Lincoln Benefit Life Co v. AEI Life LLC , 800 F.3d 99 ( 2015 )

PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 14-2660
LINCOLN BENEFIT LIFE COMPANY,
Appellant
v.
AEI LIFE, LLC; ALS CAPITAL VENTURES, LLC; JOEL
JACOB; INNOVATIVE BROKERS; JRJ SERVICES, INC.
_____________
On Appeal from the United States District Court
for the District of New Jersey
(D.C. Civ. No. 3-13-cv-04117)
District Judge: Honorable Freda L. Wolfson
_____________
Argued: January 14, 2015
Before: AMBRO, FUENTES, and ROTH, Circuit Judges
(Opinion Filed: September 2, 2015)
Jason P. Gosselin ARGUED
Katherine L. Villanueva
Drinker Biddle & Reath LLP
One Logan Square, Suite 2000
Philadelphia, PA 19103
Attorneys for Appellant
Ira S. Lipsius, Esq. ARGUED
Lipsius-BenHaim Law LLP
80-02 Kew Gardens Road, Suite 1030
Kew Gardens, New York 11415
Attorney for Appellee Innovative Brokers
OPINION OF THE COURT
FUENTES, Circuit Judge.
A plaintiff who files suit in federal court may face
significant difficulties when jurisdiction is premised on
diversity and the defendant is an unincorporated association
such as a partnership or limited liability company (“LLC”).
The members of the association determine its citizenship, but
these members may be unknown to the plaintiff even after a
diligent pre-filing investigation. The plaintiff may tentatively
assert that complete diversity exists, but whether this
assertion survives a motion to dismiss depends entirely on the
pleading standard that the court chooses to apply. We hold
that a plaintiff need not affirmatively allege the citizenship of
each member of an unincorporated association in order to get
past the pleading stage. Instead, if the plaintiff is able to
allege in good faith, after a reasonable attempt to determine
the identities of the members of the association, that it is
diverse from all of those members, its complaint will survive
a facial challenge to subject-matter jurisdiction. If the
defendant thereafter mounts a factual challenge, the plaintiff
2
is entitled to limited discovery for the purpose of establishing
that complete diversity exists.
I. Background
Lincoln Benefit Life Company filed a federal
complaint seeking a declaratory judgment voiding two $6.65
million life insurance policies. Lincoln Benefit alleges that
these policies were procured by fraud and for the benefit of
third-party investors who have no prior relationship to the
individual whose life is the subject of the policies. According
to the complaint, this sort of “stranger originated life
insurance” or “STOLI” scheme generally violates state
insurable-interest laws and the public policy against wagering
on human life.
The defendants identified in Lincoln Benefit’s
complaint included a corporation named Innovative Brokers,
which was involved in the procurement of the policies, and
two LLCs that were the record owners and beneficiaries of
the policies: AEI Life, LLC and ALS Capital Ventures, LLC.
Federal subject-matter jurisdiction was premised on
diversity of citizenship. Accordingly, Lincoln Benefit
included the following allegations in its complaint:
7. Plaintiff Lincoln Benefit is a citizen of the
State of Nebraska. Lincoln Benefit is a life
insurance company organized and existing
under the laws of Nebraska, with its principal
place of business at 2940 South 84th Street,
Lincoln, NE 68506.
3
8. Upon information and belief, Defendant AEI
Life, LLC is a citizen of and is domiciled in
New York, and Defendant AEI Life, LLC
maintains its principal address at 1428 36th
Street, Ste. 219, Brooklyn, New York 11218.
Defendant AEI Life, LLC is the record owner
of Policy No. 01N1404934.
9. Upon information and belief, Defendant ALS
Capital Ventures, LLC is a citizen of and
domiciled in the State of Delaware. Defendant
ALS Capital Ventures is the record owner of
Policy No. 01N1404844.1
The defendants filed motions to dismiss for, among
other things, lack of subject-matter jurisdiction. Their primary
argument was that Lincoln Benefit had failed to adequately
plead diversity jurisdiction: an LLC’s citizenship is
determined by the citizenship of its members, and Lincoln
Benefit had not alleged the citizenship of the members of the
LLC defendants.
In response, Lincoln Benefit pointed out that none of
the defendants had asserted that it was a citizen of Nebraska.
It further argued that because “information concerning the
citizenship of the members of the defendant-LLCs is not
available to Lincoln Benefit,” it should not be required to
plead that information with specificity.2 Lincoln Benefit’s
1
(App. Vol. II at 2-3.)
2
(Resp. to Innovative Broker’s Mot. to Dismiss, ECF No. 26
at 7.) All ECF citations refer to the District Court’s docket.
4
counsel responded that it “was unable to discern the identity
and/or citizenship of Defendant AEI Life, LLC and
Defendant ALS Capital Ventures, LLC. Counsel for Lincoln
Benefit searched public databases, civil dockets, and various
business-related search engines, including the New York
Secretary of State website.”3 Lincoln Benefit reiterated,
however, that “based on publicly available information, none
of the defendants is a citizen of Nebraska.”4
In support of this allegation, Lincoln Benefit provided
the District Court with certain documents it had consulted.
