Opinion
No. 97-775, c/w 97-803
June 5, 2000
ORDER AND REASONS
Before the Court is the motion of defendants, Grinnell Corporation, Broadmoor Corporation, Tier Rack Corporation, and the City of New Orleans, to impose sanctions on plaintiffs' counsel for failing to adequately investigate the basis for diversity jurisdiction and failing to timely disclose the potential jurisdictional defect while they persisted in prosecuting their claims. Plaintiffs first notified this Court of the potential problem by telephone, on January 3, 2000. Subsequently, the Court held a status conference on January 7, 2000. After the conference, the Court, by its own initiative under Rule 11(c)(1)(B), ordered plaintiffs to show cause why sanctions should not be imposed under Rule 11(b), and ordered the parties to submit memoranda on the issue. The Court conducted a hearing on the issue. For the following reasons, the Court will not impose sanctions in this case.
Defendant Southland Tube, Inc., who has since settled with plaintiffs, has indicated that it is premature to address the issue of sanctions until this Court has ruled on whether it has subject matter jurisdiction over the case.
I. Background
This case arises out of a warehouse fire that destroyed MacFrugal's warehouse. On March 18, 1997, plaintiffs, including Lloyd's of London, brought this diversity subrogation action against various defendants in this Court, seeking recovery of over $27 million that it paid to its insured, West Coast Liquidators, Inc. ("WCL"), for merchandise destroyed in the fire. The case has proceeded in this Court for the past three years, and the Court has granted motions for summary judgment that dismissed certain parties from the case. Two days after filing their case in this Court, plaintiffs filed an identical action in state court, which remained dormant until December of 1999, at which time service was effected on defendants, including at least one defendant (the National Fire Protection Agency) that had been dismissed from this federal case on summary judgment.
Between June and December of 1999, this Court dismissed the NFPA, Factory Mutual Engineering Corp., Factory Mutual Research Corp., Underwriters' Laboratories, and Southern Building Code Congress, whose motion was unopposed, from this case.
On January 4, 2000, plaintiffs filed a motion for partial dismissal without prejudice, alerting the Court and the other parties that there may be a jurisdictional defect. Specifically, plaintiffs alleged that certain "Names" in Lloyd's syndicates share the same citizenship as some of the defendants and that some of them do not meet the amount in controversy requirement. Plaintiffs' counsel assert that they only discovered the potential jurisdictional defect during the summer of 1999, at which time a London adjuster informed them that a question had arisen as to complete diversity in an unrelated district court case. (See Affidavit of Martin English.) Plaintiffs' counsel submit that they did not alert the Court or the other parties to the possible problem at that time, because they wanted to confirm that there was, in fact, a problem, and that it took several months to gather the information necessary to do so. Specifically, plaintiffs' counsel claim that they immediately contacted their client, Mr. English, who conferred with representatives of the individual Names underwriting the policy at issue. In addition, English coordinated the execution of affidavits from the two Lead Underwriters in the case, Mr. McAuslin and Mr. Youell, who are suing in both their individual and representative capacities. Plaintiffs' counsel aver that it took months to procure these affidavits, because McAuslin was ill and Youell had retired, and that they informed the Court and defendants as soon as they were certain of the potential jurisdictional problem.
