A recent comment by calgary411 reminds us of a truly bizarre problem in U.S. diaspora policy. Much unlike the problems with tax paperwork and FATCA-related bank account denials — which could be largely ameliorated by mere executive fiat, and totally resolved by ordinary House bills — this problem might not be fixable by anything short of a constitutional amendment.
The U.S. Constitution gives the federal courts original jurisdiction in cases involving disputes between Americans from different U.S. states, or between Americans and foreigners. This is commonly known as “diversity jurisdiction”. In Guaranty Trust Co. v. York, 326 U.S. 99 (1945), the Supreme Court concisely stated the reason why the U.S.’ Founding Fathers wanted federal courts rather than local courts to have jurisdiction in such cases:
Diversity jurisdiction is founded on assurance to nonresident litigants of courts free from susceptibility to potential local bias. The Framers of the Constitution, according to Marshall, entertained “apprehensions” lest distant suitors be subjected to local bias in State courts, or, at least, viewed with “indulgence the possible fears and apprehensions” of such suitors … And so Congress afforded out-of-State litigants another tribunal, not another body of law.
The Supreme Court has held that this “benefit of citizenship” does not extend to U.S. citizens abroad — the rights of the diaspora in this regard are thus inferior to those of both Homelanders and foreigners. However, if Homelanders are trying to sue you in federal court, you can turn this against them. The most recent example of this is explained in a new Baker & MacKenzie article about a Third Circuit decision from last September. An Ohio resident attempted to sue an American citizen in Germany in a U.S. federal court; however:
The Third Circuit affirmed the decision, dismissing the dispute for lack of subject matter jurisdiction. For purposes of diversity jurisdiction, “citizenship is synonymous with domicile.” Domicile is an individual’s “true, fixed and permanent home and place of habitation. It is the place to which, whenever he is absent, he has the intention of returning.” The court further cited Supreme Court doctrine implying that an American citizen not domiciled in a particular state is essentially “stateless” under 28 U.S.C. § 1332(a). These individuals cannot litigate in federal court based on diversity jurisdiction since they are not “citizens of a State,” or “citizens or subjects of a foreign state.”
Table of contents
- The statute
- Puerto Rico
- The U.S. Constitution
- Upheld by the Supreme Court
- Could an American abroad be a “foreign subject”?
- What about a dual citizen?
- Practical effects
28 USC § 1332, the law mentioned by the Third Circuit, states:
(a) The district courts shall have original jurisdiction of all civil actions where the matter in controversy exceeds the sum or value of $75,000, exclusive of interest and costs, and is between—
(1) citizens of different States;
(2) citizens of a State and citizens or subjects of a foreign state, except that the district courts shall not have original jurisdiction under this subsection of an action between citizens of a State and citizens or subjects of a foreign state who are lawfully admitted for permanent residence in the United States and are domiciled in the same State;
(3) citizens of different States and in which citizens or subjects of a foreign state are additional parties; and
(4) a foreign state, defined in section 1603 (a) of this title, as plaintiff and citizens of a State or of different States.
If you are a member of the American diaspora, you are none of the above, and therefore it is not considered important that you enjoy the same access to a U.S. federal court — one unlike a U.S. state court in that it is supposedly “free from susceptibility to potential local bias” — that every other human being on earth (except, possibly, people without any nationality at all) enjoys in disputes with Homelanders.
This is a very concrete counter-example to the false claim that Americans abroad enjoy the same rights of citizenship as American Homelanders. But in practical terms this discrimination isn’t one of the biggest problems faced by Americans abroad — for most people, it won’t even register on the scale, especially in comparison to tax paperwork and retirement savings issues. First and foremost, it’s not so likely that a federal court, with a Homelander judge sitting on the bench, really would be free of “potential local bias” when adjudicating a dispute between a loyal patriotic Homelander true American and one of those un-American weirdos who voluntarily left the Greatest Country on Earth.