The New York Department of State record for AEI Life, LLC
indicated that it was organized in New York, and the only
addresses and business associates listed were located in New
York. Similarly, the Delaware Secretary of State record for
ALS Capital Ventures, LLC indicated connections only to
Delaware. Lincoln Benefit explained that because it “did not
have first-hand knowledge of the information supporting the
citizenship designations (i.e., its allegations were based on
public records), Lincoln Benefit prefaced its allegations ‘upon
information and belief.’”5 It contended that in light of the
above, it had adequately pleaded diversity. In the alternative,
it requested leave for limited jurisdictional discovery.
The docket number assigned by the District of New Jersey to
this action is 3:13-cv-04117.
3
(Aff. of Katherine Villanueva, ECF No. 26-1 at 2 ¶ 6.)
4
(Resp. to AEI Life, LLC’s Mot. to Dismiss, ECF No. 34 at
2.)
5
(Id. at 5.)
5
The District Court granted the defendants’ motions in
part and dismissed the complaint without prejudice for lack of
subject-matter jurisdiction. Citing Johnson v. SmithKline
Beecham Corp.,6 it held that Lincoln Benefit was required to
allege the citizenship of each member of each defendant LLC
in order to plead complete diversity. In addition, it denied the
request for jurisdictional discovery, reasoning that it would
waste judicial resources and amount to an impermissible
exercise of jurisdiction to order discovery when the plaintiff
had not adequately alleged jurisdiction in the first place.
On appeal, Lincoln Benefit maintains that its
jurisdictional allegations were sufficient and that the District
Court erroneously imposed a heightened pleading standard.
Only Innovative Brokers filed a brief defending the District
Court’s decision; neither the LLCs nor any other defendant
has chosen to participate in this appeal.7
II. Discussion
A. General Principles of Diversity Jurisdiction
“The principal federal statute governing diversity
jurisdiction, 28 U.S.C. § 1332, gives federal district courts
6
724 F.3d 337 (3d Cir. 2013).
7
“We have jurisdiction pursuant to 28 U.S.C. § 1291 over a
dismissal for lack of subject matter jurisdiction, and our
review for lack of subject matter jurisdiction is plenary.”
Swiger v. Allegheny Energy, Inc., 540 F.3d 179, 180 (3d Cir.
2008).
6
original jurisdiction of all civil actions ‘between . . . citizens
of different States’ where the amount in controversy exceeds
$75,000.”8 For over two hundred years, the statute has been
understood as requiring “complete diversity between all
plaintiffs and all defendants,” even though only minimal
diversity is constitutionally required.9 This means that, unless
there is some other basis for jurisdiction, “no plaintiff [may]
be a citizen of the same state as any defendant.”10
“Most rules of citizenship are well established. A
natural person is deemed to be a citizen of the state where he
is domiciled. A corporation is a citizen both of the state where
it is incorporated and of the state where it has its principal
place of business.”11 But unlike corporations, unincorporated
associations such as partnerships “are not considered
‘citizens’ as that term is used in the diversity statute.”12
Instead, “the citizenship of partnerships and other
8
Lincoln Prop. Co. v. Roche, 546 U.S. 81, 89 (2005)
(alteration in original) (quoting 28 U.S.C. § 1332).
9
Id. Although challenges to subject-matter jurisdiction may
be raised at any time, whether diversity exists is determined
by the citizenship of the parties at the time the action is filed.
See Grupo Dataflux v. Atlas Global Grp., L.P., 541 U.S. 567,
570-71 (2004).
10
Zambelli Fireworks Mfg. Co. v. Wood, 592 F.3d 412, 419
(3d Cir. 2010).
11
Id. (citations omitted).
12
Swiger, 540 F.3d at 182 (citing Carden v. Arkoma Assocs.,
494 U.S. 185, 187-92 (1990)).
7
unincorporated associations is determined by the citizenship
of [their] partners or members.”13 The state of organization
and the principal place of business of an unincorporated
association are legally irrelevant.14 “Accordingly, the
citizenship of an LLC is determined by the citizenship of its
members.”15 For complete diversity to exist, all of the LLC’s
members “must be diverse from all parties on the opposing
side.”16
13
Zambelli, 592 F.3d at 420; see also Emerald Investors
Trust v. Gaunt Parsippany Partners, 492 F.3d 192, 200 (3d
Cir. 2007). The “one exception” identified by the Supreme
Court is “the entity known as a sociedad en comandita,
created under the civil law of Puerto Rico, [which is] treated
as a citizen of Puerto Rico for purposes of determining
federal-court jurisdiction.” Carden, 494 U.S. at 189-90.
14
See Carden, 494 U.S. at 192; Johnson, 724 F.3d at 348.
