Diversity Jurisdiction in Cases Involving Foreign Citizens and Businesses
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When Is a Foreigner Diverse? Diversity Jurisdiction in Cases Involving Foreign Citizens and Businesses 66 •• THETHE FEDERALFEDERAL LAWYERLAWYER • • J JANUARYANUARY/F/EBRUARYFEBRUARY 2015 2015 BY HON. GERALDINE SOAT BROWN People, businesses, and transactions increasingly cross borders. When a dispute arises, lawyers need to know whether a federal court will have diversity jurisdiction over the ensuing lawsuit. he globalization of the American ing these jurisdictional issues by discussing the jurisdictional economy and the expansion of basis for cases filed before and after the recent change to 28 U.S.C. § 1332. The article stresses points often overlooked in Tinternational trade mean that law- determining jurisdiction over cases involving foreign citizens suits in American courts will increasingly and businesses. Finally, the article provides charts and hypo- theticals to help in determining jurisdiction. involve foreign citizens and businesses. Because practitioners as well as courts Constitutional Authority and the Diversity Statute have a duty to police the jurisdictional Article III, § 2 of the U.S. Constitution allows federal courts to adjudicate cases and controversies “between a State, or the grounding of their cases, it is important Citizens thereof, and foreign States, Citizens or Subjects.”3 To to understand the jurisdiction of federal that constitutional bedrock, Congress added a statutory layer with the Judiciary Act of 1789, narrowing federal jurisdiction to courts over disputes involving foreigners. civil actions in which a minimum sum was disputed (then only The Federal Courts Jurisdiction and Venue Clarification Act $500) and “an alien is a party, or the suit is between a citizen of 2011 (Clarification Act) amended the long-standing diversity of the State where the suit is brought, and a citizen of another jurisdiction statute, 28 U.S.C. § 1332, to clear up some, but not State.”4 all, lingering questions about the authority of federal courts to Early on, the Supreme Court interpreted the constitutional adjudicate disputes involving resident aliens and corporations and statutory diversity rules as imposing important limitations on that are either incorporated or have a principal place of business federal jurisdiction. First, in Strawbridge v. Curtiss, the Court overseas. Even with the amendment, however, federal juris- determined that the statute generally requires “complete diver- diction over foreign citizens and businesses can be uncertain. sity” among the parties, i.e., that every party on one side of an Courts are still sorting out the effect of the Clarification Act, action must be the citizen of a state different from that of every which did not become effective until Jan. 6, 2012.1 Also, because party on the opposing side.5 Second, and key to understanding Congress did not make the amendment retroactive, prior case the limits on disputes involving foreigners, the Court in Hodgson law governs actions filed before the effective date.2 v. Bowerbank concluded that the Constitution does not allow This article provides a guide to practitioners and courts fac- federal courts to hear an action solely between non-U.S. citizens.6 JANUARY/FEBRUARY 2015 • THE FEDERAL LAWYER • 67 The modern diversity statute, codified at 28 U.S.C. § 1332, con- suit was between a “deemed” U.S. citizen and a foreign citizen. The fers federal jurisdiction over disputes involving foreigners as parties D.C. Circuit reasoned, however, that because the “literal reading” of in two circumstances. First, § 1332(a)(2) covers actions between the proviso “would produce an odd and potentially unconstitutional “citizens of a State and citizens or subjects of a foreign state,” with result,” the statute must be interpreted in light of the legislative an important exception discussed later related to lawful permanent history evincing congressional intent to limit rather than expand residents. Second, § 1332(a)(3) covers lawsuits between “citizens federal jurisdiction.12 of different States and in which citizens or subjects of a foreign state Nearly a decade later, in Intec USA, LLC v. Engle, the Seventh are additional parties.” Federal courts agree that the latter provision Circuit chimed in. Intec was a limited liability company suing cor- allows a limited exception to the complete diversity rule: if U.S. citi- porations incorporated in New Zealand, Australia, Brazil, and the zens are on both sides of a controversy and are diverse from each United Kingdom. The citizenship of a limited liability company other, aliens, even from the same country, may be “additional par- depends on the citizenship of its members, and Intec’s members ties” on opposing sides without destroying jurisdiction.7 Historically, were citizens of both North Carolina and New Zealand. The Seventh however, courts have read the statute, in line with Strawbridge and Circuit