- A proposed amendment to the Federal Rules of Civil Procedure would require unincorporated business organizations to file with the court information as to the citizenship of all of its partners/members/beneficial owners.
- The proposed amendment aims to remove the determination of citizenship from the discovery process.
- The result will be a reduce burden on a plaintiff filing in or a defendant removing to federal court, given that in only few cases is the membership of an unincorporated entity available in the public record.
At its April meeting, the Advisory Committee on Civil Rules approved a proposed amendment to Federal Rule of Civil Procedure 7.01 that, if adopted, will require that each party to a lawsuit in federal court where jurisdiction is conditioned upon diversity jurisdiction (28 U.S.C. § 1332) file a statement setting forth the information necessary to determine each parties’ citizenship.
For purposes of federal diversity jurisdiction, no plaintiff may have the same citizenship as any defendant. See, e.g., OnePoint Solutions, LLC v. Borchert, 486 F.3d 342, 346 (8th Cir. 2007) (complete diversity “exists where no defendant holds citizenship in the same state where any plaintiff holds citizenship.”). In the case of a natural person, one is a citizen of the state in which one is domiciled. Although there can be disputes as to a person’s domicile (see, e.g., Art Van Furniture LLC v. Zimmer, 2019 WL 2433245 (E.D. Mich. June 11, 2019)), seldom will that occur. A corporation (private, nonprofit, professional service, etc.) is a citizen of its jurisdiction of incorporation and a citizen of the state in which it maintains its principal place of business (see 28 U.S.C. 1332(c)(1)), the latter determined under the “nerve center” test. See Hertz Corp. v. Friend, 559 U.S. 77, 130 S. Ct. 1181 (2010) (decision adopting and explaining the “nerve center” test). Although there may be more dispute as to the location of a corporation’s principle place of business than the domicile of an individual, the dispute and confusion is, again, unlikely.
Things become more complicated for other business organizations, including partnerships, limited partnerships, LLCs, and business trusts. In each of those instances, the organization itself has no citizenship. Indeed, the state of organization and location of the principal place of business play no role in determining the citizenship of these organizations. See, e.g., Citizens Bank v. Plasticware, LLC, 2011 WL 5598883 (E.D. Ky 2011); Hale v. MasterSoft Int’l Pty. Ltd., 93 F.Supp.3d 1108 (D. Colo. 2000). Rather, the organization’s citizenship is the citizenship of each of its “members.” In the case of a partnership or limited partnership, the members are, for these purposes, every general partner and every limited partner. See Carden v. Arkoma Assoc., 494 U.S. 185 (1990). In the case of a limited liability company, it will be deemed to have the citizenship of every one of its members. See, e.g., Cosgrove v. Bartoletta, 150 F.3d 729 (7th Cir. 1998). A business trust will have the citizenship of every one of its beneficial owners. See Conagra Foods, Inc. v. Americold Logistics, LLC, 136 S. Ct. 1012 (2016). Whether it will as well have the citizenship of any trustee who is not also a beneficial owner is something of an open question. See Thomas E. Rutledge & Christopher E. Schaefer, The Trust as an Entity and Diversity Jurisdiction: Is Navarro Applicable to the Modern Business Trust?, 48 Real Property, Trust & Estate L. J. 83 (Spring 2013). This means that an unincorporated business organization may be a citizen of numerous states, perhaps even every state if its membership is large enough. See, e.g., Reisman v. KPMG Peat Marwick LLP, 965 F.Supp. 165 (D. Mass. 1997 (noting that the then-“Big Six” accounting firms are “effectively immunized” from being subject to diversity jurisdiction).
The proposed amendments to Rule 7.01, if adopted, would require unincorporated business organizations to file with the court information as to the citizenship of each of its partners/members/beneficial owners. Recall that in many instances business organizations are in turn owned by other business organizations. For example, consider an LLC in which one of the members is a limited partnership. It will now be necessary that the LLC, in order to satisfy the proposed rule, list the partners, both general and limited, of that limited partnership. Ultimately, that LLC (or other unincorporated organization) must drill down through all of its layers of ownership until it reaches natural persons (who have their own citizenship), corporations (again, who have a recognized citizenship), and other structures, an example being a decedent’s estate, that, again, have their own citizenship. See, e.g., Delay v. Rosenthal Collins Group, LLC, 585 F.3d 1003, 1005 (6th Cir. 2009) (“When diversity jurisdiction is invoked in a case in which a limited liability company is a party, the court needs to know the citizenship of each member of the company. And because a member of a limited liability company may itself have multiple members—and thus may itself have multiple citizenships—the federal court needs to know the citizenship of each ‘sub-member’ as well.”).
Although this may seem burdensome at first blush, this proposed rule (and at this juncture it is only a proposal) would require nothing more than is already required; the parties to the dispute and the court have an obligation to confirm that diversity jurisdiction exists. Thus, at some juncture (and that juncture should be early) there must be scrutiny of the parties’ citizenship. See, e.g., Four Winds Distrib., LLC v. Cincinnati Ins. Co., 2019 WL 3940936 (D. Colo. Aug. 20, 2019) (“delay in addressing the issue only compounds the problem if, despite much time and expense having been dedicated to the case, a lack of jurisdiction causes it to be dismissed.”). Parties (particularly their attorneys) fail to engage in this analysis at their peril. See, e.g., Belleville Catering Co. v. Champaign Marketplace, LLC, 350 F.3d 691 (7th Cir. 2003) (case then on appeal on the merits to the Seventh Circuit Court of Appeals remanded to state court where diversity jurisdiction was in fact not present, depriving federal courts of jurisdiction; counsel ordered to relitigate dispute in state court pro bono on behalf of clients as sanction for this “doomed foray into federal court”). The proposed amendment to Rule 7.01, if adopted, will streamline the process, requiring each party to make a declaration to the court rather than leaving the determination of citizenship to the discovery process. Moreover, this proposed rule change may eliminate oft-seen gamesmanship as to the availability of diversity jurisdiction, particularly with respect to facial attacks. See, e.g., Lincoln Benefit Life Co. v. AEI Life, LLC, 800 F.3d 99 (3d Cir. Sept. 2, 2015) (court ordered jurisdictional discovery when defendant asserted a facial attack on the plaintiff’s position that diversity jurisdiction existed, trying to defeat the jurisdictional statement while denying information as to its citizenship, which was not publicly available).
This change (again assuming its adoption) will perhaps reduce the initial burden on a plaintiff filing in or a defendant removing to federal court. It is rare that the membership of an unincorporated entity available in the public record. This objective fact has necessitated allegations of diversity based upon “information and belief.” See, e.g., Wright, Federal Practice & Procedure § 1224 (pleading diversity jurisdiction on the basis of “information and belief” is a “practical necessity.”). There are, however, a number courts that have rejected allegations of diversity based on information and belief. See, e.g., Pharmerica Corp. v. Crestwood Care, LLC, 2015 WL 1006683 (N.D. Ill. Mar. 2, 2015); Principal Solutions LLC v. Feed.Ing BV, 2013 WL 2458630 (E.D. Wisc. June 5, 2013). Assuming that the party bringing the action to federal court has a good-faith basis for the assertion that diversity exists, and as that assertion will be quickly tested against the other parties’ citizenship disclosure, perhaps any bar against information and belief pleading should be reduced.