You Think You Belong In Federal Court? Are You Sure?

Published on April 17, 2019

Getting a complex business dispute into Federal Court can be the best decision for both the lawyer and the client. The more stringent rules and schedules keep your case on track. The judges are of the highest caliber. The courthouse itself is more majestic. You won’t be crammed into a narrow hallway filled with lawyers, court reporters, clients and witnesses waiting forever for your case to be called. And win or lose, you can be confident that your briefs will be read and your arguments will be fairly and impartially considered. So, it makes perfect sense that if you can get your business dispute into federal court, you should seriously consider doing so.

But business litigation is not fun – except for the lawyers. It’s expensive. It’s time consuming. The outcome can almost never be guaranteed. If you’re a small or medium sized business, it can put your entire operation at risk. So, if you choose to litigate in federal court, you’d better be sure you can prove you belong there. If you don’t, you may spend months or years litigating and spend tens or hundreds of thousands of dollars in legal fees only to end up back in state court having to start over.

For many complex business disputes, establishing federal court jurisdiction is easy. If your case arises from a federal statute, you qualify. But if your dispute is based on a breach of contract, fraud, breach of fiduciary duty or other “common law” theory of recovery, you must establish “diversity jurisdiction” to get your case into federal court. To meet these requirements, the amount in controversy must be more than $75,000.00, and the dispute must be between “citizens of different states.” 28 U.S.C. §1332(a)(1) (2011). This means that none of the parties on the plaintiff side of the case can be “citizens” of the same state as any of the parties on the defendant side of the case. If any plaintiff and any defendant are citizens of the same state, the case cannot be brought in federal court no matter how much is at stake or how complex the issues may be.

When the parties are all individuals, this is easy to determine. Plaintiff John Doe is from Florida. Defendant John Smith is from New York. Diversity established.  The difficulty arises when the parties on one or both sides of the case are business entities, particularly Limited Liability Companies. Limited Liability Companies are quickly becoming the business entity of choice for many small and mid-sized companies. They are easy to create. They are frequently treated more favorably from a tax perspective, and there are fewer corporate governance requirements to maintain their status. Most importantly, they provide most of the same protections from personal liability as do traditional corporations.

However, for purposes of establishing federal court diversity jurisdiction, LLCs can create tremendous risks for the parties and their lawyers if careful research is not done before jumping into federal court. This is because LLCs are considered “citizens” of every state in which any of their Members are citizens. For example, if you have an LLC with Members who are citizens of Florida, California, New York and Georgia, the LLC is considered a citizen of each of these states. If your LLC sues another LLC, and that LLC has even one Member who is also a citizen of any of these states, diversity jurisdiction cannot be established, and the case cannot be filed in federal court. This applies even if the LLC is only registered to do business in one state, and its principal place of business and operations are located in only one state.

The perils of failing to investigate the citizenship of LLCs before filing or removing a case to federal court are highlighted in two recent decisions from the United States Court of Appeals for the Eleventh Circuit, which includes Florida.  In the first case, Thermoset Corporation v. Building Materials Corp. of America, 849 F.3d 1313 (11th Cir. 2017), a roofing contractor sued two building supply companies that provided materials on a construction project in the Bahamas. The Plaintiff was a Florida corporation with its principal place of business in Florida. One defendant was a Delaware corporation with its principal place of business in New Jersey. The other defendant was a Delaware LLC with its principal place of business in Texas. Plaintiff initially filed the case in Florida state court, but one of the defendants removed the case to federal court. The case proceeded for almost 3 years in federal court until the court entered summary judgment in favor of the defendants. On appeal, the Eleventh Circuit discovered that one of the Members of the defendant Delaware LLC with its principal place of business in Texas was, in fact, a citizen of Florida. This destroyed diversity jurisdiction because the plaintiff was also a citizen of Florida. The Eleventh Circuit therefore vacated the summary judgment ruling and instructed the district court to remand the case back to the Florida state court. As a result of the defendant’s rush to get the case into federal court without diligently investigating the citizenship of all of the parties, victory was snatched away, and the defendants were forced back into litigation in state court.

In the second case, Purchasing Power, LLC v. Bluestem Brands, Inc., 851 F.3d 1218 (11thCir. 2017), the plaintiff initially filed the action in Georgia state court. The defendant, a corporation with citizenship in Minnesota and Delaware, sought to remove the case to federal court. Before doing so, the defendant’s attorney asked plaintiff’s attorney to determine the citizenship of the plaintiff for diversity purposes. That determination, however, was not as simple as it seemed. The plaintiff, Purchasing Power, LLC, had just one member – Purchasing Power Holdings LLC. That entity, however, had individual members who were residents of Georgia and three additional members that were separate LLCs. To determine the citizenship of Purchasing Power, LLC, you would need to know the citizenship of all of the members of the three LLCs that were “thrice removed” from the actual party to the litigation. Plaintiff’s counsel asked his client to investigate the citizenship of all of the Members of each LLC and the client advised that none were citizens of Delaware or Minnesota.

Without any other confirming evidence, defendant removed the case to federal court, and the parties proceeded with the litigation for more than two years. The federal district court ultimately granted summary judgment to the defendant. As in Thermoset, the victory was short-lived. On appeal, the Eleventh Circuit noted the lack of sufficient evidence to prove diversity of citizenship. This led to a more comprehensive investigation which revealed that one of the thrice removed Members of one of the LLC’s that was a Member of the plaintiff company was, in fact, owned by a Delaware corporation, the same citizenship as the defendant. Diversity destroyed; summary judgment vacated; case remanded to state court.

On top of the colossal waste of time and money spent litigating in federal court, the federal district court sanctioned the plaintiff’s attorneys, ordering them to pay over $500,000 to the defendant for attorney’s fees and costs, based on the attorneys’ failure to disclose the facts that would have revealed the lack of diversity jurisdiction at the inception of the federal court proceedings. The Eleventh Circuit reversed this sanction award, finding no bad faith or intentional misconduct given the complexity of the ownership structure and the fact that the plaintiff, itself, simply did not know the information until it was discovered on appeal. However, with the Eleventh Circuit’s opinion now published, future courts may not be as forgiving of such missteps.

In sum, any business entity that is facing complex and costly business litigation must do a full investigation of all of the parties on both sides of the case before jumping into federal court. This is especially necessary if you, your co-parties or any of your adversaries are Limited Liability Companies. A little legwork at the outset of the case to make sure you satisfy the requirements of diversity jurisdiction will save you thousands of dollars and years of wasted time and effort. You (and especially your attorney) will also avoid the risk of crippling sanctions.

The Court’s full opinions can be found here:

Thermoset Corp. v. Building Materials Corp. of America, Inc.:

Purchasing Power, LLC. v. Bluestem Brands, Inc.:

If you would like more information about these decisions or have questions about other commercial business disputes, please contact me by email at, by calling my office at 305.459.3033, or by visiting my website at