Diversity Juristriction for LLCs?
Basically, forget about it
By Carter G. Bishop and Daniel S. Kleinberger
Is an LLC more like a corporation or a
In the early days of the modern U.S. limited liability
company, lawyers and judges often had to examine that
question. Although the question has different answers in
different legal contexts, for most contexts, it is now
Nowhere is the question more emphatically settled than
in the context of federal diversity jurisdiction, whose
purpose is to protect out-of-state parties from
potential prejudice in local courts. In Belleville
Catering Co. v. Champaign Marketplace, LLC, 350 F.3d
691, 692 (7th Cir. 2003), a case involving an Illinois
corporation and a Delaware LLC, the Seventh Circuit
bluntly chastised the lawyers for both parties for a
jurisdictional statement that was "transparently
incomplete and incorrect" and for an
"insouciance toward the requirements of federal
jurisdiction [which] has caused a waste of time and
Vacating the district court judgment (which had followed
a jury trial) and remanding "with instructions to
dismiss . . . for want of subject-matter
jurisdiction," the court also admonished the
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. . . . 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.
Belleville Catering at 694.
In some respects, the Belleville Catering
decision is easy to understand. The Seventh Circuit had
addressed the LLC diversity issue five years earlier,
stating unequivocally and definitively that "the
citizenship of an LLC for purposes of the diversity
jurisdiction is the citizenship of its members."
Cosgrove v. Bartolotta, 150 F.3d 729, 731 (7th
Cir. 1998). Four years later, a district court in the
Seventh Circuit had chided counsel that "it has
been clear for more than four years that the place of
organization and principal place of business of a
limited liability company are irrelevant."
Trowbridge v. Dimitri's 50's Diner L.L.C., 208 F.
Supp. 2d 908, 910 (N.D. Ill. 2002)
But to fully understand the Seventh Circuit's ire
requires understanding some important concepts of
federal diversity jurisdiction, and to protect clients
from Belleville Catering's long shadow requires
knowing how those concepts apply to LLCs. This article
will begin with a brief history and explanation of
federal diversity jurisdiction and then focus on recent
court pronouncements concerning diversity jurisdiction
and noncorporate business entities. The article will
conclude by considering whether those pronouncements
make policy sense and then by explaining some key
practical implications of the law as it stands for
The federal courts, like the federal government in
general, have only those powers conferred or
contemplated by the Constitution. Article III, § 2,
clause 1 provides that "The judicial power shall
extend to all cases . . . between citizens of different
states," and federal courts have had diversity
jurisdiction since 1789 when the Judiciary Act made
exceeding $500 the "amount in dispute"
requirement. Some 20 years later, the Supreme Court
decided that diversity meant complete diversity
that is, that diversity jurisdiction is not available if
any party to a case has the same citizenship as any
adverse party. Strawbridge v. Curtiss, 7 U.S. (3
Cranch) 267 (1806). Today, the "amount in
controversy" requirement is to exceed $75,000, but
the complete diversity doctrine remains in place.
See 28 U.S.C. § 1332(a).
The diversity requirement pertains to a federal court's
subject matter jurisdiction and therefore cannot be
waived by the parties. Diversity can be challenged by
any party and by the court itself at any time before
final judgment (including during an appeal) but is
determined "upon the state of things at the time of
the action brought." Mollan v. Torrance, 22
U.S. (9 Wheat) 537, 539 (1824). This "time-of-
filing" rule means that a party cannot cure a
diversity problem by changing its citizenship after a
lawsuit has begun.
A cure can be achieved by dismissing any nondiverse
party from the lawsuit. Grupo Dataflux v. Atlas
Global Group, LP, 124 S.Ct. 1920, 1924-25 (2004).
However, this cure presupposes that the nondiverse party
is not indispensable that is, that "in
equity and good conscience" dismissal will not
unduly prejudice either the dismissed party or the
remaining parties and will not unduly undermine the
adequacy of the remedies available in the lawsuit. Fed.
R. Civ. P. 19(b).
Diversity analysis turns on a litigant's state
citizenship, and, for diversity purposes, domicile
determines the state citizenship of U.S. citizens who
are human beings. It was initially unclear, however,
what citizenship means when applied to a party other
than a human being. That was hardly surprising, given
that the framers of the Constitution had in mind human
beings when they provided for diversity jurisdiction.
