Diversity Jurisdiction — Federal Credit Unions Normally Not a Citizen of Any State — Localized Operations Exception

From Mungo v. Minn. Life Ins. Co., 2011 U.S. Dist. LEXIS 67654 (D. S.C. June 22, 2011):

As Mungo points out in her brief, Founders recently asserted to this court in a removal notice in an unrelated case that it is a citizen of South Carolina "for purposes of any diversity analysis." *** The citizenship of Founders was not relevant in that case, and Founders argues that it had not thoroughly researched the issue before making that representation and that this is an issue of first impression for the court. Mungo argues that Founders should be judicially estopped from claiming to not be a citizen of any state when it has already declared itself a citizen of South Carolina.

Federal credit unions are incorporated under federal law, not under any state's laws. Congress has chosen not to define the citizenship of these institutions. Therefore, they are usually not considered citizens of any particular state for diversity purposes. However, courts have found that when a credit union maintains "localized operations," it can be treated as a citizen of the state in which it operates. Mungo encourages the court to adopt the reasoning in Feuchtwanger v. Lake Hiawatha Credit Union and treat Founders as a citizen of South Carolina because its operations are primarily focused in this state. 272 F.2d 453, 454-456 (3rd Cir. 1959).

The defendants point out that neither the Supreme Court nor the Fourth Circuit has expressly adopted this judicially-created exception. While that may be the case, several district courts in the Fourth Circuit have used the localization test. See Northern Virginia Foot & Ankle Associates, LLC v. Pentagon Federal Credit Union, 2011 WL 280983 (January 26, 2011), Iceland Seafood Corp. v. Nat'l Consumer Co-op Bank, 285 F.Supp.2d 719 (E.D.Va. 2003).

By far the majority of Founders' members, branches, and operations are located in South Carolina. Nearly 90% of its members reside in South Carolina. Over 90% of its retail deposits and 94% of its commercial deposits were owned by members residing in South Carolina. (ECF No. 18). Over 89% of its retail loans and 94% of its commercial loans were made to South Carolina residents. Id.

The defendants argue that although a small percentage of its business is conducted outside of South Carolina, that percentage consists of a large amount of business. The 10% of members that live outside of South Carolina adds up to 20,000 people. Also, it has a number of business partners in North Carolina and it extends eligibility to employees of those business partners. The defendants also point out that Founders' initial charter authorized it to do business in four states.

After weighing the arguments of both parties, the court finds that Founders is a citizen of South Carolina for purposes of diversity. Although Congress has not defined the citizenship of federal credit unions and Founders is authorized to expand its business to other states, its operations remain highly centralized in South Carolina, such that it should be considered a citizen of this state.

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