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Posted: May 11, 2018

Judge Hurley Continues Sua Sponte Dismissals Of Cases Involving LLCs That Fail To Properly Plead Diversity Jurisdiction

Posted by Solomon N. Klein, Litigation Partner

We previously wrote about District Judge Denis R. Hurley’s sua sponte dismissal of cases involving LLCs that fail to properly plead diversity jurisdiction. Judge Hurley has recently dismissed yet another case involving an LLC for lack of subject matter jurisdiction. Encompass Group, LLC v. Oceanside Inst’l Indus., Inc., 16-cv-2560 (E.D.N.Y May 3, 2018) (DRH) (AYS).

(As explained in our previous post, the citizenship of an LLC is determined based on the citizenship of its members – unlike traditional corporations where citizenship is based on the principal place of business and state of incorporation. However, many attorneys assume that diversity jurisdiction exists based on the LLC’s state of organization and principal place of business, resulting in cases where jurisdiction is improperly pled or nonexistent.)

The anecdotal tally of Judge Hurley’s effort to establish jurisdictional order in his Court (at least three dismissals of LLC cases since early April) suggests that the overall number of such cases in the federal court system may be quite high. Indeed, it is the view of the author that this problem will not be resolved absent legislative change in how LLCs are treated for diversity purposes or, at least, a change in the “civil cover sheet” that accounts for the citizenship requirements of LLCs.

In this most recent case, Judge Hurley explained that “[t]his case is but just one of the numerous cases filed in this Court in which diversity jurisdiction is not properly alleged.” The Court noted that “the problem is such that this Court has, in the past year, issued numerous orders to show cause pointing out the deficiencies in a pleading’s jurisdictional allegations and directing that the relevant party show cause why the action should not be dismissed for lack of jurisdiction.”

The case at issue had been filed almost two years ago and discovery was complete. Apparently, while reviewing the plaintiff’s motion for summary judgment, the Court recognized that the plaintiff had failed to properly plead diversity jurisdiction.

[T]he Court issued the following Order to Show Cause on April 13, 2018:

“In connection with the pending motion for summary judgment, it has come to the Court’s attention that subject matter jurisdiction based on diversity of citizenship is not properly alleged in this matter. According to the Complaint ‘[Plaintiff] Encompass is a limited liability company organized and existing under the laws of State of Delaware and maintains a principal place of business at 615 Macon Street, McDonough, Georgia 30253.’ However, the citizenship of a limited liability company (LLC) is determined by the citizenship of each of its members. See, e.g., Bayerische Landesbank, New York Branch v. Aladdin Capital Management LLC, 692 F.3d 42, 49 (2d Cir. 2012); Handelsman v. Bedford Vill. Assocs. Ltd Pship, 213 F.3d 48, 51-52 (2d Cir. 2000). . . . Accordingly, IT IS HEREBY ORDERED THAT Plaintiff file an amended complaint, on or before May 1, 2018, setting forth the citizenship of each of its members.”
. . .
Encompass has not taken advantage of the opportunity afforded it to amend its complaint to correctly assert its citizenship for diversity purposes. Accordingly, based on the record before the Court, this action must be dismissed for lack of subject matter jurisdiction.

Encompass Group, LLC v. Oceanside Inst’l Indus., Inc., 16-cv-2560 (E.D.N.Y May 3, 2018) (DRH) (AYS).

Posted by Solomon N. Klein, Litigation Partner

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