Jurisdiction always matters. Of course, litigants and the courts tend to focus on the merits. After all, the merits, not rote jurisdictional analyses, are what a lawsuit is all about. But parties cannot ignore basic jurisdictional principles in the hope that courts will. As recent decisions make clear, they won’t. Thus, like wide receivers, attorneys and their clients must see the jurisdictional ball into their hands before turning downfield to score on the merits.
This advice is especially important for limited liability companies (“LLCs”) filing in or removing suits to federal court. According to the Internal Revenue Service, LLCs have been the fastest growing and most prolific form of business entity in the United States for nearly two decades. And when it comes to federal court, their jurisdictional hook of choice is 28 U.S.C. § 1332. That provision allows for “original jurisdiction” in the district courts “of all civil actions where the matter in controversy exceeds the sum or value of $75,000” and the parties’ citizenship is diverse.[1] Though the first element is easily satisfied, LLCs have often found themselves in trouble when setting out their citizenship to establish diversity.
As the Sixth Circuit recently observed, there are three lessons that all LLCs and counsel representing them should keep in mind when litigating in federal court.[2] We address each in turn.
Lesson 1 “LLCs are not corporations.”[3] “[A]lleging that an LLC is organized under the laws of a certain state does nothing to establish its citizenship.”[4] Nor does asserting an LLC’s headquarters or principal place of business. And though the Supreme Court has not weighed in on this issue, the Circuit Courts of Appeals are unanimous in holding that, LLCs “have the citizenship of their members and sub-members,” through all of their corporate layers.[5]
That said, this citizenship test is not statutory. It comes directly from the bench. Thirty years ago, the Supreme Court urged Congress to set out the proper analysis for unincorporated business organizations, recognizing that the current rule was “unresponsive to policy considerations raised by the changing realities of business organization.”[6] To date, that call has gone unanswered. Still, even though there is currently no split among the Circuit Courts of Appeals for determining the citizenship of LLCs, we submit that litigants should urge courts to revisit this precedent en banc, because, as Third Circuit Judge Thomas L. Ambro recently observed, “[t]here is no good reason to treat LLCs differently from corporations for diversity-of-citizenship purposes.”[7]
Lesson 2 “[L]itigants and district courts must assure themselves of subject-matter jurisdiction at the earliest possible moment to avoid wasting judicial and party resources.”[8] Indeed, the failure to do so could result in “years of litigation [being] swept away.”[9] That means that even on an appeal from a final judgment after trial,[10] the court could still find it lacks jurisdiction over the case due to its “independent obligation to determine whether subject-matter jurisdiction exists, even in the absence of a challenge from any party.”[11]
The Fourth Circuit’s recent decision in Capps v. Newmark S. Region, LLC shows what can happen when this lesson goes unheeded.[12] There, Timothy Capps brought suit against Newmark Southern Region, LLC, in the United States District Court for the Eastern District of North Carolina, alleging eight state-law claims. Newmark counterclaimed, alleging breach of contract. Both parties relied on diversity jurisdiction. And both cited Newmark’s principal place of business and State of incorporation for support.[13] After briefing motions to dismiss at the pleading stage and engaging in extensive discovery, the parties proceeded to a bench trial. The district court rendered judgment for Newmark.
Capps appealed. At oral argument, which took place more than four years after the suit began, the Fourth Circuit for the first time in the litigation, questioned whether the parties were completely diverse. The Court subsequently ordered Newmark to file a letter under Federal Rule of Civil Procedure 28(j) stating the LLC’s membership and citizenship. Newmark complied and, in doing so, determined that Capps and one of its “great-grandparent entit[ies]” were citizens of the same State.[14] Capps moved for vacatur of judgment and remand for dismissal, arguing that the conceded lack of complete diversity that existed at the time of filing meant the federal courts lacked subject-matter jurisdiction over the suit. The Fourth Circuit agreed.
Emphasizing the need to “trace Newmark’s citizenship through [the] layered entities” that made up its corporate family, the Court observed that the overlap in citizenship demonstrated that “complete diversity did not exist between the[] [parties] at the time of filing,” meaning the district court lacked subject-matter over the claims.[15]
Among its arguments against granting Capps’s motion, Newmark contended that the Court should “forgive the jurisdictional defect . . . in the interest of ‘finality, efficiency, and economy,’ given that [the] matter proceeded to judgment.”[16] But the Court reasoned that “[n]either side of [the] dispute lacked the means to ascertain Newmark’s citizenship at any point.”[17] “Whether mutual contentment with the federal forum or genuine obliviousness brought the parties to this unfortunate juncture,” the Court made clear that it would “not condone the exercise of jurisdiction where it did not truly exist.”[18] And creating “convoluted jurisdiction exceptions” like the one Newmark proposed would impose too significant a burden on “parties and the judiciary.”[19]
As a result, four years of litigation were swept away with the stroke of a pen. And it was all because of a jurisdictional oversight that either party should have seen coming from a mile away.
