Hoagland, Don v. Sandberg Phoenix

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

No. 03-2059 17

“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

18 No. 03-2059

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.

No. 03-2059 19

A true Copy:

Teste:

_____________________________

Clerk of the United States Court of

Appeals for the Seventh Circuit

USCA-02-C-0072—9-22-04