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No federal question jurisdiction over contract dispute

Virginia Lawyers Weekly//January 11, 2022

No federal question jurisdiction over contract dispute

Virginia Lawyers Weekly//January 11, 2022

Where parties disputed whether the plaintiff’s right to purchase an affordable housing development was triggered, there was no federal question jurisdiction. Although the housing development was created to take advantage of federal tax credits, resolution of the claims did not involve construction and application of the federal statute.


The case involves a dispute over the purchasing rights of an affordable housing development located in Herndon, Virginia Plaintiff Wesley Housing Development Corporation, or WHDC, is nonprofit corporation organized under Virginia law. Plaintiff Wesley Coppermine Inc. is a Virginia corporation. Defendant SunAmerica Housing Fund 1171 LP is a Nevada limited partnership.

In 2021, WHDC, Wesley and SunAmerica formed defendant Wesley Coppermine Limited Partnership to build the Coppermine Place II and to take advantage of a federal tax subsidy for constructing low income housing. On Aug. 23, 2021, Wesley and WHDC filed suit against SunAmerica and the partnership in Virginia state court.

On Sept. 2, 2021, SunAmerica removed the case to federal court on the basis of diversity and federal question jurisdiction. On September 9, SunAmerica filed a motion to dismiss the complaint for failure to state a claim, and on Sept. 21 the plaintiffs filed a motion to remand the case to state court.

Federal question jurisdiction

Analysis of federal question jurisdiction in removal disputes is guided by the well-pleaded complaint rule, under which “removal [to federal court] is appropriate if the face of the complaint raises a federal question.” There is no doubt in this case, however, that the well-pleaded complaint rule is not satisfied, as the complaint raises three state law causes of action under Virginia contract law.

SunAmerica nonetheless argues that federal question jurisdiction exists in this case under an exception to the well-pleaded complaint rule called embedded federal question jurisdiction, “in which state law supplies the cause of action but federal courts have jurisdiction under § 1331 because ‘the plaintiff’s right to relief necessarily depends on resolution of a substantial question of federal law.’” SunAmerica argues that federal jurisdiction exists because resolution of plaintiffs’ claims necessarily involves construction and application of the federal low-income housing tax credit statute.

This argument strains credulity. The present case is a contract dispute, not a tax case, and it is difficult to see how interpretation of this tax safe harbor provision has anything to do with the case at hand. The central dispute in this action is whether the right of first refusal, or ROFR, was properly triggered. Indeed, the ROFR is a contractual provision drafted by the parties with language the parties agreed to, not terms or language dictated by federal statute. Interpretation of that contractual provision, therefore, does not require an interpretation or adjudication of a federal statute.

Diversity jurisdiction

SunAmerica also argues that diversity jurisdiction is proper under 28 U.S.C. § 1332(a). Both plaintiffs in this case are Virginia citizens for the purpose of diversity jurisdiction analysis. The partnership, however, defeats diversity, as its two members are SunAmerica (whose citizenship is Nevada, California, Texas and Colorado) and Wesley (whose citizenship is Virginia), and the partnership is therefore considered to be a citizen of Virginia (as well as Nevada, California, Texas and Colorado). Because the plaintiffs are Virginia residents, the presence of a Virginia defendant therefore defeats the complete diversity required by §1332(a).

SunAmerica argues that the partnership’s citizenship should be disregarded because the partnership is merely a nominal party. But this argument ignores the fact that it is the partnership, and not SunAmerica, which holds the title for Coppermine Place II. To this end, each count of the complaint seeks specific performance of the ROFR agreement against the partnership.

There is little doubt that in this case, where plaintiffs seek to compel the partnership to sell a housing development according to the specific terms of the ROFR, that the partnership will be affected by the resolution of this suit. Accordingly, the partnership is not a nominal party and the partnership’s citizenship must be considered in determining whether complete diversity exists between the parties.

SunAmerica’s argument that the plaintiffs fraudulently joined the partnership for the sole purpose of defeating diversity fails for the same reason: the partnership holds title to the Coppermine Place II property and plaintiffs cannot obtain the relief they seek without suing the partnership. Therefore, the partnership was not fraudulently joined.

Plaintiffs’ motion to remand granted.

Wesley Housing Development Corporation of Northern Virginia v. SunAmerica Housing Fund 1171 LP, Case No. 1:21-cv-1011, Dec. 22, 2021. EDVA at Alexandria (Ellis). VLW 021-3-557. 13 pp.

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