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U.S. District Court Ponders Citizenship of Dissolved Partnership for Diversity of Citizenship Purposes

In WolfBlock LLP v. Fed. Ins. Co., No. 13-6676, 2014 U.S. Dist. LEXIS 84108iStock_000027988064xsmall.jpg (E.D. Pa. June 18, 2014), the U.S. District Court for the Eastern District of Pennsylvania recently considered an interesting question: when a partnership has been dissolved and is involved in a lawsuit, what is its citizenship for diversity purposes under 28 U.S.C. Section 1332(a)(1)?

This issue came before the court after a dissolved law partnership (i.e., a Pennsylvania limited liability partnership) moved to remand a fiduciary insurance coverage dispute with its insurer after the insurer had removed the dispute from state to federal court. In support of its motion to remand, the dissolved law partnership argued that there was no diversity of citizenship because many of the firm's partners resided in New Jersey, which is where the insurer had its principal place of business. The insurer disagreed, arguing that the firm no longer had any partners because it had been dissolved. The court rejected this argument and agreed with the dissolved law partnership that diversity of citizenship was lacking.

In resolving this issue, the court began its analysis with the basic premise that a partnership is deemed to be a citizen of all states where its partners reside. Next, the court looked to substantive partnership law in Pennsylvania to answer the question of whether a dissolved partnership continues to have partners. Citing a Pennsylvania case recognizing that a partnership continues to exist after dissolution until its affairs are wound up, the court determined that the operative issue in the case before it was whether the dispute between the dissolved partnership and the insurer was a "pre-existing matter." If it was, then the dispute would constitute ongoing business of the partnership, and the citizenship of the partnership would be determined by the citizenship of its partners. If it was not, however, then the citizenship of the partners would be irrelevant since the dispute would not be part of winding up the affairs of the partnership.

Faced with these two alternatives, the court concluded that the dispute, which involved the dissolved partnership's post-dissolution decision to terminate severance payments that the partnership had previously agreed to make to a former partner, was a "pre-existing matter." Specifically, the court found unpersuasive the insurer's argument that the dispute was not "pre-existing" because the decision to terminate the severance agreement was not made and the former partner's suit was not filed until after the partnership was dissolved. Accordingly, the court found that the case should be remanded to state court because diversity jurisdiction was lacking. The court declined, however, to award fees because it concluded that the insurer's position was not objectively unreasonable.

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