15
Zambelli, 592 F.3d at 420; see also Johnson, 724 F.3d at
348.
16
Swiger, 540 F.3d at 185. Depending on the membership
structure of the LLC, this inquiry can become quite
complicated. “[A]s with partnerships, where an LLC has, as
one of its members, another LLC, ‘the citizenship of
unincorporated associations must be traced through however
many layers of partners or members there may be’ to
determine the citizenship of the LLC.” Zambelli, 592 F.3d at
420 (quoting Hart v. Terminex Int’l, 336 F.3d 541, 543 (7th
Cir. 2003)).
8
B. Challenges to Subject-Matter Jurisdiction
The burden of establishing federal jurisdiction rests
with the party asserting its existence.17 “Challenges to subject
matter jurisdiction under Rule 12(b)(1) may be facial or
factual.”18 A facial attack “concerns ‘an alleged pleading
deficiency’ whereas a factual attack concerns ‘the actual
failure of [a plaintiff’s] claims to comport [factually] with the
jurisdictional prerequisites.’”19
“In reviewing a facial attack, the court must only
consider the allegations of the complaint and documents
referenced therein and attached thereto, in the light most
favorable to the plaintiff.”20 By contrast, in reviewing a
factual attack, “the court must permit the plaintiff to respond
with rebuttal evidence in support of jurisdiction, and the court
then decides the jurisdictional issue by weighing the
17
DaimlerChrysler Corp. v. Cuno, 547 U.S. 332, 342 n.3
(2006).
18
Common Cause of Pa. v. Pennsylvania, 558 F.3d 249, 257
(3d Cir. 2009) (quoting Taliaferro v. Darby Twp. Zoning Bd.,
458 F.3d 181, 188 (3d Cir. 2006)).
19
CNA v. United States, 535 F.3d 132, 139 (3d Cir. 2008)
(alterations in original) (quoting United States ex rel.
Atkinson v. Pa. Shipbuilding Co., 473 F.3d 506, 514 (3d Cir.
2007)).
20
Gould Elecs. Inc. v. United States, 220 F.3d 169, 176 (3d
Cir. 2000).
9
evidence. If there is a dispute of a material fact, the court
must conduct a plenary hearing on the contested issues prior
to determining jurisdiction.”21
If the defendants here had challenged the factual
existence of jurisdiction, Lincoln Benefit would have been
required to prove by a preponderance of the evidence, after
discovery, that it was diverse from every member of both
defendant LLCs. Instead, however, the defendants mounted a
facial challenge to the adequacy of the jurisdictional
allegations in Lincoln Benefit’s complaint. We therefore turn
to the pleading requirements for diversity jurisdiction.
C. Pleading Diversity Jurisdiction
The District Court held that Lincoln Benefit was
required to “plead the citizenship of each member of the
defendant LLCs and allege that these citizenships differ from
that of [Lincoln Benefit].”22 Although it cited Johnson v.
SmithKline Beecham Corp.23 for this proposition, Johnson
involved a factual challenge to diversity jurisdiction and did
not address pleading requirements.
The requirement that a plaintiff plead the basis for
federal jurisdiction appears in Federal Rule of Civil
Procedure 8(a)(1), which requires the complaint to provide “a
21
McCann v. Newman Irrevocable Trust, 458 F.3d 281, 290
(3d Cir. 2006) (citations omitted).
22
(App. Vol. I at 16.)
23
724 F.3d 337.
10
short and plain statement of the grounds for the court’s
jurisdiction.” Beyond stating that the jurisdictional allegations
should be “short and plain,” the Rule does not specify the
level of detail required to adequately plead the “grounds” for
federal jurisdiction. There are, however, a number of other
guideposts that we may consult in deciding the issue.24
The Appendix to the Rules contains forms that “suffice
under the[] rules and illustrate the simplicity and brevity that
the[] rules contemplate.”25 Form 7, entitled “Statement of
24
Supreme Court cases predating the Federal Rules of Civil
Procedure suggest that a plaintiff must affirmatively plead the
citizenship of each member of an unincorporated association.
See Thomas v. Bd. of Trs. of Ohio State Univ., 195 U.S. 207,
217-18 (1904); Great S. Fire Proof Hotel Co. v. Jones, 177
U.S. 449, 458 (1900); Chapman v. Barney, 129 U.S. 677,
681-82 (1889). But the case before us requires us to construe
Rule 8, which represented a significant departure from the
stringent pleading requirements that preceded it. See Ashcroft
v. Iqbal, 556 U.S. 662, 678-79 (2009); Bell Atlantic Corp. v.
Twombly, 550 U.S. 544, 573-76 (2007) (Stevens, J.
dissenting); Swierkiewicz v. Sorema N. A., 534 U.S. 506, 512-
14 (2002).
