"The Most Gullible Man in Cambridge" is Ordered to Show Cause Why His Complaint Should Not Be Dismissed

"In order to invoke this Court’s diversity jurisdiction, Plaintiff must allege that the citizenship of each member of the LLC defendant was diverse from that of Plaintiff at the date of this action’s filing."

|The Volokh Conspiracy |

In August, I blogged about Professor Bruce Hay's pro se case. He  sued New York Media LLC, a Delaware LLC that is headquartered in New York, as well as a former and current employee of New York Magazine. Hay relied on 28 U.S.C. § 1332(a) to establish diversity jurisdiction. But he failed to establish the citizenship of each member of the LLC.

Now, the U.S. District Court for the Southern District of New York has issued an order to show cause why the complaint should not be dismissed for lack of jurisdiction. Judge Oetken's order is two paragraphs:

Plaintiff invokes this Court's diversity jurisdiction pursuant to 28 U.S.C. § 1332. However, the Complaint does not adequately demonstrate the Court's subject matter jurisdiction because it does not allege the citizenship of each of the members of the LLC defendant. The state of registration and headquarters location of a limited liability company are irrelevant to the question of diversity of citizenship under § 1332. Rather, for purposes of diversity jurisdiction, an LLC has the citizenship of each of its members. See ICON MW, LLC v. Hofmeister, 950 F. Supp. 2d 544, 546 (S.D.N.Y. 2013) (citing Bayerische Landesbank v. Aladdin Capital Mgmt. LLC, 692 F.3d 42, 49 (2d Cir. 2012)). Thus, in order to invoke this Court's diversity jurisdiction, Plaintiff must allege that the citizenship of each member of the LLC defendant was diverse from that of Plaintiff at the date of this action's filing. Therefore, Plaintiff shall, on or before October 7, 2020, either (1) show cause as to why its complaint should not be dismissed for lack of subject matter jurisdiction, or (2) move to file an amended complaint that properly pleads jurisdiction. If Plaintiff fails to do so, this action may be dismissed.

Last week, an attorney made a notice of appearance for Hay. Perhaps Hay will file an amended complaint.

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  1. If this judge is right, then what is the benefit of a LLC incorporating in Delaware?

    In other words, if a LLC is a legal resident of every state in which a member resides, then why wouldn’t it be bound by the state laws of every state in which a member of the corporation resides?

    Usury laws come to immediate mind, and I’m not sure a LLC would be affected by those, but there are a lot of powers a state doesn’t have over a non-resident corporation, and hence the advantage of a DE or SD “residency.” But if the judge is right then why can’t a state AG bypass all of that by serving the LLC through the resident member?

    1. Because, as is often the case, status for federal procedural purposes such as diversity jurisdiction is completely different from status for substantive state law purposes such as extent of liability, governance, adjudication of disputes between principals, etc.

      Essential, state law usually recognizes an LLC as being a distinct legal entity similar to a corporation. But federal regards it as a kind of partnership, similar to a corporation.

      Think of it as being the corporate equivalent of a fetus. A person for some legal purposes, more or less it’s members’ appendix for others.

      1. The worst (or funniest, depending on how you look at it) aspect of the diversity rules regarding LLCs is that you have to keep going.

        In other words, you will often have LLCs that are comprised not just of people as members, but of other LLCs as members, and those LLCs have LLCs as members, and so on.

        And yes, you have to trace it all the way down.

        I mean … I guess it discourage some diversity suits, so there’s that?

        1. Wasn’t there a nursey rhyme about that? Something about a guy with seven wives, sacks, cats and kittens. Poor guy had to schlep all that on the road back from St. Ives.

        2. For federal judges, keeping cases out of federal court is an end in itself.

          1. “For federal judges, keeping cases out of federal court is an end in itself.”

            I mean, that’s not wrong!

            Again, in fairness, they sort of have to, what with the whole “limited jurisdiction” and all that. Just because someone would prefer to be in federal court instead of state court doesn’t mean that they get to be there.

