Jurisdiction means, literally, the power to speak the law. In practical terms, it refers to the power of a court to issue a ruling that binds a natural person, entity, or thing (such as personal property or real estate). While courts are fond of saying that jurisdiction “is a word of many, too many, meanings,” e.g., Fort Bend Cty. v. Davis, 139 S. Ct. 1843, 1848 (2019), there are two basic components to jurisdiction, known as “personal jurisdiction” and “subject matter jurisdiction.” For a court to “speak the law” and issue a ruling that binds the parties before it, the court must have jurisdiction over the person (“personal jurisdiction”) and jurisdiction over the type of dispute that is before the court (“subject matter jurisdiction”). The basic concept behind personal jurisdiction is that it’s not fair to drag someone living in Rhode Island into court in California, unless the person in Rhode Island has taken affirmative steps directed at California that make a California lawsuit reasonable. A Rhode Island litigant can waive lack of personal jurisdiction, either by affirmatively filing suit in California, or by failing to raise it as a defense if sued there (the Rhode Islander could also simply not show up in California at all, and fight the case on personal jurisdiction grounds if the Californian ever shows up in Rhode Island and tries to enforce the judgment). Subject matter jurisdiction serves a different purpose — it sets structural limitations on the types of cases a court can hear. Subject matter jurisdiction, unlike personal jurisdiction, cannot be waived — in other words, the parties to a lawsuit cannot agree to prosecute a case in a court that does not have the authority to hear the type of suit that the plaintiff filed.
State courts and federal courts exercise different types of subject matter jurisdiction. The Rhode Island state courts are generally known as courts of general (subject matter) jurisdiction. [As a side note, there are two sub-types of personal jurisdiction, known as general personal jurisdiction and specific personal jurisdiction, not to mention “in rem” personal jurisdiction over property in the forum state and “tag” personal jurisdiction based on personal presence in the forum state — with all these similar names for legally distinct doctrines, no wonder law students hate some parts of law school! Now back to general subject matter jurisdiction.] The Rhode Island Superior Court, for example, can hear any case where the amount in dispute is at least $5,000 or involves declaratory or equitable (non-monetary) claims. If you wanted to bring a lawsuit seeking an order that presidential candidates shouldn’t be allowed to drink a Del’s with a straw, you could bring that claim in Rhode Island Superior Court and it would have subject matter jurisdiction to hear the case. You would probably lose very quickly (sorry Del’s purists), but the court could not say that it did not have the power to hear the case in the first place and it would issue a ruling on the merits.
Federal courts, by contrast, are courts of limited (subject matter) jurisdiction. The types of federal subject matter jurisdiction are listed in Article III, section 2 of the U.S. Constitution — by far the most common types are federal question and diversity. Federal question subject matter jurisdiction usually refers to cases arising out of the U.S. Constitution and federal laws. It makes sense that federal courts should have the power to hear these types of cases because they go to the core of federal power. Diversity subject matter jurisdiction refers usually to lawsuits involving citizens of different states. Even if the claim in the case has nothing to do with the U.S. Constitution or a federal law, diversity subject matter jurisdiction means that a person can still bring the case in federal court. The idea is that a Rhode Island citizen shouldn’t be held to the whims of the California state courts just because the Rhode Islander has a beef with a Californian over a state-law contract dispute — instead, the Rhode Island citizen should have the right to bring the suit in federal court in California because all federal judges have Article III (lifetime) tenure, and therefore the judges aren’t subject to political winds.
Article III, section 2 of the U.S. Constitution sets the outer limit for federal subject matter jurisdiction, and courts have interpreted Article III to empower Congress to limit the subject matter jurisdiction of the lower federal courts that Congress creates. Most federal cases start in the federal district courts — essentially the federal trial courts. Congress has specifically legislated the types of diversity cases that federal district courts can hear in 28 U.S.C. 1332. Essentially, 28 U.S.C. 1332 empowers federal district courts to hear diversity cases involving “citizens of different states” as long as the amount in controversy is at least $75,000.
When a plaintiff files a lawsuit in federal court, if the plaintiff asserts diversity jurisdiction as the basis for bringing the suit, most federal judges require that the plaintiff affirmatively state the basis for diversity in the complaint. This means that the plaintiff must plead in writing, subject to the reasonable investigation requirements in Federal Rule of Civil Procedure 11, that he or she is domiciled in X state, the defendant(s) is domiciled in Y state, and that the amount in controversy is at least $75,000. Usually, this task isn’t too difficult for a natural (living) person or for a corporation.
