LLCs can cause problems for any lawyer attempting to determine if there is diversity jurisdiction. The LLC is a citizen of each state in which one of its members is a citizen. If one LLC owns another LLC, citizenship must be verified through both layers of the LLC.

If there is no diversity, there is no subject matter jurisdiction, and the proceedings in federal court are essentially null and void.

In the Bluestern case, the problem did not become apparent until the case had been pending in federal court for some time, almost two years. Bluestern, the defendant, was sued in Georgia State Court in December 2011. Bluestern, believing that there was diversity jurisdiction, promptly removed the case to federal court. Later, discovery requests were served, but the parties did not notice the problem. Only in late 2012, did the parties and the court fully comprehend the problem. The case was remanded back to state court.

The Court explained the problem in this way:

This case demonstrates the difficulty of applying established diversity jurisdiction principles to 21st-century business organizations. When determining citizenship of the parties for diversity jurisdiction purposes, a limited liability company (LLC) is a citizen of every state that any member is a citizen of. And it is common for an LLC to be a member of another LLC. Consequently, citizenship of LLCs often ends up looking like a factor tree that exponentially expands every time a member turns out to be another LLC, thereby restarting the process of identifying the members of that LLC. The simplest misstep has the potential to derail years of litigation and result in a massive financial sanction, as happened here. It is in everyone’s best interest, both the litigants’ and the courts’, to verify that diversity jurisdictionexists before proceeding with the case. Everyone involved in this case trusted that diversity jurisdiction existed, but no one verified it. The law firms involved trusted their clients. The clients trusted their lawyers. The law firms trusted each other, and the district court trusted them. But there was no verification.

Pursuant to its inherent authority, the district court sanctioned one of the parties in the amount of $550,000 in legal fees. The Eleventh Circuit reversed on the ground that the sanction an abuse of discretion because the party that made the jurisdictional mistake did not abuse the legal process. The court explained that the sanction was a misapplication of the doctrine of the inherent power of the court. Again, a thoughtful explanation from the court:

If a district court is unsure whether to sanction a party under its inherent powers, it should look to the guidance of the Supreme Court in Chambers. The purpose of the inherent power is both to vindicate judicial authority without resorting to contempt of court sanctions and to make the non-violating party whole. See Chambers, 501 U.S. at 45-46, 111 S. Ct. at 2133. The inherent power must be exercised with restraint and discretion. This power is not a remedy for protracted litigation; it is for rectifying disobedience, regardless of whether such disobedience interfered with the conduct of the trial. See id. at 44, 111 S. Ct. at 2132. Courts considering whether to impose sanctions under their inherent power should look for disobedience and be guided by the purpose of vindicating judicial authority. None of these concerns are present here.

In the end, the court concluded that no party engaged in any bad faith conduct. Instead, the court noted that the case was a colossal waste of time and money. The Eleventh Circuit chose to be merciful to the lawyers involved in the case, reasoning that the wasted legal fees and embarrassment were enough punishment.

 

Source: PURCHASING POWER, LLC v. BLUESTEM BRANDS, INC., Court of Appeals, 11th Circuit 2017 – Google Scholar

This case was decided in 2003. However, it is worth posting again as these issues seem to come up all the time. The citizenship of an LLC is determined by the citizenship of each member. If you have a member from Illinois, the LLC is an Illinois citizen. If the defendant is from Illinois, there is no diversity of citizenship and no subject matter jurisdiction federal court. 28 USC 1332.

As I have indicated before, the diversity jurisdiction issues relating to LLCs can be more complicated than they seem. In this case, the diversity error was not uncovered until the case had been tried and was on appeal before the Seventh Circuit. The Seventh Circuit did not take kindly to the error. It explained:

Counsel and the magistrate judge assumed that a limited liability company is treated like a corporation and thus is a citizen of its state of organization and its principal place of business. That is not right. Unincorporated enterprises are analogized to partnerships, which take the citizenship of every general and limited partner. See Carden v. Arkoma Associates, 494 U.S. 185, 110 S.Ct. 1015, 108 L.Ed.2d 157 (1990). In common with other courts of appeals, we have held that limited liability companies are citizens of every state of which any member is a citizen. See Cosgrove v. Bartolotta, 150 F.3d 729 (7th Cir.1998). So who are Champaign Market Place LLC’s members, and of what states are they citizens? Our effort to explore jurisdiction before oral argument led to an unexpected discovery: Belleville Catering, the corporate plaintiff, appeared to be incorporated in Illinois rather than Missouri!

At oral argument we directed the parties to file supplemental memoranda addressing jurisdictional details. Plaintiffs’ response concedes that Belleville Catering is (and always has been) incorporated in Illinois. Counsel tells us that, because the lease between Belleville Catering and Champaign Market Place refers to Belleville Catering as “a Missouri corporation,” he assumed that it must be one. That confesses a violation of Fed. 693*693 R.Civ.P. 11. People do not draft leases with the requirements of § 1332 in mind — perhaps the lease meant only that Belleville Catering did business in Missouri — and counsel must secure jurisdictional details from original sources before making formal allegations. That would have been easy to do; the client’s files doubtless contain the certificate of incorporation. Or counsel could have done what the court did: use the Internet. Both Illinois and Missouri make databases of incorporations readily available. Counsel for the defendant should have done the same, instead of agreeing with the complaint’s unfounded allegation.

…..