        3. Are you sure? As Mr Blackman noted in his original blog post, case law from SDNY holds that the chain ends with ‘natural persons’, so you don’t “…have to keep going…”.
          That post, “The Most Gullible Man in Cambridge”, cites New Millennium Capital Partners, III, LLC v. Juniper Grp. Inc., 2010 WL 1257325, at *1 (S.D.N.Y. Mar. 26, 2010)
          (“A complaint premised upon diversity of citizenship must allege the citizenship of natural persons who are members of a limited liability company”).

          1. “Are you sure?”

            Yes.

            “case law from SDNY holds that the chain ends with ‘natural persons’”

            That was Loki’s point. not all the members of an LLC are natural persons, some may be other LLCs.

            The court ruling here is not that plaintiff needs to show that some member of the LLC is diverse from him, the court ruled he had to show the EVERY member of the LLC was diverse from him.

            IF the LLC has another LLC as a member, to show that LLC member is diverse from him he needs to show all of it’s members are diverse from him.

            With nested LLCs, he has to find every last leaf (natural person) of every last branch (nested LLC) and show that every single leaf is diverse from him.

      2. I’m failing to come up with any good reason WHY federal law would choose to treat LLCs differently than state law treats them. If state law creates exactly what an LLC is, and says “this is a separate legal entity”, there is zero reason for federal law to say “nope, it’s not, it’s actually just a partnership”.

        1. The IRS gives you the option of treating it like a Partnership or a Corporation for tax purposes.

    2. I don’t take issue with your description of how diversity works, but it’s a really silly rule. For diversity purposes, all artificial entities should be treated like corporations.

      1. There is a statute specific to corporations so Congress can amend the statute (though there are limits to how Congress can define citizenship). Until it does though, judges are bound by the statute. In any event, diversity jurisdiction itself is rather outdated (state discrimination is not exactly the biggest on the list of discrimination I am worried about and, in any event, the judges and jurors from federal courts are also from the home state) and we would free up a ton of federal judicial resources by further limiting it, if not abolishing it.

    3. “If this judge is right”

      He is right. Supreme Court, and before it every Circuit to address the issue, has held that citizenship of an LLC is determined by its members. Yet I see people misplead that all the time – when I was a district court law clerk almost 20 years ago, we trained our externs doing jurisdiction checks to watch for that issue and we’d OSC it all the time.

      1. Agree it is extremely common to see a case pleaded this way. That is why I was surprised Professor Blackman jumped up and down and pointed at the complaint. I realized he never properly practiced, but surely he encountered this type of thing when he was clerking for Judge Gibson.

  2. Isn’t this the guy who teaches civil procedure at Harvard?

    1. Yes.

      It’s like the chair of neurlogy at Harvard Medical School asking, “Where’s the brain again?”

      1. In fairness, law school professors know very little about practice. And there is a huge gulf between practice and academia. For example, a law school professor might be able to explain the difference between statutory and FRCP interpleader, but would be clueless when it comes to describing how discovery actually works.

        On the other hand … this is a civil procedure professor? C’mon.

        1. It’s been a long time since I was a law student, but I would say there is very little overlap between the theory one learns and what practice is actually like. I had two semesters of contract law without ever seeing an actual contract, or being asked to draft an actual contract.

          That said, though, the whole point of learning civil procedure is learning how to read and understand the rules.

          1. There is this thing I learned in law school called legal research. I do it almost every working day.

            For civil procedure questions like this, my go-to are two very good treatises, Wright and Miller, Federal Practice and Proecudre, and Moore’s Federal Practice. Both are available on-line, on Westlaw and Lexis, respectively. Law professors get both free.

            This issue could have been researched on-line in five minutes in either treatise. Harvard law professors are apparently too busy.

