2.6 Diversity of Citizenship/alienage Jurisdiction

• Library: Federal Civil Practice in Virginia (Virginia CLE) (2018 Ed.)

2.6 DIVERSITY OF CITIZENSHIP/ALIENAGE JURISDICTION

2.601 Sources and Basic Rules. Article III, section 2 authorizes federal courts to exercise jurisdiction over cases between "Citizens of different States . . . and between a State, or the Citizens thereof, and foreign States, Citizens, or Subjects."

28 U.S.C. § 1332 requires diversity of citizenship and an amount in controversy exceeding $75,000 (exclusive of interest and costs).

2.602 Complete Diversity. The United States Supreme Court has interpreted the constitutional language to require "complete diversity," namely, the citizenship of each plaintiff must be diverse from that of each defendant. ³⁰¹

In a recent Western District of Virginia case, the court held that complete diversity exists even when a "fictitious" or John Doe defendant may be a Virginia resident. ³⁰² In Waker, the Western District denied remand because all known defendants had complete diversity, even though the fictitious defendant could destroy diversity of citizenship requirements. ³⁰³

2.603 Alienage Jurisdiction. Article III, section 2 of the Constitution authorizes federal courts to exercise jurisdiction over cases between "Citizens of different States . . . and between . . . foreign States, Citizens, or Subjects." ³⁰⁴ 28 U.S.C. § 1332(a) provides that

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[t]he district courts shall have original jurisdiction of all civil actions . . . between . . . (2) citizens of a State and citizens or subjects of a foreign state (but permanent residents are now excluded); (3) citizens of different States and in which citizens or subjects of a foreign state are additional parties; and (4) a foreign state, defined in section 1603(a) of this title, as plaintiff and citizens of a State or of different States.

Where aliens are involved in a case, check carefully the changes made to the law by the Federal Courts Jurisdiction and Venue Clarification Act of 2011. ³⁰⁵

A. Limitations on Alienage Jurisdiction.

1. Alien Versus Alien or Alien Versus Alien and Citizen. An alien cannot invoke diversity jurisdiction to sue: (i) other aliens or (ii) a combination of aliens and United States citizens. ³⁰⁶

2. Aliens on Both Sides of a Case Involving Diverse Citizens. Where there are completely diverse United States citizens on both sides of a case, then, generally, federal courts have held that they have diversity jurisdiction over such actions even though aliens may also be present on both sides the case. ³⁰⁷

Where a foreign country or its governmental institutions are sued, considerations of sovereign immunity come into play. For an illustration of how dramatically sovereign immunity can affect a case procedurally, see Republic of Philippines v. Pimentel. ³⁰⁸ This case involved an interpleader

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action to determine the ownership of property allegedly stolen by Ferdinand Marcos when he was President of the Republic of the Philippines. Two entities named in the suit invoked their sovereign immunity and were dismissed. Over their objections, the interpleader action proceeded to judgment. The sovereign entities contended that, under Fed. R. Civ. P. 19, the action should have been dismissed once it had become clear that they could not be joined as parties without their consent. The Ninth Circuit had held that the action could proceed without the sovereign entities being included as parties. The Supreme Court reversed because, under Fed. R. Civ. P. 19, they were "required entities," and, without them as parties in the interpleader action, "their interests in the subject matter are not protected." As a result, the Supreme Court ruled that the interpleader action should have been dismissed because of the inability to join sovereign entities whose interests would necessarily have been affected by the disposition of the case. ³⁰⁹

3. Permanent Residents. In passing the Federal Courts Jurisdiction and Venue Clarification Act of 2011, which went into effect on January 6, 2012, Congress intended to restrict the existence of diversity jurisdiction in cases involving resident aliens. 28 U.S.C. § 1332(a)(2) has been amended to clarify that resident aliens are now "deemed" to be citizens for diversity jurisdiction purposes: "the district courts shall not have original jurisdiction under this subsection of an action between citizens of a State and citizens or subjects of a foreign state who are lawfully admitted for permanent residence in the United States and are domiciled in the same State." ³¹⁰

4. Foreign Corporations. The Act also clarifies the citizenship of foreign corporations and foreign insurance companies, and amends 28 U.S.C. § 1332(c)(1) by treating foreign corporations and insurers as citizens of: (i) every foreign state in which they have been incorporated; and (ii) every "State or foreign state" in which they have their principal places of business.

