Establishing Diversity Jurisdiction over Limited Liability Companies

There can be many advantages to bringing a lawsuit in federal court, especially in the Eastern District of Virginia’s rocket docket, one of those advantages being reaching a disposition quickly. There can also be disadvantages to bringing a lawsuit in federal court.  Many practitioners rarely litigate in federal court and would prefer to avoid such an unfamiliar venue.  In that same vein, federal court may be inconvenient geographically, such as having to travel from Ocean City to Baltimore to try a case in the nearest federal courthouse.  Whether you want to be in federal court or would like to escape federal court, having a clear grasp of the federal courts’ diversity jurisdiction rules can provide you with the tools to put your case in the venue of your choosing.  

Subject Matter Jurisdiction

The rules regarding federal courts’ subject matter jurisdiction are mostly straight forward.  A case generally falls within a federal court’s jurisdiction if it involves a federal question, such as a federal statute or a constitutional question, or if the case does not involve a federal question but is between diverse parties (parties domiciled in different states) and involves an amount in controversy exceeding $75,000.  See 28 U.S.C. § 1332(a)(1).  This blog post concerns the second of the two types of subject matter jurisdiction – diversity jurisdiction – as it applies to limited liability companies (LLCs).  

Diversity Jurisdiction

Many times a case is filed in state court involving a claim of over $75,000 and is between parties of different states.  The defendant in the action is free to answer the claim in state court or it can remove the case to federal court if that is a preferred venue based on the federal courts’ diversity jurisdiction.  See 28 U.S.C. § 1441.  On the other hand, a plaintiff may file a case in federal court, alleging diversity jurisdiction, because federal court is the preferred venue for that litigant.  Sometimes a plaintiff believes its case falls within the court’s jurisdiction but is incorrect for one of a number of potential reasons.  If this is the case, the federal court may remand the case to state court sua sponte, or the defendant may seek dismissal of the case for lack of subject matter jurisdiction.  In either scenario, knowing the rules can get you in the appropriate court.

The diversity of citizenship statute requires “complete diversity” between the parties, meaning that the “state of citizenship of each plaintiff must be different from that of each defendant” at the time an action commences.  Athena Auto., Inc. v. DiGregorio, 166 F.3d 288, 290 (4th Cir. 1999); see State Farm Fire & Cas. Co. v. Tashire, 386 U.S. 523, 531 (1967); Strawbridge v. Curtiss, 3 Cranch 267, 267 (1806).  This is a rather simple concept when the parties are persons.  You determine in which states the parties are domiciled, and if any plaintiffs share a domicile with any defendants, the district court lacks subject matter jurisdiction, and “[i]f at any time before final judgment it appears that the district court lacks subject matter jurisdiction, the case shall be remanded” to state court.  28 U.S.C. § 1447(c).

Diversity for Corporations vs. Limited Liability Companies

One aspect of the complete diversity requirement that trips up litigants is the particular rules that apply to corporations and limited liability companies.  The rule for corporations is clearly set out in 28 U.S.C. § 1332(c), which states “a corporation shall be deemed to be a citizen of every State and foreign state by which it has been incorporated and of the State or foreign state where it has its principal place of business.”  Generally, a corporation is incorporated in one state and has its principal place of business in one state.  For large corporations, the state of incorporation is generally Delaware and the principal place of business is the state of its headquarters.  For smaller corporations, many are incorporated in the same state where they hold their principal place of business, making this analysis quite simple.  However, as there is no clear statutory rule on the citizenship of limited liability companies, many litigants mistakenly believe the same rule that applies to corporations also applies to limited liability companies – after all they are a form of corporate structure.  

Instead, to determine the citizenship of a limited liability company, one must follow a different rule: a limited liability company is a citizen of all states of which its members are citizens/domiciled.  See, e.g., Gen. Tech. Applications, Inc. v. Exro Ltda, 388 F.3d 114, 120 (4th Cir. 2004); Cosgrove v. Bartolotta, 150 F.3d 729, 731 (7th Cir. 1998).  The state of organization for the company is irrelevant.  This rule has been developed by the various federal courts of appeals only within the past thirty years as limited liability companies are relatively new creatures of the state legislatures.  The courts have justified this determination on the ground that limited liability companies mostly resemble limited partnerships so their citizenship should be determined in the same fashion.  

Application

Therefore, a limited liability company can easily be a citizen of multiple states as limited liability companies often consist of multiple members.  So when determining jurisdiction in litigation with a limited liability company as a party, make sure to apply the correct rule.  

In application, a limited liability company is more likely to have more states of citizenship than a corporation, and with that there is a greater chance the complete diversity requirement will not be satisfied.  And remember, all it takes is one member of the limited liability company to share citizenship with the opposing party to destroy complete diversity.  Unfortunately, in practice, one may not be able to determine each limited liability company members’ citizenship with certainty until discovery.  

There are additional, more nuanced rules that affect this general rule for limited liability companies, such as the rules of nominal parties, fraudulent joinder, and realignment of parties, but these rules only arise in special situations and are beyond the scope of this blog post.  As a practitioner, it simply helps to know the basic rule for limited liability companies and be cognizant that there are additional rules that can help shape your jurisdictional analysis if necessary.