FORUM STOPPING: How the presence of a U.S. citizen domiciled abroad defeats diversity jurisdiction

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According to the most recent records published by the Administrate Office of the United States Courts, nearly 60% of new civil cases brought in the federal courts were based on diversity jurisdiction.

If you remove cases in which the U.S. is a party, that number jumps to more than 67%. Thus, more than two-thirds of recent civil cases brought in federal courts between private litigants are based on diversity of citizenship and less than one-third are based on federal question jurisdiction. A recent case from the Seventh Circuit Court of Appeals details an important variable in determining a company’s access to the federal court system.

In Page v. Democratic Nat’l Comm., the Seventh Circuit determined that, for business entities in which the citizenship of a business is determined by the citizenship of the owners (limited liability companies, partnerships, etc.), the presence of any owner who is a U.S. citizen domiciled abroad will defeat diversity jurisdiction. Thus, any such business cannot litigate in federal court when the only basis of subject-matter jurisdiction is diversity.

Page was a former advisor to the Donald Trump Presidential Campaign. In 2020, he brought suit in the Northern District of Illinois against the Democratic National Committee and several other entities, including a prominent law firm that is organized as a limited liability partnership. The purported basis of subject-matter jurisdiction was complete diversity of citizenship among the parties. The District Court dismissed for lack of personal jurisdiction, and Page appealed. On appeal, the Seventh Circuit questioned whether the court had subject-matter jurisdiction, as three of the partners of the law firm are U.S. citizens domiciled in China. In a matter of first impression for the Seventh Circuit, the court determined that the presence of any “stateless” partner destroys complete diversity of citizenship, and thus the court dismissed the case for lack of subject-matter jurisdiction.

The Court of Appeals began by noting that, whereas the United States Supreme Court has not directly ruled on this issue (and it recently denied certiorari in the Page case) the Supreme Court in a 1989 case had determined that a U.S. citizen domiciled abroad is not a citizen of any state. Therefore, that citizen destroys complete diversity in cases brought by or against that person, as diversity requires (for U.S. citizens) that they be citizens of different states. Further, in 1990, the Supreme Court concluded that the citizenship of a partnership is based on the citizenship of each of the individual partners.

Over time, courts have unanimously concluded that the same principle applies to limited partnerships, limited liability partnerships, limited liability companies, and other “non-corporate” business entities. Putting these two principles together, it is easy to draw the conclusion that, just as a U.S. citizen domiciled abroad cannot be sued in diversity, neither too can a business organization whose citizenship is based on the citizenship of its owners, when at least one owner is a U.S. Citizen who is domiciled in a foreign country. Indeed, the four other Circuit Courts of Appeal that have considered this issue (the First, Second, Third and Fifth Circuits) all reached the same conclusion. The Seventh Circuit followed suit in Page.

Philosophers and linguists could amuse themselves arguing that U.S. citizens domiciled abroad are citizens of a null-state or the “No-State,” and “No-State” is different from a specific U.S. state because something is different from nothing. But the Supreme Court implicitly rejected any such contention in 1989 when it held that stateless citizens always defeat diversity. In that sense, Page’s holding is a simple combination of settled principles, on the order of one plus one equals two. But this relatively straightforward result potentially has large consequences, particularly given the diversity-heavy nature of federal civil cases.

For instance, many large law firms have overseas offices in which U.S. citizens live and work (e.g., the law firm involved in Page). Such law firms are “diversity-proof” and can avoid private litigation in federal court in cases not involving a federal question. Other large non-corporate organizations are also likely to have owners who are U.S. citizens living abroad. Further, a company that wanted to avoid federal litigation whenever possible could bring on a U.S. citizen living abroad as a minority owner (a “forum-stopper”). Conversely, a company that wanted the ability to bring actions in or remove actions to federal court whenever possible could consider refraining from bringing on an owner who is a U.S. citizen domiciled in a foreign country.

Perhaps an even more interesting possibility would be for a non-corporate business to send an owner to a foreign country to reside there indefinitely (or to bring them back) if the business expected to bring or be the subject of litigation, and wanted to influence whether the action could be litigated in federal court. Domicile is the place where a person resides and intends to remain indefinitely, and diversity jurisdiction is determined on the day a suit is filed, so such travel need not be for extended periods (albeit a quick trip across a border and back could cast doubt on the owner’s sincere intent to remain indefinitely). In cases where the amount at stake dwarfs the cost of relocation of the “forum-hopper,” and litigating in state or federal court is deemed mission-critical, it could make economic sense to send out or bring back a minority owner to make or break diversity jurisdiction.

Strategic migration aside, two-thirds of new federal civil cases are brought on the basis of diversity jurisdiction alone. Non-corporate entities have the power to control whether they can sue or be sued in federal court in the bulk of cases brought in the federal courts. Whether or not it makes sense to consider that potential tool in organizing a business or bringing in or removing owners, any litigant who seeks to bring a federal action or remove a state action to federal court on the basis of diversity must pay careful attention to the current whereabouts of each owner whenever a non-corporate entity is involved.