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October 2015 ▪ Volume 19 ▪ Issue 10

LAWYER CITIZENSHIP OF LLCS mentators have remarked on the lack of attention to the legal implications of the AND SUBJECT MATTER rising dominance of the LLC business IN THE form.5 Ironically, given that the popularity FEDERAL : A is partly predicated on the belief that the TRAP FOR THE LLC oers litigation-related advantages, one issue that is not widely understood is UNWARY the manner in which the citizenship of an By Jonathan I. Handler & LLC is determined for federal juris- David W.S. Lieberman diction purposes. As we explain below, Jonathan Handler is a Boston-based citizenship of an LLC will ultimately turn

Securities in the Electronic Age partner in the Litigation Department at on the citizenship of each of its members. Day Pitney LLP. His practice focuses on Thus, in extreme cases, large, multi- complex commercial disputes. David Lieberman is a Boston-based associate member LLCs may not be able to estab- in the Litigation Department at Day lish the complete diversity of citizenship Pitney LLP. His practice focuses on that is often necessary to le a case in, or Wall Street complex commercial disputes including those arising under the False Claims remove it to, federal court regardless of Act. The authors wish to thank their col- the citizenship of the opposing party. league Dennis Townley for his assis- Moreover, to establish diversity jurisdic- tance with this article. Contact: jihandle tion, an LLC must be prepared to disclose [email protected]. the citizenship of each of its members. Nearly unheard of prior to the 1990s, This could be unattractive or impossible the Limited Liability Company (LLC) for condentiality or other business quickly grew to become the dominant reasons. organizational form for new business ventures in the United States by a nearly Diversity Jurisdiction Requires two-to-one margin.1 In Delaware, a popu- Consideration of Every Member of lar for establishing new business an LLC entities, that margin rose to over three-to- As rst-year law students learn, federal one.2 This rapid growth is generally attrib- courts are courts of limited jurisdiction uted to the LLC’s combination of favor- permitted to hear cases only if authorized able tax treatment, exibility of by the Constitution and federal law. With governance structure, and limited liability respect to common business litigation for owners.3 Indeed, the LLC has proved including contract and tort disputes aris- popular for businesses of all types and ing solely from state law, the basis for sizes, including wholly-owned federal court jurisdiction arises under so- subsidiaries.4 called “diversity jurisdiction.” Diversity Amidst this meteoric growth, com- jurisdiction confers federal jurisdiction in October 2015 | Volume 19 | Issue 10 Wall Street Lawyer

cases between citizens of dierent states.6 Con- extend to all unincorporated entities regardless of gress has further restricted this jurisdiction, as is how much their structure resembled that of a its right, to “civil actions where the matter in corporation.12 Nearly every federal court of ap- controversy exceeds the sum or value of $75,000, peals has subsequently applied the Carden rea- exclusive of interest and costs, and is soning to LLCs.13 Thus, at this point it is clear between. . . [c]itizens of dierent States.”7 that that citizenship of an LLC is determined by the citizenship of each of its members. Thus, assuming that the amount-in- controversy threshold is met, federal jurisdiction Failure to Recognize this Rule can be turns on the citizenship of the parties. While a Costly relatively straightforward proposition for natural Despite the clarity of the jurisprudence, liti- persons, it becomes more complicated when gants regularly predicate diversity jurisdiction on dealing with entities such as corporations and an LLC’s state of organization as they would a LLCs. Indeed, more than 200 years ago, the corporation under § 1332(c). This may well be Supreme Court initially concluded that the citi- due to the perceived similarities between LLCs zenship of a corporation turned on “the character and corporations. In any event, this mistaken of the individuals who compose the corporation” basis for jurisdiction has led to numerous costly (i.e., the citizenship of the president, directors situations in which a case proceeds in federal and shareholders).8 Later, the Court reconsidered court without either the parties or the judge real- this approach and held that corporations doing izing that the federal courts are not competent to business in their state of incorporation would be hear the dispute. In many instances, this realiza- deemed citizens of that state regardless of where tion does not occur until the case has reached the the individuals making up the entity resided.9 court of appeals, sometimes after the parties have This issue was only rmly resolved in 1958 by tried the case to a verdict. amendment to § 1332(c), which established that For example, the jurisdictional defect in Bel- “a corporation shall be deemed to be a citizen of leville Catering Co. v. Champaign Market Place, every State and foreign state by which it has been LLC14 was not discovered until after trial and a incorporated and of the State or foreign state jury award of $220,000 in favor of the defendant/ where it has its principal place of business.” counter-claimant.15 The appeals court, recogniz- In 1990, the Supreme Court held in Carden v. ing that the improperly failed to dis- Arkoma Associates that a general partnership is a close the identity and citizenship of the members citizen of each of the states in which one of its of the defendant LLC, sua sponte ordered juris- member is a citizen.10 Thus, in a suit between an dictional brieng that revealed that the plainti Arizona-organized partnership and citizens of was incorporated in Illinois and the defendant Louisiana, the federal court in Louisiana lacked LLC was composed of Illinois members, thereby subject matter jurisdiction over the case because destroying diversity and any basis for jurisdic- one of the limited partners of the plainti partner- tion in federal court. The court, decrying the ship was also a citizen of Louisiana.11 The Court’s “litigants’ insouciance towards the requirements reasoning made clear that this analysis would of federal jurisdiction,” ordered the case dis-