(Only 30 private corporations existed in the United
States before 1790.)
The Supreme Court's first opinion on diversity
jurisdiction for entities stated that "the term
citizen' ought to be understood as it is used in the
Constitution, . . . . [t]hat is, to describe the real
persons who come into court." Bank of the United
States v. Deveaux, 9 U.S. (5 Cranch) 61, 86-91
(1809). Accordingly, "[t]hat invisible, intangible,
and artificial being, that mere legal entity, a
corporation aggregate, is certainly not a citizen; and,
consequently, cannot sue or be sued in the courts of the
United States, unless the rights of the members, in this
respect, can be exercised in their corporate name."
Therefore, the corporate plaintiff had the citizenship
of each of the human beings that "composed"
In 1844, the Supreme Court reversed itself and declared
a corporation to be a citizen of its state of
incorporation, at least where the corporation did
business in its state of incorporation. "[A]
corporation created by and doing business in a
particular state, is to be deemed to all intents and
purposes as a person, although an artificial person, an
inhabitant of the same state, for the purposes of its
incorporation, capable of being treated as a citizen of
that state, as much as a natural person."
Louisville, C. & C.R. Co. v. Letson, 43 U.S.
497, 558 (1844).
In 1958, Congress narrowed the diversity aperture for
corporations, declaring that "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." 28 U.S.C. §
1332(c)(1). The statute does not define "principal
place of business," and many courts use the so-
called "nerve center" test to make the
By its terms, Section 1332(c)(1) applies only to "a
corporation" and leaves unaffected a long line of
cases (some decided before 1958 and some after) holding
that, for diversity purposes, an unincorporated
organization has the citizenship of each of its members
or owners and that the organization's state of formation
and principal place of business are irrelevant. For LLC
purposes, the most important of these cases is Carden
v. Arkoma Associates, 494 US 185, 195 (1990), which
involved a limited partnership's suit against a lease
guarantor and whose rationale was recently re-confirmed
in Grupo Dataflux.
Carden held that, for diversity purposes, a
limited partnership partakes of the citizenship of every
one of its general and limited partners. A vigorous
dissent argued that limited partners are not "real
parties in interest" and are therefore irrelevant
to the diversity analysis. The dissent relied heavily on
Navarro Savings Ass'n. v. Lee, 446 U.S. 458
(1980), which had used the "real party in
interest" analysis to hold that the trustees of a
Massachusetts common law business trust could bring a
diversity claim without regard to the citizenship of the
The Carden majority rejected the "real party
in interest" analysis, the dissent's reliance on
Navarro, and the asserted analogy to a business
trust. The majority acknowledged that it is
"undoubtedly correct" that limited
partnerships are "functionally similar" to
other entities that have greater access to the federal
courts, but rejected a functional approach as
inappropriate given Congress' use of the word
The majority opinion spent considerable time
recapitulating and reaffirming precedent. From the
standpoint of LLCs, the most instructive part of that
discussion is the opinion's treatment of two cases,
Chapman v. Barney, 129 U.S. 677 (1889) and
Puerto Rico v. Russell & Co., 288 U.S. 476
(1933). Chapman concerned the United States
Express Co., a New York joint stock company.
Russell involved a Puerto Rico sociedad en
The Chapman court flatly rejected assertions that
the Express Co. was a citizen of New York, and in doing
so rejected any expansive reading of the notion of
[T]he express company cannot be a citizen of New York,
within the meaning of the statutes regulating
jurisdiction, unless it be a corporation. The allegation
that the company was organized under the laws of New
York is not an allegation that it is a corporation. In
fact the allegation is that the company is not a
corporation, but a joint-stock company that is,
a mere partnership.
Chapman, at 682.
In contrast, Russell held that a Puerto Rico
sociedad en comandita had a juridical personality
so complete under foreign law that there was "no
adequate reason" for according the sociedad
a different status than a U.S. corporation.
Russell, at 480-82.
The Carden majority embraced Chapman and
its formalist, per se rule, while essentially limiting
Russell to its facts. The majority noted that a
previous case, United Steelworkers v. R.H.
Bouligny, had explained Russell as an
exercise in "fitting an exotic creation of the
civil law. . . into a federal scheme which it knew
not." Carden, at 190 (quoting United
Steelworkers v. R.H. Bouligny Inc., 382 U.S. 145,
151 (1965)). The majority also characterized
Bouligny as specifically rejecting any analysis
that looks to an entity's organization and structure.
