Federal diversity jurisdiction is conditioned on two requirements – the amount in controversy must exceed $75,000, and there must be “complete diversity,” meaning that no defendant may have the same “citizenship” as any plaintiff. In this CT Corporation webinar, learn more about diversity jurisdiction with special guest Thomas E. Rutledge of Stoll Keenon Ogden PLLC. For more information, head to ct.wolterskluwer.com.

1. DIVERSITY JURISDICTION AND “L” ENTITIES – THE IMPORTANCE OF
GETTING IT RIGHT AND THE TRAUMA OF GETTING IT WRONG
Prepared for CT Corporation
November 17, 2015
Thomas E. Rutledge
Stoll Keenon Ogden PLLC

2. [I]N A DIVERSITY CASE, WHENEVER THERE IS AN UNCONVENTIONAL PARTY
(THAT IS, SOMEONE OR SOMETHING OTHER THAN EITHER A NATURAL PERSON
SUING IN HIS OWN RATHER THAN A REPRESENTATIVE CAPACITY, OR A BUSINESS
CORPORATION), A JURISDICTIONAL WARNING FLAG SHOULD GO UP.
Cosgrove v. Bartolotta, 150 F.3d 729, 731 (7th Cir. 1998)
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3. Diversity Jurisdiction
Federal diversity jurisdiction is conditioned on two requirements – the amount in
controversy must exceed $75,000, and there must be “complete diversity,” meaning that
no defendant may have the same “citizenship” as any plaintiff.
Determining the citizenship of unincorporated business organizations, many of which
are the recently incarnated “L” Entities such as the limited liability company, the
limited liability partnership, the limited liability limited partnership and the limited
cooperative association, is a far more involved task than is determining the citizenship
of a traditional business or nonprofit corporation.
While not “L” Entities, this group includes as well the unincorporated nonprofit
association and the statutory trust.
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4. Belleville Catering Co. v. Champaign
Marketplace, LLC
Consider the following scene: an attorney is sitting at his/her desk, reading a just
received appellate decision. The blood drains from his/her face as the first line is
read, namely:
“Once again, litigants’ insouciance toward the requirements of federal jurisdiction
has caused a waste of time and money.”
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5. Belleville Catering Co. v. Champaign
Marketplace, LLC
Bringing us to the remedy ordered by the 7th Circuit:
“The costs of a doomed foray into federal court should fall on the lawyers who
failed to do their homework, not on the hapless clients. Although we lack
jurisdiction to resolve the merits, we have ample authority to govern the
practice of counsel in the litigation. The best way for counsel to make the
litigants whole is to perform, without additional fees, any further services that
are necessary to bring this suit to a conclusion in state court, or via settlement.
That way the clients will pay just once for the litigation. This is intended not
as a sanction, but simply to ensure that clients need not pay for lawyers’ time
that has been wasted for reasons beyond the clients’ control.”
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6. 28 USC § 1332 - Diversity of citizenship; amount in controversy; costs.
A.The district courts shall have original jurisdiction of all civil actions where the matter in
controversy exceeds the sum or value of $75,000, exclusive of interest and costs, and is
between—
1. citizens of different States.
***
(c) For the purposes of this section and section 1441 of this title --
5. a corporation shall be deemed to be a citizen of any State by which it has been
incorporated and of the State where it has its principal place of business.
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7. Corporate Citizenship
By statute, a corporation is deemed a citizen of both (a) the jurisdiction of incorporation
and (b) the jurisdiction in which the corporation maintains its principal place of
business.
Where a corporation is incorporated is seldom going to be a challenge.
While there have over the years developed a variety of alternative (and sometimes
conflicting) test as to where is the “principal place of business,” in Hertz Corp. v. Friend
the US Supreme Court held that, for purposes of determining the “State where a
[corporation] has its principal place of business” under 28 USC § 1332, it will utilize the
“nerve center” test, directing that the focus be upon the “place where a corporation’s
officers direct, control and coordinate the corporation’s activities.”
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8. So What Is The Treatment Of Entities That Are
Not “Corporations”?
In Carden v. Arkoma Associates, the Supreme Court held that a limited partnership,
for purposes of diversity jurisdiction, has the citizenship of each of its partners,
regardless of whether general or limited. The Carden majority rejected a “real party
in interest” analysis of the limited partnership, and, although agreeing that it is
“undoubtedly correct” that limited partnerships are “functionally similar to other
entities that are treated as having their citizenship determined on a less restrictive
basis than that of all the constituent owners,” rejected such a functional analysis as
Congress had used the terms “corporation” and “incorporated” in 28 USC § 1332.
In so doing, the Court held that the citizenship of the limited partners, as well as the
citizenship of the general partners, would be assessed in determining the availability
of diversity jurisdiction in a suit brought by or against a limited partnership.
Carden v. Arkoma Associates, 494 U.S. 185 (1990).
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9. Lets Be Clear – None of the Capacity to Sue
and Be Sued Nor “Entity” Characterization
Matter
Most modern unincorporated business organization acts expressly
provide that the business organization, as an entity, may sue and be sued
in its own name. Still, the ability of a business organization to sue or be
sued in its own name does not alter the fact that none of these
organizations is either a “corporation” or “incorporated” and does not
indicate the characterization of the organization “incorporated” for
purposes of 28 U.S.C. § 1332(c).
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10. Lets Be Clear – Tax Classification Does Not
Matter
There has been rejected the notion that an LLC’s election to be classified for
tax purposes as a corporation affects its treatment for purposes of diversity
jurisdiction:
“Similarly, Spara’s elective decision to be treated as a corporation for tax
purposes does not somehow transform its LLC status for purposes of
evaluating diversity jurisdiction. The motivations behind a business entity’s
choice to be taxed in a certain manner have no bearing on the rationale for
evaluating the citizenship of each member of an LLC.”
Fairfield Castings, LLC v. Hofmeister, 2015 WL 4105027 (S.D. Iowa July 2,
2015)
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11. A Limited Liability Company (LLC) Is
Unincorporated And Is Deemed To Have
The Citizenship Of Each Member
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12. A Limited Liability Partnership (LLP) Is
Unincorporated And Is Deemed To Have
The Citizenship Of Each Of Partner
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13. Jurisdiction Of Organization And Principal
Place Of Business Are Irrelevant
This is both counter-intuitive and crucial – in the realm of assessing the
citizenship of an unincorporated organization, both jurisdiction of organization
and principal place of business are irrelevant.
Certain early decisions such as Carlos v. Adamany which looked to the
principal place of business of an LLC to determine its citizenship have now
been soundly rejected and do not constitute good law. hence the rule for
unincorporated organizations is entirely divorced from that for corporations as
they look only to jurisdiction of incorporation and principal place of business.
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14. Qualification To Transact Business Is Irrelevant

