Tuesday, May 8, 2018
Delaware Courts Should Do Better On Entities & LLC Diversity Jurisdiction Is Wrong
If I have learned anything over the years, it is that I should not expect any court to be immune from messing up entities. Delaware, as a leader in business law and the chosen origin for so many entities, though, seems like a place that should be better than most with regard to understanding, distinguishing, and describing entities. Sometimes they get things rights, as I argued here, and other times they don't. A recent case is another place where they got something significant incorrect.
The case starts off okay:
Plaintiffs brought this action under federal diversity jurisdiction, 28 U.S.C. § 1332(a)(1), asserting that complete diversity of citizenship exists among the parties. In Defendants’ Motion to Dismiss, however, they argue that complete diversity of the parties is lacking. Federal jurisdiction under § 1332(a)(1) requires complete diversity of citizenship, meaning that “no plaintiff can be a citizen of the same state as any of the defendants.” Midlantic Nat. Bank v. Hansen, 48 F.3d 693, 696 (3d Cir. 1995); Exxon Mobil Corp. v. Allapattah Servs., Inc., 545 U.S. 546, 553 (2005).
A natural person is a citizen of “the state where he is domiciled,”1 and a corporation is a citizen of the state where it maintains its principal place of business, as well as the state where it is incorporated. Zambelli Fireworks Mfg. Co. v. Wood, 592 F.3d 412, 418 (3d Cir. 2010). For purposes of § 1332, the citizenship of a limited liability corporation2 (“LLC”) is determined “by the citizenship of each of its members.” Id. Plaintiff Cliffs Natural Resources Inc. is incorporated in Ohio, and Plaintiff CLF Pinnoak LLC is incorporated3 in Delaware and maintains its principal place of business in Ohio. Third Am. Compl. ¶¶ 3–4, ECF No. 162. In moving to dismiss this action for lack of jurisdiction, Defendants assert that Seneca Coal Resources, LLC, a Delaware corporation,4 includes members who are Ohio citizens, thus destroying complete diversity as required for § 1332.
Thanks for the comment, Tom. I don’t think we’re that far apart. My big picture view is the whatever the rule is, it should be consistent based on the rationale behind the rule. My suggestion above is consistent what I think is the practical reality that, as I think we agree, no one is going to change the rule as to corporations. As such, I’d be okay with bringing other entities in line, at least for similarly situated equity holders. If that runs amok, then maybe we’d actually see a legislative solution to address the real issue. Even writing that I see my suggestion is not much more likely to happen. Still, the inconsistency rubs me the wrong way.
Posted by: Joshua Fershee | May 8, 2018 2:20:57 PM
Josh, I suggest you have it backwards in suggesting that LLCs should be subject to the same rules of diversity jurisdiction as are applied to corporations. Corporations are the weird case consequent to special rules adopted in 1332 that apply only to entities that are incorporated. Consistency would entail removing the corporation’s special status and subjecting them to the same rules that apply to (nearly all) other business organizations.
Not that it matters what we think. Congress is not going to change the rule, And the courts, including the Supreme Court, have been very clear that nothing is going to be changed in this area unless and until Congress changes the rules.
Posted by: Thomas E. Rutledge | May 8, 2018 2:02:32 PM