Todd Delay v. Rosenthal Collins Group, LLC ( 2009 )

RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit Rule 206
File Name: 09a0375p.06
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
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TODD J. DELAY,
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Plaintiff-Appellant,
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No. 08-4557
v.
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Defendant-Appellee. -
ROSENTHAL COLLINS GROUP, LLC,
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Appeal from the United States District Court
for the Southern District of Ohio at Columbus.
No. 07-00568—James L. Graham, District Judge;
Norah McCann King, Magistrate Judge.
Argued: October 8, 2009
Decided and Filed: October 27, 2009
Before: SUTTON, KETHLEDGE, and WHITE, Circuit Judges.
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COUNSEL
ARGUED: James G. Vargo, JAMES E. ARNOLD & ASSOCIATES, LPA, Columbus,
Ohio, for Appellant. Jeffrey A. Schulman, WOLIN, KELTER & ROSEN, LTD., Chicago,
Illinois, for Appellee. ON BRIEF: James G. Vargo, JAMES E. ARNOLD &
ASSOCIATES, LPA, Columbus, Ohio, for Appellant. Jeffrey A. Schulman, WOLIN,
KELTER & ROSEN, LTD., Chicago, Illinois, for Appellee.
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OPINION
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KETHLEDGE, Circuit Judge. Todd Delay filed this suit against his former
employer, Rosenthal Collins Group, LLC (RCG), seeking indemnification for legal expenses
incurred in successfully defending a prior suit brought against him under the Commodities
Exchange Act (CEA), 7 U.S.C. § 1 et seq. The district court dismissed Delay’s claim,
finding it preempted by federal law. We respectfully disagree, and thus vacate and remand.
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I.
According to Delay’s complaint, RCG is a “futures commission merchant,” see
7 U.S.C. § 1a(20), operating numerous trading desks on the floor of the Chicago Board of
Trade and the Chicago Mercantile Exchange. Beginning in 2002, Delay worked as the
manager of RCG’s branch office in Columbus, Ohio.
Delay was fired from that job in September 2005. Soon thereafter, the Commodity
Futures Trading Commission (CFTC) filed a civil complaint against Delay in federal court,
alleging he had violated several provisions of the CEA. Delay eventually prevailed in that
suit after a bench trial.
Delay thereafter commenced this suit against RCG in Ohio state court, asserting two
claims for relief. First, Delay sought indemnification for his expenses in defending against
the CFTC’s claims, alleging that the claims involved conduct in his capacity as an employee
of RCG. Second, Delay claimed that RCG had breached his employment contract by failing
to provide ninety days’ notice before terminating him.
RCG removed the case to federal court on diversity grounds and then moved to
dismiss both claims. The district court granted the motion as to Delay’s indemnification
claim, but denied it as to his contractual one. The district court later denied Delay’s motion
to reconsider that decision. The parties thereafter settled the contractual claim, which
accordingly was voluntarily dismissed with prejudice. That cleared the way for Delay to
bring this appeal.
II.
We first address the issue of subject-matter jurisdiction. “[E]very federal appellate
court has a special obligation to ‘satisfy itself not only of its own jurisdiction, but also that
of the lower courts in a cause under review,’ even though the parties are prepared to concede
it.” Bender v. Williamsport Area Sch. Dist., 475 U.S. 534, 541 (1986) (quoting Mitchell v.
Maurer, 293 U.S. 237, 244 (1934)). Discharging that obligation requires some work here.
RCG’s notice of removal said that Delay is a citizen of Ohio and that RCG is a
limited liability company organized under the laws of Illinois, with its principal place of
business in Illinois. Delay’s jurisdictional statement under Federal Rule of Appellate
No. 08-4557 Delay v. Rosenthal Collins Group, LLC Page 3
Procedure 28(a)(4) told the same story. For its part, RCG failed to include a jurisdictional
statement in its brief at all, thereby indicating that RCG was not dissatisfied with the one
contained in Delay’s. See Fed. R. App. P. 28(b).
