Purchasing Power, LLC v. Bluestem Brands, Inc.
Filing
201
OPINION AND ORDER that Defendant Bluestem Brands, Inc.'s 183 Motion for Involuntary Dismissal, Attorneys' Fees, and Costs is GRANTED IN PART. Defendant is entitled to an award of the attorneys' fees and costs that it would not hav e otherwise incurred in this action if the case had not been removed to this Court. Defendant shall file, on or before October 26, 2015, a motion for attorneys' fees and costs. Defendant may include only the attorneys' fees and costs tha t it would not have otherwise incurred if the case had not been removed to this Court. Defendant also shall disclose the criteria it used in making this determination in detail sufficient to show it is claiming only attorneys' fees and costs it would not otherwise have incurred. IT IS FURTHER ORDERED that Defendant's 186 and 196 Motions to Provisionally File Under Seal are DENIED AS MOOT. Signed by Judge William S. Duffey, Jr on 9/25/2015. (anc)
I.
BACKGROUND AND FINDINGS OF FACT3
A.
Plaintiff’s Corporate Structure and Introduction
Plaintiff’s corporate structure, its resultant citizenship, and the
“investigation” Plaintiff and its litigation lawyers performed to determine these
facts, are central issues in this matter and are discussed in greater detail later in this
Order. Briefly, Plaintiff is a limited liability company whose sole member is
Purchasing Power Holdings, LLC (“Holdings”). Holdings’ members are nine
(9) individuals, all residents of Georgia, and three legal entities. Two of these legal
entities are limited liability companies: (1) Purchasing Power Investors, LLC, also
known as Rockbridge4 (“Rockbridge”) and (2) Stephens Capital Partners, LLC,
this Court for their continued protection. The October 19, 2012, Protective Order,
states that any document designated as entitled to protection under the Order which
is submitted to the Court in a pleading is entitled to maintain its protected status for
ten (10) days. (October 19, 2012, Protective Order [51] ¶ 11). During this ten-day
period, the party who designated the information as protected may move the Court
to continue the protected status. (Id.). Plaintiff has not moved to continue the
protected status of these exhibits. The Court, accordingly, denies Defendant’s
Motions to File Under Seal.
3
Much of this background is restated from the Court’s January 6, 2015,
Order. Additional factual background is taken from Plaintiff’s Response,
Defendant’s Sanctions Motion, related pleadings and their supporting documents.
There are additional fact findings in the “Discussion” section of this Order. All
facts found are based on the record and reasonable inferences supported by the
record facts.
4
This entity is, at times, referred to by Plaintiff as Rockbridge Growth Equity,
LLC.
2
also known as “Stephens”5 (“Stephens”). The third entity-member, FSP III
Kendrick Purchasing Power Holdings, Inc. (“FSP III”), is a corporation
incorporated in the State of Delaware. It was misidentified by Plaintiff and
Plaintiff’s litigation lawyers as “FSP III Kendrick Purchasing Power Holdings,
LLC,” also known as “Falcon.” The citizenship of these three legal entities (all
three together, the “LLC Members”) was relevant to whether the case was properly
removed to this Court based on diversity of citizenship. Until its June 2014,
investigation into Plaintiff’s citizenship at the direction of the Eleventh Circuit,
Plaintiff and its litigation lawyers treated all three of Holdings’ entity-members as
limited liability companies.
Throughout its pleadings and when its corporate officers were testifying,
Plaintiff often discussed Holdings’ members—the three legal entities and nine
individuals—as if they were Plaintiff’s direct members. Because Plaintiff often
conflated itself and Holdings throughout these proceedings, and because Holdings
is Plaintiff’s sole member, and, thus, any of Holdings’ members’ citizenships will
directly control Plaintiff’s citizenship, the Court will also at times refer, where
appropriate, to Holdings’ members as if they were Plaintiff’s direct members.
5
This entity is, at times, referred to by Plaintiff as Stephens-Purchasing
Power, LLC.
3
It was the fundamental misrepresentation of FSP III to Defendant and to the
Court, and Plaintiff’s counsel’s failure to conduct a competent investigation into
Plaintiff’s citizenship that resulted in the Court’s consideration of sanctions.
B.
