Diversity Jurisdiction

Article III section 2 of the Constitution allows the federal courts to hear cases between citizens of different states. Put differently, diversity jurisdiction exists if the parties are diverse. Diversity jurisdiction allows the parties to file a state law claim in federal courts with the hope of removing any “homefield advantage” one party may have in the forum state. The requirements for diversity jurisdiction are outlined in 28 USC § 1332. There are two primary requirements:

“The district courts shall have original jurisdiction of all civil actions where the matter in controversy exceeds the sum or value of $75,000, exclusive of interest and costs, and is between—citizens of different States.”

– 28 USC § 1332(a), (a)(1).

In other words, to satisfy diversity jurisdiction, (1) the parties must be citizens of different states (referred to as complete diversity), and (2) the amount in controversy must exceed $75,000.

Complete Diversity

The first requirement to satisfy diversity jurisdiction is that there must be “complete diversity” between the parties. The word complete is important. The rule for complete diversity is:

All the plaintiffs need to be from different states than all the defendants.

Another way of describing complete diversity is that all the parties on either side of the “v.” must be from different states. This is different from minimal diversity where (if there are multiple plaintiffs or multiple defendants) at least one of the parties must be from other states. Below are some examples to illustrate the difference between minimal diversity and complete diversity. As another reminder, only complete diversity satisfies diversity jurisdiction.

Minimal diversity examples:

Plaintiff 1 from Minnesota, Plaintiff 2 from Wisconsin v. Defendant from Wisconsin.

Plaintiff from Minnesota v. Defendant 1 from Minnesota, Defendant 2 from Wisconsin.

Complete diversity examples:

Plaintiff 1 from Minnesota, Plaintiff 2 from Wisconsin v. Defendant from Iowa.

Plaintiff 1 from Minnesota, Plaintiff 2 from Wisconsin v. Defendant 1 from Iowa, Defendant 2 from Illinois.

Plaintiff from Minnesota v. Defendant 1 from Iowa, Defendant 2 from Illinois.

Plaintiff from Minnesota v. Defendant 1 from Iowa, Defendant 2 from Iowa.

If there is no complete diversity, the claim must be dismissed for lack of subject matter jurisdiction and refiled in a state court.

Domicile Test

The word “domicile” has been used several times up to this point without providing a definition. This word is important because domicile determines where the parties are “from” at the time the litigation is filed, which is essential to determine whether there is complete diversity.

As a relevant side note, the domicile of the parties is important at the time when the litigation is filed. If the parties are not diverse at the time the litigation is filed, but later become diverse, there is no diversity jurisdiction. Likewise, if the parties are diverse at the time the litigation is filed then later become no longer diverse, there may still be diversity jurisdiction.

Domicile, however, has a different definition depending on whether the party is an individual or a business.

Individuals

For an individual the definition of domicile is:

The domicile of an individual is the state where the individual is (1) physically present and (2) has an intent to remain there indefinitely.

Notice how the individual must have the intent to remain “indefinitely” not “permanently.” An individual is not required to never leave their domicile.

This rule brings up two situations when a domicile is likely to change (1) students moving to another state for school, and (2) moving generally.

A student’s domicile may or may not change, depending on their intent. If the student intends to return to their home state after obtaining an education, the domicile is likely to never have left the home state. But if a student leaves the home state to go to school, not knowing whether they will return to their home state or to another state, their domicile is likely to have changed. Factors a court is likely to consider are whether the individual opens a bank account in the new state, whether they obtain a driver’s license in the new state, whether they register their car in the new state, whether they register to vote in the new state, etc.

The “physically present” requirement is easier to determine but just as important. If a family is moving from State A to State B with no intent to return to State A, their domicile remains in State A until they actually reach State B. So, if the family is involved in a car crash in State C, their domicile for purposes of the lawsuit is State A until they reach State B.

Corporations

The domicile of a corporation can be found in multiple states:

1. State of incorporation.

2. The principal place of business.

A corporation may be incorporated in the same state where they have their principal place of business, but it does not have to be. The principal place of business has been defined as the corporation’s “headquarters.” A corporation could, but does not need to, file its articles of incorporation in the same state where they have their headquarters.

