Fourth Circuit Answers Civ Pro Hypothetical

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Civil procedure professors love to gin up tricky hypotheticals to quiz 1Ls on the limits of diversity jurisdiction under 28 U.S.C. § 1332(a). The Fourth Circuit recently confronted a real-world scenario involving a dual-citizen LLC and the distinction between § 1332(a)(2) and § 1332(a)(3). In a decision destined to be cited in casebooks, the Fourth Circuit (in an opinion authored by Chief Judge Albert Diaz) concluded that diversity jurisdiction was lacking.

The Non-Hypothetical Hypothetical

In FS Medical Supplies, LLC v. Tanner Pharma UK Ltd., the LLC plaintiff sued a UK corporation, a North Carolina corporation, and two North Carolina individuals regarding a breach of contract for the provision of personal protective equipment and other COVID-related products during the early days of the pandemic. The asserted basis for federal subject-matter jurisdiction was diversity, but there was a wrinkle: in the lead-up to a status conference, the plaintiff disclosed that one of its members was in fact a Chinese citizen. The defendants immediately moved to dismiss for lack of subject-matter jurisdiction.

As the Fourth Circuit explained, the first step in applying § 1332 is to determine the citizenship of each party. It applied § 1332(c)(1) to determine the citizenship of the defendant corporations. As for the LLC, an unincorporated association, caselaw makes clear that it carries the cumulative citizenship of each of its members. The plaintiff LLC’s members were citizens of California, Texas, and (it turned out) China, meaning it is both a U.S. and a foreign citizen. The court noted a difference in treatment between individuals who are dual citizens and corporations or associations that have multiple nationalities: while the dual citizenship of an individual can be ignored when it would defeat diversity jurisdiction, the dual citizenship of a corporation or association cannot be. Thus, the existence of a foreign citizen among the LLC’s members rendered it effectively foreign for purposes of diversity jurisdiction.

The second step in a § 1332 analysis is to identify which one of § 1332(a)’s four categories covers the alignment of the parties’ citizenship. The plaintiff LLC had invoked § 1332(a)(3), which covers controversies between “citizens of different States and in which citizens or subjects of a foreign state are additional parties.” That category requires there to be a U.S. citizen on both sides of the “v,” but the plaintiff LLC’s foreign citizenship meant there was effectively no U.S. plaintiff for purposes of § 1332(a)(3).

Nor could the plaintiff fall back on § 1332(a)(2), which covers controversies between “citizens of a State and citizens or subjects of a foreign state.” Although the case involved a foreign plaintiff and U.S. defendants, there was also a foreign defendant, which defeated complete diversity.

Efforts to Salvage Jurisdiction

The plaintiff directed its Chinese member to transfer her shares to her husband, who was also a member of the LLC, but the district court noted that such a transfer would not cure the jurisdictional defect as diversity is determined at the time the case is filed. The Fourth Circuit also rejected an effort to cure the jurisdictional problem by dismissing the British corporate defendant, though I wish it had explained its reasoning more: if the plaintiff amended its complaint to omit a defendant, the amended complaint would supersede the original complaint for jurisdictional purposes (as last Term’s decision in Royal Canin U.S.A. v. Wullschleger indicates). So dismissing the foreign defendant should have cured the jurisdictional problem, allowing the case to come in under § 1332(a)(2).

Nor is this the plaintiff’s first struggle with jurisdiction: its initial effort to sue the defendants in California state court was short-lived, after the defendants removed the case to federal court and then secured its dismissal for lack of personal jurisdiction. While this appeal was pending, the plaintiff filed a new case against the defendants, this time without a Chinese member. That case is still pending—perhaps the third time’s the charm?