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Failure to investigate corporate citizenship not sanctionable

Where a defendant’s in-house counsel told the plaintiff that they were not planning to object to the federal court’s subject matter jurisdiction and their outside counsel later discovered that the defendant’s corporate citizenship negated the complete diversity of the parties, the defendant was not sanctioned for failing to inform plaintiff about the lack of diversity before the plaintiff filed its complaint because defense counsel did not have a duty to investigate their client’s corporate citizenship.

Background

On Aug. 27, 2018, before filing this case, counsel for Atkins Nuclear Secured LLC sent Aptim Federal Services LLC’s in-house counsel a letter requesting confirmation that neither Aptim, nor any of its members, were citizens of Delaware, Tennessee or Florida in order to establish that the parties were completely diverse, and the federal court would therefore have subject matter jurisdiction over Atkins’ claims. Aptim’s in-house counsel, without looking into the issue, responded that Aptim had no plans to object to object to subject matter jurisdiction in the Eastern District of Virginia.

Atkins then filed this action on Aug. 30, 2018, alleging that Atkins was a Delaware LLC with its principal place of business in Tennessee and that Atkins’ sole member was a Delaware LLC with its principal place of business in Florida. The complaint further alleged, upon information and belief, that Aptim was a Louisiana LLC with its principal place of business in Louisiana and that none of its members were citizens of Delaware, Tennessee or Florida.

On Sept. 4, 2018, Aptim retained outside counsel for the case. On Sept. 21, 2018, Aptim moved to dismiss the action for failure to state a claim. That same day, Aptim filed a corporate disclosure statement stating that Aptim’s sole member was Aptim Government Solutions LLC. The court denied the motion, but granted Atkins leave to file an amended complaint, which it did on Nov. 7, 2018.

On Nov. 15, 2018, while drafting its answer to the amended complaint, Aptim’s counsel discovered that Aptim Government Solutions LLC’s sole member, Aptim Corp, was a Delaware corporation, and that Aptim was therefore a citizen of Delaware like Atkins. Counsel for Aptim informed Atkins of this discovery the next day. On Feb. 8, 2019, the court granted Aptim’s motion to dismiss for lack of subject matter jurisdiction.

On Dec. 28, 2018, Atkins filed this motion for sanctions on the ground that Aptim had vexatiously and wantonly multiplied the proceedings in bad faith. The magistrate judge recommended that sanctions not be imposed. Atkins objects to the magistrate’s report.

Analysis

Whether an objective or subjective bad faith standard applies in assessing Aptim’s conduct is an unsettled issue in this circuit. Based on its de novo review of the applicable legal standards, this court concludes that a subjective bad faith standard applies to the court’s inherent power to award sanctions against a party.

A court’s inherent sanctioning power is narrower than its authority to impose sanctions under Rule 11 or 28 U.S.C. § 1927 and therefore requires a showing of greater culpability. This inherent authority should only be used against a party who has actually acted in bad faith. The use of an objective standard, however, fails to fully account for a party’s actual motives. Thus, applying a subjective standard is the only sensible option.

In this case, Atkins, as plaintiff, had the affirmative duty to establish the court’s subject matter jurisdiction over its claims. Notably, Atkins recognized in its letter to Aptim that the parties could not confer subject matter jurisdiction to the court by agreement. As such, Atkins was aware that Aptim’s response that it did not plan to object to subject matter jurisdiction was essentially irrelevant to the issue of whether Atkins’ claims could properly be filed in federal court. Nevertheless, Atkins failed to make any further inquiry before filing its complaint upon information and belief that diversity jurisdiction existed.

Like the magistrate judge, this court is unable to find any evidence that either Aptim’s in-house or outside counsel actually intended to delay or disrupt the proceedings by failing to investigate Aptim’s corporate citizenship sooner. While Aptim’s failure to conduct what would have been an easy investigation is concerning, the court cannot assume that this failure was the result of bad faith and improper motives. However easy and desirable such an investigation may have been, Aptim did not have a duty to undertake it such that sanctions would be appropriate.

Plaintiff’s motion for sanctions denied.

Atkins Nuclear Secured LLC v. Aptim Federal Services LLC, Case No. 1:18-cv-1112, April 24, 2019. EDVA at Alexandria (Trenga). VLW 019-3-213. 16 pp.