Concept
Unincorporated Associations and LLCs
Diversity jurisdiction
Unincorporated Associations and LLCs
The corporate citizenship rules just covered rest on a specific statutory text. Section 1332(c)(1) tells a court where a corporation is a citizen, and Congress wrote it in 1958 when it added the principal place of business to the State of incorporation.1 That provision speaks only of corporations. Partnerships, unions, limited liability companies, and similar groups have no statutory definition of their citizenship, so the courts have had to decide how to treat them. They have answered by looking through the entity to the people who compose it, and the result is a rule that is easy to state and surprisingly easy to get wrong in practice. The two sub-sections below take partnerships first, because the rule began there, and then limited liability companies, which are the modern entity most often mistaken for corporations.
Partnerships After Carden
A partnership or other unincorporated association takes the citizenship of every one of its members, so diversity exists only if no member shares a State with any opposing party.2 The rule has an old pedigree. The Supreme Court had applied it to a joint stock company, to a limited partnership association, and to a labor union, and in each case refused to give the group the corporate treatment.3 The question that remained open for limited partnerships was whether the passive investors, the limited partners, counted along with the general partners who run the business.
In Carden v. Arkoma Associates an Arizona limited partnership sued two Louisiana citizens on a contract claim in federal court in Louisiana. The defendants showed that one of the limited partners was also a Louisiana citizen. The Fifth Circuit had found complete diversity by looking only at the general partners, reasoning that they are the ones who control the entity.4 The Supreme Court reversed. It held that diversity in a suit by or against such an entity depends on the citizenship of "all the members," and that a court may not consult the citizenship of fewer than all of them.5 The Court also rejected the argument that a court should ask which members are the real parties to the controversy, based on who holds control. Diversity is a jurisdictional question the Court must decide in every case, and the earlier decisions had counted every member without examining each member's degree of power.6
The reasoning behind the rule comes in two parts. The first is institutional. Carden admitted that its result was technical and did not track the commercial reality that limited partnerships function much like corporations. It held that adjusting diversity jurisdiction to new business forms is a job for Congress, which had created special treatment for corporations and had not extended it to anyone else.7 The second is mechanical. A rule that asks only whose names are on the membership list is simple to apply at the threshold stage, where a court has little more than the pleadings in front of it. It also respects the premise of complete diversity: if any member lives in the same State as an opponent, a same-State relationship exists inside the case, and that is exactly what diversity is designed to avoid.
The later case of Grupo Dataflux v. Atlas Global Group shows how the rule works and how much of the entity it reaches. A Texas limited partnership sued a Mexican corporation. Two of its limited partners were Mexican citizens, so the partnership was a citizen of Mexico, as well as of Delaware and Texas through its other partners. Aliens therefore stood on both sides and diversity was absent.8 The Court described Carden as treating the partnership as one artificial entity whose own citizenship is found by consulting all of its members. The members are not treated as separate parties to the lawsuit.9
Two invented lineups show where the answer turns. Suppose a Missouri plaintiff sues a law partnership whose partners all live in New York or New Jersey. Diversity is complete, because no partner shares Missouri citizenship with the plaintiff. Now suppose a Pennsylvania plaintiff sues a 120-partner firm headquartered in New York, in which most partners live in New York, ten live in New Jersey, and one lives in Pennsylvania. The firm is a citizen of all three States, so the Pennsylvania plaintiff is not diverse from it, and a state-law fraud claim must go to state court.10 Nothing about the firm's headquarters or size changed. The only change was one member's home State.
Tiered entities require the same inquiry at every level. If a member of a partnership is itself a partnership, the court must follow the chain down and count the citizenship of that member's partners as well. In Hart v. Terminex International the parties assumed that a Delaware limited partnership was a Delaware citizen. One of its partners was itself a partnership with Illinois partners, and the Illinois plaintiffs therefore lacked diversity, so the case was dismissed after eight years of litigation.11 The practical difficulty is real, since membership is often not public record, members can change, and the entity's own members are sometimes entities too. Courts and commentators have urged the Supreme Court or Congress to adopt a simpler rule for such entities, and that criticism does not change the rule currently in force.12
The rule also depends on how state law characterizes the entity. A professional corporation, such as a law firm incorporated under a professional corporation statute, is created as a corporation and is called one, so most courts treat it under § 1332(c)(1) even though it operates much like a partnership.13 The partnership rule applies to an entity that is not a corporation in the eyes of the law that created it, not to one that merely resembles a partnership in how it works.
