Introduction

This appeal turns on a familiar but often dispositive threshold issue: subject-matter jurisdiction in a diversity case arising from a derivative action. The Eleventh Circuit confronted whether Expect Quest, LLC—a Florida limited liability company initially named as a nominal defendant and later realigned as a nominal plaintiff—must instead be aligned as a defendant. If so, realignment destroys complete diversity, ending the federal case.

Plaintiff-appellant Qatalyst, Inc., a Florida corporation and 50% managing member of Expect Quest, brought a derivative suit alleging that defendants Pipes.AI, LLC (a Delaware LLC whose members are citizens of California and Texas), 805Guru, LLC (a California LLC), and individual Drew Thorne-Thomsen (California) collaborated with Expect Quest’s other 50% manager, Robert Graham Enterprises, LLC (RGE), to induce Florida insurance agencies to cancel contracts with Expect Quest, to the company’s detriment. After the district court flagged jurisdictional concerns, Qatalyst amended its complaint to place Expect Quest on the plaintiff side of “the v.” in an effort to maintain diversity.

The Eleventh Circuit held that Expect Quest must be realigned as a defendant because antagonism between the derivative plaintiff and those controlling the company was evident, not merely a product of formal deadlock. That realignment places a Florida citizen on both sides of the case, destroying complete diversity under 28 U.S.C. § 1332(a). The court therefore affirmed the district court’s dismissal for lack of subject-matter jurisdiction.

Summary of the Opinion

The court affirmed dismissal, concluding that:

• A federal court must realign parties to reflect their real interests in the litigation, not simply accept the parties’ self-selected alignment.
• In derivative actions, the company is ordinarily aligned as a plaintiff. But where “active antagonism” between the derivative plaintiff and those managing the company is evident, the company must be aligned as a defendant.
• Because the defendants mounted a factual challenge to jurisdiction, the court could look beyond the pleadings and consider extrinsic materials (including Qatalyst’s state-court interrogatory responses and the fact that Expect Quest was named as a defendant in related state litigation).
• Those materials showed practical, complete opposition: Qatalyst was excluded from Expect Quest’s operations and decision-making by RGE, which had gained operational control. This goes beyond mere formal deadlock and amounts to active antagonism.
• Realigning Expect Quest as a defendant puts a Florida citizen on both sides, defeating complete diversity. Diversity is assessed at the time of filing, and without complete diversity, the court lacks subject-matter jurisdiction under § 1332(a).

Analysis

Precedents Cited and Their Influence

• City of Indianapolis v. Chase Nat’l Bank, 314 U.S. 63 (1941): Anchors the realignment inquiry in the “principal purpose of the suit” and the “primary and controlling matter in dispute,” emphasizing a practical, not mechanical, approach. Here, the Eleventh Circuit applied that practical lens to look past formal labels and assess the real-world alignment of interests.
• Smith v. Sperling, 354 U.S. 91 (1957): Two key contributions: (1) diversity is determined at the time of filing; and (2) antagonism is a practical determination, not a formalism. Sperling also contrasts inability or refusal to act. The Eleventh Circuit relied on Sperling to conclude that exclusion of Qatalyst from corporate control demonstrates “refusal to take action,” evidencing antagonism.
• Swanson v. Traer, 354 U.S. 114 (1957): Establishes that the corporation can be “actively antagonistic” to the shareholder-plaintiff in a derivative suit, justifying alignment as a defendant. The Eleventh Circuit invoked Swanson’s “active antagonism” concept and the standard that antagonism exists where management and the stockholder are “completely and irreconcilably opposed.”
• Duffey v. Wheeler, 820 F.2d 1161 (11th Cir. 1987): Provides the “general rule” that the corporation is aligned as a plaintiff in derivative actions, but carves out an “exception” where antagonism is evident. Crucially, Duffey clarifies that mere inaction or inability to act due to deadlock is not, standing alone, antagonism. The court here explained Qatalyst overstated Duffey: it does not immunize a derivative plaintiff from realignment when evidence shows more than formal deadlock.
• City of Vestavia Hills v. General Fidelity Ins. Co., 676 F.3d 1310 (11th Cir. 2012): Confirms federal courts’ obligation to realign parties to reflect their actual interests in the litigation. Applied here to reject Qatalyst’s strategic alignment of Expect Quest as a nominal co-plaintiff.
• Owen Equipment & Erection Co. v. Kroger, 437 U.S. 365 (1978): Reaffirms the complete diversity requirement: every plaintiff must be diverse from every defendant. Once Expect Quest (with Florida citizenship via its member Qatalyst) is properly aligned as a defendant, complete diversity collapses.
• Thermoset Corp. v. Building Materials Corp. of Am., 849 F.3d 1313 (11th Cir. 2017): Cited for the time-of-filing rule in diversity cases. It also underscores that citizenship of unincorporated entities (like LLCs) is that of all their members, making Florida citizenship unavoidable for Expect Quest given Qatalyst’s membership.
• Molinos Valle Del Cibao, C. por A. v. Lama, 633 F.3d 1330 (11th Cir. 2011): Confirms de novo review of subject-matter jurisdiction.
• McElmurray v. Consolidated Gov’t of Augusta-Richmond Cnty., 501 F.3d 1244 (11th Cir. 2007): Distinguishes facial from factual attacks on jurisdiction; in factual attacks, courts may consider matters outside the pleadings. This permission proved decisive here, as the panel looked to Qatalyst’s prior sworn statements and related state-court posture.
• Liddy v. Urbanek, 707 F.2d 1222 (11th Cir. 1983): Confirms the company is an indispensable party in derivative actions; it cannot be dropped to manufacture jurisdiction. This forecloses any attempt to avoid the realignment problem by simply omitting Expect Quest.

