Unincorporated Associations

Unincorporated Associations

A party that is not a corporation takes its citizenship from its members. Section 1332(c)(1) tells a court how to find a corporation’s citizenship: the corporation is 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.¹ Apart from its exception for insurers sued directly, the provision speaks only of corporations. Partnerships, labor unions, and limited liability companies appear nowhere in it, so the charter-plus-headquarters formula that governs a corporation does not govern them.

The Supreme Court filled the gap in Carden v. Arkoma Associates. It held that diversity jurisdiction in a suit by or against an unincorporated entity depends on the citizenship of all the entity’s members.² The entity is therefore a citizen of every State of which any member is a citizen. Each member’s State is then compared with the State of every opposing party, as in any complete-diversity analysis, so one member who shares a State with an adversary defeats jurisdiction over the whole action. The State where the entity was organized and the State where it does business drop out of the count. A pleading for such a party must identify its members and their States, because the entity’s address answers nothing the statute asks.

The two subsections below take up partnerships, where the rule began, and limited liability companies, where it most often catches a litigant who assumes the corporate formula applies.

Carden and Partnerships

A partnership, general or limited, is a citizen of every State of which any partner is a citizen, and Carden v. Arkoma Associates announced the rule. The case had to decide what § 1332(c)(1) left open: how a partnership that sues in its own name is assigned to a State. A limited partnership has two kinds of owners. In Arkoma’s own description, the general partners manage the assets, control the litigation, and bear the risk of the partnership’s debts, and the limited partners invest without managing.³ The question was whether the second kind counts when a court compares citizenships across the caption.

Arkoma Associates, an Arizona limited partnership, sued Carden and Limes on a contract dispute and relied on diversity. Carden and Limes, who were Louisiana citizens, challenged jurisdiction because one of Arkoma’s limited partners was a Louisiana citizen too. After a bench trial the district court awarded Arkoma a money judgment, and the Fifth Circuit affirmed, reasoning that Arkoma’s citizenship turned on its general partners and not on its limited partners.⁴ The Supreme Court thus reached the jurisdictional question after a full trial, with a judgment at stake. If limited partners count, the Louisiana limited partner shares a State with the defendants and complete diversity fails.

To keep its judgment, Arkoma needed one of two premises: either a limited partnership is itself a citizen of the State that organized it, or a court may consult the general partners alone. The Court rejected both. The first borrows from corporation law, an exception with a history of its own. In 1809 the Court held that a corporation is not a citizen and that a court must look to the individuals who compose it. It reversed course in 1844 in Louisville, C. & C. R. Co. v. Letson, which treated a corporation as capable of being a citizen of the State that created it, and Congress later added the principal place of business to the statute.⁵ Nothing comparable exists for any other entity. Having established special treatment for corporations, the Court said, it would leave the rest to Congress.⁶

The second premise had even less support in precedent than the first.⁷ Arkoma stressed that only the general partners manage the assets, control the litigation, and bear liability for the partnership’s debts. Yet the Court had always stated its rule in terms of all the members: “all the members,” “the several persons composing such association,” and “each of its members.”⁸ Arkoma’s reliance on Navarro Savings Assn. v. Lee fared no better. Eight individual trustees of a Massachusetts business trust had sued in their own names, and the defendant argued that the beneficiaries, not the trustees, were the real parties to the controversy. Navarro asked which natural persons were the real parties. It did not ask whether an artificial entity is a citizen, which is the question a partnership suing in its own name presents.⁹ The Court therefore rejected the contention that a court may consult the citizenship of fewer than all of an entity’s members.¹⁰

Justice O’Connor, dissenting, would have asked a different question. She would have applied the real-party-to-the-controversy test and counted only the members who control the subject of the dispute and the litigation over it, which would have excluded limited partners, who neither run the business nor direct the suit.¹¹ She also objected that the majority professed deference to Congress while deciding the issue itself, because it announced a rule that counts every member without analyzing the particular entity.¹² The majority answered her attempt to distinguish its earlier decisions on the ground that their records said nothing about control. Because diversity is a jurisdictional requirement, it said, the Court is always “called upon to decide” it, so those decisions could not be set aside as silent on the point.¹³ The two opinions mark a real choice. The majority’s line is mechanical and counts every member; the dissent’s line is functional and asks what each member does. The majority’s line is the law.

The two halves of the majority’s rule rest on different reasons. Refusing to make a partnership a citizen of its State of organization rests on text and history: the statute speaks of citizens, the Court recognized corporations as citizens through a special line of decisions, and nothing similar exists for other entities. Refusing to count only some members rests on administration. A control test would force a court to study the partnership agreement and the governing state law, decide who really runs the business and the lawsuit, and repeat that work for every new form of entity, all before it could say whether it has power to hear the case. The Court called such questions “more readily resolved by legislative prescription than by legal reasoning,” and ones “whose complexity is particularly unwelcome at the threshold stage of determining whether a court has jurisdiction.”¹⁴ It conceded that its result is technical and unresponsive to changing business realities, and that limited partnerships may deserve treatment like corporations. That adjustment, it held, belongs to Congress.¹⁵

The rule keeps a partnership out of federal court only when some member shares a State with an opposing party. A partnership whose roster is entirely diverse from the other side proceeds normally.

