For a variety of reasons, a limited liability company may
desire to litigate disputes in federal district court instead of state court.
However, in order to do so, an LLC must establish the required 28 USC 1332
"diversity jurisdiction" — that the case is between citizens of different
states. If the plaintiff and defendant are citizens of the same state, there is
no diversity. This will be problematic for LLCs to establish because, unlike a
corporation, an LLC is not recognized as an entity citizen. Instead, an LLC is
treated as a partnership, meaning, it is a citizen of each state in which its
members are citizens. See Johnson v. Columbia Props. Anchorage LP, 437 F.3d 894
(9th Cir. 2006).
An LLC seeking to establish federal district court
jurisdiction must undertake an extensive effort to determine the citizenship of
each member. If there is no diversity (where the LLC is a plaintiff or
defendant) or if any member is a forum defendant — a citizen of the state in
which the action is brought (where the LLC is a defendant) — there is no
diversity jurisdiction. Thus, if an LLC is sued as a defendant in state court in
which it has a citizen-member, the action must remain in state court and cannot
be removed. See 28 USC 1441(b)(2); Ibarra v. Protective Life Ins. Co., 2009 WL
1651292 (D. Ariz. Jun. 12, 2009).
Example: An Oklahoma corporation sues an Arizona LLC for
$100,000 owed under a contract in Arizona state court. One LLC member is a
citizen of the State of Arizona. The LLC will be deemed a forum defendant and
cannot remove the action to federal district court. The dispute will be resolved
in the Superior Court of Arizona.
Example: An Oklahoma LLC (with a Texas citizen member) sues
an Arizona LLC (with a Texas citizen member) in Texas state court. Since an LLC
is a citizen of each state in which its members are citizens, both the plaintiff
and defendant LLCs are citizens of Texas and there is no diversity jurisdiction.
The dispute will be resolved in Texas state court.
With the barriers to obtaining federal district court
jurisdiction significantly higher for LLCs, members should consider whether
there are options to state court.
Article © Fred Witt 2014. All Rights Reserved.
Disclaimer: This alert is
provided for general information only and is not intended to constitute legal
advice. Please consult with your own legal advisor before making any decisions.