Lincoln Benefit Life Co. v. AEI Life, LLC
2015 WL 5131423, 2015 U.S. App. LEXIS 15576, 800 F.3d 99 (2015)
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Rule of Law:
A plaintiff pleading diversity jurisdiction against an unincorporated association, such as an LLC, is not required to affirmatively allege the citizenship of each member in the complaint. Instead, the complaint will survive a facial challenge to subject-matter jurisdiction if the plaintiff, after a reasonable pre-filing inquiry, alleges in good faith that it is diverse from all of the association's members.
Facts:
- Lincoln Benefit Life Company, a Nebraska citizen, issued two life insurance policies worth $6.65 million each.
- Lincoln Benefit later alleged these policies were procured through fraud as part of a "stranger originated life insurance" (STOLI) scheme, where investors with no relationship to the insured wager on their life.
- The record owners and beneficiaries of the policies were two LLCs: AEI Life, LLC and ALS Capital Ventures, LLC.
- Another defendant, Innovative Brokers, was also involved in the procurement of the policies.
- Lincoln Benefit conducted a pre-filing investigation by searching public databases and secretary of state websites to determine the citizenship of the members of the defendant LLCs.
- This investigation failed to reveal the identities or citizenships of the LLCs' individual members.
- Based on publicly available information showing connections to New York and Delaware, Lincoln Benefit concluded that none of the defendants appeared to be citizens of Nebraska.
Procedural Posture:
- Lincoln Benefit Life Company filed a complaint for declaratory judgment in the U.S. District Court for the District of New Jersey against AEI Life, LLC, ALS Capital Ventures, LLC, and Innovative Brokers.
- The defendants filed motions to dismiss for lack of subject-matter jurisdiction under Rule 12(b)(1), arguing that Lincoln Benefit had failed to adequately plead the citizenship of the LLC defendants' members.
- Lincoln Benefit opposed the motions and, in the alternative, requested leave for limited jurisdictional discovery.
- The District Court granted the defendants' motions and dismissed the complaint without prejudice, denying the request for discovery.
- Lincoln Benefit, as appellant, appealed the dismissal to the U.S. Court of Appeals for the Third Circuit.
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Issue:
Does a plaintiff seeking to establish diversity jurisdiction need to affirmatively allege the citizenship of each member of a defendant unincorporated association, such as a limited liability company (LLC), in the initial complaint?
Opinions:
Majority - Fuentes, J.
No. A plaintiff is not required to affirmatively plead the citizenship of each member of a defendant LLC to establish diversity jurisdiction. Federal Rule of Civil Procedure 8(a)(1) requires only a 'short and plain statement' of the grounds for jurisdiction. A rigid rule requiring plaintiffs to identify every member of an LLC, whose membership is often not public information, would create an insurmountable barrier to federal court and effectively shield many LLCs from diversity suits. The proper balance is to permit a plaintiff, after conducting a reasonable inquiry, to allege in good faith that none of the defendant association's members share the plaintiff's citizenship. This is sufficient to survive a facial challenge to jurisdiction. If the defendant then mounts a factual challenge, the plaintiff is entitled to limited jurisdictional discovery to establish that complete diversity exists.
Concurring - Ambro, J.
While agreeing with the majority's conclusion, this opinion argues that the underlying legal framework governing LLC citizenship is flawed and should be revisited by the Supreme Court. The current rule, established in Carden v. Arkoma Associates, which treats LLCs like partnerships (citizenship of all members), is impractical and illogical in the modern economy where LLCs are a dominant business form. The Court should abandon the Carden rule and instead treat LLCs like corporations, whose citizenship for diversity purposes is determined by their state of incorporation and principal place of business. This approach would align with the functional analysis used in Puerto Rico v. Russell & Co. and provide a more sensible, predictable standard for establishing jurisdiction.
Analysis:
This decision establishes a practical pleading standard that prevents unincorporated associations from using their private ownership structure as a shield against federal diversity jurisdiction at the motion-to-dismiss stage. It resolves a significant procedural hurdle for plaintiffs who, despite diligent efforts, cannot ascertain the citizenship of every member of a defendant LLC. By distinguishing between facial and factual jurisdictional challenges, the court allows cases to proceed to limited discovery on the issue of jurisdiction, rather than being dismissed at the outset. This ruling provides crucial guidance in the Third Circuit and aligns with a modern, practical approach to a problem created by the intersection of business entity law and federal procedure.
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