Diversity jurisdiction
In the law of the United States, diversity jurisdiction is a form of subject-matter jurisdiction that gives United States federal courts the power to hear lawsuits that do not involve a federal question. For a federal court to have diversity jurisdiction over a lawsuit, two conditions must be met. First, there must be "diversity of citizenship" between the parties, meaning the plaintiffs must be citizens of different U.S. states than the defendants. Second, the lawsuit's "amount in controversy" must be more than $75,000. If a lawsuit does not meet these two conditions, federal courts will normally lack the jurisdiction to hear it unless it involves a federal question, and the lawsuit would need to be heard in state court instead.
The United States Constitution, in Article III, Section 2, grants Congress the power to permit federal courts to hear diversity cases through legislation authorizing such jurisdiction. The provision was included because the Framers of the Constitution were concerned that when a case is filed in one state, and it involves parties from that state and another state, the state court might be biased toward the party from that state. Congress first exercised that power and granted federal trial circuit courts diversity jurisdiction in the Judiciary Act of 1789. Diversity jurisdiction is currently codified at, the statute originally enacted on June 25, 1948.
In 1969, the American Law Institute explained in a 587-page analysis of the subject that diversity is the "most controversial" type of federal jurisdiction, because it "lays bare fundamental issues regarding the nature and operation of our federal union."
Statute
Diversity of parties
Mostly, in order for diversity jurisdiction to apply, complete diversity is required, where none of the plaintiffs can be from the same state as any of the defendants. A corporation is treated as a citizen of the state in which it is incorporated and the state in which its principal place of business is located. A partnership or limited liability company is considered to have the citizenship of all of its constituent partners/members. Thus, an LLC or partnership with one member or partner sharing citizenship with an opposing party will destroy diversity of jurisdiction. Cities and towns are also treated as citizens of the states in which they are located, but states themselves are not considered citizens for the purpose of diversity. U.S. citizens are citizens of the state in which they are domiciled, which is the last state in which they resided and had an intent to remain.A national bank chartered under the National Bank Act is treated as a citizen of the state in which it is "located". In 2006, the Supreme Court rejected an approach that would have interpreted the term "located" to mean that a national bank is a citizen of every state in which it maintains a branch. The Supreme Court concluded that "a national bank... is a citizen of the State in which its main office, as set forth in its articles of association, is located". The Supreme Court, however, left open the possibility that a national bank may also be a citizen of the state in which it has its principal place of business, thus putting it on an equal footing with a state-formed corporation. This remains an open question, with some lower courts holding that a national bank is a citizen of only the state in which its main office is located, and others holding that a national bank is also a citizen of the state in which it has its principal place of business.
The diversity jurisdiction statute also allows federal courts to hear cases in which:
- Citizens of a U.S. state are parties on one side of the case, with nonresident alien as adverse parties;
- Complete diversity exists as to the U.S. parties, and nonresident aliens are additional parties;
- A foreign state is the plaintiff, and the defendants are citizens of one or more U.S. states; or
- Under the Class Action Fairness Act of 2005, a class action can usually be brought in a federal court when there is just minimal diversity, such that any plaintiff is a citizen of a different state from any defendant. Class actions that do not meet the requirement of the Class Action Fairness Act must have complete diversity between class representatives and the defendants.
If the case requires the presence of a party who is from the same state as an opposing party, or a party who is a U.S. citizen domiciled outside the country, the case must be dismissed, the absent party being deemed "indispensable". The determination of whether a party is indispensable is made by the court following the guidelines set forth in Rule 19 of the Federal Rules of Civil Procedure.
Diversity is determined at the time that the action is filed
Diversity is determined at the time that federal court jurisdiction is invoked, and on the basis of the state citizenships of the parties at that time. A change in domicile by a natural person before or after that date is irrelevant. However, in Caterpillar, Inc. v. Lewis, the Supreme Court also held that federal jurisdiction predicated on diversity of citizenship can be sustained even if there did not exist complete diversity at the time of removal to federal court, so long as complete diversity exists at the time the district court enters judgment. The court in Caterpillar sustained diversity as an issue of "fairness" and economy, given a lower court's original mistake that allowed removal.Corporate citizenship based on principal place of business
Before 1958, a corporation for the purpose of diversity jurisdiction was deemed to be a citizen only of the state in which it had been formally incorporated. This was originally not a problem when a corporation could be chartered only by the enacting of a private bill by the state legislature. Thus, corporations were normally headquartered in the same state where they were incorporated, since their promoters had to be quite well-known and well-connected in that state in order to obtain passage of a private bill.The traditional rule only became a problem when general incorporation laws were invented around 1896, state legislatures began a race to the bottom to attract out-of-state corporations, and corporations began to incorporate in one state but set up their headquarters in another state. During the 20th century, the traditional rule came to be seen as extremely unfair in that corporate defendants actually headquartered in a state but incorporated elsewhere could remove diversity cases against them from state courts to federal courts, while individual and unincorporated defendants physically based in that same state could not. Therefore, during the 1950s, various proposals were introduced to broaden the citizenship of corporations in order to reduce their access to federal courts.
In 1957, conservative Southern Democrats, as part of their larger agenda to protect racial segregation and states' rights by greatly reducing the power of the federal judiciary, introduced a bill to limit diversity jurisdiction to natural citizens. Liberals in Congress recognized this was actually a form of retaliation by conservative Southerners against the Warren Court, and prevailed in 1958 with the passage of a relatively narrow bill which deemed corporations to be citizens of both their states of incorporation and principal place of business. The two proposals, respectively, promised to reduce the federal civil caseload by 25% versus 2%.
However, Congress never defined what exactly is a "principal place of business". The original proposal for this term from the Committee on Jurisdiction and Venue of the Judicial Conference of the United States recommended that the "principal place of business" should be the state, if any, from which a corporation derived fifty percent or more of its gross income. This was severely flawed because it implied that the largest corporations which earned gross income from many states would have no principal place of business at all.
In September 1951, the committee substituted a different recommendation from the judges of the Tenth Circuit, to the effect that the term "principal place of business" should be determined according to the precedents which had interpreted this term as used in the Bankruptcy Act. This recommendation was accepted uncritically by the House and Senate committees which produced the 1958 bill. The problem with this approach was that the Bankruptcy Act precedents treated the issue as a question of fact to be decided in light of all relevant evidence, which meant that they provided virtually no guidance.
The question of what is a "principal place of business" became hotly disputed during the late 20th century as many areas of the American economy came under the control of large national corporations. Although these corporations usually had a headquarters in one state, the majority of their employees, assets, and revenue were often physically located at retail sites in the states with the largest populations, and hence a circuit split developed in which some judges held that the latter states could also be treated as the corporation's principal place of business. The rationale was that those states were where the business was actually occurring or being transacted. This issue was finally resolved by a unanimous Supreme Court in Hertz Corp. v. Friend, which held that a corporation's principal place of business is presumed to be the place of the corporation's "nerve center" from where its officers conduct the corporation's important business.