15. With The General Rule Now In Hand, Let’s
Talk About Some Wrinkles, Like A Citizenship
Of A Partnership With Non-US Resident
Partners
Cresswell v. Sullivan & Cromwell
There is no diversity jurisdiction if a partner/owner of an unincorporated
business organization is a U.S. citizen domiciled outside the United States.
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16. Partners Come And Partners Go
Provident Energy Associates of Montana v. Bullington
“Where, pursuant to state law, an LLC member had ceased to be a member by
reason of its bankruptcy, that member’s citizenship was not relevant for
diversity purposes.”
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17. But Who Is A Partner?
Morson v. Kreindler & Kreindler, LLP
The court considered whether a “contract partner’s” residency would be
attributed to a partnership. The contract partner in question received a Form W-
2, not a Form K-1, had no voting rights in the firm and did not share in its profits
or losses. Ergo, he was not a partner but rather a mere employee.
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18. Don’t Stop Until You Are Done
In a world of complicated, multi-layer structures, it is crucial that the diversity
analysis be continued through all upstream layers until it reaches natural persons,
corporations or other forms that have for themselves citizenship.
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19. There Is No De Minimis Member Exemption, And
“I Don’t Know” Is Not An Excuse
Fadal Machining Centers, LLC v. Mid-Atlantic CNC, Inc.
In response to a de minimis argument, namely that “‘SP MAG Holdings, LLC’s
Membership Interest should be disregarded for purposes of determining citizenship,’
because the company holds ‘only a severely fractionalized interest with no control
over the day-to-day operations’ of MAG,” and that interest being as well non-
voting, the Court stated that “the character of [SP MAG Holdings’] membership
interests is irrelevant to the determination of its citizenship,” citing Carden v.
Arkoma Assocs. “Scant though Mr. O’Shea’s interest in the Appellants, the rules
governing subject matter of jurisdiction are ‘inflexible and without exception,’”
again citing Carden.
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20. There Is No De Minimis Member Exemption, And
“I Don’t Know” Is Not An Excuse
Alphonse v. Arch Bay Holdings, L.L.C.
Declaring as “unpersuasive” plaintiff’s argument that “an absurdity exists in this
case because the non-diverse member is in fact a member of a member of one of
Arch Bay’s members, is a limited partner with no managerial responsibilities, and
was difficult to locate.”
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21. When Is Diversity Determined?
Grupo Dataflux v. Atlas Global Group, L.P.
• At the time the action is filed or removed
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22. A Business Trust is Unincorporated, but Less So
Navarro Savings Ass’n v. Lee
• Suit by Trust or Suit by Trustees?
• Trustees or Trustees and Beneficiaries or Beneficiaries
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23. And There Is No Clear Rule As To Donative
Trusts
Trustees v. Trustees & Beneficiaries
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24. Facial Attacks On Diversity Jurisdiction; Lincoln
Benefit Life v. AEI Life, LLC
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25. Implications of Citizenship of Unincorporated
Business Organizations
• Action Between Unincorporated Association and Any of Its Members
• Derivative Actions
• Nationwide “Partnerships” Are Not Subject to Diversity Jurisdiction
• Actions for an Accounting
• Action for Judicial Dissolution
• Publicly Traded Master Limited Partnerships
• Unincorporated Associations with Complicated, Multi-Level Ownership
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26. The ABA Proposal To Amend 28 U.S.C. §
1332
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