But RCG should have been dissatisfied. The parties erred in assuming that a limited
liability company, like a corporation, is a citizen of its states of organization and principal
place of business. The general rule is that all unincorporated entities—of which a limited
liability company is one—have the citizenship of each partner or member. See Carden v.
Arkoma Assocs., 494 U.S. 185, 187-92 (1990). Accordingly, we held in an unpublished
decision that a limited liability company has the citizenship of each of its members. See
Homfeld II, L.L.C. v. Comair Holdings, Inc., 53 F. App’x 731, 732-33 (6th Cir. 2002). And
we so hold today. In doing so, we join every other circuit that has addressed this issue. See
Pramco, LLC ex rel. CFSC Consortium, LLC v. San Juan Bay Marina, Inc., 435 F.3d 51, 54-
55 (1st Cir. 2006); Handelsman v. Bedford Vill. Assocs. P’ship, 213 F.3d 48, 51-52 (2d Cir.
2000); Gen. Tech. Applications, Inc. v. Exro Ltda, 388 F.3d 114, 120 (4th Cir. 2004); Harvey
v. Grey Wolf Drilling Co., 542 F.3d 1077, 1080 (5th Cir. 2008); Cosgrove v. Bartolotta, 150
F.3d 729, 731 (7th Cir. 1998); OnePoint Solutions, LLC v. Borchert, 486 F.3d 342, 346 (8th
Cir. 2007); Johnson v. Columbia Props. Anchorage, LP, 437 F.3d 894, 899 (9th Cir. 2006);
Rolling Greens MHP, L.P. v. Comcast SCH Holdings L.L.C., 374 F.3d 1020, 1022 (11th Cir.
2004).
The result is that RCG’s jurisdictional allegations, and Delay’s jurisdictional
statement on appeal, were deficient. When diversity jurisdiction is invoked in a case in
which a limited liability company is a party, the court needs to know the citizenship of each
member of the company. And because a member of a limited liability company may itself
have multiple members—and thus may itself have multiple citizenships—the federal court
needs to know the citizenship of each “sub-member” as well. See Hicklin Eng’g L.C. v.
Bartell, 439 F.3d 346, 347-48 (7th Cir. 2006). Indeed, if even one of RCG’s members—or
one member of a member—were a citizen of Ohio, then complete diversity, and with it
federal jurisdiction, would be destroyed. See Caudill v. N. Am. Media Corp., 200 F.3d 914,
916 (6th Cir. 2000).
No. 08-4557 Delay v. Rosenthal Collins Group, LLC Page 4
Thus we directed RCG to submit a jurisdictional statement identifying the citizenship
of all of its members. RCG’s response assures us that none of RCG’s members is a citizen
of Ohio. The parties are thus completely diverse, and we have jurisdiction over the case.
III.
We review de novo a district court’s dismissal of a claim under Rule 12(b)(6).
Biegas v. Quickway Carriers, Inc., 573 F.3d 365, 377 (6th Cir. 2009). In doing so, we
accept as true all non-conclusory allegations in the complaint and determine whether they
state a plausible claim for relief. Ashcroft v. Iqbal, ___ U.S. ___, 129 S. Ct. 1937, 1949-50
(2009).
A.
The district court held that the CEA preempts any state-law right to indemnification
for expenses incurred in defending against a CEA claim—even if the defense was successful.
Delay has abandoned any claim that federal law affirmatively provides him with an
indemnification right, but argues that the district court erred in holding that federal law
preempts his indemnification claims under state law.
There is some general support for the district court’s position, albeit by way of
analogy to federal securities law. The Fourth Circuit has held that state-law indemnification
claims for expenses relating to federal securities-law violations are preempted, at least as to
wrongdoers. See Baker, Watts & Co. v. Miles & Stockbridge, 876 F.2d 1101, 1108 (4th Cir.
1989). The Second, Third, and Ninth Circuits have likewise held that state-law
indemnification claims for federal securities-law liability are incompatible with the policies
behind the federal law, at least as to wrongdoers. See Globus v. Law Research Serv., Inc.,
418 F.2d 1276, 1288-89 (2d Cir. 1969), Eichenholtz v. Brennan, 52 F.3d 478, 483-85 (3d
Cir. 1995); Franklin v. Kaypro Corp., 884 F.2d 1222, 1232 (9th Cir. 1989). Other decisions
have rejected indemnification for securities-law liability without specifying whether the
indemnification claim was asserted under state or federal law. See, e.g., Heizer Corp. v.
