Court Opinion

ID: 2997235
Source: CourtListenerOpinion
Date Created: 2015-09-24 19:34:49.112989+00
Date Added: 2024-06-11T09:19:12.207435
License: Public Domain

In the
 United States Court of Appeals
              For the Seventh Circuit
                         ____________

No. 03-2059
DONALD HOAGLAND, as receiver
of Midwest Transit, Inc.,
                                               Plaintiff-Appellant,
                                v.

SANDBERG, PHOENIX & VON GONTARD, P.C.,
                                               Defendant-Appellee.

                         ____________
            Appeal from the United States District Court
                for the Southern District of Illinois.
              No. 01-4246-JPG—J. Phil Gilbert, Judge.
                         ____________
  ARGUED DECEMBER 11, 2003—DECIDED SEPTEMBER 22, 2004
                         ____________

  Before BAUER, POSNER, and EASTERBROOK, Circuit Judges.
  POSNER, Circuit Judge. Donald Hoagland, as receiver for
Midwest Transit, filed suit in an Illinois state court against
the Sandberg law firm, which in the course of representing
Midwest had, Hoagland charged, wronged its client. The
law firm removed the suit to federal district court on the
basis of diversity of citizenship. The district court entered
2                                                  No. 03-2059

judgment for Sandberg after determining that Hoagland
had not proved the elements of legal malpractice, and
Hoagland appeals.
  As happens all too often when a suit comes into the
federal courts by removal, so that the original pleadings did
not specify a basis for federal jurisdiction, the case came to
us without adequate specification of the citizenship of the
parties, even though the only possible basis for federal
jurisdiction was diversity of citizenship. We therefore
directed the parties to file supplemental briefs addressed to
jurisdiction, and they have done so. The supplemental briefs
reveal that Hoagland is a citizen of Illinois; and it is his
citizenship rather than Midwest’s that is germane to
diversity, FDIC v. Elefant, 790 F.2d 661, 665-66 (7th Cir. 1986);
Gross v. Hougland, 712 F.2d 1034, 1037-39 (6th Cir. 1983);
Jump v. Manchester Life & Casualty Management Corp., 579
F.2d 449, 452 n. 4 (8th Cir. 1978); cf. Navarro Savings Ass’n v.
Lee, 446 U.S. 458 (1980), because there is no suggestion that
he was appointed receiver in order to create diversity
jurisdiction. 28 U.S.C. § 1359; Gross v. Hougland, supra, 712
F.2d at 1037-39. The briefs also reveal, however, that while
the Sandberg firm is a professional corporation incorporated
and having its principal place of business in Missouri, three
of the twenty-two members of the firm (the shareholders in
the professional corporation) are citizens of Illinois. If the
citizenship of the members is what counts for purposes of
determining diversity, as would be the case if the law firm
were a partnership, a limited liability company, or any other
noncorporate enterprise, then the requirement of complete
diversity has not been met and the suit must be dismissed
for want of federal jurisdiction.
  In Coté v. Wadel, 796 F.2d 981, 983 (7th Cir. 1986), however,
we held, as had the Second Circuit in Saxe, Bacon & Bolan,
P.C. v. Martindale-Hubbell, Inc., 710 F.2d 87, 89 (2d Cir. 1983),
No. 03-2059                                                     3