The bright line has costs. A plaintiff preparing to sue must learn who all the members are and where each is a citizen, which is hard when membership is not a matter of public record. Members are often business entities themselves, so the inquiry becomes a multi-level search, and a large organization may change its members whenever an interest is sold. Because citizenship is measured on the day of filing, the research must establish who the members were on that day, a rule the later section on time of filing develops.¹⁶ Until Congress moves toward corporate-style treatment of unincorporated associations, the member-by-member rule governs.¹⁷

The third step does the tracing work. A partner that is itself a partnership contributes no State of its own and sends the court on to that partner’s members, and the search continues through each layer until it reaches individuals, whose domicile fixes their citizenship, and corporations, which are citizens of every State of incorporation and of the State of their principal place of business.¹⁸

Two instincts lose points on partnership problems. The first treats the partnership like a corporation and asks where it was organized and where it keeps its main office, although the Court refused to make a partnership a citizen of its State of organization and the principal-place-of-business inquiry belongs to the corporate rule. The second asks which partners run the business and ignores the rest, which is the general-partners-only approach the Court rejected.¹⁹ The Court reaffirmed the all-members approach in 2016 in Americold Realty Trust v. ConAgra Foods, Inc.²⁰ Congress has changed the rule for one setting. When a court exercises jurisdiction under the Class Action Fairness Act, an unincorporated association is deemed a citizen of the State where it has its principal place of business and the State under whose laws it is organized, a point the later section on class actions develops.²¹ The next subsection applies the member-citizenship rule to limited liability companies, which look like corporations but follow the partnership rule.

Limited Liability Companies

A limited liability company is a citizen of every State of which any of its members is a citizen. Section 1332(c)(1) says nothing about LLCs, and its charter-plus-headquarters formula reaches only corporations.²² The corporate formula tempts litigants anyway, because a state statute creates an LLC much as it creates a corporation and calls its owners members. In Belleville Catering Co. v. Champaign Market Place LLC, the Seventh Circuit rejected the analogy. Unincorporated enterprises, it explained, are analogized to partnerships, which take the citizenship of every general and limited partner, and LLCs are citizens of every State of which any member is a citizen.²³ The holding applies the rule of Carden v. Arkoma Associates.

Belleville shows how the error arises and what it costs. Counsel and the magistrate judge had assumed that an LLC is treated like a corporation and is therefore a citizen of its State of organization and its principal place of business, and the court called that assumption wrong.²⁴ Once the court asked who the LLC’s members were, counsel reported that several were Illinois citizens, and the corporate plaintiff turned out to be incorporated in Illinois rather than Missouri. Citizens of Illinois thus stood on both sides of the suit, which could not proceed under § 1332, and the court placed part of the blame on both sides for assuming that an LLC resembles a corporation.²⁵ A complaint that recites an LLC’s State of organization and principal place of business therefore pleads nothing about its citizenship. The pleader must identify the members and the State of each.

Several reasons support classifying an LLC as an unincorporated association. Congress wrote § 1332(c)(1) for corporations, and the Supreme Court has refused to extend corporate-style citizenship to other entities, leaving that change to Congress.²⁶ Courts of appeals found that an LLC resembles a limited partnership closely enough to take its members’ citizenship, and the Eighth Circuit reasoned in just that way.²⁷ Federal courts also treat LLCs like partnerships because state law does not call them corporations, even though they resemble corporations in some respects.²⁸ When the Supreme Court addressed the point in Grupo Dataflux v. Atlas Global Group, L.P., it noted that it had never ruled on the question and that the courts of appeals count the citizenship of each member of an LLC. The case involved a Texas LLC, serving as a limited partnership’s general partner, whose members included Mexican citizens.²⁹

The rule also counts every member, as it does for partnerships. The Court insists on counting all the partners of a limited partnership even though the general partners manage the business and the limited partners resemble shareholders, so an LLC’s passive investors count as fully as its managers.³⁰

An exam stem that describes a business as incorporated tests the same classification from the other direction, and the diagnostic question is what state law calls the entity. A professional corporation, such as a law or medical practice that has incorporated under a state’s professional-corporation statute, is a corporation under that statute. Section 1332(c)(1) therefore gives it citizenship in its State of incorporation and the State of its principal place of business only, and the citizenship of its shareholder-professionals does not enter the count.³¹

The two groups have the same owners, the same office, and the same dispute, so the label that state law attaches to the entity is the only fact that moved the answer.

Many LLC members are themselves entities, and the member rule then applies again at each layer. In Belleville, one member of the defendant was another LLC that asserted confidentiality for its own members, and the court answered that it is not possible to litigate under the diversity jurisdiction with details kept confidential from the judiciary.³² The same tracing arose in Grupo Dataflux, where the Court observed that the Texas LLC general partner, like the two Mexican-citizen limited partners, arguably spoiled diversity at the outset.³³ The chain ends only at members whose citizenship can be fixed directly: an individual counts in the State of domicile, a corporation counts in every State of incorporation and in the State of its principal place of business, and a partnership or LLC sends the court on to its own members.³⁴

The third step carries a date, because jurisdiction turns on the parties’ citizenship on the day of filing, so the research must establish who the members were on that day.³⁵ It also carries a duty. Lawyers for defendants as well as plaintiffs must investigate rather than assume jurisdiction, and they must first learn the legal rules that determine whose citizenship matters. An entity that claims confidentiality for its members’ identities and citizenships is poorly placed to say it believed in good faith that complete diversity existed.³⁶

The Class Action Fairness Act supplies the one exception noted above: under it, an unincorporated association, which would include an LLC, is deemed a citizen of its State of organization and the State of its principal place of business.³⁷