Action Item: An LLC's state of organization and principal place of business are legally irrelevant for purposes of determining diversity jurisdiction in the Third Circuit. Despite the practical difficulties this law imposes on litigants, it will remain the standard until the U.S. Supreme Court accepts the Third Circuit's direct invitation to change the law.
In Lincoln Benefit Life Company v. AEI Life, LLC, the Third Circuit removed any doubt that may have existed regarding how the citizenship of limited liability companies ("LLCs") is determined for purposes of establishing diversity jurisdiction in federal court. In the Third Circuit, the state of organization and the principal place of business of an unincorporated association are "legally irrelevant," and instead, parties and courts must determine jurisdiction based on the citizenship of the entity's members. As a result, LLCs seeking to file suit in federal court under diversity jurisdiction, as well as defendant LLCs wishing to remove based on diversity, need to perform a far more burdensome analysis of the parties' citizenship than that required when a corporation is involved.
The plaintiff in Lincoln Benefit filed a complaint in the District of New Jersey against several defendants, including two LLCs. The plaintiff's alleged basis for the court's federal subject-matter jurisdiction was diversity of citizenship, but the complaint failed to assert the citizenship of any of the members of the two LLC defendants. The plaintiff claimed the identity and citizenship of the LLCs' members was not ascertainable when the suit was commenced. In light of the plaintiff's failure to allege the citizenship of each member of LLC, the district court dismissed the complaint for lack of jurisdiction.
On appeal, the Third Circuit reaffirmed that the citizenship of unincorporated associations, including LLCs and partnerships, is determined by the citizenship of their members or partners. Accordingly, "for complete diversity to exist, all of the LLC's members 'must be diverse from all parties on the opposing side.'" The court vacated the district court's order, however, based on its finding that whether a complaint will survive a motion to dismiss is dependent upon the type of challenge to subject-matter jurisdiction. After a reasonable inquiry into the identities and citizenship of the LLCs' members, if a plaintiff has a good faith basis to assert diversity of citizenship between it and those members, then the plaintiff's complaint can survive a motion to dismiss based on subject-matter jurisdiction. In response, defendants may attempt to factually challenge whether diversity exists, but plaintiffs will be permitted jurisdictional discovery to determine if the parties are truly diverse.
The practical implications for an LLC's citizenship being dictated by its members' citizenship are widespread. In fact, the Third Circuit recognized these burdens by stating the need to analyze the members' citizenship is "unwield[y]" and "impractical," and "[t]here is no good reason to treat [limited liability companies] different from corporations for diversity-of-citizenship purposes." In light of these issues, the court directly challenged the Supreme Court to rule that the citizenship of an alternative entity's members should not be considered when determining the entity's citizenship, and rather, that determination will be made based on the entity's state of organization and principal place of business.
This law is significant for plaintiffs seeking to file suit in federal court. The pre-suit investigation a plaintiff needs to perform to confirm it has a good faith basis to assert diversity will frequently be very costly and time consuming, so much so that it may deter plaintiffs from seeking to file in federal court. Similarly, state court defendants may incur the same costs to determine whether they have a right to remove the action to federal court.
Both plaintiffs and defendants considering diversity issues now eagerly await the Supreme Court's response.
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