LLCs and Other Unincorporated Associations Present Challenges for Federal Diversity Jurisdiction

Unincorporated associations, such as LLCs, present particular challenges for establishing federal diversity jurisdiction. In BRT Management LLC v. Malden Storage LLC, the United States Court of Appeals for the First Circuit recently reversed a District Court judgment awarding over $10 million to defendant LLCs on their counterclaims, finding that the record below failed to demonstrate the existence of diversity jurisdiction. The First Circuit ruled that, despite six years of litigation and a bench trial, the parties were unable to establish the citizenship of the defendant LLCs to support the exercise of federal diversity jurisdiction.

BRT Management LLC (“BRT”) filed suit against Malden Storage, LLC (“Malden”), Plain Avenue Storage, LLC (“Plain Avenue”), and Banner Drive Storage, LLC (“Banner”) in the United States District Court for the District of Massachusetts. Banner was later dismissed in an effort to preserve jurisdiction. BRT alleged that it was a citizen of Massachusetts and that defendants were Delaware LLCs with principal places of business in Illinois. The District Court ordered BRT to show cause why the action should not be dismissed for lack of subject matter jurisdiction.

As the First Circuit explained, under federal law the citizenship of unincorporated legal entities, including LLCs and trusts, for diversity purposes is the citizenship of the entities’ members. If the members of an LLC are themselves unincorporated entities, the citizenship of their members must be disclosed as well to determine citizenship in an iterative process tracing the “citizenship of any member that is an unincorporated association through however many lawyers of members or partners there may be.” Eventually the District Court was satisfied, and after a bench trial awarded over $10 million to the defendants.

On appeal, the First Circuit ordered the parties to demonstrate complete diversity providing federal jurisdiction over the case, finding that the submissions below were inadequate. While the parties did identify the ultimate members of the defendant LLCs, including individuals, corporations and trusts, they only identified the trusts’ citizenship by the domiciles of their trustees. The First Circuit stated that the parties failed to undertake the iterative process required to determine citizenship. Trusts, with some exceptions, take the citizenship of all their members or beneficiaries. Where information regarding the members of the trusts was not provided, diversity had not been established.

The First Circuit therefore vacated the judgment and remanded the case to the District Court to determine whether diversity subject matter jurisdiction exists. Recognizing the challenges for a party attempting to assert diversity jurisdiction where information on citizenship lies in the hands of opposing parties, the First Circuit did endorse the lower court’s approach allowing limited jurisdictional discovery to confirm a party’s good faith assertion of complete diversity. Litigants should be prepared to pursue the entire iterative process required by the First Circuit for any diversity claim involving unincorporated associations.

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