"Nowhere Man": Treat LLCs Like Corporations To Ensure Diversity Jurisdiction Remains Viable

• Published date: 08 March 2024
• Subject Matter: Corporate/Commercial Law, Corporate and Company Law, Diversity, Equity & Inclusion
• Law Firm: Wiley Rein
• Author: Mr Lukman S. Azeez, Krystal B. Swendsboe and Nicole C. Hager Fingeroot

In speaking for the U.S. Supreme Court, Justice Frankfurter explained that "[d]iversity jurisdiction is founded on assurance to nonresident litigants of courts free from susceptibility to potential local bias." Guar. Tr. Co. v. York, 326 U.S. 99, 111 (1945). As limited liability corporations (LLCs) have surpassed corporations as the predominant business entity in the United States, federal courts have declined to treat them the same for diversity purposes, depriving litigants of access to federal courts and burdening them with onerous requirements before they can file a complaint or seek removal. To ensure that diversity jurisdiction remains a viable way to access federal courts, LLCs and corporations should be treated the same for diversity purposes.

Under 28 U.S.C. ' 1322(c), a corporation is "deemed" to be a citizen of the state in which it is incorporated and the state in which it has its principal place of business. Unlike a corporation's citizenship, however, the citizenship of an LLC is determined by the citizenship of each of its members. See, e.g., Wise v. Wachovia Sec., LLC, 450 F.3d 265, 267 (7th Cir. 2006); Harvey v. Grey Wolf Drilling Co., 542 F. 3d 1077, 1080 (5th Cir. 2008).

Accordingly, pleading requirements differ for suits that involve corporations and those that involve LLCs. While complaints invoking diversity jurisdiction where the defendant is a corporation must allege only the company's state of incorporation and principal place of business, plaintiffs who wish to sue LLCs must allege the citizenship of the natural persons who are members of the LLC.

Determining the ultimate membership of an LLC, and the citizenship of those members, is often burdensome if not impossible. Most states do not require that LLCs report their members, nor is an LLC's membership otherwise made public. This information is frequently only obtainable from the LLC itself, which has little incentive to voluntarily provide it. For that reason, even if there is complete diversity among an LLC's membership and prospective plaintiffs, they may be foreclosed from even commencing an action in federal court. See, e.g., Sienna Ventures, LLC v. Halley Equip. Leasing, LLC, No. 18-cv-201 (E.D.N.Y. Apr. 2, 2018) (dismissing complaint for failing to properly invoke jurisdiction). The same is true for defendants who are sued by LLCs that seek to remove the case to federal court.

Further complicating matters is that an LLC's members may themselves be LLCs, and therefore a...