How to Get an LLC into Federal Court: Tips for Pleading Diversity Jurisdiction Over Unincorporated Entities

sutcliffe

by Thomas Sutcliffe

Practice Tips

For federal diversity jurisdiction under 28 U.S.C. § 1332, a plaintiff, or removing defendant, must establish diversity of citizenship between the parties.  Typically, that means that all of the plaintiffs must be citizens of a different state than all of the defendants.  And a party wishing to get into federal court is required to plead diversity at the outset of litigation.

Pleading diversity, however, can be a challenge when the other party is an unincorporated entity.  A corporation’s citizenship is straightforward; it is considered to be a citizen of both the state of incorporation and the state in which its principal place of business is located.  The citizenship of other entities, such as LLCs and partnerships, is based upon the citizenship of each of its individual members or partners.  See generally Americold Realty Tr. v. Conagra Foods, Inc., 136 S. Ct. 1012 (2016).  A complaint or notice of removal, therefore, must say something about the citizenship of an unincorporated entity’s members.  Failure to do so can result, at the very least, in a show cause order, especially within the First Circuit, where judges have not hesitated to raise the issue sua sponte.  See e.g., N. Beacon 155 Assocs. LLC v. Mesirow Fin. Interim Mgmt. LLC, No. CV 15-11750-LTS, 2015 WL 13427609, at *1 (D. Mass. June 29, 2015) (finding that allegation in notice of removal that only pleaded state of organization and principal place of business of LLC parties insufficient); Fratus v. Vivint Solar Developer LLC, 1:16-CV-10517 (D. Mass June 8, 2016) (issuing show cause order sua sponte based on similar problem in plaintiff’s complaint); see also D.B. Zwirn Special Opportunities Fund, L.P. v. Mehrotra, 661 F.3d 124, 125 (1st Cir. 2011) (determining, sua sponte, that notice of removal failed to allege jurisdiction over LLC plaintiff).

Requiring a party to plead the citizenship of another party’s members results in something of a Catch-22.  The membership of an LLC or partnership is often not publically available information, meaning a party trying to access federal court may not be able to determine the citizenship of its adversary until discovery.  But parties typically cannot conduct discovery unless they can plead some basis for subject matter jurisdiction, leaving plaintiffs and removing defendants in a quandary.

The Pragmatic Approach Taken by Some Circuits

Some courts, outside the First Circuit, have started to address this dilemma by adopting a more pragmatic approach to pleading citizenship.  For example, in Carolina Cas. Ins. Co. v. Team Equip., Inc., 741 F.3d 1082 (9th Cir. 2014), the Ninth Circuit embraced the “sensible principle that, at [the pleading stage], a party should not be required to plead jurisdiction [against an LLC] affirmatively based on actual knowledge.”  Id. at 1087.  Instead, the court held, it is enough for a plaintiff “to allege simply that the defendants were diverse to it,” and it is permitted “to plead its allegations on the basis of information and belief.”  Id.  Meanwhile, if the unincorporated entity – which presumably knows the citizenship of its own members – has information to the contrary, it is free to provide it and the court can “reevaluate its jurisdiction if contrary information emerged later.”  Id.  Until then, the court reasoned, the unincorporated entity is not in a position to complain.

The Third Circuit reached a similar conclusion in Lincoln Ben. Life Co. v. AEI Life, LLC, 800 F.3d 99 (3d Cir. 2015).  In Lincoln, the court reasoned that “[d]epriving a party of a federal forum simply because it cannot identify all of the members of an unincorporated association is not a rational screening mechanism,” particularly given that “[t]he membership of an LLC is often not a matter of public record.”  Id. at 108.  As a result, the court forged a compromise aimed at “strik[ing] the appropriate balance between facilitating access to the courts and managing the burdens of discovery.”  Id.  Specifically, it held that it was enough for a plaintiff to “alleg[e] that none of the defendant association’s members are citizens of” the same state as the plaintiff.  Id. at 107.  Furthermore, plaintiffs were permitted to make that allegation on information and belief provided they “conduct[ed] a reasonable inquiry into the facts alleged,” such as by consulting publically available sources.  Id. at 108.  “If, after this inquiry,” the court held, “the plaintiff has no reason to believe that any of the association’s members share its state of citizenship, it may allege complete diversity in good faith.” Id.

