Thread by @AkivaMCohen

Hey, #LitigationDisasterTourists

Want an explainer on why this is nightmare fuel - and why it's so important to have lawyers who know what the rules are?

OK. This is going to be a relatively short thread, because it's a relatively short decision.

First, some background about the way Federal Courts work

Not everything can go to federal court. In fact, they only take two types of cases: federal question (case involving federal law/constitution) or diversity (case between citizens of different states or a US citizen and a foreigner).

State law dispute between 2 NYers?

Or, to pick a random example, a lawsuit between a Canadian and an Italian?

Now, the thing about subject matter jurisdiction - which is "what types of cases does this court have the power to hear" is that it can't be created by the parties' agreement. The court either has it or it doesn't.

So while an objection to personal jurisdiction can be waived by not raising it - you may not be able to sue me in Nome, Alaska, but if you do and I show up to litigate instead of moving to dismiss, then it turns out you can - that's not true for subject matter jurisdiction

That's what happened in this case. Two parties litigated in Federal Court. For. Years.

After a hard fought battle, the defendant won a summary judgment motion.

And then, on appeal? THIS happened

How could this happen?

Well, it turned on the parties not understanding the differences between LLCs and corporations, and the Court not paying attention to it.

The law treats different types of business organization differently. As distinct legal entities, the law treats corporations as distinct from their shareholders. They're taxed differently. And, for diversity purposes, "who the shareholders are" doesn't matter.

Basically, a corporation is a citizen where it's incorporated and where it's HQ is.

Partnerships are different. They're treated as the amalgamation of the individual partners - bunch of people coming together - so they're citizens of anywhere one of their partners is.

Want to sue a large law firm? Good luck with diversity jurisdiction; if any of its partners live in your state, you don't have it. (Some law firms are actually corporations; go hog wild against them)

How about LLCs? They're not an incorporated entity, but they're also not technically a partnership. But it's a pass-through entity for tax purposes, and the courts basically decided to treat them the same way as partnerships: An LLC has the citizenship of all of its members

And that bit about "sub-members"? That's where it gets really fun. Because sometimes the members of an LLC you want to sue (or are suing) are *themselves* LLCs. So to figure out what the citizenship is, you need to trace through ALL of that until you get to real people (or corps)

And you potentially run into problems when the lawyers don't notice that an LLC is different from a corporation for purposes of diversity jurisdiction, which is what happened here.

Step by step:

1) Plaintiff's lawyer acted like his LLC client was a corporation, and just alleged it was a Michigan citizen because the LLC was created under Michigan law

2) The defendant didn't catch that. Neither did the court (typically, the court WILL notice and instruct the plaintiff to allege where the members are based)

3) So they spent 3 years doing discovery and motion practice. And defendant won! Hooray! (Oh no)

Plaintiff appealed, and the Court of Appeals, being a little more attentive to detail this time than the trial court judge (and btw, you can bet their clerk did not have a fun time reading this decision) went

Anyway, the court orders briefing, and the plaintiff goes "oh, hey, your honors, it turns out that the ultimate owner in the LLC chain is a Swiss company owned by an Italian dude. Oh well"

And if that's true, and the court has no reason to think it isn't, that means the trial court never had jurisdiction to begin with, because both parties are non-US citizens, so there's no diversity.

The result? The 6th Circuit kicks it back down to the trial court (the defendant will at least get to do some discovery to confirm if what the Plaintiff said is true) and absent a miracle, the case will be dismissed for lack of subject matter jurisdiction

That's a big win for the Plaintiff; assuming the statute of limitations hasn't run, it gets to retry the case knowing what did and didn't work the first time, and every decision by the trial court is wiped from existence.

As a lawyer ... nightmare fuel.

/fin