The U.S. Court of Appeals for the Second Circuit on Monday revived a lawsuit to recover $1.7 million in unpaid debt from Ohio-based drugmaker Navidea Biopharmaceuticals Inc., saying a district court judge had improperly dismissed the case without first determining a key jurisdictional issue.

The ruling, from a three-judge panel in an opinion by Judge Michael Park of the U.S. Court of Appeals for the Second Circuit, reinstated a 2017 suit filed by Navidea creditor Platinum-Montaur Life Sciences LLC and its Holland & Knight attorneys, claiming that the company was still owed the money under a 2012 loan agreement.

Originally filed in New York state court, Navidea, a Delaware corporation headquartered in Dublin, Ohio, removed the suit to the U.S. District Court for the Southern District of New York, where Judge Valerie Caproni later dismissed it for lack of Article III. The decision followed confusion on both sides as to whether there was a complete diversity of citizenship between the parties, which would have allowed the district court to hear the case.

According to the Second Circuit opinion, Caproni conducted "limited informal jurisdictional discovery" and assumed subject-matter jurisdiction because she had no "good faith basis to believe that there is not complete diversity" among the parties.

Park said Navidea's original notice of transfer did not resolve the diversity issue, and Caproni should have exercised her discretion to order full jurisdictional discovery.

"Here, none of the underlying state-court pleadings, the notice of removal, or the record as a whole reflected that the parties were completely diverse," Park wrote in a 13-page opinion. "Thus, the district court erred by proceeding to the merits of this case. We therefore remand so that the district court can exercise its discretion to conduct further proceedings, if any, as it deems appropriate."

Park was joined in the ruling by Chief Judge Robert Katzmann and Judge john Walker Jr. of the U.S. Court of Appeals for the Second Circuit, a senior judge on the on the court.

Among the considerations, Park said, was the citizenship of Platinum Partners Value Arbitrage Fund, a Cayman Islands limited partnership and one of three members in the Platinum-Montaur LLC.

For the purposes of diversity jurisdiction, Park said, partnerships take on the citizenship of all their members, meaning that Platinum-Montaur is a citizen of every state of which PPVA's partners are citizens.

Navidea did not identify those partners in its notice of removal from state court, and it was later determined that one of PPVA's partners was an onshore feeder fund, which took the citizenship of its approximately 220 members.

If any one of those members was a citizen of Delaware or Ohio, Park said, it would "destroy diversity of citizenship between Platinum-Montaur and Navidea."

In his ruling, Park noted that courts' discretion to conduct more thorough discovery on diversity "should be exercised with caution," but said the circumstances warranted such a step.

"Nonetheless, even when the citizenship of an LLC or LP is in question, a district court may not proceed to the merits without first determining whether it has subject-matter jurisdiction," Park said.

Attorneys for Navidea and Platinum-Montaur were not immediately available Monday afternoon to comment on the decision.

Platinum-Montaur is represented by Robert Burns, Warren Gluck, Barbara Parlin and Kathryn B. Daly of Holland & Knight in New York.

Navidea is represented by Robert Folland of Barnes & Thornburg in Columbus, Ohio.

The case, on remand, is captioned Platinum-Montaur v. Navidea.