On January 8, 2010, the Fourth Circuit handed down the Ferrell decision, a reminder that even the Class Action Fairness Act of 2005 (CAFA) minimal diversity test for removal of class action lawsuits to federal court can encounter complicated and significant hurdles when a limited liability company (LLC) is involved as a defendant. The LLC may not be diverse from the plaintiff’s state after a court applies the two tests for determining the LLC’s principal place of business—the nerve center test and the place of operations test.

For purposes of diversity, LLCs have traditionally been deemed residents of the states where their members are citizens. This is the so-called “Carden Rule,” which comes from the 1990 U.S. Supreme Court decision Carden v. Arkoma Assocs., 494 U.S. 185 (1990) (holding that a limited partnership is not itself a citizen as a separate entity, but instead, courts must look to the citizenship of its members to determine if diversity jurisdiction exists). Pre-CAFA, the Fourth Circuit applied the Carden Rule to LLCs in its 2004 ruling, Gen. Tech Applications, Inc. v Exro Ltda., 388 F.3d 114, 121 (4th Cir. 2004).

On the facts in Ferrell, the defendant Express Check had a sole member, QC Financial Services, a resident of both Missouri and Kansas. All other parties were South Carolina citizens. Express Check claimed that diversity was satisfied, which is logical under the Carden Rule. However, CAFA’s removal rules first must be taken into consideration.

CAFA was passed in 2005, and the removal test language in the statutes makes reference to the citizenship of “corporations” and “unincorporated associations.” The question of statutory interpretation under CAFA presented by Ferrell was whether Section 1332(d)(10), which changed the rules for determining the citizenship of “unincorporated associations,” also applies to LLCs, such that the inquiry is not where the members reside, but where the LLC was established and where it has its principal place of business. The Fourth Circuit held that when CAFA removal is involved, an LLC is an “unincorporated association” and therefore is a citizen of the state in which it is organized and the state where it has its principal place of business.

As a result, in the Ferrell matter, Express Check’s principal place of business was not determined to be Kansas, where four high-level officers lived. Rather, the court determined that the LLC’s citizenship was South Carolina because it made loans, had store locations and most of its employees were in South Carolina. Thus, minimal diversity between the South Carolina plaintiff and the LLC defendant in Ferrell did not exist, and removal under CAFA was improper. The case has been remanded, and the parties will go back to state court to litigate the class action lawsuit.