Federal Court Diversity Jurisdiction
Understanding the intricacies of federal court jurisdiction is crucial for law students, practicing attorneys, and litigants alike. One of the foundational concepts in this area is diversity jurisdiction, a key component of federal court proceedings. This blog post aims to demystify the complexities of diversity jurisdiction as outlined in 28 U.S.C. § 1332, focusing on its application to U.S. citizens and entities. By exploring the nuances of this legal principle, we will illuminate its significance in the broader context of civil procedure and its practical implications in legal disputes.
Diversity is one way for federal courts to have jurisdiction over a matter. As outlined in 28 U.S.C. § 1332, there are two diversity requirements: (1) the matter in controversy exceeds the sum or value of $75,000, exclusive of interest and costs, and (2) the matter is between citizens of different states. While there are also diversity avenues for foreign citizens, this post focuses on U.S. citizens and U.S. entities since that is what most trial attorneys and litigants will face.
A defendant is a party who would remove a case for federal court diversity before it files an answer or another responsive pleading in state court. 28 U.S.C. § 1446(a) & (b)(1) (“A defendant or defendants desiring to remove any civil action from a State court shall file in the district court of the United States for the district and division within which such action is pending a notice of removal… within 30 days after the receipt by the defendant, through service or otherwise, of a copy of the initial pleading setting forth the claim for relief upon which such action or proceeding is based….”).
The first requirement – the matter exceeds $75,000 – is usually easy to satisfy. Plaintiffs often assert a sum certain in the complaints they file. Or a plaintiff will assert their claims are “at least” a certain monetary number. It is the second requirement – citizens of different states – where a much more thorough analysis may be needed.
The Easy Diversity Jurisdiction Analysis for Individuals and Corporations
Let’s start with the easy concepts. For an individual, their citizenship is based on where they live. U.S.C. § 1332 (a)(1). For example, Plaintiff lives in Phoenix, Arizona, and Defendant lives in Los Angeles, California. In that case, there is complete diversity between the parties since the two parties live in different states.
For a corporation, its “citizenship” is based on either its state of incorporation or where its principal place of business is located. 28 U.S.C. § 1332 (c)(1) (“…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….”). If Plaintiff is a Delaware corporation with its principal place of business in Texas, and Defendant is an Arizona corporation with its principal place of business in Phoenix, Arizona, then there is complete diversity. However, if the Defendant is an Arizona corporation, with its principal place of business in Texas, then diversity would be defeated (and the case would need to be heard in state court).
The examples can get very complicated when there are multiple defendants and/or multiple plaintiffs. Each defendant and plaintiff must be analyzed when determining whether diversity exists.
The More Difficult Diversity Jurisdiction Analysis for LLCs
Seems straightforward so far. Let’s make things more difficult. For LLCs, the members’ or owners’ citizenship is what needs to be analyzed for diversity determinations. This is vastly different than a corporation, where diversity is based on two criteria (place of incorporation and principal place of business).
As the District Court stated in Discover Growth Fund, LLC v. Clickstream Corp., 20232023 U.S. Dist. LEXIS 110638, *3 (D.NV. 2023), “For purposes of diversity, a limited liability company is a citizen of all states where its members are citizens. Johnson v. Columbia Props. Anchorage, LP, 437 F.3d 894, 899 (9th Cir. 2006) (“an LLC is a citizen of every state of which its owners/members are citizens.”).” Moreover, the court stated,
Discover states that it “is a limited liability company organized under the laws of the United States Virgin Islands (‘USVI’) with its principal pace of business in St. Thomas, USVI.” ECF No. 1 at 1. Discover, a limited liability company, has failed to allege diversity because it has not identified its members, the citizenship of its members, whether its members are comprised of additional business entities, and the citizenship of those entities. Without adequately identifying the citizenship of its members, a limited liability company fails to sufficiently establish complete diversity. Id. at *3-4.
The court in Discover Growth clearly articulated the rule that the moving party has the burden of proof for diversity issues. The court also noted that if a member of an LLC is also a business entity, then a party who is attempting to remove the case to federal court must analyze those intermediate entities. For example, if an LLC is owned by two other LLCs, a defendant would need to analyze the ownership interests of the two LLCs. And, if these two LLCs are owned by other business entities, a defendant would need to analyze those entities as well.
The Most Difficult Diversity Jurisdiction Analysis for Unincorporated Entities, Like Business Trusts
Now, let’s make things even more difficult. The U.S. Supreme Court has weighed in on issues regarding the ownership interests in a business trust. As the name suggests, a business trust will have a trustee(s) as well as beneficial owners. The business trust may have other interested and/or controlling parties, like a servicer. Does a defendant need to analyze the ownership interests of the trust’s owners, the trustee, the servicer, and/or other parties? It depends on a variety of factors.
In Navarro Sav. Ass’s v. Lee, 446 U.S. 100 (1980), the U.S. Supreme Court held that federal diversity jurisdiction based on the citizenship of trustees of a business trust, as opposed to the citizenship of the trust’s beneficiaries, was proper. The Court noted, “[The trust] is an express trust, and the question is whether its trustees are real parties to this controversy for purposes of a federal court’s diversity jurisdiction.” Id. at 462. The Court then noted, in prior cases, the Court established that the “citizens” upon whom diversity a plaintiff grounds jurisdiction must be real and substantial parties to the dispute. Id. at 460. Therefore, “a federal court must disregard nominal or formal parties and rest jurisdiction only upon the citizenship of real parties to the controversy.” Id. at 461.
The Supreme Court analyzed the trustees’ duties and roles to determine whether they were the real parties in interest. As the Court stated:
At all relevant times, [the trustees] operated under a declaration of trust that authorized the trustees to take legal title to trust assets, to invest those assets for the benefit of the shareholders, and to sue and be sued in their capacity as trustees. Respondents filed this lawsuit in that capacity. They seek damages for breach of an obligation running to the holder of a promissory note held in their own names. [The trust’s] 9,500 beneficial shareholders had no voice in the initial investment decision. They can neither control the disposition of this action nor intervene in the affairs of the trust except in the most extraordinary situations. Id. at 464-65.
Thus, the Court held that the trustees were the real parties in interest, and the beneficial shareholders were not the appropriate parties to analyze for diversity purposes.
Applying the principle of diversity jurisdiction requires careful analysis of statutes and case law, particularly in diverse situations involving individuals, corporations, LLCs, and unincorporated entities like business trusts. Understanding the intricacies of these requirements is vital to ensuring proper court proceedings and avoiding the pitfalls of jurisdictional errors. In addition to the Navarro case cited above, the U.S. Supreme Court has issued two other relevant decisions. Any litigator who wants to remove a case to federal court needs to understand these concepts. Otherwise, a federal court can remand the case back to state court for lack of jurisdiction.