9th Circuit Addresses Diversity Jurisdiction and LLCs

9^th Circuit Addresses Diversity Jurisdiction and LLCs

            A recent decision of the 9^th Circuit Court of Appeals addressed the requirements for diversity jurisdiction in a case involving an LLC and the necessity of tracing the ownership through the various owners.  In doing so, the Court rejected the notion that there is a de minimis exemption to the requirement of complete diversity.  Fadal Machining Centers, LLC v. Mid-Atlantic CNC, Inc., No. 10-56494, 2012 WL 8669 (Jan. 3, 2012) (Not For Publication).

            In the underlying action, the federal district court dismissed the claim on the basis that it was subject to arbitration.  It was that decision that was appealed to the Ninth Circuit.  It, in turn, determined that subject matter jurisdiction matter was lacking and, on that basis, both dismissed the appeal and vacated the district court’s judgment.

            As to the substance of the determination that diversity was lacking, a second appellant, MAG Industrial Automation Systems, LLC (“MAG”) was in turn owned in part (10%) by SP MAG Holdings, LLC (“SP MAG”).  SP MAG had members including a Delaware limited partnership, Silver Point Capital Fund, LP, and a Delaware LLC, SPCP Group III, LLC.  In turn, Robert O’Shea, a citizen of New Jersey, was a member of both SPCP Group III, LLC and Silver Point Capital Fund, LP.  Appellee Mid-Atlantic CNC, Inc. was a New Jersey corporation.  Applying the rule that MAG would, consequent to O’Shea’s membership in one of its members, be a citizen of New Jersey, diversity jurisdiction was lacking. 

            In response to a de minimis argument, namely that “‘SP MAG Holdings, LLC’s Membership Interest should be disregarded for purposes of determining citizenship,’ because the company holds ‘only a severely fractionalized interest with no control over the day-to-day operations’ of MAG,” and that interest being as well non-voting, the Court stated that “the character of [SP MAG Holdings’] membership interests is irrelevant to the determination of its citizenship.”, citing Carden v. Arkoma Assocs., 494 U.S. 185, 192 (1990).  “Scant though Mr. O’Shea’s interest in the Appellants, the rules governing subject matter of jurisdiction are ‘inflexible and without exception,’” again citing Carden.