Seventh Circuit Once Again Tangles with Whether a Chinese-Based Company Is a Corporation or a Limited Liability Company for Purposes of Alien-Citizen Diversity Jurisdiction

Previously, this blog reported on a complex 28 U.S.C. §1332(a)(2) issue of whether a Chinese enterprise was properly held to be a partnership, corporation, or foreign state for diversity purposes (see January 31, 2023 post) decided by the Seventh Circuit.  This Seventh Circuit case, Sunny Handicraft (H.K.) Ltd. v. Envision This! LLC, No. 21-1579 (7th Cir. May 4, 2023) presents the issue of whether two companies designated as “Ltd.” were corporations or LLCs under the laws of China and Hong Kong.

“Sunny Handicraft and Bin Teh Handicraft (collectively Sunny) sold seasonal merchandise to Walgreens, with Envision This! as an intermediary. From 2007 through 2012 Sunny shipped goods directly to Walgreens but routed contracts and other documents through Envision. Every year Sunny sent documents calling for it to be named the beneficiary of letters of credit to cover the price. Envision 2 No. 21-1579 passed these to Walgreens, which arranged for the letters of credit. In 2013 business relations continued, and Sunny sent the usual documents to Envision. But Envision played a dirty trick: it substituted its own name for Sunny’s as the beneficiary of the letters of credit. It did not tell Sunny about this switch. Walgreens sent the letters of credit to Envision, which drew more than $3 million. Envision did not remit a dime to Sunny.”

Sunny sued Envision This! In federal district court under alien-citizen diversity jurisdiction, 28 U.S.C. §1332(a)(2). A jury found in favor of Sunny, awarding some $4.4 million in beach of contact and fraud damages. The defendant appealed the award of fraud damages.

The Seventh Circuit affirms, although it must first determine that there is diversity jurisdiction.

“Envision is a limited liability company, both of whose members are citizens of Florida. Both plaintiffs are business entities based in China—one in Hong Kong and the other on the mainland. The parties treat them as equivalent to corporations, telling us their places of incorporation and principal places of business. But it is inappropriate simply to assume that any given business entity based outside the United States is a “corporation” for the purpose of §1332. Many domestic business entities (such as limited liability companies) are not corporations . . . and the Supreme Court has instructed us that entities other than traditional corporate forms should be treated as partnerships rather than corporations.”

The Seventh Circuit had previously held that “a Hong Kong business ‘limited by shares’ and bearing the identifier ‘Ltd.’ is treated as a corporation. This recognition stemmed from the fact that Hong Kong inherited its legal system from the United Kingdom, and we had previously concluded that other ‘Ltd.’ entities in that tradition should be treated as corporations when they are perpetual, can issue traded shares, and are independent of investors for tax and liability.” Yet in China, the same “Ltd.” designation “can be more like an American LLC” because investment interests in such an “Ltd.” may be inalienable.

“Fortunately, it is not necessary to remand for further proceedings to investigate contemporary Chinese law and the attributes of the two plaintiffs. In response to Envision’s docketing statement in this court, Sunny told us that Bin Teh Handicraft has only one investor, Sunny Handicraft, and that Sunny has four shareholders: Daniel Huang, his father, his mother, and his brother. The statement continues: ‘All live and work in Shenzhen, China where the business is located.’ It is exceedingly unlikely that any of the Huangs is a citizen of Florida, where both members of Envision are domiciled. So even if the two plaintiffs are treated as partnerships or LLCs, complete diversity of citizenship has been established.”

Despite the immediate resolution of the matter, though, the panel observes that in other cases, the investors may be far more numerous. “From a jurisdictional perspective, it is lucky that only six investors are involved. Many business entities have hundreds, thousands, or more investors. Accurate classification of the nature of these entities can be vital to ascertaining subject-matter jurisdiction. We have dodged a problem today, but it will recur. Counsel must pay more attention to the proper classification of foreign business entities than they have done in this litigation.”

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