When subject-matter jurisdiction is based on diversity, the presence of a limited liability company or a partnership on the pleadings may require a complicated and time-consuming investigation into that party’s citizenship. The Eleventh Circuit’s decision in J.C. Penney Corporation v. Oxford Mall, LLC, No. 22-12461, 2024 WL 1904569 (May 1, 2024), is an example of why counsel must go through this exercise—and timely inform the court of the results.
After a dispute arose about a shopping-center lease, J.C. Penney sued Oxford Mall in federal court in April 2019, basing subject-matter jurisdiction on diversity of citizenship. Determining J.C. Penney’s citizenship was easy. Incorporated in Delaware and with a principal place of business in Texas, J.C. Penney is a citizen of both states. Because 28 U.S.C. § 1332(a) requires complete diversity, jurisdiction therefore would be defeated if Oxford Mall was a citizen of either Delaware or Texas.
But Oxford Mall is an LLC, and its citizenship is not so straightforward. For diversity purposes, an LLC takes on the citizenship of each of its members, each of which in turn takes on the citizen of each of its members or partners, all the way down the chain until there are no more LLCs or partnerships left. As the structures of many LLCs and partnerships have become more and more complex, district courts have become more persistent in ensuring the existence of diversity jurisdiction at the outset of a case. Parties and counsel therefore must be diligent in meticulously investigating citizenship at the outset to avoid the consequences of litigating a case for months—or even years—only to discover that the court never had jurisdiction in the first place.
Oxford Mall was not so diligent. The parties’ initial pleadings averred that Oxford Mall was not a citizen of either Delaware or Texas, and the case proceeded for two years, through discovery; a bankruptcy stay; cross-motions for summary judgment; partial granting of J.C. Penney’s motion and denial of Oxford Mall’s; denial of Oxford Mall’s motion for reconsideration; and a failed mediation. Eventually, however, Oxford Mall notified that court that it actually was a Delaware citizen the whole time, meaning that the unfavorable decisions against it all vanished, and the case would have to start over in state court.
This delayed revelation would have been bad enough, but the details behind it represent “a textbook example of bad faith.” As it turns out, Oxford Mall knew of its Delaware citizenship as early as January 2020—almost 15 months before it told the court.
Oxford Mall’s discovery arose in the context of another federal-court lawsuit brought by another tenant, Hibbett Sporting Goods, in August 2019. Unlike with the J.C. Penney action, Oxford Mall—through its general counsel—immediately began investigating its citizenship after the Hibbett case was filed. In an email to one of its members—itself a limited partnership—Oxford Mall’s general counsel explained that, if the LP had any partners who were citizens of Alabama, the Hibbett case would have to be dismissed from federal court. (Hibbett apparently was a citizen of both Alabama and Delaware.) Oxford Mall’s general counsel clearly understood the implications of a similar discovery with respect to the J.C. Penney case, explaining, “Likewise for J.C. Penney, … if one or more of the members is a Texas or Delaware resident, then we may be able to relocate their lawsuit to Georgia.”
A few months later, Oxford Mall’s general counsel again reached out to the member LP, explaining that the Hibbert court had now ordered Oxford Mall to disclose all of its members and their citizenship, presumably, he said, because the judge did “not want to spend time on a diversity action for which diversity jurisdiction[] does not actually exist,” and then “have the proceedings vacated at some later date.”
In January 2020, the LP notified Oxford Mall that it indeed had a Delaware citizen in its ownership chain. Oxford Mall filed suit against Hibbert in Georgia state court the very next day, and then a little more than a month it later filed a motion to dismiss the federal case for lack of jurisdiction. Oxford Mall did not file a similar motion in the J.C. Penney case.
By the time Oxford Mall finally informed the J.C. Penney court of its Delaware citizenship, it was April 2021. Almost 15 months of litigation had occurred, with Oxford Mall knowing the whole time that there was no subject-matter jurisdiction.
After Oxford Mall moved to dismiss, J.C. Penney moved for sanctions. After briefing and a hearing, the district court granted the motion and asked for briefing on the amount of attorneys’ fees to be awarded. Rather than simply attacking the reasonableness of the amount sought by J.C. Penney, as the court had instructed, Oxford Mall also submitted an affidavit from its general counsel explaining why sanctions were not warranted. The court struck the affidavit as untimely and irrelevant and awarded J.C. Penney $62,556 in attorneys’ fees and $558.05 in costs. Oxford Mall then appealed both orders.
The Eleventh Circuit “enthusiastically affirmed” both the order granting sanctions and the amount. The district court has inherent authority to fashion sanctions for abuse of the judicial process. To justify such sanctions, the court must make specific findings of “subjective bad faith”—i.e., the conduct must be intentional, not merely reckless. But “that intent can be inferred ‘if an attorney’s conduct is so egregious that it could only be committed in bad faith.’”
The district court here specifically found that Oxford Mall acted in bad faith, and the Eleventh Circuit rejected Oxford Mall’s arguments otherwise as “absolute nonsense.” Oxford Mall claimed that, when it discovered its Delaware citizenship in January 2020, it did not make the connection between the Hibbert case and the J.C. Penney case. But the general counsel’s own email from September 2019 spelled out that exact connection. Further, the timing of Oxford Mall’s disclosure was strategic, coming after several unfavorable rulings. In short, “Oxford Mall’s wrongdoing here is startling in its obviousness.”
The court also rejected the evidentiary standard espoused by Oxford Mall, which argued that sanctions were not appropriate because bad faith was not the only plausible explanation for its conduct. That would be tantamount to requiring proof beyond a reasonable doubt, which is too high a burden. The court left open the question of whether bad faith must be found by clear and convincing evidence or by only a preponderance of the evidence, concluding that either standard was met.
The district court also did not abuse its discretion in setting the amount of the award. The district court appropriately awarded J.C. Penney only the amount of fees it incurred “but for” Oxford Mall’s misconduct. Its starting point was the fees J.C. Penney incurred after March 5, 2020, the date Oxford Mall moved to dismiss the Hibbert case. And the district court awarded only two-thirds of that amount, because J.C. Penney’s efforts after that date could be used in the state-court litigation and therefore were not entirely wasted. The Eleventh Circuit rejected Oxford Mall’s argument that the district court was required to assess and allocate specific expenses rather than using a percentage based on its “overall sense of [the] suit,” a method that has been expressly blessed by the Supreme Court.
Finally, the court concluded that the district court acted within its discretion in striking Oxford Mall’s affidavit as irrelevant and untimely. Instructed to brief the reasonableness of the amount of fees requested, Oxford Mall submitted an affidavit intended to show that sanctions were not warranted at all. This was an attempt to relitigate an issue on which the court had already ruled.
The court’s “emphatic” affirmance of sanctions here emphasize that courts “do not take this kind of jurisdictional manipulation lightly.” Govern yourself accordingly.