Litigation and Jurisdictional Issue
This is an acrimoniously litigated commercial dispute between companies
that compete in the business of “payroll deduction” sales, or the sale of goods to
employees by allowing deductions from employees’ pay. Plaintiff alleges that
Defendant misappropriated Plaintiff’s trade secrets, violated provisions of a
confidentiality agreement between the Parties, and engaged in fraud.
On December 21, 2011, Plaintiff filed this action against Defendant in the
Superior Court of Fulton County, Georgia. On January 25, 2012, Defendant filed
its Notice of Removal [1] (“Notice”), removing the action to this Court on the basis
of diversity jurisdiction. Defendant stated it was “a Delaware corporation with its
principal place of business in Eden Prairie, Minnesota, and thus a citizen of
Delaware and Minnesota.” (Notice at 2). Defendant, in relying on information
provided by Plaintiff’s counsel, stated that Plaintiff, “a Georgia limited liability
company, has no members that are citizens of either Minnesota or Delaware.” (Id.,
citing Exhibit B to the Notice [1.3]). Exhibit B to the Notice is an e-mail dated
4
January 20, 2012, from Mr. Joe Letzer—counsel for Plaintiff—to Mr. Randall
Kahnke—counsel for Defendant—in which Mr. Letzer represented:
we are informed by our client that none of the members of the LLC
are resident citizens of either the states of Minnesota or Delaware.
We trust this gives you the essential information you requested to
assess removability on diversity grounds.
([1.3] at 2) (the “January 20, 2012, E-mail”). Plaintiff undertook to provide the
information it and its counsel knew was necessary to invoke this Court’s subject
matter jurisdiction. The circumstances within which it was provided is discussed
later.
In addition to Plaintiff’s representations to Defendant regarding jurisdiction,
counsel for Plaintiff, on four separate occasions, represented in pleadings filed with
the Court that the Court had jurisdiction over this case. On March 2, 2012, in the
Joint Preliminary Report and Discovery Plan [19], Plaintiff represented that there
was no question regarding the Court’s jurisdiction. (Joint Preliminary Report and
Discovery Plan at 15). On August 16, 2012, Plaintiff filed its Amended Complaint
[39], in which Plaintiff alleged that the “Court has subject matter jurisdiction over
the claims at issue in this action.” (Am. Compl. ¶ 3). On October 5, 2012,
Plaintiff filed its Motion for Leave to File Second Amended Complaint [49].
Plaintiff’s Proposed Second Amended Complaint [49.1] expressly alleged that the
“Court has original subject matter jurisdiction over the claims in this action
5
pursuant to 28 U.S.C. § 1332, because there is complete diversity of citizenship
between the parties, and the amount in controversy exceeds the $75,000 statutory
minimum, exclusive of interest and costs.” (Proposed Second Am. Compl. ¶ 4).
On January 18, 2013, Plaintiff filed its Motion for Leave to File Revised Second
Amended Complaint [66]. Plaintiff’s Revised Second Amended Complaint [66.1]
again expressly alleged that the “Court has subject matter jurisdiction over the
claims at issue in this action.” (Revised Second Am. Compl. ¶ 3).6
This case, during its torturous history, was contentious and the litigation
tactics employed often troubling. The time required to manage this litigation
involved substantial and extraordinary expenditure of judicial resources. Judicial
activities included considering motions filed by the Parties and the Court’s
personal review of hundreds of documents filed, without justification, under seal.
On May 9, 2014, the Court granted summary judgment in favor of Defendant on
all claims in the case, and the case was concluded [158].
On June 6, 2014, Plaintiff appealed [160]. On June 27, 2014, the Eleventh
Circuit docketed its “Jurisdictional Question,” noting that the pleadings did not
sufficiently allege Plaintiff’s citizenship, and asked the Parties if the record
adequately proved Plaintiff’s citizenship or if a formal amendment to the pleadings
6
All four of these documents were filed by Plaintiff’s counsel,
Burr & Forman LLP, on behalf of Plaintiff.
6
was necessary. Plaintiff’s counsel finally undertook the jurisdiction inquiry they
should have conducted before January 20, 2012, and which the Court believed had
been conducted considering the jurisdictional representations Plaintiff made
repeatedly. Plaintiff, the Court concludes, now had a different motivation to
conduct its investigation into jurisdiction considering the result Plaintiff suffered in
the District Court.