II. Discussion
A. Rule 11 Sanctions
A district court may impose Rule 11 sanctions even if it lacks subject matter jurisdiction over a dispute. See Elliot v. Tilton, 64 F.3d 213, 214 (5th Cir, 1995); Willy v. Coastal Corp., 915 F.2d 965, 966 (5th Cir. 1990), citing Cooter Gell v. Hartmarx Corp., 496 U.S. 384, 110 S.Ct. 2447 (1990). Therefore, if this Court finds that plaintiffs' counsel violated Rule 11, it may impose sanctions even if it dismisses the case for lack of diversity jurisdiction. In determining whether a party has violated Rule 11, courts apply an objective standard of reasonableness under the circumstances. Smith v. Our Lady of the Lake Hospital, Inc., 960 F.2d 439, 444 (5th Cir. 1992); Thomas v. Capital Sec. Servs., 836 F.2d 866, 873 (5th Cir. 1988); Robinson v. National Cash Register Co., 808 F.2d 1119, 1127 (5th Cir. 1987), abrogated on other grounds by Thomas, supra. "An attorney's good faith is no longer enough to protect him from sanctions." Thomas, 836 F.2d at 873. "Rule 11 applies to each and every paper signed during the course of the proceedings and requires that each filing reflect a reasonable inquiry." Id. at 875. Once a court finds that counsel has violated Rule 11, the imposition of sanctions is discretionary. See FED. R. CIV. P. 11(c). If the Court does impose sanctions, it has considerable discretion in fashioning appropriate sanctions, even though attorneys' fees and reasonable expenses are expressly provided for in the rule. See Thomas, 836 F.2d at 877. In choosing the appropriate sanction, the Court should bear in mind that the purpose of Rule 11 is to deter attorneys from violating it, but the sanctions should also be educational and rehabilitative in nature. See id. The sanction imposed should be the least severe sanction adequate to the purpose of the rule; admonition may suffice. See id.
Federal Rule of Civil Procedure 11 states in relevant part:
(b) Representations to Court. By presenting to the court (whether by signing, filing, submitting, or later advocating) a pleading, written motion, or other paper, an attorney or unrepresented party is certifying that to the best of the person's knowledge, information, and belief, formed after an inquiry reasonable under the circumstances, —
(1) it is not being presented for any improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation;
(2) the claims, defenses, and other legal contentions therein are warranted by existing law or by a nonfrivolous argument for the extension, modification, or reversal of existing law or the establishment of new law;
(3) the allegations and other factual contentions have evidentiary support or, if specifically so identified, are likely to have evidentiary support after a reasonable opportunity for further investigation or discovery[.]
FED. R. Civ. P. 11(b). Under Rule 11(b)(3), plaintiffs' counsel had a duty to make a reasonable investigation into allegations of diversity jurisdiction at the time they filed the suit. See International Shipping Co. v. Hydra Offshore, Inc., 875 F.2d 388, 390-91 (2d Cir. 1989). Because this Court must employ the "snapshot" approach in examining counsel's conduct, a finding that, in hindsight, counsel's assertion of subject matter jurisdiction was erroneous or tenuous, does not warrant the imposition of sanctions. See Smith, 960 F.2d at 444. In assessing whether counsel made a reasonable factual inquiry, this Court may consider a number of factors: (1) the time available to counsel for investigation; (2) the extent they relied on their client for the factual support of the jurisdictional allegations; (3) the feasibility of prefiling investigation; (4) the complexity of the factual and legal issues; and (5) the extent to which the development of factual circumstances underlying the claim required discovery. See id.; Thomas, 836 F.2d at 875-76. In determining whether counsel has made a reasonable legal inquiry, relevant factors to consider are (1) the time available to the attorney; (2) the plausibility of the legal view contained; and (3) the complexity of the legal and factual issues raised. See Smith, 960 F.2d at 439; Thomas, 836 F.2d at 875-76. Considering the foregoing factors, this Court does not find that counsel's investigation into allegations of diversity jurisdiction at the time they filed this suit violated Rule 11.
When plaintiffs filed this suit in March 1997, the state of the law concerning the citizenship requirements of Lloyd's was somewhat ambiguous, although a reading of Carden v. Arkoma Assocs., 494 U.S. 185, 195-96, 110 S.Ct. 1015, 1021 (1990), should have alerted plaintiffs' counsel to the potential problem. In Carden, the Supreme Court held as follows:
[W]e reject the contention that to determine for diversity purposes, the citizenship of an artificial entity, the court may consult the citizenship of less than all of the entity's members. We adhere to our oft-repeated rule that diversity jurisdiction in a suit by or against the entity depends on the citizenship of "all the members," . . . "the several persons composing such association," . . . "each of its members[.]"494 U.S. at 195-96, 110 S.Ct. at 1021, quotations omitted. Also pointing to a potential jurisdictional problem was Royal Ins. Co. of America v. Quinn-L Capital Corp., 3 F.3d 877 (5th Cir. 1993), which held that, under Carden, a "Lloyd's plan" as provided for in Texas law was an unincorporated association and thus considered to have the citizenship of its members. 3 F.2d at 882-83.
