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Agreement Isn’t Enough: The Fifth Circuit Examines Diversity Jurisdiction Sua Sponte

A recent opinion from the U.S. Court of Appeals for the Fifth Circuit serves a sharp reminder of the principle that federal courts have limited jurisdiction.  In MidCap Media Finance, L.L.C. v. Pathway Data, Inc., Judge Oldham explained that “[r]espect for the state system and the strictly circumscribed nature of federal jurisdiction requires our unflagging attention to these limits.” 929 F.3d 310, 316 (5th Cir. 2019).  In that case, such unflagging attention led to the sua sponte consideration of whether federal jurisdiction existed in a case appealed after trial.

MidCap Media Finance, L.L.C., agreed to loan Pathway Data, Inc., over a million dollars, and Pathway’s CEO personally guaranteed the loan.  Id. at 312-13.  Pathway eventually stopped making payments, and MidCap sued in federal court on the basis of diversity jurisdiction.  Id. at 313.  After a bench trial, the court found that Pathway was liable but that the CEO was not.  Id. Pathway appealed, and MidCap cross-appealed, but the Fifth Circuit held that it could not consider the merits of either party’s argument.  Despite the fact that the parties agreed on appeal that the Fifth Circuit had subject-matter jurisdiction, the court did not find that the record supported that conclusion.  Id.

In the pleadings, the parties had alleged “only that MidCap was ‘organized and existing under the laws of the State of Texas and had its principal place of business’ in Texas.”  Id. at 314.  But citizenship of an L.L.C., the Fifth Circuit explained, is determined by the citizenship of each of its members.  As a result, to properly allege citizenship of an LLC for purposes of diversity, one must allege the citizenship of each of its members. Id.

After examining the record, the Fifth Circuit determined that there was insufficient evidence of the citizenship of the LLC’s two members.  The court thus could not determine whether complete diversity existed between the parties.  As a result, the Fifth Circuit remanded the case to the district court so that the pleadings could be amended, the record could be supplemented, and a determination regarding jurisidiction could be made.

Midcap serves as a cautionary tale.  Parties should take care to ensure that the record supports the exercise of diversity jurisdiction as the lack of subject-matter jurisdiction can be raised at any time either by any party or by the court.