Fred Witt PLC, Phoenix Federal Tax Attorney
   

July 2014

LLC Alert: Don’t Be Blindsided by the Problem of LLC Federal District Court Jurisdiction

With the barriers to obtaining federal district court jurisdiction significantly higher for LLCs, members should consider whether there are options to state court.

Fred Witt

 

Fred Witt

 

For a variety of reasons, a limited liability company may desire to litigate disputes in federal district court instead of state court. However, in order to do so, an LLC must establish the required 28 USC 1332 "diversity jurisdiction" — that the case is between citizens of different states. If the plaintiff and defendant are citizens of the same state, there is no diversity. This will be problematic for LLCs to establish because, unlike a corporation, an LLC is not recognized as an entity citizen. Instead, an LLC is treated as a partnership, meaning, it is a citizen of each state in which its members are citizens. See Johnson v. Columbia Props. Anchorage LP, 437 F.3d 894 (9th Cir. 2006).

An LLC seeking to establish federal district court jurisdiction must undertake an extensive effort to determine the citizenship of each member. If there is no diversity (where the LLC is a plaintiff or defendant) or if any member is a forum defendant — a citizen of the state in which the action is brought (where the LLC is a defendant) — there is no diversity jurisdiction. Thus, if an LLC is sued as a defendant in state court in which it has a citizen-member, the action must remain in state court and cannot be removed. See 28 USC 1441(b)(2); Ibarra v. Protective Life Ins. Co., 2009 WL 1651292 (D. Ariz. Jun. 12, 2009).

Example: An Oklahoma corporation sues an Arizona LLC for $100,000 owed under a contract in Arizona state court. One LLC member is a citizen of the State of Arizona. The LLC will be deemed a forum defendant and cannot remove the action to federal district court. The dispute will be resolved in the Superior Court of Arizona.

Example: An Oklahoma LLC (with a Texas citizen member) sues an Arizona LLC (with a Texas citizen member) in Texas state court. Since an LLC is a citizen of each state in which its members are citizens, both the plaintiff and defendant LLCs are citizens of Texas and there is no diversity jurisdiction. The dispute will be resolved in Texas state court.

With the barriers to obtaining federal district court jurisdiction significantly higher for LLCs, members should consider whether there are options to state court.