The Federal diversity jurisdiction statute, 28 U.S.C. § 1332, provides for Federal jurisdiction in cases involving more than $75,000 between ‛(1) citizens of different States; (2) citizens of a State and citizens or subjects of a foreign state; (3) citizens of different States…in which citizens or subjects of a foreign state are additional parties; and (4) a foreign state...as plaintiff and citizens of a State or of different States.“
Plaintiff A, a citizen of Utah, sues Partnership B, a professional partnership with offices in New York, California, London and Paris. Several of the partners in the London office of Partnership B are U.S. citizens, but have lived in London for years and have no intention of leaving. Diversity is alleged. Does it exist? Answer: No.
Where is the diversity loophole?
Under traditional diversity rules, the citizenship of a partnership is determined by the citizenship of its partners. See, e.g., Carden v. Arkoma Assoc., 494 U.S. 185, 192-95, 110 S.Ct. 1015, 108 L.Ed.2d 157 (1990); Grupo Dataflux v. Atlas Global Group, L.P., 541 U.S. 567, 569, 124 S.Ct. 1920, 1923, 158 L.Ed.2d 866 (2004). Partnership B therefore has the citizenship of all of its partners, including those in the London office.
Some of the London partners are U.S. citizens. But because they live outside the U.S. and intend to stay there permanently, they are domiciled abroad. They are, therefore, U.S. citizens without a State for diversity purposes. See, e.g., Cresswell v. Sullivan & Cromwell, 922 F.2d 60, 68 (2d Cir. 1990) (‛United States citizens who are domiciled abroad are neither citizens of any state of the United States nor citizens or subjects of a foreign state“); Sadat v. Mertes, 615 F.2d 1176, 1180 (7th Cir. 1980).
As a result, complete diversity is absent in the suit involving Partnership B. This is because:
• Section 1332(a)(1) doesn’t apply. The dispute is not between ‛citizens of different States.“ The London partners are U.S. citizens without State citizenship. The partnership assumes that status.
• Section 1332(a)(2) doesn’t apply. The dispute is not between ‛citizens of a State and citizens or subjects of a foreign state.“ The London partners are not foreign citizens or subjects—they are U.S. citizens domiciled abroad. The partnership assumes that status.
• Section 1332(a)(3) doesn’t apply. The dispute is not between ‛citizens of different States…in which citizens or subjects of a foreign state are additional parties.“ There is only one party on the defense side of the case, Partnership B.
• Section 1332(a)(4) doesn’t apply. The dispute is not between ‛a foreign state...as plaintiff and citizens of a State or of different States.“ Plaintiff A is not a foreign state and the sole defendant, Partnership B, assumes the ‛Stateless“ U.S. citizen status of its London partners.
For a reported case involving these issues, see, e.g., Herrick v. SCS Comm’s, Inc., 251 F.3d 315, 322 (2d Cir. 2001).
Because federal courts are courts of limited jurisdiction, overlooking diversity loopholes such as this one at the outset of a case can have significant consequences later on when the absence of jurisdiction comes to light.
(Note: the analysis above does not apply in cases governed by CAFA, 28 U.S.C. § 1332(d), including its unincorporated association provision, 28 U.S.C. § 1332(d)(10)).
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