Ross, 601 F.2d 330, 334-35 (7th Cir. 1979). These cases generally reason that
indemnification would “tend[] to frustrate and defeat” the policies of the securities laws, and
that “[a] securities wrongdoer should not be permitted to escape loss by shifting his entire
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responsibility to another party.” Id. at 334; see also Baker, Watts & Co., 876 F.2d at 1108
(“[I]t would run counter to the basic policy of the federal securities laws to allow a securities
wrongdoer . . . to shift its entire responsibility for federal violations on the basis of a
collateral state action for indemnification”).
The predicate for that reasoning, however, is that the party seeking indemnification
is a “wrongdoer.” The CFTC failed to prove that Delay was a wrongdoer here. Thus, even
if we were persuaded by the analogy to securities law, we do not think that allowing Delay
to enforce a state-law indemnification right would “tend[] to frustrate and defeat” the CEA’s
purposes. Heizer Corp., 601 F.2d at 334. As the Tenth Circuit concluded in the securities-
law context, we “find no policy contrary to an award to a party for legal expenses in
successfully defending” a CEA claim. Koch Indus., Inc. v. Vosko, 494 F.2d 713, 725 (10th
Cir. 1974).
But RCG cites not only frustration and defeat in seeking preemption here. It argues
as well that preempting Delay’s claim would affirmatively advance the CEA’s purposes.
That may well be true—but only in the sense that platinum (a heavier metal) makes a better
paperweight than iron does. It appears likely enough that, if people know they cannot obtain
indemnification after even a successful defense against a CEA claim, they might be more
careful than otherwise to comply with the statute. But that benefit appears marginal at best;
and it would come at a disproportionately high cost as measured against the policies
supporting any state-law rights of indemnification. Meanwhile, the CEA itself says nothing
about indemnification. We conclude, therefore, that Congress did not intend to displace the
state-law indemnification rights, if any, of parties found not to have violated the CEA.
Contrary to RCG’s suggestion, our conclusion does not conflict with the Seventh
Circuit’s decision in King v. Gibbs, 876 F.2d 1275 (7th Cir. 1989). Although the court there
did hold that a securities-fraud defendant could not obtain indemnification even if he could
show that he was innocent of any wrongdoing, see id. at 1278-83, its decision was limited
to the question whether federal law affirmatively supplied a cause of action for
indemnification. Because the defendant had waived his state-law indemnification claim, see
id. at 1279 n.5, the court did not address the preemption question presented here. Moreover,
the King court’s observation that “[t]he federal government has no conceivable stake in the
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indemnification of corporate officers and directors,” id. at 1282, is entirely consistent with
our conclusion that the CEA does not displace state law governing whether an innocent
defendant is entitled to indemnification.
B.
Our holding that federal law does not preempt a state-law indemnification right says
nothing about whether the right exists in the first place. The district court did not address
this issue in its opinion dismissing Delay’s indemnification claim; and we read its opinion
denying his motion for reconsideration not to have addressed the issue either.
The issue whether Delay can state an indemnification claim under state law appears
to be a complex one. There is first the question whether Ohio or Illinois law should apply
under Ohio’s choice-of-law rules, see Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487,
496-97 (1941)—a question as to which neither party ventures an answer on appeal.
Moreover, regardless of which State’s law applies, difficult questions await, such as whether
Delay can invoke the mandatory indemnification right conferred on employees of limited
liability companies by Ohio Rev. Code § 1705.32, or the implied indemnification right
sometimes read into employment contracts under the common law. See Johnston v. Suckow,
370 N.E.2d 650, 653 (Ill. App. Ct. 1977); Restatement (Third) of Agency § 8.14 cmt. d
(2006). We think the best course is to allow the district court to analyze these issues in the
first instance.
The district court’s judgment is vacated, and the case remanded for further
proceedings consistent with this opinion.