2 K 2015 Thomson Reuters Wall Street Lawyer October 2015 | Volume 19 | Issue 10 missed and both parties’ counsel to perform any court’s power to hear a case, the citizenship of additional services necessary to bring the dispute the parties must be armatively established; it to resolution at no charge to their clients.16 cannot be assumed, it cannot be stated in the neg- ative, and any failure to identify citizenship Additional Considerations Complicate the 19 Analysis precludes federal court jurisdiction. In D.B. Zwirn, the U.S. Court of Appeals for the First Understanding the jurisdictional treatment of Circuit, recognizing an insucient jurisdictional LLCs does not end with recalling that citizenship statement for the rst time at oral argument, cannot be established on the basis of the state of instructed the plainti LLC investment fund20 to organization. Rather, two additional factors add le an adavit identifying its members. In re- to the complexity of adequately establishing sponse, the fund stated that according to its re- subject matter jurisdiction in cases involving cords “there were no members of the limited li- LLCs: (i) the citizenship rules are “iterative”; and ability company who were citizens of” the (ii) a party must armatively establish its defendant’s home state. The First Circuit held citizenship. this response insucient, noting that the Supreme The citizenship rules for unincorporated enti- Court’s 1888 decision in Cameron v. Hodges21 ties are “iterative” in that where a member of an held that citizenship must be armatively estab- LLC is itself an LLC, LLP or partnership, citizen- lished for jurisdictional purposes. The court ship for that entity is also determined by the explained that because certain persons are citizenship of its members.17 For example, in deemed “stateless” and invariably destroy diver- Hart v. Terminex International,18 the Illinois- sity, statements of citizenship must armatively domiciled plaintis led a product liability ac- identify the citizenship of all parties.22 In light of tion against Dow Chemical and Terminix Interna- the prior insucient statement, the court gave the tional Company LP. Dow removed the action to parties 15 days to le an adequate response. The federal court on the basis of diversity, claiming parties settled the case before any such statement that Terminix was a Delaware limited partner- was led.23 ship and neither of the partners were citizens of Illinois. The case proceeded in litigation for In Extreme Cases, LLCs May Never seven years before it reached the U.S. Court of Satisfy Diversity Jurisdiction Appeals for the Seventh Circuit. On appeal, the The two diculties identied above came Seventh Circuit demanded a complete statement together in a recent case in the District of Mas- of citizenship for Terminix and discovered that sachusetts, Garber Brothers Inc. v. Louis Troilo the chain of membership of that entity included & Harold Levinson & Associates, LLC.24 A suit Illinois corporations. Thus, after more than eight was led in state court solely against defendant years of litigation, it was nally revealed that the Troilo and removed to the District of parties were not completely diverse, and the court Massachusetts. The Massachusetts-incorporated was forced to dismiss the action for want of plainti then amended the complaint to add jurisdiction. Harold Levinson and Associates, LLC (HLA) as Moreover, because diversity aects a federal an additional defendant, describing it as “a New

