Court Opinion

ID: 9497433
Source: CourtListenerOpinion
Date Created: 2023-08-05 16:51:23.559074+00
Date Added: 2024-06-11T17:58:11.779616
License: Public Domain

EASTERBROOK, Circuit Judge,
concurring.
A curious consequence of today’s holding is that states define the meaning of a federal statute — a jurisdictional statute, -no less, one designed to draw a boundary between state and federal domains. My colleagues conclude that for purposes of 28 U.S.C. § 1332(a) a “corporation” is any entity on which a state bestows that label. Thus if a state renames a limited liability company as a “limited liability corporation,” it becomes a “citizen” with its own jurisdictional attributes, and the citizenship of its members no longer matters. Contrast Cosgrove v. Bartolotta, 150 F.3d 729 (7th Cir.1998). So too if a state renames a “limited partnership” a “limited partnership corporation,” or a “joint stock company” as a “joint stock corporation.”
Almost all corporations are created and defined by state law, so states now hold the keys to federal jurisdiction. Thus when in Texas lawyers organize as “professional corporations,” while local politics dictated that groups of physicians be “professional associations,” the former becomes a citizen while the latter is treated like a partnership under Carden v. Arkoma Associates, 494 U.S. 185, 110 S.Ct. 1015, 108 L.Ed.2d 157 (1990). And if lawyers in Missouri may organize professional corporations, while those on the other side of the Mississippi River in Illinois must call themselves “limited liability partnerships,” again the states have admitted one to federal court while excluding the other. (These and more details about which states use which labels may be found in Alan R. Bromberg & Larry E. Ribstein, Limited Liability Partnerships, the Revised Uniform Partnership Act, and the Uniform Limited Partnership Act (2003 ed.).)
My colleagues proceed as if state control over the scope of federal jurisdiction were an inescapable result of Congress’s decision to treat corporations, but not other organizations, as citizens. Then the only question is whether something is a “corporation,” and, as states devise and regulate corporations, see Atherton v. FDIC, 519 U.S. 213, 117 S.Ct. 666, 136 L.Ed.2d 656 (1997); Kamen v. Kemper Financial Services, Inc., 500 U.S. 90, 111 S.Ct. 1711, 114 L.Ed.2d 152 (1991), the jurisdictional effect of the label is a natural consequence. Yet Congress has not made such a decision. Sections 1332(a)(1) and (c)(1) taken together mean that corporations are citizens, but nothing in § 1332 says that state rather than federal law identifies a “corporation.” Section 1332 is a federal statute, after all. Its meaning also is a question of federal law. And if, as often is apt, federal law absorbs rules from state sources, the decision to do this also is one of federal law. See United States v. Kimbell Foods, Inc., 440 U.S. 715, 99 S.Ct. 1448, 59 L.Ed.2d 711 (1979). See also Clackamas Gastroenter-ology Associates, P.C. v. Wells, 538 U.S. 440, 123 S.Ct. 1673, 155 L.Ed.2d 615 (2003) (using common-law rules of agency, not *746state nomenclature, to identify an “employer” for purposes of federal employment-discrimination law).
My colleagues have collected quite a few cases for the proposition that § 1332 treats as a “corporation” any entity bearing that label as a matter of state law. With the exception of Coté v. Wadel, 796 F.2d 981 (7th Cir.1986), and Saxe, Bacon & Bolan, P.C. v. Martindale-Hubbell, Inc., 710 F.2d 87 (2d Cir.1983), however, these decisions fail to discuss (or even notice) the jurisdictional question. They therefore have not produced holdings on the subject. See Pennhurst State School & Hospital v. Halderman, 465 U.S. 89, 119 & n. 29, 104 S.Ct. 900, 79 L.Ed.2d 67 (1984); United States v. L.A. Tucker Truck Lines, Inc., 344 U.S. 33, 37-38, 73 S.Ct. 67, 97 L.Ed. 54 (1952); Webster v. Fall, 266 U.S. 507, 511, 45 S.Ct. 148, 69 L.Ed. 411 (1925).
The Supreme Court, which has addressed this question, treats taxonomy as a matter of federal law. Great Southern Fire Proof Hotel Co. v. Jones, 177 U.S. 449, 20 S.Ct. 690, 44 L.Ed. 842 (1900), is an example. It held that a joint stock company must be deemed a partnership rather than a corporation under § 1332, even though the Constitution of Pennsylvania provided that “all joint stock companies or associations having any of the powers or privileges of corporations not possessed by individuals or partnerships” were “corporations.” See 177 U.S. at 456, 20 S.Ct. 690. Pennsylvania made joint stock companies, unlike normal partnerships, distinct entities that like corporations could sue and be sued in their own name; this made joint stock companies “corporations” as a matter of Pennsylvania law — but not, the Supreme Court held, as a matter of federal law, under which entity status “is not a sufficient reason for regarding it as a corporation within the jurisdictional rule heretofore adverted to.” Id. at 457, 20 S.Ct. 690.