Moreover, if you’re suing a Homelander (or vice versa), you can always file your suit in a U.S. state court or non-U.S. court instead. Of course, if you win a lawsuit, but in a place where the defendant has no assets, you will then have to incur even more legal costs trying to get that judgment recognised somewhere that the defendant does have assets, but this problem also cuts both ways: it affects not just an American abroad suing a Homelander in a non-U.S. court, but a Homelander suing an American abroad in a U.S. state court as well.
The diversity jurisdiction statute contains this amusing little interpretive proviso:
(e) The word “States”, as used in this section, includes the Territories, the District of Columbia, and the Commonwealth of Puerto Rico.
Thus Americans in Puerto Rico (including people who formerly lived in the fifty states and got rich there but moved to Puerto Rico solely in order to avoid federal taxes on U.S. capital gains) enjoy access to federal courts when suing people from elsewhere on the basis of diversity jurisdiction, but Americans abroad (who enjoy no such exemption for capital gains, and instead face crippling restrictions on their ordinary local savings, along with taxation of unrealised gains and “gains” that don’t even exist) do not. Conversely, Americans in Puerto Rico can be sued in federal court on the basis of diversity jurisdiction, but Americans abroad cannot.
This is rather ironic, both because the federal courts are quite obviously funded by federal taxes, and also because the supporters of citizenship-based taxation and punishment of renunciants keep mentioning the justice system as one of those “benefits of citizenship” (e.g. this piece by Farhad Manjoo).
The U.S. Constitution
Does Congress actually have the power to fix this problem by statute? Article III, Section 2 of the U.S. Constitution states:
The judicial Power shall extend to all Cases, in Law and Equity, arising under this Constitution, the Laws of the United States, and Treaties made, or which shall be made, under their Authority;—to all Cases affecting Ambassadors, other public Ministers and Consuls;—to all Cases of admiralty and maritime Jurisdiction;—to Controversies to which the United States shall be a Party;—to Controversies between two or more States;—between a State and Citizens of another State;—between Citizens of different States;—between Citizens of the same State claiming Lands under Grants of different States, and between a State, or the Citizens thereof, and foreign States, Citizens or Subjects.
Congress has the power to restrict federal courts’ diversity jurisdiction to narrower limits than those specified by the Constitution (which they have done, for example, by waiving jurisdiction in cases where less than $75,000 is at stake, or in cases involving green card holders and U.S. citizens in the same state), but not to expand it to additional cases not mentioned in the Constitution. And there’s nothing in Article III, Section 2 about American citizens who aren’t citizens of a State.
For what it’s worth, about thirty-five years ago, one legal scholar noticed the issues with diversity jurisdiction and Americans abroad, and suggested that Congress might be able to fix the issue without Constitutional amendment by trying somehow to shoehorn Americans abroad without state citizenship into the “citizens of different States” clause: Patricia Lynn Gattling, “Dual Citizenship and Federal Diversity Jurisdiction Under 28 U.S.C. § 1332”, 6 MJIL 1 (1980).
However, if fixing this problem does require a constitutional amendment, it’s safe to conclude that it will never get fixed. It’s unlikely enough that Congress would actually care enough about Americans abroad to look into such a thorny issue, let alone go through all the trouble to draft the amendment and convince three-quarters of the Homelanders’ states to agree that their state courts should give up jurisdiction in these cases.
Upheld by the Supreme Court
One time that the issue of diversity jurisdiction and citizens abroad has made it to the Supreme Court was in Newman-Green v. Alfonzo-Lorrain, 490 U.S. 826 (1989), but there does not seem to have been any dispute on this point — instead the litigation focused on the appellate courts’ powers to dismiss a dispensable party who spoils the “complete diversity” between the two sides of a case. With regards to diversity jurisdicition, Thurgood Marshall, writing the majority opinion, simply cited a century-old case about the definition of “citizen of a State” and “alien” under the diversity statute, found that one party to the case met neither definition, and moved on, all within the space of one paragraph:
At oral argument before a panel of the Seventh Circuit Court of Appeals, Judge Easterbrook inquired as to the statutory basis for diversity jurisdiction, an issue which had not been previously raised either by counsel or by the District Court Judge. In its complaint, Newman-Green had invoked 28 U.S.C. 1332(a)(3), which confers jurisdiction in the District Court when a citizen of one State sues both aliens and citizens of a State (or States) different from the plaintiff’s. In order to be a citizen of a State within the meaning of the diversity statute, a natural person must both be a citizen of the United States and be domiciled within the State. See Robertson v. Cease, 97 U.S. 646, 648-649, 24 L.Ed. 1057 (1878); Brown v. Keene, 8 Pet. 112, 115, 8 L.Ed. 885 (1834). The problem in this case is that Bettison, although a United States citizen, has no domicile in any State. He is therefore “stateless” for purposes of § 1332(a)(3).