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York limited liability company with a principal and ordered HLA to identify the citizenship of place of business” in New York.25 The district each of its members. HLA submitted an adavit court raised the jurisdictional issue sua sponte describing the following organization structure:26

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HLA’s structure consisted of at least four subject matter jurisdiction, remanded the case to organizational tiers, each containing some LLCs state court.28 or LPs. Fatally for HLA, although each of the Practice Tips When Dealing with entities it could identify was diverse from the Jurisdiction over LLCs Massachusetts plainti (i.e., was a citizen of some state other than Massachusetts), HLA was The Supreme Court’s decision in Carden unable to determine the citizenship of more than makes clear that regardless of how much LLCs 40 of its members. Nor was this due to counsel’s may resemble or operate like corporations, the lack of eort in ascertaining the factual bases for courts will continue to resolve citizenship ques- jurisdiction. According to an adavit from tions by looking at each of the members of the HLA’s Executive Vice President, the institutional entity.29 One solution to this lack of access to the entities were either unwilling or restricted by federal courts would be to amend 28 U.S.C. contract from disclosing the identities of their in- § 1332(c) to simplify the citizenship analysis of vestor partners.27 Based on HLA’s inability to af- an LLC perhaps by adopting, in whole or in part, rmatively identify the citizenship of all of its the rules applicable to a corporation, which is members, the court, concluding that it lacked deemed a citizen of its state of organization and

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principal place of business. Carden suggests that tion involving the entity in question. Unlike for the Court would deem such a statutory revision corporations, documents necessary to establish adequate notwithstanding the constitutional the jurisdiction of an LLC are often dicult to dimensions of the jurisdiction issue.30 nd publicly and, in many cases, are unobtain- able by third parties. Nevertheless, failure to Absent congressional action, however, federal adequately investigate jurisdictional facts has jurisdiction for LLCs will remain a trap for the been characterized as a violation of a party’s unwary. This is particularly true for large, multi- obligations under Federal Rule of Civil Proce- member LLCs, such as investment vehicles, that dure 11,33 which requires a party to conduct a rea- are likely to have many layers of articial entities sonable inquiry into the truth of its factual as members and value the condentiality of the contentions.34 identity of those members. It may be true that If taken to its logical conclusion, court enforce- some LLCs are established by sophisticated par- ment of this approach could deprive a party of its ties and counsel with the expectation that they right to litigate in federal court simply because may never satisfy diversity jurisdiction in federal the facts underlying its opponent’s citizenship court.31 However, for the practitioner who would are nonpublic, preventing it from adequately al- like to preserve the option to litigate in federal leging diversity jurisdiction.35 However, where a court based on diversity of citizenship, we can party has taken reasonable steps, such as those oer a number of suggestions. outlined above, and is still unable to determine First, when initially drafting the LLC operat- the citizenship of the adverse parties, all may not ing agreement, an attorney could consider using be lost. Two recent appeals court decisions in the language that would require all members to Third and Ninth Circuits have held that in this identify their residency and that of their own situation, a party may comply with its Rule 11 members if required to establish citizenship for obligations and survive a to dismiss by litigation purposes. There is authority supporting identifying the steps it took to ascertain jurisdic- the view that such a disclosure to a court may be tion and then alleging, “on information and 32 belief,” that the adverse parties are citizens of made under seal to alleviate any potential dierent states.36 privacy concerns on the part of the LLC’s Noting that it would be transpar- members. ently unfair to deny jurisdiction based on facts solely within an opponent’s possession, both Second, when drafting a jurisdictional state- courts held that in the event the opponent then ment either in a complaint or a notice of removal, challenges jurisdiction, the would counsel must take reasonable steps to attempt to be permitted to order limited jurisdictional ascertain the citizenship of an LLC (whether the .37 The Third Circuit noted that this opposing party or one’s own client). Counsel discovery should be relatively straightforward to should budget adequate time and resources for accomplish: “in determining the membership of this research and should consider looking at sec- an LLC or other unincorporated association, a retary of state lings, UCC lings, corporate few responses to interrogatories will often reports and disclosures, and lings in other litiga- suce.”38 While this approach is practical and