25
Fed. R. Civ. P. 84; see also Swierkiewicz, 534 U.S. at 513
n.4. On April 29, 2015, the Supreme Court submitted to
Congress its Proposed Amendments to the Federal Rules of
Civil Procedure, which abrogate Rule 84 and the
accompanying forms. Absent contrary congressional action,
these Proposed Amendments will go into effect on December
1, 2015. Given that the forms are currently in effect, we find
11
Jurisdiction,” contains sample allegations that establish
federal subject-matter jurisdiction.26 According to these
samples, a plaintiff may simply allege that a party is a
“citizen of [a certain state].”27 In the case of a corporation, the
state of incorporation and principal place of business should
be alleged, as the corporation is a citizen of both states.28
Form 7 does not, however, show how to plead the citizenship
of an unincorporated association. It would certainly be
enough to list the states of citizenship of each member of the
unincorporated association; even the most convoluted
association is, at bottom, made up of natural persons and/or
corporations, for which bare allegations of citizenship suffice.
But Form 7 does not indicate that such a list is required.
Our precedent is more instructive, as we have
previously held that a plaintiff may plead diversity
jurisdiction without making affirmative allegations of
citizenship. In Lewis v. Rego Co.,29 all of the plaintiffs were
Pennsylvania citizens. Three of four defendants filed a
removal petition, as the fourth had not yet entered an
appearance. The petition affirmatively stated the citizenship
of the three defendants who had entered an appearance. In
addition, on the basis of information obtained from the fourth
it useful to consider them, but we do not rely on them in
reaching our ultimate conclusion.
26
Fed. R. Civ. P. Form 7.
27
Id.
28
See id.; 28 U.S.C. § 1332(c)(1).
29
757 F.2d 66 (3d Cir. 1985).
12
defendant, the petition alleged “on information and belief”
that the fourth defendant was not a citizen of Pennsylvania.
We held that these allegations sufficed to establish diversity.30
Thus, rather than affirmatively alleging the citizenship
of a defendant, a plaintiff may allege that the defendant is not
a citizen of the plaintiff’s state of citizenship.31 Permitting
30
See id. at 68-69. The fact that this was a removal case
makes no difference, as the relevant language of the removal
statute tracks the language of Rule 8(a). See Dart Cherokee
Basin Operating Co., LLC v. Owens, 135 S. Ct. 547, 553
(2014) (noting that both 28 U.S.C. § 1446(a) and Rule 8(a)
require “a short and plain statement of the grounds” for
federal jurisdiction); Lewis, 757 F.2d at 68 (noting that the
version of § 1446(a) then in force required “a short and plain
statement of the facts which entitled [the defendant] to
removal”).
31
In a later case, we noted that “in a diversity action, the
plaintiff must state all parties’ citizenships such that the
existence of complete diversity can be confirmed.” Chem.
Leaman Tank Lines, Inc. v. Aetna Cas. & Sur. Co., 177 F.3d
210, 222 n.13 (3d Cir. 1999). Because we did not confront the
situation presented in Lewis, however, this broad statement
cannot be interpreted as implicitly overruling that decision,
even if that were possible. See United States v. Joseph, 730
F.3d 336, 341 (3d Cir. 2013) (holding that normally we
follow the earlier of conflicting decisions).
Separately, we note that in Lewis we deemed it
permissible to make allegations of citizenship “on
information and belief.” The motions to dismiss Lincoln
Benefit’s complaint argued that these sorts of qualified
13
this sort of negative allegation makes good sense. The fact
that the plaintiff and defendant do not share a state of
citizenship usually establishes diversity.32 Consequently, it
serves little purpose to require the plaintiff to allege the
defendant’s precise state of citizenship, especially when this
would entail a difficult factual investigation prior to filing.33
We see no reason why Lewis should not apply in the
context of unincorporated associations. A State X plaintiff
allegations were insufficient. As Innovative Brokers does not
renew this argument on appeal, we need not address it.
Several Courts of Appeals accept allegations “on information
and belief” when the facts at issue are peculiarly within the
defendant’s possession. See Carolina Cas. Ins. Co. v. Team
Equip., Inc., 741 F.3d 1082, 1087 (9th Cir. 2014); Pirelli
Armstrong Tire Corp. Retiree Med. Benefits Trust v.
Walgreen Co., 631 F.3d 436, 442-43 (7th Cir. 2011); Medical
Assur. Co. v. Hellman, 610 F.3d 371 (7th Cir. 2010); Arista
Records, LLC v. Doe 3, 604 F.3d 110, 120 (2d Cir. 2010). As
Lincoln Benefit argues, and Innovative Brokers concedes,
information regarding the membership of the defendant LLCs
is uniquely within their possession.
32
If, however, the other party is an American citizen
domiciled abroad, he or she is “stateless” for purposes of the
diversity statute and cannot be sued in federal court based on
diversity jurisdiction. See Swiger, 540 F.3d at 184.
33
Cf. 5 Charles Alan Wright et al., Federal Practice and
Procedure: Federal Rules of Civil Procedure § 1208 (3d ed.,
updated 2013) (making a similar argument with respect to
alleging the principal place of business of a corporation).
