This blog, written by Thomas E. Rutledge, focuses primarily on business entity law in Kentucky. Postings on contract law, contractual and statutory construction, and the entity law of other jurisdictions appear as well. There may as well be some random discussions of classical, medieval and renaissance history.
Friday, July 8, 2016
West Virginia Court Incorrectly Applies Corporate Diversity of Citizenship Rules to LLC
Virginia Court Incorrectly Applies Corporate Diversity of Citizenship Rules to
With due respect to the court, the
application of the rules for determining the citizenship of a corporation
(i.e., the state of incorporation and the state in which the principal place of
business as determined under the “nerve center” test) to an LLC is
inappropriate.That is, however, exactly
what happened in a recent decision from West Virginia.KJBL,
LLC v. EnerVest Operating, LLC, Civil Act. No. 1:16CV55, 2016 WL 3566865
(N.D. W. Va. June 27, 2016).
LLC and two individuals filed suit against EnerVest, LLC in West Virginia state
court alleging that the defendant has mismanaged certain oil and gas properties
in which the plaintiffs hold working and overriding royalty interests.EnerVest removed the action to federal court
of the basis of diversity jurisdiction.The plaintiffs sought a remand on the basis that Enervest is a citizen
of West Virginia on the basis that its principal place of business, determined
under the nerve center test, is in West Virginia.The court wrote that:
The question presented in whether EnerVests’s nerve center,
and therefore its principal place of business, is in Houston, Texas or
Charleston, West Virginia.
reason the court was concerned with where is Enervest’s principal place of
business was stated to be:
An unincorporated association, including an LLC, is a
citizen of the state where it has its principal place of business and the state
under whose law it is organized. 28 U.S.C. § 1332(d)(1o).An LLC
is also assigned the citizenship of each of its members.
The problem with this statement of the law is that it is
largely incorrect.Initially, 28 U.S.C. § 1332(d)(10) is the “Class Action
Fairness Act,” wherein Congress adopted “minimal diversity” as the requirement
for certain class action. It is not
applicable to an action, such as this lawsuit, that is not a class action.
Next, the citizenship of an LLC
(such as the defendant in this action) is determined exclusively by reference
to the citizenship of its members; a small sampling of the cases espousing that
rule is recited below. It has been expressly recognized in the Fourth Ciruit,
of which West Virginia is a part.SeeCentral West Virginia Energy Company, Inc. v. Mountain State Carbon, LLC, 636 F.3d 101 (4th Cir.
2011), “For purposes of diversity jurisdiction, the citizenship of a limited
liability company (such as Mountain State) is determined by the citizenship of
all of its members (such as Severstal Wheeling).”If one of those members is itself an
unincorporated organization such as an LLC or limited partnership, the analysis
must continue through the layers until it reaches corporations or natural persons
with citizenship.See, e.g., Delay v. Rosenthal Collins Group, LLC,
585 F.3d 1003, 1005 (6th Cir. 2009) (“When diversity jurisdiction is
invoked in a case in which a limited liability company is a party, the court
needs to know the citizenship of each member of the company.And because a member of a limited liability
company may itself have multiple members – and thus may itself have multiple
citizenships – the federal court needs to know the citizenship of each
‘sub-member’ as well.”).
In that citizenship is determined by the citizenship of the
members, an LLC is not a citizen of either the jurisdiction of organization or
of its principal place of business unless one of its members has that
citizenship.Put another way, neither
the jurisdiction of organization nor the jurisdiction in which the principal place
of business is maintained by an LLC have any bearing upon the question of the
LLC’s citizenship for purposes of diversity. Cases as to this point are
In its Notice of Removal, at
paragraph 5, EnerVest stated:
EnerVest is a Delaware limited liability company.The members and owners of EnerVest are
EnerVest, Ltd., EnerVest Advisors, Ltd. And Jones EnerVest, Ltd., which are all
Texas limited partnerships.The
corporate headquarters and nerve center of EnerVest and its members is located
in Houston Texas.
But that is not the question.EnerVest is a citizen of every state in which
any of its members is a citizen – where EnerVest is organized and where it
maintains its principal place of business are irrelevant to the question.As each of the members of the EnerVest LLC is
itself a limited partnership, what matters is the citizenship of the general
and limited partners thereof.
