Back to School: 7th Circuit Issues Two Decisions on International Diversity Jurisdiction

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Putting together all the Seventh Circuit’s decisions from the last few decades on subject-matter jurisdiction would yield an impressive textbook on the subject. The court (and Judge Easterbook, in particular) has adhered assiduously to its role as a federal court with limited jurisdiction. Its latest two decisions on this subject (authored by none other than Judge Easterbrook) should be added to the chapter on international diversity jurisdiction.

28 U.S.C. § 1332(a)(2) creates diversity jurisdiction between “citizens of a State and citizens or subjects of a foreign state.” So far, so good. But many of these cases become tricky when one of the parties is a foreign entity. The general rule (found in § 1332(c)(1)) is that corporations are citizens in only two places: where they are incorporated and where they have their principal places of business. Other collective entities (e.g., LLCs) take on the citizenship of every member or equity investor. The existence of the foreign entity thus requires the court to decide, by analogy to American law, if that entity is akin to the American corporation or some other form of American business.

In BuoMatic, LLC v. Indento Operations, BV, No. 13-2300 (7th Cir. July 22, 2014), the question concerned the citizenship of the defendant, a besloten vennootschap met beperkte aansprakelijkheid, or “BV” for short, organized under the laws of the Netherlands. The plaintiff, BuoMatic, had members in several states in the U.S., but none in the Netherlands. If Indento was akin to a corporation, the court’s international diversity jurisdiction was secure.

And so it was. As the court explained, a BV is a “closely held business whose shares are subject to a restriction of some kind, such as a buy-sell agreement that prevents investors from selling to strangers without offering them to the business first.” Slip Op. 2. Most important, it had the “standard elements of ‘personhood’ (perpetual existence, the right to contract and do business in its own name, and the right to sue and be sued),” and its investors (shareholders) benefited from limited liability. Slip Op. 3. The court noted that a BV’s restriction on the transferability of its shares was “a common device in this nation’s close corporations too.” In Hoagland v. Sandberg, Phoenix & von Gontard, P.C., 385 F.3d 737 (7th Cir. 2004), the court had held that a professional corporation, “in which only a few lawyers can invest, is a ‘corporation.’” Slip Op. 3. By that logic, the Netherlands BV was a corporation too.

The second case, Fellowes, Inc. v. Changzhou Xinrui Fellowes Office Equipment Co., Ltd., No. 12-3124 (7th Cir. July 22, 2014), required the court to determine the citizenship of the defendant Changzhou Fellowes (a Hong Kong entity), because one of its investor-members, Hong Kong Fellowes, had its principal place of business in Illinois, where the plaintiff was a citizen.

This case was simpler than BuoMatic. Both parties described Changzhou Fellowes as an LLC, but Changzhou Fellowes argued that “every ‘juridicial person’—that is, every entity that can own property, make contracts, transact business, and litigate in its own name—is a corporation for the purpose of § 1332 no matter what other attributes it has or lacks.” Slip Op. 3.

That was plainly wrong. Changzhou Fellowes had found that argument in Puerto Rico v. Russell & Co., 288 U.S. 476 (1933), which involved a Puerto Rican sociedad en comandita, and in Autocephalous Greek-Orthodox Church v. Goldberg and Feldman Fine Arts, Inc., 917 F.2d 278, 285 (7th Cir. 1990), which dealt with a religious body organized under the laws of Cyprus. The court explained that Russell’s rationale was limited to the sociedad en comandita, and it stopped short of overruling Autocephalous, noting that the case applied only to Cypriot religious bodies.

The court vacated the judgment of the district court, and the case was remanded with instructions to dismiss for want of subject-matter jurisdiction.

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Topics:  Foreign Entities, Jurisdiction, Subject Matter Jurisdiction

Published In: Civil Procedure Updates, Finance & Banking Updates, International Trade Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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