene as a plaintiff under Rule 24, and claims against a non-diverse party joined under Rules 14, 19, 20 or 24.[6]

B. Arm of the State Analysis

It is well established that " a State is not a ‘ citizen’ for purposes of [ ] diversity jurisdiction." [7] This restriction extends to a plaintiff who is an arm or alter ego of a state.[8] In determining whether an entity was an arm of the state for diversity purposes, the Supreme Court declined to accept a county's own characterization of its relationship with the state of California and instead conducted " a detailed examination of the relevant provisions of California law— beyond simply the generalization contained in ... the state constitution." [9] Although it did not establish a formal test, the Supreme Court considered six factors in reaching the conclusion that a California county was not an arm of the state: (1) whether it had " corporate powers and

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[was] designated a body corporate and politic; " (2) whether it " could sue and be sued; " (3) whether it was " a local public entity in contrast to the State and state agencies; " (4) whether it was " liable for all judgments against it [and] authorized to levy taxes to pay such judgments; " (5) whether it could " sell, hold, or otherwise deal in property; " and (6) whether it was " empowered to issue general obligation bonds payable from county taxes" which " create no obligation on the part of the State." [10]

The Second Circuit has not elaborated on the approach set forth in Moor for determining whether a governmental entity is a citizen for purposes of diversity jurisdiction,[11] although it has addressed the question. In World Trade Center Properties, L.L.C. v. Hartford Fire Ins. Co., the court made clear that the fact that an entity is a " state-created body" with obligations to the state does not foreclose the possibility of its being a citizen for diversity purposes.[12] The Second Circuit held that the Port Authority was a citizen for diversity purposes where it was defined under New York Law as " ‘ a body corporate and politic’ " with the mission of " ‘ development of public transportation, terminal, and other facilities of commerce,’ " and " ‘ governed by a board of commissioners, whose resolutions are essentially legislative acts of the bi-state entity that must be approved by the governors of both states.’ " [13] In another case, the Second Circuit found that the Connecticut Development Authority, which was alleged to be " an agency of the State of Connecticut" was " a political subdivision of the state that is empowered to sue and be sued" and therefore was " a citizen of Connecticut for purposes of diversity of citizenship." [14]


A. Supplemental Jurisdiction Over Non-Diverse Plaintiffs

1. Joinder of Non-Diverse Plaintiffs Under Rule 20 Destroys Diversity Jurisdiction

This case involves plaintiffs joined under Rule 20 and therefore is not explicitly excluded from supplemental jurisdiction under Section 1367(a). In Exxon Mobil Corp. v. Allapattah Services, the Supreme Court authorized exercise of supplemental jurisdiction over plaintiffs joined under Rule 19 who did not independently meet the amount-in-controversy requirement. [15] The Court specifically noted that " [n]othing in the text of § 1367(b) ... withholds supplemental jurisdiction over the claims of plaintiffs permissively joined under Rule 20 ...." [16] However, the Court distinguished incomplete diversity, which it held " destroys original jurisdiction with respect

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to all claims, so there is nothing to which supplemental jurisdiction can adhere." [17]

If this statement in Exxon left any doubt as to whether supplemental jurisdiction exists over the claims of non-diverse plaintiffs, in Merrill Lynch & Co. v. Allegheny Energy, Inc., the Second Circuit clarified that " a defect of [diversity, as opposed to amount-in-controversy] eliminates every claim in the action, including any jurisdictionally proper action that might otherwise have anchored original jurisdiction, and removes the civil action from the purview of § 1367 altogether." [18] In short, both the Supreme Court and the Second Circuit have held that the presence of a non-diverse plaintiff " deprives the court of original jurisdiction over the entire action." [19] Therefore, joinder of a non-diverse party, whether under Rule 19 or Rule 20 would destroy this Court's subject matter jurisdiction.[20]

2. Joinder of Non-Citizen Plaintiffs Violates the Complete Diversity Requirement

Plaintiffs argue that the above conclusion does not resolve the issue of whether PSERS and FSBA must be dropped from the case. They raise the seemingly novel argument that the " contamination theory" is inapplicable to joinder of parties that are not technically citizens of any state, and certainly are not citizens of the same state as defendants ( i.e. non-diverse). While there is some logic to their argument,[21] every court to address the question,

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including the Second Circuit, has held that the initial inclusion of an arm of the state destroys complete diversity where it would otherwise exist and plaintiffs cite no case in support of their argument. [22] Therefore, joinder of an arm of the state would defeat diversity jurisdiction.

