Hunton Insurance Recovery Blog

Earlier this month, the Eighth Circuit remanded a COVID-19 insurance recovery case to the district court on jurisdictional grounds. See Great River Ent., LLC v. Zurich Am. Ins. Co., No. 21-3815, 2023 WL 5839565 (8th Cir. Sept. 11, 2023).The Eighth Circuit’s decision underscores federal courts’ continued scrutiny of subject matter jurisdiction—especially in complex cases involving limited liability companies.

Background

Great River Entertainment commenced its litigation in Iowa state court.  Its insurer, Zurich, removed the case to federal district court based on diversity jurisdiction under 28 U.S.C. § 1332. The district court ultimately granted the insurer’s motion to dismiss on substantive coverage issues. See Great River Ent., LLC v. Zurich Am. Ins. Co., No. 3:21-CV-00035, 2021 WL 5412276 (S.D. Iowa Nov. 15, 2021). The district court’s opinion never addressed subject matter jurisdiction.

On appeal, however, the Eighth Circuit focused solely on whether the litigation was properly removed to federal court.  Central to the court’s inquiry: did the federal district court properly have subject matter jurisdiction over the litigation. As the Eighth Circuit explained,  “[j]urisdiction is always the first and fundamental question” of federal courts. Great River Ent., LLC, 2023 WL 5839565, at *1.

Fundamentally, diversity jurisdiction under 28 U.S.C. §1332 requires (i) an amount in controversy exceeding $75,000; and (ii) complete diversity of citizenship among the parties. While seemingly straight-forward for individuals or corporations, questions abound when one of the litigants is a limited liability company. This is typically because unlike corporations, which typically have definite corporate domiciles, limited liability companies are considered to have the citizenship of all of their members.

Viewing Great River as a citizen of each jurisdiction in which a member resided, the Court of Appeals ruled that factual development in the district court was insufficient to allow the court to determine whether the parties were completely diverse. In other words, the record lacked sufficient detail to determine whether any of Great River’s members were citizens of Illinois—the place where the insurer had its principal place of business. To the extent any member of Great River was a citizen of Illinois, the parties would not enjoy complete diversity, the federal court would lack subject matter jurisdiction, and the case would be remanded to state court.

The Great River of LLCs

Great River is a salient reminder that subject matter jurisdiction may be challenged at any time, even by the court sua sponte.  It is critical, therefore, that litigants exercising diversity jurisdiction understand the citizenship of the parties and, where LLC’s are involved, the citizenship of its members. Failure to do so may waste significant time and resources.  

The Eighth Circuit’s decision further underscores the jurisdictional complexities associated with establishing diversity jurisdiction for a modern-day LLC. Modern business organizations are often made up of a labyrinthian of distinct corporate structures, including, among others, various members, managers, holding companies and subsidiaries. Business organizations become particularly complex where an LLC’s member is yet another LLC. The complexity then becomes increasingly stupefying for each additional layer of LLC in a corporate structure. As explained by another federal appellate court, in those cases, “the citizenship of LLCs often ends up looking like a factor tree that exponentially expands every time a member turns out to be another LLC, thereby restarting the process of identifying the members of that LLC.” Purchasing Power, LLC v. Bluestem Brands, Inc., 851 F.3d 1218, 1220 (11th Cir. 2017).

All told, cases like Great River show “the difficulty of applying established diversity jurisdiction principles to 21st-century business organizations.” Id.

Lessons Learned

Businesses litigating in federal court would be wise to assess these complicated jurisdictional issues early-on to verify that their case is properly proceeding in federal court. Otherwise, businesses risk a “colossal waste of time and effort” as they work to sort out whether federal jurisdiction is properly invoked. Id. at 1228.

Great River is also a timely reminder that federal courts carefully police subject matter jurisdiction issues. Indeed, as the Eleventh Circuit described in 2017, federal courts “must be vigilant in forcing parties to meet the unfortunate demands of diversity jurisdiction in the 21st century.” Id. Until the current jurisdictional analysis for unincorporated associations like LLCs is amended, putative litigants must continue to venture down the rabbit hole of citizenship for all constituent members.

Remaining mindful of federal judicial oversight is important not only to keep a case on the right track, but it may also be necessary to avoid sanctions under Federal Rule of Civil Procedure 11. As just one example, the Southern District of New York sanctioned attorneys under Rule 11 for misrepresenting that a case could properly be removed to federal court. See Rivas v. Bowling Green Assocs., L.P., No. 13-CV-7812 PKC, 2014 WL 3694983 (S.D.N.Y. July 24, 2014). Cases like this are indeed becoming increasingly common as jurisdictional issues grow in complexity.

In sum, modern day businesses should think about jurisdictional issues early and often. Doing so best allows the case to promptly be litigated on the merits and may avoid costly jurisdictional rabbit holes that result in delays, costs, or worse, sanctions.