that for purposes of the diversity jurisdiction a professional
corporation should be treated like any other corporation,
rendering the members’ citizenship irrelevant. A number of
subsequent cases are in accord. Schneider ex rel. Estate of
Schneider v. Fried, 320 F.3d 396, 399, 400 (3d Cir. 2003); Ocean
Ships, Inc. v. Stiles, 315 F.3d 111, 114, 115 n. 1 (2d Cir. 2002);
Edell & Associates, P.C. v. Law Offices of Peter G. Angelos, 264
F.3d 424, 427 (4th Cir. 2001); Duffey v. Wheeler, 820 F.2d 1161,
1162 (11th Cir. 1987). There are no contrary decisions.
   We reaffirmed Coté in Saecker v. Thorie, 234 F.3d 1010,
1010-13 (7th Cir. 2000), and at about the same time, in a case
involving a nonprofit corporation, made clear that Coté
stands for a rule that “for purposes of diversity jurisdiction
a corporation is a corporation is a corporation,” CCS
Information Services, Inc. v. American Salvage Pool Ass’n, 230
F.3d 342, 346 (7th Cir. 2000) (quoting Coté v. Wadel, supra,
796 F.2d at 983); see also National Ass’n of Realtors v. National
Real Estate Ass’n, Inc., 894 F.2d 937, 939 (7th Cir. 1990); Wild
v. Subscription Plus, Inc., 292 F.3d 526, 528-29 (7th Cir. 2002);
Mutual Service Casualty Ins. Co. v. Country Life Ins. Co., 859
F.2d 548, 550-51 (7th Cir. 1988)—it doesn’t matter what
kind. Yet we know that business entities that are functionally
similar to corporations, but are not formally corporations,
such as limited partnerships and limited-liability companies,
are not classified as corporations for diversity purposes.
Carden v. Arkoma Associates, 494 U.S. 185 (1990); Great
Southern Fire Proof Hotel Co. v. Jones, 177 U.S. 449, 454-57
(1900); Belleville Catering Co. v. Champaign Market Place,
L.L.C., 350 F.3d 691, 692-93 (7th Cir. 2003); Tango Music, LLC
v. DeadQuick Music, Inc., 348 F.3d 244, 245 (7th Cir. 2003);
Cosgrove v. Bartolotta, 150 F.3d 729, 731 (7th Cir. 1998); Rolling
Greens MHP, L.P. v. Comcast SCH Holdings L.L.C., 374 F.3d
1020, 1021-22 (11th Cir. 2004) (per curiam); GMAC Commer-
cial Credit LLC v. Dillard Department Stores, Inc., 357 F.3d 827
(8th Cir. 2004); Riley v. Merrill Lynch, Pierce, Fenner & Smith,
4                                                  No. 03-2059

Inc., 292 F.3d 1334, 1337-40 (11th Cir. 2002); Handelsman v.
Bedford Village Associates Limited Partnership, 213 F.3d 48, 51-
52 (2d Cir. 2000). Since professional corporations differ in
certain respects from business corporations, perhaps in
more respects than the entities involved in the cases just
cited, we were led in Saecker v. Thorie, supra, 234 F.3d at
1012-13, to wonder whether the rule of Coté could be
reconciled with these cases.
   Upon reconsideration, however, we have concluded that
we ought to continue to follow Coté rather than overrule it
and by doing so create an intercircuit conflict and, worse,
inject confusion into the determination of federal jurisdic-
tion. A salient consideration in favor of Coté is the easy
applicability of a rule that treats any corporation as a corp-
oration for diversity purposes. Functional approaches to
legal questions are often, perhaps generally, preferable to
mechanical rules; but the preference is reversed when it
comes to jurisdiction. When it is uncertain whether a case is
within the jurisdiction of a particular court system, not only
is the cost and complexity of litigation increased by the
necessity of conducting an inquiry that will dispel the
uncertainty but the parties will often find themselves having
to start their litigation over from the beginning, perhaps after
it has gone all the way through to judgment. “Jurisdictional
rules ought to be simple and precise so that judges and
lawyers are spared having to litigate over not the merits of
a legal dispute but where and when those merits shall be
litigated.” In re Lopez, 116 F.3d 1191, 1194 (7th Cir. 1997); see
also Budinich v. Becton Dickinson & Co., 486 U.S. 196, 202-03
(1988); Jerome B. Grubart, Inc. v. Great Lakes Dredge & Dock
Co., 513 U.S. 527, 549-56 (1995) (concurring opinion);
Kennedy v. Wright, 851 F.2d 963, 967 (7th Cir. 1988); Inter-
Coastal Xpress, Inc. v. United States, 296 F.3d 1357, 1367 (Fed.
Cir. 2002). “The more mechanical the application of a
jurisdictional rule, the better. The chief and often the only
No. 03-2059                                                        5