Legal Reasoning

The panel’s analysis proceeds in three related steps: (1) the scope of review on a factual jurisdictional attack; (2) the realignment standard in derivative suits; and (3) the consequences for diversity jurisdiction.

1. Factual attack permits consideration of evidence beyond the complaint. The court accepted that the challenge to subject-matter jurisdiction was factual (not merely facial). Under McElmurray, this opened the door to extrinsic materials. The court therefore considered Qatalyst’s own state-court interrogatory responses acknowledging that Expect Quest’s “financial and operational information” became inaccessible to Qatalyst, that those records were integrated into RGE’s records, and that RGE “gained control” of operations, excluding Qatalyst from “all decisions and actions taken on behalf of Expect Quest.” Additionally, Expect Quest’s status as a named defendant in a related state case corroborated practical opposition.
2. Realignment turns on practical antagonism, not formalities. While Duffey provides the general rule that a company is aligned as plaintiff in a derivative action, it equally recognizes an exception where the company is “actively antagonistic” to the derivative plaintiff. Critically, Duffey cautions that “mere inaction” or inability to act due to deadlock does not itself show antagonism. But here, the court found more than inaction: the derivative plaintiff’s own prior representations showed complete and irreconcilable opposition from the managers controlling Expect Quest. The court expressly invoked Sperling’s instruction that antagonism is a practical, not mechanical, determination—one that depends on the nature of the dispute. Where management has effectively frozen out the derivative plaintiff and refused to vindicate the company’s rights, antagonism is “evident.”
3. Realignment defeats complete diversity. Once Expect Quest is properly aligned as a defendant, a Florida citizen appears on both sides—Qatalyst (plaintiff) and Expect Quest (defendant, with Florida citizenship via its Florida member). Under Owen Equipment’s complete diversity rule, that overlap eliminates § 1332(a) jurisdiction. Because diversity is assessed at the time of filing (Sperling; Thermoset), later alignment maneuvers cannot cure the jurisdictional defect. The district court’s dismissal was therefore affirmed.

Why Duffey Didn’t Save the Case

Qatalyst argued that, as in Duffey, the company could not act due to a 50/50 deadlock and therefore was not antagonistic. The Eleventh Circuit rejected this framing as an overreading of Duffey. Duffey merely holds that deadlock and inaction alone do not equal antagonism; it does not transform deadlock into a safe harbor whenever evidence shows something more. Here, Qatalyst’s own sworn statements and litigation posture in state court evidenced exclusion, operational control by the opposing co-manager, and practical hostility—i.e., refusal, not mere inability, to act—triggering the exception and compelling realignment.

Impact and Implications

• Derivative litigation strategy: Plaintiffs cannot preserve a federal forum simply by styling the company as a nominal co-plaintiff when the record shows managerial hostility. Courts will realign based on practical antagonism, including extrinsic materials from parallel state litigation.
• Deadlock is not a jurisdictional shield: A 50/50 deadlock provision will not, by itself, forestall realignment. If one faction exercises de facto control and excludes the other, expect a finding of antagonism and realignment of the company as a defendant.
• Early factual attacks on jurisdiction: McElmurray’s framework encourages defendants to mount factual challenges to diversity and submit evidence beyond the complaint. Parties should anticipate targeted jurisdictional discovery and the use of their own prior statements against them.
• Forum selection and parallel actions: Plaintiffs pursuing derivative claims involving closely held LLCs with overlapping citizenship should carefully evaluate whether diversity is realistically sustainable. Where realignment is likely, state court may be the only viable forum.
• Operating agreements and governance: Governance structures that allow one manager to exercise de facto control in deadlock scenarios can heighten the risk of antagonism findings. Drafters seeking to preserve federal forum options should consider mechanisms that avoid practical exclusion and document neutral deadlock-resolution procedures.
• Indispensable party barrier: Because the company is indispensable in a derivative action (Liddy), plaintiffs cannot drop the company to salvage diversity.