In its July 11, 2014, Response to the Jurisdictional Question (“Plaintiff’s
Response to Jurisdictional Question”), Plaintiff stated, almost two and a half years
after Mr. Letzer’s January 20, 2012, E-mail, that the evidence showed that the
Court lacked jurisdiction over this case. (Pl.’s Resp. to Jurisdictional Question at
1). Neglecting to acknowledge that Plaintiff had offered its citizenship
representations in the January 20, 2012, E-mail, to avoid disclosure of the LLC
Members’ members, it choose to shift to Defendant responsibility for the subject
matter jurisdiction failure committed by Plaintiff. Plaintiff argued that Defendant’s
Notice failed to allege Plaintiff’s members and their respective citizenships and
any jurisdiction shortcoming was not its responsibility. (Id. at 8-9). Plaintiff’s
representation was made knowing its counsel had assured Defendant and the Court
that there was diversity between the Parties, representations upon which Plaintiff
and its counsel knew Defendant and the Court would rely. Plaintiff, in its filing
7
with the Eleventh Circuit, neglected even to reference the January 20, 2012,
E-mail, in which Plaintiff’s counsel expressly represented to counsel for Defendant
that none of Plaintiff’s members are citizens of either the states of Minnesota or
Delaware. Instead, Plaintiff cavalierly stated that the record showed—as it always
had—that one of Plaintiff’s members,7 FSP III Kendrick Purchasing Power
Holdings, Inc., is a citizen of Delaware, and that complete diversity does not exist
and did not exist when this case was removed. (Id. at 10-11). Plaintiff’s lawyers
sanctimoniously argued that this matter was required to be remanded.
Defendant’s July 11, 2014, Response to the Jurisdictional Question
(“Defendant’s Response to Jurisdictional Question”) provided a fuller, and more
honest, account of Plaintiff’s and its lawyer’s severe professional shortcomings.
The response disclosed the January 20, 2012, E-mail and its origins. (Def.’s Resp.
to Jurisdictional Question at 3). Defendant stated that it had requested, in 2012, the
production of documents from Plaintiff concerning Plaintiff’s members and their
citizenship, which Plaintiff obstructed by objecting to production of these
documents because they were “not relevant.” (Id. at 4-5). Defendant noted that,
on November 12, 2012, counsel for Defendant sent counsel for Plaintiff a letter
7
As discussed supra, FSP III is one of Holdings’ members, not one of
Plaintiff’s members. Holdings, Plaintiff’s sole member, has twelve total members,
nine individuals and three legal entities, including FSP III.
8
regarding Plaintiff’s objections to producing the documents, stating that the
documents were relevant “because they relate to jurisdiction . . . .” (Id. at 5).
Aware that Defendant wanted to investigate federal jurisdiction, on
November 19, 2012, counsel for Plaintiff responded by referring to the
January 20, 2012, E-mail, stating Plaintiff’s counsel already had identified the
citizenship and residence information requested by Defendant, that counsel for
Plaintiff had provided the information necessary to determine the existence of
federal subject matter jurisdiction and, for those reasons, reiterated their objection
to these document requests. (Id.). Based on this record history, Defendant stated
to the Eleventh Circuit that, because counsel for Plaintiff insisted that its
January 20, 2012, representations about citizenship were unqualified and reliable,
it declined to require further underlying fact information.
The Parties, on July 14, 2014, based on Plaintiff’s delayed representation
about FSP III’s citizenship, filed their Joint Motion for Remand, requesting that the
Eleventh Circuit remand this case to the Court to supplement the record and to
make appropriate findings regarding its jurisdiction. On August 4, 2014, the
Eleventh Circuit entered its Remand Order, remanding the case “for the limited
purpose of making a factual determination as to whether diversity jurisdiction
exists in this case and to permit further proceedings to address jurisdictional
9
deficiencies, as deemed necessary by the district court.” (Remand Order at 1).