virtue of a jurisdictional rule is clarity.” In re Kilgus, 811 F.2d
1112, 1117 (7th Cir. 1987) (citations omitted).
  There is an enormous variety of types of corporation. There
are business corporations, professional corporations, public
benefit and charitable corporations, mutual benefit corpora-
tions, religious corporations, educational and scientific
corporations, municipal and other public corporations,
cooperative corporations, corporations sole (see, e.g., Cal.
Corp. Code § 10002), and Native American tribal corp-
orations. See 1 & 1A William Meade Fletcher, Fletcher
Cyclopedia of the Law of Private Corporations, ch. 3 (rev. ed. 1999),
and 1 James D. Cox & Thomas Lee Hazen, Cox & Hazen on
Corporations, ch. 1 (2d ed. 2003). Would it be a sensible, or
even a feasible, judicial undertaking to create and apply,
case by case, a standard for deciding which of these should
be classified as corporations for purposes of the diversity
jurisdiction and which not? No court has thought so. All the
cases that discuss the citizenship of nonbusiness corp-
orations hold that they are indeed corporations for diversity
purposes. Besides those we’ve cited already, see Moor v.
County of Alameda, 411 U.S. 693, 717-18 (1973) (municipal
corporation); City of Clinton v. Moffitt, 812 F.2d 341, 342 (7th
Cir. 1987) (same); Rucci v. City of Pacific, 327 F.3d 651, 652
(8th Cir. 2003) (same); Caudle v. American Arbitration Ass’n,
230 F.3d 920, 922 (7th Cir. 2000) (nonprofit corporation);
Indiana Port Comm’n v. Bethlehem Steel Corp., 702 F.2d 107,
109-10 (7th Cir. 1983) (public corporation); University of
Rhode Island v. A.W. Chesterton Co., 2 F.3d 1200, 1202-03, 1206-
07 (1st Cir. 1993) (same); Gaines v. Ski Apache, 8 F.3d 726, 729
(10th Cir. 1993) (tribal corporation); Stock West, Inc. v.
Confederated Tribes of the Colville Reservation, 873 F.2d 1221,
1226 (9th Cir. 1989) (same). Countless other cases assume that
business and nonbusiness corporations should be treated
the same. E.g., Tosco Corp. v. Communities for a Better Environ-
ment, 236 F.3d 495 (9th Cir. 2001) (per curiam) (nonprofit
6                                                 No. 03-2059

corporation); Bell v. United States, 754 F.2d 490, 494-95 (3d
Cir. 1985) (same); Knab Co. v. St. Mary’s Hospital, Inc., 286
F.2d 854, 855 (7th Cir. 1961) (charitable corporation);
Wellness Community-National v. Wellness House, 70 F.3d 46, 47
(7th Cir. 1995) (same); Fresenius Medical Care Cardiovascular
Resources, Inc. v. Puerto Rico & Caribbean Cardiovascular
Center Corp., 322 F.3d 56, 59 (1st Cir. 2003) (public corpora-
tion); Strotek Corp. v. Air Transport Ass’n of America, 300 F.3d
1129, 1130-32 (9th Cir. 2002) (incorporated trade associa-
tion); American Institute of Chemical Engineers v. Reber-Friel
Co., 682 F.2d 382, 383-84 (2d Cir. 1982) (educational and
scientific nonprofit corporation); Lyxell v. Vautrin, 604 F.2d
18, 19-20 (5th Cir. 1979) (per curiam) (religious corporation).
Is all this law to be discarded?
   Simplicity, at least, could be preserved by a rule that only
a corporation organized under a state’s business-corporation
law is a corporation for purposes of the diversity jurisdiction.
But such a rule would involve the courts in rewriting the
diversity statute. The statute states flatly that a “corpora-
tion” is a citizen of the state in which it is incorporated and
also the state in which its principal place of business is
located. 28 U.S.C. § 1332(c)(1). The word is not qualified. In
refusing in Carden to treat a limited liability company as a
“corporation” for purposes of the diversity statute, the
Supreme Court dropped no hint that the corporations of
which the statute speaks are limited to business corpora-
tions. Had the Court been minded to go down that road—
had it thought there was some reason to think Congress had
wanted to confine the corporate category to business
corporations—it might have been expected to consider
whether noncorporate business entities that were function-
ally similar to business corporations should be treated the
same way in order to carry out Congress’s desire to give
special treatment to businesses. Far from adopting a func-
tional approach, one that might cast a shadow over Coté,
No. 03-2059                                                   7