Defendants urge this Court to impose sanctions, arguing that under Carden and Royal, Lloyd's of London is an unincorporated association, and that therefore, for purposes of diversity jurisdiction, the Court must consider the citizenship of each member. While Carden should have alerted plaintiffs' counsel to a potential jurisdictional problem, it does not directly address Lloyd's of London and the situation in this case. Furthermore, Royal did not involve Lloyd's of London, but rather an unincorporated association of insurance companies in a Lloyd's style plan, operating under Texas law. Thus, while relevant, neither Carden nor Royal was on all fours with this case.
Further, the only circuit court that had ruled on the Lloyd's issue at the. time the suit was filed was Certain Interested Underwriters at Lloyd's v. Layne, 26 F.3d 39 (6th Cir. 1994), which found that the Names were undisclosed principals, and, applying Tennessee law, held that the diversity of only the Lead Underwriter need be considered.
It appears that counsel had sufficient time to investigate the pleadings, and after finding that the Lead Underwriters were British citizens, they did not believe it was necessary to investigate the citizenship of each Name. Last, plaintiffs and their counsel claim that they failed to discover, until recently, that the Lead Underwriters did not satisfy the amount in controversy requirement. There is no evidence, however, that they knew of this at the time they filed the suit, or that they purposely withheld this information for an improper purpose. Cases are often dismissed well after filing because it turns out that they lack the requisite amount in controversy.
In sum, given the state of the law at the time counsel filed this suit, this Court does not find that counsel's belief that this Court had subject matter jurisdiction over the case was unreasonable. Thus, the imposition of sanctions is not warranted.
The parties agree that this Court must also inquire into whether counsel's conduct at the time they discovered the potential jurisdictional defect, in the summer of 1999, was reasonable. The Fifth Circuit instructs courts to "test the signer's conduct by inquiring what was reasonable to believe at the time the pleading, motion, or other paper was submitted." Thomas, 836 F.2d at 875, citing FED. R. Civ. P. 11, Advisory Committee Note. The Fifth Circuit has admonished that Rule 11 does not impart on counsel a continuing duty; rather, it requires that a pleading, paper or motion comply with its terms at the time of filing. See Edwards v. General Motors Corp., 153 F.3d 242, 245 (5th Cir. 1998). The parties have not alleged which pleading, paper, or motion perpetrated an improper purpose. It is arguable, however, that plaintiffs and their counsel violated Rule 11 in continuing to prosecute this case by, for example, submitting numerous motions for summary judgment while they believed that the Court might lack subject matter jurisdiction. While plaintiffs and their counsel admit that they were aware of a potential problem, there is no evidence that they willfully concealed a known jurisdictional defect in order to delay the proceedings, or to vex or harass defendants.
Defendants cite Itel Containers Int'l Corp. v. Puerto Rico Marine Mgt., Inc., 108 F.R.D. 96, 103 (D.N.J. 1985), in support of the imposition of sanctions. In that case, a district court imposed Rule 11 and 28 U.S.C. § 1927 sanctions on a party and its counsel for intentionally concealing the court's lack of subject matter jurisdiction over the case. Itel, however, involved egregious behavior by defendant and its counsel, who knew from the outset that jurisdiction was lacking, yet willfully, actively and artfully pursued the case for as long as possible. See id. at 97. They also admitted under oath that their strategy from day one was to withhold from plaintiff and the court their knowledge that the court had no jurisdiction. See id. The circumstances of this case are clearly distinguishable from those of Itel.
