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Every U.S. state permits the creation of limited liability companies. This type of business organization has proved to be extremely popular, as it shields its investors � called members � from personal liability for the entity’s obligations and permits management by non-members or by members whose personal liability remains limited to their individual investments, while enabling members to enjoy pass-through tax status. [1] Roughly speaking, an LLC is the functional equivalent of a subchapter S corporation, without the limitations on number of investors, and the restrictions of certain tax allocation and gain recognition rules that inhere in S corporation status. An LLC can sue or be sued, and has a juridical existence conferred by its state of creation. However, for the purposes of federal diversity jurisdiction, an LLC is not a “citizen.” The federal courts sitting in New York have held uniformly that in evaluating a claim to federal jurisdiction either under the original diversity provision, 28 USCA �1332(a)(1), or under the removal diversity provision, 28 USCA 1446(a), an LLC has the citizenship of every one of its members. [2] And, since an LLC is not an entity with a “citizenship” of its own, it is not a “citizen” of the state that created it. [3] At least in the U.S. Court of Appeals for the Seventh Circuit, the “member citizenship” rule is so well established that an attorney risks Rule 11 sanctions if he fails to make an aggressive inquiry into the citizenship of every member of an LLC before filing the initial pleading, as ruled in Belleville Catering Co. v. Champaign Market Place LLC, 350 F3d 691, 692 (2003). This case law, based on an unnecessarily parsimonious view of a U.S. Supreme Court decision involving limited partnerships, is wrong, and ought to be abandoned. [4] ‘Carden’ The “member citizenship” rule for LLCs is derived from the holding of the Supreme Court in Carden v. Arkoma Associates, 494 US 185. Here, Arkoma, an Arizona limited partnership, sued two citizens of Louisiana in federal court under the diversity jurisdiction. One of the limited partners was a citizen of Louisiana, and the defendants moved to dismiss under the “complete diversity” doctrine of Strawbridge v. Curtiss, 2 LEd 435 (1806). The majority of the Court viewed the presenting question to be whether Arkoma “can (like a corporation) assert its own citizenship, or rather is deemed to possess the citizenship of its members, and if so, which members.” While reaffirming its holding in Louisville, C.&C.R. Co. v. Letson, 11 LEd 353 (1844) that “a corporation is ‘capable of being treated as a citizen of [the state which created it], as much as a natural person’ “, the Court held that “having entered the field of diversity policy with regard to artificial entities once (and forcefully) in Letson, we have left further adjustments to be made by Congress.” Most of the Carden majority opinion is devoted to rehearsing the history of Supreme Court decisions that refused to accord “citizenship” for diversity purposes to various artificial persons recognized by state law as citizens, including a joint stock company and a limited partnership association, both of which had a single class of owners that elected and controlled the entity’s managers, and thus had the essential characteristics of a general partnership, not of a corporation. However, as the Carden majority acknowledged, the Court had once before, in Puerto Rico v. Russell & Co., 288 US 476, 482 (1933), affirmed the “citizenship” of an entity, the Puerto Rican sociedad en comandita, which, in the words of the Carden dissenters, is “virtually identical” to the modern limited partnership. In both forms of business organization, the general partners have unlimited liability for the debts of the entity, and manage the entity, while the “special partners” in the sociedad are liable only to the extent of their individual investments, and have no management role unless some such role is specified in the articles of organization. The Russell court held that: These characteristics under the Codes of Puerto Rico give content to their declaration that the sociedad is a juridical person. That personality is so complete in contemplation of the law of Puerto Rico that we see no adequate reason for holding that the sociedad has a different status for purposes of federal jurisdiction than a corporation organized under that law. The Carden majority declined to follow Russell, citing a 1965 decision denying entity citizenship to a labor union organized as an unincorporated association, and holding that any argument to apply Russell “beyond its facts” was “at least 25 years too late.” Whatever the weakness of the reasoning of the Carden majority � and it has been described in one prominent text as “indefensible in basic principle” [5] � it clearly determines the lack of “citizenship,” for diversity purposes, of any limited partnership which, like the Arkoma partnership at issue in Carden itself, has general partners. The Carden dissenters argued that the touchstone of diversity analysis should be the citizenship of the real parties to the controversy, and that where a limited partnership was concerned, the real parties to the controversy were the general partners who control the assets of the organization and have the power to control the litigation. The majority viewed this approach as simply irrelevant; either the business organization was a “citizen,” as is the case of a corporation or a sociedad en comandita, or each of its members was a “citizen.” For the majority, there was no middle ground. The majority opinion, ignoring its own analysis of the sociedad en comandita, ends with the unnecessarily broad declaration, “We have long since decided that, having established special treatment for corporations, we will leave the rest to Congress.” It is this dictum that has led the lower federal courts to hold, without “analyzing an entity’s characteristics to determine its status,” [6] that a limited liability company has no “citizenship” of its own for diversity purposes. Application Error It is submitted, however, that the courts have erred in applying the Carden doctrine to limited liability companies. As the Seventh Circuit pointed out in Cosgrove v. Bartolatta, 150 F3d. 729, 731 (1998), the “principal difference” between a limited partnership and a limited liability company “is that [an LLC] need have no equivalent to a general partner, that is, an owner who has unlimited personal liability for the debts of the firm.” In light of “what seems to have crystallized as a principle that members of