Carden rejects such an approach in favor of drawing a bright
line between corporations and all other associations. The
Court said that “having established special treatment for
corporations, we will leave the rest to Congress.” Carden v.
Arkoma Associates, supra, 494 U.S. at 197. We shall do likewise.
   Coté was decided in 1986; the Second Circuit’s similar
decision had been rendered three years earlier. In the years
since, a judicial consensus has, as we have seen, emerged
that all corporations are to be treated the same way in de-
termining citizenship for diversity purposes. Against this
background, our overruling Coté would cause needless
confusion and create an intercircuit conflict. Such a step
would be especially gratuitous because of the tendency al-
ready noted in Saecker toward the convergence of profes-
sional with business corporations. Saecker v. Thorie, supra,
234 F.3d at 1012; see also Christopher C. Wang, Comment,
“Breaking Up Is Hard to Do: Allocating Fees from the
Unfinished Business of a Professional Corporation,” 64 U.
Chi. L. Rev. 1367, 1372-75 (1997). The tax advantages that
formerly motivated the choice of the corporate form by law
firms have largely been eliminated, Cox & Hazen, supra,
§ 1.23, pp. 73-74, and that choice is now determined, just as
in the case of business firms, by the advantages of limited
liability, perpetual existence, and the other traditional
advantages of incorporation. See Robert W. Hillman,
“Organizational Choices of Professional Service Firms: An
Empirical Study,” 58 Business Lawyer 1387, 1391-93 (2003);
Thomas E. Rutledge, “The Place (If Any) of the Professional
Structure in Entity Rationalization,” 58 Business Lawyer 1413,
1417-19 (2003); Robert W. Hamilton, “Professional Partner-
ships in the United States,” 26 J. Corp. L. 1045, 1048-51
(2001); Debra L. Thill, Comment, “The Inherent Powers
Doctrine and Regulation of the Practice of Law: Will
Minnesota Attorneys Practicing in Professional Corporations
or Limited Liability Companies Be Denied the Benefit of
8                                                No. 03-2059

Statutory Liability Shields?,” 20 Wm. Mitchell L. Rev. 1143,
1148-49, 1152-57 (1994); see also 1A Fletcher, supra, § 70.10.
  In Missouri, the state in which the Sandberg firm is in-
corporated and has its principal place of business, the pro-
fessional-corporation statute makes the regular corporation
law of Missouri applicable to professional corporations.
Vernon’s Annotated Missouri Statutes §§ 356.031, 356.061;
see also, e.g., Churchman v. Kehr, 836 S.W.2d 473, 477-78 (Mo.
App. 1992). At the same time, Missouri authorizes the
formation of “Limited Liability Companies.” Vernon’s
Annotated Missouri Statutes §§ 347.010, 347.187; Nimrod
Chapel, Jr., “The Limited Liability Company: Small Business
Applications in Missouri,” 53 J. Mo. Bar 348 (1997). Had the
Sandberg firm followed that route—a route Missouri regards
as legally distinct—the rule of Carden v. Arkoma Associates
would have clicked in and removal of the litigation to the
federal district court would have been precluded. On the
other hand, the firm could have elected to be taxed on a
pass-through basis—that is, there would have been no state
income tax at the entity level—while as a professional corp-
oration it must, like a regular business corporation, pay
corporate income tax unless it elects Subchapter S status. 26
U.S.C. §§ 11(b)(2), 1362(a); Revenue Ruling 70-101, 1970-1
CB 278; Hamilton, supra, 26 J. Corp. L. at 1052 n. 21.
   The major difference remaining between a professional
corporation and a business corporation (besides the facts
that “only licensed professionals who are employed by the
professional corporation may be shareholders or directors”
and that “shares can only be transferred to other individuals
licensed to practice in the same profession,” 1A Fletcher,
supra, § 70.10) is that the former usually requires less
financial capital, the principal capital of a professional
corporation being its human capital—the skills and reputation
and contacts of its professional employees. But of course
No. 03-2059                                                     9