On August 20, 2014, the Court conducted an evidentiary hearing to allow
the Parties to present evidence of Plaintiff’s citizenship at the time of removal (the
“August 20, 2014, Hearing”). At the August 20, 2014, Hearing, Mr. Richard
Alfred Carrano, II, Plaintiff’s President and Chief Executive Officer, testified that
Plaintiff’s litigation counsel asked him to prepare a list of Plaintiff’s members8 and
their states of residence (the “Member List”). (Tr. of August 20, 2014, Hearing
[173] at 8-9 & Pl.’s Ex. 3). He was instructed only to look for residence
information. Mr. Carrano testified that he did not receive any instruction or
guidance from Plaintiff’s litigation lawyers regarding what federal jurisdiction
requires or what information was needed to determine the citizenship of Plaintiff’s
members. (Id. at 22, 50-52).9
8
Mr. Carrano testified that Plaintiff’s sole member was Purchasing Power
Holdings, LLC. (Tr. of August 20, 2014, Hearing [173] at 18). As noted supra,
throughout the August 20, 2014, Hearing, Mr. Carrano and Plaintiff’s litigation
counsel referred to “Plaintiff’s members” when apparently discussing Holdings’
members. Holdings’ members’ citizenship are relevant to Plaintiff’s citizenship
because Holdings, like Plaintiff, is a limited liability company. This failure to
distinguish between seperate legal entities throughout Plaintiff’s corporate
structure obstructed the Court’s inquiry into the jurisdictional issues required by
the Eleventh Circuit.
9
Mr. Carrano noted that “the concept of residence and citizenship is a foreign
one to me, and as such I interpret that to mean physical location.” (Tr. of
August 20, 2014, Hearing at 16).
10
The Member List states:
AKA
State of
Residence
Purchasing Power Investors, LLC
Rockbridge
Michigan
FSP Kendrick Purchasing Power Holdings, LLC
Falcon
Stephens Capital Partners, LLC
Stephens
LLC Member
Massachusetts
Arkansas
Keith Calhoun
Georgia
Richard Carrano
Georgia
Elizabeth Halkos
Georgia
Brian Daprano
Georgia
Reena Mattupurath
Georgia
Bob Wimmer
Georgia
Racquel Roberts
Georgia
Eleanor Fulton
Georgia
Alex Hesu
Georgia
(Id. at Pl.’s Ex. 3). Mr. Carrano testified that he obtained this information from the
Unit Purchase and Recapitalization Agreement (“UPRA”),10 which memorialized
the October 2011 sale transaction in which the LLC Members, through Holdings,
became the new owner of Plaintiff. (Id. at 9-10).
Mr. Carrano testified that when he prepared the Member List he believed it
to be accurate. (Id. at 11). In preparing the Member List, Mr. Carrano looked only
to page 56 of the UPRA, which lists the notice addresses of each of the member
10
The UPRA was marked as Plaintiff’s Exhibit 4 at the August 20, 2014,
Hearing.
11
entities. (Id. at 16). Page 56 lists FSP III as a limited liability company. (Id.).11
Mr. Carrano testified, however, that the second listed member, “FSP III Kendrick
Purchasing Power Holdings, LLC,” was actually FSP III, and was incorrectly
identified as a limited liability company. (Id. at 11-12). FSP III is, he now
testified, a corporation, incorporated in the State of Delaware. (Id.). Mr. Carrano
testified specifically that he was not asked by Plaintiff’s litigation lawyers to
identify the individual members of Rockbridge, Stephens, and “FSP III Kendrick
Purchasing Power Holdings, LLC.”12 (Id. at 43-46).
Mr. Carrano testified that at some point, likely after the initiation of this
action, the UPRA was provided to counsel for Plaintiff. (Id. at 70). The UPRA,
unlike on Page 56, on its first page states that FSP III is a Delaware corporation.
(Id. at 69). Plaintiff’s counsel did not ever advise Defendant’s counsel or the Court
that FSP III may be a corporation, in conflict with Plaintiff’s counsel’s prior
representations that FSP III was a limited liability company.13
11
The UPRA, in several other substantive provisions, identifies FSP III as a
corporation. (Tr. of August 20, 2014, Hearing at 16).
12
Mr. Carrano testified that the UPRA identifies the LLC Members as owners
of Holdings, and “assumed” that the buyers are identified as members. (Id. at
76-77). Counsel for Defendant stated that the UPRA does not, at any point,
identify FSP III as a member of Plaintiff. (Id. at 77-78).
