There's no place like your principal place of business: 4th Circuit rules that an LLC is an "unincorporated association" under CAFA.

by Kirsten Small

Affirming the District of South Carolina (Matthew Perry, Senior District Judge), the Fourth Circuit ruled last week that a limited liability company should be treated as an "unincorporated association" for purposes of the minimal diversity provisions of the Class Action Fairness Act. Ferrell v. Express Check Advance of SC

Express Check is an LLC organized under the law of Tennessee; its sole member is QC Financial Services, Inc., a Missouri corporation with its principal place of business in Kansas. QC Financial is owned, in turn, by QC holdings, a Kansas corporation with its principal place of business in Kansas. With the exception of four officers (who are in Kansas), all of Express Check's employees are in South Carolina.

Ferrell, a South Carolina citizen, brought a class action in South Carolina state court alleging that Express Check's "payday loan" business violated SC consumer protection statutes. Express Check removed the action to federal court, invoking the "minimal diversity" standard of CAFA, 28 U.S.C. § 1332(d)(2)(A). Under this provision, diversity jurisdiction is available in a class action when the amount in controversy exceeds $5 million and "any member of a class of plaintiffs is a citizen of a State different from any defendant." For purposes of this provision, CAFA provides that an "unincorporated association" is a citizen of the state in which it is organized and the state in which it has its principal place of business, see 28 U.S.C. § 1332(d)(10).

Express Check asserted that the term "unincorporated association" referred only to business entities lacking a distinct corporate identity under state law. Because the law of Tennessee gave Express Check a corporate form (as an LLC), the company argued that its citizenship--under traditional rules applicable to non-corporate entities--was that of its member, i.e., Tennessee and Kansas, rendering jurisdiction in federal court proper under the minimal diversity standard. The district court disagreed and remanded, holding that § 1332(d)(10) applied to all non-corporate business forms regardless of their status under state law.

In affirming the district court, Judge Niemeyer (joined by Chief Judge Traxler and Judge Agee) traced the history of § 1332(d)(10) and concluded that Congress' purpose in enacting the provision was "to respond to the categorical distinction" between corporations (treated as persons for purposes of diversity jurisdiction) and unincorporated associations (i.e., every other business form), created by the Supreme Court. There was not, as Express Check contended, a third category for non-corporate business forms recognized by state law.

Having concluded that Express Check was a unincorporated association under CAFA, the Court turned to the question of Express Check's principal place of business, argued by Ferrell to be South Carolina (using the "place of operations" test) and by Express Check to be Kansas (using the "nerve center" test). The panel stated that "the nature of the business determines which test is the more appropriate to apply"; when a company has physical operations the "place of operations" test is more appropriate, while the "nerve center" test better suits a company without a specific geographic nexus, such as an investment company. In light of Express Check's business as a payday lender with numerous stores in South Carolina, the court concluded that the "place of operations" test was the more appropriate one and that, under it, Express Check was a citizen of South Carolina. The court therefore affirmed the district court's order of remand.