Wednesday, October 2, 2019

LLC Derivative Actions and Federal Diversity Jurisdiction


LLC Derivative Actions and Federal Diversity Jurisdiction

As was confirmed in a recent decision from a federal district court in Virginia, there is not diversity jurisdiction in an LLC derivative action. Littlestone, L.C.C. Chauvin, Civ. Act. No. 3:19-cv-514, 2019 WL 4722436 (E.D. Va. Sept. 26, 2019).

In this derivative action, the court observed that “when analyzing whether complete diversity exists in a case in which a party asserts a derivative claim, the Court must consider the citizenship of the entity on whose behalf the party asserts the derivative claim.” 2019 WL 4722436, *3. The court would as well describe the entity on whose behalf the derivative action is brought as the “real party in interest.”

One of the prerequisites to bringing a derivative action on behalf of an LLC is that the nominal plaintiff acting on behalf of an LLC must have been a member of the company at the time of the actions complained of and through the pendency of the action. Attributing to the LLC citizenship of each of its members will ipso facto give the LLC the same citizenship as that of at least one of the defendants in the action. In consequence, there will not be diversity jurisdiction.

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