Diversity
Jurisdiction and Jurisdictional Discovery: The Third Circuit Holds That “Hiding
The Ball” Will Not Work
Federal diversity jurisdiction,
28 U.S.C. § 1332, requires that the dispute both involve more than $75,000 and
that there be complete diversity, i.e.,
that no defendant be a citizen of any state of which a plaintiff is a citizen.
While corporations, consequent to specific legislative designation, are deemed
to be citizens of the jurisdiction of incorporation and the jurisdiction in
which is located the corporation’s principal place of business, an
unincorporated association such as a partnership, limited partnership or LLC is
deemed to be a citizen in which any of its partners/members are citizens to the
effect that, for example, if a member of an LLC is itself another LLC or a
partnership, citizenship must be tracked through all layers until there are
reached either natural persons or corporations. A plaintiff bringing an action in
federal court, or a defendant seeking to remove an action to federal court, is
required to plead facts demonstrating that diversity exists. This obligation
can be at best difficult to satisfy when one considers that the membership of
partnerships and LLCs is almost never of public record. How then, can either
the plaintiff or the defendant seeking to enlist diversity jurisdiction
adequately plead its existence?
This dilemma was recently faced
and addressed by the Third Circuit Court of Appeals. In this case, the
plaintiff brought an action in federal court against defendants including LLCs.
Those defendants moved to dismiss the action on the basis that diversity
jurisdiction had not been adequately pled. Of course, the information as to the membership
of those defendant LLCs was uniquely within their control. As such, the
plaintiff had pled diversity jurisdiction on the basis of “information and
belief.” Ultimately, the Third Circuit would confirm that “information and
belief” pleading is at least initially sufficient. Lincoln Benefit Life Company v. AEI Life, LLC, No. 14-2660, 2015 WL
5131423, ___ F.2d__ (3rd Cir. Sept. 2, 2015).
Lincoln Benefit brought suit in
order to have declared void two life insurance policies, alleging they were
procured by fraud or for the benefit of third-party investors (i.e., “Stranger Originated Life Insurance”
or “STOLI”). AEI Life, LLC and ALS Capital Ventures, LLC were identified as the
record owners and beneficiaries of those two policies. In its Complaint,
originally filed in New Jersey, Lincoln Benefit alleged that it is a citizen of
Nebraska based upon its organization and principal place of business. It
alleged, “upon information and belief,” that AEI Life, LLC and ALS Capital Ventures,
LLC were citizens of, respectively, New York and Delaware. In response:
The
defendants filed motions to dismiss for, among other things, lack of
subject-matter jurisdiction. Their primary argument was that Lincoln Benefit
failed to adequately plead diversity jurisdiction: an LLC’s citizenship is
determined by the citizenship of its members, and Lincoln Benefit had not
alleged the citizenship of the members of the LLC defendants.
Lincoln Benefit, in response,
pointed out that none of the defendants had asserted that it was a citizen of
Nebraska and further that, as information as to the membership of an LLC is not
publicly available, it should be allowed to proceed on a “information and
belief” basis or, in the alternative, it should be afforded the opportunity to
undertake limited discovery for the purposes of confirming that diversity did
exist. The trial court held against Lincoln Benefit, holding (a) that pleading diversity
on the basis of information and belief is insufficient and (b) that allowing
jurisdictional discovery would be inappropriate when it was not clear that the
federal court did not already have jurisdiction. It was from these
determinations that Lincoln Benefit appealed to the Third Circuit Court of Appeals.
The Third Circuit, after
providing a brief review of the rules of diversity jurisdiction, noted that
there are two bases for challenging jurisdiction. First, there is a “facial
attack,” which, as was done in this case, alleges a deficiency in the pleadings.
There is as well a “factual attack,” which challenges whether the alleged facts
justify jurisdiction. Distinguishing, in the setting of this dispute, a facial
from a factual attack, the Court, wrote:
If the defendants here had challenged the factual existence
of jurisdiction, Lincoln Benefit would have been required to prove by a
preponderance of the evidence, after discovery, that it was diverse from every
member of both defendant LLCs. Instead, however, the defendants mounted a
facial challenge to the adequacy of the jurisdictional allegations in Lincoln Benefit’s
complaint. 2015 WL 5131423,* 3.
In reliance, at least in part,
on the decision rendered in Lewis v. Rego,
Co., 757 F.2d 66 (3rd Cir. 1985), and as well limiting Chem. Leaman Tank Lines, Inc. v. Aetna Cas.