        2. Maybe Harvard isn’t everything it purports to be…

    2. Didn’t he teach Critical Thinking?

  3. Here is the problem that I see:

    How can a plaintiff suing an LLC know who the members of the LLC are when the complaint is filed (before discovery). A typical Certificate of Formation of an LLC will be about half a page and other than identifying the Registered Agent for Service of Process, there is no requirement that the members of the LLC be identified or made public. The identity of the members and each member’s ownership interest is usually identified in the Operating Agreement, which is NOT public.

    And, as was pointed out, the LLC may have members that are themselves LLCs, and could have hundreds of members. Even the Manager of the LLC that is the named defendant may not know the members of each of these LLCs.

    It seems to me that there is virtually no way to satisfy this pleading requirement unless the plaintiff is himself a member of the LLC and has a copy of the Operating Agreement identifying all the members.

    So in fairness to the professor.

    1. My problem here is that the LLC is treated as an LLP or LP here. Maybe that makes sense. Doesn’t to me. If given the choice, I would treat it as a corporation, and not a partnership. But, of course, I’m not given a choice here.

      Still, I expect that most of the real attorneys here would have recognized the issue, done the research, and proceeded accordingly. I expect that I would have. That is just part of the job. Done it enough other times in regards to federal jurisdiction. As anyone who has done even as little litigation as I have, has done v

      1. For diversity purposes, I don’t even see any good reason to treat partnerships as having the citizenship of their partners. If an entity can sue and be sued in its own name (as partnerships can), then that should be the end of it. Just analyze the partnership the same way you would a corporation. That may be tricky with general partnerships (which are relatively uncommon in litigation anyway), but it’s not an additional burden with respect to general partnerships, and it’s better than making life unnecessarily complicated and absurd for LLCs, the most common business entity.

        1. You can still have the litigation, but it just can’t be in federal court. Keeping claim that is worth litigating but just not in my courtroom is the goal of most federal jurisdictional rules.

    2. The answer to this issue varies by which federal court and judge you happen to be sitting in front of. Some will allow allegations on information and belief. Others will not. Some will allow jurisdictional discovery. Others will not. Some will allow negative allegations based on a reasonable investigation (e.g., “Plaintiff researched the LLC’s membership in X, Y, and Z ways, did not find any basis for believing that any member is a citizen of Plaintiff’s state, and found reasons A, B, and C to believe that no member is a resident of Plaintiff’s state.”). Others will not.

      It’s a terrible mess. The simple (and best) solution is to just treat all entities that can sue and be sued in their own name (e.g., LLPs, LLCs) as corporations.

      1. Bingo. Maybe a decade ago, there was this judge (viz. clerk) in the Middle District of Pennsylvania who was basically requiring an affidavit establishing citizenship with the filing that initially alleged federal jurisdiction (the complaint if filed in federal court or the notice of removal if filed in state court), and would simply dismiss you if you didn’t have it exactly right.

        This was incredibly difficult even for removing defendants given the short time for removal (30 days from service), which is truncated by the preference of many defendants to remove before the due date for the state court response arrives (20 days from service). In addition, when you are removing, often all you know about the plaintiff is what’s in the complaint, which will typically not include many facts about the parties and certainly not the weird ones needed to establish federal diversity jurisdiction.

        I can only imagine how hard it was for plaintiffs. You want to sue a business that you think is a corporation, but then it turns out to be an LLC whose members are LLC in a kind of nesting-doll configuration. You typically cannot figure this out from public sources and end up guessing.

        As I recall most judges in the Western District would accept facts as pleaded and would ask for an affidavit only if a party raised questions.

  4. This is usually a nothingburger. Plead upon information and belief, and then figure out the answer in discovery. If the Defendant believes there isn’t diversity, they will usually promptly bring that up in a Rule 12(b)(1) motion. The only reason it is news is because of the plaintiff himself.

    1. Some courts won’t allow that sort of pleading or will disallow the jurisdictional discovery. I think they’re typically wrong, but it happens.

