Diversity removal of a limited liability company to federal court: pitfalls and practice tips.

• Author: Prosser, Deborah C.
• Position: Conning the Newsletters

This article originally appeared in the November 2015 Toxic and Hazardous Substances Litigation Committee newsletter.

1. Introduction: What is a Limited Liability Company?

   In the world of toxic tort cases, removal of a case to federal court is a powerful procedural weapon. One of the most common federal practice mistakes is applying diversity rules to a limited liability company ("LLC") as if it were a corporation. Many practitioners and surprisingly --many federal district judges do not know the removal rules applicable to LLCs. This article provides guidance on such rules.

   An "LLC" is a business organization that shares characteristics of both corporations and partnerships. Like a corporation, the formation of an LLC allows its owners or "members," as they are known, to enjoy personal liability shields not available in a partnership. The LLC is a separate legal entity, and much like a corporation, its assets are held separate and apart from the assets of its members. Given these similarities, it is tempting to treat LLCs and corporations the same for purposes of effecting removal to federal court. In reality, however, the diversity rules applicable to an LLC are entirely different from those applicable to a corporation.

2. What Rules Govern Diversity of a Limited Liability Company for Purposes of Removal?

   "Federal courts are courts of limited jurisdiction." (1) They are empowered to hear only those cases authorized by the Constitution and statute. (2) A federal court has original subject matter jurisdiction over an action that either arises under federal law, or when there is complete diversity of citizenship between the parties and the amount in controversy exceeds $75,000. (3) Pursuant to 28 U.S.C. [section] 1332, the federal courts only have subject matter jurisdiction predicated on diversity of citizenship when a suit is between "citizens of different states." (4)

   Diversity jurisdiction under [section] 1332 requires complete diversity of citizenship; each plaintiff must be a citizen of a different state than each defendant. (5) In cases where entities rather than individuals are litigants, diversity jurisdiction depends on the form of the entity. (6) For example, an unincorporated association such as a partnership has the citizenship of all of its members. (7) In contrast, a corporation is a citizen of the state where its principal place of business is located and the state in which it is incorporated. (8)

   In this respect, an LLC is akin to a partnership. "[A]n LLC is a citizen of every state of which its owners/members are citizens." (9) As such, citizenship depends on the citizenship of all of its members. (10)

   Procedures are in place that should help the practitioner assess the diversity of an LLC. For example, if an LLC files a complaint in federal court, the complaint must allege the citizenship of its constituent members. (11) "A plaintiff suing in a federal court must show in his pleading, affirmatively and distinctly, the existence of whatever is essential to federal jurisdiction ...." (12) An allegation as to where an LLC resides, is licensed, or has a principal place of business will not properly invoke the court's jurisdiction. (13)

   Similarly, a removing party must set forth the basis of the court's subject matter jurisdiction, whether by federal question or diversity of citizenship, in the petition for removal. In the case of diversity, the removing party must also attest to the citizenship of the entities. (14) Once the case has been removed, an opportunity exists to file a motion for remand and challenge the validity of the removing party's jurisdictional assessment. (15)

   The Federal Rules offer additional opportunities to assess and discover whether diversity exists based on the residence of LLC members. For example, Rule 7.1 of the Federal Rules of Civil Procedure requires the filing of a corporate disclosure statement with a party's first appearance. Some district court local rules go even further, requiring that "all non-governmental parties shall file with their first appearance a Notice of Interested Parties, which shall list all persons, associations of persons, firms, partnerships, and corporations (including parent corporations, clearly identified as such) that may have a pecuniary interest in the outcome of the case." (16) The parties are also often required to include an assessment of subject matter jurisdiction within their Rule 26(f) disclosures to the court and as part of the Rule 26(f) requirement that counsel confer and "consider the nature and basis of their claims and defenses."

   When the parties fail to recognize lack of subject matter jurisdiction, which is often the case in removal cases...