associations are citizens for diversity purposes unless Congress provides otherwise,” the court then held, with no further discussion, that “an LLC for purposes of the diversity jurisdiction has the citizenship of its members.” The circuit court failed to examine whether the “principal difference” was a difference in principle. In ignoring the Russell example, at a time when no other appellate court had yet considered whether to subject LLCs to the Carden doctrine, Judge Richard Posner, a jurist of considerable national stature, missed an opportunity to draw a useful line between business units that have only their own identity, like corporations and LLCs, and those in which individuals remain legally responsible in their own persona for the decisions, and liabilities, of the entity. It is somewhat remarkable that in none of the decisions subjecting LLCs to the Carden doctrine has a court noted that when Carden was written in 1990, there were virtually no limited liability companies. Delaware adopted its Limited Liability Act in 1992; the Uniform Limited Liability Company Act was first promulgated in 1994. The courts now appear to subsume the complexities of the modern American business landscape into two overarching categories: “corporations versus all other business organizations � in which only corporations are deemed to have entity citizenship.” [7] LLCs are thus paired with other unincorporated associations, ranging from limited liability partnerships and business trusts through informal social clubs, widely diverse in name and structure, yet all sharing the common element of limited jurisdictional choice and institutional in capacity to invoke the diversity jurisdiction of the federal courts. This conflation by the courts is grossly simplistic and unwarranted. The operating structure of the typical LLC is much closer to the corporate form when compared with any other unincorporated organization, including the limited partnership or limited liability partnership (LLP). Therefore, the LLC should enjoy a singular “juridical personality”, apart from its members for diversity purposes, endowing it with the “same legal status as the corporation.” [8] The most enticing feature of the basic LLC for the prospective investor is that it amalgamates all the federal tax advantages of a partnership with limited liability for all its members. Like the corporation, the LLC is marked by a “separateness from its constituents,” by “centralized management,” and by “the associated limited liability protection produced thereby.” [9] However, while shareholders of corporations are essentially taxed twice, once on income at the corporate level and again on dividends, members of an LLC receive pass-through tax treatment under the “check the box” regulations of the Internal Revenue Service while still being shielded from personal liability for LLC obligations. Adding favorable tax treatment to lower filing fees and more lenient fiduciary duties between owners, the LLC is quickly becoming the most pervasive nonpublicly traded entity in the country. The application of Carden to LLCs threatens to shut out entirely the burgeoning form of the LLC from federal adjudication, although its functional identity with the corporation is indisputable. There is simply no reason to deprive investors utilizing the LLC form rather than the corporate form of the ability to have their claims and defenses heard by federal courts. Equally, there is no reason to deprive plaintiffs seeking redress against an LLC of a federal forum if one would otherwise be available were the defendant a corporation. An LLC is starkly different from the limited partnership considered in Carden. While the general partners of the classic limited partnership must risk personal liability for the indebtedness of their organization, the entire management and membership of the LLC is impervious to personal attack. [10] Because the debts, obligations, and liabilities of an LLC are only those of the entity, “An LLC . . . constitutes a separate legal entity . . . [and] the interest of a member is analogous to shareholders of a corporation,” the court wrote in Exchange Point LLC v. SEC, 100 F.Supp.2d 172, 175 (SDNY 1999). Complementarily, all members of an LLC may engage in management functions while protecting their personal assets from the liability of the partnership. This is the crucial difference between the LLC and the limited partnership: unlike other unincorporated forms, when an LLC encounters organizational liability, all members have been in a position to influence decisions involved in their adversary’s claim, yet none have any personal liability. This being so, the forum for litigation for or against the entity should be the same as that available to a corporation, and not be dependent on rules devised for individual liability. Conclusion In sum, the mechanistic bar of the LLC from federal diversity jurisdiction in its own right is neither required nor appropriate. It is now recognized in every state that pass through tax liability and unrestricted ability to participate in enterprise management can be joined with lack of personal liability for entity obligations. No commentator, and no federal jurist, has argued that the availability of a federal forum, or the lack thereof, ought to figure into the calculus of whether to operate in the corporate or the LLC form. Denying entity citizenship to an LLC serves no valid purpose; Carden does not compel that result, and the courts should so hold. Jeffrey E. Glen is a member of Anderson Kill & Olick. Craig M. Hirsch, a summer associate at the firm, assisted in the preparation of this article. Endnotes: [1] A fully annotated version of this article is available from the author at [email protected]. [2] Handelsman v. Bedford Village Assoc. L.P., 213 F3rd 48, 51-52 (2nd Cir. 2000); Keith v. Black Diamond Advisors, Inc., 48 FSupp.2nd 326, 329-330 (SDNY 1999). [3] Marseilles Hydro Power v. Marseilles L&WCo., 299 F3d 643, 652 (7th Cir. 2002). [4] In so arguing, we follow the lead, although not in all respects the analysis, of Professor Debra R. Cohen, whose article Citizenship of Limited Liability Companies for Diversity Jurisdiction, 6 J. of Small and Emerging Business Law 435 (2002) is the essential academic text on the issue. [5] Ribstein & Keatinge, Limited Liability Companies, sec. 10.06 at p. 18 [6] Keith, supra note 2. [7] Cohen, supra note 4. [8] Johnson, Limited Liability Companies (LLC): Is the LLC Liability Shield Holding up Under Judicial Scrutiny, 35 New Eng. L. Rev. 177, 217 (2000). [9] Id., at 190. [10] Cohen, supra note 4.

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