By now, attorneys practicing in the Fifth Circuit should know that if a case is in federal court on the basis of diversity jurisdiction, they must ensure that the record supports the diversity of citizenship requirement, lest the Fifth Circuit raise the issue sua sponte on appeal.1
The most recent lesson from the Fifth Circuit is to ensure that attorneys do not confuse LLC ownership with LLC membership when alleging the citizenship of an LLC. See SXSW, L.L.C. v. Fed. Ins. Co., 83 F.4th 405, 408 (5th Cir. 2023).
In that case, SXSW sued its insurer, Federal Insurance Company, after the insurer failed to defend SXSW in a class action. After the court granted the defendant's motion for summary judgment, SXSW appealed. Id. at 407. Though the parties agreed in their appellate briefs that the district court had jurisdiction on the basis of diversity, the Fifth Circuit, citing its "independent obligation to assess subject matter jurisdiction," remanded, holding that it "could not find proper allegations or evidence of SXSW's citizenship." Id. at 407.
The court noted several deficiencies, including the plaintiff's failure to plead citizenship as opposed to residency for one of the LLC's members and the plaintiff's failure to make clear that the proof that was put on reflected citizenship at the time the complaint was filed.
But the Court also found problematic the plaintiff's jurisdictional statement that one LLC was wholly owned by another LLC that was wholly owned by an identified individual. See id. at 408. The Court observed that there "is a potentially important difference between LLCmembership and LLC ownership." In several states, one can be an LLC member without being an LLC owner. See id. (citing DEL. CODE ANN. tit. 6, § 18-301(d); TEX. BUS. ORGS. § 101.102). As a result, a list of all of an LLC's owners would not necessarily reflect all of the LLC's members and thus would fall short of the requirement of "clear, distinct, and precise affirmative jurisdictional allegations." MidCap Media Fin., L.L.C. v. Pathway Data, Inc., 929 F.3d 310, 313 (5th Cir. 2019) (internal citation omitted).
Lawyers should take note. An allegation that an LLC is wholly owned by John Doe, who is a resident-citizen of State X is not sufficient to allege citizenship of the LLC. Instead, counsel should allege that the LLC has a single member, John Doe, who is a resident-citizen of State X.
Footnote
1 See https://www.jdsupra.com/legalnews/turtles-all-the-way-down-new-amendment-7734434/ and https://www.jdsupra.com/legalnews/agreement-isn-t-enough-the-fifth-42340/
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.