Generally speaking, pleading and establishing federal diversity jurisdiction is not a complicated affair. The rule of complete diversity is familiar to every lawyer who survived first-year civil procedure: The plaintiffs must be citizens of different states than the defendants. The corollary rules are that individuals are citizens of the state where they reside, and corporations are citizens of both the state in which they are incorporated and the state in which they have their principal place of business. In 2010, the U.S. Supreme Court clarified in Hertz Corp. v. Friend that the latter phrase means the corporation’s “nerve center.” But, what about the citizenship of a limited liability company (LLC) whose sole member is a corporation? Or what about the increasingly commonplace situation where an LLC has members composed of individuals, corporations, partnerships or other limited liability companies?
The federal circuit courts have uniformly held that the citizenship of an LLC is determined by the citizenship of each of its members. In other words, an LLC may be deemed a citizen for diversity purposes in every state in which its members are citizens. This is easy enough to determine for LLCs composed of a few individuals. The increasing structural sophistication of many businesses, however, means that in-house and outside counsel should carefully examine the citizenship of any entity involved in litigation. The failure to do so could result in a remand to state court, a costly appeal and admonishment from the court or even sanctions.
A recent case from the 3rd Circuit, Johnson v. SmithKline Beecham Corp., illustrates some of these issues. GSK LLC is a large pharmaceutical company responsible for the U.S. division of GlaxoSmithKline. It was formed in 2009, when its predecessor was converted from a Pennsylvania corporation into a Delaware LLC for tax purposes. Despite the change in corporate form and domicile, the company’s headquarters remained in Philadelphia where it occupies 650,000 square feet of office space and employs 1,800 people. Questions about GSK LLC’s citizenship gave rise to an appeal challenging the denial of a motion to remand.
In Johnson, the sole member of the LLC was a Delaware holding corporation founded in 1999, called GSK Holdings. It had a three-member board that met for 15 to 30 minutes in Delaware a few times a year, a bank account in Delaware with less than $25, a ten-by-ten office in Delaware. Its sole activities were limited to approving the financial statements from investments, paying dividends, making new investments and approving proposed restructurings. Because GSK Holdings was a Delaware corporation, the parties agreed that GSK Holdings was a citizen of Delaware and, by extension, so was GSK LLC. Under this analysis, the plaintiffs were different citizens than GSK LLC and diversity jurisdiction existed. But this did not end the matter.
Determining the citizenship of GSK LLC also required application of the Hertz “nerve center” test applicable to corporations. The appellants argued that GSK Holdings’ nerve center was in Philadelphia because GSK Holdings had the authority to manage GSK LLC but “delegated” that power to GSK LLC’s managers, who were all located at the company’s headquarters in Philadelphia. The 3rd Circuit rejected this “delegation” theory, holding that it turned the traditional citizenship analysis for LLCs on its head: Courts look to the citizenship of an LLC’s members, not at the activities of the LLC itself. Thus it was the activities of GSK Holdings, the sole member of GSK LLC, that mattered. On this point, the appellants argued that GSK Holding’s activities were directed from Philadelphia and so its nerve center was located in Pennsylvania. Despite GSK Holdings’ modest activities in Delaware, the 3rd Circuit held the district court did not err in concluding that GSK Holdings’ principal place of business was in Delaware. As a result, the 3rd Circuit affirmed the district court’s holdings that GSK LLC was not a citizen of Pennsylvania and therefore remand to state court was not required.
In more complex cases, the citizenship of an LLC may require analyzing the citizenship of the individual members, any corporate members and the citizenship of the members of any LLCs that have an interest in the LLC whose citizenship is at issue. No matter the number and types of members, what is important is remembering that an LLC’s citizenship turns on that of its members. With that starting point, determining citizenship should be just a matter of investigation and the application of well-known principles.