Could an American abroad be a “foreign subject”?
Since Congress created 28 USC § 1332(e) to expand the word “State” above to include places which clearly are not states, you might think it could have been possible for them to pass another law interpreting “foreign … Subject” to include all people domiciled abroad, perhaps on the theory that being subject to the laws of the foreign state where they live makes them “foreign subjects”. This would bring Americans abroad under the scope of “alienage jurisdiction” (“between a State, or the Citizens thereof, and foreign States, Citizens or Subjects”).
This is actually what the plaintiff argued in Van Der Schelling v. US News & World Report, Inc., 213 F.Supp 756 (ED. Pa. 1963). Some footnotes omitted:
Federal jurisdiction in this libel action is invoked solely on the basis of diversity of citizenship: 28 U.S.C.A. § 1332. Defendant has moved to dismiss the complaint, arguing that, while plaintiff is a citizen of the United States, she is not a citizen of any state therein and, therefore, since this is not a suit between “citizens of different States” [28 U.S.C.A. § 1332(a)(1)], diversity jurisdiction does not exist. Plaintiff, on the other hand, contends that federal jurisdiction exists because she is a “subject” of a foreign state within the meaning of 28 U.S.C.A. § 1332(a)(2) …
The plaintiff is concededly a citizen of the United States. Since 1950 she has lived and worked in Mexico, and for the past eleven years she has been a permanent and continuous resident of the Republic of Mexico. Plaintiff owns no property in the United States, having sold whatever land she had owned in California in 1961. She last applied for a passport in 1951 or 1952 and has not since had it renewed. Plaintiff has no present ties whatsoever with the United States. Her status in Mexico, according to an unrebutted affidavit given by a Mexican lawyer and filed by defendant, is that of “inmigrado.” That status gives plaintiff the “right of definitive residence” in Mexico, the right to stay there indefinitely, to hold any job, to change jobs or not to work at all.
However, Judge Joseph S. Lord pointed out a long line of cases, going as far back as the 19th century, suggesting that the Founders probably didn’t intend that meaning of “subject” in the constitutional clause in question:
The legislators of 1789 who enacted the Judiciary Act of 1789 apparently felt that Article III, Section 2, was not concerned with Americans abroad, for that first implementing Act provided federal access where the suit was between a citizen of the United States and aliens, a designation that persisted until the Act was amended in 1875. There is no reason to suppose that the first Congress deliberately failed to exercise a power given by the Constitution, and the inference is, I think, that those who stood close to the framing of the Constitution, both in point of time and association, intended to exhaust the grant of federal jurisdiction. The necessary concomitant is that by using “aliens”, they embraced “citizens or subjects” as constitutionally used in Article III. The necessary conclusion is, then, that the Constitution did not cover American citizens domiciled abroad, for these are not aliens: 2 Am.Jur., Aliens, § 2; Hammerstein v. Lyne, 200 F. 165 (W.D.Mo.1912); Low Wah Suey v. Backus, 225 U.S. 460, 32 S.Ct. 734, 56 L.Ed. 1165 (1912); 2 Kent’s Comm. (12th Ed.) 51.
