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Seventh Circuit: Even One Stateless Partner to a Partnership Defeats Diversity Jurisdiction

On Behalf of | Jun 25, 2021 | Firm News

Over the last decade on the Hoosier Litigation Blog, the perennial champion for most-read post has been Federal Diversity Jurisdiction and the “Gaping Hole Problem”. At the core of that discussion is the statute that establishes diversity jurisdiction in federal courts: 28 U.S.C. § 1332. It has long been my belief that the post was as heavily trafficked as it has been due to it providing an approachable explanation of what was called the gaping hole problem in diversity jurisdiction, which remains a matter studied by many (if not most all) law students. The opinion that provides the primary focus for today’s discussion, however, has caused me to rethink that assumption and acknowledge that it might just be that the hiding complexities of Section 1332 remain ever present, with guidance being sought from all corners of the legal community.

For this discussion, we turn our attention to the Seventh Circuit’s opinion in Page v. Democratic National Committee. Although enveloped in hot-button political issues, it is not the political intrigue of the opinion that places it in our crosshairs. Instead, it is the court’s jurisdictional analysis and troublesome procedural outcome that draws our focus. The court summarized the key question as: “whether a partnership—here [a] law firm [ ]—made up of at least one, individual ‘stateless citizen’ partner can be sued in diversity.” To avoid hiding the ball, the court answers that question: “We conclude that it cannot.”

Before peeling back the layers of the onion that is Page, we pause, as we often do, to acknowledge a few other notable cases from this week. Also from the Seventh Circuit, Loughran v. Wells Fargo Bank, N.A., noted an important and easily overlooked aspect of federal appellate practice. Addressing the propriety of a federal district court’s decision to stay an action brought before it while a substantially similar matter was pending in state court, the Seventh Circuit observed that the order may be directly appealable in accordance with 28 U.S.C. § 1291. Looking to Moses H. Cone Memorial Hospital v. Mercury Construction Corp., the court recognized “that a stay of federal litigation pending the resolution of a state suit was final for the purposes of section 1291 where the federal and state actions ‘involved [an] identical issue’ and that issue was ‘the only substantive issue present in the federal suit.’” While that recognition would have broken no new ground, what makes Loughran particularly notable was the court’s conclusion that “appellate jurisdiction over stay orders is not limited to situations in which the state court will finally decide the federal court claims with preclusive effect, as was the case in Moses Cone. Rather, jurisdiction under section 1291 extends to cases in which there remains some chance that the case will return to federal court to dispose of residual issues. The key question for jurisdictional purposes is whether the ‘object of the stay order is to require all or an essential part of the federal suit to be litigated in a state forum.’”

Shifting over to the Eleventh Circuit, we next look to Goodloe v. Royal Caribbean Cruises, Ltd. The case turned on a choice-of-law question where the plaintiff died aboard a cruise ship docked in Alaska. The decedent was from Wisconsin and the cruise line was headquartered in Florida. The court found that the death having occurred in navigable waters subjected it to general maritime law but “[g]eneral maritime law does not, however, provide a comprehensive remedy for all deaths that occur in state territorial waters. Instead, state statutes may supplement maritime law and allow for remedies beyond those afforded by maritime law alone.” After a thorough analysis, the court ruled that the more favorable provisions of Florida law governed the claims instead of Wisconsin law.

We now take a quick peek to the Indiana Court of Appeals’ Howard County Sheriff’s Department v. Duke opinion. Finding that the governmental defendant had not carried its hefty burden to establish entitlement to an affirmative defense at summary judgment, the court ruled that there were sufficient questions of fact as to whether the operators of an emergency 911 system engaged in willful or wanton misconduct in sending emergency-rescue personnel to the wrong apartment complex, allowing the emergency caller to die. The governmental defendant invoked immunity under the Indiana Tort Claims Act (Ind. Code § 34-13-3-3(a)(19)). That immunity, however, is curtailed by Ind. Code § 36-8-16.7-43 by “willful or wanton misconduct.” Given the high burden for summary judgment in Indiana state courts, the court of appeals affirmed denial of summary judgment.

