September 01, 2016

ABA urges specific, limited change to diversity jurisdiction

The ABA urged Congress this month to enact a specific, limited change to federal diversity jurisdiction, which provides federal courts with jurisdiction over civil cases involving citizens of different states where the amount in controversy exceeds $75,000.

In a letter submitted for the record of a Sept. 13 hearing before the House Judiciary Subcommittee on the Constitution and Civil Justice, ABA Governmental Affairs Director Thomas M. Susman expressed concern about the subcommittee’s consideration of proposals to expand diversity jurisdiction, including those that seek to replace the current “complete diversity” position (requiring that all plaintiffs have a different citizenship from all defendants) with a “minimal diversity” position (requiring that only one plaintiff be diverse from one defendant).

He also emphasized that while the ABA has long held that diversity jurisdiction should not be abolished or curtailed in scope, the association also believes that Congress should alter diversity jurisdiction only when there is a compelling demonstration of a need for changes.

Consistent with this principle, Susman urged the subcommittee to eliminate the difference in the way citizenship is determined for corporations, on the one hand, and all unincorporated business associations, on the other hand, for the purpose of satisfying the diversity of citizenship requirement under the law. He explained that the differential treatment is no longer justified and has created needless confusion.

Currently, a corporation is treated as a citizen of two states: the state where it is incorporated and the state where it maintains its principal place of business. By contrast, for all business associations that are not corporations – such as partnerships, limited liability companies and certain trusts – the citizenship of every individual member, shareholder, or other owner of any portion of the entity constitutes the citizenship of the entity and therefore must be examined to determine whether complete diversity exists.

Susman pointed out that the distinction made sense when enacted in 1958, when only corporations were treated as entities with an existence apart from their members. Today, however, unincorporated associations are effectively legal constructs, like corporations, with rights and duties separate and apart from their members and owners.

He said that the retention of two sets of rules not only no longer makes sense, it also adversely affects the administration of justice by: creating uncertainty for plaintiffs and defendants regarding the availability of filing in, or removing to, a federal forum; increasing the cost of litigation by creating a need for additional (and often costly) research to ascertain the citizenship of every member, even those with no direct contact with the business; and wasting significant judicial resources when cases have been fully adjudicated at the federal district court level are reversed on appeal or vacated due to lack of diversity jurisdiction, even if no party raised the issue in the district court.

To avoid these outcomes and to improve the administration of justice, the ABA urges Congress to amend 28 U.S. §1332 to provide that unincorporated associations are treated the same as corporations for the purpose of determining citizenship for diversity jurisdiction purposes.

He emphasized that the proposed change aligns with the way unincorporated business associations are treated for citizenship purposes under the 2005 Class Action Fairness Act, and enactment of the change would ensure uniform treatment of unincorporated associations, regardless of whether the plaintiff sues solely on his or her behalf or on behalf of a putative class.

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