ABA House of Delegates Urges Change to Diversity Statute
By Carl A. Aveni, Litigation News Contributing Editor – October 30, 2015

As part of the 2015 ABA Annual Meeting, the ABA House of Delegates urged Congress to pass sweeping changes to the laws regarding federal diversity jurisdiction over unincorporated businesses. If Congress acts, it would mark the first revisions to the federal diversity statute since the Eisenhower Administration.

In August 2015, the House of Delegates overwhelmingly passed House Resolution 103B. This initiative, submitted by the ABA Section of Litigation, urges Congress to amend the federal diversity statute to provide that unincorporated entities be treated like their incorporated counterparts—as citizens only of the states where each is organized and maintains its principal place of business. Under the current rules, unincorporated entities, such as general partnerships, limited liability companies, and trade associations, have long been treated as citizens of each and every state where any one of their members resides. This multiplicity of citizenships has made federal diversity jurisdiction over such entities both harder to establish and more opaque to litigants, lawyers and courts alike.

A Trap for Unwary Litigants and Judges

Under 28 U.S.C. § 1332, federal courts enjoy diversity jurisdiction when, among other things, at the moment the suit is filed, no party plaintiff and defendant share common citizenship in any one state. Even hidden or latent defects in diversity jurisdiction are unwaivable, requiring courts to immediately dismiss the suit upon discovery—regardless of how far the case has since progressed.

As the Proposed Resolution and Report to the House of Delegates noted, “[d]etermining the citizenship of unincorporated business litigants has turned into a jurisdictional morass.” “[T]he existence of a single, passive member of an LLC who was not even involved in the dispute or event being litigated can destroy diversity if he or she hails from the same state as one adverse party.” Worse, “[t]he LLC’s records may not even reveal the citizenship of every member, thus making it difficult if not impossible for any party to determine quickly (let alone with any assurance of accuracy) whether complete diversity exists prior to discovery.” The report goes on to explain that“[t]he current diversity regime sets a potential trap for plaintiffs, defendants, and even trial court judges every time litigation involves an unincorporated business entity.”

Section leaders have wrestled with this problem firsthand. “I have seen the problems and uncertainty in my own practice, and those problems mirrored those of experienced lawyers on the Task Force, the Section of Litigation Council, and throughout the bar,” explains Gregory R. Hanthorn, Atlanta, GA, cochair of the Section of Litigation’s Federal Practice Task Force. “Clients have had to spend ridiculous amounts of time and effort examining the citizenship question for removal or to figure out whether filing in federal court as a plaintiff is an available option. It creates a tremendous amount of extra work just through the uncertainty,” says Hanthorn.

Even that extra work provides no assurance of accurate results, warns Dennis J. Drasco, Roseland, NJ, Section of Litigation representative to the ABA House of Delegates. For example, just prior to suit, “[a]ll of a sudden, and quietly, a passive owner could move across a state line, keep his old cell phone number, and none of the lawyers or even the principals are any the wiser. And as a result, diversity is defeated, and the court is powerless to do something about it. Both sides would have wasted all that time and effort,” explains Drasco. Not only are the resulting dismissals inefficient, they can lead to the case being time-barred in other forums. Such “[d]isappearing diversity . . . can intersect with state statutes of limitations in tricky ways,” adds Drasco. The current “situation may be a ticking legal time bomb,” notes Hanthorn.

Building Consensus Among the Delegates

Yet not everyone was initially convinced. The resolution, originally planned for the 2015 ABA Midyear Meeting, was delayed six months to allow time to shore up support. “Some skeptics originally wondered whether this was a problem that needed solving” Drasco explains. “There was a concern that by making removal less troublesome, we might burden the federal judiciary.”

In fact, federal judges proved to be among the resolution’s chief proponents. “It turned out that the federal judges and federal bar were strongly in favor of the resolution,” Drasco notes. “This isn’t a plaintiff’s issue or a defendant’s issue. Judges and parties on both sides of the ‘v’ in the caption should care.”

Throughout the past spring and summer, proponents met with groups of delegates and built a supporting consensus in favor of the resolution. “A fair amount of what might have been uninformed opposition melted away as folks got a chance to examine what this resolution does and doesn’t do. Once they kicked the tires, it was clear this was an even-handed improvement for the benefit of all practitioners,” observes Hanthorn.

Next Steps: Capitol Hill

Now that the House of Delegates has overwhelmingly approved the measure, focus shifts to finding a receptive sponsor on Capitol Hill. “We have our fingers crossed that Congress will take this up and make it law,” Drasco notes. “We can take pride that we initiated this for the benefit of everyone that practices in federal court—judges, lawyers and litigants alike. Bringing that kind of certainty—well, everybody wins,” Drasco adds. “The drafting and passage of this Resolution was an example of all of the various constituencies of the ABA working together to get it right,” notes Hanthorn.

Keywords: diversity unincorporated citizenship, House of Delegates, 28 U.S.C. § 1332, Resolution 103B

 
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