KING PLAZA v. KP (2024)

OPINION

THIS MATTER is before the Court on plaintiff King Plaza, L.L.C.’s (King Plaza) motion to remand (Remand Motion) (ECF No. 47 (Mot.)). Defendants Alliant Tax Credit Fund 40, Ltd., Alliant Tax Credit Fund 42, Ltd., Alliant Tax Credit Fund XVIII, Ltd., Alliant ALP 40, LLC, Alliant ALP 42, LLC, and Alliant Tax Credit XVIII, LLC (collectively, Alliant Defendants) filed opposition to the Remand Motion (ECF No. 58 (Opp'n Br.)), to which King Plaza filed a reply (ECF No. 63 (Reply Br.)). For the following reasons, the Remand Motion will be GRANTED.

I. FACTS AND PROCEDURAL HISTORY

The parties are partners in a Low-Income Housing Tax Credit partnership. (ECF No. 1–1 (Compl.) ¶ 2.) King Plaza formed KP Residential, L.P. (KP Residential or Partnership) to develop and operate an affordable housing development of 249 apartments (Apartment Complex) in Perth Amboy, New Jersey. (Id. ¶ 2.) King Plaza is the general partner—with “the exclusive authority to manage the Partnership”—and the Alliant Defendants are limited partners. (Id. ¶¶ 3, 9.) King Plaza owns the land upon which the Apartment Complex is located and leases the property to the Partnership. (Id. ¶ 89).

The Low-Income Credit Program (Tax Credit Program) is “a highly complex, unique federal program” that seeks to promote institutional investment in low-income housing through the granting of tax credits. (Id. ¶¶ 19–23.) Generally, a “project sponsor” will obtain “an allocation of [t]ax [c]redits on behalf of the project partnership by engaging in a complex, ‘extremely competitive’ application process.” (Id. ¶ 26.) Once the tax credits are secured, the project partnership can collect the tax credits over a statutory period of time. (Id. ¶ 27.) The project sponsor then admits a “tax credit investor” into the partnership, who is brought into the partnership to provide capital contributions “in exchange for the allocation of substantially all of the [t]ax [c]redits awarded to the project partnership.” (Id. ¶ 30.) Here, plaintiff is the project sponsor, the Partnership is the project partnership, and the Alliant Defendants are the tax credit investors.

Under the Tax Credit Program, the “tax benefits ․ flow to partners in accordance with their respective ownership interest percentages in the project partnership.” (Id. ¶ 32.) Typically, the tax credit investor will own 99% or more of the ownership interest in the partnership and, although typically holding 1% or less ownership interest, the project sponsor “as the general partner ․ assume[s] all responsibility for the operations of the project partnership and the project's development, management, and compliance with the [Tax Credit Program] for the life of the project.” (Id. ¶¶ 32, 34.)

The project sponsor does not realize a substantial benefit until after the statutorily-prescribed period that the project must comply with the Tax Credit Program's complex regulations. (Id. ¶ 45.) On the other hand, the tax credit investor has reaped the tax credit benefits during the statutorily-prescribed period and has little to no incentive to continue with the partnership after it has exhausted the tax credit benefits. (Id. ¶¶ 43–51.) “Correspondingly, the tax credit investor customarily does not expect, nor project, any material cash payment upon its exit, including in connection with the sale of the project.” (Id.¶ 52.)¹ However, under the Alliant Defendants’ interpretation of the agreement governing the Partnership, they should receive a large payment in connection with the sale of the Apartment Complex.

Here, the rights and obligations of the parties to the Partnership are governed by an Amended and Restated Agreement of Limited Partnership dated October 1, 2006 (Partnership Agreement). (Id. ¶ 4, Ex. A.) King Plaza claims that it is entitled to exercise an option to purchase the Apartment Complex at “fair market value” pursuant to section 5.4.E of the Partnership Agreement. (Id. ¶¶ 78–80, 120.) Pursuant to that understanding, King Plaza exercised the option and informed the Alliant Defendants. (Id. ¶¶ 120, 122.) The parties, thereafter, had a video conference wherein the Alliant Defendants claimed that the proceeds from the sale of the Apartment Complex would be “treated as liquidation proceeds rather than being distributed” under a provision of the Partnership Agreement relating to the sale of the Apartment Complex to King Plaza. (Id. ¶ 124.)