disagreed with Singh and agreed with Saadeh that the 1988 Hodgson, as not allowing an alien to sue another alien and a U.S. amendment granted “every permanent-resident alien two citizen- citizen as co-defendants in federal court.8 ships.” Thus, the court held that Intec’s lawsuit ran afoul of Supreme Court precedent requiring complete diversity (Strawbridge) and Lawful Permanent Resident Aliens prohibiting actions solely between aliens (Hodgson).13 To understand the Clarification Act’s changes to § 1332(a) But the Seventh Circuit also disagreed in part with Saadeh, related to resident aliens, it is worth reviewing the Act’s history. rejecting the D.C. Circuit’s view that the resident alien pro- One of the curious features of § 1332 as initially written was that viso “always defeats diversity jurisdiction.” The Seventh Circuit it appeared to allow federal jurisdiction over disputes between two explained that even before 1988, a Mexican citizen living as a people living in the same state if one of them was a lawful perma- permanent resident in California could sue a U.S. citizen domiciled nent resident of the United States but a citizen of a foreign state. in New York under § 1332(a)(2). But the 1988 amendment, the That changed in 1988 when Congress amended the diversity statute court reasoned, also allowed the Mexican permanent resident as an to add as a hanging paragraph at the end of § 1332(a) that “an alien “imputed” citizen of a U.S. state to sue both the New Yorker and admitted to the United States for permanent residence shall be a Canadian citizen in federal court because the Canadian qualified deemed a citizen of the State in which such alien is domiciled.”9 This under § 1332(a)(3) as an “additional party” to a dispute between is often called the “resident alien proviso.”10 citizens.14 In solving one problem, however, the 1988 amendment created In the 2011 Clarification Act, Congress removed the troublesome another. By ascribing state citizenship to resident aliens, the amend- resident alien proviso.15 To replace it, Congress added a subordinate ed statute arguably expanded the law to allow diversity jurisdiction clause to § 1332(a)(2) allowing federal jurisdiction of civil actions even without diverse U.S. citizens on either side of a lawsuit, as the between “citizens of a State and citizens or subjects of a foreign Third Circuit’s 1993 decision in Singh v. Daimler illustrated. In state, except that the district courts shall not have original Singh, the plaintiff was a citizen of India domiciled as a permanent jurisdiction under this subsection of an action between citizens resident in Virginia. The defendants were a German car manufactur- of a State and citizens or subjects of a foreign state who are er and its American distributor, which was a Delaware corporation lawfully admitted for permanent residence in the United States with a New Jersey principal place of business. Under pre-1988 law, and are domiciled in the same State.”16 A House report reveals there would have been no federal jurisdiction. The foreign parties that the amendment was intended to respond to decisions like on each side of the dispute precluded complete diversity and could Singh that interpreted the language of the resident alien proviso not qualify as “additional parties” under § 1332(a)(3) because there as expanding federal jurisdiction.17 The amendment also wiped out were not diverse U.S. citizens on both sides. Relying on the 1988 the Seventh Circuit’s concern about “additional party” jurisdiction amendment, however, the Third Circuit concluded that the plain- under § 1332(a)(3) by planting the language about permanent resi- tiff’s Indian citizenship was not to be considered and that diversity dents firmly in § 1332(a)(2). jurisdiction existed because the plaintiff was “a deemed citizen of Virginia suing an alien and a citizen of Delaware and New Jersey.”11 Business Entities Have Citizenships, Too (Sometimes Many The Third Circuit’s view did not catch on with other appellate of Them) courts, eventually creating a three-way circuit split. In 1997, the Questions of citizenship can become particularly complex when D.C. Circuit concluded in Saadeh v. Farouki that there was no one of the parties is a business organization. As Intec demonstrated, federal jurisdiction when a nonresident alien sued four defendants: certain types of business organizations, like partnerships and LLCs, a domestic corporation, a foreign married couple living in the United have the citizenship of every member.18 For example, a partner- States as permanent residents, and the couple’s foreign business. ship with 10 general partners or an LLC with 10 members has the At the lawsuit’s start, the court noted, there was no jurisdiction citizenship of each of those partners or members and is deemed to because there were aliens on both sides of the dispute—the plain- be a citizen of every state in which a partner or member is a citizen. tiff and the foreign business—without a U.S. citizen on each side.