Diversity jurisdiction

In the law of the United States, diversity jurisdiction is a form of subject-matter jurisdiction in civil procedure in which a United States district court in the federal judiciary has the power to hear a civil case when the amount in controversy exceeds $75,000 and where the persons that are parties are "diverse" in citizenship or state of incorporation (for corporations being legal persons), which generally indicates that they differ in state and/or nationality. Diversity jurisdiction and federal-question jurisdiction (jurisdiction over issues arising under federal law) constitute the two primary categories of subject matter jurisdiction in U.S. federal courts.

United States federal
civil procedure doctrines
Justiciability
Jurisdiction
Subject-matter
Personal
Federalism

The United States Constitution, in Article III, Section 2, grants Congress the power to permit federal courts to hear diversity cases through legislation authorizing such jurisdiction. The provision was included because the Framers of the Constitution were concerned that when a case is filed in one state, and it involves parties from that state and another state, the state court might be biased toward the party from that state.[1] Congress first exercised that power and granted federal trial circuit courts diversity jurisdiction in the Judiciary Act of 1789. Diversity jurisdiction is currently codified at 28 U.S.C. § 1332.

In 1969, the American Law Institute explained in a 587-page analysis of the subject that diversity is the "most controversial" type of federal jurisdiction, because it "lays bare fundamental issues regarding the nature and operation of our federal union".[2]

Diversity of parties

Mostly, in order for diversity jurisdiction to apply, complete diversity is required, where none of the plaintiffs can be from the same state as any of the defendants.[3] A corporation is treated as a citizen of the state in which it is incorporated and the state in which its principal place of business is located.[4] A partnership or limited liability company is considered to have the citizenship of all of its constituent partners/members.[5] Thus, an LLC or partnership with one member or partner sharing citizenship with an opposing party will destroy diversity of jurisdiction. Cities and towns (incorporated municipalities) are also treated as citizens of the states in which they are located, but states themselves are not considered citizens for the purpose of diversity. U.S. citizens are citizens of the state in which they are domiciled, which is the last state in which they resided and had an intent to remain.[6] Though an alien (foreign national) who has been granted the status of permanent resident status used to be treated as a citizen of the state where the alien is domiciled, legislation proposed in July 2017 would eliminate this language from the code and add language specifically denying diversity jurisdiction in a claim between a citizen of a state and an alien permanent resident.[7]

A national bank chartered under the National Bank Act is treated as a citizen of the state in which it is "located."[8] In 2006, the Supreme Court rejected an approach that would have interpreted the term "located" to mean that a national bank is a citizen of every state in which it maintains a branch.[9] The Supreme Court concluded that “a national bank . . . is a citizen of the State in which its main office, as set forth in its articles of association, is located.”[9] The Supreme Court, however, left open the possibility that a national bank may also be a citizen of the state in which it has its principal place of business, thus putting it on an equal footing with a state-formed corporation.[10] This remains an open question, with some lower courts holding that a national bank is a citizen of only the state in which its main office is located, and others holding that a national bank is also a citizen of the state in which it has its principal place of business.[11]

The diversity jurisdiction statute also allows federal courts to hear cases in which:

  • Citizens of a U.S. state are parties on one side of the case, with nonresident alien(s) as adverse parties;
  • Complete diversity exists as to the U.S. parties, and nonresident aliens are additional parties;
  • A foreign state (i.e., country) is the plaintiff, and the defendants are citizens of one or more U.S. states; or
  • Under the Class Action Fairness Act of 2005, a class action can usually be brought in a federal court when there is just minimal diversity, such that any plaintiff is a citizen of a different state from any defendant. Class actions that do not meet the requirement of the Class Action Fairness Act must have complete diversity between class representatives (those named in the lawsuit) and the defendants.

A U.S. citizen who is domiciled outside the U.S. is not considered to be a citizen of any U.S. state, and cannot be considered an alien. The presence of such a person as a party completely destroys diversity jurisdiction, except for a class action or mass action in which minimal diversity exists with respect to other parties in the case.

If the case requires the presence of a party who is from the same state as an opposing party, or a party who is a U.S. citizen domiciled outside the country, the case must be dismissed, the absent party being deemed "indispensable". The determination of whether a party is indispensable is made by the court following the guidelines set forth in Rule 19 of the Federal Rules of Civil Procedure.

Diversity is determined at the time that the action is filed

Diversity is determined at the time that the action is filed, and on the basis of the residency of the parties at that time. A change in domicile by a party before or after that date is irrelevant.[12] However, in Caterpillar, Inc. v. Lewis (1996), the Supreme Court also held that federal jurisdiction predicated on diversity of citizenship can be sustained even if there did not exist complete diversity at the time of removal to federal court, so long as complete diversity exists at the time the district court enters judgment. The court in Caterpillar sustained diversity as an issue of "fairness" and economy, given a lower court's original mistake that allowed removal.

