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A pain worse than losing (Part 3): A jurisdictional defect


We’ve written before about the heartfelt pain appellate lawyers experience when a case is dismissed after briefing and oral argument at the Ohio Supreme Court. In the first instance, it happened for a lack of a final appealable order. In the second, the court ultimately decided the case had already been mooted. It turns out there’s a third possibility — a jurisdictional defect.

Dismissed for lack of subject-matter jurisdiction
Although we tend to focus on the state courts here at Ohio Appellate Insights, today’s discussion arises from a recent Sixth Circuit opinion. In Akno 1010 Market St. v. Pourtaghi, the court dismissed an appeal for lack of subject-matter jurisdiction. While dismissals for lack of subject-matter jurisdiction are not entirely uncommon, the issue usually is raised by one of the parties in the trial court. Here, neither party raised the issue during the three years of litigation before the trial court. The trial court ultimately entered summary judgment on behalf of the defendant.

The Sixth Circuit panel recognized a potential subject-matter jurisdiction issue after briefing was completed and oral argument was scheduled. It then ordered supplemental briefing from the parties on whether the trial court possessed subject-matter jurisdiction to hear the case at all.

Alleged diversity of citizenship

people walking over large globe image representing jurisdictional defect of diversity of citizenship

In federal court, subject-matter jurisdiction must be alleged pursuant to a statute. Here, the plaintiff, Akno 1010 Market Street, a Michigan limited liability corporation (LLC), alleged there was a “diversity of citizenship” between itself and the defendant as a Canadian resident.

The issue the Sixth Circuit panel focused on was that unlike a corporation, under case law interpreting 28 U.S.C. 1332(a)(2), an LLC possesses the citizenship of its members — not its state of incorporation. The supplemental briefing revealed that at the time the action was filed, Akno 1010 Market Street’s only member was another Michigan LLC, whose member was a Swiss holding company, whose member was an Italian citizen. Confused yet?

Regardless, the Sixth Circuit held that federal courts are not the proper forum for a foreign citizen to sue another foreign citizen. The Opinion remanded for the trial court to make the factual determination necessary as to the existence of subject-matter jurisdiction.

Principles of diversity jurisdiction
The court appeared concerned about the result after so much time, energy and money was expended below. It stated it was “emphasizing three well-established principles of diversity jurisdiction:”

  1. that the party asserting diversity jurisdiction bears the burden of establishing it;
  2. that LLCs are not corporations and different rules apply; and
  3. that litigants and district courts must assure themselves of subject-matter jurisdiction “at the earliest possible moment to avoid wasting judicial and party resources.”

With respect to the second principle, the Sixth Circuit noted that “[a]lleging that an LLC is organized under the laws of a certain state does nothing to establish its citizenship. Rather, LLCs have the citizenships of their members and sub-members. Thus, when an LLC is a party in a diversity action, the court must know the citizenship of each member and sub-member.”

Importance of recognizing jurisdictional defect early in proceeding
The court concluded by noting that any of the participants below, the plaintiff, the defendant or even the trial court could have avoided wasting three years of litigation if the issue had been properly noticed below. As this demonstrates, case defects requiring dismissal can pop up at any point during the proceeding. Recognizing when and how this can occur is important for practitioners to avoid wasting a client’s time and money.



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