Fun and Games and Diversity Jurisdictions; and Now the Rest of the Story

Fun and Games and Diversity Jurisdictions; and Now the Rest of the Story

      In a recent case out of Louisiana, the court considered the evidence necessary to demonstrate that a now former member had indeed been bought out of an LLC, with the effect that diversity jurisdiction would thereafter exist. An illuminating footnote discussed the back story of this transaction and how diversity jurisdiction had, from at least one perspective, been manufactured. HomeLife in the Gardens, LLC v. Landry, Civ. Act. No. 16-15549, 2017 WL 3189220 (E.D. La. July 27, 2017).

      Relying upon federal diversity jurisdiction i.e., that none of the defendants shared the same citizenship as any of the plaintiffs and the amount in controversy exceeded $75,000, HomeLife in the Gardens LLC brought this action in federal court against Landry. Landry's basis for seeking dismissal of the complaint was that diversity did not exist because one of the members of the plaintiff, Schmidt, was a citizen of Louisiana, as was she, thereby precluding diversity jurisdiction. Schmidt admitted that he had been a member of the LLC, but that his interest therein had been bought out. In support of this assertion, there were tendered to the court bank records documenting the transfer of funds pursuant to which the transaction took place, it happening on October 7, 2016. Schmidt as well file what was apparently an affidavit (“Schmidt declared under penalty of perjury”) explaining that he sold his interest in the company on October 7, 2016.  In that this complaint was filed after that October 7 date on which Schmidt ceased to be a member of the plaintiff, diversity jurisdiction was present.

      But then, the rest of the story. In a footnote, the court explained how this complaint followed on one voluntarily dismissed when the plaintiffs apparently recognized that diversity jurisdiction was lacking, leading to the Schmidt buyout so that the suit could be refiled. Specifically, at footnote 8, the court wrote:

The Court notes that the present case is not the first case to feature a dispute between these parties.  On September 27, 2016, these same plaintiffs filed suit against Landry in this Court asserting substantially the same claims as in the present case.  See Rankey et al. v. Landry, No. 16-14968, Dkt. 1 (E.D. La. 2016).  This first case was voluntarily dismissed by the plaintiffs on October 7, 2016-the same day that Schmidt sold his stake in HomeLife.  See id., Dkt. 11.  Schmidt represents to the Court that the dismissal of the first case was to permit “additional time” to “investigate the citizenship of the parties.” Case No. 16-15549, R. Doc. No. 43-1, ¶9.  Schmidt stretches the term “investigate” to its breaking point: Schmidt did not want time to “investigate the citizenship of the parties,” but rather wanted time to refile the case after changing HomeLife’s citizenship.  By first selling off his interest in HomeLife and then refiling the case, Schmidt created the complete diversity that – it is now obvious – was lacking in the first case.  While Schmidt and HomeLife should have been more forthright with the Court, current law permitted them to act as they did.  See Grupo Dataflux v. Atlas Global Group, L.P., 541 U.S. 567, 581 (2004).