An Enigma Wrapped Inside A Conundrum: Suing the LLC in Federal Court – How Hard Can it Be?

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A limited liability company (LLC) is generally lauded as a flexible business entity that provides the limited liability of a corporation with the tax attributes of a partnership (flow-through, not double, taxation).

Flexibility is another oft-cited hallmark of the LLC form as its members can be one or more individuals, corporations, partnerships or even other LLCs. It’s common to see LLCs that have several other LLC members that are in turn comprised of (still more) LLC members.  With multiple layers of LLC members, tricky jurisdictional issues routinely abound.

When Federal subject matter jurisdiction is at stake, the question of whether a plaintiff can sue an LLC in Federal court quickly morphs from an academic, “fun” one, to an important strategic one.

Here are some useful bullet-points:

– A Federal district court has original subject matter jurisdiction over matters involving citizens of different states and the amount in controversy exceeds $75,000. 28 U.S.C. s. 1332(a)(1).

– There must be “complete diversity” between the parties: each plaintiff must be a citizen of a different state than each defendant.  The easily parroted rule becomes hard to apply the more parties are involved in a given lawsuit; especially where business entities are implicated in a case.

– A corporation is considered a citizen of the state where it has its principal place of business and where it is incorporated.  So, if Corporation X was incorporated in Texas but has its main office in Ohio, Corporation X would be considered a citizen of both Ohio and Texas.  28 U.S.C. s. 1332(c)(1).

– An LLC is considered a citizen of the state of its members;

– An LLC can have as members, partnerships, corporations and other entities;

– When an LLC has multiple members that have varied citizenships, a court must examine each member’s state of citizenship, as well as each member’s members’ citizenship, when determining whether it has jurisdiction over an LLC defendant.

A Case Illustration

Cumulus Radio Corp. v. Olson, 2015 WL 1110592, a case I’ve twice featured for its discussion of Federal TRO guidelines, illustrates the serpentine analytical framework involved with an LLC that’s made up of one or more LLC members.

There, the plaintiff broadcasting company was a Nevada corporation with its principal place of business in Georgia.  The defendant LLC was a Delaware-registered LLC based in Oregon.  The defendant LLC had but one member that happened to be another LLC.  That LLC (the sole member of the defendant LLC) had a single member – an individual who lived in Georgia.

Because the Delaware LLC’s sole member’s sole member was a Georgia resident, there was incomplete diversity between the plaintiff and defendant.  Normally, this would give the defendant a basis to move to dismiss the complaint for lack of subject matter jurisdiction.  The plaintiff would then have to sue the LLC defendant in state court in Delaware (where it was formed) Oregon (where it is based) or Georgia (where its member’s member lived).

While the court ultimately found that the Georgia resident wasn’t truly a member based on the LLC’s Operating Agreement, Cumulus provides a good illustration of the multi-layered jurisdictional analysis required with an LLC defendant that has several individual or business entity constituents.

Sources:

Hicklin Engineering LC v. Bartell, 439 F.3d 346 (7th Cir. 2006);

– 28 U.S.C. s. 1332(a), (c).

http://www.insidecounsel.com/2013/09/12/litigation-carefully-examine-the-layers-of-llc-cit (this is a good article from 2013 that lays out the applicable rules)

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PaulP

Litigation attorney at Fisher Kanaris, P.C. representing businesses and individuals in all types of commercial disputes.