"This article originally was published in May 2016 edition of The Middle Ground, a publication of the Federal Bar Association—Middle District of North Carolina Chapter."
Imagine opening your email one morning to find a copy of a complaint and summons just received by your out-of-state corporate client. The caption shows a familiar North Carolina company as the lone plaintiff, and a cursory review of the allegations reveals several indicia of a case that you would prefer to defend in federal court: a demand for substantial damages, a remote venue with limited court calendars, a plaintiff who is a major employer in the forum county, and potentially complicated legal issues that would benefit from full briefing. "No problem," you think, because the matter will probably be removable, given the amount at issue and your client’s out-of-state incorporation and headquarters. When you scrutinize the caption again and note the three letters “LLC” appended to the plaintiff’s name, however, what first seemed clear becomes opaque.
At this juncture, a quick review of the rules applicable to diversity jurisdiction and removal is helpful. The familiar requirements for diversity jurisdiction include an amount in controversy in excess of $75,000 and diversity of citizenship between each plaintiff and each defendant. Additionally, no defendant may remove a matter filed in a state where the defendant is a citizen, and all defendants properly joined and served in a matter must consent to removal. Generally, a defendant must remove within 30 days of service of a pleading or other paper showing the propriety of diversity jurisdiction. During the first year after the action is commenced, if the initial pleading is not removable, a defendant may also remove within 30 days of receiving a paper demonstrating removal is proper.
A corporation is a citizen of the state where it is incorporated and the state where it has its principal place of business. In 2010, the Supreme Court clarified that “the phrase ‘principal place of business’ refers to the place where the corporation's high level officers direct, control, and coordinate the corporation's activities,” often referred to as its “nerve center.” An LLC, on the other hand, is a citizen of every state where its members are citizens. Consequently, the state where an LLC is formed and the location of its principal place of business are irrelevant for diversity purposes. Rather, to determine an LLC’s citizenship, one must ascertain the citizenship of each member following the guidelines provided.
Returning to the hypothetical, assume the complaint alleges that plaintiff is a North Carolina LLC with its principal office in Greensboro, but says nothing about plaintiff’s members. The North Carolina Secretary of State’s website confirms the domestic formation, but is silent about the current membership. Unless you find another source that identifies plaintiff’s members, you are stuck litigating in your non-preferred forum, at least until you can use the discovery process to identify plaintiff’s members, a process that could take weeks or months.
As this scenario illustrates, taking differing approaches to LLC and corporate citizenship can give rise to potentially frustrating inefficiencies. Several factors favor abandoning this disparate approach and applying the same citizenship criteria to corporations and LLCs.
Womble Carlyle articles are intended to provide general information about significant legal developments and should not be construed as legal advice on any specific facts and circumstances, nor should they be construed as advertisements for legal services.