6 K 2015 Thomson Reuters Wall Street Lawyer October 2015 | Volume 19 | Issue 10 logically compelling, it has only been adopted in Revolution-The Social Cost of Academic Neglect, two circuits39 and only very recently; counsel 38 Creighton L. Rev. 35, 36-40 (2004). should be cautious in relying upon it in other 4Id. at 44. . 5See John Tyler, et. al, Producing Better Mileage: Advancing the Design and Usefulness Conclusion of Hybrid Vehicles for Social Business Ventures, 33 Quinnipiac L. Rev. 235, 271-72 (2015) (not- The LLC form of business organization has ing that “many practitioners and law professors been widely embraced by lawyers and business bemoaned the ‘dearth’ of case law” early in the people, but it can be highly disadvantageous if development of the form). the organization is seeking diversity-based juris- 6U.S. Const. art. III, § 2, cl. 1. diction in the federal courts. Conversely of 728 U.S.C. § 1332(a) (emphasis added). Note course, it can help defeat federal diversity juris- that § 1332 governs “original jurisdiction” of federal courts for civil actions. That is, actions diction if the LLC prefers to be in state court. originally led by a plainti in federal court. Ac- Thus, if federal diversity jurisdiction is an impor- tions originally led in state court but removed to tant right that the business wishes to retain, care- federal court are governed by the federal removal ful consideration must be given at the time the statute, 28 U.S.C. § 1441. This statute permits re- moval for cases that could have been brought in entity is established as to whether the LLC is the federal court under “original jurisdiction” includ- best form for organizing the business. ing under § 1332. 8Bank of U.S. v. Deveaux, 9 U.S. 61, 92 For the LLC involved in a dispute, litigation (1809). counsel should be aware that the test for deter- 9Louisville, C. & C.R. Co. v. Letson, 43 U.S. mining the citizenship of these entities involves 497,558, 2 How. 497, 11 L. Ed. 353, 1844 WL an unintuitive and often cumbersome inquiry into 5963 (1844). the citizenship of every member of the LLC. Dil- 10Carden v. Arkoma Assocs., 494 U.S. 185, igent counsel must be aware of these rules at the 195-96 (1990). outset of litigation to avoid potentially wasting 11Id. at 186. signicant time (and their client’s money) in 12Id. at 193-96. federal court only to discover that jurisdiction 13See, e.g., D.B. Zwirn Special Opportunities was lacking all along. Fund, LP v. Mehrotra, 661 F.3d 124, 125 (1st Cir. 2011); Johnson v. Smithkline Beecham Corp., 724 F.3d 337, 348 (3d Cir. 2013); Intec ENDNOTES: USA, LLC v. Engle, 467 F.3d 1038, 1041-42 (7th 1See Rodney D. Chrisman, LLCs Are the New Cir. 2006); GMAC Commercial Credit LLC v. King of the Hill: An Empirical Study of the Dillard Dep’t Stores, Inc., 357 F.3d 827, 829 (8th Number of New LLCs, Corporations, and LPs Cir. 2004); Segundo Suenos, LLC v. Jones, 494 Formed in the United States Between 2004-2007 Fed. Appx. 732 (9th Cir. 2012); Siloam Springs and How LLCs Were Taxed for Tax Years 2002- Hotel, L.L.C. v. Century Sur. Co., 781 F.3d 1233, 2006, 15 Fordham J. Corp. & Fin. L. 459, 460 1234 (10th Cir. 2015). (2010). 14Belleville Catering Co. v. Champaign Mar- 2Id. at n.4. ket Place, L.L.C., 350 F.3d 691 (7th Cir. 2003). 3Howard M. Friedman, The Silent LLC 15See also GMAC Commercial Credit LLC,

