United States: Limited Liability Companies Are Like Corporations For Purposes Of Determining Citizenship Under CAFA

Last Updated: May 22 2014
Article by CAFA Law Blog

Heckemeyer v. NRT Missouri, LLC, 2013 WL 2250429 (E.D. Mo. May 22, 2013).

The U.S. District Court for the Eastern District of Missouri held that Congress chose to treat limited a limited liability company ("LLC") like a corporation for purposes of determining citizenship under CAFA; thus, an LLC is deemed to be a citizen of the states where its principal place of business is located and the state under whose laws it is organized.

The Missouri resident plaintiffs brought an action under the Missouri Merchandising Practices Act, in Circuit Court of St. Louis County, Missouri, alleging that the defendants knowingly misrepresented the square footage of the homes that the plaintiffs and the putative class members purchased, by including footage of the empty space on the second floor above a two-story entry foyer or two-story great room. The plaintiffs alleged that James Dohr, as NRT Missouri LLC's ("NRT") designated broker, was responsible for supervising NRT's brokers and salespeople and adopting a written policy covering various matters, including the subject matter of the lawsuit.

The defendants removed the action to the District Court, asserting traditional diversity jurisdiction under 28 U.S.C. § 1332(a) and CAFA jurisdiction under § 1332(d). The defendants asserted that complete diversity of citizenship existed for purposes of § 1332(a), because NRT Missouri was a citizen of Delaware and New Jersey and James Dohr was fraudulently joined so his citizenship should not be taken into account. Further, the defendants asserted that the general rule that an LLC's citizenship is based on the citizenship of its members applies under CAFA, such that diversity of citizenship under § 1332(d), also existed.

The plaintiffs moved for remand, arguing that traditional diversity jurisdiction did not exist because Dohr was not fraudulently joined and the defendants did not show that the requisite amount in controversy of $75,000 was met with respect to any one plaintiff. The plaintiffs also argued that jurisdiction under CAFA did not exist because, under CAFA ,an LLC's citizenship is based upon the state in which the LLC is organized and where its principal place of business is located. The plaintiffs asserted that NRT's principal place of business was in Missouri and argued that the defendants did not establish CAFA's requisite $5 million amount in controversy.

First, the District Court noted that the claim of any one plaintiff was less than $75,000, and the defendants made no effort to show otherwise. Thus, the District Court found that the defendants did not meet their burden to establish that traditional diversity jurisdiction existed.

Additionally, the District Court stated that diversity jurisdiction under §1332(a)(1) requires complete diversity, such that no defendant holds citizenship in the same state where any plaintiff holds citizenship. Because an LLC's citizenship for purposes of traditional diversity jurisdiction is the citizenship of each of its members, there was diversity between the plaintiffs and NRT for purposes of traditional diversity jurisdiction. The District Court, however, remarked that, because Dohr was a citizen of Missouri, his presence as a defendant defeated traditional diversity jurisdiction.

Next, the District Court observed that, to prove that a plaintiff fraudulently joined a diversity-destroying defendant, the Eighth Circuit requires a defendant seeking removal to prove that the plaintiff's claim against the diversity-destroying defendant has no reasonable basis in fact and law. Further, the District Court stated that joinder is not fraudulent where there is arguably a reasonable basis for predicting that the state law might impose liability based upon the facts involved.

The District Court also noted the Eighth Circuit's instruction that, where the sufficiency of the complaint against the non-diverse defendant is questionable, the better practice is for the federal court not to decide the doubtful question in connection with the motion to remand but simply to remand the case and leave the question for the state courts to decide. Thus, because the sufficiency of the complaint against Dohr was questionable, the District Court opined that it would be best for a Missouri state court to decide Dohr's potential liability in the present action.

Second, the District Court remarked that, although the defendants had established by a preponderance of the evidence the CAFA jurisdictional requirements of numerosity and amount in controversy, they failed to establish CAFA diversity of citizenship.

Under § 1332(d)(10), CAFA provides that an unincorporated association shall be deemed to be a citizen of the State where it has its principal place of business and the State under whose laws it is organized. Although the Eighth Circuit had not yet addressed the question, the Fourth Circuit held that an LLC is properly considered "an unincorporated association" within the meaning of § 1332(d)(10) and, thus, is deemed to be a citizen of the state both where it has its principal place of business and the state under whose laws it is organized.  Further, the District Court observed that CAFA's legislative history, specifically Senate Report No. 109-14, shows that Congress chose to treat LLCs like corporations for purposes of determining citizenship under CAFA.

The Fourth Circuit also rejected the argument that Congress intended "unincorporated association" to refer only to those non-corporate entities that, unlike an LLC in Missouri, lacked a distinct legal identity under the law of the state where they are organized. The defendants argued that the term "unincorporated association" in § 1332(d)(10) referred to only a narrower subset of non-corporate business forms, a class that excluded entities having a distinct legal identity under the law of the state in which they are organized.

The Fourth Circuit reasoned that the term "business enterprise" includes both corporations and non-corporate entities, and the District Court noted that use of the terms "business enterprise," "corporation," and "unincorporated association" reflects Congress's intent to subdivide the entities covered by the term "business enterprise" into two categories: corporations and non-corporate entities. The District Court stated that CAFA refers to non-corporate entities as "unincorporated associations." To extend CAFA's application, Congress narrowly defined the citizenship of non-corporate entities to include only one or two states, thereby extending federal court jurisdiction over class actions.  Accordingly, the District Court stated that Congress chose to treat LLCs like corporations for purposes of determining citizenship under CAFA.

Next, the District Court analyzed the location of NRT's principal place of business. In Hertz Corp. v. Friend, 130 S. Ct. 1181 (2010), the Supreme Court adopted the "nerve center" test for determining a corporation's principal place of business, defining "principal place of business" as the place where a corporation's officers direct, control, and coordinate the corporation's activities. Further, the District Court opined that the "nerve center" normally was the place where the corporation maintained its headquarters, provided that the headquarters was the actual center of direction, control, and coordination, and not simply an office where the corporation held its board meetings.

The plaintiffs asserted that NRT's principal place of business was Missouri, as evidenced by NRT's judicial admissions in several cases that its principal place of business and corporate headquarters were in Missouri. The plaintiffs also maintained that NRT's principal place of business was Missouri, because NRT Missouri maintained its corporate office in St. Louis County, Missouri operating and doing business under the fictitious name of Caldwell Banker Gundaker.

In support of its contention that its principal place of business was New Jersey, NRT submitted the sworn declaration of its General Counsel who attested that, although business was carried out in Missouri, all NRT's business was subject to the control of its officers in the NRT corporate headquarters in New Jersey.  However, because the District Court found that defendants did not met their burden of establishing that NRT's principle place of business was not Missouri, it held that all plaintiffs and both defendants were citizens of Missouri for purposes of CAFA, and jurisdiction under CAFA did not exist.

Accordingly, the District Court granted the plaintiffs' motion for remand.

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