Lesson 3 The party asserting diversity jurisdiction bears the burden of establishing the factual predicate for it. Some courts, like the Sixth Circuit, have held “[t]hat means that a plaintiff (or a defendant in a removal action) must fully allege the citizenship of each party.”[20]
Other courts, however, take a less stringent approach. The Third Circuit, for example, has held that “a plaintiff need not affirmatively allege the citizenship of each member of an unincorporated association to get past the pleading stage” so long as there is an allegation “in good faith, after a reasonable attempt to determine the identities of the members of the association, that it is diverse from all of those members.”[21]
We submit the Third Circuit’s approach is the most sensible one for at least three reasons. First, even in cases brought under diversity jurisdiction, there is nothing independently material about the specific citizenship of an LLC’s members—all that matters is that its citizenship is different than that of the plaintiff. As the Third Circuit recognized, a party may have a good-faith basis to allege that, even if it does not definitively know the specific citizenship of each member of each LLC party.
Second and relatedly, “[t]he membership of an LLC is often not a matter of public record.”[22] Quite the opposite, it is often hidden (intentionally or not) by interlocking webs and layers of member LLCs and other entities.
Third, under the Federal Rules of Civil Procedure, a complaint need only contain “a short and plain statement of the grounds for the court’s jurisdiction,”[23] and that provision, along with all other aspects of the Rules, “should be construed, administered, and employed by the court and the parties to secure the just, speedy, and inexpensive determination of every action and proceeding.”[24] Requiring a plaintiff to plead the specific citizenship of each member of an LLC adversary imposes a threshold pleading burden not found in any rule or statute and which, in fact, is not necessary to establish the factual predicate of diversity citizenship—simply that the plaintiff’s citizenship is different from that of all of its adversaries.
Of course, the Third Circuit’s approach only gets litigants through the pleading stage. An adversary may still challenge—and the Court may still inquire sua sponte about—the factual predicate underlying the allegation, which could lead to jurisdictional discovery. Thus, counsel and parties—especially LLCs—should still conduct a reasonable, expeditious investigation to prevent a finding of lack of subject after the case has entered advanced stages.
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As Courts of Appeals across the country are becoming more invested in their jurisdictional gatekeeping roles,[25] failing to ensure complete diversity at the outset of a case could prove costly. Both LLCs and their attorneys need to see the jurisdictional ball into their hands before going for the big score, lest they lose the game—and years of hard-fought litigation—on an unforced error.
[1] 28 U.S.C. § 1332.
[2] Akno 1010 Market Street St. Louis Missouri LLC v. Pourtaghi, 43 F.4th 624, 626 (6th Cir. 2022) (“[T]he parties and the district court spent years in discovery and dispositive motion practice without properly establishing the parties’ citizenship.”).
[3] Id.
[4] Id.
[5] Id.; see also Cent. W. Va. Energy Co., Inc. v. Mountain State Carbon, LLC, 636 F.3d 101, 103 (4th Cir. 2011).
[6] Carden v. Arkoma Assocs., 494 U.S. 185, 196 (1990).
[7] Lincoln Benefit Life Co. v. AEI Life, LLC, 800 F.3d 99, 111 (3d Cir. 2015) (Ambro, J., concurring).
[8] Akno 1010, 43 F.4th at 627.
[9] Id. at 628.
[10] MidCap Media Finance, L.L.C. v. Pathway Data, Inc., 929 F.3d 310 (5th Cir. 2019); see also Caroline Smith, Agreement Isn’t Enough: The Fifth Circuit Examines Diversity Jurisdiction Sua Sponte, JD Supra (Apr. 24, 2020), https://www.jdsupra.com/legalnews/agreement-isn-t-enough-the-fifth-42340/.
[11] Arbaugh v. Y & H Corp., 546 U.S. 500, 514 (2006) (citing Ruhgras AG v. Marathon Oil Co., 526 U.S. 574, 583 (1999)).
[12] 2022 WL 16954346, —F.4th— (4th Cir. 2022).
[13] See Compl., Capps v. Newmark Southern Region, LLC, No. 5:18-cv-00133-FL (ECF No. 1, March 29, 2018); Answer to Compl. And Counterclaim, Capps v. Newmark Southern Region, LLC, No. 5:18-cv-00133-FL (ECF No. 57, December 10, 2018).
[14] 2022 WL 16954346, at *2.
[15] Id.
[16] Id. at *3.
[17] Id.
[18] Id.
[19] Id.
[20] Akno 1010, 43 F.4th at 627 (emphasis added).
[21] Lincoln Benefit Life Co., 800 F.3d at 102; see also Carolina Casualty Ins. Co. v. Team Equipment, Inc., 714 F.3d 1082 1087 (9th Cir. 2014) (holding that it is sufficient at the pleading stage for parties to “allege simply that the [LLC] defendants were diverse to it” and that they may make this allegation “on the basis of information and belief”).
[22] Lincoln Benefit Life Co., 800 F.3d at 108.
[23] Fed. R. Civ. P. 8(a)(1).
[24] Fed. R. Civ. P. 1.
[25] See Jay A. Yagoda, Jurisdiction, That Is the Question: Keeping Your Case in Federal Court After the 11th Circuit Issues a Jurisdictional Question That Stalls Your Appeal, 91 F. Bar J. No. Sept./Oct. 2017, at 59.