Unincorporated Entities

The domicile of an unincorporated entity (such as a partnership or LLC) is determined by the domicile of the partners or members. For instance, if a plaintiff business is organized as a partnership and has three partners from Iowa, South Dakota, and Wyoming, then none of the defendants can be from Iowa, South Dakota, or Wyoming.

International Issues

There is an important exclusion in 28 USC § 1332. United States Citizens that are domiciled abroad cannot be subject to diversity jurisdiction. For example, Plaintiff A is currently domiciled in California and sues defendant B is a US citizen currently domiciled in France for a state law claim. In this instance, Plaintiff A cannot sue Defendant B in a federal court because the court cannot exercise subject matter jurisdiction.

However, foreign nationals who have a presence in the United States will be considered a citizen of the state they are currently residing in for purposes of domicile.

Amount in Controversy

To satisfy diversity jurisdiction, the amount in controversy must exceed $75,000. In reality, that means the damages must be $75,001 or more. At a certain point, though, amount in controversy rules become somewhat arbitrary. There must be a “legal certainty” that the amount in controversy requirement is meant. The reason for the legal certainty test is because the actual damages may not be known at the time the lawsuit is filed and there must be a bit of guess work. To determine whether there is a legal certainty that the amount in controversy is satisfied, the plaintiff must make a good faith claim that is supported by factual evidence.

A great example of the legal certainty test is described in Diefenthal v. C.A.B., 681 F.2d 1039 (5th Cir. 1982). There, the actual damages were significantly lower than the amount in controversy requirement. The plaintiffs only felt embarrassment and an inexpensive breach of contract. Added together, the factual evidence did not support a claim that the amount in controversy requirement was satisfied.

Aggregate Claims

A plaintiff can also aggregate the damages from multiple claims against a defendant.

The basic rule for an aggregate (summed up) case is that a plaintiff can combine several claims against one defendant that can reach the amount in controversy rule. For instance, when the requirement is $75,000, a plaintiff can claim breach of contract for $40,000 and a fraud claim for another $40,000 to satisfy the requirement.

However, multiple plaintiffs can’t combine against one defendant. Additionally, a single plaintiff can’t combine against multiple defendants. Here are a couple examples where the requirement is not met.

• Plaintiff A has claim of $60,000 and Plaintiff B has claim of $60,000 against Defendant A.
• Plaintiff A has a claim of $60,000 against Defendant A and another claim of $60,000 against Defendant B.

Rule summary:

A single plaintiff can aggregate claims against a single defendant.

A single plaintiff cannot aggregate claims against multiple defendants.

Multiple plaintiffs can aggregate claims against a single defendant if at least one of the plaintiffs sufficiently meets the amount in controversy requirement; the other plaintiffs can aggregate through supplemental jurisdiction if the claims are related.

Multiple plaintiffs cannot aggregate claims against a defendant if none of the plaintiffs can state a claim alone.

Case Briefs

Gordon v. Steele

376 F. Supp. 575 (W.D. Pa. 1974).

Gordon is the plaintiff. Defendant moved to dismiss for lack of diversity.

Question

Was there diversity? Was the plaintiff domiciled in Pennsylvania or Idaho?

Rule

Domicile is determined by:

1. Physical presence.
2. Intent to remain indefinitely.

Domicile is not determined by an intent to remain permanently.

Holding

Plaintiff is a citizen of Idaho for purpose of diversity. Motion to dismiss is denied.

Facts

This is a medical malpractice suit where the plaintiff was improperly diagnosed in Pennsylvania and suffered extensive wrist injuries. Defendants were from Pennsylvania.

Essential facts:

• Injury occurred February 1972.
• Resident of Pennsylvania before August 9, 1972.
• On August 9, 1972, plaintiff enrolled in and moved to Ricks College in Idaho.
• Action was brought in April 1973.