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357 F.3d at 829 (jurisdictional defect identied also ‘of the State where it has its principal place post-trial; appeals court remanded for jurisdic- of business.’ ” (quoting 28 U.S.C. § 1332(c)). tional discovery). 31Moreover, regardless of the structure of the 16Id. at 692. LLC, certain types of actions essentially preclude 17D.B. Zwirn Special Opportunities Fund, diversity jurisdiction when they involve LLCs. LP, 661 F.3d at 126-27. These include: suits between the LLC and one of its members; suits between members of an LLC 18 Hart v. Terminex Intern., 336 F.3d 541 (7th in which the LLC is an ; and Cir. 2003). derivative suits brought on behalf of the LLC. 19D.B. Zwirn Special Opportunities Fund, See Carter G. Bishop and Daniel S. Kleinberger, LP, 661 F.3d at 126. Diversity Jurisdiction for LLCs? Basically, forget 20While the caption of the case indicates that about it, Business Law Today (Sept./Oct. 2004). D.B. Zwirn Special Opportunities Fund, L.P. was 32D.B. Zwirn Special Opportunities Fund, a limited partnership, at the time of removal it L.P. v. Mehrotra, 661 F.3d 124, 125 (1st Cir. had become a limited liability company. See 661 2011). F.3d at 125 n.2. 33Belleville Catering Co. v. Champaign Mar- 21Cameron v. Hodges, 127 U.S. 322, 8 S. Ct. ket Place, L.L.C., 350 F.3d 691, 692-93 (7th Cir. 1154, 32 L. Ed. 132 (1888). 2003). 22D.B. Zwirn, 661 F.3d at 126 (identifying 34Fed. R. Civ. P. 11(b). United States citizens domiciled abroad, Indian 35Of course there is nothing illegitimate about tribes, and U.S. states as examples of entities that an LLC keeping that information condential; destroy diversity under 28 U.S.C. § 1332). there are many reasons why LLC members may 23See D.B. Zwirn Special Opportunities wish not to disclose their identity and, indeed, Fund, LP v. Mehrotra, No. 11-1172, Document such protections are one of the attractions of us- No. 0011630219 (1st Cir. Dec. 9, 2011). ing an LLC structure. 36 24Garber Brothers Inc. v. Louis Troilo & Lincoln Benet Life Co. v. AEI Life, LLC, Harold Levinson & Associates, LLC, No. 1:15- No. 14-2660, 2015 U.S. App. LEXIS 15576 (3d cv-10148-IT, slip op. (D. Mass., June 25, 2015). Cir. Sept. 2, 2015); Carolina Cas. Ins. Co. v. Team Equipment, Inc., 741 F.3d 1082 (9th Cir. 25 Am. Compl. at ¶ 5, Garber Brothers Inc. v. 2014). Louis Troilo & Harold Levinson & Associates, 37 No. 1:15-cv010148 (D. Mass. Jan. 30, 2015). The Third Circuit’s decision in Lincoln Benet Life Co. contains a “concurrence” joined 26Adavit of Barry Feldman at 2-3, Garber by all three panel judges in which the court, not- Brothers Inc. v. Louis Troilo & Harold Levinson ing Congress’s inaction, urges the Supreme Court & Associates, No. 1:15-cv010148 (D. Mass. June to abandon its Carden jurisprudence and treat 4, 2015). LLCs as citizens of the state in which they are 27Id. organized. Lincoln Benet Life Co., 2015 U.S. App. LEXIS 15576, at *23 (Ambro, J., concur- 28Garber Brothers Inc. v. Louis Troilo & ring). Harold Levinson & Associates, No. 1:15- cv010148, slip op. at 8 (D. Mass. June 25, 2015). 38Lincoln Benet Life Co., 2015 U.S. App. 29 LEXIS 15576, at *18; see also Carolina Cas. Ins. Carden at 195-96. Co., 741 F.3d at 1088 (“If the defendants deny 30Id. at 196 (“Congress has not been idle. In that the court has jurisdiction, the district court 1958 it revised the rule established in Letson, should evaluate the record created by the parties providing that a corporation shall be deemed a to determine its jurisdiction. Jurisdictional dis- citizen not only of its State of incorporation but covery may be appropriate.” (internal citations

8 K 2015 Thomson Reuters Wall Street Lawyer October 2015 | Volume 19 | Issue 10 omitted)). ting plainti to alleged the citizenship of natural 39See also Medical Assur. Co., Inc. v. Hell- persons on information and belief). man, 610 F.3d 371,376 (7th Cir. 2010) (permit-

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