B. Realignment of the Parties. To determine whether complete diversity exists, the court has the responsibility to realign parties properly to ensure that the parties' real interests are reflected by the alignment. ³¹¹

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The Fourth Circuit employs the "principal purpose" test, in which the court determines the primary issue in controversy and then aligns the parties according to their positions with respect to that issue. ³¹² The "primary issue" inquiry is generally understood as "a top-level summary of the claims rather than a discrete, narrow legal issue presented by the case." ³¹³ It also does not consider cross-claims and counterclaims filed by the defendants; instead, it looks only to plaintiff's principal purpose for filing its suit." ³¹⁴

In a derivative suit, the claim pressed by the stockholder against directors or third-parties is not his or her own, but the corporation's. ³¹⁵ "At times, however, the nominal corporate party, on whose behalf the suit is brought, may be antagonistic to the shareholder plaintiff." ³¹⁶ Under these circumstances, district courts may align the parties according to their real interests for jurisdictional purposes where a nominal corporate party's citizenship would otherwise destroy diversity jurisdiction. This "doctrine of antagonism" is "specifically limited to the realignment of the parties in a derivative suit and does not allow for real parties in interest to be ignored when determining whether diversity exists." ³¹⁷

C. Time for Determining Diversity When Suit Filed. The relevant time for determining whether the parties are diverse is when the suit is filed. ³¹⁸

In removal cases, diversity "must have existed both at the time the action was originally commenced in state court and at the time of filing the petition for removal." ³¹⁹

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D. States or State Agencies as Parties. Ordinarily, states are not considered to be "citizens" for diversity purposes. ³²⁰

Difficult diversity issues can arise when arms of the state, or state agencies, are involved. For example, in South Carolina Department of Disabilities & Special Needs v. Hoover Universal, Inc., ³²¹ the plaintiffs, three agencies of the state of South Carolina, had prosecuted an action in federal court, contending that diversity was the basis of the lower court's jurisdiction. After losing a motion for summary judgment, they reversed course and contended that the resulting judgment should be vacated because there was no diversity in the first place. ³²² The state agencies argued that they were arms of the state, or alter egos of the state, and it is well settled that a state cannot be a "citizen" for diversity purposes. ³²³ The Fourth Circuit found that the three state agencies involved were, in fact, arms of the state of South Carolina, and, thus, they could not be deemed to be "citizens" of any state pursuant to 28 U.S.C. § 1332(a)(1). In view of the fact that subject matter jurisdiction was the issue, the court was not particularly troubled by the plaintiffs' seemingly inconsistent volte-face.

The court set out the governing test to determine whether a state-created entity is an arm of the state itself: (i) whether, if there were to be a judgment against the entity, it would it be paid by the state, or, if there were to be a recovery by the entity, would it inure to the benefit of the state; (ii) the degree of autonomy exercised by the entity, including such circumstances as who appoints the entity's directors or officers, who funds the entity, and whether the state retains a veto power over the entity's actions; (iii) whether the entity is involved with state concerns, as distinct from nonstate concerns, including local concerns; and (iv) how the entity is treated under state law, such as whether the entity's relationship with the "the state [is] sufficiently close to make an entity an arm of the state." ³²⁴

Another application of the principle that states are not "citizens" for diversity purposes appeared in the context of the Class Action Fairness Act ("CAFA"). ³²⁵ While agreeing that Louisiana was not a "citizen" for

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purposes of the diversity statutes, the court concluded that Louisiana was seeking relief both for the state and its citizens as "recipients" of insurance. Accordingly, the citizens of Louisiana were "properly joined as plaintiffs, and there was minimal diversity under CAFA, so CAFA supplied federal jurisdiction and a path to removal unless State sovereignty turns away its exercise." ³²⁶ By bringing citizens of Louisiana into the suit, the court concluded that Louisiana had waived its sovereign immunity. ³²⁷

E. Failure to Join Necessary Parties Under Fed. R. Civ. P. 19. The Fourth Circuit has dismissed a case as a result of the plaintiff's failure to join necessary parties whose citizenship destroyed diversity. ³²⁸

F. Fraudulently Joined Parties. 28 U.S.C. § 1359 provides that "[a] district court shall not have jurisdiction of a civil action in which any party, by assignment or otherwise, has been improperly or collusively made or joined to invoke the jurisdiction of such court."

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