13
In an effort to deflect Plaintiff’s counsel’s responsibility for their
misrepresentation, counsel for Plaintiff asked Mr. Carrano at the hearing about
depositions taken by Defendant during discovery, noting that counsel for
12
Mr. Greg Birge, general counsel of Plaintiff, stated at the hearing that
Plaintiff’s “cap table” was the best document to identify the members of Plaintiff at
the time of removal.14 (Id. at 82). The record evidence shows that Plaintiff’s
litigation lawyers did not, in preparation for the August 20, 2014, Hearing, make
an inquiry about how to determine Plaintiff’s citizenship, including the members of
the limited liability companies, and, apparently, did not have or request to review
the cap table. Based on the shallow, confusing, and incomplete presentation of
evidence by Plaintiff’s counsel at the August 20, 2014, Hearing, the Court
concluded that the information presented at the hearing was insufficient for it to
answer the Eleventh Circuit’s jurisdictional question. (Id. at 77-94).
As a result, on September 23, 2014, the Court scheduled [179] a second
evidentiary hearing for October 22, 2014 (the “October 22, 2014, Hearing”), and
specifically ordered Plaintiff to present testimony from an officer or senior
Defendant did not specifically ask questions about Plaintiff’s members. (Id.
at 24-27). Plaintiff’s litigation counsel suggested that they did not fail to identify
the citizenship of Plaintiff’s members, but only mistakenly identified FSP III as a
limited liability company when it is a corporation. (Id. at 34). Their position
appears to be that even though they knew the importance of citizenship, the need to
determine citizenship when evaluating diversity jurisdiction, and had not
conducted this evaluation themselves, it was Defendant’s mistake to rely on
Plaintiff’s litigation lawyers’ representations in the January 20, 2012, E-mail.
14
Mr. Birge was hired by Plaintiff in or around March 2013, and was not
present at, or involved in, the discussions between Messrs. Carrano and Delp, and
Litigation Counsel at the time of removal. (Tr. of August 20, 2014, Hearing, at
81:10-14, 82:12-13).
13
manager of each of Plaintiff’s members, and the members of the members of
Plaintiff, so the Court could determine the citizenship of each.
At the October 22, 2014, Hearing, Mr. John Schnabel, who is employed by
Falcon Investment Advisors (“FIA”), a private equity investment group, testified.
He stated that FIA invested in Plaintiff through FIA’s “third fund,” Falcon
Strategic Partners III L.P. (the “Fund”). (Tr. of October 22, 2014, Hearing [180] at
99-101). Mr. Schnabel testified that the Fund invested in Plaintiff through a
“blocker,” a corporation that receives money from the Fund to invest thereby
enabling the Fund’s investors to avoid the federal income tax consequence of their
investment. (Id. at 102-03).15
15
Mr. Schnabel put it this way:
It’s really just a way to make sure that we don’t receive income that’s
ECI related. So if we were to pull money out of the equity directly -in other words, we would sell the underlying equity and the money
would then flow into the blocker, we would then pay taxes at the
blocker, therefore sanitizing it of ECI, UBIT, and then it would go up
into the fund. It wouldn’t be tax efficient. So generally what we do is
sell the blocker that owns the shares to whoever is buying it.
(Tr. of October 22, 2014, Hearing at 104). Mr. Schnabel testified that their
fund documents are designed to protect investors from “allow[ing] ECI or
UBIT to flow through the fund.” (Id.). Regarding the “blocker,” Mr.
Schnabel testified:
Schnabel: Well, money was sent down by the fund, and 100 percent of
the blocker stock was sent back up.
14
Mr. Schnabel also testified that FSP III was the “blocker” for this investment
and that the Fund is the 100% owner of FSP III, which in turn owns a partial
interest in Purchasing Power Holdings, LLC, which in turns owns Plaintiff. (Id. at
104, 109). Mr. Schnabel testified further that FSP III is a Delaware corporation.
(Id. at 106). Mr. Schnabel testified that the identification of FSP III as a limited
The Court: And there is nothing else that the blocker does other than
to take the fund’s money –
Schnabel: And pass it on, yes.
The Court: So it’s –
Schnabel: It’s a cleansing mechanism. It’s a blocker for income.
