"The Most Gullible Man in Cambridge" and 28 U.S.C. § 1332(a)

Professor Bruce Hay sued an LLC in diversity jurisdiction, but failed to note the citizenship of each member of the LLC.

|The Volokh Conspiracy |

Yesterday, Eugene blogged about Hay v. New York Media LLC. This case is premised on a New York Magazine article, titled "The Most Gullible Man in Cambridge." Harvard Law School Professor Bruce Hay filed this suit, pro se, in the U.S. District Court for the Southern District of New York.

Hay, a professor at Harvard, is a citizen of Massachusetts. He asserted diversity jurisdiction.

The complaint lists three defendants. First, Kera Bolonik, a former editor at New York magazine, is a citizen of New York. Second, David Koreznik, counsel to New York Media, is a citizen of New York. If these were the only parties, and the amount in controversy was satisfied, then Hay could rely on 28 U.S.C. § 1332(a) to establish diversity jurisdiction. That is, there is complete diversity of citizenship between the parties.

However, Hay added a third defendant: New York Media LLC, a Delaware LLC that is headquartered in New York. Does this additional defendant defeat diversity? Perhaps.

28 U.S.C.§ 1332(c) provides that "a corporation shall be deemed to be a citizen of every State and foreign state by which it has been incorporated and of the State or foreign state where it has its principal place of business." In Hertz v. Friend, the Court adopted the so-called "nerve center" to decide where a corporation has its "principal place of business." If New York Media LLC were a corporation, then its headquarters in New York would likely render it a New York corporation.

But New York Media LLC is not a corporation. It is, as the name suggests, a limited liability corporation. And LLCs are treated differently than corporations for purposes of diversity jurisdiction. LLCs do not fall under 28 U.S.C.§ 1332(c). Instead, they fall under 28 U.S.C. § 1332(a). And an LLC takes the citizenship of each of its members. Here is a relevant precedent from SDNY:

"A complaint premised upon diversity of citizenship must allege the citizenship of natural persons who are members of a limited liability company and the place of incorporation and principal place of business of any corporate entities who are members of the limited liability company." New Millennium Capital Partners, III, LLC v. Juniper Grp. Inc., 2010 WL 1257325, at *1 (S.D.N.Y. Mar. 26, 2010)

Hay pleaded the fact that New York Media LLC was incorporated in Delaware. This fact is irrelevant. He will need to plead the citizenship of each member of that LLC. On its face, this complaint fails to establish subject matter jurisdiction. It is possible that at least one of the members is a citizen of Massachusetts. In that case, then diversity is defeated.

Delaware does not publicize the citizenship of members. Therefore, it is difficult for Hay to know for sure at this point that all defendants are non-diverse. Therefore, courts may permit limited discovery to determine the citizenship of the LLC's members.

The Third Circuit addressed this issue in a 2015 decision:

A plaintiff who files suit in federal court may face significant difficulties when jurisdiction is premised on diversity and the defendant is an unincorporated association such as a partnership or limited liability company ("LLC"). The members of the association determine its citizenship, but these members may be unknown to the plaintiff even after a diligent pre-filing investigation. The plaintiff may tentatively assert that complete diversity exists, but whether this assertion survives a motion to dismiss depends entirely on the pleading standard that the court chooses to apply. We hold that a plaintiff need not affirmatively allege the citizenship of each member of an unincorporated association in order to get past the pleading stage. Instead, if the plaintiff is able to allege in good faith, after a reasonable attempt to determine the identities of the members of the association, that it is diverse from all of those members, its complaint will survive a facial challenge to subject-matter jurisdiction. If the defendant thereafter mounts a factual challenge, the plaintiff is entitled to limited discovery for the purpose of establishing that complete diversity exists.

Hay stated in paragraph 21 that "there is complete diversity." I am not sure if he has to hedge, and say something like, "upon information and belief, there is complete diversity." A court will have to determine if Hay "is able to allege in good faith, after a reasonable attempt" that there are no non-diverse defendants.

H/T Elliott Davis for flagging this issue.

Update: I've revised the post to address the fact that courts employs a good-faith standard at the motion-to-dismiss stage.

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  1. So is there a logical reason for having to list the citizenships of all members of a LLC, or is this just something else to keep lawyers in business?

    1. It’s a legal requirement. Diversity jurisdiction in federal court requires complete diversity, meaning that all plaintiffs are citizens of different state(s) than all defendants. The citizenship of an LLC — like a partnership — is the citizenship of each of its members. (This is different than a corporation, which is an independent legal entity and therefore its citizenship is not derivative of that of its owners.)