Complex Concepts Simplified

• Diversity jurisdiction (28 U.S.C. § 1332(a)): Federal courts can hear cases between citizens of different states if the amount in controversy exceeds the statutory threshold and there is “complete diversity”—no plaintiff shares a state of citizenship with any defendant.
• Complete diversity: Every plaintiff must be from a different state than every defendant. A single overlap defeats jurisdiction.
• Citizenship of LLCs: An LLC is a citizen of every state in which its members are citizens, not the state where it’s formed. If even one member is a Florida citizen, the LLC is a Florida citizen.
• Derivative action: A shareholder or member sues on behalf of the company to recover for harm to the company. The company is the real party in interest and is an indispensable party to the suit.
• Realignment: Courts can (and must) rearrange parties to reflect their true interests in the controversy. Labels in the complaint do not control.
• Active antagonism: In the derivative context, antagonism means the company’s management is “completely and irreconcilably opposed” to the derivative plaintiff’s position—typically because management refuses to pursue the claim, is aligned with alleged wrongdoers, or is excluding the plaintiff from corporate control.
• Deadlock vs. antagonism: Deadlock means the company is unable to act because decision-makers are split. Antagonism means the company (through those controlling it) is opposed to the plaintiff’s claim. Deadlock alone does not prove antagonism, but evidence of practical exclusion/refusal to act does.
• Facial vs. factual jurisdictional attack: A facial attack challenges the adequacy of jurisdictional allegations on their face; a factual attack permits the court to consider evidence outside the pleadings (affidavits, testimony, other litigation materials) to decide whether jurisdiction truly exists.
• Time-of-filing rule: Diversity is measured when the complaint is filed. Later changes generally do not create or cure jurisdiction.

Selected Passages That Frame the Holding

“The way the parties align themselves in the pleadings is not dispositive. Rather, federal courts are required to realign the parties in an action to reflect their interests in the litigation.”

“The general rule is that in derivative actions, the corporation is properly realigned as a plaintiff... However, an exception to this rule applies where antagonism is evident on the face of the pleadings and by the nature of the controversy.”

“Qatalyst overstates Duffey’s reach... [M]ere deadlock and inaction without more don’t show antagonism... [H]ere there is more.”

“By this account, management of Expect Quest isn’t so much unable to take action as they are actively refusing to take action. Therefore, antagonism is evident.”

Practical Takeaways for Litigators

• Expect courts to scrutinize alignment in derivative suits; labels like “nominal plaintiff” won’t control.
• Assume extrinsic materials (including prior pleadings and discovery from related cases) will be considered in a factual jurisdictional attack; maintain consistency across fora.
• When a 50/50 deadlock exists, document neutral, bona fide inability to act; any evidence of exclusionary control may tip the scale toward antagonism.
• Evaluate LLC member citizenship early—if the company shares citizenship with any adversary, realignment will likely be fatal to diversity jurisdiction.
• Do not rely on post-filing alignment maneuvers to establish jurisdiction; the time-of-filing rule governs.
• If federal jurisdiction is tenuous, consider state-court filing or alternative federal hooks (if any) rather than risking dismissal after substantial litigation effort.

Conclusion

The Eleventh Circuit’s unpublished decision in Qatalyst Inc v. Pipes.AI, LLC reinforces a pragmatic approach to party alignment in derivative actions. The key rule is straightforward: the presence of formal deadlock does not, by itself, insulate a derivative plaintiff from realignment; courts will look for practical antagonism. Where evidence shows that those controlling the company exclude the derivative plaintiff and refuse to pursue the company’s claims, the company must be aligned as a defendant. Once realigned, overlapping citizenship defeats complete diversity, eliminating federal jurisdiction under § 1332(a).

Although non-precedential, the opinion synthesizes Supreme Court guidance (Sperling, Swanson, City of Indianapolis) and Eleventh Circuit law (Duffey, City of Vestavia Hills, Thermoset, McElmurray) into a clear message: jurisdictional reality, not pleading formalities, governs. Derivative plaintiffs should plan accordingly—especially in closely held, 50/50-managed LLCs where control dynamics can quickly transform deadlock into demonstrable antagonism.