With due respect to the Court, the
wrong question has here been considered.Diversity may exist, or it may not.But only upon an examination as to the citizenship of the plaintiff LLC and
the defendant LLC, through as many layers as are necessary, will it be known
whether the parties are truly diverse.
►An LLC is a citizen of each jurisdiction in which any of
its members are citizens:
Homfeld II, L.L.C. v. Comair Holdings, Inc., 53 Fed. Appx. 731, 2002 WL 31780184 (6th Cir.
2003) (adopting the rule of Cosgrove v.
Bartolotta in the 6th Circuit to the effect that “a limited liability
company is not treated as a corporation and has the citizenship of its members.”)
Delay v. Rosenthal Collins Group, LLC, 585 F.3d 1003, 1005 (6th Cir. 2009)
(reiterating the Homfeld decision to
the effect that an LLC “has the citizenship of each of its members.”)
Ltd. Liability Co. v. AK Steel Corp., 2008 WL 19990810 (E.D. Ky 2008) (“It is well
established that an LLC has the citizenship of each of its members.”) (citing Homfeld II, LLC v. Comair Holdings,
Inc., 2002 WL 31780184 (6th Cir. 2002)).
& Rich Partnership v. Poetman Records USA, 2008 WL 1868028 (E.D. Ky. 2008).
of organization and of principal place of business of LLC do not confer
Citizens Bank v. Plasticware, LLC,
2011 WL 5598883 (E.D. Ky. 2011) (“Plasticware’s principal place of business,
however, is not relevant to its citizenship determination.”)
Marom v. JBS USA LLC,2012
U.S. Dist. LEXIS 78116 (D. Conn. June 5, 2012) (“citizenship of a limited
liability company is not the state in which it is organized or has its
principal place of business, but rather, each of the states in which it has
Ludell Manufacturing Company
v. Leisure Pools USA, LLC,
Case No. 13-C-133 (E.D. Wisc. Feb. 14, 2013) (“However, for purposes of
diversity jurisdiction, the citizenship of a limited liability company is
determined by the citizenship of all its members, not on its principal place of
business or the jurisdiction under whose laws it is organized.”)
Master v. Quiznos Franchise Co., 2007 WL 419287 (D. N.J. Feb. 1, 2007)
(“limited liability companies are (1) unincorporated associations, and (2)
deemed citizens of each state in which their members are citizens, not the
states in which they were formed or have their principal places of business.”)
JMTR Enterprises, L.L.C. v.
Duchin,42 F. Supp.2d 87 (D. Mass. 1999) (the citizenship of a LLC is
determined is that of the citizenship of its members, and it is not deemed a
citizen of the state in which it is organized)
Muhlenbeck v. KI, LLC, 304 F. Supp.2d 797, 2004 WL 292111 (E.D.
Va. 2004) (“[T]he citizenship of a limited liability company depends not on the
state in which it is organized or the state in which it does most of its
business, but rather on the citizenship of the entities that own the LLC.”)
IFC Credit Corp. v. Mahon,2003
WL 503601 (N.D. Ill. February 24, 2003) (characterizing as “wholly irrelevant
for diversity purposes” the jurisdiction of formation and the principal place
of business of a limited liability company.)
TPS Utilicom Services, Inc.
v. AT&T Corp., 223 F.
Supp.2d 1089, 1102 (N.D. Ca. 2002) (“[T]he place of organization of an L.L.C.
is not relevant to its citizenship for diversity purposes.”)
Bank One Nat. Ass’n v.
Pickens,2002 WL 1008456 (D.C. Ill. 2002) (the
principal place of business of a partnership or any other unincorporated
association, as well as its jurisdiction of formation, are totally irrelevant
for purposes of determining whether diversity is present)
Johnson v. SmithKline Beecham
Corp., 724 F.2d 337, 348
(3rd Cir. 2013) (the principal place of business of n unincorporated
entity is therefore irrelevant to determining its citizenship)
Rupp v. City Brewing Company,
LLC, No. 12-CV-676-BBC
(W.D. Wisc. May 21, 2013) (the citizenship of a limited liability company is
not determined by the state in which it is organized or the location of its principal
place of business)
Principle Solutions LLC v.
Feed.Ing BV,Case No. 13-C-223 (E.D. Wisc. June 5,
2013) (the allegation of a limited liability company’s principal place of
business is irrelevant to the issue of subject matter jurisdiction)