      1. Which I now see the post explained, so I’m not sure why you asked.

    2. The logical reason (to the extent that anything this arcane can be logical) is that an LLC doesn’t really exist as a “thing” separate from its owners. So in suing an LLC, you’re directly suing the owners. Glom that structure on to the “complete diversity” rule and you have to know all the owners’ citizenship in order to be sure your diversity is complete.

      Of course, that just moves the question. There’s a fair argument that the “complete diversity” rule (regardless of how it interacts with LLCs) is more about full-employment-for-lawyers than about logic or justice.

      1. The complete diversity rule, like the $75k jurisdictional limit, is basically about keeping cases out of federal court and therefore in state court. It is about Congress not wanting to fund a larger court system, federal judges wanting to do this much work and no more, and possibly some concern about the federal courts putting state courts out of business.

  2. This situation is even more bothersome in the removal context. Federal courts are typically more lenient when a plaintiff files their complaint directly in federal court, as evidenced by your Third Circuit case cite. Many will allow pleading in the negative (i.e. stating that none of the LLC’s members are citizens plaintiff’s domicile) and make statements made under “information and belief.” In the removal context, however, the defendant has to be certain federal jurisdiction exists before removing. Typically when an LLC files suit in state court, it’s not going to list in its complaint the domicile of all of its members. This makes a so-called paragraph 1 removal improper in those situations because there the complaint has to be removable on its face. Defendants have to often resort to discovery (such as interrogatories) to determine the LLC’s citizenship before removing the case. If they do otherwise, federal courts have been consistent in remanding cases in these situations.

    Another interesting note is what courts should do with publicly traded LLCs and partnerships. Presumably, a publicly traded LLC will have members in every state, and could never be completely diverse from opposing party. The IRS treats publicly traded LLCs as corporations for tax purposes. Perhaps the courts should as well under Section 1332.

    1. Thanks, Matticus, for a very good comment.
      I’m amazed I’ve never heard anybody talk about this as a MAJOR advantage of organizing as a corporation instead of an LLC: that if you’re sued in a corrupt Texas county, you can remove to federal court. Do practitioners think about this? Should they?

  3. LLC stands for “Limited Liability COMPANY” not “corporation.”

    1. It’s either a partnership or it’s a corporation. If it has and sells stock shares it’s a corporation.

      1. No, it’s a limited liability company, which is kind of like a corporation and kind of like a partnership, but is really its own thing.

  4. IANAL. I can understand that if all the parties to a lawsuit are in different states, the case has to be in federal court to avoid problems of different states having different laws and procedures, and if all parties are in the same state, it could be in state or federal court. Following this logic, when some parties are in the same state and some in a different state, it would also seem logical to require the case be in a federal court to avoid differing state laws and procedures. Is that the case? The only alternative I can see is requiring separate state and federal cases, which seems mighty silly.

    Then this LLC aspect — why should that even matter? Whether the LLC itself, or its members, are in the same state or a different state, shouldn’t matter when two other defendants are already in a different state.

    Sometimes you lawyers have the damnedest excuses for such silliness, and sometimes they even make sense. I sure can’t think of any reason why being an LLC should matter once any party is in a different state.

    1. I think it would be helpful to know the following:

      Cases can almost always be filed in state court.

      Cases may be filed in federal court:
      –If there is a “federal question” which usually means that you are suing under federal law.
      –If the parties are “diverse” which means they are in different states.
      Keep in mind that you could still file cases meeting those criteria in state court, but it would be possible for the defendant to “remove” them to federal court.

      Now here’s what’s tripping you up: under the law, diversity between plaintiffs and defendants has to be “complete.” That is, if any plaintiff is from the same state as any defendant, there is no diversity and the case can’t be tried in federal court (unless there is a federal question).

      NY guy sues PA guy, NJ guy, CT guy: complete diversity, enjoy your stay in federal court.

      But NY guy sues PA guy, NJ guy, CT guy, NY guy: diversity defeated, go directly to state court.

      So the question you have to ask for diversity is not “Is any different from a different state from the plaintiff?” It is “Is any defendant from the same state as the plaintiff?” because if so, no diversity.

      In this case, we have MA guy suing NY guy, NY guy, and ?? guy. The question marks are because, under our weird law about LLCs (and business entities more generally), it’s a bit tough to say where an LLC is from and the information is often hard to find.

