By Michele E. Connolly
Litigants who invoke diversity jurisdiction in federal court need to ensure that there is, in fact, complete diversity of citizenship between plaintiff(s) and defendant(s), lest they find themselves facing reversal of a judgment after trial. That is exactly what appellees in BRT Management LLC v. Malden Storage LLC, et al. faced in a case recently decided by the United States Court of Appeals for the First Circuit. The parties in that case litigated for six years, went to trial, and the defendants/counterclaim plaintiffs obtained an eight-figure judgment–only to have that judgment overturned on appeal because diversity had not been established.
Diversity jurisdiction requires complete diversity of citizenship between plaintiffs and defendants, a threshold fact that is often not straightforward when one or more parties is neither a corporation nor a natural person. An unincorporated entity is a citizen of every state of which any of its members is a citizen. How is citizenship determined when the members of an unincorporated entity are, themselves, unincorporated entities? A court must look to the citizenship of each member-entity’s members. The inquiry must continue until only natural persons or corporations remain. In the case of BRT Management LLC v. Malden Storage LLC, et al., a three-judge panel of the First Circuit found that the parties had not adequately traced through the membership of two LLC defendants and therefore the District Court’s jurisdiction had not been established.
Factual and Procedural History
Plaintiff BRT Management LLC (“BRT”) filed suit in the United States District Court for the District of Massachusetts against Malden Storage LLC (“Malden”), Plain Avenue Storage LLC (“Plain Avenue”), Banner Drive Storage LLC (“Banner”), and Brian Wallace, invoking diversity jurisdiction pursuant to 28 U.S.C. § 1332. The plaintiff did not assert any federal question or any other form of subject matter jurisdiction. Plaintiff’s complaint asserted complete diversity on the basis that it was a Massachusetts LLC with a usual place of business in Massachusetts, and that the defendant LLCs were Delaware LLCs with usual places of business in Illinois. Malden and Plain Avenue asserted counterclaims against BRT, also asserting diversity jurisdiction, and, like BRT, alleged facts relating only to the state of registration and usual place of business of the counterclaim plaintiffs.
Shortly thereafter, U.S. District Judge Saylor issued an order to show cause why the action should not be dismissed for lack of subject matter jurisdiction, noting that BRT failed to allege the citizenship of its members. BRT responded by alleging that its sole member was a natural person and a Massachusetts citizen; the sole member of both Malden and Plain Avenue was C. Banner Storage LLC (“C. Banner”); and the sole member of Banner was Banner Storage Holding LLC (“Banner Holding”). BRT did not allege the citizenship of the members of C. Banner or Banner Holding, however, so the District Court issued a second order to show cause requiring BRT to do so.
In response, BRT argued that it was unable to identify the citizenship of the members of C. Banner and Banner Holding and requested limited jurisdictional discovery, which the court granted. After the limited discovery was complete, the parties filed a stipulation that “there exists complete diversity of citizenship” and set forth several facts, including that the sole member of C. Banner was B-Dev Manager LLC (“B-Dev”). However, though BRT had responded to the first order to show cause claiming that Banner had only one member – Banner Holding – in fact, Banner had more than eighty members, at least one of whom was a Massachusetts resident. Because that Massachusetts resident would destroy diversity, the parties stipulated to Banner’s dismissal, leaving Malden and Plain Avenue as the only LLC defendants (the “LLC defendants”).
After a conference with the parties, the court dismissed Banner, but did not address the failure of the parties to allege the citizenship of the members of B-Dev. Notwithstanding this failure, the litigation continued, eventually leading to a nine-day bench trial and a judgment of over ten million dollars in favor of the LLC defendants on their counterclaims. BRT appealed.
After receiving the appellate briefs, the First Circuit entered an order finding the record was insufficient to establish diversity jurisdiction and directed the parties to file an affidavit of jurisdictional facts sufficient to establish jurisdiction.
