Citizenship of LLC Members Determines LLC's Citizenship for Diversity Purposes

Citizenship of LLC Members Determines LLC's Citizenship for Diversity Purposes

 A federal court must determine that it has subject matter jurisdiction and personal jurisdiction and that venue is proper before it can adjudicate a matter. If it lacks any one of the three, the court will not proceed, and it need not examine whether the other two requirements are met. In diversity actions, subject matter jurisdiction is appropriate where the amount in controversy exceeds $75,000 and the dispute is between citizens of different states. In Liberty Mutual v. KB Home [an enhanced version of this opinion is available to lexis.com subscribers], the Newport News Division of the Eastern District of Virginia found that a plaintiff need not show with legal certainty that the amount-in-controversy requirement is met, but must allege the citizenship of all individual members of a defendant limited liability company to establish the citizenship of the LLC.

Liberty Mutual Fire Insurance Company filed a complaint against KB Home, KB Home Raleigh-Durham, Inc. and Stock Building Supply, LLC--a subcontractor for KB Home Raleigh-Durham--seeking a declaratory judgment that it had discharged its duties as defendants' insurer in a North Carolina state court action. The KB Home defendants moved to dismiss for lack of subject matter jurisdiction, personal jurisdiction and improper venue.

To determine whether the amount in controversy requirement for subject matter jurisdiction is met, courts rely on the sum claimed by the plaintiff in good faith. A defendant contesting the amount in controversy must show that it is legally impossible for the plaintiff to recover the amount sought. Liberty Mutual's complaint alleged in a simple and conclusory fashion that the amount in controversy exceeded the sum or value of $75,000. The defendants pointed out that the complaint also alleged that the insurance policy between the parties was exhausted such that the sum at stake could not exceed $75,000. Liberty Mutual responded that legal defense costs totaling $82,314.74 were at issue as evidenced by a legal billing invoice.

Defendants argued that the court could not consider the billing document because it had not been authenticated, yet they cited no authority requiring that material supporting subject matter jurisdiction be admissible at trial. (At the summary judgment stage, courts can generally rely on evidence that would be inadmissible at trial). Defendants also asserted that Liberty Mutual unquestionably owed $54,980.30 of the $82,314.74. According to the court, that argument went to the merits of the underlying suit. Defendants failed to meet their burden of showing that the amount in controversy could not, to a legal certainty, exceed $75,000.

However, the court also noted that complete diversity requires that all of the plaintiffs be citizens of different states than all of the defendants. Here, the defendants pointed out that Liberty Mutual failed to allege facts sufficient to show the citizenship of the LLC defendant. While the complaint alleged that Stock was organized and existing under the laws of North Carolina and that it has its principal place of business in North Carolina, it failed to allege the citizenship of its members, which is how an LLC's citizenship is determined. Plaintiff argued that jurisdiction need not be plead with specificity, but the court found the complaint utterly devoid of any facts sufficient to establish diversity. Rather than dismiss the case, the court granted leave to amend the complaint.

The court did not address the personal jurisdiction or venue issues, but noted that if it indeed had subject matter jurisdiction, it could transfer venue if appropriate without deciding the question of personal jurisdiction.

Read the rest of the article at the Virginia Business Litigation Lawyer blog.

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