The Court: That’s an interesting term, cleansing mechanism. Sanitize
I think is another word that you have used. So it’s really just a
fabrication in order to make sure that the fund doesn’t have to pay the
taxes on whatever profits –
Schnabel: Yeah, it’s really there only to make sure that a certain type
of income never hits the fund.
...
The Court: That the investor is really the owner that has the equity
interest in Purchasing Power L.L.C., but they do that by having
created this corporation for the sole purpose really of whatever tax
advantage there was as the money flowed from Purchasing Power
L.L.C. back to the investor; is that right?
Schnabel: That’s right.
(Id. at 119-20).
15
liability company on page 56 of the UPRA was a mistake, and that it is a
corporation. (Id. at 113-16).
Mr. Birge testified, at the October 22, 2014, Hearing, that Purchasing Power
Holdings, LLC—Holdings—is the holding company and the 100% owner and only
member of Plaintiff. (Id. at 130, 134). Mr. Birge testified that the owners of
Holdings are: 1) FSP III; 2) Rockbridge; and 3) Stephens, in addition to several
individuals16 who are or were formerly in management. (Id. at 135). Mr. Birge
testified that he had reviewed the UPRA and sale transaction documents and spoke
with the transaction attorneys involved in the original sale transaction, and
confirmed that FSP III is not a limited liability company but rather a corporation,
as it is identified in all the operative parts of the UPRA. (Id. at 138-39). This
testimony described the complicated structure of Plaintiff and made clear the need
for careful investigation before Plaintiff’s litigation lawyers made their unqualified
summary misrepresentations in their January 20, 2012, E-mail, and subsequent
Court filings.
On January 6, 2015, the Court concluded, based on the evidence and
testimony presented at the August 20, 2014, and October 22, 2014, Hearings, that
FSP III was incorporated in the State of Delaware and is a Delaware citizen.
16
The nine individuals identified as Georgia residents on the Member List.
16
(Show Cause Order at 16-17). The Court further concluded that complete
diversity, thus, does not exist. (Id.). The Court ordered the Clerk of Court to
return this action to the Eleventh Circuit with the Court’s factual and jurisdictional
findings. (Id. at 20-21). The Court further ordered Plaintiff to show cause why
sanctions should not be imposed based on the misrepresentations, including those
made to the Court, regarding its jurisdiction. (Id. at 21).
On February 2, 2015, the Eleventh Circuit vacated [184] the judgment in this
case and remanded this action to the Court with instructions to remand the case to
state court because the parties are not completely diverse. (February 2, 2015,
Order at 1).
C.
Plaintiff’s Response to the Show Cause Order
On February 13, 2015, Plaintiff filed its Response to the Show Cause Order,
arguing that sanctions were not warranted in this case. Plaintiff asserts additional
facts and recasts some of the facts developed during the August 20, 2014, Hearing.
Plaintiff asserts that, on November 29, 2011, litigation lawyers from
Burr & Forman LLP met with Mr. Carrano, and Plaintiff’s Chief Financial Officer,
Mr. Chad Delp, to discuss the lawsuit Plaintiff planned to file against Defendant.
(Pl.’s Res. at 3-4). The Burr & Forman lawyers at the November 29, 2011,
meeting were Ms. Ashby Fox, Ms. Elizabeth Shirley, and Mr. Letzer (“Litigation
17
Counsel”). (Id. at 2). 17 They discussed at the meeting what court would have
jurisdiction over the lawsuit and they discussed generally Plaintiff’s ownership
structure. (Id. at 4). Mr. Delp and Mr. Carrano explained to Litigation Counsel
that Plaintiff’s sole member was Purchasing Power Holdings, LLC, and that
Holdings’ members consisted of a number of individuals that were residents of
Georgia, and three limited liability companies—Rockbridge Growth Equity, LLC
of Michigan; Falcon Investment Advisors, LLC of Massachusetts; and
Stephens-Purchasing Power, LLC of Arkansas. (Id.). Mr. Carrano told Litigation
Counsel that the members of the LLC Members were high net worth individuals18
who wanted to remain confidential, that they were primarily residents of Michigan,
Massachusetts, and Arkansas, and that none were residents of Minnesota or
Delaware. (Id. at 4-5). Based on its desire not to disclose the individual members
of the LLC Members, Plaintiff and the Litigation Counsel decided to file Plaintiff’s
claims in Georgia state court. (Id. at 5-6). As a result, a more in-depth inquiry into
Plaintiff’s citizenship was not undertaken. (Id.). There is no evidence Plaintiff’s
17
Plaintiff supports its factual contentions with sworn declarations from Mr.
