Subject-matter Jurisdiction – Breach-of-contract

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7^th Circuit Court of Appeals

Case Name: Big Shoulders Capital LLC, v. San Luis & Rio Grande Railroad, Inc., et al.,

Case No.: 19-3234; 19-3428; 19-3516; 20-1053; 20-1503

Officials: BRENNAN, SCUDDER, and KIRSCH, Circuit Judges.

Focus: Subject-matter Jurisdiction – Breach-of-contract

This labyrinth of appeals stems from a breach of contract claim brought by Big Shoulders Capital LLC against San Luis & Rio Grande Railroad Inc. (SLRG) and Mt. Hood Railroad Co., with federal jurisdiction ostensibly based on diversity of citizenship. In its complaint, Big Shoulders requested that the district court appoint a receiver to handle SLRG’s assets. That court did so, which brought the case to the attention of the several creditors who have interests in entities in the same corporate group as SLRG and Mt. Hood. One of these parties, Sandton Rail Company LLC, intervened and challenged the appointment of the receiver as well as the district court’s jurisdiction. Sandton alleged that Big Shoulders failed to join necessary parties who, if added, would destroy diversity of citizenship.

Meanwhile, other creditors—referred to here as Petitioning Creditors—filed an involuntary bankruptcy petition on behalf of SLRG in federal bankruptcy court in Colorado. The receiver objected. Because the judicially approved receivership agreement contained an anti-litigation injunction, the district court initially concluded that the bankruptcy petition was void. On reconsideration, however, the district court determined that it did not have authority to enjoin the bankruptcy. So the bankruptcy continued, and after Big Shoulders refused to continue to fund the receivership, the district court approved its termination.

Out of these circumstances come several appeals. Sandton brings the main appeal which claims the district court lacked subject matter jurisdiction over the entire contract dispute because—contrary to the original pleadings—Big Shoulders, SLRG, and Mt. Hood all have Illinois citizenship. The other appeals relate to the bankruptcy petition and the district court’s decision to first enforce the anti-litigation injunction but then to allow the bankruptcy to proceed. In another layer of complexity, each appeal also involves questions of standing or mootness.

In the end, those justiciability questions require us to dismiss all but Sandton’s appeal. As for Sandton’s argument that diversity jurisdiction is lacking, we remand to the district court for an application in the first instance of the “nerve center test” to determine if SLRG and Mt. Hood are citizens of Illinois.

Dismissed in part. Remanded in part.

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Derek A Hawkins is Corporate Counsel, at Salesforce.