14
may therefore survive a facial challenge by alleging that none
of the defendant association’s members are citizens of State
X.34 Significantly, however, the plaintiff is permitted to make
such an allegation even if it is not certain of the association’s
membership. In order to satisfy its obligations under Rule 11,
a party must conduct a reasonable inquiry into the facts
alleged in its pleadings.35 Thus, before alleging that none of
an unincorporated association’s members are citizens of a
particular state, a plaintiff should consult the sources at its
disposal, including court filings and other public records. If,
after this inquiry, the plaintiff has no reason to believe that
any of the association’s members share its state of citizenship,
it may allege complete diversity in good faith. The
unincorporated association, which is in the best position to
ascertain its own membership, may then mount a factual
34
To be sure, in two cases where unions were parties, we
faulted the plaintiffs for asserting complete diversity while
failing to identify the unions’ members and plead their
citizenships. See Local No. 1 (ACA) Broad. Emps. of the Int’l
Bhd. of Teamsters, Chauffeurs, Warehousemen & Helpers of
Am. v. Int’l Bhd. of Teamsters, Chauffeurs, Warehousemen &
Helpers of Am., 614 F.2d 846, 853 (3d Cir. 1980);
Underwood v. Maloney, 256 F.2d 334, 338-39 (3d Cir. 1958).
These cases do not govern the question presented to us,
however, as the plaintiffs there did not make negative
allegations of the sort we approved in Lewis or allege that
they could not ascertain the unions’ memberships without
discovery.
35
See Forbes v. Eagleson, 228 F.3d 471, 488 (3d Cir. 2000).
15
challenge by identifying any member who destroys
diversity.36
We believe that allowing this method of pleading
strikes the appropriate balance between facilitating access to
the courts and managing the burdens of discovery. District
courts have the authority to allow discovery in order to
determine whether subject-matter jurisdiction exists.37 Rule
8(a)(1), however, serves a screening function: only those
plaintiffs who have provided some basis to believe
jurisdiction exists are entitled to discovery on that issue.38
36
Of course, where the unincorporated association is the
proponent of diversity jurisdiction, there is no reason to
excuse it of its obligation to plead the citizenship of each of
its members. See, e.g., Underwriters at Lloyd’s, London v.
Osting-Schwinn, 613 F.3d 1079, 1088-89 (11th Cir. 2010);
Barclay Square Properties v. Midwest Fed. Sav. & Loan
Ass’n of Minneapolis, 893 F.2d 968, 969 (8th Cir. 1990).
37
See Oppenheimer Fund, Inc. v. Sanders, 437 U.S. 340, 351
& n.13 (1978); Johnson, 724 F.3d at 340 n.1; Emerald
Investors Trust, 492 F.3d at 208.
38
See, e.g., Baer v. United States, 722 F.3d 168, 177 (3d Cir.
2013) (affirming a Rule 12(b)(1) dismissal and the denial of
jurisdictional discovery because the appellant had not
adequately alleged subject-matter jurisdiction under the
Federal Tort Claims Act). Moreover, although Rule 8(a)(1)
does not appear to govern the pleading of personal
jurisdiction, see Fed. R. Civ. P. Form 7; Caribbean Broad.
Sys., Ltd. v. Cable & Wireless P.L.C., 148 F.3d 1080, 1090
(D.C. Cir. 1998); Stirling Homex Corp. v. Homasote Co., 437
16
The corollary of this principle is that a plaintiff need not
allege an airtight case before obtaining discovery.
Depriving a party of a federal forum simply because it
cannot identify all of the members of an unincorporated
association is not a rational screening mechanism. The
membership of an LLC is often not a matter of public
record.39 Thus, a rule requiring the citizenship of each
F.2d 87, 88 (2d Cir. 1971), our decisions in the personal-
jurisdiction context also support the notion that jurisdictional
discovery is not available merely because the plaintiff
requests it. In Eurofins Pharma US Holdings v. BioAlliance
Pharma SA, for example, we required sufficient allegations of
personal jurisdiction in order to prevent “a fishing expedition
. . . under the guise of jurisdictional discovery.” 623 F.3d 147,
157 (3d Cir. 2010).
39
Indeed, many cases note the absence of publicly available
information regarding the membership of LLCs. See Carolina
Cas. Ins. Co., 741 F.3d at 1087; Rooflifters, LLC v. Nautilus
Ins. Co., No. 13 C 3251, 2013 WL 3975382, at *4 (N.D. Ill.
Aug. 1, 2013); WMCV Phase, LLC v. Tufenkian Carpets Las
Vegas, LLC, No. 2:12-cv-01454-RCJ, 2013 WL 1007711, at
*3 (D. Nev. Mar. 12, 2013); Pinson v. 45 Dev., LLC, No.
2:12-CV-02160, 2012 WL 4343494, at *3 (W.D. Ark. Sept.