The parties have not been able to agree on: (a) the proper provision of the Partnership Agreement for the distribution of the proceeds from the sale under King Plaza's exercise of its option to purchase the Apartment Complex; and (b) a mutually agreeable appraiser to determine the fair market value of the Apartment Complex. As a result of the former disagreement, the parties have differing versions of what happens to the net proceeds from the sale of the Apartment Complex to plaintiff. King Plaza's position is that, because the sale of the Apartment Complex will be through an option right provided in section 5.4.E ² of the Partnership Agreement, the proceeds should be distributed pursuant to the “waterfall” provision in section 9.2.B.³ (ECF No. 47–1 (Pl. Br.) pp. 17, 18.) Distribution under section 9.2.B would result in King Plaza receiving 89.99% and the Alliant Defendants receiving 10.01% of the net sales proceeds. (Id. p. 11.) The Alliant Defendants in their counterclaim (ECF No. 8 (Countercl.)) assert that the sale of the Apartment Complex would, instead, constitute “an event of dissolution” under article 12 of the Partnership Agreement and, accordingly, distribution of the net sales proceeds is governed by section 12.4. (Countercl. p. 30.) If the Alliant Defendants are correct, “the Alliant Defendants [would] receiv[e] approximately $14.1 million, which is millions of dollars more than the 10.01% of [s]ale [p]roceeds they are entitled to receive ․ under [s]ection 9.2.B.” (Compl. ¶ 130; see also Countercl. p. 31.)

Plaintiff filed a complaint in the Superior Court of New Jersey on October 20, 2023. (Compl.) Plaintiff seeks a declaration under the New Jersey Uniform Declaratory Judgment Act, N.J. Stat. § 2A:16–50, et seq., that section 9.2.B of Partnership Agreement governs and that the proceeds from the sale of the Apartment Complex to plaintiff are to be distributed as “liquidation proceeds” and not as proceeds from the dissolution of the Partnership. (Id. ¶ 145.) Plaintiff also seeks an order of specific performance authorizing the Partnership to sell the Apartment Complex to plaintiff and to distribute the proceeds pursuant to section 9.2.B. (Id. ¶ 146.)

On November 30, 2023, the Alliant Defendants removed the case asserting diversity jurisdiction under 28 U.S.C. § 1332(a). (ECF No. 1 (Removal Not.).) The Alliant Defendants’ notice of removal states that the citizenship of KP Residential should not be considered since “[t]he citizenship of ․ KP Residential is irrelevant to the diversity-of-citizenship inquiry because KP Residential is named in the [c]omplaint solely as a nominal defendant and is not even listed in the summary of parties to the action.” (Removal Not. ¶ 18.)

On December 7, 2023, the Alliant Defendants filed an answer and counterclaim. (ECF No. 8.) The counterclaim seeks, in part, a declaration that article 12—and not section 9.2.B—of the Partnership Agreement governs the distribution of the proceeds resulting from the sale of the Apartment Complex to plaintiff. (Countercl. p. 33.)

In response to the Court's directive (see docket entry after ECF No. 1), the Alliant Defendants filed diversity disclosure statements on December 7, 2023 and December 8, 2023 (ECF Nos. 5, 11). Upon reviewing the diversity disclosure statements, District Judge Zahid N. Quraishi directed the Alliant Defendants to file a further disclosure statement “that explicitly identifies both the state of incorporation and the state of principal place of business for [the Alliant] Defendants’ relevant corporate entities.” (ECF No. 16.) In response, the Alliant Defendants filed an “exhibit” to the diversity disclosure statement filed on December 8, 2023. (ECF No. 18.) The diversity disclosure statements and the exhibit (collectively, Diversity Disclosure Statements) were filed under seal. (See notices to counsel following ECF Nos. 5, 11, 18.)

On December 21, 2023, the Alliant Defendants moved to seal the Diversity Disclosure Statements (Motion to Seal). (ECF No. 19.) Plaintiff filed opposition to the Motion to Seal (ECF No. 33), to which the Alliant Defendants filed a reply (ECF No. 48). Plaintiff filed the instant Remand Motion on the same day she filed the reply to the Alliant Defendants’ Motion to Seal. (Mot.)

While the Motion to Seal and Remand Motion were pending, this matter was reassigned to Magistrate Judge Sharon A. King and me. (ECF No. 66.) On June 26, 2024, Judge King denied the Motion to Seal and advised that the Diversity Disclosure Statements attached to the Motion to Seal would be unsealed at a future date. (ECF Nos. 85, 86.) No timely appeal having been filed, Judge King ordered ECF Nos. 5, 11, 18, 33–1, and 33–3 to be unsealed. (ECF No. 91.)