Although the Court did not say what attributes justify calling an entity a “corporation”, Great Southern Fire Proof Hotel demonstrates that federal rather than state law supplies the rule of decision. The Court observed, 177 U.S. at 456-57, 20 S.Ct. 690, that state judges referred to joint stock companies (also called “limited partnership associations”) as “quasi-corporations” under Pennsylvania law but did not explain what distinguishes a “quasi” corporation from a real one. If a joint stock company deserves a “quasi,” why doesn’t a professional corporation, which like a joint stock company differs in many ways from a firm chartered under a state’s general corporate law?
Just as Great Southern Fire Proof Hotel holds that nomenclature is not sufficient to make an entity a “corporation” under § 1332, so Moor v. County of Alameda, 411 U.S. 693, 717-21, 93 S.Ct. 1785, 36 L.Ed.2d 596 (1973), holds that the name is unnecessary. The Court concluded in Moor that a municipality is a corporate “citizen” under § 1332(a)(1) when it is a freestanding entity with the ability to incur and pay its own debts, and operate without (immediate) direction of the state that created it. This even though the entity was called a “county” rather than a “corporation.”
Both Great Southern Fire Proof Hotel and Moor insist that an entity’s legal attributes rather than its name identify a “corporation.” But which attributes? Entity status is insufficient, as is limited liability; limited partnerships combine these yet were held in Carden not to be “citizens.” In Moor the Court emphasized that California’s judiciary would issue mandamus to counties, which is proper only when the body is an “inferior tribunal, corporation, board, or person.” So why *747was the County a “corporation” rather than an “inferior tribunal” or “board”? The Court did not say. The reasoning in Moor implies that the County’s status as a juridical entity, able to sue and be sued in its own name, was enough; yet Great Southern Fire Proof Hotel and Carden hold that entity status is not the distinction between corporations and those organizations that are not treated as “citizens” under § 1332(a)(1).
What about marketable stock, which has been used in securities law to distinguish firms subject to regulation from those outside it? See, e.g., Marine Bank v. Weaver, 455 U.S. 551, 102 S.Ct. 1220, 71 L.Ed.2d 409 (1982); United Housing Foundation, Inc. v. Forman, 421 U.S. 837, 95 S.Ct. 2051, 44 L.Ed.2d 621 (1975). A principal economic function of corporate organization is separation of ownership from control, so that entrepreneurs need not supply all the capital, and those who supply capital may diversify their investments and need not furnish managerial skills. Shareholders frequently change and must be ignored for jurisdictional purposes; only the entity continues. A professional corporation does not separate ownership from control even in principle, and it offers no opportunity for diversification either; a P.C. is scarcely different economically from a partnership. Each shareholder of a Missouri professional corporation must be a current employee licensed to provide the services in which the firm specializes, or another entity consisting solely of such persons. See Mo.Rev. Stat. § 356.111. Yet Alameda County did not issue stock; the nature and negotiability of an entity’s securities thus can’t be the distinguishing feature of a corporation under federal law. Alameda County was a governmental body, with legal attributes (other than entity status) utterly unlike those of a business corporation.
Indeed, no matter what feature one names as the potential dividing line, it is possible to find a decision of the Supreme Court on the other side. That makes life hard for an intermediate appellate court. We must choose between letting nomenclature control and trying vainly to identify which legal characteristics distinguish corporations from other entities. The former approach is wrong in principle, the latter untenable in practice.
Forced to choose between these options, I join the majority in thinking that it is better to let names control than to set off on a snipe hunt. Carden, the Court’s most recent word, is essentially formal. A formal approach has at least the virtue of certainty, a desirable feature in a jurisdictional rule. It also produces consistency. Professional corporations were created to permit lawyers, physicians, accountants and others to set up firm-wide tax-advantaged pension plans at a time when federal law restricted that opportunity to corporations. States created entities with the corporate name but the functional features of a professional partnership. If that gimmick opens the door to federal tax benefits, why not to citizenship under § 1332? (The federal rules for pensions were changed in 1992, which may explain why most professionals today opt for limited liability partnerships or other non-corporate forms of organization, but this does not affect the treatment of existing entities.) Either Congress or the Supreme Court can draw finer lines if a broad brush leaves states (and entrepreneurs) with too much discretion.