there are many professional corporations that have more
financial capital than many business corporations; there are
law firms today that have annual revenues of hundreds of
millions of dollars—two of them just passed the billion-dol-
lar mark. In the case of professional as of business corpora-
tions, limited liability makes it easier to raise equity capital
from individuals who do not want to place their personal
assets (beyond those invested in the corporation) at risk.
   In the case neither of a business corporation nor of a pro-
fessional corporation does limited liability shield the personal
assets of investors who cause the corporation to commit a
tort or other unlawful act. This is an important point the
neglect of which has led to an exaggerated sense, illustrated
by such cases as South High Development, Ltd. v. Weiner, Lippe
& Cromley Co., 445 N.E.2d 1106, 1107-08 (Ohio 1983) (per
curiam), and Kenneth A. Vinall, D.D.S., P.C. v. Hoffman, 651
P.2d 850, 851-52 (Ariz. 1982); see H. Bradley Jones, “The
Professional Corporation,” 27 Fordham L. Rev. 353, 354-55
(1958), of the practical difference between professional and
business corporations. Of course a lawyer cannot insulate
himself from a malpractice suit by incorporating. But neither
can an individual who uses his position in a business
corporation to commit a tort. Suppose a corporate employee
in furtherance of his employment bribes the purchasing
officer of one of his corporation’s customers. The customer
(if harmed by the bribe) can sue the corporation—but he can
also sue the employee who did the bribing. “It is a common
misunderstanding that the principle of limited liability
protects the shareholders and officers of a corporation for
liability for their own wrongful acts. It does not. It protects
them from derivative liability, that is, from being called to
account for the wrongs of the corporation.” Spartech Corp. v.
Opper, 890 F.2d 949, 953 (7th Cir. 1989) (emphasis in origi-
nal); see also Dietrich v. Cape Brewery & Ice Co., 286 S.W. 38,
41 (Mo. 1926); Browning-Ferris Industries of Illinois, Inc. v. Ter
10                                                  No. 03-2059

Maat, 195 F.3d 953, 955-56 (7th Cir. 1999); Refrigeration Sales
Co. v. Mitchell-Jackson, Inc., 770 F.2d 98, 102-03 (7th Cir.1985);
Coastal Abstract Service, Inc. v. First American Title Ins. Co.,
173 F.3d 725, 734 (9th Cir. 1999); Haupt v. Miller, 514 N.W.2d
905, 907-08 (Iowa 1994); Fields v. Jantec, Inc., 857 P.2d 95, 97-
98 (Ore. 1993); Vacco Industries, Inc. v. Van Den Berg, 6 Cal.
Rptr. 2d 602, 613 n. 20 (App. 1992). You don’t buy immunity
from suits for your torts by being a member of a business
corporation or a member of a professional corporation.
  So the differences between the two types of corporation
are actually rather slight, maybe slighter than the differ-
ences between business corporations and limited liability
companies. But these are details. The charm of Coté’s rule is
that it avoids the need for judges to entangle themselves in
functional inquiries into the differences among corpora-
tions. And it is a rule supported, maybe compelled, by
Carden’s formalistic approach. Granted, had the effect of
Coté’s flat rule been to induce states to rename sole propri-
etorships, mah jongg clubs, or pit bulls “corporations” in
order to make them more (or would it be less?) suable in
federal court, we would be in trouble; but we are relieved to
note that no such tendency is discernible. It is because states
are not using the label of “corporation” to game the diver-
sity statute that the courts are comfortable deferring to the
label the state places on a business entity. Great Southern Fire
Proof Hotel Co. v. Jones, supra, illustrates the point. The
“limited partnership association” involved in that case had
many properties of a corporation, but because it wasn’t
called that in the Pennsylvania statute it was deemed not to
be a corporation for purposes of the diversity jurisdiction.
Cf. Wild v. Subscription Plus, Inc., supra, 292 F.3d at 528-29;
Ripalda v. American Operations Corp., 977 F.2d 1464, 1468-69
(D.C. Cir. 1992).
 The only situation in which a simple reference to state law
will fail to resolve the issue of a party’s citizenship is where
No. 03-2059                                                    11

