International Diversity Jurisdiction Is Determined by Member Investors of an LLC Functional Equivalent: Seventh Circuit | Practical Law

International Diversity Jurisdiction Is Determined by Member Investors of an LLC Functional Equivalent: Seventh Circuit | Practical Law

The US Court of Appeals for the Seventh Circuit, in Fellowes, Inc. v. Changzhou Xinrui Fellowes Office Equipment Company Ltd., held that if a foreign entity's structure is functionally identical to a limited liability company (LLC), there can be no diversity jurisdiction where there is shared citizenship between any of the entity's member investors and the opposing party.

International Diversity Jurisdiction Is Determined by Member Investors of an LLC Functional Equivalent: Seventh Circuit

by Practical Law Litigation
Published on 29 Jul 2014 • USA (National/Federal)
The US Court of Appeals for the Seventh Circuit, in Fellowes, Inc. v. Changzhou Xinrui Fellowes Office Equipment Company Ltd., held that if a foreign entity's structure is functionally identical to a limited liability company (LLC), there can be no diversity jurisdiction where there is shared citizenship between any of the entity's member investors and the opposing party.
On July 22, 2014, the US Court of Appeals for the Seventh Circuit, in Fellowes v. Changzhou Xinrui Fellowes Office Equipment Company Ltd., held that if a foreign entity's structure is functionally identical to a limited liability company (LLC), there can be no diversity jurisdiction where there is shared citizenship between any of the entity's member investors and the opposing party (No. 12-3124, (7th Cir. July 22, 2014)).
The plaintiff, Fellowes, Inc., is a citizen of Illinois. The defendant, Changzhou Fellowes, is a business established under the laws of China. The plaintiff filed a breach of contract suit in federal district court against the defendant under international diversity jurisdiction, 28 U.S.C. § 1332(a)(2). The district court entered a preliminary injunction for the plaintiff. The defendant appealed arguing that:
  • It should have been treated as an LLC, which has the citizenship of every member investor.
  • The court lacked diversity jurisdiction since one of its member investors, like plaintiff, was a citizen of Illinois.
The Seventh Circuit agreed with the defendant and vacated and remanded the case. In determining that the defendant should be treated as an LLC, the court noted that:
  • The plaintiff referred to the defendant as an LLC in its complaint.
  • The defendant described itself as an LLC.
  • Both parties agreed that the defendant has members with inalienable membership, rather than shareholders.
The court held that since the defendant's structure is functionally identical to an LLC, it must be treated in the same manner as a domestic LLC for the purpose of determining diversity jurisdiction. Therefore, there was no diversity jurisdiction because the plaintiff and one of the defendant's member investors shared citizenship.
The Seventh Circuit further noted that it was not circumscribed by the juridical-entity approach in People of Puerto Rico v. Russell & Co., Sucesores S. En. C., 288 U.S. 476 (1933), where the US Supreme Court held that a Puerto Rican entity known as a sociedad en comandita should be treated as a citizen of Puerto Rico for purposes of determining federal-court jurisdiction. The Seventh Circuit clarified that such an approach was limited to the sociedad en comandita and no other foreign entity.