The court in Lincoln went on to examine the plaintiff’s complaint and found that – when combined with the plaintiff’s opposition to the defendants’ motion to dismiss – its allegations were sufficient to plead diversity of citizenship.  Specifically, the court noted that the plaintiff had alleged that:

  1. The LLC defendants had some connection to states where the plaintiff was not a citizen;
  2. Plaintiff’s counsel had “conducted a reasonable inquiry to determine the membership of the LLC defendants but found nothing of value;” and
  3. Plaintiff’s counsel “found no connection between the LLC defendants” and plaintiff’s home state.

Id. at 110.

Based on these allegations, the court concluded that the plaintiff had “alleged complete diversity in good faith.” Id. at 111.

Applying Carolina and Lincoln in the First Circuit

Can the approach of Carolina and Lincoln be applied in the First Circuit?  Not exactly.  In D.B. Zwirn Special Opportunities Fund, L.P. v. Mehrotra, 661 F.3d 124 (1st Cir. 2011), the First Circuit held, in a decision that predates Lincoln, that citizenship cannot be pleaded in the negative; that is, it is not enough to allege that the plaintiff and defendants are not parties of the same state, as the parties in that case had done.  The problem, the court explained, was that even if a party was not a citizen of the same state as its adversary, that did not rule out the possibility that one of the parties was a stateless entity (such as a foreign corporation) in which case diversity jurisdiction would again be lacking.  Id. at 126-27.  As a result, the court required affirmative information regarding the citizenship of the plaintiff-LLC’s members.

But the Carolina/Lincoln approach still offers some guidance, and Massachusetts courts might be warming to it.  In BRT Mgmt. LLC v. Malden Storage, LLC, No. CV 17-10005-FDS, 2017 WL 2726689 (D. Mass. June 23, 2017), for example, the court issued a show cause order, and the plaintiff, citing Lincoln, argued that it had searched publically available records but had been unable to determine the citizenship of the LLC defendant.  Judge Saylor observed that the approach articulated in Lincoln conflicted somewhat with D.B. Zwirn, but he nonetheless concluded that Lincoln’s “basic reasoning is sound.”  Id. at *1.  He further held that, because BRT – like the plaintiff in Lincoln – had “consulted all available public information and alleged, in good faith, that there is complete diversity of citizenship,” it was entitled to take jurisdictional discovery.  Id.

BRT suggests then that providing some indication of good faith research might go a long way towards overcoming the seemingly high burden set by D.B. Zwirn. The decision in D.B. Zwirn itself signaled that the court may be open to this kind of a pragmatic approach. Indeed, it is noteworthy that, in D.B. Zwirn, the court ordered the plaintiff-LLC to provide information regarding its citizenship, not the defendant who had removed the case to federal court (and who bore the burden of establishing jurisdiction). That suggests that the First Circuit may, in the future, be open to permitting jurisdictional discovery, at least in those instances where the party seeking federal jurisdiction makes an adequate threshold showing.

Lessons to Be Learned

So what are the lessons that can be gleaned from the case law?  A few guidelines seem to emerge:

  1. First, a party seeking federal diversity jurisdiction involving an unincorporated entity should research publically available information to the fullest practical extent and describe those efforts in the complaint or notice of removal. Even if that research is inconclusive, it is helpful to establish good faith.
  2. Second, if the research reveals no contacts between the unincorporated party and the state of which the party seeking federal jurisdiction is a citizen, the complaint should say so. If there are some contacts, the complaint should explain (if possible) why those contacts are insufficient and/or explain why the unincorporated party’s connections to another state are more extensive. The party should also allege, if appropriate, on information and belief, that the parties are not citizens of the same state.
  3. Third, the party should try to allege the unincorporated party’s state of citizenship, even if it is only an educated guess. That will help avoid the kind of “negative” pleading the First Circuit rejected in D. B. Zwirn.  Failing that, the complaint should at least try to allege facts ruling out the possibility that the unincorporated party is a “stateless” actor, such as, for example, establishing that the entity is based in the United States (and therefore presumably a citizen of some state).

