A recent case decided in the District Court for the Eastern District of New York, places in stark relief, the difficulty in establishing diversity jurisdiction that would allow for an action in Federal Court when one of the parties is an LLC or LLP.
In Coward v. Nat’l Railroad Passenger Corp. the plaintiff brought a purported diversity action alleging he was a resident of New Jersey and the defendant was a limited liability company formed and existing under the laws of the State of Connecticut. The Court issued an Order requiring the plaintiff to show cause why the case should not be dismissed for failing to adequately plead subject matter jurisdiction.
The citizenship of an LLC or LLP has nothing to do with its state of formation or principal place of business. The citizenship of an LLC consists of the imputed citizenship of each one of its members.
The Plaintiff responded to an Order to Show Cause with a proposed amended Complaint alleging, upon information and belief, that the managing member listed on the LLC’s certificate of organization was the sole member of the LLC and his residence address was in Connecticut.
The Court determined that the “information and belief allegation” that the managing member of the LLC and who was the sole member of the LLC was inadequate as the only basis. The certificate of organization requirement in nearly all fifty states does not require the identification of all of the members of the LLC and, therefore, the allegation was not supported by information or belief and was just plaintiff’s wishful thinking and dismissed the second cause action for lack of subject matter jurisdiction. The Court recognized the hardship on the plaintiff. It stated:
No doubt, this can make it hard for a plaintiff to sue an LLC in federal court, as one of the purposes of forming an LLC may be to deter public identification of its members…. “While various state legislatures have decided to permit the members of LLCs to remain anonymous to the public at large, Congress has not created an exception to the requirements of diversity jurisdiction which would allow the members of LLCs to remain anonymous in federal court.” … As the Eleventh Circuit has noted, this means there is “difficulty [in] applying established diversity jurisdiction principles to 21st-century business organizations.” But that is the way Congress has left it. The Court is not going to circumvent the statute by finding that it has diversity jurisdiction based on a conclusory allegation than an interest holder is the sole interest holder….
If you are involved in a diversity action in Federal Court with an LLC or LLP, consult your legal counsel question about subject matter jurisdiction, It may result in dismissal of the case. However, be aware that may not preclude a subsequent action
in State Court and the rendering of a nonunanimous jury decision.
The information presented is not intended to be, and does not constitute, “legal advice.” Because each situation varies, and only brief summary information is provided here, you should not use this information as a basis for action unless you have independently verified with your own counsel that it applies to your particular situation.