Diversity Jurisdiction For Limited Liability Corporations And Partnerships

• Published date: 27 June 2023
• Subject Matter: Corporate/Commercial Law, Litigation, Mediation & Arbitration, Corporate and Company Law, Trials & Appeals & Compensation, Diversity, Equity & Inclusion
• Law Firm: Alto Litigation
• Author: Mr Bahram Seyedin-Noor, Bryan Ketroser and Joshua Korr

Defendants in business disputes often wish to have their cases heard in federal rather than state court. The Federal Rules of Civil Procedure are standardized and may be more streamlined than their state-law counterparts. Furthermore, Plaintiffs in federal civil cases must obtain a unanimous verdict, whereas many states simply require a majority or supermajority. There also is a prevailing perception that the federal bench is more likely to grant a defendant's motion to dismiss or motion for summary judgment, though it is less pronounced in jurisdictions like California, which have specialized complex litigation courts that themselves are sometimes more receptive to such motions.

Regardless of the reason for knocking, the gates of federal court are not open to all comers. Where federal question jurisdiction is lacking, parties must navigate the corridors of diversity jurisdiction under 28 U.S.C. ' 1332. The requirements are well known; the amount in controversy must exceed $75,000 and there must be complete diversity of citizenship between all plaintiffs and defendants. But determining whether diversity exists in cases featuring limited liability corporations and partnerships presents unique complications:

1. Courts Consider the Residency of All Members or Partners: While the general rule for corporations is that they are citizens of the state in which they are incorporated, the Supreme Court has erected a "doctrinal wall," whereby this rule does not apply to other types of entities. See, e.g., Carden v. Arkoma Assocs., 494 U.S. 185, 189 (1990). For unincorporated entities, diversity jurisdiction depends on the citizenship of "all the members." Id. It does not matter if certain members are general or limited partners or hold greater or lesser rights. All of their citizenships are considered.
2. Courts May Trace Through Multiple Entity Levels: A court's diversity analysis is not superficial - if one member of an LLC is itself an LLC or partnership, then the members or partners of that entity must also be considered. See, e.g. Mut. Assignment & Indem. Co. v. Lind-Waldock & Co LLC, 364 F.3d 858, 861 (7th Cir. 2004) ("Lind-Waldock is a limited liability company, which means that it is a citizen of every state of which any member is a citizen; this may need to be traced through multiple levels if any of its members is itself a partnership or LLC.").
3. Courts Split on Pleading Requirements and Jurisdictional Discovery: A party seeking to invoke diversity...