Donald Hoagland, as Receiver of Midwest Transit, Inc. v. Sandberg, Phoenix & Von Gontard, P.C.

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 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, 100 S.Ct. 1779, 64 L.Ed.2d 425 (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), 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," CCC 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, 110 S.Ct. 1015, 108 L.Ed.2d 157 (1990); Great Southern Fire Proof Hotel Co. v. Jones, 177 U.S. 449, 454-57, 20 S.Ct. 690, 44 L.Ed. 842 (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 Commercial Credit LLC v. Dillard Department Stores, Inc., 357 F.3d 827 (8th Cir.2004); Riley v. Merrill Lynch, Pierce, Fenner & Smith, 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 jurisdiction. A salient consideration in favor of Coté is the easy applicability of a rule that treats any corporation as a corporation 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 are 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, 108 S.Ct. 1717, 100 L.Ed.2d 178 (1988); Jerome B. Grubart, Inc. v. Great Lakes Dredge & Dock Co., 513 U.S. 527, 549-56, 115 S.Ct. 1043, 130 L.Ed.2d 1024 (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 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 corporations, 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 corporations. 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 corporations 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, 93 S.Ct. 1785, 36 L.Ed.2d 596 (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 Environment, 236 F.3d 495 (9th Cir.2001) (per curiam) (nonprofit 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 corporation); Strotek Corp. v. Air Transport Ass'n of America, 300 F.3d 1129, 1130-32 (9th Cir.2002) (incorporated trade association); 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 "corporation" 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 corporations. 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 functionally 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 functional approach, one that might cast a shadow over Coté, 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, 110 S.Ct. 1015. 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 determining 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 already noted in Saecker toward the convergence of professional 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 Partnerships 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 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 incorporated and has its principal place of business, the professional-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 corporation 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 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-dollar mark. In the case of professional as of business corporations, 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 professional 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., 4 Ohio St.3d 1, 445 N.E.2d 1106, 1107-08 (1983) (per curiam), and Kenneth A. Vinall, D.D.S., P.C. v. Hoffman, 133 Ariz. 322, 651 P.2d 850, 851-52 (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 original); see also Dietrich v. Cape Brewery & Ice Co., 315 Mo. 507, 286 S.W. 38, 41 (1926); Browning-Ferris Industries of Illinois, Inc. v. Ter 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., 317 Or. 432, 857 P.2d 95, 97-98 (1993); Vacco Industries, Inc. v. Van Den Berg, 5 Cal.App.4th 34, 6 Cal.Rptr.2d 602, 613 n. 20 (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 differences 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 corporations. 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 proprietorships, 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 diversity 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 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, 110 S.Ct. 1015; Puerto Rico v. Russell & Co., 288 U.S. 476, 53 S.Ct. 447, 77 L.Ed. 903 (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, 110 S.Ct. 1015. 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, 139 Ill.2d 399, 151 Ill.Dec. 534, 564 N.E.2d 1196, 1200-02 (1990), and cases cited there; Besco v. Henslee, Monek & Henslee, 297 Ill.App.3d 778, 233 Ill.Dec. 852, 701 N.E.2d 1126, 1130 (1998).

Hoagland presented no such testimony. His grievance is that he should have been allowed either to amend his complaint 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 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 represented the adversaries — a corporation (Midwest) and its swindling president — in a derivative action and used its dual representation to prevent the corporation from recovering 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 therefore 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, Brumund & Belom, 81 Ill.2d 201, 40 Ill.Dec. 816, 407 N.E.2d 47 (1980); Nagy v. Beckley, 218 Ill.App.3d 875, 161 Ill.Dec. 488, 578 N.E.2d 1134, 1136-38 (1991); Barth v. Reagan, supra, 151 Ill.Dec. 534, 564 N.E.2d at 1200-02; Wissore v. Alvey, 204 Ill.App.3d 931,