  5. Not even Prof. Blackman could muster a spirited approval (or defense) of Pres. Trump’s debate performance?

    #TwoTermsPresidentThenPrison

    1. Does anyone want to talk about it? I tuned in expecting a trainwreck, and even with those expectations, I was shocked at how … ugh … just … ugh. It’s kind of shocking to remember that this is America, and he is our President, and then you see that.

      It’s just tiring. I just want to go back to being able to ignore politics for hours, or even days (!) at a time. To maybe have a moment or two where I don’t have to be bombarded by the latest crass destruction of Norms I Used To Appreciate(tm).

      My goodness; give me the tired old tropes of “zingers” like “There he goes again” instead of that bleating, bullying, unhinged crackhead I saw last night. Please.

      1. Why did you waste time watching? You are going to vote for Biden, you hate Trump. You could read about or see the highlights in 3 minutes the next day if you still wanted.

        Don’t be such a baby. Don’t want to think about politics, don’t watch silly things like “debates” which are just tandem press conferences.

        Take a walk, down a bourbon, watch baseball. Nothing said yesterday will matter.

        1. This may shock and surprise you, Bob, but some of us generally care for the polity.

          We do things like volunteer to help with the polls, and judge our local schools’ entrants for Constitution Day, and teach middle school moot court. Things like that. So we kinda sorta care about the overall example set when it comes to matters of civics, of which this is one of the biggest examples. To use an expression that I normally hate, it really is for the kids sometime. Modelling behavior. Showing how things are done.

          So I know that you are a nihilist that only lives to see libtards pwned and pray that the heat death of the universe somehow beats your own demise, but … for those of us who genuinely hope for a better future somehow, we’d like to be able to say something other than, “I’m so sorry. I’m so very sorry. It’s not supposed to be like this.”

            1. Yeah, Bob, it takes a real saint to have a minimum level of community involvement.

              I mean, I should be canonized just because I cared a wee bit, right? We can’t all be cool like you, drinking bourbon and watching baseball (you’re 80, right?) while the world burns around you.

              1. Your rotator cuffs must be awful sore from all that back patting you do.

                Biden ain’t stopping any burning. He’ll just set his own things on fire.

          1. We do things like volunteer to help with the polls, and judge our local schools’ entrants for Constitution Day, and teach middle school moot court. Things like that. So we kinda sorta care about the overall example set when it comes to matters of civics, of which this is one of the biggest examples. To use an expression that I normally hate, it really is for the kids sometime. Modelling behavior. Showing how things are done.

            I hate to get between two close friends, but Loki, while all of that is commendable, what does any of it have to do with watching debates? One can be involved in civic and community affairs without watching the political equivalent of mud wrestling.

            Your conclusion does not follow from your premise, even if your premise is noble.

            1. I watched because my 9th grader’s government teacher told her students to watch it, and I still don’t feel he should watch adult programming unaccompanied.

              1. What adult programming, the debate was practically a kindergarten grade argument?

          2. Please don’t tell me you approved of what Biden’s ad hominems.

            1. The facts abandoned the Left 100 years ago. Personal attack is all they have left to persuade and to intimidate.

    2. In case anyone missed the debate, Loki13 and Bob have been kind enough to reenact in.

    3. Kirkland is a worthless troll. Get a life.

    4. I enjoyed Trump’s performance. That is how New Yorkers talk. That manner of speech was described by John Adams in a letter to his wife in Virginia in the 1700’s. Try contradict a Cuomo, you will see the same thing. Trump scored dozens of points. Biden just called him disrespectful names, and told him to shut up. That the Left. The facts abandoned it 100 years ago.

  6. I took a look at the complaint. Plaintiff contacts a reporter at New York magazine and tells his story. New York magazine publishes it. But the story plaintiff told the magazine was false, and harmful to the plaintiff’s reputation. Therefore, the reporter and the magazine are guilty of libeling the plaintiff.

    There are several counts in the complaint, but this one is up there with the man who murders both his parents and then pleads for leniency on the grounds that he is an orphan.

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