In MaxBounty, ULC v. Zocdoc Inc., 24-cv-3307 (S.D.N.Y. Jul. 3, 2014), the Southern District of New York held that a Canadian “unlimited liability corporation” should be treated as a partnership for purposes of determining whether the court has diversity jurisdiction.
The requirements for establishing federal diversity jurisdiction are well established when it comes to natural persons and corporate entities commonly incorporated in the United States. Natural persons are citizens of their state of domicile. A corporation, as the “paradigmatic artificial person,” is deemed a citizen of the state or states in which it is incorporated and maintains its principal place of business. Other entities, like limited liability corporations and partnerships, are not deemed artificial persons but are instead treated as collections of their members. These “non corporate” or “unincorporated” entities are treated as citizens of every state in which any of their members (whether natural persons or entities) are themselves citizens.
But how do federal courts analyze diversity jurisdiction with respect to entities that take less familiar corporate forms? MaxBounty posed this very question, requiring the court to evaluate diversity jurisdiction with respect to a Canadian unlimited liability corporation (“ULC”), a rare corporate form recognized in just three Canadian provinces. To determine whether it had diversity jurisdiction, the court analogized to familiar entity structures and considered whether a ULC should be treated as a corporation or as an unincorporated entity.
The court found that ULCs bear some characteristics of both corporations and partnerships. Like corporations, ULCs have articles, by-laws, and shareholders. But like partnerships, they also expose shareholders to liability for the debts and obligations of the company. The court found the latter characteristic to be controlling. Noting that the bedrock characteristic of a corporation is that the shareholders are not liable for the company’s debts and obligations, the court held that a ULC should be treated as a partnership for diversity purposes.
As a deemed unincorporated entity, the ULC was obligated to plead the citizenship of every shareholder of the company. Because the company had failed to plead that citizenship, the court dismissed the case for lack of jurisdiction.
MaxBounty serves as a reminder that courts’ jurisdictional analysis prioritizes substance over form, and parties seeking to establish diversity jurisdiction must be mindful of the unique impact that each party to the action has on that analysis. If you have questions about jurisdiction, please contact Michael C. Rakower or Daniel F. Gilpin.
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