B. Whether the FSBA Is an Arm of the State for Diversity Purposes

Plaintiffs concede that PSERS is an arm of Pennsylvania. Therefore, in light of the foregoing conclusions, it must be dismissed. However, plaintiffs dispute that the FSBA is an arm of the state of Florida. Although federal law governs the analysis of when an entity is an arm of the state for diversity purposes, Florida law governs this Court's understanding of the FSBA's relationship to the State, federal law governs the analysis of when an entity is an arm of the state for diversity purposes.[23]

The FSBA is a creation of Florida law tasked with " invest[ing] all ... funds specifically required by law to be invested by the board." [24] " The [FSBA] may invest any funds of any state agency, any state university or college, any unit of local government [et cetera] ... pursuant to the terms of a trust agreement [with the head of the relevant entity]" subject to approval by the Board.[25] It is the duty of the FSBA to " see that the moneys [it invests on behalf of various state and local entities] are at all times handled in the best interests of the state." [26]

The question whether the FSBA is sufficiently distinct from the state to render it a Florida citizen is a difficult one. The FSBA is charged with investing on behalf of state and municipal entities, and is closely aligned with the state. For example, the FSBA is accounted for in the State of Florida's audited financial statements as a " blended component unit" meaning " either (1) the component unit's governing

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body is substantively the same as the governing body of the state or (2) the component unit provides services entirely, or almost entirely, to the state or otherwise exclusively, or almost exclusively, benefits the state even though the component unit does not provide services directly to the state." [27]

However, the Florida Supreme Court opined on the question, albeit over fifty years ago, and, until that decision is overturned, its interpretation of Florida law largely settles the matter. As a Florida District Court applying the factors set forth in Moor held, " [t]he Florida Supreme Court has characterized the FSBA as a ‘ body corporate’ which is distinguishable from the State of Florida." [28] In Holland v. Watson, the court recognized that " the duties of the [FSBA] are in the main fiscal" and were " previously performed by the counties and special road and bridge districts and are in no way related to the duties imposed on the officers of the administrative departments by the Constitution and the statute." [29] Holland also held that " [t]he very fact that [the Florida Constitution] creates the Board a body corporate with power to sue and be sued ... would seem to foreclose the question [of whether it is authorized to employ counsel to assist it]." [30]

More recently the Florida Supreme Court characterized the FSBA as a " state fiscal agency." [31] However, the Second

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Circuit made clear that the fact that an entity is characterized as a state agency does not foreclose the possibility that the entity is a citizen for diversity purposes. [32] Moreover, although the Board of the FSBA is composed of the Governor, the State Chief Financial Officer and the State Attorney General, [33] the Florida Supreme Court noted that " in performing the duties [of fiscal administration] laid on them, the members of the Board act without reference to their duties as state officers" and the Board " might have been composed of three teachers, three preachers, three doctors, or three sheriffs." [34]

In addition, the FSBA has the ability to sell, hold or otherwise deal in property including the power to " execute ... agreements relating to real, personal and mixed property, services, commodities and capital outlay items required for the day-to-day operations of the Board ... [and to] negotiate, enter into and execute contracts and agreements to carry out the administrative, investment and debt functions of the Board." [35] It has the power to " make purchases, sales, exchanges, investments, and reinvestments for and on behalf of" the funds it manages for state and local entities. [36] With these obligations comes the right to bring suit as well as the ability to be sued, in its own name, in court.[37]

The weight of Florida authority, both state and federal, dictates that, while closely aligned with the state of Florida, the FSBA is separate for the purposes of diversity jurisdiction. This is consistent with Second Circuit and Supreme Court case law holding that corporate status and the ability to sue and be sued in its own capacity renders an entity a citizen for diversity purposes. [38] The decision to exercise jurisdiction over the FSBA is made easier by the knowledge that, if the FSBA's citizenship is appealed post-judgment

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and the court of appeals disagrees with my conclusion, it has the power to dismiss the FSBA while preserving the judgment as to the other concededly diverse parties.[39]


For the foregoing reasons, PSERS is dismissed in order to preserve this Court's subject matter jurisdiction.


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