Bar News - December 14, 2012
Business Law & Business Litigation: Lesson Learned: A Federal Jurisdictional Pitfall in LLC Members Disputes
By: Brandon Ross
An LLC offers wonderful organizational flexibility to its members. Unfortunately, that same membership flexibility can be a headache, if a serious, derivative-like member dispute arises.
In a sophisticated member dispute, a litigant may rush to federal court, by initial complaint or by removal. However, be careful: The federal court may lack subject matter jurisdiction. Trying to proceed may trigger Rule 11 sanctions.
Federal diversity jurisdiction, 28 U.S.C. § 1332, requires that all adverse parties be citizens of different states. The statute further defines a corporation to be a citizen of the state of incorporation and the corporation’s principal place of business. Yet, an LLC is not a corporation; it is more like a partnership. The US Supreme Court has held that when Congress wrote "corporation" in the diversity statute, it specifically meant corporation – and no other business entity. Carden v. Arkoma Associates, 494 U.S. 185 (1990). Citizenship of LLCs is instead controlled by a string of cases providing for partnership-like treatment.
This is a problem for a member-party who prefers federal court. Because the party is a member of the LLC, the LLC is also a citizen of the member’s state. Complete diversity seems impossible to obtain. What’s a practitioner to do?
First, do not file in (or remove to) federal court – at least not based on diversity. Second, accept that federal court may not be a viable forum. Next, ask whether you have any additional sources of federal jurisdiction. For example, are you sure there is no federal question jurisdiction? If not under the general federal question jurisdiction, be sure to review Title 18 meticulously, because it does authorize federal jurisdiction in certain, specific causes of action (e.g. certain intellectual property claims).
Knowledge of this peculiar pitfall can prevent an embarrassing misstep, saving you and your client time and money.
Brandon Ross is a lawyer at the Law Offices of Brandon D. Ross, PLLC in Manchester, NH. Brandon practices intellectual property, commercial, and other financial planning law. He can be reached at email@example.com.