& Sur. Co., 177 F.3d 210, 222 n. 13 (3rd Cir., 1999), for
the proposition that “rather than affirmatively alleging the citizenship of the
defendant, a plaintiff may allege that the defendant is not a citizen of the plaintiff’s state of citizenship.” To the
effect that:
A State X plaintiff
may therefore survive a facial challenge by alleging that none of the defendant
association’s members are citizens of States X. Id. at *4.
provided
that the plaintiff has undertaken reasonable inquiry in support thereof. To
that end:
[B]efore
alleging that none of an unincorporated association’s members are citizens of a
particular state, a plaintiff should consult the sources at its disposal,
including court filings and other public records. If, after this inquiry, 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. The
unincorporated association, which is in the best position to ascertain its own membership,
may then mount a factual challenge by identifying any member who destroys
diversity. Id.
Explaining the rationale for
its holding, the Court wrote:
We believe
that allowing this method of pleading strikes the appropriate balance between
facilitating access to the courts and managing the burdens of discovery.
District courts have the authority to allow discovery in order to determine
whether subject-matter jurisdiction exists. Rule 8(a)(1), however, serves a
screening function: only those plaintiffs who have provided some basis to
believe jurisdiction exists are entitled to discovery on that issue. The
corollary of this principle is that a plaintiff need not allege an airtight
case before obtaining discovery.
Depriving 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. The
membership of an LLC is often not a matter of public record. Thus, a rule
requiring the citizenship of each member of each LLC to be alleged
affirmatively before jurisdictional discovery would effectively shield many
LLCs from being sued in federal court without their consent. This is surely not
what the drafters of the Federal Rules intended.
Moreover, the
benefits of such a stringent rule would be modest. Jurisdictional discovery
will usually be less burdensome than merits discovery, given the more limited
scope of jurisdictional inquiries. It seems to us that in determining the
membership of an LLC or other unincorporated association, a few responses to
interrogatories will often suffice. So long as discovery is narrowly tailored
to the issue of diversity jurisdiction and parties are sanctioned for making
truly frivolous allegations of diversity, the costs of this system will be
manageable. Id. at * 5.
This opinion was followed by a
concurrence written by Judge Ambro that, while not specifically commenting upon
this dispute, urged the U.S. Supreme Court to in effect abandon the rule of Carden v. Arkoma Associates, 494 U.S. 185
(1990), and allow at least limited liability companies, notwithstanding the
fact that they are unincorporated, to proceed under the rules for determining
citizenship that are applicable to corporations.
Assuming the reasoning employed
in the Lincoln Benefit decision is
followed by the other circuits, this could be a most important decision. First,
it significantly undercuts the large number of decisions that, to date, have
held that citizenship must be pled specifically and not on information and
belief. See, e.g., Principle Solutions LLC v. Feed.Ing BV, Case
No. 13-C-223 (E.D. Wisc. June 5, 2013) (“It is well-settled that a plaintiff
claiming diversity jurisdiction may not do so on the basis of information and
belief, only personal knowledge is sufficient.”); Pharmerica Corp. v. Crestwood Care, LLC, No. 13C 1422, 2015 WL
1006683 (E.D. Ill. March 2, 2015) (“[I]t is not sufficient to assert
jurisdiction based on information and belief.”); MCP Trucking, LLC v. Speedy Heavy Hauling, Inc., 2014 WL 5002116 (D.
Colo. Oct. 6, 2014) (denying jurisdictional discovery and remanding action to
state court even as it acknowledged that further discovery in that forum could
demonstrate that diversity exists, leading to subsequent removal); Lake v. Hezebicks, 2014 WL 1874853 (N.
D. Ind. May 9, 2014) (allegations of subject matter jurisdiction must be based
on personal knowledge and may not be based upon information and belief and
collecting cases to that effect). Further, it stands in direct challenges to
those decisions that have held that citizenship must be affirmatively pled and
that negative statements as to citizenship are insufficient. See, e.g.,
D.B. Zwirn Special Opportunities Fund, LP
v. Mehrotra, 661F.3d. 124 (1st Cir. 2011), citing Cameron v. Hodges, 127 U.S. 322 (1888).
While it may do nothing to address the fact that diversity jurisdiction may be
unavailable consequent to de minimis indirect ownership (see, e.g., Fadal Machining Centers, LLC v. Mid-Atlantic
CNC, Inc., 2012 WL 8669, 2012 U.S. App. LEXIS 48 (Jan. 3, 2012), Alphonse v. Arch Bay Holdings, L.L.C.,
2015 WL 4187585 (5th Cir. July 13, 2015)), it does limit the ability
of a defendant to “hide the ball” as to its citizenship while objecting that
the other side has not adequately pled citizenship and therefore diversity.