Viewed against the background of history and the context of the times, it is not surprising that the men who drafted the Constitution equated “citizen” and “subject”. Until the Colonies had successfully won their freedom from England, their inhabitants were subjects of the King. With the birth of the United States, the sovereignty that had previously been that of one man,the King,was transferred to the collective body of the people. Those who had been subjects of the King were now citizens of the State … if federal jurisdiction had been couched solely in terms of “citizenship,” there may have resulted an arbitrary denial of federal access to many foreigners only because of the nature of the government under which they happened to live. It was only by the inclusion of “subjects” that all aliens, whether they owed allegiance to a sovereign monarch or were citizens of a democracy, could sue or be sued in federal courts.
What about a dual citizen?
U.S. citizens abroad are not considered “foreign subjects” for these purposes even if they are dual citizens. This conclusion does not seem to have changed as a result of any of the gradual loosening of U.S. treatment of dual citizenship over the decades; it applies not just to people who naturalise as U.S. citizens while retaining their original citizenship (see e.g. Sadat v. Mertes, 615 F.2d 1176 (1976), mentioned by Prof. Gattling above), but also to native-born Americans who naturalise in foreign countries without intent to relinquish U.S. citizenship (Action SA v Rich, 951 F.2d 504 (1991)).
The Fifth Circuit came to this conclusion with reasoning that I find particularly offensive: that dual citizens abroad should be denied the right to claim alienage jurisdiction because it would give them an “unfair advantage” over other U.S. citizens, even when at the same time every Homelander in every U.S. state has an equivalent advantage over the dual citizen abroad who cannot claim diversity jurisdiction and thus must resort to the U.S. state courts. Coury v. Prot, 85 F.3d 244 (1996):
Accordingly, the dual citizen should not be allowed to invoke alienage jurisdiction because this would give him an advantage not enjoyed by native-born American citizens. Sadat v. Mertes, 615 F.2d 1176 (7th Cir. 1980); Soghanalian v. Soghanalian, 693 F. Supp. 1091 (D.C.Fla. 1988); Liakakos v. CIGNA Corp., supra. The latter conclusion is sound according to 1 Moore’s Federal Practice Section(s) 0.74, because the major purpose of alienage jurisdiction is to promote international relations by assuring other countries that litigation involving their nationals will be treated at the national level, and alienage jurisdiction is also intended to allow foreign subjects to avoid real or perceived bias in the state courts — a justification that should not be available to the dual citizen who is an American.
First — not to belabour the obvious — this loophole in diversity jurisdiction does not prevent the U.S. government from suing you; Article III clearly gives federal courts jurisdiction in “Controversies to which the United States shall be a Party”, regardless of the citizenship or domicile of the other party. However, this loophole does apply in disputes between private individuals, or between a private individual and a U.S. state.
It seems that some American civil defendants abroad, or their lawyers, have figured out how to use this loophole as a tactic: they wait for the plaintiff’s lawyer to file suit against them in federal court, and get it dismissed by demonstrating lack of domicile in any U.S. state. Since I’m not a lawyer and in particular have no experience whatsoever with litigation, I’m not sure what this does for them, besides running up the legal costs for the other side, or giving them a “trump card” on appeal in the event that no one brought up jurisdiction issues in the lower court and they don’t like the way that ruling went. Apparently they have learned to take the batch of lemons handed to them by the Homeland — utter inattention to the interests and problems of the diaspora — and turn it into lemonade in their specific situations. Of course, the vast majority of the diaspora is not so well-equipped with lemonade-making ability.
The effects of this Congressional inattention to the diaspora become truly absurd when extended to business partnerships: an unincorporated association is deemed to have the citizenship of all of its members — see for example Carden v. Arkoma Associates, 494 U.S. 185 (1990) — so if any one partner is an American abroad, there can be no diversity jurisdiction. (This also applies to the members of LLCs, and in some circumstances even to the beneficiaries of trusts — see for example this Tenth Circuit ruling from three days ago in Conagra Foods v. Americold Logistics).