II. DISCUSSION

A. Standard

A defendant may remove a civil action to federal court if the federal court would have original jurisdiction to hear the matter in the first instance. 28 U.S.C. § 1441(a); Brown v. Francis, 75 F.3d 860, 864 (3d Cir. 1996). Where subject matter jurisdiction is based on diversity jurisdiction, all plaintiffs must be of diverse citizenship from all defendants, and the amount in controversy must exceed $75,000. 28 U.S.C. § 1332(a); Grand Union Supermarkets of the V.I., Inc. v. H.E. Lockhart Mgmt., Inc., 316 F.3d 408, 410 (3d Cir. 2003). Removal statutes “are to be strictly construed against removal and all doubts should be resolved in favor of remand.” Steel Valley Auth. v. Union Switch and Signal Div., 809 F.2d 1006, 1010 (3d Cir. 1987).

“[A] federal court must disregard nominal or formal parties and rest jurisdiction only upon the citizenship of real parties to the controversy.” Navarro Sav. Ass'n v. Lee, 446 U.S. 458, 461, 100 S.Ct. 1779, 64 L.Ed.2d 425 (1980). “Nominal parties are generally those without a real interest in the litigation.” Bumberger v. Ins. Co. of N. Am., 952 F.2d 764, 767 (3d Cir. 1991). The Third Circuit's definition of “nominal party” is inherently flexible. Boston Culinary Grp., Inc. v. JDK Catering, Inc., Case No. 08-00045, 2009 WL 2707587, *1 (M.D. Pa. Aug. 25, 2009).

B. Analysis

The discrete issue to be resolved is whether the citizenship of the Partnership, whom plaintiff named as a “nominal defendant” in this action, can be disregarded for diversity jurisdiction purposes. The parties agree that plaintiff is a citizen of New Jersey, the Alliant Defendants are not citizens of New Jersey, and the Partnership is a citizen of New Jersey and other states.⁴ (Pl. Br. p. 15.) As a result, if the Partnership's citizenship is considered in the jurisdictional analysis, diversity jurisdiction will be destroyed.

Plaintiff primarily relies on the holding in Wesley. The court in Wesley addressed whether a partnership formed to take advantage of the Tax Credit Program was a nominal party in a dispute involving the general partner's exercise of its right of first refusal to purchase an apartment complex owned by the partnership. Although the factual circumstances in Wesley are similar to this case, there are some critical differences. Here, the dispute centers around the characterization of the sales transaction and distribution of the net sales proceeds. In Wesley the dispute centered on whether the general partner had the right to exercise its right of first refusal, not on how the sales proceeds were to be distributed.

Despite the differences, I find that the rationale and the determination that the partnership in Wesley was not a nominal defendant to be persuasive. In Wesley, the court determined that the partnership was not a nominal party because the dispute could not “be resolved without affecting the non-consenting nominal defendant.” 577 F. Supp. 3d at 458 (quoting Hartford Fire Ins. Co. v. Harleysville Mut. Ins. Co., 736 F.3d 255, 260 (4th Cir. 2013)). In applying the Fourth Circuit's “key inquiry” analysis, the court concluded that the partnership would be affected by the resolution of the dispute because the general partner sought specific performance requiring the partnership to sell the apartment complex to plaintiff under the right of first refusal. Id. (“[I]f the plaintiff prevails, the [p]artnership will be ordered to sell the [apartment complex] at a substantially below-market price as specified in the [right of first refusal] the parties previously agreed to.”). The same relief—an “order of specific performance” for the sale of the Apartment Complex by the Partnership to plaintiff—is sought in this case. (Compl. ¶ 146.)

The resolution of this case will also affect the Partnership in another way. Unlike Wesley, the parties do not dispute that plaintiff has the right to purchase the Apartment Complex. However, if it is determined that sale of the Apartment Complex to plaintiff is an event of dissolution—as the Alliant Defendants assert—the Partnership will be significantly impacted. Section 12.1 of the Partnership Agreement provides that the “Partnership shall continue in full force and effect until December 31, 2066.” (ECF No. 1–1 p. 164.) An event of dissolution, however, will require the “liquidation and termination of the Partnership.” (Id. p. 165.) If the Alliant Defendants are successful in their counterclaim, the Partnership will not only be compelled to sell the Apartment Complex but the Partnership will cease to exists. Therefore, a resolution of this case will not only determine the distribution of the net sales proceeds but whether the Partnership is liquidated and terminated.⁵

The parties dispute whether the Partnership has assets beyond the Apartment Complex that would need to be liquidated if the Alliant Defendants prevail. (Compare Reply Br. p. 19 (it is not admitted “that the Partnership will have no other assets after the Apartment Complex is sold and the Sale Proceeds therefrom are distributed pursuant to the Sales Waterfall.”) with Opp'n Br. p. 15 (“the Apartment Complex is the Partnership's sole asset.”).) I need not resolve this factual issue because “all doubts should be resolved in favor of remand.” Steel Valley Auth., 809 F.2d at 1010.