Analysis

The citizenship at the time of filing is what matters. Was she a citizen of Idaho or Pennsylvania when the litigation was initiated? The courts said that she was a citizen of Idaho. Although she still had ties to Pennsylvania (went back for medical purposes, had a Pennsylvania Driver’s License, etc.) she had expressed an intent not to return to Pennsylvania. She did not know where she would end up but would let the work of her husband lead her to whichever place she went.

In citing other cases, the plaintiff has the burden to show only that they intend to remain in a place indefinitely. They could remain in the state, but don’t need to. Also, they must not have the intention to return back to their previous state. Based on the facts of this case, she is a citizen of Idaho.

Hertz Corp. v. Friend

559 U.S. 77 (2010).

Friend sued Hertz in state court. Removed to federal court.

Rule

Principle place of business means the “nerve center” typically the headquarters where all business communication and direction come from.

Holding

Principle place of business is New Jersey, not California because New Jersey is the company headquarters where all communication may be derived from.

Facts

The plaintiff sued in a California state court for state law wage and hour claims. Hertz removed to federal court saying that they were incorporated in Delaware and New Jersey was their principle place of business, therefore they were not diverse. They argued that New Jersey was their principle place of business because it was the company headquarters.

On the other hand, the plaintiffs argued that California was the principal place of business because that is where Hertz’s primary revenue, employment, and work was conducted.

Analysis

The court has to pick between two potential theories for the principal place of business. First, there is the “nerve center” theory. Second, there is the “business activities” theory. The business activities approach can be difficult to apply, especially when it comes to large corporations. So, the Supreme Court adopts the nerve center theory for the following reasons.

First, the statute language supports the approach. Meaning, we are looking for a singular prominent place where the work is conducted. The headquarters are often fitting this description.

Second, this approach simplifies the jurisdictional process. It removes questions and is easier to apply (comparatively speaking).

Third, legislative history supports this theory. Meaning, the legislative intent was to keep this benchmark as simple as possible.

Although there are complications and exceptions, this theory is easy to adopt so the courts adopt it and apply it to the case at hand.

• California Plaintiffs
• Delaware, New Jersey defendants
• Filed in state court
• Defendants want to remove to federal court

The dispute here is whether the principal place of business is New Jersey or California. The plaintiffs argue that California should be the principal place of business because that is where the majority of the sales are. The defendants argue that it should be the headquarters.

The court says that the principal place of business is the headquarters. This is called the “nerve center test.” This is often a single place.

Carden v. Arkoma Assocs.

494 U.S. 185 (1990).

Arkoma is the plaintiff.

Question

Whether the citizenship of the partners in a limited partnership corporation need to be considered to establish diversity.

Rule

Overarching Rule: A diversity claim under § 1332 requires complete diversity. That is, all parties being sued must be completely diverse.

Issue Rule Partnership: Limited Partnership is not a citizen for jurisdictional purposes, even if the state considers it a citizen through creation. Therefore, look to the citizenship of the partners.

Issue Rule General vs. Limited Partners: Examine the citizenship of all the partnerships, not just some.

Holding

A limited partnership is not considered a citizen of the state that created it. A federal court must look to all of the partners, not just some. Reversed and remanded

Facts

Arkoma Associates is a partnership organized in Arizona. They sued on a contract dispute with the defendants who are from Louisiana. The defendant’s filed a motion to dismiss because one of Arkoma’s partners is also from Louisiana. Therefore, they argue that there is no diversity.

Analysis

The Supreme Court says that the trial court got it wrong (there was complete diversity) unless a limited partnership is considered a citizen of the state, or if the federal court only needs to look at the general but not the limited parters.

For the first issue, the court says that a limited partnership is not a citizen and must therefore look to the citizenship of the members. This is because all the past cases that have found citizenship for businesses have been for corporations. Additionally, statute has looked towards the citizenship of corporations. All other entities therefore, need to examine the citizenship of its members. For this case, Arkoma is not a citizen because of it’s filing status and we need to examine where all of the partners are citizens.

