Friday, August 18, 2017

Indiana Court Addresses, For Purposes of Diversely Jurisdiction, Classification of a Chinese Business Organization

Indiana Court Addresses, For Purposes of Diversely Jurisdiction, Classification of a Chinese Business Organization


      A lawsuit may be brought in or removed to federal court pursuant to “diversity” jurisdiction, which requires, inter alia, that none of the defendants have the same citizenship as do any of the plaintiffs.  In addition, diversity jurisdiction requires that the amount in dispute exceed $75,000.  The citizenship of a natural person is dependent upon their “domicile.” For business organizations, there are two tests that are applied. If the business organization is a corporation, it has the citizenship of its jurisdiction of organization and that in which it maintains its principal place of business. Alternatively, if the business organization is “unincorporated,” there is attributed to it the citizenship of each of its owners.  The application of this test becomes particularly difficult with respect to foreign business organizations as it is necessary to first determine whether they are equivalent to a corporation or, rather, are unincorporated.  Recently the Federal District Court for the Northern District of Indiana was presented with this challenge.  Nanshan America Advanced Aluminum Technologies, LLC v. Nemick, Case No. 4:13-CV-078 JD, 2017 WL3333963 (N.D. Ind. August 4, 2017).
      The substance of this dispute involves apparently blatant embezzlement by Nemick against his employer Nanshan.  The court, sua sponte, in ruling upon a motion for default judgment as to breach of fiduciary duty, considered first whether it had jurisdiction in the matter.
      The plaintiff, Nanshan, is an LLC and therefore has the citizenship of each of its members. The only member of Nanshan is a Shandong Nanshan Aluminum Co., Ltd., a Chinese entity.  So the question was, would Shandong be treated as a corporation or as an unincorporated association?  In determining that it is the former, the court wrote:

According to Nanshan’s supplemental filing, Shandong is organized as a “Gufen Youxian Gongsi,” which is also referred to as a “company limited by shares.” Such an entity provides limited liability for equity investors and also shares the features of personhood, including the right to contract and litigate in its own name. It also appears that the entity has a perpetual existence unless otherwise specified in its articles of association. Shares are also alienable, as such companies can be listed on a stock exchange, and Shandong is in fact listed on the Shanghai Stock Exchange. The entities are also governed by a board of directors, which employs a manager who is responsible for the company’s operations. Company Law of the People’s Republic of China, art. 108, 113. A Gufen Youxian Gongsi is also required to be treated as a corporation for U.S. tax purposes. 26 C.F.R. § 301.7701-2(b)(8)(i).

The Seventh Circuit has held that entities from other countries that share these characteristics qualify as corporations for the purposes of diversity jurisdiction. E.g., BouMatic, 759 F.3d at 791. It has also held that companies “limited by shares” under the laws of other countries are equivalent to corporations for these purposes. Superl Sequoia Ltd. v. Carlson Co., Inc., 615 F.3d 831, 832 (7th Cir. 2010) (holding that a “Hong Kong business organization ‘limited by shares’ “ is “equivalent to a corporation in the United States”); Lear Corp. v. Johnson Electric Holdings Ltd., 353 F.3d 580, 583 (7th Cir. 2003) (“[A] business organization ‘limited by shares’ under Bermuda law is equivalent in all legally material respects to a corporation under state law.”). Thus, the Court finds that Shandong is properly treated as a corporation for purposes of diversity jurisdiction. And because it is incorporated and has its principal place of business in China, Shandong (and thus Nanshan) is a citizen of China, meaning that complete diversity exists and the Court has subject matter jurisdiction under § 1332(a)(2).

As an aside, I believe this is the first opinion to, in the context of classifying a foreign entity as either incorporated or unincorporated, to have referenced the check-the-box classification regulations; I have previously argued that the courts should make that reference in these determinations.  See Rutledge, Recent Developments in Diversity Jurisdiction for LLCs and Other Unincorporated Forms, Journal of Passthrough Entities (Nov./Dec. 2015) , available at SSRN: HERE IS A LINK TO THAT ARTICLE

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