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Plaintiff in Federal Court Lawsuit Need Not Affirmatively Allege the Citizenship of Each Member of an LLC in Order to Plead Diversity Jurisdiction

By on October 23, 2015 in Blog with 0 Comments

If a plaintiff wishes to file suit in federal court based upon the premise of diversity jurisdiction, he must be able to establish that the plaintiff and the defendant are citizens of different states. While the citizenship of a corporation is both of the state of its incorporation, as well as its principal place of business, the citizenship of an LLC is based upon where its members reside. That may be difficult to establish at the inception of the case. In Lincoln Benefit Life Co. v. AEI Life LLC, 2015 U.S. App. LEXIS 15576 (3d Cir. 2015), the Third Circuit dealt with the issue of establishing diversity against an LLC when the citizenship of all of its members are not known at the time of filing suit.

In Lincoln Benefit, the plaintiff filed suit seeking a declaratory judgment voiding two $6.65 million life insurance policies. It alleged that these policies were procured through fraud and for the benefit of investors who had no relationship to the individual whose life was insured. According to its complaint, this sort of policy is called a “stranger originated life insurance” or “STOLI” scheme which generally violates state insurable-interest laws and the public policy against wagering on human life.

It sued a corporation involved in the procurement of the policies and also two LLCs that were the record owners and beneficiaries of the policies. It based jurisdiction on the diversity of citizenship. Lincoln Benefit pleaded that it was a citizen of the State of Nebraska and, upon information and belief, the 2 defendant LLCs were citizens and were domiciled in either NY or Delaware.

The defendants filed a motion to dismiss based upon lack of subject matter jurisdiction because the plaintiff had not pleaded the citizenship of the members of the LLC. In response, Lincoln Benefit pointed out that none of the defendants asserted that they were a citizen of the State of Nebraska and, at this pleading stage, after a diligent search, it was unable to plead their citizenship with more specificity. It opposed this motion and asked for limited jurisdictional discovery.

The District Court granted the defendants’ motion to dismiss based upon the inadequacy of the complaint to establish jurisdiction as to the members of the LLC. It also denied the plaintiff’s request for jurisdictional discovery.

The Third Circuit reversed this decision, allowing this complaint to go forward at this pleading stage. It held that, at this stage it is sufficient for the plaintiff to affirmatively allege the citizenship of a defendant is not a citizen of the plaintiff’s state of citizenship. It noted that the fact that the plaintiff and defendant do not share the same state of citizenship usually establishes diversity without requiring the plaintiff to allege the defendant’s precise state of citizenship – especially when not all the facts are known at the time the complaint is filed.

However, in order to survive a Rule 11 sanction, the Court held that the plaintiff must conduct a reasonable inquiry into the facts alleged in the pleading by consulting all public records at its disposal, including other court filings, to be able to state in good faith that diversity exists. Thereafter, the LLC defendant, who is in the best position to ascertain its own members and their citizenship, may mount a factual challenge by identifying any members that would destroy diversity. If a defendant does challenge diversity, then the Third Circuit held that the plaintiff would be entitled to limited discovery for the purpose of establishing complete jurisdiction exists.

Based upon this case, it will now be much easier to file suit against an LLC defendant in federal court. It is typically very difficult to identify, yet know the states of citizenship of members of an LLC before filing suit. Further, the district courts have not been receptive to limited discovery to establish if diversity does exist. This Third Circuit case eases the pleading standard to sue an LLC, as well as permitting a plaintiff limited discovery, in the event there is a challenge to diversity.

 

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About the Author

About the Author:

Ms. Ramos is an Executive Committee Member and Co-Chair of the Litigation Department at Capehart Scatchard, P.A. located in Mount Laurel, New Jersey. She is an experienced litigator with over 25 years experience handling diverse matters. Practice areas include tort defense, business litigation, estate litigation, tort claims and civil rights defense, construction litigation, insurance coverage, employment litigation, shareholder disputes, and general litigation.

For the years 2020 and 2021, Ms. Ramos was selected for inclusion in The Best Lawyers in America© in the practice area of Litigation - Insurance. The attorneys on this list are selected based upon the consensus opinion of leading lawyers about the professional abilities of their colleagues within the same geographical area and legal practice area. A complete description of The Best Lawyers in America© methodology can be viewed via their website at: https://www.bestlawyers.com/methodology.

In 2021, Capehart Scatchard and Ms. Ramos received the “Best Law Firm” ranking in the area of Litigation – Insurance (Metro, Tier 3) published by U.S. News & World Report and Best Lawyers®. Law firms included on the list are recognized for professional excellence with consistently impressive ratings from clients and peers. To be eligible for a ranking, a firm must have at least one attorney who has been included in the current edition of Best Lawyers in America, which recognizes the top five percent of practicing lawyers in the United States. Betsy Ramos (Litigation – Insurance) was recognized for this prestigious award in the 2021 edition. For a description of the “Best Law Firm” selection methodology please visit: https://bestlawfirms.usnews.com/methodology.aspx.

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