After the parties filed affidavits — including a corrected affidavit by the LLC defendants that identified their ultimate owners as individuals, corporations, and trusts — a three-judge panel of the First Circuit (Judges Kayatta, Lynch, and Montecalvo) found that the record still was insufficient to establish the Court’s jurisdiction and remanded the case to the district court to afford the LLC defendants one more opportunity to establish such jurisdiction.
The First Circuit based its ruling on lack of information about the member trusts. While the LLC defendants’ affidavit provided the citizenship of the trustee of each trust, it failed to describe the nature of each trust or provide the citizenship of each trust’s beneficiaries. The Court noted that the citizenship of a “traditional trust” that was not a separate legal entity, but rather simply a fiduciary relationship between or among multiple people, is to be determined by the citizenship of the trustee. A trust that stands as a distinct legal entity, however, takes the citizenship of all its members, though it is unclear in the First Circuit whether a trust’s “members” includes both beneficiaries and trustees. Without knowing whether the at-issue trusts were distinct legal entities, and without knowing the citizenship of the beneficiaries of the trusts, the Court was unable to determine whether diversity jurisdiction existed.
Because it found that the LLC defendants’ affidavit was insufficient with respect to the ultimate trust members, it did not address BRT’s arguments that the affidavit was insufficient in other respects; namely that, for certain entities in the LLC defendants’ ownership structures, the affidavit failed to provide adequate information about what type of entity each member was — e.g., a corporation, a partnership, an LLC, etc. — and therefore the citizenship of those entities could not be determined.
Notably, the Court cautioned that parties cannot establish federal subject matter jurisdiction by agreeing that the basis for jurisdiction is satisfied. The parties’ stipulation was not sufficient and did not confer subject matter jurisdiction on the court.
The Court’s Coda
In its opinion, the Court included a coda, noting that a potential plaintiff may not have necessary information about an unincorporated defendant entity to determine whether jurisdiction exists, as such information would be uniquely in the possession of the defendant. The Court approved Judge Saylor’s approach of granting limited jurisdictional discovery at the outset to try to confirm the existence of jurisdiction where a plaintiff had made a good-faith effort on its own to ascertain the facts necessary to establish a defendant-entity’s citizenship. The Court noted that “[i]f done right, limited and succinct jurisdictional discovery to confirm diversity…can assure the parties and the court at an early stage of litigation that complete diversity exists.” In this case, however, either the discovery was insufficient, or the parties had not adequately put forth the basis for the Court’s jurisdiction.
When a party relies on diversity jurisdiction to sue in federal court, questions of subject matter jurisdiction should be determined at the outset to avoid incurring substantial expense and delay litigating a case in federal court only to have a judgment vacated. Plaintiff(s) considering bringing suit in the First Circuit should consider the following:
- For each party, is the party an individual, corporation, or unincorporated entity?
- If the party is an individual, what is the person’s domicile?
- If the party is a corporation, what is/are the corporation’s state(s) of incorporation and principal place of business?
- If the party is an unincorporated entity, such as an LLC or partnership, what is the citizenship of its members?
- Has the membership of an unincorporated entity been traced through all the necessary levels to determine its state(s) of citizenship?
- If the entity is a trust, is it a “traditional trust” as described by the First Circuit – i.e., a trust that is a “fiduciary relationship” rather than a separate legal entity? If so, what is the citizenship of the trustee? If the trust is a separate legal entity, what is the citizenship of its members?
- A plaintiff may not always have access to all information necessary to determine the citizenship of a defendant. If the plaintiff has undertaken a good-faith effort to make that determination but is unable to do so because the necessary information necessary is uniquely within the possession of the defendant, then the plaintiff should consider requesting limited jurisdictional discovery at the outset.
- The parties cannot stipulate to a federal court’s subject matter jurisdiction.
- A court’s determination of subject matter jurisdiction is always subject to de novo review, is not given any deference, and is not waivable by a party.