21, 2012); Chesapeake Louisiana, LP v. Creamer Prop.
Mgmt., LLC, Civil Action No. 09-cv-0370, 2009 WL 653796,
at *1 (W.D. La. Mar. 11, 2009); Ypsilanti Cmty. Utils. Auth.
v. MeadWestvaco Air Sys., LLC, No. 07-CV-15280, 2008 WL
2397651, at *3 (E.D. Mich. June 9, 2008); see also Carter G.
Bishop & Daniel S. Kleinberger, Limited Liability
Companies: Tax and Business Law ¶ 1.03(3)(b)(ii)(A), 1998
17
member of each LLC to be alleged affirmatively before
jurisdictional discovery would effectively shield many LLCs
from being sued in federal court without their consent. This is
surely not what the drafters of the Federal Rules intended.
Moreover, the benefits of such a stringent rule would
be modest. Jurisdictional discovery will usually be less
burdensome than merits discovery, given the more limited
scope of jurisdictional inquiries.40 It seems to us that in
determining the membership of an LLC or other
unincorporated association, a few responses to interrogatories
will often suffice. So long as discovery is narrowly tailored to
the issue of diversity jurisdiction and parties are sanctioned
for making truly frivolous allegations of diversity, the costs of
this system will be manageable.
We are not the only Court of Appeals to take this
position. The Ninth Circuit confronted facts remarkably
similar to ours in Carolina Casualty Insurance Co. v. Team
Equipment, Inc.41 Carolina Casualty Insurance Co., a citizen
of Iowa and Florida, filed a diversity action seeking a
declaratory judgment that it was not liable under one of its
insurance policies. Two of the defendants were LLCs, but
WL 1169338 at *29. The problem is compounded if the LLC
(or other unincorporated association) has members that are
themselves unincorporated associations, or even many layers
of such members. See Zambelli, 592 F.3d at 420.
40
See In re Auto. Refinishing Paint Antitrust Litig., 358 F.3d
288, 303 (3d Cir. 2004).
41
741 F.3d 1082.
18
Carolina did not allege the citizenship of their members.
When the district court dismissed the complaint sua sponte
for lack of jurisdiction, Carolina filed a motion to alter or
amend the judgment and submitted a proposed amended
complaint.
Carolina advised the court in its moving papers
that it was unable to determine the citizenship
of the LLCs, because their organizational filings
did not list their members. As a result, Carolina
alleged simply that the members of the LLCs
were “citizens of neither Iowa nor Florida.” . . .
Carolina explained in its motion . . . that it had
made efforts to determine the citizenship of the
two LLCs . . . but it was unable to do so from
publicly available information. The business
filings that Carolina submitted to the district
court show[ed] that information necessary to
determining the citizenship of the LLCs could
not be determined from the public filings of
those companies.42
The district court denied the motion, holding that the
proposed amended complaint suffered from the same
jurisdictional defect, among others.
On appeal, the Ninth Circuit recognized that “[t]he
novel issue presented by this case is how a plaintiff may
allege diversity jurisdiction where the facts supporting
42
Id. at 1085, 1087.
19
jurisdiction are not reasonably ascertainable by the
plaintiff.”43 It observed that “Carolina made a showing that at
least some of the information necessary to establish the
diversity of the parties’ citizenship was within the defendants’
control.”44 And it concluded that, under these circumstances
and “at this early stage in the proceedings, a party should not
be required to plead jurisdiction affirmatively based on actual
knowledge.”45 Accordingly, it held that “it was sufficient for
Carolina to allege simply that the defendants were diverse to
it” and that “Carolina should have been permitted to plead its
allegations on the basis of information and belief.”46
The decision of the Ninth Circuit is consistent with our
view that a plaintiff need not affirmatively allege the
citizenship of each member of a defendant LLC if it is unable
to do so after a reasonable investigation.47 If the plaintiff is
43
Id. at 1087.
44
Id.
45
Id.
46
Id.
47
But see Fifty Assocs. v. Prudential Ins. Co. of Am., 446
F.2d 1187, 1190-91 (9th Cir. 1970) (citing Underwood and
other authorities for the proposition that “[t]he citizenship of
each member of an unincorporated association must be
alleged” and rejecting as “mere guesswork” the plaintiff’s
allegations that unknown John Doe defendants were not
citizens of its state of citizenship). Otherwise, we are not
aware of any Court of Appeals decision that expressly rejects
the argument Lincoln Benefit makes here—that where the
20
able to allege in good faith that the LLC’s members are not
citizens of its state of citizenship, its complaint will survive a
facial challenge.
D. The Sufficiency of Lincoln Benefit’s Allegations of
Diversity
Lincoln Benefit’s allegations satisfy this standard.
Taken together, the complaint and opposition to the motions
to dismiss indicate that Lincoln Benefit has a good-faith basis
for alleging that the LLC defendants’ members are not
citizens of Nebraska.