For the second issue, the court says that all the previous precedent has led them to consider the citizenship of all the members of the partnership, not just the general ones. Therefore, the partner in Louisiana cannot be overlooked and his citizenship needs to be accounted for. Because he is a citizen of Louisiana, there is not complete diversity.

Looking at the case: Arizona plaintiffs, Louisiana plaintiff v. Louisiana defendant.

The problem here is that the plaintiff is a Limited Partnership. Not a corporation. If it was a corporation, we would have only looked at the owners and what was their principle place of business or their place of incorporation. Instead, because this is a limited partnership, we need to look at all the parties involved in the partnership.

Redner v. Sanders

2000 WL 1161080 (S.D.N.Y. 2000).

Question

Can a US resident domiciled abroad bring a diversity claim against a defendant?

Rule

A US resident domiciled abroad cannot claim diversity jurisdiction under §1332.

Holding

Domiciled in France.

Facts

The plaintiff was a US Citizen residing in France and sued New York plaintiffs.

Analysis

There is nothing in §1332 that allows a court to hear a case of a US citizen residing in a foreign nation. Therefore, the first claim is dropped (arguing that because the domicile was France and the defendants were in New York, there was diversity). Instead, the plaintiff would have to argue that they were domiciled in California. However, because there is lack of information concerning the residence in France, the court has no choice but to say that the plaintiff was domiciled in France.

Because there is nothing in §1332 about US citizens residing abroad, the courts are not allowed to hear those cases. The absence of express authorization to hear a case means that they cannot hear it at all.

However, foreign nationals who have presence in the United States, will be considered a citizen of that state (even though they are not a US citizen) for purposes of domicile.

The issue here is that the plaintiff did not have any definite plans to return to California. Therefore, he has not changed his domicile and the case will be dismissed on grounds 12(b)(1). However, the plaintiff could still sue in state court.

Currently, in §1332, the claim needs to have at least $75,000 in dispute. The purpose of doing so reduces the claims with a lower dollar amount to minimize the burden on district courts.

Diefenthal v. C.A.B.

681 F.2d 1039 (5th Cir. 1982).

Diefenthals are the plaintiffs while CAB and Eastern Airlines are the defendants. Case dismissed in trial and appealed.

Question

Was the amount in controversy met?

Rule

If the claim was made in good faith and it is plausible that the amount could be more than the required amount, the claim has met the amount in controversy requirement. If not, the case must be dismissed.

Holding

There was insufficient evidence to support the claim that the amount in controversy was met. Affirmed.

Facts

The plaintiffs had purchased tickets for a flight from New Orleans to Pennsylvania. These tickets included the ability to fly first class in the smoking section. They had confirmed their seats, but upon arrival, they were informed “brusquely” that there were no more available smoking seats in first class. From this experience, the plaintiffs claimed that they were humiliated, embarrassed, and that the defendant’s had breached their contract.

In the complaint, the damages requested was $50,000. The amount in controversy requirement at the time was $10,000. The plaintiff asserted that the complaint was made in good faith, but the trial court dismissed because there was no “conceivable” way that the amount would exceed 10,000. They were permitted the opportunity to amend but the complaint came back quite similar as before. No additional facts were provided to show evidence for the claim.

Analysis

Although the complaint was made in good faith, there were several pieces of evidence missing to show that the claim could possibly have arisen above $10,000. The claim merely stated that the plaintiffs had suffered humiliation and embarrassment to exceed emotional damages above the required amount. However, the court requires more evidence, based in fact, to show this claim. For instance, the plaintiff should show up with medical bills, therapy bills, etc. to show evidence of their suffering. This kind of evidence was totally lacking so there was no conceivable way to rise above the “legal certainty” level required to meet the amount in controversy requirement.

Usually, the plaintiff has the burden of proof. This is true during trial. However, for purposes of pleading (discovery) and filing the complaint, we assume the plaintiffs claim is true unless the defendant shows that there is no way for that much recover. So, defendants have the burden of proof during pretrial to show that the amount in controversy is not met.

Here, the only damage the plaintiffs felt was embarrassment. Can any court find that there was 10,000 in damages? No reasonable jury would be able to find that amount.