For natural persons, citizenship for diversity purposes is defined as where the person is “domiciled,” not where the person actually “resides” at the moment. Domicile is usually interpreted to mean the person has a physical presence in a state and also has the intent to make the state a home. A person’s domicile and the person’s residence can be two different places, and it’s the domicile that controls for federal diversity subject matter jurisdiction purposes. “A party may reside in more than one state but can be domiciled, for diversity purposes, in only one.” Lundquist v. Precision Valley Aviation, Inc., 946 F.2d 8, 10 (1st Cir. 1991). U.S. citizens domiciled abroad are considered “stateless” and destroy diversity jurisdiction because they are not “citizens of a State.” Hearts with Haiti, Inc. v. Kendrick, 856 F.3d 1, 4 (1st Cir. 2017). People who travel all the time and do not have a home (like some professional performers) are also considered stateless. Or think George Clooney from the movie Up in the Air.
For corporations, 28 U.S.C. 1332 treats the place of citizenship differently — it states that a corporation is deemed a citizen of the state of its incorporation and the state where it has its principal place of business. Often, these are two different places. Many corporations are incorporated in Delaware, for example, but they might run their operations from a different state. The U.S. Supreme Court has defined the principal place of business for diversity purposes as the “nerve center,” defined as “the place where the corporation’s high level officers direct, control, and coordinate the corporation’s activities,” which is normally the corporation’s headquarters.
The task of pleading diversity is a whole lot messier for limited liability companies, which brings us finally to the new proposal for Federal Rule of Civil Procedure 7.1 currently proffered by the powerful Committee on Rules of Practice and Procedure of the Judicial Conference of the United States. For diversity purposes, the First Circuit does not treat limited liability companies like corporations. When pleading diversity subject matter jurisdiction for a corporation, it is usually sufficient to state that “Defendant XYZ Corp. is a Delaware Corporation with a principal place of business in Boston, Massachusetts.” That does not work for limited liability companies – the First Circuit has held that LLCs are “unincorporated entities. The citizenship of an unincorporated entity, such as a partnership, is determined by the citizenship of all of its members.” Pramco, LLC v. San Juan Bay Marina, Inc., 435 F.3d 51, 54 (1st Cir. 2006). So, under this doctrine, pleading diversity subject matter jurisdiction for an LLC requires the identity of every person or corporation that has an ownership interest in the LLC, and the pleader must keep drilling down until they get to this level of ownership. Each of those persons or corporations has to be domiciled in a different State from the Plaintiff, and not be “stateless.” For example, if the members of an LLC are two other LLCs, the plaintiff has to keep going down the ownership chain to plead the ownership interest in the two LLCs, and hope that none of those people or corporations who own those two LLCs are domiciled in the same State as the plaintiff.
This rule has tripped up practitioners (including me), courts and others for years. LLCs have emerged as an attractive form of ownership for many companies, including very large companies. One branch of Amazon (the online retailer), for example, is an LLC. I’ve seen bazillions of complaints (that’s only a slight exaggeration) in which LLCs are pleaded just like corporations — e.g., “Defendant XYZ is a Delaware LLC with a principal place of business in Boston, Massachusetts.” Even now, in 2019, the rule continues to elicit surprise among seasoned lawyers, often because they tend to think of LLCs as functioning and acting more like corporations than true partnerships. I’d be willing to bet that lots of diversity cases involving LLCs have proceeded to judgment over the years without anyone checking on the domiciles of the ownership interests in the LLC. Heck, I even asked a law professor once who taught civil procedure, and that person had no idea about the rule! So to say that the First Circuit rule on diversity jurisdiction for LLCs (also followed by other federal appeals courts) is a bit obscure is a bit of an understatement. But it is also vitally important because diversity jurisdiction can be challenged at any time. Subject matter jurisdiction addresses the authority of a court to hear a type of case, and since this is at the core of judicial power, courts can dismiss cases for lack of subject matter jurisdiction (including for lack of diversity) on their own volition. Federal courts have a duty to satisfy that subject matter jurisdiction exists. A case could go all the way through trial in the federal district court, to the court of appeals, and then to the Supreme Court. If the Supreme Court determines that diversity jurisdiction did not exist at the time the plaintiff filed the lawsuit in federal district court, it would dismiss the case for lack of subject matter jurisdiction and vacate any rulings or judgments made by the lower courts. Basically, it would result in a mulligan.