That brings us back to the Page decision. We need to begin with a brief description of how diversity jurisdiction works. Put simply, federal courts have jurisdiction under Section 1332 so long as the amount in controversy exceeds $75,000 and there is complete diversity of citizenship. What is meant by complete diversity of citizenship is that no plaintiff can be from the same state as any defendant. Multiple plaintiffs or multiple defendants may be from the same state as each other, but there cannot be a single state in common between any plaintiff and any defendant. The same applies to when a party is a citizen of a “foreign state.”

The analysis does not, however, end there. Things get complicated when business entities are tossed into the mix. As the Seventh Circuit explained:

When it comes to corporations, however, the diversity statute itself makes clear that a corporation is a citizen of both its state of incorporation and the state in which it maintains its “principal place of business.” The Supreme Court has determined that a corporation’s principal place of business is the same as its “nerve center,” or “the place where the corporation’s high level officers direct, control, and coordinate the corporation’s activities.”

Determining the citizenship of other forms of business associations is often more difficult. Partnerships, for example, are citizens of every state in which an individual partner is a citizen. The same rule applies to other unincorporated entities, like limited liability companies, whose citizenship is also determined by the citizenship of its “members.” Think about the size of many of today’s partnerships, whether law firms, accounting firms, consulting firms, and so on. It is often no easy task for a plaintiff to discern the domicile (and, by extension, citizenship) of each partner or member.

Were that level of complexity not already enough, there is a third category other than citizen of a state or a foreign citizen:

Add another layer of complexity. Some individuals or entities are not considered to be citizens of any state. Recall that the diversity statute creates jurisdiction only over suits between citizens of different states, citizens of a state and a foreign citizen, or foreign citizens living in the United States. The Supreme Court has interpreted this statutory list to exclude United States citizens who are domiciled abroad. Such individuals are not “citizens” of any state for purposes of the statute because they are not domiciled in a state. They are, in a word, “stateless.” Nor, of course, would United States citizens living in another nation fall within the statute’s understanding of “foreign citizens.” It takes more than living abroad to be a citizen of the foreign nation.

Now you may be settling in on the problem at issue in Page. There, a defendant was a massive law firm, registered as a limited liability partnership, with three partners who are U.S. citizens residing in China. Those three partners are stateless. If, as we just saw, a limited liability partnership’s citizenship is determined by the citizenship of its partners, those three partners could render the entire law firm “stateless.”

The Supreme Court has not explicitly answered this question. But the Court has held both that a stateless citizen cannot be sued in diversity and that the citizenship of a partnership is based on the citizenship of each individual partner. Whether reading these two rules together requires finding that a partnership composed of at least one stateless citizen is itself stateless—a concept we refer to as attribution of statelessness—remains unresolved by the Court.

Joining with the First, Second, Third, and Fifth Circuits, the Seventh Circuit ruled “a single stateless partner destroys diversity just as much as would a partner residing in the same state as a plaintiff.” (An interesting note on the First Circuit’s decision, Judge Ripple from the Seventh Circuit was sitting on the panel by designation. Similarly, Senior Judge Tashima of the Ninth Circuit authored the Third Circuit’s opinion.)

In light of Supreme Court precedent, I think the Seventh Circuit reached the correct conclusion. That said, I think it is beyond time for an amendment to Section 1332 to treat registered business entities such as limited liability partnerships and limited liability companies the same as corporations to avoid the litany of issues under the current iteration of the diversity jurisdiction.

Join us again next time for further discussion of developments in the law.


*Disclaimer: The author is licensed to practice in the state of Indiana. The information contained above is provided for informational purposes only and should not be construed as legal advice on any subject matter. Laws vary by state and region. Furthermore, the law is constantly changing. Thus, the information above may no longer be accurate at this time. No reader of this content, client or otherwise, should act or refrain from acting on the basis of any content included herein without seeking appropriate legal or other professional advice on the particular facts and circumstances at issue.