Reverse and Render : Texas Appellate Lawyer & Attorney : Cowles & Thompson Law Firm : Court of Appeals, Texas Supreme Court

The United States Supreme Court recently resolved a split of authority as to the citizenship of corporations for purposes of federal diversity jurisdiction.  Corporations are deemed citizens of the state in which they are incorporated and the state in which they have their "principal place of business."  In Hertz Corp. v. Friend, the Court adressed the interpretation of the phrase "prinicipal place of business."  The Court first discussed the various tests developed and applied by the courts of appeals focusing on the "nerve center" test  and "business activities" test.  In this case, the Ninth Circuit employed the business activities test and held that because Hertz did more business in California than any other state, it was a citizen of California.  The Supreme Court disagreed and held that 

“[P]rincipal place of business" is best read as referring to the place where a corporation’s officers direct, control, and coordinate the corporation’s activities. It is the place that Courts of Appeals have called the corporation’s “nerve center.”  And in practice it should normally be the place where the corporation maintains its headquarters . . .

The Court concluded by acknowledging that "seeming anomalies" will arise under this test, but the Court was willing to accept them "in an effort to find a single, more uniform, interpretation of the statutory phrase" and "in view of the necessity of having a clearer rule."  Thus, a corporation's dual citizenship for diversity purposes consists of the state of incorportation and the state in which the headquarters is located.  Accordingly, the Court reversed the Ninth Circuit and remanded for reconsideration in light of this test.  The Supreme Court's unaminous opinion can be found here. 

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For the purpose of determining diversity jurisdiction, is a limited liability company a citizen of the state where it is organized or is it a citizen of the states of which its members are citizens? 

In an issue of first impression, the Fifth Circuit, in Harvey v. Grey Wolf Drilling Co., held that a limited liability company, for diversity jurisdiction purposes, depends on the citizenship of its members.

In Grey Wolf, the plaintiffs, Louisiana residents, sued Grey Wolf in the Eastern District of Louisiana on diversity jurisdiction grounds. Grey Wolf was a Texas LP with members that included an LLC with members in Texas and Nevada, but was organized in Louisiana. The district court applied 28 U.S.C. § 1332(c), a statute governing citizenship of corporations, to the LLC, and held that (1) an LLC's citizenship is determined by where it is organized; and (2) that the parties lacked diversity jurisdiction.

The Fifth Circuit reversed the district court's opinion because:

·          Every Circuit Court that had dealt with the issue held that citizenship would be determined by the LLC’s members;

·          The district court's holding was inconsistent with Supreme Court jurisprudence;

·          The district court’s opinion conflicted with § 1332(c)(1)’s language;

·          Louisiana law clearly distinguished LLCs from Corporations.

*For more insight on the district court's reasoning, see Debra R. Cohen’s article "Limited Liability Company Citizenship: Reconsidering an Illogical and Inconsistent Choice", 90 Marq. L. Rev. 269 (2006).

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