Attorneys must relitigate case for free

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“The best way for counsel to make the litigants whole is to perform, without additional fees, any further services that are necessary to bring this suit to a conclusion in state court, or via settlement.” Hon. Frank Easterbrook Seventh Circuit

It has long been an understatement that the Seventh Circuit judges are sticklers when it comes to diversity jurisdiction. But on Dec. 1, they raised the bar a little higher, taking the unprecedented step of ordering the attorneys involved to relitigate a case in state court at no expense to their clients.

Belleville Catering Company filed a lawsuit in the Central District of Illinois against Champaign Market Place, L.L.C. The complaint alleged that Belleville is a Missouri corporation with its principal place of business there.

It further alleged that Champaign is a Delaware Limited Liability Company, with its principal place of business in Illinois. Champaign agreed with these allegations and counterclaimed.

The parties consented to trial before a magistrate judge, who accepted the jurisdictional allegations at face value. A jury trial was held, resulting in a judgment of $220,000 in favor of Champaign. Belleville appealed, but, in a decision by Judge Frank Easterbrook, the Seventh Cir-cuit vacated the judgment, with instructions on remand to dismiss the case for lack of subject matter jurisdiction.

LLC Citizenship

The court found that both counsel and the magistrate judge assumed that an LLC is treated like a corporation, for diversity jurisdictional purposes, and thus is a citizen of its state of organization and its principal place of business. However, pursuant to Cosgrove v. Bartolotta, 150 F.3d 729 (7th Cir. 1998), unincorporated enterprises are analogized to partnerships, which take the citizenship of every general and limited partner.

In investigating whether Champaign had any partners whose residence is in Missouri, the court discovered that Belleville is actually incorporated in Illinois, rather than Missouri.

Since citizens of Illinois are on both sides of the suit, the court held that diversity of citizenship is lacking, and it therefore lacks jurisdiction.

Blame Game

The court concluded, “Both sides also must share the blame for assuming that a limited liability company is treated like a corporation. … The complaint should not have been filed in federal court (for Belleville Catering had to know its own state of incorporation), the answer should have pointed out a problem (for Cham-paign Market Place’s lawyers had to ascertain the legal status of limited liability companies), and the magistrate judge should have checked all of this independently (for inquiring whether the court has jurisdiction is a federal judge’s first duty in every case).”

The court added, “Failure to perform these tasks has the potential, realized here, to waste time (including that of the put-upon jurors) and run up legal fees.”

The court further rejected Champaign’s request that it decide the merits notwithstanding the lack of jurisdiction. Champaign argued, “Surely in the past this Court has decided a case on the merits where an examination of the issue would have shown a lack of subject matter jurisdiction in the District Court. It would be unfortunate in the extreme for Champaign Market Place L.L.C. to lose a judgment where Belleville Catering Company, Inc. misrepresented (albeit unintentionally) its State of incorporation in its Complaint. … [T]here was no reason for Champaign Market
Place L.L.C. to question diversity of citizenship, since it is not, and never has been, a citizen of Missouri.”

Rejecting this suggestion, the court wrote, “This passage … leaves us agog. Just where do appellate courts acquire authority to decide on the merits a case over which there is no federal jurisdiction? The proposition that the Seventh Circuit has done so in the past — a proposition unsupported by any citation — accuses the court of dereliction combined with usurpation. … And while counsel feel free to accuse the judges of ultra vires conduct, and to invite some more of it, they exculpate themselves. Lawyers for defendants, as well as plaintiffs, must investigate rather than assume jurisdiction; to do this, they first must learn the legal rules that determine whose citizenship matters (as defendant’s lawyers failed to do).”

Accordingly, the court vacated the judgment of the district court, with instructions to dismiss the case for lack of jurisdiction.

Remedy

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Before concluding, the court held that the attorneys must bear the costs of having failed to determine whether jurisdiction was present.

The court held, “The costs of a doomed foray into federal court should fall on the lawyers who failed to do their homework, not on the hapless clients. Although we lack jurisdiction to resolve the merits, we have ample authority to govern the practice of counsel in the litigation. The best way for counsel to make the litigants whole is to perform, without additional fees, any further services that are necessary to bring this suit to a conclusion in state court, or via settlement. That way the clients will pay just once for the litigation. This is intended not as a sanction, but simply to ensure that clients need not pay for lawyers’ time that has been wasted for reasons beyond the clients’ control (cites omitted).”

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David Ziemer can be reached by email.