In short, the Supreme Court's opinion in Carden
states a rule remarkably similar to the approach used by
the IRS in its 1997 "check-the-box"
regulations on the tax classification of business
entities: If it's a corporation, it's a corporation; if
it's not, it's not. Carden thus dictates that,
when federal diversity is the issue, LLCs are treated
like any other unincorporated business organization.
Corporate tests are irrelevant, and an LLC has the
citizenship of each of its members.
In 1996, three unreported federal district court
decisions suggested that the corporate tests do apply to
LLCs, but since then every reported decision at
both the district and circuit court levels has
acknowledged that Carden controls. A recent Eight
Circuit opinion is illustrative: "We recognize
numerous similarities exist between a corporation and an
LLC, but Congress is the appropriate forum to consider
and, if it desires, to apply the same citizenship' rule
for LLCs as corporations for diversity jurisdiction
purposes. This issue appears resolved by Justice Antonin
Scalia's analysis in Carden." GMAC
Commercial Credit LLC v. Dillard Department Stores
Inc., 357 F.3d 827, 828 (8th Cir. 2004).
Is Carden good policy? The implication of the
case is that a name (corporate or not) matters and
function and structure do not, and the case can easily
be criticized as the triumph of labels over substance.
But this criticism disregards the decision's key
"separation of powers" point. In the early
days of the republic, Congress left open the question of
the citizenship of entities. Since 1958, however, a
statute has provided a rule applicable to a
"corporation." Congress having legislated on
the matter, it is for Congress, not the courts, to
revise that term in light of contemporary business
The Carden dissent should not attract those who
advise or use LLCs. To make its "real party in
interest" argument, the dissent must engage in a
type of "veil piercing" that goes far beyond
the majority approach (which attributes the citizenship
of each partner to the limited partnership). The dissent
must not only look through the limited partnership but
must also attempt to conflate those who manage the
entity with the entity itself. That is precisely the
type of exercise attempted by creditors of an LLC when
seeking to hold members liable for the debts of the
In any event, Carden is the law and the case's
applicability to LLCs is now beyond doubt and possibly
even beyond "a nonfrivolous argument for the
extension, modification, or reversal of existing
law." Fed. R. Civ. P. 11(b)(2). This state of the
law has some important practical consequences. In
In any suit between an LLC and a third party (that is,
not a member), diversity jurisdiction depends on the
citizenship of each LLC member at the time the lawsuit
In any suit between an LLC and a member, diversity
jurisdiction is impossible.
In an LLC-related suit among members of an LLC,
diversity jurisdiction depends on whether the LLC is an
indispensable party (even assuming the litigating
members are diverse).
In any derivative lawsuit brought on behalf an LLC,
diversity jurisdiction depends on the citizenship of
each LLC member at the time the lawsuit is filed and is
impossible in all but very limited
Some of the particular consequences relate to the
conduct of a lawsuit asserting diversity jurisdiction.
Most obviously, litigators who make a Belleville
mistake risk sanctions, orders reducing or
eliminating their fees in the federal suit, and, if harm
is shown (such as a missed statute of limitations),
malpractice liability. Perhaps less obviously, an LLC
that invokes or challenges federal jurisdiction must be
prepared to disclose at minimum to the court in
camera the identity and citizenship of each of
the LLC's members.
Obversely, because LLC membership information is rarely
a matter of public record, a third party that invokes
diversity jurisdiction against an LLC may have to
proceed first "on information and belief" and
then promptly obtain the court's assistance to determine
the citizenship of each LLC member.
A change in an LLC's membership occurring after the
lawsuit begins will not affect the diversity analysis.
Diversity is determined as of the start of the suit.
. Likewise, a corporation properly
sued in federal court cannot escape to state court by
merging or converting into an LLC, "checking the
box" (to continue to be taxed as a corporation so
as to avoid horrendous tax consequences), and using the
citizenship of its members (formerly its shareholders)
to destroy diversity. The die is cast when the lawsuit
There are also consequences as to which LLC-related
lawsuits are excluded from diversity jurisdiction. As
diversity jurisdiction extends to a suit between an LLC
and a third party only if that third party is diverse
vis-à-vis every member of the LLC. Moreover, if an LLC
has a member that is itself an unincorporated
organization, the LLC has the citizenship not only of
that member but also of every member of that member.
