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March 7, 2017

Jurisdiction gives a federal court the power to hear a case. Jurisdiction matters at the outset of a lawsuit. It matters during discovery. It even matters after summary judgment. Jurisdiction matters because federal courts are courts of limited jurisdiction. State courts, however, are courts of general jurisdiction, meaning they hear many types of cases. But federal courts may only hear specific cases. A federal district court may exercise jurisdiction over cases where a statute grants its jurisdiction. District courts have original jurisdiction of all civil actions arising under the Constitution, laws, or treaties of the United States. See 28 U.S.C § 1331. Those cases involve federal question jurisdiction. District courts have original jurisdiction over cases involving diversity jurisdiction. See 28 U.S.C. § 1332. District courts may also exercise supplemental jurisdiction at their discretion. See U.S.C. § 1367.

Insurers rely on diversity jurisdiction to litigate in federal court. Diversity jurisdiction has two threshold requirements. First, the amount in controversy must exceed $75,000, exclusive of interest and costs. Second, the dispute must involve citizens of different states. See 28 U.S.C § 1332(a)(1). A party may remove a case from state court to federal court where both requirements are met. The removing party has the burden to prove the complete diversity of citizenship. Complete diversity does not exist if citizens of the same state are on each side of a lawsuit. Moreover, a removing party must prove complete diversity exists at the time the original action is filed and at the time of removal to federal court.

Proving a corporate entity’s citizenship is not always easy. A corporation is a citizen of any state where it has been incorporated and has its principal place of business. A corporation may be a citizen of more than one state. But, a corporation has only one principal place of business. A corporation’s principal place of business is its “nerve center.” See Hertz Corp. v. Friend, 559 U.S. 77 (2010). The nerve center is where the corporation’s officers direct, control, and coordinate business activity.

The citizenship of a limited liability company is based on its members—all members. Where a limited liability company is named as a party, federal courts require the removing party to list the citizenship of all members of the company. The principal place of business is not relevant to a limited liability company’s citizenship.

A recent decision by the Eleventh Circuit Court of Appeals emphasizes the importance of verifying the citizenship of all members of a limited liability company before removing to federal court. The decision of Thermoset Corporation v. Building Materials Corp. of America et al, 2017 WL 816224 (11th Cir., March 2, 2017) reminds litigants to conduct a thorough analysis of membership to prove complete diversity. The case involved a product liability action and dispute between three businesses. A roofing contractor sued a manufacturer and distributor of roofing materials in Florida state court over the installation of a roofing system at an international airport in the Bahamas. Tropical Storm Nicole hit the Bahamas. Strong winds caused the roofing system to fail. The roofing contractor claimed damages in excess of $1 million against both the manufacturer and distributor. The defendant manufacturer removed the case to federal court. After completing discovery, the defendants jointly moved for summary judgment. The district court granted summary judgment in favor of the defendants. The roofing contractor appealed the summary judgment order. Then, the fleeting victory for the defendants took a turn for the worse.

The first issue the appellate court checked, on its own (sua sponte), involved jurisdiction. The appellate court said it was obligated to raise concerns about the district court’s subject matter jurisdiction. The amount in controversy easily exceeded $75,000 because the plaintiff claimed over $1 million in damages. The citizenship of the parties, however, created a threshold jurisdictional problem.

The parties were not citizens of different States. The plaintiff roofing contractor was organized under the laws of Florida. It had a principal place of business in Florida. The roofing contractor was a Florida citizen for purposes of diversity jurisdiction. The defendant manufacturer was organized under Delaware law. It had a principal place of business in New Jersey. The manufacturer was a citizen of Delaware and New Jersey for purposes of diversity jurisdiction. The defendant distributor was organized under Delaware law and had a principal place of business in Texas. But the defendant distributor was a limited liability company.

For purposes of diversity jurisdiction, “a limited liability company is a citizen of any state of which a member of the company is a citizen.” Rolling Greens MHP, L.P. v. Comcast SCH Holdings, L.L.C., 374 F.3d 1020, 1022 (11th Cir. 2004). The appellate court determined that one member of the distributor company was a Florida citizen, like the plaintiff. Therefore, a complete diversity of citizenship did not exist between the plaintiff and all defendants. The non-diverse citizenship of one member, who was a Florida citizen, destroyed federal diversity jurisdiction. The district court never had jurisdiction over the case in the first place. Ultimately, the appellate court vacated the summary judgment order in favor of the defendants, remanded the case back to the district court, and instructed it to remand the entire case back to the Florida state court.

Insurers defending lawsuits involving insurance coverage, liability, and bad faith are often hungry to litigate in federal court for several reasons. One compelling reason is neutrality. Out-of-state insurers want to avoid the danger of prejudice they may face litigating in local and state courts. Federal courts offer out-of-state insurers a neutral forum. Insurers prefer federal court for procedural reasons, too. The rules of procedure and evidence are strict. Federal courts also follow their own local rules. Moreover, the summary judgment standard in federal court requires a non-moving party to come forward with evidence. It is harder for a non-moving party to oppose summary judgment. A party cannot simply allege or claim a genuine issue of fact for trial to avoid an adverse summary judgment ruling. Mere allegations or denials in the pleadings will not defeat a summary judgment motion in federal court. Instead, the non-moving party must set forth specific facts showing that there is a genuine issue for trial.

Many limited liability companies that own property in Florida are insured by commercial property insurance policies. The Thermoset decision is an important reminder for parties who want to litigate in federal court. Be cautious. Do your due diligence when the case involves a limited liability company. Verify the citizenship of all members. You can find information on managing members and other members of a limited liability company by reviewing annual reports filed with the Secretary of State. Remember, it only takes one non-diverse member of a limited liability company to destroy federal diversity jurisdiction. If you do not catch the jurisdictional defect, the appellate court will likely correct the error later on its own volition. Jurisdiction always matters in federal court.

For any further questions, please contact Hudson Jones.