Jural Entities, Real Parties in Controversy, and Representative Litigants: A Unified Approach to the Diversity Jurisdiction Requirements for Business Organizations

The rules that make the federal courts available for the resolution of controversies between citizens of different states have often been described as placing an undue burden on the federal system. Congress has for the most part turned a deaf ear to calls by jurists and commentators for reform or even abolition of federal diversity jurisdiction, leaving the courts to struggle with difficult issues about the proper contours of the jurisdictional requirements. One recurring difficult issue is the manner in which citizenship is to be attributed to the investors who compose various business organizations. The general rule has been that corporations are to be treated as having an existence and citizenship separate from their investors; only the entity has had to satisfy the diversity of citizenship requirements. The rule is not so clear for other organizations, however, even those that share many, or nearly all, of the corporation\u27s fundamental characteristics. Consideration of policy arguments against expansion of diversity jurisdiction has often been implicit, and sometimes even explicit, in the determination of how such unincorporated associations are to be treated. Recently, a narrow majority of the United States Supreme Court sent a clear message that the Court will not expand diversity jurisdiction for use by an unincorporated association, even if the association seems to have the same fundamental characteristics as a corporation. Evidently, concern about the burdens of diversity jurisdiction—not sound doctrinal analysis—governs how citizenship will be attributed to business organizations. The Supreme Court has created a “doctrinal wall” around corporations that enables courts to avoid persuasive arguments that other business organizations should also be able to qualify for diversity jurisdiction as entities apart from their investors. Moreover, the rules are not as tidy as the declaration of a “doctrinal wall” would suggest. The Supreme Court has applied a “real party in controversy” test to permit one type of organization—a business trust—to qualify for diversity based on the trustees\u27 citizenship alone, thereby overcoming any lack of diversity due to common citizenship of the trust\u27s beneficiary investors. The rules governing business organizations\u27 access to the federal courts are further complicated by a procedural mechanism found in Federal Rule of Civil Procedure 23.2, which enables suits to be brought by or against an organization\u27s designated representatives. Some courts have interpreted Rule 23.2 as giving access to the federal courts solely for the purpose of providing a convenient procedure for designating representative litigants when state law does not provide one. Other courts refuse to allow Rule 23.2 to be employed in this role, on the ground that to do so is inconsistent with the judicial policy of interpreting the availability of diversity jurisdiction narrowly. The very existence of Rule 23.2, as well as the real party in controversy test, makes it possible for some business organizations to gain access to the federal forum regardless of where they are found in relation to the Supreme Court\u27s entity status “doctrinal wall.” As a result, potential litigants may be unable to predict confidently whether they can sustain a suit in federal court. This Article discusses the evolution of the entity treatment, real party in controversy, and Rule 23.2 representative litigant rules as they are applied to business organizations, and argues for a predictable, theoretically sound approach that is based not on an apologetically offered arbitrary line, but rather on investor expectations viewed in the context of diversity jurisdiction\u27s underlying purposes