the party is foreign, for it is then necessary to determine
whether the characteristics of the foreign entity are enough
like those of a U.S. corporation to make “corporation” the
correct translation into English. Carden v. Arkoma Associates,
supra, 494 U.S. at 189-90; Puerto Rico v. Russell & Co., 288 U.S.
476 (1933); Lear Corp. v. Johnson Electric Holdings Ltd., 353 F.3d
580, 582-83 (7th Cir. 2003). Carden describes this as “the one
exception to the admirable consistency of our jurisprudence
on this matter.” 494 U.S. at 189. Cases involving U.S. entities
are indeed consistent—in treating the state’s label as
determinative.
   So there is federal jurisdiction of Hoagland’s suit, and we
can proceed at last to the merits of his appeal, which are
slight. The district court determined after a bench trial that
Hoagland’s suit failed as a suit for legal malpractice.
Hoagland doesn’t disagree. A suit for legal malpractice
under Illinois law, which governs the substantive issues in
this case simply because the parties have assumed that it
does, Indiana Ins. Co. v. Pana Community Unit School District
No. 8, 314 F.3d 895, 900 (7th Cir. 2002); Grundstad v. Ritt, 166
F.3d 867, 870 (7th Cir. 1999); Wood v. Mid-Valley Inc., 942
F.2d 425, 426-27 (7th Cir. 1991); BBSerCo, Inc. v. Metrix Co.,
324 F.3d 955, 960 n. 3 (8th Cir. 2003), requires (unless the
lawyer’s breach of duty is obvious even to a layperson,
which is not contended) expert testimony regarding the
standard of care or loyalty that the lawyer is alleged to have
violated. Barth v. Reagan, 564 N.E.2d 1196, 1200-02 (Ill. App.
1990), and cases cited there; Besco v. Henslee, Monek &
Henslee, 701 N.E.2d 1126, 1130 (Ill. App. 1998).
  Hoagland presented no such testimony. His grievance is
that he should have been allowed either to amend his com-
plaint to make clear that his claim, which he believes the
district judge misunderstood, is not malpractice but is rather
breach of contract or alternatively breach of fiduciary duty, or
12                                               No. 03-2059

allowed to dismiss his suit without prejudice and start over.
To bolster his contention that he is not proceeding on a
malpractice theory he points out that he is seeking not
common law damages but only the return of the attorneys’
fees that Midwest paid the Sandberg firm. We think the
judge understood Hoagland’s case perfectly well and that
Hoagland’s attempt to change horses came too late, but in
any event his current theory has no basis in Illinois law, so
amending the complaint or dismissing the suit without
prejudice wouldn’t do him any good. Widell v. Wolf, 43 F.3d
1150, 1151 (7th Cir. 1994); Hatch v. Department for Children,
Youth & Their Families, 274 F.3d 12, 19 (1st Cir. 2001).
   The claim, in substance and without regard to how it
might be characterized, is that the Sandberg law firm rep-
resented the adversaries—a corporation (Midwest) and its
swindling president—in a derivative action and used its
dual representation to prevent the corporation from recov-
ering assets of which the president had wrongfully deprived
the corporation; that the law firm had wrongfully accepted
payment of its fees from the corporation (the client whose
interests the firm had sacrificed); and that it should there-
fore be required to rebate (“disgorge”) the fees to Hoagland
for the benefit of the corporation. An attorney’s throwing
one client to the wolves to save the other is malpractice.
Rogers v. Robson, Masters, Ryan, Brumun & Belom, 407 N.E.2d 47
(Ill. 1980); Nagy v. Beckley, 578 N.E.2d 1134, 1136-38 (Ill.
App. 1991); Barth v. Reagan, supra, 564 N.E.2d at 1200-02;
Wissore v. Alvey, 562 N.E.2d 978, 983-84 (Ill. App. 1990);
Tucek v. Grant, 472 N.E.2d 563 (Ill. App. 1984); 1 Ronald E.
Mallen & Jeffrey M. Smith, Legal Malpractice § 1.1, p. 5 (5th
ed. 2000); Restatement (Third) of the Law Governing Lawyers
§§ 121 comment f, 131 and comment a (2000), whatever the
plaintiff chooses to call it. Brush v. Gilsdorf, 783 N.E.2d 77
(Ill. App. 2002). He cannot be permitted, by recharacterizing
the claim—whether by calling the conflict of interest a
No. 03-2059                                                  13