      1. Civics 101, removal to Federal court was created to protect out of staters from parochial state courts. And that is being defeated because just one minor defendant is in the same state. In theory, the rights of the other defendants are ignored.

        After all, isn’t the liability of the members of the LLC limited to their investments while the liability of other defendants is not. Civics 101 would hold that the residence of those with more to lose should prevail.

        Of course we have drifted a long way from what was intended in 1787.

    2. Sometimes you lawyers have the damnedest excuses for such silliness, and sometimes they even make sense. I sure can’t think of any reason why being an LLC should matter once any party is in a different state.

      Your initial premise is mistaken. It is not so that “if all the parties to a lawsuit are in different states, the case has to be in federal court to avoid problems of different states having different laws and procedures.” Choice of law has nothing to do with whether something is in federal or state court. Indeed, Erie says that even if it’s federal court you have to decide which state’s law applies.

      1. aHA! I knew I was missing something. Well, I have to admit that does make sense. I suppose if Joe Blow sues Jane Blane over an eBay sale, there’s no need to, umm, make a federal case about it.

  5. I think you missed the most notable part.

    This is a professor of law at Harvard. Who teaches Civil Procedure, no less.

    Yet he missed a very basic requirement. Five minutes of research would reveal that an LLC has its citizenship according to its members, not its place of incorporation. That has been decided by hundreds of federal court opinions.

    This is the kind of thing a first year associate would get yelled at.

    I guess Harvard Law professors are overrated.

    1. Be careful here.

      I think it actually says something else. Law schools teach way too much theory and way too little actual law. And that’s because they don’t think of themselves as trade schools even though they are. So they export the actual teaching of law to big law firms and other employers who have to train their young lawyers.

      Accordingly, being a Harvard civil procedure professor does not necessarily mean you know how to draft a Complaint.

      1. How is he supposed to know that there is an LLC member who has citizenship in Massachusetts before conducting discovery?

        1. That’s the conundrum, which the 3d Circuit case addresses in part. Yes, it’s a difficult issue for plaintiffs (or removing defendants) in many cases.

          My point is this professor seems oblivious to the issue.

          1. To be fair, I’ve encountered plenty of practicing lawyers who miss this issue. Or they’ll plead residence but not citizenship.

          2. After reading the article, I’d say that’s not all he’s oblivious about.

        2. I’ve heard of courts permitting limited jurisdictional discovery when personal jurisdiction is an issue. But I don’t know if a federal court could/would permit that for establishing diversity.

          1. It is sometimes allowed, but much less often than for personal jurisdiction. The 3d Circuit case suggests it should be allowed, at least where the pertinent facts are not readily available.

      2. Right. But since he drafted and filed it pro se, you would think he would do some due diligence.

    2. If you want to go with “this guy is a Harvard law professor,” the better question is why did he file this lawsuit at all. If what happened to him happened to me, I would quietly try to put my life back together and hope for no more publicity.

      1. True. But lawyers often act silly in this regard. I know lawyers who bring or fight lawsuits that any normal person would just drop or settle, on the theory that they can fight it for free or almost for free.

        1. Like pants lost by a dry-cleaner.

        2. It’s not just that he’s representing himself for free. It’s more that this case is terrible publicity that can’t possibly be good for his career. I hope he has tenure at Harvard because with publicity like this, neither biglaw nor the bench are likely to find their way to his resume.

    3. I guess Harvard Law professors are overrated.

      You can always tell a Harvard man — you just can’t tell him much.
      There are some good people there, but a lot are so damn arrogant over there that they don’t bother to “check their work.”

      1. The folks up Chuck River are the best.

  6. This is really a stupid way to go about it. An LLC is still a corporation (regardless of whether it passes income through, as an S-corp can do anyway, or is treated as a separate entity for taxable purposes). It has a separately legal existence outside of its owners. The LLC is the named party in a lawsuit, not the members. Maybe the rules should be different for a single-member LLC, but I don’t see how the text of 28 USC 1332 requires this result. That precedent should be reexamined.

    1. Yeah, the ultimate problem here is the statute. An LLC can sue in its own name. It’s a legal person. So why the heck do we look at the residence of the owners?

      1. As any parent could tell you, “Because I Said So.” (Where “I” means the courts.)

      2. Yes, sort of what I was trying to say above — the LLC is a party to the suit, not its members.

  7. One other thing — we all are presuming that the professor is sane.

    There is a *lot* of mental illness in academia. Just saying….

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