When Filing Suit in Federal Court, Don’t Forget the Key to the Courtroom Door


Formalism matters in federal court. One cannot obtain access to the courtroom without presenting the jurisdictional key to the courtroom door. A fundamental principle of subject matter jurisdiction is that parties asserting such jurisdiction must make “clear, distinct, and precise affirmative jurisdictional allegations” in their pleadings. That critical jurisdictional component was missing in a new Fifth Circuit decision that focused upon a case involving diversity subject matter jurisdiction.

Diversity Jurisdiction

Derived from the constitutional pronouncement in Article III of the Constitution, federal courts have from the beginning of the Republic been empowered to exercise original jurisdiction in all cases between citizens of different states (subject to the amount in controversy threshold). The first Congress passed the Judiciary Act of 1789 to reinforce this constitutionally commanded jurisdiction, now codified as 28 U.S.C. §1332. As a result, in a diversity case, the party asserting jurisdiction must demonstrate that all persons or entities on one side of the controversy are citizens of different states than all persons or entities on the other side.

The statute focuses upon “citizenship” of an individual party; it also specifies the formula for determining the “citizenship” of a corporation, which is that such a party must be a citizen of the State of its incorporation and of the State where it has its principal place of business. With the creation of other forms of business organization, such as partnerships and limited liability companies (LLCs), the courts have engrafted upon the statute rules for determining the “citizenship” of these entities. For example, it is now settled that the citizenship of limited liability companies (such as the LLC involved in this case) derives directly from the citizenship of each of its members, Harvey v. Grey Wolf Drilling Co., 542 F.3d 1077, 1080 (5th Cir. 2008), and such individualized citizenship must be alleged specifically. Settlement Funding L.L.C. v. Rapid Settlements, Ltd., 851 F.3d 530, 536 (5th Cir. 2017).

Background of New Decision

In MidCap Media Finance, L.L.C. v. Pathway Data, Inc., ____ F.3d ____, 2019 WL 2943486 (5th Cir. July 9, 2019), the United States Court of Appeals for the Fifth Circuit has recently reminded practitioners of the fundamental importance of demonstrating the existence of diversity jurisdiction, and the corresponding hazard to a party that forgets to present properly the jurisdictional key to the courtroom door.

In this case, MidCap Media agreed to lend money to Pathway Data. Pathway’s CEO, Mr. Coulter, signed a guaranty agreement to support this transaction. Pathway stopped making payments, and MidCap then sued Pathway and Coulter. They in turn asserted various counterclaims and defenses. The District Court (acting through the Magistrate Judge by approval of the parties) conducted a bench trial, found Pathway Data liable for payment of the loan, and further found that Mr. Coulter was not personally liable on his guarantee. The parties filed cross-appeals as to these rulings.

Problems with Parties’ Jurisdictional Evidence on Appeal

The presence of diversity jurisdiction was not addressed by the lower court. When the parties lodged their respective briefs with the Court of Appeals, they both referred to Section 1332 as the source of subject matter jurisdiction in this case.

Nevertheless, the MidCap Media Court determined at the outset that it could not rely solely upon the parties’ presentations as proof of the existence of diversity jurisdiction. Raising the fundamental jurisdictional question on its own, the Court requested that the parties submit supplemental briefing to demonstrate evidence of the citizenship of the parties.

The parties did so, but the Court determined that neither side had alleged diversity of citizenship properly: Mr. Coulter was identified in the record solely as a “California resident;” and MidCap Media was identified in the record as “organized under Texas law and having its principal place of business in Texas,” without any mention of its members’ respective citizenship locales. Regarding Mr. Coulter, the Court focused upon the critical difference between citizenship and residency. It emphasized that for natural persons citizenship is residency combined with the purpose to make the residence one’s home. Thus, the Court held that an allegation of residency standing alone did not satisfy the statute’s requirement. The Court also held that the documentation in the case did not reveal the citizenship of any of the members of MidCap Media.

Confronted with this jurisdictional evidentiary deficit, the Court then assessed whether it could correct the problem at the appellate level under 28 U.S.C. §1653, which authorizes amendment of defective jurisdictional allegations. It determined it could not, because Section 1653 only permits correction of erroneous statements about jurisdiction that already exists, not the remedying of defective or absent jurisdictional facts. See Robertson v. Cease, 97 U.S. 646, 648 (1878) (appellate courts prohibited from receiving jurisdictional evidence on appeal).

Ruling by the Court

On this record, therefore, the MidCap Media Court concluded that there was some reason to believe that diversity jurisdiction might exist. It therefore remanded the case to afford the parties the opportunity to amend these allegations and supplement the record. It reiterated that it was obliged to respect the strictly circumscribed nature of diversity jurisdiction by unflagging attention to jurisdictional limits, and that it expected “the same unflagging attention from litigants who invoke its jurisdiction.”

Conclusion

The MidCap Media decision starkly reminds practitioners of the central importance of adhering to the formalistic requirements of subject matter jurisdiction allegations to satisfy proof from the onset of litigation that one has the key to obtain entry to the federal courtroom.


Meet Lonnie

Lionel M. Schooler is a management-side employment lawyer and recognized authority on employment law, federal appellate practice, and arbitration. Lonnie’s employment practice focuses on counseling clients and litigating, on a nationwide basis, claims under all employment laws, wage and hour claims, and investigations by the Equal Employment Opportunity Commission, the U.S. Department of Labor, and the Texas Workforce Commission. Lonnie is also experienced as an arbitrator on the Commercial and Employment Panels of the American Arbitration Association and as an advocate. He was selected for inclusion by the National Association of Distinguished Neutrals and is certified as a Fellow of the Chartered Institute of Arbitrators for international arbitration matters. Since 2017, Lonnie has served on the Board of Directors of the Houston Bar Association. His previous editorial experience includes serving as editor-in-chief of The Houston Lawyer, a bimonthly publication of the Houston Bar Association.

Mr. Schooler gratefully acknowledges the assistance provided to him by his colleague, Ross Forbes, in preparing this article.

The opinions expressed are those of the author and do not necessarily reflect the views of the firm, its clients, or any of its or their respective affiliates. This article is for informational purposes only and does not constitute legal advice.