We will exercise our discretion to consider what
Lincoln Benefit said to the District Court in opposition to the
motions to dismiss. Normally, “[i]n reviewing a facial attack,
the court must only consider the allegations of the complaint
and documents referenced therein and attached thereto, in the
light most favorable to the plaintiff.”48 Affidavits and briefs
in opposition do not fall in this category. But Lincoln Benefit
could have amended its complaint to include the information
membership of a defendant association is not reasonably
ascertainable, the plaintiff is excused from identifying each
member of that association.
48
Gould Elecs. Inc., 220 F.3d at 176.
21
contained in those documents,49 and we have the authority to
permit such amendment on appeal.50
The information provided by Lincoln Benefit indicates
that (1) the LLC defendants have connections to New York
and Delaware; (2) counsel for Lincoln Benefit conducted a
reasonable inquiry to determine the membership of the LLC
defendants but found nothing of value; and (3) counsel for
Lincoln Benefit found no connection between the LLC
defendants and Nebraska. On the basis of this information,
Lincoln Benefit alleges that none of the LLCs’ members are
citizens of Nebraska.
It is certainly possible that two LLCs organized and
based in New York and Delaware have at least one member
domiciled in Nebraska. This scenario is not so
overwhelmingly likely, however, that Lincoln Benefit’s
allegation to the contrary can be considered frivolous,
especially when there is no indication that either LLC has any
ties to Nebraska.
Lincoln Benefit has alleged complete diversity in good
faith, and this is enough to survive a facial attack. If
defendants mount a factual challenge to jurisdiction on
49
We do not fault Lincoln Benefit for failing to move to
amend. Given the District Court’s opinion, it would have
been futile to add this information to the complaint.
50
See 28 U.S.C. § 1653 (“Defective allegations of jurisdiction
may be amended, upon terms, in the trial or appellate
courts.”).
22
remand, however, the District Court must permit
jurisdictional discovery in order to ascertain whether
complete diversity exists.
III. Conclusion
For the foregoing reasons, we will vacate the District
Court’s order dismissing the complaint and remand for
further proceedings.
23
Lincoln Benefit Life Co. v. AEI Life, LLC, et al.
No. 14-2660
_________________________________________________
AMBRO, Circuit Judge, with whom FUENTES and ROTH,
Circuit Judge join, concurring.
As we are unanimous in the Court’s opinion, we are as
well in this concurrence urging the Supreme Court, when
defining the citizenship of limited liability companies (LLCs),
to return to the path it started to mark for unincorporated
business organizations in Puerto Rico v. Russell & Co., 288
U.S. 476, 480 (1933). In its more recent punt to Congress of
all questions relating to the citizenship of business
associations, the Court recognized that it laid down a rule
“unresponsive to policy considerations raised by the changing
realities of business organization.” Carden v. Arkoma
Associates, 494 U.S. 185, 196 (1990). As Congress has not
accepted the invitation of the Court to craft a workable law of
business citizenship, the latter should step into the breach.
There is no good reason to treat LLCs differently from
corporations for diversity-of-citizenship purposes. A
corporation is an entity that exists in law for the benefit of its
owners—shareholders. Principal features of corporations
include limited liability, access to equity markets, and the
directors’ fiduciary obligations of care and loyalty to
stockholders.
An LLC—an entity owned by members often referred
to as unitholders—is in most respects similar to a corporation.
Among the primary differences are that there are far fewer
statutory default rules for LLCs (for example, “[t]he
Delaware statute does not provide any manager or member
standards of conduct [with respect to fiduciary duties] and
1
instead defers to the operating agreement,” Wayne M. Gazur,
The Limited Liability Company Experiment: Unlimited
Flexibility, Uncertain Role, 58 L. & Contemp. Probs. 135,
151 (1995)), and an LLC can elect to be taxed as a
partnership or a corporation.
What do these differences have to do with diversity of
citizenship? Nothing. The kinds of business activities that
can be carried on by LLCs are identical to those in which
corporations may engage. 6 Del. Code § 18–106. And by
picking corporate-style default rules in a membership
agreement, an LLC could function in exactly the same way as
a corporation for all purposes except diversity of citizenship.
Just as treating LLCs as citizens of every state of
which its members are citizens defies logic, it also takes the
wrong lesson from our experience of assigning citizenship to
business organizations. Under Bank of United States v.
Deveaux, 9 U.S. (5 Cranch) 61, 86, 91–92 (1809),
corporations were citizens of each state where each
stockholder was a citizen. By 1844, the Supreme Court
recognized the impracticality of that rule and held that a
corporation is a citizen of the state in which it is incorporated.
Louisville, C. & C.R. Co. v. Letson, 43 U.S. (2 How.) 497,
558 (1844). That rule remained unchanged until 1958 when
Congress added in 28 U.S.C. § 1332(c) that corporations are
also citizens of their principal places of business. See
Carden, 494 U.S. at 196.