Again, this appears to be a problem which will sneak up on ordinary unsuspecting people while accruing to the advantage of the well-advised. Judge Theodore McKee of the Third Circuit has noted this fact fairly recently; in a concurring opinion in Swiger v. Allegheny Energy, 540 F.3d 179 (2008), he decried the conclusion that he and his colleagues were forced to reach as a result of the law: it is actually impossible to sue a multinational law firm in federal court.
The rule that a United States citizen permanently domiciled abroad may not sue or be sued on the basis of diversity of citizenship (sometimes called the “stateless person” doctrine) is a doctrine likely born of chance rather than design … This was likely not an intentional omission from diversity jurisdiction, but rather flowed from the (now incorrect) assumption that all U.S. citizens would also be domiciled in a U.S. state …
The traditional explanation of the purpose of diversity jurisdiction is “the fear that state courts would be prejudiced against out-of-state litigants.” See 13B Charles Alan Wright and Arthur R. Miller, Federal Practice and Procedure § 3601 (2008). Morgan Lewis is a nationally prominent law firm whose main office is in Philadelphia, Pennsylvania. It is certainly not unreasonable to believe that local bias might operate in state court in favor of a litigant that is as prominent and influential in the local community as Morgan Lewis. That is the rationale for allowing Swiger to sue in federal court — assuming complete diversity.
The rationale is not undermined one iota merely because one of Morgan Lewis’ many hundreds of partners has been residing in England and will apparently continue to reside there indefinitely. So long as none of Morgan Lewis’ partners is a citizen of Swiger’s home state of West Virginia, the purpose of diversity jurisdiction is fully served, and Swiger should be permitted to test the merits of his claim in a federal forum. Lubar’s lack of citizenship in any state should not be the jurisdictional equivalent of citizenship in the same state as Swiger. Accordingly, we should be able to conclude that this suit presents “two adverse parties [who] are not co-citizens.”
However, McKee seems to think that the only way Congress could fix this situation is to provide clearer statutory rules for diversity jurisdiction over cases involving partnerships; apparently he thinks there’s no hope for fixing the rules on Americans abroad besides another Supreme Court case.
The U.S. government is no good at dealing with the fact that America has a diaspora. Thus we see all these clumsy “monkey patches” to the laws which affect us. For taxation, they say that non-resident citizens are always resident for tax purposes (even if we’re no longer citizens under the actual nationality laws), and particularly that we’re resident in Washington, D.C. if the IRS wants to sue us. For diversity jurisdiction, they’ve just given up entirely. And for voting, instead of giving us proper diaspora representatives the way France does, the federal government dilutes our votes among the fifty states — the same states of which we expressly are not citizens for purposes of diversity jurisdiction — and declines to require that those states extend voting rights to the descendants of their former residents.
It’s unlikely that the strange issues with U.S. federal courts’ diversity jurisdiction will ever affect any of us Brockers, but nevertheless they clearly demonstrate a basic principle: U.S. laws are not set up to deal with non-resident U.S. citizens in a rational and consistent fashion, and this problem goes all the way down to the foundations of the legal system itself. If you want to enjoy the “benefits of American citizenship”, you must actually live in the Homeland.
Thank you for translating this complicated subject into layman terms, Eric.
Kind of reminds me of the name of an old Firesign Theatre album:
How Can You be in Two Places at Once When You Aren’t Anywhere at All
Fantastic work, Eric! The contradictions sure undercut the rationale for U.S. citizenship-based taxation.
@Eric, Very good, as always. Your conclusion is totally correct, US laws are not designed to deal with nonresident citizens in a rational way.
It seems to me that Congress could indeed “fix” this situation by statute. Section 1332 specifies that corporations “shall be deemed” citizens of their place of incorporation or business activity, and that legal representatives of other people “shall be deemed” citizens of the state of the person being represented. It also specifies that “state” includes DC and territories. So Congress could likewise assign a state for US citizens abroad in section 1332, for example DC or the state where they or their parents last resided, as it’s done for the jurisdiction of tax disputes or voting. I don’t think this would be unconstitutional.
Thanks for a great post.
