LLCs in Diversity Jurisdiction: Keeping the Playing Field Bumpy

Your company has just been sued in a foreign state court by an LLC organized in that foreign state demanding more than $75,000 in damages. But you’re not fazed because you can remove to federal court and get rid of the baseless case on a 12(b)(6) motion, right? Wrong!

Or, at least, possibly wrong because you are probably asking the wrong question. In every Court of Appeals Circuit that has ruled on the question (including the Second), and nearly every District Court in the Circuits that are silent, the citizenship of an LLC is not the state where it is organized, but rather the state of citizenship of its members.

The rule is based on sound, if narrow, interpretation of 28 U.S.C. § 1332(c), which states that “a corporation shall be … a citizen of any State by which it has been incorporated and of the State where it has its principal place of business…” In Carden v. Arkoma Assocs., 494 U.S. 195 (1990), the Supreme Court states confirms the strict interpretation of § 1332(c) – if it ain’t a corporation, § 1332(c) does not apply. (The Court acknowledges that it is being “unresponsive to … the changing realities of business organization,” so that is something.)

I have not done a state-by-state survey, but I’m willing to bet that very few states, if any, had adopted limited liability company acts when Carden was decided. This is a classic example of trying to fit a square peg in a round hole. Still, the Supreme Court’s intellectual honesty is little comfort when your company has just been served.

So what’s a defendant to do? You have two choices:

  1. Wing it – file the notice of removal and hope neither the plaintiff nor the Court calls you out.
  2. Aggressively pursue jurisdiction discovery to find out the citizenship of the members. Remove within 30 days of the date when you receive the document or other information from which you can determine the citizenship of the members and, no matter what, have it all done within the first year.

Simple, right?