In Purchasing Power, LLC v. Bluestem Brands, Inc., 2017 WL 1046103 (11th Cir. Mar. 20, 2017), the Eleventh Circuit reminded litigants and their counsel that it is critical to confirm the citizenship of all relevant corporate entities in determining the existence of diversity jurisdiction, but reversed the district judge’s order imposing “inherent power” sanctions on a party which had conducted an insufficient investigation.
Purchasing Power, LLC sued Bluestem Brands, Inc. in state court. Bluestem, a citizen of Minnesota and Delaware, removed on the basis of the district court’s diversity jurisdiction. Bluestem’s counsel asked counsel for Purchasing Power to identify the state(s) of which Purchasing Power’s members were citizens, recognizing that for diversity purposes, an LLC is a citizen of every state of which one of its members is a citizen. Purchasing Power’s counsel spoke with the company’s CEO and wrote back, “[W]e are informed by our client that none of the members of the LLC are resident citizens of either the states of Minnesota or Delaware.” Bluestem attached that response to its notice of removal, with no further evidence that complete diversity existed.
During discovery, Bluestem asked for documents concerning the identity, residency, and citizenship of Purchasing Power’s members (and members’ members). Purchasing Power objected, asserting that some of the requested information was not in its care, custody, or control, and that the documents were not relevant, anyway, because diversity had already been confirmed. Bluestem never brought those objections before the district court.
Almost two years later, the district court granted Bluestem’s motion for summary judgment. On appeal, the Eleventh Circuit noted that the pleadings did not sufficiently allege Purchasing Power’s citizenship. Thereafter, it came to light that complete diversity (and thus subject-matter jurisdiction) had never existed. Purchasing Power’s CEO and its outside counsel had overlooked a Delaware corporation which was a member of one of Purchasing Power’s constituent LLCs. District Judge William S. Duffey, Jr. sanctioned Purchasing Power’s counsel under Rule 26(g) and the court’s inherent power, ordering the firm to pay $582,385 in fees and costs.
The Eleventh Circuit reversed the sanction. Judge Charles Wilson, in an opinion joined by Judge Jill Pryor and by Judge Susan C. Bucklew, visiting from the Middle District of Florida, disposed of the Rule 26(g) sanction in a footnote. The district judge had faulted Purchasing Power for objecting to the discovery request about citizenship based on a desire “to avoid discovery of information [Purchasing Power] told [its lawyers] it did not want disclosed,” but that was, the Eleventh Circuit noted, a proper basis for a discovery objection—especially in this case, where Purchasing Power asserted that jurisdiction had already been confirmed and Bluestem did not disagree.
As for the district court’s imposition of sanctions under its inherent power, the Eleventh Circuit began with a reminder that “[t]his power ‘must be exercised with restraint and discretion’ and used . . . ‘to sanction the willful disobedience of a court order, and to sanction a party who has acted in bad faith, vexatiously, wantonly, or for oppressive reasons’. . . . The key to unlocking a court’s inherent power is a finding of bad faith.” The district court had improperly relied on cases involving sanctions under 28 U.S.C. § 1927 and Rule 11 and imposing an objective standard to evaluate a party’s conduct: “That is an incorrect recitation of the standard for inherent power sanctions. The standard is a subjective standard with a narrow exception for conduct tantamount to bad faith.” The district court had also erred in applying a simple recklessness standard: “Recklessness alone does not satisfy the inherent powers standard; there must be more.”
In this case, the Eleventh Circuit held, the subjective bad faith standard was not met, especially once the “culpability of [both] parties” was considered. It had been Bluestem’s burden, as the removing party, to establish that jurisdiction existed, but it accepted the objection to jurisdictional discovery without moving to compel. And Bluestem had asserted in its notice of removal that none of Purchasing Power’s members was a citizen of Minnesota or Delaware, although the actual e-mail from Purchasing Power’s counsel had been more qualified, describing only what “we are informed by our client . . . .” Thus, “by stating as fact what was only Purchasing Power’s belief, Bluestem shielded a potential issue that would have thwarted its removal efforts.” And Purchasing Power had not failed altogether to investigate the citizenship of its members; it had conducted an investigation, albeit an investigation that turned out to be insufficient. In short, “[n]o party in this case acted with bad intentions, but the result was a colossal waste of time and effort.”
Posted by Valerie Sanders.