The rules for establishing diversity jurisdiction over unincorporated parties are at times byzantine and arguably “def[y] logic.”  Lincoln, 800 F.3d at 111 (all judges concurring).  But neither the Supreme Court nor Congress has shown any sign of changing those rules, and courts are quick to enforce them.  By putting a bit of extra time into alleging diversity jurisdiction over these entities, parties can save themselves considerable trouble in the future and ensure that they remain in the forum of their choosing.

Thomas Sutcliffe is an attorney at Prince Lobel Tye LLP. His practice focuses on complex commercial litigation.


Amendments to Mass. Rules of Civil Procedure Address E-Discovery

by Stephany Collamore

Heads Up

Collamore_StephanyLitigants in state court cases have been obtaining discovery of Electronically Stored Information, or “ESI,” for quite some time.  The broad scope of discovery permitted by Mass.R.Civ.P. 26(b)(1), the expansive definition of “documents” found in the previous version of Mass.R.Civ.P 34(a), and the reference to “electronic storage locations” in Superior Court Standing Order 1-09(c)(3) all suggest that ESI should be discoverable.  Until the enactment of certain amendments to the Mass. Rules of Civil Procedure (“Rules”) that took effect on January 1st of this year, however, litigants and the courts had little guidance as to how to proceed with this important form of discovery.  Rules 16, 26, 34, 37 and 45, as amended, now provide some much-needed regulation.  This article addresses some of the key provisions.

Form of Production

Rule 34 has been amended to include a specific reference to ESI and to provide the requesting party the opportunity to specify the form in which it would like ESI to be produced.  Mass.R.Civ.P. 34(b)(1).  For example, a party may request that e-mails be produced in searchable native format rather than in less readily searchable PDF format or in paper.  A party may also request production in the particular electronic form that works best with the computers of the requesting party or its ESI vendor.  At the same time, amended Rule 34 allows the responding party to object to a requested form of ESI production.  Mass.R.Civ.P. 34(b)(2)(B).  This should help identify areas of disagreement before the production is actually made.

ESI Conferences

A party has a right to demand an ESI conference with the opposing party so long as the demanding party serves a written request for such a conference within 90 days after service of the first responsive pleading.  Mass.R.Civ.P. 26(f)(2)(A).  Per Rule 26(f)(2)(C), the topics to be addressed at an ESI conference include:

  • any issues relating to preservation of discoverable information;
  • the form in which each type of information will be produced;
  • what metadata, if any, should be produced;
  • the time within which the information will be produced;
  • the methods for asserting or preserving (a) claims of privilege and/or work product protection and (b) the confidential and/or proprietary status of information;
  • whether allocation among the parties of the expense of production is appropriate; and
  • any other issue related to the discovery of ESI.

Once a request is served, the conference should be held as soon as possible, but no later than 30 days after the request is made.  Id.  This means that a party may be required to participate in an ESI conference within a month of the filing of a responsive pleading, making it imperative for attorneys to become knowledgeable about their clients’ ESI as soon as possible.

Even when a party waives its right to an ESI conference by failing to timely request one, the parties may nevertheless hold such a conference by agreement or by order of the court upon motion.  Mass.R.Civ.P. 26(f)(2)(B).  Regardless of how the ESI conference is initiated, the same topics identified above are to be addressed, and an ESI plan is to be filed with the court within 14 days after the conference.  Mass.R.Civ.P. 26(f)(2)(C).

