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  • Writer's pictureDaniel Schneider

Non-corporate entities must be aware of this lesser-known obstacle to diversity jurisdiction

If you are one of many affiliated with an LLC, LLP or LP, beware: litigating your claim in Federal Court under a diversity of citizenship theory of subject matter jurisdiction, is more complicated than for corporations. “Diversity of Citizenship” is a basis of subject matter jurisdiction permitting claims to be heard in, and confer original jurisdiction to, the Federal Court. See 28 U.S.C. § 1332. It is the one basis under which State law claims may be heard before a Federal judge even though they do not arise out of a federal claim. While one might ask the reasons for bringing State Law claims in Federal Court, choice of forum being subject to numerous considerations including, without limitation, the perceived receptiveness of such claims in the State as opposed to the Federal forum, efficiency of the litigating process, the expansion of the pool of potential jurors and the mechanics of discovery, this article focuses on a serious lesser known obstacle to establishing diversity jurisdiction. In order to pass muster under 28 U.S.C. § 1332(a), the amount in controversy must exceed $75,000 exclusive of interests and costs and “all of the adverse parties in a suit ... be completely diverse with regard to citizenship.” Handelsman v. Bedford Vill. Assocs. Ltd. P'ship, 213 F.3d 48, 51 (2d Cir. 2000). The former requirement is self-explanatory but the latter is more nuanced.

Diversity of citizenship means that no plaintiff and no defendant can be from the same state. See e.g. Wisconsin Dep't of Corr. v. Schacht, 524 U.S. 381, 388 (1998). Individual defendants can share citizenship with other defendants, and the same is true for plaintiffs, but if any plaintiff and any defendant are from the same state, “complete diversity,” as it is known, is destroyed. This analysis is enormously important for litigants because even if the lack of diversity goes unnoticed, it is fatal to a case at any stage, even after trial or appeal. See e.g. Kontrick v. Ryan, 540 U.S. 443, 455 (2004) (“A litigant generally may raise a court's lack of subject-matter jurisdiction at any time in the same civil action, even initially at the highest appellate instance”). Plainly stated, a litigant may endure the costs and time of an entire litigation, win, and a later-discovered lack of diversity will render that victory meaningless. As a result, scrutiny of the citizenship of each party is vital—whether that party is a natural person or an entity—when choosing to bring a case in Federal Court based upon Diversity Jurisdiction. Citizenship of an individual is straightforward. “An individual's citizenship, within the meaning of the diversity statute, is determined by [that person’s] domicile.” Palazzo ex rel. Delmage v. Corio, 232 F.3d 38, 42 (2d Cir. 2000). A corporation’s citizenship statutorily defined as being deemed to be both the state in which it is incorporated and the stated in which its principal place of business is situated. See 28 U.S.C. § 1332(c)(1); Hertz Corp. v. Friend, 559 U.S. 77, 80 (2010). However, the citizenship of non-corporate entities, such as limited liability companies, limited liability partnerships, or limited partnerships is not determined by its place of registration nor its principal place of business, in the way a corporation’s citizenship is determined. Practitioners take note: citizenship of these entities is determined by the domicile of its owners, usually known as members or partners, depending on the type of entity. See Handelsman, 213 F.3d at 51-52. For example, citizenship of an eight-member LLC registered in Delaware, with a headquarters in New Jersey, will be the state(s) in which those eight members reside. Therefore, if six of the members live in New Jersey, one in Pennsylvania, and one in New York, then the LLC’s citizenship, for the purpose of diversity, is that of New Jersey, Pennsylvania and New York. Unfortunately for a New York resident bringing suit against this LLC, the one New York resident member of the LLC would eradicate diversity of citizenship and such a plaintiff would thus be relegated to State Court to pursue its claims. Because non-corporate entity citizenship for the purposes of Diversity Jurisdiction depends on the domicile of its member—not just one member, but all of them—the opportunities to nullify jurisdiction are that much greater because even one non-diverse member is fatal. Moreover, the issue of Diversity is much harder to resolve because the identities of members and partners are often not readily identifiable through typical research methods. Counsel must be prepared to engage thorough, proactive due diligence to uncover the identities of the members or partners as well as the location of their domicile. Litigants should be aware that this legwork must be necessarily engaged before an action is even filed, and can be costly and time consuming. However, it is nonetheless vital because lack of diversity can invalidate the entire case at any stage. So, the analysis must be exhaustive—and accurate.


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