The Alliant Defendants rely primarily on Muskegon Holdings. The parties in Muskegon Holdings were, like here, partners in a partnership formed to take advantage of the Tax Credit Program. And like Wesley, the parties disputed whether a partner could exercise a right of first refusal to purchase an apartment complex. See Muskegon Holdings, 2023 WL 9420120, at *2. But, unlike Wesley, the lawsuit in Muskegon Holdings was filed by the limited partner—i.e. the tax credit investor—seeking a declaration that the general partner could not exercise its right of first refusal. Id. The partnership, moreover, was not named as a party-defendant. Id. Rather, the defendants argued that the partnership was an indispensable party under Federal Rule of Civil Procedure (Rule) 19(b) and its required joinder would destroy complete diversity. Id. at * 4. The court concluded that the partnership was not an indispensable party because plaintiff could receive complete relief “even if the judgment does not bind the partnership.” Id. In other words, because plaintiff was seeking a declaration that would prevent defendants from purchasing the apartment complex, a judgment in plaintiff's favor would not affect the partnership. Id.

Muskegon Holdings is distinguishable. Here, the Alliant Defendants are not seeking to prevent the sale of the Apartment Complex to plaintiff. Rather, they have filed a counterclaim seeking affirmative relief that will have the effect of liquidating and terminating the Partnership. And instead of an analysis under Rule 19(b), the appropriate consideration is whether the Partnership has “a real interest in the litigation.” It does.

III. CONCLUSION

I find that the Partnership is not a nominal party. Accordingly, this Court lacks subject matter jurisdiction and this matter will be remanded to the Superior Court of New Jersey. An appropriate order accompanies this opinion.

FOOTNOTES

1.   Plaintiff asserts that this is “one of many similar cases that have emerged around the country in recent years concerning affordable housing developed under the federal government's [Tax Credit Program].” (ECF No. 1–1 (Compl.) ¶ 1.) Plaintiff cites to numerous cases involving the program. (Id. ¶ 7). Cases such as Wesley Housing Development Corp. of Northern Virginia v. SunAmerica Housing Fund 1171, 577 F. Supp. 3d 448 (E.D. Va. 2021) and Muskegon Holdings LLC v. VP LB 13 LLC, Case No. 23-01302, 2023 WL 9420120 (C.D. Cal. Dec. 5, 2023) provide a more fulsome explanation of the Tax Credit Program.

2.   Section 5.4.E. provides, in relevant part:[T]he General Partner shall have the option during the period commencing upon the end of the Compliance Period and ending twelve (12) months thereafter to purchase the Apartment Complex for an amount equal to the greater of: (X) (i) the outstanding indebtedness secured by the Apartment Complex, (ii) the amount of federal, state and local tax liability that the Limited Partners would incur as a result of such sale, and (iii) the amount of unreimbursed deficiency in Housing Tax Credits recognized by the Investor Limited Partner, or its partners or members, with respect to the Apartment Complex (including, without limitation, the amount of any Tax Credit Shortfall Payments otherwise due and owing to the Investor Limited Partner) or (Y) the fair market value of the Apartment Complex as determined as provided herein.(ECF No. 1–1 p. 99.)

3.   Section 9.2.B provides, in relevant part:Subject to Section 12.4 hereof, Sale or Refinancing Transaction Proceeds shall be applied in the following order of priority:* * * *(vii) The balance [after payment of items (i) to (vi)], if any, 10% to the Investor Limited Partner, 0.01 % to the Administrative Limited Partner and 89.99% to the General Partners; provided, however, the portion of the Sale and Refinancing Transaction Proceeds otherwise distributable to the General Partners hereunder will first be applied to pay any unpaid Deferred Development Fee as of the date of such distribution.(ECF No. 1–1 p. 155.)

4.   The citizenship of a partnership is the citizenship of its partners. Carden v. Arkoma Assocs., 494 U.S. 185, 196, 110 S.Ct. 1015, 108 L.Ed.2d 157 (1990).

5.   The Alliant Defendants assert that “neither side is seeking any relief in this action with respect to the dissolution procedures.” (Opp'n Br. p. 15.) While the parties are not seeking relief as “to the dissolution procedures,” the Alliant Defendants’ counterclaim seeks a declaration that would necessarily result in the Partnership's dissolution and termination.

KIEL, United States District Judge