Turtles All The Way Down? New Amendment Requires Disclosure Of Ultimate Ownership Of LLCs

• Published date: 13 May 2022
• Subject Matter: Corporate/Commercial Law, Corporate and Company Law, Diversity, Equity & Inclusion
• Law Firm: Butler Snow LLP
• Author: Mr Caroline Smith

Whether representing a plaintiff determining where to file a lawsuit or a defendant evaluating whether it can remove a state action to federal court, lawyers are often tasked with determining the citizenship of a party that is an LLC. In many instances, such an evaluation requires information beyond the lawyer's reach, and often, identifying an LLC's immediate owner leaves the attorney no better off than before, if that owner is simply another LLC. It is not uncommon for lawyers to discover layer after layer of LLC ownership before discovering who the ultimate, individual owners are.¹

As we have previously discussed, see Agreement Isn't Enough: The Fifth Circuit Examines Diversity Jurisdiction Sua Sponte - Butler Snow, federal courts take the requirements of 28 U.S.C. ' 1332 seriously. As the Fifth Circuit has observed, "Because federal courts have limited jurisdiction, parties must make 'clear, distinct, and precise affirmative jurisdictional allegations' in their pleadings." MidCap Media Fin., L.L.C. v. Pathway Data, Inc., 929 F.3d 310, 313 (5th Cir. 2019) (internal citation omitted). This makes the information asymmetry described above particularly problematic for parties seeking to establish federal diversity jurisdiction.

A new amendment to Federal Rule of Civil Procedure 7.1, set to go into effect December 2022, seeks to remedy this problem. It provides as follows:

In an action in which jurisdiction is based on diversity under 28 U.S.C. ' 1332(a), a party or intervenor must, unless the court orders otherwise, file a disclosure statement. The statement must name'and identify the citizenship of'every individual or entity whose citizenship is attributed to that party or intervenor: (A) when the action is filed in or removed to federal court, and (B) when any later event occurs that could affect the court's jurisdiction under ' 1332(a).

https://www.uscourts.gov/sites/default/files/scotus_package_2021_final_0.pdf

While this new disclosure...