Limited Liability Companies
A limited liability company is formed under a state statute and shields its owners from personal liability, much as a corporation does, and that resemblance invites the mistake of treating it like one. Federal courts nevertheless treat an LLC as an unincorporated association. It is a citizen of every State of which any member is a citizen, and it has no separate State of organization or principal place of business for diversity purposes.15 The Supreme Court in Grupo Dataflux noted that the courts of appeals had reached this result, although the Court had not itself ruled on the issue.16 Courts reason that an LLC closely resembles a limited partnership and is not called a corporation, so Carden controls.17
In Belleville Catering Co. v. Champaign Market Place LLC the Seventh Circuit confronted what happens when lawyers assume otherwise. The complaint invoked diversity by alleging that the plaintiff corporation was a Missouri citizen and that the defendant was a "Delaware Limited Liability Company" with its principal place of business in Illinois. Both sides and the magistrate judge accepted those allegations, and a jury returned a verdict.18 The court found the allegations incomplete and wrong. The plaintiff corporation had always been incorporated in Illinois, and the defendant LLC had several Illinois members, so Illinois citizens stood on both sides. One of its members was another LLC that claimed confidentiality for its own members, which meant that the court could not even identify the citizenships that mattered.19 The court vacated the judgment and ordered the complaint dismissed for want of jurisdiction.20
Belleville also teaches what lawyers must do before they allege diversity. Counsel had taken the plaintiff's State of incorporation from a lease that called it "a Missouri corporation," and the court held that securing jurisdictional facts from original sources, such as a certificate of incorporation, is a duty whose neglect violates Rule 11.21 Defense counsel share that duty, because a court cannot decide the merits of a case over which it lacks jurisdiction, and lawyers must learn which citizenship counts before assuming that diversity exists.22 The court also required counsel to finish the case in state court without extra fees, so that the clients would not pay twice for the lawyers' mistake.23 The pleading rules point the same way. A diversity complaint must allege each party's citizenship, residence is insufficient, and a corporation must be described by its State of incorporation and principal place of business.24 In Walker v. Norwest Corp. an attorney who pleaded that defendants were South Dakota "residents" and claimed diversity with only "some" of them was sanctioned under Rule 11 for the defective complaint.25
A matched pair shows which fact decides the outcome. Suppose an LLC organized in Delaware with its headquarters in Texas has members who are citizens only of Ohio and Florida. A Texas plaintiff is diverse from it, because neither the place of organization nor the headquarters adds a citizenship. If one member is a Texas citizen, the same plaintiff is not diverse, and the Delaware charter and Texas office make no difference. The membership list controls in both cases, and an LLC with a single Illinois-citizen member cannot be sued in diversity by an Illinois plaintiff.
The rule applies to ordinary diversity under § 1332(a). In class actions under the Class Action Fairness Act, unincorporated associations are treated like corporations for citizenship purposes under § 1332(d)(10), a contrast taken up in the class action section below.26
Partnerships After Carden
Statutory text tells a court how to find the citizenship of a corporation, but nothing in § 1332 says how to find the citizenship of a partnership. The Supreme Court settled that gap in Carden v. Arkoma Associates, and the answer is that a partnership, whether general or limited, and any similar unincorporated association is a citizen of every State of which any of its partners or members is a citizen.28 The entity does not get a single citizenship of its own, as a corporation does through its State of incorporation and its headquarters. Instead the court looks through the entity to the people who compose it and counts all of them.
The facts of Carden show what is at stake in that choice. Arkoma Associates, an Arizona limited partnership, sued two Louisiana citizens on a contract dispute in federal court in Louisiana. The defendants objected that one of Arkoma's limited partners was also a Louisiana citizen. The Fifth Circuit had found complete diversity anyway, reasoning that the partnership's citizenship should be determined by its general partners alone, since they run the business, and that the passive limited partners could be ignored.29 The Supreme Court reversed. It rejected the idea that a court may consult the citizenship of fewer than all of an entity's members and held that diversity in a suit by or against the entity depends on the citizenship of "all the members."30 A single Louisiana limited partner was therefore enough to put Louisiana citizens on both sides of the case and destroy diversity.
The dissent in Carden is worth knowing only because it describes the alternative the majority turned down. Justice O'Connor would have asked which members are the real parties to the controversy, meaning those who actually control the subject matter of the dispute and the litigation over it. On that test a limited partner, who by law and by the partnership agreement has no say in managing the business or conducting a lawsuit, would not be counted.31 The majority declined to inquire into each member's degree of control, and the two reasons it gave explain why the rule has the shape it does.
The first reason is institutional. The majority conceded that its result was technical and did not reflect the commercial reality that limited partnerships function much like corporations. It nevertheless held that adapting diversity jurisdiction to new business forms is a task for Congress. In 1958 Congress amended § 1332(c) to give corporations a second citizenship, their principal place of business, and it made no provision for any other kind of entity. Having once established special treatment for corporations, the Court said it would leave the rest to the legislature.32 The second reason is practical. A rule that counts every member is a bright line, and a court deciding its own jurisdiction at the threshold, with little beyond the pleadings in hand, can apply a bright line far more easily than a case-by-case inquiry into who controls what. The same rule also protects the premise of complete diversity, because a member who shares a State with an opponent puts a same-State relationship inside the case no matter how little power that member holds.
