LINCOLN BENEFIT LIFE COMPANY, Appellant v. AEI LIFE, LLC; ALS Capital Ventures, LLC; Joel Jacob; Innovative Brokers; JRJ Services, Inc.
No. 14-2660.
United States Court of Appeals, Third Circuit.
Opinion Filed: Sept. 2, 2015.
800 F.3d 99
Argued: Jan. 14, 2015.
Ira S. Lipsius, Esq., ARGUED, Lipsius-BenHaim Law LLP, Kew Gardens, NY, Attorney for Appellee Innovative Brokers.
Before: AMBRO, FUENTES, and ROTH, Circuit Judges.
OPINION OF THE COURT
FUENTES, Circuit Judge.
I. Background
Lincoln Benefit Life Company filed a federal complaint seeking a declaratory
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.
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 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 orga
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., 724 F.3d 337 (3d Cir. 2013), 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,
“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 corpora
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 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.
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
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 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
Thus, rather than affirmatively alleging the citizenship of a defendant, a plaintiff may allege that the defendant is
We see no reason why Lewis should not apply in the context of unincorporated associations. A State X plaintiff may therefore survive a facial challenge by alleging that none of the defendant association‘s members are citizens of State X.34
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 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
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 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 jurisdiction are not reasonably ascertainable by the plaintiff.”43 It observed that “Carolina made a showing that at least some of
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 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
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 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.
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 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.
LINCOLN BENEFIT LIFE COMPANY, Appellant v. AEI LIFE, LLC; ALS Capital Ventures, LLC; Joel Jacob; Innovative Brokers; JRJ Services, Inc.
No. 14-2660.
United States Court of Appeals, Third Circuit.
Opinion Filed: Sept. 2, 2015.
800 F.3d 99
Argued: Jan. 14, 2015.
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
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 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
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. 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 re
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 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 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 differ
Notes
Separately, we note that in Lewis we deemed permissible allegations of citizenship “on information and belief.” The motions to dismiss Lincoln Benefit‘s complaint argued that these sorts of qualified 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.