In the past two years, several courts, including by the Seventh and Second Circuits, have held that each Lloyd's Name must be of diverse citizenship for the purposes of diversity jurisdiction. See, e.g., Indiana Gas Co. v. Home Ins. Co., 141 F.3d 314 (7th Cir. 1998); E.R. Squibb Sons, Inc. v. Accident Cas. Ins. Co., 160 F.3d 925 (2d Cir. 1998). Counsel claim that they first discovered that the pleadings might be jurisdictionally defective in the summer of 1999. Their excuse for withholding this information from the Court and defendants for about six months is two-fold: (1) they wanted to ensure that certain Names were, in fact, citizens of the same state as certain defendants; and (2) for various reasons, it took months to procure this information. It is troublesome that, upon discovering this Court might have no jurisdiction to hear this matter, plaintiffs continued to prosecute their claims vigorously through discovery and motion practice, and that, when they' discovered some Names were not diverse, they then initiated service of process on the state court action before they brought this information to the Court's attention. Nevertheless, the Court does not find plaintiff counsel's conduct sanctionable. Counsel claims that they did not raise the issue with the Court until they confirmed the facts and that their delay in doing so was unavoidable because they relied on their client, Mr. English, to acquire the necessary information. The extent to which counsel relied on their client for information is one factor to consider in evaluating the reasonableness of their conduct. Further, although the state of the law changed considerably since the filing of this suit, Indiana Gas and Squibb are not directly controlling in the Fifth Circuit. Finally, although counsel may have been able to bring this matter to the Court's attention sooner had they been more diligent, they did raise the issue. The Court does not find that their actions were driven by an improper motive, as in Itel, supra, or that they were so unreasonable as to warrant sanctions.
B. Sanctions under 28 U.S.C. § 1927
Certain defendants also argue that this Court may impose sanctions on plaintiffs' counsel under 28 U.S.C. § 1927, which states in pertinent part:
Any attorney . . . who so multiplies the proceedings/in any case unreasonably and vexatiously may be required by the court to satisfy personally the excess costs, expenses and attorneys' fees reasonably incurred because of such conduct.28 U.S.C. § 1927. Section 1927 sanctions are imposed, for example, when an attorney continues to prosecute a meritless claim. See, e.g., Edwards, supra (attorney sanctioned for causing needless delay and causing opposing counsel to incur costs in pursuing groundless claim). The Fifth Circuit has held that sanctions must be based on conduct that is both unreasonable and vexatious. See Edwards, 153 F.3d at 246, citing Travelers Ins. Co. v. St. Jude Hospital, Inc., 38 F.3d 1414, 1416-17 (5th Cir. 1994). This requires that the Court find evidence of bad faith, improper motive or reckless disregard of the duty owed to the Court. See id. Negligence, however, will not suffice.
The Court finds that the actions of plaintiffs and their counsel, although less than diligent, do not rise to the level of recklessness, and are not the product of bad faith or improper motive. Thus, sanctions under § 1927 are, not warranted.
C. Sanctions under Court's inherent power
Certain defendants also submit that the Court should impose sanctions under its inherent power. "[T]he threshold for the use of inherent power sanctions is high. . . . and must be exercised with restraint and discretion." Elliott, 64 F.3d at 217, citing Chaves v. M/V Medina Star, 47 F.3d 153, 156 (5th Cir. 1995), internal quotations and citations omitted. This requires a specific finding of bad faith; the Court's mere displeasure is not enough. See id.; Kipps v. Caillier, 197 F.3d 765, 770 (5th Cir. 1999) (reversing lower court because it failed to make specific finding of bad faith and imposed sanctions in face of magistrate's finding that counsel's actions were not bad faith attempt to disrupt or delay proceedings). Again, the Court does not find that the actions at issue arose from bad faith. Thus, it declines to impose sanctions under its inherent power.
III. Conclusion
For the reasons stated above, defendants' motion for sanctions is denied.