In a unanimous decision on March 7, 2016, the United States Supreme Court affirmed its longstanding principle that unincorporated entities cannot claim diversity jurisdiction for federal court purposes. This case highlights the striking differences between corporations and other entities, and provides a roadmap for how major unincorporated entities are viewed by the federal court system.
Briefly, a primer on diversity jurisdiction: for a suit to commence in federal court, that court must have subject matter jurisdiction over the case. This can be achieved either through bringing a claim “arising under” federal law, or through what is known as “diversity jurisdiction.” In diversity jurisdiction, opposing parties must have a minimum amount in controversy ($75,000) and complete diversity, meaning, generally, that the opposing parties cannot reside in the same state.
In Americold Realty Trust v. ConAgra Foods, Inc., et al, ConAgra sued Americold, a real estate investment trust (“REIT”) in a Kansas court. The latter removed the case to federal court, citing diversity jurisdiction. On appeal, the Tenth Circuit held that the District Court lacked subject matter jurisdiction to hear the suit, arguing that, since Americold was not a corporation, citizenship for diversity jurisdiction purposes fell to the citizenship of the members of the REIT, its shareholders. As citizenship for the shareholders had not been established, the District Court had no jurisdiction to hear the case. A unanimous Supreme Court agreed, suggesting that the rules regarding diversity jurisdiction are “easy enough to apply to humans, but can become metaphysical when applied to legal entities.”
The reasoning behind the case seems clear and simple enough, but it should be enough to give any business organizers pause when choosing a business form. Many of the popular forms of business entity in the modern era are, in fact, unincorporated entities. The form at issue in the Americold case is an REIT, but business organizers should be aware that partnerships, limited partnerships (“LPs”), limited liability partnerships (“LLPs”) and limited liability companies (“LLCs”) are all considered unincorporated, and choosing this form may effectively put access to federal court out of reach in many circumstances. The greater the number of members in these entities, the greater the likelihood that diversity jurisdiction becomes difficult to attain in federal court. While this may not be nearly as strong of a consideration in choosing a form as taxation, it is a reminder that there are still pros and cons to every form, and the citizenship of the entity as an entity is always important.