A matched pair shows which fact decides the outcome. Suppose an invented Ohio limited partnership sues a Louisiana defendant, and its general partners and limited partners are all citizens of Ohio, Texas, and Florida. No member shares Louisiana citizenship with the defendant, so the partnership can sue in diversity. Now add one limited partner who lives in Louisiana. The partnership is now a Louisiana citizen as well, and the suit fails, even though that partner holds a tiny passive stake and has no say in the litigation. That is the Carden result itself, with an Arizona partnership and Louisiana defendants. Only the membership list changed.
The Court applied the same reasoning in Grupo Dataflux v. Atlas Global Group. A Texas limited partnership sued a Mexican corporation, and two of the partnership's limited partners were Mexican citizens. Under Carden the partnership was therefore a citizen of Mexico, and of Delaware and Texas through its other partners, so aliens stood on both sides of the case and diversity was absent.33 The partnership's State of organization and its headquarters did nothing to save jurisdiction, because only the members' citizenships counted. Related cases show the limits of the rule. A suit brought by individual trustees in their own names is judged by the trustees' citizenship, because the trustees, not an entity, are the parties.34
Limited Liability Companies
A limited liability company is created under a state statute and shields its owners from personal liability for its debts, and those features make it look and behave like a corporation. The partnership rule just taught for unincorporated associations raises the question of which model governs an LLC. Federal courts answer that an LLC is treated as an unincorporated association, so it is a citizen of every State of which any of its members is a citizen. It has no separate State of organization or principal place of business for diversity purposes.36
The reason is that courts follow the entity's legal form and not its commercial function. Section 1332(c)(1) gives special citizenship treatment only to a "corporation," and an LLC is not called one and more closely resembles a limited partnership. Entities that are not corporations are therefore analogized to partnerships, whose citizenship comes from all the members.37 A second reason is practical. A federal court must satisfy itself that it has jurisdiction, and it can do that only if the citizenship of everyone who counts is disclosed. An LLC that keeps its members confidential has therefore not shown that diversity exists, no matter how it describes itself in the pleadings.
The Seventh Circuit's decision in Belleville Catering Co. v. Champaign Market Place LLC shows what happens when lawyers assume the corporate rule applies. The complaint alleged that the defendant was a "Delaware Limited Liability Company" with its principal place of business in Illinois. The defendant agreed, a magistrate judge accepted the allegations at face value, and a jury returned a verdict of $220,000 on the counterclaim.38 On appeal the court observed that counsel and the magistrate judge had assumed an LLC is a citizen of its State of organization and its principal place of business, and that this assumption was wrong. Several of the defendant's members were Illinois citizens, and the plaintiff corporation turned out to have been incorporated in Illinois all along, so Illinois citizens stood on both sides. One member was itself an LLC that asserted confidentiality for its own members, and the court said that diversity cannot be litigated with such details withheld from the judiciary.39
The case also assigns responsibility for checking. The plaintiff's lawyer had taken the corporation's State of incorporation from a lease describing it as "a Missouri corporation." The court held that this confessed a Rule 11 violation, because counsel must obtain jurisdictional facts from original sources, such as the certificate of incorporation or the State's public incorporation database, before alleging them formally.40 A lease is not drafted with § 1332 in mind and may only mean the company does business in Missouri. The duty runs to defense counsel as well, who must learn which citizenship counts and cannot simply agree with the complaint.41 Pleading a party's residence instead of its citizenship invites the same trouble, as the attorney in Walker v. Norwest Corp. found when he alleged that defendants were South Dakota "residents" and claimed diversity with only "some" of them, and was sanctioned under Rule 11.42
The court itself is the final safeguard. A court lacks discretion to decide the merits of a case over which it has no jurisdiction, so the appellate court vacated the judgment and ordered dismissal even though a full jury trial had been held.43 It also directed that the lawyers, not the clients, bear the cost of the mistake by completing the case in state court without added fees, which it described as a way of making the clients pay only once and not as a sanction.44 A defendant's wish to keep a favorable verdict does not cure the defect, because parties cannot create subject-matter jurisdiction by agreeing that it exists.
Two invented lineups show where the answer turns. Suppose an LLC organized in Delaware has members who are citizens of Missouri and Kansas, and it sues an Illinois corporation whose nerve center is in Illinois. Neither the LLC's charter nor its headquarters adds a citizenship, so diversity is complete. Now suppose the LLC has several members who are Illinois citizens and sues the same Illinois corporation. Diversity fails, whatever State the LLC was organized in. Diversity also fails if the LLC refuses to identify its members, because nothing then shows that no member shares a State with the opponent.