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  • John H. Ray, III

Expanded Corporate Disclosure Requirement for Proposed Amendment to Federal Rule 7.1

Currently, Rule 7.1 of the Federal Rules of Civil Procedure only requires nongovernmental corporate parties to file a statement that "(1) identifies any parent corporation and any publicly held corporation owning 10% or more of its stock; or (2) states that there is no such corporation." Fed. R. Civ. P. 7.1(a). The requirement addresses, as explained in the 2002 Committee Notes, the “financial interest” standard of Canon 3C(1)(c) of the Code of Conduct for United States Judges, and supports properly informed disqualification decisions in situations that call for automatic disqualification under Canon 3C(1)(c). In most cases, the disclosure is minimal and the filing uneventful. Id.

A new proposed amendment to the rule, however, dramatically changes the disclosure requirement in a way that will significantly invade the privacy and confidentiality interests of one of the most popular corporate forms—the limited liability company. On June 4, 2019, the Advisory Committee on Civil Rules to the Committee on Rules of Practice and Procedure of the Judicial Conference of the United States recommended "disclosure of the name and citizenship of each person whose citizenship is attributed to a party for purposes of determining diversity jurisdiction." The proposed amended was published for comment on August 19, 2019. The change is directed to an admittedly serious problem, that for LLCs, the citizenship of its members is attributed to the corporation, and in many instances, either plaintiffs do not know, or defendants do not appreciate the implications of, the citizenship of the defendant LLC's members, who in some cases are numerous, and potentially defeat diversity. The Advisory Committee suggests that this new disclosure requirement "serves to ensure that diversity jurisdiction actually exists, a matter that is important in itself," and that it "protects against the risk that a federal court’s substantial investment in a case will be lost by a belated discovery—perhaps even on appeal—that there is no diversity." And it does.

But the members of an LLC are, in many and the most frequently incorporating states, private. More than that, members are passive investors. Access to their identity is often extremely limited, and even in litigation, ordinarily subject to confidentiality protections. That privacy interest is substantial (in the 27 states that do not require members to be disclosed in the articles of incorporation or otherwise part of the public record, including for example in New York and Delaware, as well as Nevada, New Mexico and Wyoming (which allow anonymous LLCs)). This privacy facilitates investment. It protects members from harassment. It shields investors from potentially negative association with the actions of the LLC. The privacy, and the potential investment it facilitates, would be all but be destroyed by the proposed amendment, which while perhaps a sacrifice fairly demanded from a plaintiff LLC seeking the protection of the federal courts, is less fair to defendant LLCs who may be compelled to disclose such information in an action subject to dismissal or upon which they may ultimately prevail, but leaving a public record of their members on

The proposed amendment, which would become effective on December 1, 2021 (if approved, including by the Supreme Court), would require a public filing, "that names—and identifies the citizenship of—every individual or entity whose citizenship is attributed to that party at the time the action is filed." That means disclosure of the names of every member of the LLC, and the names of members of any LLC who is a member (as a number of investment corporations are themselves LLCs). To address the concern, the proposed Committee Notes state: "The rule recognizes that the court may limit the disclosure in appropriate circumstances. Disclosure might be cut short when a party reveals a citizenship that defeats diversity jurisdiction. Or the names of identified persons might be protected against disclosure to other parties when there are substantial interests in privacy and when there is no apparent need to support discovery by other parties to go behind the disclosure." But that is hardly enough.

Defendant corporations of course could seek to file their disclosure statements under seal under Rules 5.2(d) and 26, and the court's local rules, which the court is likely in many cases to grant. But given the substantial privacy concerns raised above, the proposed amendment should provide sealed or limited remote access protection as a matter of right, limiting access to the parties and at the courthouse, similar to the protections under Rule 5.2(c) in Social Security and removal cases. With that change, the requirement would protect the privacy interests of the LLC members, while allowing the courts to verify diversity at the outset of litigation.

Comments to the proposal are due this month, by February 19, 2020. For more information regarding the proposed amendments or to comment, click here.

This article is for informational purposes, is not intended to constitute legal advice, and may be considered advertising under applicable state laws. For more information, or to discuss potential representation, contact Ray & Counsel, P.C.

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