ESI Plans and Orders

A court may enter an order governing the discovery of ESI sua sponte (after notice to the parties), or after conference, motion or stipulation.  In addition to the topics set out in Rule 26(f)(2)(C), an order governing the discovery of ESI may also address whether discovery of ESI is reasonably likely to be sought and the permissible scope of such discovery.  Mass.R.Civ.P. 26(f)(3)(A-J).  Nonetheless, the general scope of discovery is unaffected.  Mass.R.Civ.P. 26(b)(1).

Cost-Shifting and Inaccessible ESI 

Rule 26(f)(2)(C)(vii) directs the parties to discuss at their ESI conference “whether allocation among the parties of the expense of production is appropriate.”  The allocation of expense is often referred to as “cost shifting.”  One specifically identified area where cost shifting may be imposed is with regard to “inaccessible” ESI.

“Inaccessible” ESI is defined as ESI “from sources that the party identifies as not reasonably accessible because of undue burden or cost.”  Mass.R.Civ.P. 26(f)(1).  For example, data archived on back-up tapes might be determined to be “inaccessible.”  In the context of a motion to compel, a party objecting to the production of ESI pursuant to Rule 26(f)(4)(A) bears the burden of showing inaccessibility.  Mass.R.Civ.P. 26(f)(4)(B).  Even where this showing is made, the requesting party may nonetheless obtain discovery of the inaccessible ESI if the requesting party is able to show that the likely benefit of its receipt outweighs the likely burden of its production.  Mass.R.Civ.P. 26(f)(4)(C).  In making this determination, the court should consider the amount in controversy, the resources of the parties, the importance of the issues, and the importance of the requested discovery in resolving the issues.  Id.  Further, where the production of inaccessible ESI is ordered, the court may set conditions for its discovery, including cost-shifting.

Court’s Power to Limit Discovery

The amended Rules also explicitly grant courts the power to limit discovery from accessible ESI sources “in the interests of justice” based on a consideration of several factors.  See Mass.R.Civ.P. 26(f)(4)(E).  This is one area where the Massachusetts Rules differ from the Federal Rules of Civil Procedure (“Federal Rules”), although federal courts clearly possess the power to limit discovery generally.  See Fed.R.Civ.P. 26(b).  In fact, there is significant overlap between the factors set out in Federal Rule 26(b)(2)(C) (identifying limitations to which all discovery is subject) and Massachusetts Rule 26(f)(4)(E), including whether it is possible to obtain the information from some other source that is more convenient or less burdensome or expensive, whether the discovery sought is unreasonably cumulative or duplicative, and whether the likely burden or expense of the discovery outweighs the likely benefit.

ESI Lost as a Result of Routine, Good-Faith Operations

Rule 37 has been amended to include a “safe harbor” provision that protects parties from sanctions for failing to produce ESI that has been lost as a result of the routine, good-faith operation of an electronic information system.  Mass.R.Civ.P. 37(f).  Note, however, that this amendment was not intended to alter any existing state law on the obligation to preserve evidence when litigation is reasonably anticipated or has commenced.  Mass.R.Civ.P. 37 (Reporter’s Notes 2014).

Non-Parties and Unrepresented Parties

The impact of the ESI amendments to the Rules will not be limited to represented parties.  For example, under amended Rule 45(b), a subpoena may command a person to whom it is directed to produce ESI and, under amended Rule 16, a court may direct an unrepresented party to appear for a conference.

“Clawback” Provision

The production of ESI creates an increased risk that a party will inadvertently produce material that is protected by privilege and/or the work-product doctrine.  Thus, it bears noting that the amended Rules include a “clawback” provision whereby a producing party may assert a claim of privilege or of protection under the work product doctrine with respect to information, including but not limited to ESI, that is inadvertently produced in discovery.  Mass.R.Civ.P. 26(b)(5)(B) & (C).

Stephany Collamore is an associate in the Litigation Department at Foley Hoag LLP.  Her practice is focused on complex litigation in the areas of accountants’ professional liability, governmental investigations and general commercial disputes.