Corporate citizenship based on principal place of business

Congress never defined exactly what is a "principal place of business." The question of what that phrase meant became hotly disputed during the late 20th century as many areas of the American economy came under the control of large national corporations. Although these corporations usually had a headquarters in one state, the majority of their employees, assets, and revenue were often physically located at retail sites in the states with the largest populations, and hence a circuit split developed in which some judges held that the latter states could also be treated as the corporation's principal place of business. The rationale was that those states were where the business was actually occurring or being transacted. This issue was finally resolved by a unanimous Supreme Court in Hertz Corp. v. Friend (2010), which held that a corporation's principal place of business is presumed to be the place of the corporation’s "nerve center" from where its officers conduct the corporation’s important business.

Amount in controversy

The United States Congress has placed an additional barrier to diversity jurisdiction, the amount in controversy requirement. This is a minimum amount of money which the parties must be contesting is owed to them. Since the enactment of the Federal Courts Improvement Act of 1996, 28 U.S.C. §1332(a) has provided that a claim for relief must exceed the sum or value of $75,000, exclusive of interest and costs and without considering counterclaims. In other words, the amount in controversy must be equal to or more than $75,000.01, and (in a case which has been removed from a state court to the federal court) a federal court must remand a case back to state court if the amount in controversy is exactly $75,000.00.[13]

A plaintiff may add different claims against the same defendant to meet the amount. Two plaintiffs, however, may not join their claims together to meet the amount, but if one plaintiff meets the amount standing alone, the second plaintiff can piggyback as long as the second plaintiff's claim arises out of the same facts as the main claim. More detailed information may be obtained from the article on federal supplemental jurisdiction.

The amount specified has been regularly increased over the past two centuries. Courts will use the legal certainty test to decide whether the dispute is over $75,000. Under this test, the court will accept the pled amount unless it is legally certain that the pleading party cannot recover more than $75,000. For example, if the dispute is solely over the breach of a contract by which the defendant had agreed to pay the plaintiff $10,000, a federal court will dismiss the case for lack of subject matter jurisdiction, or remand the case to state court if it arrived via removal.

In personal injury cases, plaintiffs will sometimes claim amounts "not to exceed $75,000" in their complaint to avoid removal of the case to federal court. If the amount is left unspecified in the ad damnum, as is required by the pleading rules of many states, the defendant may sometimes be able to remove the case to federal court unless the plaintiff's lawyer files a document expressly disclaiming damages in excess of the jurisdictional requirement. Because juries decide what personal injuries are worth, compensation for injuries may exceed $75,000 such that the "legal certainty" test will not bar federal court jurisdiction. Many plaintiffs' lawyers seek to avoid federal courts because of the perception that they are more hostile to plaintiffs than most state courts.

Domestic relations and probate exceptions

A longstanding judge-made rule holds that federal courts have no jurisdiction over divorce or other domestic relations cases, even if there is diversity of citizenship between the parties and the amount of money in controversy meets the jurisdictional limit. As the Supreme Court has stated, "[t]he whole subject of the domestic relations of husband and wife, parent and child, belongs to the laws of the states, and not to the laws of the United States."[14] The court concluded "that the domestic relations exception ... divests the federal courts of power to issue divorce, alimony, and child custody decrees." In explaining this exception, the high court noted that domestic cases frequently required the issuing court to retain jurisdiction over recurring disputes in interpreting and enforcing those decrees. State courts have developed expertise in dealing with these matters, and the interest of judicial economy required keeping that litigation in the courts most experienced to handle it. However, federal courts are not limited in their ability to hear tort cases arising out of domestic situations by the doctrine.[15]

A similar exception has been recognized for probate and decedent's estate litigation, which continues to hold for the primary cases; diversity jurisdiction does not exist to probate wills or administer decedent's estates directly. Diversity jurisdiction is allowed for some litigation that arises under trusts and other estate planning documents, however.[16]

Removal and remand
Main article: Removal jurisdiction

If a case is originally filed in a state court, and the requirements for federal jurisdiction are met (diversity and amount in controversy, the case involves a federal question, or a supplemental jurisdiction exists), the defendant (and only the defendant) may remove the case to a federal court.

A case cannot be removed to a state court. To remove to a federal court, the defendant must file a notice of removal with both the state court where the case was filed and the federal court to which it will be transferred. The notice of removal must be filed within 30 days of the first removable document. For example, if there is no diversity of citizenship initially, but the non-diverse defendant is subsequently dismissed, the remaining diverse defendant(s) may remove to a federal court. However, no removal is available after one year of the filing of the complaint.

