Down the Rabbit Hole: Assessing the Reach of Amended Rule 7.1
Stites & Harbison Client Alert, January 20, 2023
Rule 7.1 of the Federal Rules of Civil Procedure has long required each “nongovernmental corporate party” to file a disclosure statement when that party takes its first action in a federal court lawsuit. Effective, December 1, 2022, however, the rule was amended to require that when a case that is in federal court because of diversity jurisdiction is filed or removed, each “party or intervenor” must file a disclosure statement that provides the “name—and identif[ies] the citizenship of—every individual or entity whose citizenship is attributed to that party or intervenor.” The disclosure statement must be filed with a party’s first appearance or filing addressed to the Court, and is mandatory “unless the court orders otherwise.”1 This doesn’t sound particularly onerous, but it can be depending on whether a party is an individual, a corporation, or some other type of unincorporated entity.
As backdrop, diversity jurisdiction requires that the party asserting diversity jurisdiction in a federal lawsuit must prove, among other elements, that the lawsuit is between “citizens of different states.”2 This means that each plaintiff must be of different citizenship from each defendant. As the amended Rule 7.1 reflects, however, diversity jurisdiction turns on the citizenship of not just each party, but all individuals and entities attributable to each party. This analysis is generally uncomplicated when the party is an individual. Likewise, the citizenship of a corporation is generally deemed to be in the state(s) where it was incorporated and where it has its principal place of business.3 However, if a party is an LLC, partnership, joint venture, or other unincorporated entity, the disclosure requirement can be onerous because such entities are considered citizens of every state where its members or partners are citizens. Therefore, the citizenship of all members or partners must be disclosed. If any of those members or partners are also unincorporated entities, each of their members and partners must be disclosed, and on ad infinitum… or at least until the chain of ownership reaches a corporation or individual. As a result, amended Rule 7.1 now requires an unincorporated party not only to identify by name and citizenship each of its members or partners, but also to trace down through its sub-parties to determine the names and citizenship of all their members or partners.
This has several implications for companies involved in litigation in federal court. Depending on the nature of the company, it can involve significant time and resources to find the information now required by amended Rule 7.1, and sometimes that information is impractical or infeasible to discover. Moreover, for an unincorporated entity with multiple organization tiers, divulging the required information may raise privacy concerns, such as when members of a sub-entity LLC or partnership have a legitimate reason that their names or citizenship should not be divulged. Related to this point, the amended rule may unwittingly become a discovery tool that incentivizes filing suit in order to delve into another party’s corporate structure.
As lawyers with extensive federal court experience, Stites & Harbison is well-suited to guide parties through these issues. And, by adding the clause “unless the court orders otherwise,” the amended Rule 7.1 has potentially provided a powerful tool to protect our clients. To be sure, questions remain as to whether this clause will be an effective remedy in such circumstances. Yet, the votes are starting to come in. At least three courts have addressed aspects of this question since the December 1, 2022 effective date of the amended rule, with mixed results.
These cases have affirmed the importance in diversity cases of proving citizenship of all individuals and entities attributed to a given party. For example, in Empirian Health, LLC v. Specialty RX, Inc.,4 the parties had attempted unsuccessfully to determine the citizenship of all of the plaintiff LLC’s members. After removal, the parties argued that it was enough for diversity jurisdiction purposes to declare that no member of the plaintiff LLC’s sub-entities was non-diverse. The court rejected that notion because “[a] negative statement as to citizenship is generally not sufficient.”5
At the same time, another recent case suggests that courts are mindful of the “unless the court orders otherwise” clause and will apply it in appropriate circumstances. In Niemann v. Carlsen, plaintiff filed under federal question and diversity jurisdiction but failed to sufficiently allege the latter.6 Plaintiff amended his complaint, claiming that, upon inquiry, a defendant LLC advised that it was not aware of any non-diverse members, but could not determine the citizenship of all of its members at that time. Although the district court deemed this level of inquiry "reasonable under the circumstances," it nonetheless held that, in light of amended Rule 7.1, the defendant LLC must file an amended disclosure statement to “identify the citizenship of each of its members, traced through until a corporation or natural person is reached,” after which the court would reconsider whether it had diversity jurisdiction.7
The defendant LLC was unable to comply and sought court relief. The problem was that the LLC’s only member was another LLC, whose only member was a third LLC. But that third-tier LLC had “hundreds or thousands” of members in LLCs and limited partnerships, none of whom were parties to the litigation or controlled by the defendant LLC. The court granted the defendant LLC’s motion to cut off its disclosure after the first three tiers, finding that the sheer number and remoteness of the fourth-tier members made this one of the “appropriate circumstances” addressed in the Comments to Rule 7.1 where “there is no apparent need to support discovery by other parties to go behind the disclosure.”8
Although yet to be litigated under the amended rule, the comments to amended Rule 7.1 suggest that a court may similarly limit disclosures when “a party reveals a citizenship that defeats diversity jurisdiction,” or where “the names of identified persons might be protected against disclosure to other parties when there are substantial interests in privacy . . . .”9 Thus, while the newly required disclosures can be onerous in certain circumstances, there are opportunities to avoid or lessen the impact through diligent lawyering. Please let Stites & Harbison assist you in addressing the implications of the amended Rule 7.1 for you or your company. The amended rule will have an impact whether you are already in federal court, or whether you expect to be there soon either by filing or by removing to federal court. We are here to help.
1 Fed. R. Civ. P. 7.1(a)(2), (b).
2 28 U.S.C. § 1332(a)(1). For sake of simplicity, this article does not address the different rules for class actions or cases involving foreign parties.
3 28 U.S.C. § 1332(c).
4 No. 2:22cv639-MHT, 2022 WL 17419342, at *2 (M.D. Ala. Dec. 5, 2022).
5 The same strict adherence to the new disclosure requirements is demonstrated in Saunders v. Breit MF Preserve at Lakeland, LLC, No. 8:22-cv-2542-CEH-JSS, 2023 WL168777 (M.D. Fla. Jan. 12, 2023), where a Florida district court required incomplete disclosures to be amended, holding “where a member of the party is also an LLC or unincorporated entity, its members must also be identified continuing on through however many layers of partners or members there may be.”)
6 No. 4:22-cv-01110-AGF, 2022 WL 17403157, **1-3 (E.D. Mo. Dec. 2, 2022).
7 The same approach was applied to a Norway private limited company named as a defendant. Id. at *3.
8 Neimann v. Carlsen, No. 4:22-cv-01110-AGF, 2022 WL 22038, *2 (E.D. Mo. Jan. 3, 2023) (citation omitted). As a consequence, the defendant was able to cut off its disclosure as requested, but plaintiff was left without diversity jurisdiction. However, because there was also federal question jurisdiction, Plaintiff’s case was not dismissed, leaving unresolved whether this ruling would have changed if diversity had been the only available jurisdictional basis.
9 See Rule 7.1 Committee Notes on Rules—2022 Amendment.