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Third Circuit Eases Jurisdictional Pleading Requirement in Suits against Limited Liability Companies
     Limited liability companies are citizens of the state of their formation and also the states in which their Members are citizens, making it more difficult to plead federal diversity jurisdiction. The Court of Appeals formulated a practical solution for those pursuing a federal case, in Lincoln Benefit Life Co. v. AEI Life, LLC. Lincoln Benefit, a Nevada corporation brought a declaratory judgment action against an insurance broker (a corporation) and two limited liability companies, one in New York and the other in Delaware. The suit seeks rescission of two $6.65 million life insurance policies. On its face, the complaint alleges diversity jurisdiction. But, unlike a corporation, an LLC is a citizen of potentially several states, the domiciles of their Members. The defendant LLCs moved to dismiss the federal complaint because it failed to allege the citizenship of every member of the two LLCs. The District Court in New Jersey granted the motion. In a September 2, 2015 decision, the Third Circuit reversed. 

     The Court of Appeals noted that the plaintiff had tried diligently to obtain the citizenship information for all of the Members, satisfying the “reasonable inquiry” obligation under Rule 11. The Court stated that under those circumstances, rather than affirmatively alleging the citizenship of every Member, it is sufficient if plaintiff alleges, upon information and belief, that none of the Members of the defendant LLCs is a citizen of plaintiff’s state – here, Nevada. The defendants are in the best position to ascertain the citizenship of their Members, and can then mount a jurisdictional challenge by identifying any Member whose citizenship destroys diversity. The Court notes also that its decision is consistent with the Ninth Circuit decision in 2014 in Carolina Casualty Insurance Co. v. Team Equipment, Inc, 741 F.3d 1082, also a declaratory judgment action.

     There is an interesting concurring opinion, which urges the Supreme Court to adopt a definition of citizenship for an LLC similar to the treatment of a corporation in 28 U.S.C. §1332(c), that it is a citizen of its state of formation and the state of its principal place of business if different from its domicile state. That rule had its genesis in Louisville, C. & C.R. Co. v. Letson, decided in 1844. As the concurring Judge states, the Supreme Court invited Congress to take the step on behalf of LLCs, in Carden v. Arkoma Associates (1991), but Congress has not accepted the invitation.

     For now, LLCs remain citizens of the states of their Members’ domiciles. In a federal diversity complaint, or a removal based on diversity, it will be acceptable to allege that a diligent search has failed to uncover the Members’ states of domicile, but upon information and belief, they are diverse from the plaintiff’s, or removing defendant’s own domicile.

© October 2015, Law Offices of John C. Lane

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