Written by: Justine Ware
On October 5, 2023, in SXSW, L.L.C. v. Federal Insurance Company, 82 F.4th 405 (5th Cir. 10/5/23), the U.S. Fifth Circuit on its own motion (sua sponte) questioned its subject matter jurisdiction in a diversity case. Deciding that its subject matter jurisdiction had not been sufficiently established, it dismissed and remanded the case to state court, Judge Oldham, writing for the majority, in accordance with existing law, ruled that the party asserting diversity of citizenship had insufficiently relied on the residencies of the parties, without establishing their actual citizenship needed to invoke the Court’s diversity jurisdiction.
Plaintiff-Appellant, SXSW L.L.C., planned to hold its annual music festival in Austin, Texas, but the City of Austin canceled the festival due to the COVID-19 Pandemic. The Plaintiffs refused to refund the money paid by its ticketholders. Understandably, the ticket holders filed a class action lawsuit to recoup their money. The class ultimately settled for over $1,000,000.
SXSW then sued its insurer, Federal Insurance Company ("Federal”) in the United States District Court for the Western District of Texas, for failing to defend it in the class action. SXSW moved for partial summary judgment as to whether Federal owed a duty to defend. Federal then moved for summary judgment on all counts. Federal’s motion for summary judgment was granted, and SXSW’s motion for partial summary judgment was denied. SXSW appealed the granting of Federal’s motion for summary judgment. The Fifth Circuit did not reach the merits of the dispute due to its determination that it lacked subject matter jurisdiction over the appeal.
In its complaint, SXWS had asserted that it was a limited liability company. Instead of alleging the citizenship of all of its members, as is required under 1332, SXSW asserted only the state where its principal place of business was located, confusing the citizenship required for LLCs (all of its members) with that required of corporations (in which the citizenship of its shareholders is ignored). See 28. U.S.C. 1332(c)(1).
An exhibit attached to SXSW’s motion for partial summary judgment identified two of SXWS’ members as (1) a corporation and (2) an LLC. The exhibit identified the corporate member’s citizenship, but failed to identify or alleged the citizenship of each of the LLC’s members. In the jurisdictional statement in its brief, SXWS identified a natural person as the sole owner of the member-LLC, who is a resident of Virginia. The Court found this to be an insufficient assertion of subject matter jurisdiction.
First, the Court recognized that there is a “potentially important difference between LLC membership and LLC ownership.” This distinction is governed by state law and some states allow ownership without membership. So, asserting the ownership of an LLC does not necessarily satisfy the citizenship requirements for diversity purposes. Second, this statement confused residency with citizenship. Residency is not citizenship for the purposes of diversity jurisdiction.
Accordingly, the Court remanded the case.
For those who practice in federal courts, the lesson is to remain vigilant to the distinctions and requirements necessary to establish diversity jurisdiction. Failure to establish the citizenship for the entity seeking jurisdiction in federal court, as this case shows, can quickly lead to dismissal. The opportunity to be heard in federal court can be lost, after a substantial investment of time and money.