2.2 Diversity SMJ - domicile of business entities

Introduction to Federal Lawsuits and Business Entities

Federal lawsuits often involve large sums of money, which typically means that the parties involved are not individuals but rather business entities. This note explores the implications of diversity of citizenship with respect to business entities, focusing primarily on corporations, partnerships, and limited liability companies (LLCs).

Defining Business Entities

Understanding Legal Persons

• Business entities are often referred to as artificial persons or legal persons (juridical persons), created primarily through state law.

• Corporations, which began to proliferate in the mid-1800s, are a common example of such entities and often outnumber natural persons (individuals).

• Corporations can be sued due to their significant financial resources and involvement in various business activities that may lead to litigation.

Citizenship of Corporations

• According to Section 1332(c), a corporation has two domiciles:

  • State of incorporation: The state where the corporation was formed.

  • Principal place of business: This refers to the location where the corporation’s executive officers direct its business operations.

• The statute imposes specific rules regarding determining a corporation's citizenship and makes it essential for understanding diversity of citizenship.

Corporate Citizenship: A Dual Approach

Determining Citizenship

• To ascertain the citizenship of a corporation, one must identify:

  • The state of incorporation, akin to a human's birthplace.

  • The principal place of business, which is defined more clearly by Hertz Corp v. Friend (2010), where the Supreme Court addressed the criteria for identifying a corporation's principal place of business.

• The Court suggests directing focus on where the executive officers conduct their work rather than where the board of directors meets.

Corporate Governance Structure

• Board of Directors: Acts as the brain of the corporation, making high-level strategic decisions.

• Officers: Execute decisions made by the board, akin to hands acting on the brain's commands. Executive officers typically include the CEO, CFO, etc.

• Understanding this distinction is crucial for identifying the corporate domicile in legal settings.

Business Associations Landscape

Types of Business Entities

• Sole Proprietorship: An individual conducting business independently has no formal separation between personal and business liabilities.

• Partnership: Two or more individuals co-own a business. In a partnership, liability extends to all partners for obligations incurred by any partner.

• Corporation: Provides a separate legal entity from its owners, affording limited liability protection. This means that only the corporate assets are liable for business debts, protecting the personal assets of the individuals involved.

Transition from Simplicity to Complexity

• Prior to the 1970s, business entities were generally categorized as sole proprietorships, partnerships, or corporations. However, the introduction of the LLC added complexity.

• LLCs offer limited liability akin to corporations while retaining flexibility associated with partnerships. However, for diversity purposes, LLCs are treated like partnerships – meaning they inherit the citizenship of all their members.

Diversity Jurisdiction and Unincorporated Entities

Understanding Citizenship in Unincorporated Entities

• For federal subject matter jurisdiction (SMJ), the citizenship of unincorporated entities (partnerships and LLCs) is determined by the citizenship of each of its members.

• This creates challenges for establishing diversity, particularly when members hail from multiple states.

Key Legal Considerations

• Individuals who are members of a partnership or LLC can bring suits within federal diversity jurisdiction based on the domicile of its members.

• When determining whether an LLC or partnership member can sue, one must consider:

  • Citizenship of the suing member.

  • Citizenship of the entity being sued.

• An important point to note is that the citizenship of the representative of a decedent’s estate is only the citizenship of the decedent.

Special Representative Rules

Considerations for Insurers and Decedents

• In insurance claims, if a victim (plaintiff) sues an insurance company, the citizenry includes both the insurer and the insured's citizenship. This rule prevents circumvention of diversity jurisdiction by solely naming an out-of-state insurance company.

Conclusion

Understanding the nuances of business entities and their citizenship under federal law is crucial for determining diversity jurisdiction in federal cases. A thorough grasp of these principles is essential for effective navigation of legal complexities surrounding business litigation.