A party's citizenship at the time of the filing of the action is considered the citizenship of the party. If a defendant later moves to the same state as the plaintiff while the action is pending, the federal court will still have jurisdiction. However, if any defendant is a citizen of the state where the action is first filed, diversity does not exist. 28 U.S.C. §1441(b).

If a plaintiff or a co-defendant opposes removal, he may request a remand, asking the federal court to send the case back to the state court. A remand is rarely granted if the diversity and amount in controversy requirements are met. A remand may be granted, however, if a non-diverse party joins the action, or if the parties settle some claims among them, leaving the amount in controversy below the requisite amount.

Law applied
Main article: Erie doctrine

The United States Supreme Court determined in Erie Railroad Co. v. Tompkins (1938) that the law to be applied in a diversity case would be the law of whatever state in which the action was filed. This decision overturned precedents that had held that federal courts could create a general federal common law, instead of applying the law of the forum state. This decision was an interpretation of the word "laws" in 28 U.S.C. 1652, known as the Rules of Decision Act, to mean not just statutes enacted by the legislature but also the common law created by state courts.

Under the Rules of Decision Act, the laws of the several states, except where the constitution or treaties of the United States or Acts of Congress otherwise require or provide, shall be regarded as rules of decision in civil actions in the courts of the United States, in cases where they apply.

The Court interpreted "laws" to include the states' judicial decisions, or "common law." Thus, it is an overstatement to state that Erie represents the notion that there is no federal common law. Federal courts do adjudicate "common law" of federal statutes and regulations.

Because the RDA provides for exceptions and modifications by Congress, it is important to note the effect of the Rules Enabling Act (REA), 28 U.S.C. 2072. The REA delegates the legislative authority to the Supreme Court to ratify rules of practice and procedure and rules of evidence for federal courts. Thus, it is not Erie, but the REA, which created the distinction between substantive and procedural law.

Thus, while state substantive law is applied, the Federal Rules of Civil Procedure and the Federal Rules of Evidence still govern the "procedural" matters in a diversity action, as clarified in Gasperini v. Center for Humanities (1996). The REA, 28 U.S.C. 2072(b), provides that the Rules will not affect the substantive rights of the parties. Therefore, a federal court may still apply the "procedural" rules of the state of the initial filing, if the federal law would "abridge, enlarge, or modify" a substantive right provided for under the law of the state.

See also

References
  1. Guaranty Trust Co. v. York, 326 U.S. 99 (1945). In this decision, Justice Felix Frankfurter explained: "Diversity jurisdiction is founded on assurance to non-resident litigants of courts free from susceptibility to potential local bias. The Framers of the Constitution . . . entertained 'apprehensions' lest distant suitors be subjected to local bias in State courts, or, at least, viewed with 'indulgence the possible fears and apprehensions' of such suitors. [Citation.] And so Congress afforded out-of-State litigants another tribunal, not another body of law."
  2. American Law Institute (1969). Study of the Division of Jurisdiction between State and Federal Courts. Washington, D.C.: American Law Institute. p. 1.
  3. Lincoln Property Co. v. Roche, 546 U.S. 81 (2005).
  4. Danjaq, S.A. v. Pathe Comm'ns Corp., 979 F.2d 772 (9th Cir. 1992).
  5. Johnson v. Columbia Properties Anchorage, LP, 437 F.3d 894 (9th Cir. 2006).
  6. Sun Printing & Publishing Association v. Edwards, 194 U.S. 377 (1904).
  7. "HR010.PS" (PDF). Gpo.gov. Retrieved February 24, 2017.
  8. 28 U.S.C. § 1348.
  9. Wachovia Bank, N.A. v. Schmidt, 546 U.S. 303, 307 (2006).
  10. Wachovia Bank, N.A. v. Schmidt, 546 U.S. 303, 315 n.8, 317 n.9 (2006).
  11. Rouse v. Wachovia Mortgage, FSB, 747 F.3d 707 (9th Cir. 2014) (citing cases on each side of circuit split and joining majority rule that national bank is only citizen of state in which main office is located).
  12. LeBlanc v. Cleveland, 248 F.3d 95 (2nd Cir. 1999)
  13. Freeland v. Liberty Mutual Fire. Ins. Co., 632 F.3d 250 (6th Cir. 2011).
  14. Ex parte Burrus, 136 U.S. 586, 593-594 (1890).
  15. Ankenbrandt v. Richards, 504 U.S. 689, 694-695 (1992)
  16. Marshall v. Marshall, 547 U.S. 293 (2006).
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