August 04, 2017 Top Story

Six Years of Litigating Lost for Failing to Confirm LLC's Citizenship

Sanction of $500K reversed notwithstanding lack of diligence

By Stephen Carr

Failing to fully track down the citizenship of a limited liability corporation can lead to enormous losses for lawyers and their clients. The U.S. Court of Appeals for the Eleventh Circuit spared the attorneys more suffering, though, and reversed a more than half-million-dollar sanctions order. The court found no bad faith, even if the parties naïvely relied on one another's unverified assertions.

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Two LLCs involved in a contract dispute learned that although jurisdiction should be easy, it often is not. By failing to do due diligence on the LLC's citizenship, the two firms wasted nearly six years of litigation.

The decision represents a meaningful practice reminder on how to properly address and resolve LLC citizenship issues, say ABA Section of Litigation leaders. When dealing with LLCs, lawyers must remember that the citizenship of every member of the LLC counts. Often LLCs have other LLCs as their members; some members may be corporations whose citizenship may be in two states. The result can lead to citizenship that looks like a "factor tree." If lawyers representing, or suing, LLCs do not take the time to track down every branch of the tree, the result might be similar to the case here—a costly jurisdictional mistake.

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