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In the law of the United States, diversity jurisdiction is a form of subject-matter jurisdiction in civil procedure in which a United States district court (the trial courts of general jurisdiction in the federal judiciary) has to hear a civil case because the persons that are parties are "diverse" in citizenship, which generally indicates that they are citizens of different states or non-U.S. citizens. (Corporations, as legal persons, may also be included). Diversity jurisdiction and federal-question jurisdiction (jurisdiction over issues arising under federal law) constitute the two primary sources of subject matter jurisdiction in U.S. federal courts.

The United States Constitution, in Article III, § 2, gives the 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 presently codified at .

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 (incorporated municipalities) 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 a domicile, which is the last state in which they resided and had an intent to remain. An alien (foreign national) who has been granted the status of permanent resident status is treated as a citizen of the state where the alien resides.

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(s) as adverse parties;
  • Complete diversity exists as to the U.S. parties, and nonresident aliens are additional parties;
  • A foreign state (i.e. country) 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 (those named in the lawsuit) and the defendants.

A U.S. citizen who is domiciled outside the U.S. is not considered to be a citizen of any U.S. state, and cannot be considered an alien. The presence of such a person as a party completely destroys diversity jurisdiction, except for a class action or mass action in which minimal diversity exists with respect to other parties in the case.

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 the action is filed, and on the basis of the residency of the parties at that time. A change in domicile by a party before or after that date is irrelevant.

Corporate citizenship based on principal place of business

Oddly, neither Congress nor the U.S. Supreme Court has ever precisely defined what "principal place of business" means, and there is a significant dispute among the U.S. federal courts (a circuit split) as to how to answer that question. This issue has become increasingly problematic since the 1980s. Many sectors of the U.S. economy have become dominated by large multinational corporations whose U.S. subsidiaries are usually incorporated in Delaware, operate headquarters in states like New York, Illinois, or Texas, run back-office operations from states like New Jersey and Missouri, and transact the largest share of their business in California (due to the giant size of that state's population and economy). So which of these states is their principal place of business? In response, the Ninth Circuit has developed a "substantial predominance" test which implies that virtually any large corporation that regularly does business in California would be deemed to have its principal place of business there, and would therefore be ineligible for federal diversity jurisdiction (in cases involving California plaintiffs). The U.S. Supreme Court heard oral argument in Hertz v. Friend on November 10, 2009, and is expected to eventually announce a unified national test for determining a corporation's principal place of business.

Amount in controversy

The United States Congress has placed an additional barrier to diversity jurisdiction, the amount in controversy requirement. This is a minimum amount of money which the parties must be contesting is owed to them. As of mid 2007, under 28 U.S.C. §1332(a), a claim for relief must exceed the sum or value of $75,000, exclusive of interests and costs and without considering counterclaims.

A plaintiff may add different claims against the same defendant to meet the amount. Two plaintiffs, however, may not join their claims together to meet the amount, but if one plaintiff meets the amount standing alone, the second plaintiff can piggyback as long as the second plaintiff's claim arises out of the same facts as the main claim. See the article on federal supplemental subject matter jurisdiction here: supplemental jurisdiction.

The amount specified has been regularly increased over the past two centuries. Courts will use the "legal certainty" test to decide whether the dispute is over $75,000. Under the "legal certainty" test, the court will accept the pleaded amount unless it is legally certain that the pleading party cannot recover more than $75,000. For example, if the dispute is solely over the breach of a contract by which the defendant had agreed to pay the plaintiff $10,000, a federal court will dismiss the case for lack of subject matter jurisdiction, or remand the case to state court if it arrived via removal.

Removal and remand

If a case is originally filed in a state court, and the requirements for federal jurisdiction (diversity and amount in controversy) are met, the case involves a federal question, or a supplemental jurisdiction exists), the defendant (and only the defendant) may remove the case to a federal court.

A case cannot be removed to a state court. To remove to a federal court, the defendant must file a notice of removal with both the state court where the case was filed and the federal court to which it will be transferred. The notice of removal must be filed within 30 days of the first removable document. For example, if there is no diversity of citizenship initially, but the non-diverse defendant is subsequently dismissed, the remaining diverse defendant(s) may remove to a federal court. However, no removal is available after one year of the filing of the complaint.

A party's citizenship at the time of the filing of the action is considered as the citizenship of the party. If a defendant later moves to the same state as the plaintiff while the action is pending, the federal court will still have jurisdiction. However, if any defendant is a citizen of the state where the action is first filed, diversity does not exist. 28 U.S.C. §1441(b).

If a plaintiff or a co-defendant opposes removal, he may request a remand, asking the federal court to send the case back to the state court. A remand is rarely granted if the diversity and amount in controversy requirements are met. A remand may be granted, however, if a non-diverse party joins the action, or if the parties settle some claims among them, leaving the amount in controversy below the requisite amount.

Law applied

The United States Supreme Courtmarker determined in Erie Railroad Co. v. Tompkins (1938) that the law to be applied in a diversity case would be the law of whatever state in which the action was filed. This decision overturned precedents that had held that federal courts could create a general federal common law, instead of applying the law of the forum state. This decision was an interpretation of the word "laws" in 28 USCA 1682, known as the Rules of Decision Act.

Under the Rules of Decision Act, the laws of the several states, except where the constitution or treaties of the United States or Acts of Congress otherwise require or provide, shall be regarded as rules of decision in civil actions in the courts of the United States, in cases where they apply.

The Court interpreted "laws" to include the states' judicial decisions, or "common law." Thus, it is an overstatement to state that Erie represents the notion that there is "no general federal common law." Federal courts do adjudicate "common law" of federal statutes and regulations.

Because the RDA provides for exceptions and modifications by the congress, it is important to note the effect of the Rules Enabling Act (REA), 28 USCA 2072. The REA delegates the legislative authority to the Supreme Court to ratify rules of practice and procedure and rules of evidence for federal courts. Thus, it is not Erie, but the REA, which created the distinction between substantive and procedural law.

The Federal Rules of Civil Procedure and the Federal Rules of Evidence still govern the "procedural" matters in a diversity action not under Erie, but under the REA. The REA, 28 USCA 2072(b), provides that the Rules will not affect the substantive rights of the parties. Therefore, a federal court may still apply the "procedural" rules of the state of the initial filing, if the federal law would "abridge, enlarge, or modify" a substantive right provided for under the law of the state.

See also

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