On the issue of “domicile” (although not directly related to “diversity jurisdiction”):
The U.S. Estate and Gift Tax is triggered by “domicile” and not residence.
See for example:
Notice that the test “forming the intent”. This means that a Canadian physically present in the U.S., who had no legal basis to live in U.S., but formed the intent to stay anyway, could theoretically be subject to the Estate tax.
By the way, one of the ways of determining “intent” is by asking “where your friends are”. Obvious inference:
Rumour has it that Obama requests that the American Constitution be printed on all his loo rolls. (But you didn’t hear that from me.)
Then you’ll like Phil Hodgen’s line:
“FATCA law is a massive, steaming pile of poo”.
A badger find:
Many thanks for the link. The Founding Fathers of America must be rolling in their graves whilst seeing what an utter disgrace the United States Government has become.
Another rumor has it that Obama will rename the IRS to … the International Revenue Service. One day, all peoples of the world will be subject to America’s double taxation as well as double standards.
Even North Korea keeps to herself by comparison. (A scary thought.)
Off the topic a bit, but along the lines of Obama comments:
David Lenihan 11 hours ago
I would not be surprised at all if the President wants to change the tax system….to a system where the govt owns all your money and they decide how much you can keep. After all…..you didn’t build this.
Excellent work again, Eric! More proof of the legitimacy of our fight against CBT!
I particularly enjoyed your reference to “clumsy monkey patches to the laws which affect us”. I was addressing one such “monkey patch” on another thread yesterday. Thanks for your tremendous work!
SCOTUS unanimously affirmed 10th Circuit’s ruling in Americold Realty Trust v. ConAgra Foods: a Maryland Real Estate Investment Trust is an unincorporated association for diversity jurisdiction purposes, i.e. it’s not a “trust” in the sense that you’d sue the trustees in their own names, hence its “citizenship” is not that of the trustees but of every one of the shareholders.
In simpler terms: if the REIT has shareholders from every state, or just one shareholder who is a US citizen domiciled abroad, then no more diversity jurisdiction.
(Like I said in the main post, “this appears to be a problem which will sneak up on ordinary unsuspecting people while accruing to the advantage of the well-advised”. Some guy doing business together with an American abroad is going to get screwed in court one day by this issue which he never thought of, while the giant REITs I’m sure will figure out how to use this ruling to their advantage. OTOH, the immediate effect of this lawsuit appears to be that Conagra gets another shot at its efforts to get damages out of Americold for a warehouse fire twenty-five years ago.)
Does it follow that this could morph into another form of discrimination against USPs abroad? If one foreign-domiciled USP shareholder rules out diversity jurisdiction for an unincorporated association, might foreign-domiciled USPs find themselves presented with FATCA-like questions about citizenship when they’re trying to buy shares?
‘However, Judge Joseph S. Lord pointed out a long line of cases, going as far back as the 19th century, suggesting that the Founders probably didn’t intend that meaning of “subject” in the constitutional clause in question’
That is true. The founders didn’t enact the 14th amendment, the founders considered non-humans to not be created equal, and the founders expected that even a human who had US citizenship would lose it if they lived abroad for too many years. For a while even a law stripped US citizenship from anyone who lived outside the US for I think 3 years. Article III, Section 2 of the US Constitution would cover persons who become subjects of other governments 3 years after living there.
Is an amendment necessary to give protection to persons who retain US citizenship after more than 3 years? Yes, and THE 14TH AMENDMENT DOES IT.
Suppose a person born or naturalized in the US and subject to US law moves to Ontario and lives there for 4 years but doesn’t take Canadian citizenship. Under Canadian law the person isn’t a citizen of Ontario. But Canadian law doesn’t affect the US! The 14th amendment makes the person a citizen of the US and Ontario, under US law. Under US law the person is a citizen of Ontario, a foreign state. The person has protection of Article III, Section 2 of the US Constitution.
I am praying that whoever wrote this excellent article knows whether a stateless American, not domiciled in any American state, can be sued in a state court, if, prior to the suit, they had no minimum contacts with the state at all….