By Nicholas Glover | Staff Editor

February 23, 2024

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“Counsel did not get the point.”[1] “[Classifying a business] does not get any easier when we turn to foreign business entities.”[2] “We have dodged a problem today, but it will recur.”[3]

All three quotes are responses from federal judges describing the jurisdictional mayhem caused by improperly classifying a business entity.

The mayhem this niche problem stems from is access to the federal court system. An American corporation is domiciled in two places: its state of incorporation and principal place of business.[4] Meanwhile, a non-corporate business entity—such as limited liability company—has its domicile determined by each partner or member.[5] The domicile(s) of a company helps determine if the company will be permitted into the federal courts under diversity jurisdiction.[6] Simple enough.

Now, what about trying to determine the domicile of foreign business entities? Furthermore, what about trying to determine the domicile of foreign business entities, where a carbon copy of an American corporation does not exist?[7] Even further, what about trying to determine the domicile of foreign business entities, where a carbon copy of an American corporation does not exist, and there are markedly different and competing approaches?[8] This is the unenviable task that federal court judges are left with.

This unique situation has led to a decades-long circuit split. Judges are left with two competing approaches—the “juridical entity approach”[9] stemming from interpreting People of Puerto Rico v. Russell & Co., Sucesores En C.,[10] and the “features approach.”[11] The juridical entity approach holds that if a foreign business entity is classified as a juridical person under the laws of that foreign nation, then it will be determined as such in the American federal court system.[12] As a juridical person, its single domicile under diversity jurisdiction will be applied under 28 U.S.C. § 1332(a).

Alternatively, there is the features approach. Spearheaded by Judge Frank Easterbrook and Judge Richard Posner, this approach determines the classification of a foreign, non-corporate business entity by looking at the features it has. Specifically, the Seventh Circuit’s legal luminaries look for certain traits: “a business with indefinite existence, personhood (the right to contract and litigate in its own name), limited liability for equity investors, and alienable shares, among other features.”[13] Despite how it may be organized under its foreign laws—whether it is the American equivalent of a limited liability company, general partnership, or other—if the non-corporate business entity bears the aforementioned features, then it will be treated like an American corporation, for diversity jurisdiction purposes.[14]

These two approaches greatly contrast. Worse, the lower courts have no guidance from the Supreme Court on this issue, as the Court is weary to jump into many jurisdictional issues.[15] So, with a decades-long circuit split coming to the fore as recently as May 2023,[16] it is time for action.

There is only one body that can resolve this issue: Congress. Specifically, Congress should adopt the features approach in full, either by (1) amending 28 U.S.C. § 1332(c) to explicitly incorporate the features approach for classifying foreign, non-corporate business entities; or (2) enacting a standalone piece of legislation for this issue. The former is sensible given that 28 U.S.C. § 1332(c) already discusses jurisdictional facets of American corporations.[17] The latter would be significant, as enacting a standalone piece of legislation signals the level of importance for this issue.

If adopted, the features approach may potentially see early legal challenges—primarily of statutory interpretation; however, it is likely that none will stick. Moreover, the features approach honors Supreme Court precedent and the Founding Father’s political and economic justifications for diversity and alienage jurisdiction, and it encompasses a “more holistic review”[18] overall.

Neither approach is perfect. Both approaches contain pros and cons. But Congress would be well-advised to adopt the features approach. This approach would provide the lower courts with a clear and repeatable analytical template and end this ongoing—and unnecessary—circuit split.

[1] Lear Corp. v. Johnson Elec. Holdings Ltd., 353 F.3d 580, 582 (7th Cir. 2003).

[2] Hawkins v. i-TV Digitalis Tavkozlesi zrt., 935 F.3d 211, 223 (4th Cir. 2019).

[3] Sunny Handicraft (H.K.), Ltd. v. Envision This! LLC, 66 F.4th 1094, 1097 (7th Cir. 2023) (emphasis added).

[4] Hertz Corp. v. Friend, 559 U.S. 77, 97 (2010).

[5] Carden v. Arkoma Assocs., 494 U.S. 185, 195 (1990).

[6] 28 U.S.C. § 1332.

[7] White Pearl Inversiones S.A. (Uruguay) v. Cemusa, Inc., 647 F.3d 684, 686 (7th Cir. 2011) (“Yet, not even the United Kingdom has a business form that is exactly equal to that of a corporation.”).

[8] See People of Puerto Rico v. Russell & Co., Sucesores, S. En C., 288 U.S. 476 (1933); see also Stiftung v. Plains Mktg., 603 F.3d 295, 299 (5th Cir. 2010) (applying the “juridical entity approach”); cf. Fellowes, Inc. v. Changzhou Xinrui Fellowes Off. Equip. Co. Ltd., 759 F.3d 787, 788 (7th Cir. 2014) (applying the “features approach”).

[9] See Stiftung v. Plains Mktg., 603 F.3d 295, 299 (5th Cir. 2010) (applying the juridical entity approach).

[10] 288 U.S. 476 (1933).

[11] See Fellowes, 759 F.3d 787, 788 (7th Cir. 2014) (applying the features approach).

[12] See Cohn v. Rosenfeld, 733 F.2d 625, 629 (9th Cir. 1984) (applying the juridical entity approach).

[13] Fellowes, 759 F.3d 787, 788 (7th Cir. 2014).

[14] See 28 U.S.C. § 1332(c).

[15] Carden v. Arkoma Assocs., 494 U.S. 185, 197 (1990) (“We have long since decided that, having established special treatment for corporations, we will leave the rest to Congress; we adhere to that decision.”).

[16] See generally Sunny Handicraft (H.K.), Ltd. v. Envision This! LLC, 66 F.4th 1094 (7th Cir. 2023).

[17] See 28 U.S.C. § 1332(c).

[18] Elisabeth C. Butler, Diversity Jurisdiction and Juridical Persons: Determining the Citizenship of Foreign-Country Business Entities, 97 Tex. L. Rev. 193, 208 (2018).