Thus, for example, if a two-member LLC has as one of its
members a publicly traded limited partnership whose
limited partners include citizens of each state, the
District of Columbia, Puerto Rico and each U.S.
territory, federal diversity jurisdiction will never
extend to a suit involving the LLC.
Matters are more complex with regard to lawsuits
"within" an LLC. Most fundamentally, federal
diversity jurisdiction will never exist in a suit
between an LLC and any of its members. For example,
whether an LLC sues a member for a promised contribution
or a member sues the LLC for a distribution due under
the operating agreement, the parties are not diverse.
The member and the LLC are adverse parties, and the LLC
has the citizenship of the member.
A suit among LLC members can qualify for diversity
jurisdiction only if the litigating members are diverse
the LLC is not an indispensable party to the
suit. Where joinder of a party would defeat diversity
jurisdiction, Rule 19(b) of the Federal Rules of Civil
Procedure requires the federal court to "determine
whether in equity and good conscience the action should
proceed among the parties before it, or should be
dismissed, the absent person being thus regarded as
indispensable." The analysis is flexible and
pragmatic and permits a court to sculpt remedies so as
to retain jurisdiction, provide an adequate judgment for
the litigants, and avoid or lessen prejudice to the
Suppose, for example, that member X of an LLC claims
that member Y agreed to transfer one-half of member Y's
economic rights in the LLC to member X. The LLC is
probably not an indispensable party to the X-Y
litigation. Unless the LLC itself had some direct stake
in the allocation of those rights, "protective
provisions in the judgment . . . the shaping of relief,
or other measures" could prevent any prejudice to
the LLC. Fed. R. Civ. P. 19(b).
Often, however, a dispute among LLC members will deeply
and inextricably implicate the rights or obligations of
the LLC. In that event, the LLC will be an indispensable
party. The clearest example is a derivative suit brought
by an LLC member against another member. The LLC's
rights are obviously in play, and the suit will
determine those rights. Whether the LLC is considered
aligned with the derivative plaintiff or the defendant,
the LLC shares citizenship with an adverse party. Such a
derivative suit simply cannot qualify for diversity
Similarly, if an LLC member sues an LLC manager for acts
in the manager's official capacity, the suit is unlikely
to qualify for diversity jurisdiction. Even if the
member and manager are diverse, a judgment against the
manager would have serious legal ramifications for the
LLC. The LLC is therefore likely to be an indispensable
party, adverse to and nondiverse from the plaintiff
As for a suit to enforce an LLC operating agreement,
diversity jurisdiction is at best problematic (even
assuming complete diversity among the members). The LLC
may be an indispensable party as either a party to, or a
third-party beneficiary of, the agreement.
There is some precedent from limited partnership law to
suggest that, if all the members of an LLC are diverse
and parties to the litigation, a federal court might
manage a nonderivative case so as to dispense with the
LLC. For example, in HB General Corp. v. Manchester
, 95 F.3d 1185, 1191 (3d Cir. 1996),
the court held that a limited partnership was not an
indispensable party in a suit among the partners,
because, inter alia
, the limited partnership
could be prevented from later bringing an identical
claim: "The partnership, like a marionette, cannot
make a move unless some human being pulls the strings.
And all the people who, under the partnership agreement,
have the power to cause the partnership to bring suit .
. . are before the court."
Whether this reasoning should and will apply to LLCs is
doubtful, however. Recent federal court decisions
involving LLCs have emphasized the separate legal status
of the LLC and have not followed the limited partnership
precedents. See, for example, Trademark Retail
Inc. v. Apple Glen Investors, LP
, 196 F.R.D. 535,
540 (N.D.Ind. 2000).
Defects in federal subject matter jurisdiction are not
waivable, and a federal court has a duty even sua
to dismiss a case for which it lacks subject
matter jurisdiction. To ask a court to overlook a
subject matter flaw is to ask the court to engage in
"dereliction combined with usurpation."
at 93. Lawyers who deal with
LLCs must, therefore, learn with care the limited
contours of LLC diversity jurisdiction. Those contours
effectively relegate to state court most LLC litigation
that does not involve a federal question.
Bishop is a professor at Suffolk University Law
School in Boston. His e-mail is firstname.lastname@example.org.
Kleinberger is a professor at William Mitchell College
of Law in St. Paul, Minn. His e-mail is email@example.com.