One more subject before we conclude. The costs of a doomed foray into federal court should fall on the lawyers who failed to do their homework, not on the hapless clients. Although we lack jurisdiction to resolve the merits, we have ample authority to govern the practice of counsel in the litigation. See, e.g., Willy v. Coastal Corp., 503 U.S. 131, 112 S.Ct. 1076, 117 L.Ed.2d 280 (1992); Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 393-98, 110 S.Ct. 2447, 110 L.Ed.2d 359 (1990); Szabo Food Service, Inc. v. Canteen Corp., 823 F.2d 1073 (7th Cir.1987). The best way for counsel to make the litigants whole is to perform, without additional fees, any further services that are necessary to bring this suit to a conclusion in state court, or via settlement. That way the clients will pay just once for the litigation. This is intended not as a sanction, but simply to ensure that clients need not pay for lawyers’ time that has been wasted for reasons beyond the clients’ control.

The judgment of the district court is vacated, and the proceeding is remanded with instructions to dismiss the complaint for want of subject-matter jurisdiction.

Comment: Ouch!

Source: Belleville Catering v. Champaign Market Place, 350 F. 3d 691 – Court of Appeals, 7th Circuit 2003 – Google Scholar

One of the more simple yet frustrating requirements for establishing diversity jurisdiction is to prove that the parties are from different states. Here, a case was filed in federal court and summary judgment was granted to the defendant. Only then, when it reached the 11th Circuit, did that court determine that the parties were from the same state – Florida. How did this happen?

It happened because Thermoset, a Florida corporation, sued RGSO, an LLC. Most people don’t know this, but an LLC’s citizenship is determined by the citizenship of its members. In this case, RGSO had a Florida member. Therefore, citizens of Florida were on both sides of the litigation and there was no diversity of citizenship.

So, if you sue an LLC, make sure you know the citizenship of each member of the LLC. One way to avoid problems is to write a letter to the LLC and request that the LLC inform you of the citizenship of each member.

LLCs cause painful diversity jurisdiction issues all the time, sometimes leading to sanctions against the lawyers who fail to figure out citizenship. This is a danger area for every lawyer who practices in federal court. It is a trap for the unwary and can lead to embarrassment and sometimes worse.

Source: THERMOSET CORPORATION v. BUILDING MATERIALS CORP OF AMERICA, Court of Appeals, 11th Circuit 2017 – Google Scholar

A criminal defendant pleaded guilty in federal court and, later, wished to sue his lawyer for legal malpractice. The case was dismissed for the lack of diversity jurisdiction (both are citizens of Illinois).

Source: Merriweather v. Whitley, Dist. Court, SD Illinois 2016 – Google Scholar

FHL, INC. v. Walker, Dist. Court, MD Alabama 2014 – Google Scholar.

Diversity jurisdiction depends on the citizenship of the parties, not their residences, office addresses or where they conduct business. Although this issue is taught in law school, experienced lawyers sometimes forget to allege the citizenship of the various parties. I will admit that I have even made this mistake in my career. Here the district judge was merciful and allowed the plaintiff to amend the complaint to allege citizenship, not residency or an office address. As the court correctly noted, residency is not enough. Citizenship is the same as domicile.

It is remarkable how many cases are dismissed every year by the federal courts for lack of diversity jurisdiction. You would think we lawyers would have learned by now.

Edward X. Clinton, Jr.

Rago v. ING DIRECT, Dist. Court, ND Illinois 2013 – Google Scholar.

This is a decision holding that the court lacks diversity jurisdiction because the plaintiff could not possibly recover the minimum diversity amount, $75,000. The case is interesting because the plaintiff claimed that the defendant bank breached an agreement to refinance his mortgage in the amount of $493,500.

The bank argued that the diversity amount was met by the $493,500 allegation. Judge Durkin disagreed. The court explained:

“The Court finds that there was never any legal basis for Rago to be awarded an amount in excess of $75,000, let alone the $493,700 described in his original complaint. The $493,700 damage figure was never, and will never be, even plausibly possible. Rago alleges that ING breached a contract to refinance his mortgage such that he lost the opportunity to pay a decreased monthly payment at a lower interest rate and to pay down the principal. On the basis of these allegations, the only damages Rago can possibly seek flow from the higher interest he has paid and the fact that no portion of his payments has been applied to the loan’s principal.”

This is an interesting case because the plaintiff was allowed to amend the complaint to arguably defeat diversity jurisdiction.

Abraham v. NEWBERRY COUNTY, Dist. Court, D. South Carolina 2012 – Google Scholar.

The defendant removed the action, but was unable to identify a federal question set forth in the complaint.  Thus, the case was remanded back to state court.

The court held as follows:

The defendant bears the burden of establishing the existence of removal jurisdiction.Mulachey v. Columbia Organic Chems. Co., 29 F.3d 148, 151 (4th Cir. 1994). Because removal jurisdiction raises significant federalism concerns, a district court must strictly construe removal jurisdiction. Id. (citing Shamrock Oil & Gas Corp. v. Sheets, 313 U.S. 100 (1941)). If federal jurisdiction is in doubt, remand to state court is necessary. Id. Where, as here, the defendant bases subject matter jurisdiction on the presence of a federal question, the court must evaluate the plaintiff’s complaint filed in a state court to determine if federal question jurisdiction is present. Merrell Dow Pharms., Inc. v. Thompson, 478 U.S. 804, 808 (1986).

Plaintiff states he has alleged solely state law claims in the instant action and seeks aremand of this action to state court. Defendant does not oppose a remand. As is appears this court does not have federal question jurisdiction, the court concludes that this action must be remanded to the Court of Common Pleas for Newberry County.

Edward X. Clinton, Jr.

PHILADELPHIA INDEMNITY INSURANCE COMPANY v. YOUR FRIENDS & NEIGHBORS, INC., Dist. Court, ND Indiana 2012 – Google Scholar.

The court found that diversity jurisdiction was lacking because (a) plaintiff alleged residency, not citizenship; and (b) the allegations were made on information and belief.

The court ordered plaintiffs to amend their complaint.