New Disclosure Requirements Under Federal Rule of Civil Procedure 7.1

Origins of Federal Rule of Civil Procedure 7.1

Since 2002, Rule 7.1 has required nongovernmental corporate parties in federal court to file a disclosure statement that either:

1. identifies any parent corporation and any publicly held corporation that owns 10% or more of its stock; OR
2. states that there is no such corporation.

The intent of Rule 7.1 was to alert judges of potential financial interests they may have in relation to a corporate party and to facilitate a judge’s determination of whether his or her recusal from the case was necessary. See Ha v. Deutsche Bank New Jersey Services, Inc., 2005 WL 589408, at *2 (S.D.N.Y. Mar. 11, 2005)

Rule 7.1’s disclosure requirements were not intended to have a bearing on the issue of jurisdiction or removal. Gosnell v. Interstate Dist. Co., 2009 WL 1346051, at *1 (E.D. Tenn. May 11, 2009). In practice, however, federal courts look to disclosure statements to verify the existence of diversity jurisdiction. See e.g. Turnage v. Chase Home Finance, LLC, 2010 WL 11530719, at *3 (E.D. Tex. July 2, 2010).

Proposed Amendments to Federal Rule of Civil Procedure 7.1 

Proposed amendments to the rule seek to formalize additional disclosure requirements and provide uniformity across all federal district courts in determining the citizenship attributed to every party to ensure the existence of diversity jurisdiction.  These proposed amendments have been adopted by the Supreme Court of the United States and, subject to Congressional intervention, are scheduled to take effect on December 1, 2022,

While the original intent of Rule 7.1 focused on a judge’s prospective financial interest in litigation, the proposed additions to Rule 7.1 focus now on the determination of party citizenship for purposes of diversity jurisdiction. See Memorandum from Committee on Rules of Practice and Procedure to Scott S. Harris, Clerk, Supreme Court of the United States (Oct. 18, 2021).

Citizenship determination for individuals and many corporate entities is generally a clear-cut analysis unlikely to burden litigants. However, issues are likely to arise under proposed Rule 7.1 in determining the citizenship of unincorporated entities, whose citizenship is generally determined by the citizenship of its constituent owners or members. See Americold Realty Trust v. Conagra Foods, Inc., 577 U.S. 378, 381 (2016).

The Advisory Committee on Civil Rules has recognized the challenges presented by attributed ownership, acknowledging that “the more elaborate LLC ownership structures may make it difficult, and at times impossible, for an LLC to identify all of the individuals and entities whose citizenships are attributed to it, let alone determine what those citizenships are.” See Report of the Advisory Committee on Civil Rules (Dec. 9, 2020).

Despite the difficulties of determining attributed citizenship in some cases, “the imperative of ensuring complete diversity requires a determination of all citizenships attributed to every party.” Id.  These difficulties are further complicated by the timing requirement under the proposed Federal Rule of Civil Procedure 7.1(b), which requires parties to include the disclosure statement with the party’s first federal court filing.   

Potential Impact of Federal Rule of Civil Procedure 7.1 on Diversity Jurisdiction Removal

Once served with a legal pleading, a party will often contact counsel to investigate the veracity of the allegations and analyze the strength of the claims. Particularly if the claims are asserted in state court, counsel often will examine whether there is a way to remove the case to federal court. (See my previous article.) The benefits of proceeding in federal court can not only include pooling juries from larger geographic ranges to mitigate local biases, but can also entail cost savings of pre-discovery disclosures and discovery limitations among numerous other benefits. For removal to be proper, a federal district court must possess subject-matter jurisdiction over the case. Primarily, federal district courts possess subject-matter jurisdiction over claims in which:

1. a plaintiff alleges a cause of action arising under federal law. See 28 U.S.C. 1331 (federal question jurisdiction),
2. and claims in which the matter in controversy exceeds $75,000, exclusive of interest and costs and is between citizens of different states. See 28 U.S.C. 1332 (diversity jurisdiction).

As removal jurisdiction raises significant federalism concerns, removal is strictly construed. See Shamrock Oil & Gas Corp. v. Sheets, 313 U.S. 100, 108–09 (1941). Under the federal removal statute, a defendant generally has 30 days after service of the initial pleading setting forth the claim to remove an action filed in state court to federal court. See 28 U.S.C. § 1446(b).

As the removal deadline nears, a prospective removing defendant can lose valuable time determining its citizenship for purposes of establishing diversity jurisdiction. On one hand, the determination of citizenship for a single-member LLC whose sole member is an individual may take relatively little time to ascertain, as the entity takes on the citizenship of the individual. On the other hand, the determination of citizenship for a large LLC with multiple members, some of which may themselves be corporations and even other LLCs, has the potential to send the removing defendant down a seemingly endless rabbit hole of citizenship determination. For each member of an LLC that is itself an LLC, its members and their citizenship must be identified and traced up the chain of ownership until one reaches only individuals and/or corporations. Lewis v. Allied Bronze, LLC, 2007 WL 1299251 (E.D. N.Y. May 2, 2007).

Additionally, LLC’s attributed citizenship of its members can also implicate prohibitions on removal under the Forum Defendant Rule if one of the members of the LLC is a citizen of the state where the action is brought. See 28 U.S.C. § 1441(b)(2).

The Advisory Committee on Civil Rules recognized that proposed amended Rule 7.1 “does not address the questions that may arise when a disclosure statement or discovery responses indicate that the party or intervenor cannot ascertain the citizenship of every individual or entity whose citizenship may be attributed to it.” See Excerpt from Report of the Advisory Committee on Civil Rules, 159. What Rule 7.1 does address, however, is that the removing party must file, at the time of removal, its disclosure statement identifying the citizenship of every individual or entity whose citizenship is attributed to that party.

To avoid risking an untimely removal and remand back to state court, it would be prudent for potential litigants, and especially those who are unincorporated entities, to maintain up-to-date records of the citizenship of every individual or entity whose citizenship is attributed to it for purposes of establishing diversity jurisdiction.

If you have questions about Rule 7.1 or other aspects of federal civil procedure, contact Imran Shaukat at ishaukat@semmes.com.