chevron-down Created with Sketch Beta.
    May 12, 2023 Articles

    LLC Diversity in Class Actions Is Not Ordinary Diversity

    Key considerations when filing a class action involving limited liability companies.

    By Kymberly S. Kester

    As a preliminary matter, federal district courts must have subject matter jurisdiction over an action to issue an opinion. Absent evidence to the contrary, there is a “strong presumption” against federal court jurisdiction. See, e.g., Boghozian v. Jaguar Land Rover N. Am., LLC, Case No. CV 19-2729-JFW(PLAx), 2019 WL 1925491, at *1 (C.D. Cal. Apr. 29, 2019). Congress has outlined federal court jurisdiction through the enactment of federal statutes such as 28 U.S.C. § 1331 and § 1332, which allow federal district courts to exercise jurisdiction over cases involving, respectively, a federal question and cases where all plaintiffs are different citizens from all defendants. This article will focus on the uniqueness of diversity jurisdiction in the context of class action litigation.

    Under 28 U.S.C. § 1332(a), parties generally must show complete diversity between plaintiffs and defendants. Under the Class Action Fairness Act (CAFA), however, minimal diversity is enough—i.e., at least one plaintiff and one defendant must be diverse citizens. 28 U.S.C. § 1332(d)(2). While Congress has set other limits on federal courts’ jurisdiction over class action cases, such as raising the amount-in-controversy requirement to $5,000,000 and requiring a class to include at least 100 members, 18 U.S.C. § 1332(d)(2), (d)(5)(B), minimal diversity under CAFA is not the only difference in class action citizenship for jurisdiction purposes.

    In non-class action cases in which a plaintiff or defendant is a limited liability company, courts look to the citizenship of each of the company’s members to determine its citizenship. See, e.g., Rolling Greens MHP, L.P. v. Comcast SCH Holdings L.L.C., 374 F.3d 1020, 1022 (11th Cir. 2004). In the context of class actions, however, several courts have held that limited liability companies should be treated as “unincorporated associations” such that courts may determine the citizenship of limited liability companies by looking at the state under whose laws the company is organized and the state where the company has its principal place of business. See Ferrell v. Express Check Advance of SC LLC, 591 F.3d 698, 702 (4th Cir. 2010); but see Angiano v. Anheuser-Busch InBev Worldwide, Inc., 2021 WL 364641, at *2 (C.D. Cal. Feb. 2, 2021) (Minute Order).

    In Ferrell, the Fourth Circuit first addressed whether the CAFA provision governing the citizenship of unincorporated associations applied to limited liability companies. The Court began its analysis by noting that CAFA contains discrete provisions for the citizenship of corporations and that of unincorporated associations. Under § 1332(c)(1), the citizenship of a corporation is determined by the state in which it is incorporated and the state in which it has its principal place of business, whereas under § 1332(d)(10), the citizenship of an unincorporated association is determined by the state under whose laws it is organized and the state where it has its principal place of business. By contrast, CAFA does not explicitly reference the citizenship of limited liability companies.

    Next, the Ferrell court relied on Chapman v. Barney, 129 U.S. 677 (1889), and its progeny to conclude that the U.S. Supreme Court has “often characterized any business entity that is not a corporation as an ‘unincorporated association.’” Ferrell, 591 F.3d at 702-03. Applying this analysis to § 1332(d)(10), the Ferrell court concluded that “the specific language of § 1332(d)(10) indicates that a limited liability company, if not a corporation, is an unincorporated association, employing ‘unincorporated’ as the counterpart to ‘incorporated,’” and that under CAFA a limited liability company is therefore a citizen of the state under whose laws it is organized and the state where it has its principal place of business. Id., 591 F.3d at 704.

    Although the Fourth Circuit is the only U.S. Court of Appeals to address this issue thus far, several district courts have applied this principle, and at least one Ninth Circuit concurrence has expressly found a limited partnership to be an unincorporated association under CAFA. See Davis v. HSBC Bank Nevada, N.A., 557 F.3d 1026, 1032, & n.13 (9th Cir. 2009) (Kleinfeld, J., concurring) (applying § 1332(d)(10)). And notably, the court in Jack v. Ring LLC, 553 F. Supp. 3d 711, 715 (N.D. Cal. 2021), adopted the Fourth Circuit’s reasoning in Ferrell to grant a motion for remand based on lack of diversity citizenship because the defendant limited liability company maintained its principal place of business in the same state as plaintiffs.

    Considering the foregoing, practitioners would be wise to consider in which state a limited liability company is organized and has its principal place of business when evaluating where to file a class action and whether removal to federal court would be possible under diversity jurisdiction.

    Kymberly S. Kester is an associate with Polsinelli PC, in Nashville, Tennessee.

    Entity:
    Topic:

    Copyright © 2023, American Bar Association. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or downloaded or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. The views expressed in this article are those of the author(s) and do not necessarily reflect the positions or policies of the American Bar Association, the Litigation Section, this committee, or the employer(s) of the author(s).