Academic journal article Texas Law Review

Diversity Jurisdiction and Juridical Persons: Determining the Citizenship of Foreign-Country Business Entities

Academic journal article Texas Law Review

Diversity Jurisdiction and Juridical Persons: Determining the Citizenship of Foreign-Country Business Entities

Article excerpt

Introduction

The need for federal courts to hear cases involving foreign-country litigants has been clear since the founding.1 Indeed, there was broad consensus among the Framers that national courts must be able to hear these types of cases.2 The Framers' fears of prejudice against foreign-country litigants led to Article III's pronouncement that the judicial power of the United States extends to cases between citizens of the United States and citizens of a foreign state and to the implementation of this constitutional grant by the First Congress in the Judiciary Act of 1789.3 The Framers believed that allowing foreign-country litigants to assert their rights in federal court was necessary because cases involving citizens of a foreign country could have foreign relations consequences and thus should be decided by the courts of the nation, not of the states.4 They were particularly concerned that international business disputes not be relegated to state court.5 But now that the nature of international transactions has changed, with large foreign companies having thousands of members or shareholders from all over the world, the protections of alienage jurisdiction are in peril. If a foreign-country business entity6 is treated like an American unincorporated association instead of a corporation, the citizenship of all of the company's members would be imputed to it, and the benefits that alienage jurisdiction was designed to provide would be eviscerated. A large company would have to allege the citizenship of each of its many thousands of members, and even if it managed to do that, the citizenship of a single member could destroy jurisdiction.

The question, then, is how to determine the citizenship of foreign-country business entities so as to preserve access to alienage jurisdiction where it seems warranted. American businesses that want to enjoy the benefits of diversity jurisdiction without dealing with the citizenship of their members need only organize themselves as corporations. However, it is unclear when a foreign-country business entity can be treated like an American corporation, and neither Congress nor the Supreme Court has provided any clarification. Three courts of appeals have attempted to solve this issue, resulting in a 2-1 circuit split.

The Fifth and Ninth Circuits have developed what I refer to as the "juridical person approach." Under this framework, a court looks to the law of the foreign country to determine whether the foreign-country entity is treated like a juridical person in the country of its formation. If it is, it is treated like a corporation for citizenship purposes. If not, it is treated like an unincorporated association and has the citizenship of its members. By contrast, the Seventh Circuit has adopted what I refer to as the "comparison approach" to determine the citizenship of foreign-country business entities. This involves looking to the attributes of a foreign-country business entity and comparing it to American business entities. The court then accords the foreign-country entity the same citizenship that its American analogue would have.

This Note evaluates these approaches and determines that the Fifth and Ninth Circuits' juridical person approach is superior to the Seventh Circuit's comparison approach in terms of adherence to Supreme Court precedent and ease and consistency in its application. This Note advocates adoption of a slightly modified version the juridical person approach.

Part I of this Note surveys the existing case law, covering Supreme Court precedent and the current circuit split. It explains both the comparison approach and the juridical person approach to determining citizenship and explores how the differences in the two approaches can lead to different citizenship findings. Part II evaluates the two approaches for both their adherence to Supreme Court precedent and their ease of application. Although the relevant Supreme Court precedent is vague and at times contradictory, this Note argues that the juridical person approach most faithfully follows the Court's original justification for treating corporations differently. …

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