breach of fiduciary obligation or by contending that his
contract with the law firm contained an implied promise not
to commit such conflicts—to get around the requirement of
presenting expert testimony. That is the kind of formalist
move that courts rightly reject. Illinois courts hold that
“when a breach of fiduciary duty claim is based on the same
operative facts as a legal malpractice claim, and results in
the same injury, the later claim should be dismissed as
duplicative.” Fabricare Equipment Credit Corp. v. Bell, Boyd &
Lloyd, 767 N.E.2d 470, 476 (Ill. App. 2002); Majumdar v. Lurie,
653 N.E.2d 915, 920-21 (Ill. App. 1995); see also Meredith J.
Duncan, “Legal Malpractice By Any Other Name: Why a
Breach of Fiduciary Duty Claim Does Not Smell as Sweet,”
34 Wake Forest L. Rev. 1137 (1999).
   The fact that restitution was sought instead of conventional
damages also does not alter the nature of the suit. Restitution
is a remedy, at least when sought as here as reparations for
a tort. 1 Dan B. Dobbs, Dobbs Law of Remedies § 4.1(3), p. 566
(2d ed. 1993); see also Alaska Sales & Service, Inc. v. Millet,
735 P.2d 743, 746 (Alaska 1987); City of Harker Heights v. Sun
Meadows Land, Ltd., 830 S.W.2d 313, 317 (Tex. App. 1992). It
is often sought in lieu of damages. 1 Dobbs, supra, § 4.1(1),
p. 553; for a pertinent example see Stanley v. Brassfield,
Cowan & Howard, 504 N.E.2d 542 (Ill. App. 1987); see also 11
U.S.C. § 328(c) (authorizing forfeiture and disgorgement of
fees if debtor’s attorney has a conflict of interest); Ingram v.
Merrill Lynch, Pierce, Fenner & Smith, Inc., 371 F.3d 950 (7th
Cir. 2004) (per curiam). Asking for restitution doesn’t
change the cause of action.
                                                    AFFIRMED.
14                                                No. 03-2059

   EASTERBROOK, Circuit Judge, concurring. A curious conse-
quence 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 be-
comes 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 partner-
ship 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 corpora-
tions,” 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 (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 exclud-
ing 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
No. 03-2059                                                    15

a “corporation,” and, as states devise and regulate corpora-
tions, see Atherton v. FDIC, 519 U.S. 213 (1997); Kamen v.
Kemper Financial Services, Inc., 500 U.S. 90 (1991), the juris-
dictional 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 (1979). See
also Clackamas Gastroenterology Associates, P.C. v. Wells, 538
U.S. 440 (2003) (using common-law rules of agency, not
state 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 excep-
tion 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
(1984); United States v. L.A. Tucker Truck Lines, Inc., 344 U.S.
33, 37-38 (1952); Webster v. Fall, 266 U.S. 507, 511 (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 (1900), is an example.
It held that a joint stock company must be deemed a part-
nership 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
16                                               No. 03-2059

or privileges of corporations not possessed by individuals
or partnerships” were “corporations.” See 177 U.S. at 456.
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.
  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, 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 nomencla-
ture is not sufficient to make an entity a “corporation”
under §1332, so Moor v. County of Alameda, 411 U.S. 693, 717-
21 (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
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“corporation.” But which attributes? Entity status is insuffi-
cient, 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 was 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 corpo-
rations and those organizations that are not treated as
“citizens” under §1332(a)(1).
   What about marketable stock, which has been used in se-
curities law to distinguish firms subject to regulation from
those outside it? See, e.g., Marine Bank v. Weaver, 455 U.S.
551 (1982); United Housing Foundation, Inc. v. Forman, 421
U.S. 837 (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 share-
holder of a Missouri professional corporation must be a cur-
rent 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
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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 interme-
diate 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.
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A true Copy:
       Teste:

                      _____________________________
                       Clerk of the United States Court of
                         Appeals for the Seventh Circuit

                USCA-02-C-0072—9-22-04