Tuesday, January 17, 2017

Oops: Oregon District Court Rule For LLCs that are Defined as Corporations

Here we go again. The Oregon Federal District Court has a rule with an incorrect reference to LLCs on the books: 

In diversity actions, any party that is a limited liability corporation (L.L.C.), a limited liability partnership (L.L.P.), or a partnership must, in the disclosure statement required by Fed. R. Civ. P. 7.1, list those states from which the owners/members/partners of the L.L.C., L.L.P., or partnership are citizens. If any owner/member/partner of the L.L.C., L.L.P., or partnership is another L.L.C., L.L.P., or partnership, then the disclosure statement must also list those states from which the owners/members/partners of the L.L.C., L.L.P., or partnership are citizens.
U.S. Dist. Ct. Rules D. Or., Civ LR 7.1-1 (emphasis added). This rules is designed to assist with earlier disclosure to assist in determining diversity jurisdiction and other related issues. As the Practice Tip explains, 
The certification requirements of LR 7.1-1 are broader than those established in Fed. R. Civ. P. 7.1. The Ninth Circuit has held that, “[L]ike a partnership, an LLC is a citizen of every state of which its owners/members/partners are citizens.” Johnson v. Columbia Properties Anchorage, LP, 437 F.3d 894, 899 (9th Cir. 2006). Early state citizenship disclosure will help address jurisdictional issues. Therefore, the disclosure must identify each and every state for which any owner/member/partner is a citizen. The disclosure does not need to include names of any owner/member/partner, nor does it need to indicate the number of owners/members/partners from any particular state.
The problem is that the rule defines an LLC as a limited liability corporation, while the Ninth Circuit case cited in the Practice Tip was referring to limited liability companies, which are different entities than corporations. The language from Johnson v. Columbia Properties is correct, but the Oregon District Court rule does not include traditional LLCs. It includes corporations, as per the rule's definition of LLC.  Corporations, of course, have shareholders, not members or partners, and for diversity jurisdiction purposes, "a corporation shall be deemed to be a citizen of every State and foreign state by which it has been incorporated and of the State or foreign state where it has its principal place of business." 28 U.S.C. § 1332 (2016).  Shareholders are not part of the equation. Cf. Hertz Corp. v. Friend, 559 U.S. 77, 88 (2010). 

For federal law purposes, it appears that the rule has excluded LLCs, despite the intent (and likely specific purpose) of the rule. Interestingly, Oregon law, has extended "unless context requires otherwise" the concept of LLCs to apply to partnership and corporate law. Oregon law provides: 
Unless the context otherwise requires, throughout Oregon Revised Statutes:
(1) Wherever the term “person” is defined to include both a corporation and a partnership, the term “person” shall also include a limited liability company. 
(2) Wherever a section of Oregon Revised Statutes applies to both “partners” and “directors,” the section shall also apply:
(a) In a limited liability company with one or more managers, to the managers of the limited liability company.
(b) In a limited liability company without managers, to the members of the limited liability company.
 (3) Wherever a section of Oregon Revised Statutes applies to both “partners” and “shareholders,” the section shall also apply to members of a limited liability company.
 
Beyond potentially leaving limited liability companies out of the disclosure requirement, the rule could have another effect. The way the rule reads, although it does not change the underlying jurisdictional law, it could be read to change disclosure requirements. Though not the only possible reading, one could certainly read "owner" to include shareholders, which would require a corporation to disclose the states of citizenship of all shareholders.  
 
This is pretty obviously an error in drafting, as the court almost certainly intended to define LLCs as "limited liability companies." See Or. Rev. Stat. § 63.002 (2015).  And the court almost certainly did not intend to compel disclosure of all shareholders' states of citizenship.  Nonetheless, courts generally read statutes for what they say, not for what they meant to say.  This might just get a little interesting, if anyone (besides me) is paying attention.   

https://lawprofessors.typepad.com/business_law/2017/01/oops-oregon-district-court-rule-for-llcs-that-are-defined-as-corporations.html

Corporations, Joshua P. Fershee, Lawyering, Legislation, Litigation, LLCs, Partnership, Unincorporated Entities | Permalink

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