Overlayed on top of this is the practical reality that it is virtually impossible for most plaintiffs to plead diversity jurisdiction for LLCs. Most LLCs keep (and want to keep) their ownership interests private, and while LLCs are usually required to register with the Secretary of State in the state where they are organized, the public filings do not list the members of the LLC. Because of this, most plaintiffs have no idea who the members are, and it is next to impossible to specifically plead diversity jurisdiction at the outset of a case. To get around this problem in diversity cases involving LLCs, I usually plead something like “Defendant XYZ LLC is a Delaware limited liability company with a principal place of business in Boston, Massachusetts. On information and belief, all members of XYZ LLC are either citizens domiciled in Massachusetts or entities organized under the laws of Massachusetts or Delaware.”
The proposed change to Rule 7.1 of the Federal Rules of Civil Procedure aims to fix this problem by creating a new Rule 7.1(a)(2) that requires automatic disclosure of membership interests in LLCs for parties in a diversity case. The current version of Rule 7.1 really has nothing to do with subject matter jurisdiction — it just requires a corporate party in a case to identify a parent corporation or public corporation that owns more than 10% of its stock, so that the judge in the case can determine if he or she needs to recuse.
The proposed language to amend Rule 7.1 is a whole new ballgame — it says that “[u]nless the court orders otherwise, a party in an action in which jurisdiction is based on diversity under 28 U.S.C § 1332(a) must file a disclosure statement that names—and identifies the citizenship of—every individual or entity whose citizenship is attributed to that party at the time the action is filed.” As the committee notes to the proposed rule indicate, the purpose is to fix the problem where the party “suing an LLC may not have all the information it needs to plead the LLC’s citizenship.” The proposed automatic disclosure is designed “both to ensure that diversity jurisdiction exists and to protect against the waste that may occur upon belated discovery of a diversity-destroying citizenship.”
One interesting part of this proposed rule is that it would codify a holding that has percolated in the federal courts of appeals (there are 13 of them – including the First Circuit) but that the U.S. Supreme Court has never decided. The Supreme Court has never held that diversity jurisdiction for LLCs requires complete diversity between the plaintiff and all members of the defendant LLC, although it has suggested as much. Grupo Dataflux v. Atlas Glob. Grp., L.P., 541 U.S. 567, 585 n.1 (2004) (“Although the Court has never ruled on the issue, Courts of Appeals have held the citizenship of each member of an LLC counts for diversity purposes.”). The LLC is an increasingly popular corporate form, and I wonder how the Supreme Court would treat it. But if adopted, the proposed changes to Rule 7.1 would mean that the Supreme Court officially agrees with the position of the federal courts of appeals on diversity jurisdiction for LLCs, because it is the Supreme Court that ultimately promulgates changes to the Federal Rules of Civil Procedure.
Another notable aspect of the proposed automatic disclosure rule for membership in LLCs in diversity cases is that it will force LLCs to reveal their owners publicly. Filings in federal court cases, including those related to automatic disclosure, are public filings. LLCs often treat their membership interests as secrets. If enacted, the new Rule 7.1 might inspire some plaintiffs to bring state law claims in federal court based on diversity jurisdiction – instead of in state court – because of the added benefit in a quick disclosure of the roster of the LLC’s members. This seems a real possibility in hot-button issue cases, particularly those where LLCs support political causes, and the LLC corporate form is used to shield the identity of the owners. The proposed Rule 7.1 would also create a bonanza for companies that mine public filings in federal court dockets — they could peruse the dockets and build databases of who owns specific LLCs, and then turn around and sell that information.
How all this plays out remains to be seen – as it stands now, the proposed change to Rule 7.1 is a draft rule in the public comment phase. It’s one of those draft rules that looks innocuous, like a sheep, but it’s really not. Proposed Rule 7.1 is not, in the famous Justice Scalia parlance, a “wolf [that] comes as a wolf.” Morrison v. Olson, 487 U.S. 654, 699 (1988) (Scalia, J., dissenting).