Carden, where the Supreme Court held that
unincorporated associations are citizens of the states where
their members are citizens, came down in 1990, when LLCs,
then a creature of only some states’ laws, languished in “near
obscurity.” Rodney D. Chrisman, LLCs Are the New King of
the Hill: An Empirical Study of the Number of New LLCs,
Corporations, and LPs, 25 Fordham J. Corp. & Financial L.
2
459, 460 (2010). At the time of Carden, the Internal Revenue
Service’s ruling that an LLC could be taxed as a partnership
was just two years old, see Rev. Ruling 88-76, and it was not
until 1996 that every state had an LLC law. Just as when
Deveaux was decided in 1809, the Court in 1990 could not
have predicted the unwieldiness of its rule. But since the turn
of the millennium, LLCs have become the dominant vehicle
for doing business in the United States, and LLC formation
outpaces corporation formation by a wide margin. See, e.g.
Chrisman, supra, at 460. We need a Letson for the LLC era,
and we urge the Supreme Court to write it.
To see why it is impractical to require investigation
into the citizenship of every member of any LLC, consider
trying to sue Linn Energy, LLC, in federal court for a state-
law violation. As of the last available information we
reviewed, Linn is traded on the NASDAQ exchange, has a
market capitalization of $902 million, and has 355.2 million
outstanding units. The LLC is 40% owned by insiders; the
remaining membership is dispersed. Approximately 240
institutional unitholders combine to own a mere 10% of the
company. To identify Linn’s citizenship, we need to know
the citizenship of all those unitholders, many of which are
undoubtedly LLCs themselves with their own unwieldy
structure—and we still have 50% of the units to account for.
Would it not make more sense simply to ask where Linn was
formed (Delaware) and where its principal place of business
is located (Texas)?
The Court opened the door to a sensible understanding
of corporate citizenship, one that would not require discovery
and time-consuming inquiries into corporate structure, in
Russell, when it analyzed the sociedad en comandita, an
unincorporated business association formed under the laws of
Puerto Rico. Although the Court noted the difference
between legal personality in the common and civil-law
3
contexts, it took a functional approach to deciding whether a
business form was a juridical person and thus had citizenship
in the place it was formed (as opposed to borrowing its
citizenship(s) from its members). The Court wrote:
In the law of its creation, the sociedad is
consistently regarded as a juridical person. It
may contract, own property, and transact
business, sue and be sued in its own name and
right. . . . It is created by articles of association
filed as public records. Where the articles so
provide, the sociedad endures for a period
prescribed by them, regardless of the death or
withdrawal of individual members. Powers of
management may be vested in managers
designated by the articles from among the
members whose participation is unlimited, and
they alone may perform acts legally binding on
the sociedad. Its members are not primarily
liable for its acts and debts, and its creditors are
preferred with respect to its assets and property
over the creditors of individual members,
although the latter may reach the interests of the
individual members in the common capital. . . .
These characteristics under the Codes of Puerto
Rico give content to their declaration that the
sociedad is a juridical person. That personality
is so complete in contemplation of the law of
Puerto Rico that we see no adequate reason for
holding that the sociedad has a different status
for purposes of federal jurisdiction than a
corporation organized under that law. In neither
case may nonresidents of Puerto Rico, who
have taken advantage of its laws to organize a
juridical entity for the purpose of carrying on
4
business there, remove from the insular courts
controversies arising under local law.
Russell, 288 U.S. at 481–82 (citations omitted). Replace
“sociedad” with “LLC,” and “Puerto Rico” with any state
under which an LLC is formed, and none of the opinion’s
logic is lost.
The law of citizenship for unincorporated associations
receives frequent criticism. Johnson v. SmithKline Beecham
Corp., 724 F.3d 337, 360–61 & n.28 (3d Cir. 2013) (Ambro,
J., concurring in part and concurring in the judgment) (citing
Christine M. Kailus, Note, Diversity Jurisdiction and
Unincorporated Businesses: Collapsing the Doctrinal Wall,
2007 U. Ill. L. Rev. 1543; Debra R. Cohen, Limited Liability
Company Citizenship: Reconsidering an Illogical and
Inconsistent Choice, 90 Marq. L. Rev. 269 (2006); Robert J.
Tribeck, Cracking the Doctrinal Wall of Chapman v. Barney:
A New Diversity Test for Limited Partnerships and Limited
Liability Companies, 5 Widener J. Pub. L. 89 (1995)). We
add that the criticism is apt: there is no reason to treat LLCs
differently from corporations merely because their organic
statutes have some distinctions and they are subject to
different tax regimes. Despite some cracks in Carden’s
wall—circuit courts are divided over how to determine the
citizenship of trusts, and some circuits treat professional
corporations, which function much like LLCs, as traditional
corporations, see Wright, Miller, et al., 13F Fed. Prac. &
Proc. § 3630.1 (3d ed. 2015))—it remains a formidable
bulwark against a coherent policy with respect to the
citizenship of LLCs. We thus urge the Supreme Court to
bring back Russell’s approach.
5