To Plead Or Not To Plead Citizenship? That Is The Question (Among Others) For Limited Liability Companies Asserting Diversity Jurisdiction

• Published date: 09 December 2022
• Subject Matter: Corporate/Commercial Law, Litigation, Mediation & Arbitration, Corporate and Company Law, Trials & Appeals & Compensation, Civil Law, Diversity, Equity & Inclusion
• Law Firm: Butler Snow LLP
• Author: Mr P. Thomas Distanislao and Mitchell K. Morris

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...