Third Circuit Relaxes Pleading Requirements for Limited Liability Company Defendants and Urges Supreme Court to Redefine Citizenship Rule

Should limited liability companies continue to be treated differently than corporations for diversity-of-citizenship purposes? If a limited liability company’s citizenship continues to be determined by the citizenship of each of its members, how can a plaintiff get past the pleading stage if the identity of one or more members is unknown even after a diligent pre-filing investigation? In a recent precedential opinion, the Third Circuit in Lincoln Benefit Life Company v. AEI Life, LLC answered the latter question for the first time, holding that a plaintiff need not affirmatively allege the citizenship of each member of a defendant limited liability company to survive a motion to dismiss for lack of subject-matter jurisdiction. And in a separate concurrence targeted directly at the U.S. Supreme Court, the Third Circuit urged the Supreme Court to consider the former question and adopt a more practical rule for determining the citizenship of limited liability companies.

In 2013, Lincoln Benefit Life Company filed a complaint in the District of New Jersey against numerous defendants, including two limited liability companies. Lincoln Benefit premised federal subject-matter jurisdiction on diversity of citizenship, but the complaint did not allege the citizenship of any of the members of the two limited liability companies. According to Lincoln Benefit, the identity and citizenship of those members was not discernable at the time that it filed suit. The District Court dismissed the complaint for lack of jurisdiction because Lincoln Benefit failed to affirmatively allege the citizenship of each member of each defendant limited liability company.

In vacating the District Court’s order, the Third Circuit explained that the citizenship of unincorporated associations such as limited liability companies and partnerships is, as the District Court held, determined by the citizenship of their partners or members. For complete diversity to exist, all members of the limited liability companies must be diverse from all parties on the opposing side. Whether a complaint will survive a Rule 12(b)(1) motion to dismiss, however, depends on the type of challenge to subject-matter jurisdiction.

A facial challenge to subject-matter jurisdiction, such as the one mounted in Lincoln Benefit, concerns an alleged pleading deficiency, whereas a factual challenge concerns the failure of a plaintiff’s claims to comport factually with the jurisdictional prerequisites. Relying principally on its prior decision in Lewis v. Rego Co. – in which the Third Circuit held that a plaintiff may plead diversity jurisdiction without making affirmative allegations of citizenship – the Court held that a plaintiff can survive a facial challenge by alleging that none of the members of the defendant limited liability companies are citizens of the plaintiff’s state of citizenship. Significantly, such an allegation is permissible even if the plaintiff is uncertain as to the limited liability company’s membership at the time of filing. So long as the plaintiff is able to allege in good faith, after a reasonable inquiry into the identities and citizenship of the limited liability company’s members, that it is diverse from all of those members, its complaint will withstand a facial challenge to subject-matter jurisdiction. The defendant limited liability company may thereafter mount a factual challenge, and the plaintiff must be permitted limited jurisdictional discovery for the purpose of determining whether complete diversity exists.

Given the recent rapid growth of limited liability companies, which now outpace corporations as the dominant vehicle for doing business in the United States, the Third Circuit’s clarification of the pleading requirements for unincorporated associations in Lincoln Benefit is significant in its own right. But equally notable is the separate concurring opinion in which all three judges on the panel joined in “urging the Supreme Court” to do away with the current law of citizenship for limited liability companies. Addressing the Supreme Court directly, the Third Circuit criticized the focus on members’ citizenship as “unwield[y]” and “impractical,” arguing that “[t]here is no good reason to treat [limited liability companies] different from corporations for diversity-of-citizenship purposes.” The panel then implored the Supreme Court to return to the same sort of approach it took over 80 years ago in Puerto Rico v. Russell & Co. by focusing the citizenship inquiry on the limited liability company’s state of organization and principal place of business, not the citizenship of its members. Whether the Supreme Court will accept the Third Circuit’s invitation remains to be seen, but for now plaintiffs seeking to bring suit against limited liability companies in federal courts within the Third Circuit can find some solace in the relaxed pleading requirements announced in Lincoln Benefit.

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