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November 07, 2019 Articles

Judiciary Seeks to Expand Disclosure Requirements

Litigants should prepare for important changes coming to Federal Rule of Civil Procedure 7.1.

By Christopher Binns

The latest proposed changes to the Federal Rules of Civil Procedure by the Judicial Conference Advisory Committee on Civil Rules (Advisory Committee) would expand the list of relevant individuals whom parties must identify in Rule 7.1 disclosures when the case involves intervening parties and when the case is in federal court based on diversity jurisdiction. As indicative of Rule 7.1’s purpose, the proposed changes are aimed at increasing transparency. A public comment period for the proposed changes is ongoing and will conclude on February 19, 2020. 

Intervening Parties

In an effort to conform Rule 7.1 with the pending amendments to Federal Rule of Appellate Procedure 26.1 and Federal Rule of Bankruptcy Procedure 8012(a), the Advisory Committee proposes that nongovernmental entities seeking to intervene in a matter must disclose all parent corporations that own 10 percent or more of stock. The proposal removes the requirement that parties file two paper copies of the disclosure statement with the courts.

Current litigants are already required to identify parent companies owning 10 percent or more of stock, but this rule expands such requirements to intervening parties. According to the Advisory Committee, an embrace of technology and desire for consistency among the various federal courts were the driving forces behind this particular proposed rule change.

Additional Disclosures for Diversity Jurisdiction

Diversity jurisdiction pursuant to 28 U.S.C. § 1332(a) requires complete diversity, or, stated another way, opposing parties must reside or conduct business in different states. The proposed amendment would require Rule 7.1 disclosures to identify the name and citizenship of each person associated with a party in order to determine whether complete diversity exists.

Generally, this information is pleaded in the complaint, but parties are allowed (and will continue to be allowed) to plead this on information and belief. Nonetheless, the courts (and the parties) still need to ensure that complete diversity exists as early as possible to prevent a determination during discovery or, worse, on appeal that the court lacks jurisdiction. The proposed rule allows for limited discovery to determine the nature of a party’s citizenship, but jurisdiction may be lost if, before the completion of discovery, it is determined that there is not complete diversity. The proposed rule, however, does not address the scenario where a party is unable to ascertain the citizenship of an individual associated with a party.

Federal courts are attempting to address the need to maintain complete diversity in the face of the popular use of limited liability companies (LLCs) (as well as partnerships and limited partnerships), which take on the citizenship of each of the owners. The Advisory Committee stated that what is considered an “entity” is “shaped by the need to determine whether the court has diversity jurisdiction under § 1332(a).” It goes further by stating that it does not matter if the entity was formed in order to bring a claim or be sued using a common name or is merely a collection of individuals: “[e]very citizenship that is attributable to a party must be disclosed.” For example, if an LLC is a party and is owned by an LLC, the overall citizenship of the party is expanded to include each of the owner LLC’s members, impacting diversity jurisdiction. While this proposed new rule may not affect shrewd litigants that have already been aware of an LLC’s or partnership’s impact on diversity, the new proposed rule requires across-the-board specificity from all parties.

Final Note

Even though public comment is open until February 2020, litigants should begin implementing systems to determine whether complete diversity exists now because there is no indication that the proposed rules will be rejected considering their important jurisdictional function. Furthermore, the Advisory Committee has signaled that additional disclosure rules may be proposed in the future, especially rules addressing third-party litigation funding.

Christopher Binns is an associate at Loeb & Loeb LLP in New York, New York.

Copyright © 2019, 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 Section of Litigation, this committee, or the employer(s) of the author(s).