Letzer, Ms. Fox, Mr. Carrano, and Mr. Delp, among others. The Court will cite to
Plaintiff’s Response instead of these individual declarations.
18
These individual members are not the nine (9) individual members of
Holdings, but rather the individual members of the LLC Members.
18
litigation lawyers ever asked to review information to determine who specifically
were the LCC Members’ members.
On December 30, 2011, Defendant’s lead litigation lawyer, Mr. Kahnke,
called Mr. Letzer to obtain information from Plaintiff about its ownership structure
and citizenship to determine if the case was removable to federal court. (Id. at 6).
Mr. Letzer told Mr. Carrano that Defendant requested information about Plaintiff’s
members and the members’ states of residence. (Id.). There is no indication that
Mr. Letzer told him of the purpose of the request or discussed at all the information
required to determine federal diversity jurisdiction. Mr. Carrano told Mr. Letzer
that Holdings was Plaintiff’s sole member, and that Holdings’ members were the
nine individuals and the three LLC Members. (Id. at 7). Mr. Letzer told
Mr. Carrano that he needed to know the residence of all the individuals and of the
LLC Members and, specifically, whether any of the members were “residents” of
Minnesota or Delaware. (Id.). Mr. Letzer again did not explain the legal
distinction between residency and citizenship to Mr. Carrano because Mr. Letzer
believed the members of the LLC Members of Holdings were ultimately
individuals, and an individual is a citizen of his state of residence. (Id.).
On January 19, 2012, Mr. Letzer followed-up with Mr. Carrano, and also
spoke to Mr. Delp regarding Holdings’ members. (Id. at 8). Mr. Delp told
19
Mr. Letzer that Holdings’ members include three investment limited liability
companies: 1) Rockbridge; 2) “FSP III Kendrick Purchasing Power Holdings,
LLC;” and 3) Stephens. (Id.). Mr. Delp told Mr. Letzer that Rockbridge’s
members were residents of Michigan, “FSP III Kendrick Purchasing Power
Holdings, LLC’s” members were residents of Massachusetts, and Stephens’
members were residents of Arkansas. (Id.). Mr. Delp confirmed that none of the
individual members of the LLC Members were residents of Minnesota or
Delaware. (Id. at 9).
On January 20, 2015, Mr. Letzer received an e-mail from Mr. Carrano that
contained the Member List, which purported to show each member of Holdings
and their state of residence. (Id.). Mr. Letzer did not discuss with Mr. Carrano
how he prepared the Member List, the source of the information or the conclusions
represented on it. Had he discussed the Member List with Mr. Carrano he would
have found the chart was based only on the notice provisions of the UPRA. (Id. at
9-10).
Based on the residence information Mr. Letzer received from Messrs. Delp
and Carrano, and without any further inquiry of them, Mr. Letzer sent his
January 20, 2015, E-mail to Mr. Kahnke, informing him that “none of the members
of the LLC are resident citizens of the states of Minnesota or Delaware.” (Id.
20
at 10). Plaintiff claims Mr. Letzer made this representation to Mr. Kahnke based
on his inquiry with Messrs. Delp and Carrano and his “good faith belief” that
Holdings’ members were not residents of Minnesota or Delaware. (Id. at 10-11).
Ms. Fox was primarily responsible for drafting and filing Plaintiff’s
pleadings in this action, including the: 1) Joint Preliminary Report and Discovery
Plan; 2) Amended Complaint; 3) Proposed Second Amended Complaint; and
4) Proposed Revised Second Amended Complaint, all of which asserted that
diversity jurisdiction existed in this case. (Id. at 11). Ms. Fox was copied on the
e-mail communications between Mr. Letzer, Mr. Carrano, and Mr. Kahnke, and
was also aware that, based on conversations with Mr. Letzer, Mr. Letzer had
spoken with Messrs. Carrano and Delp regarding Plaintiff’s ownership structure
and its citizenship. (Id. at 11-12). Ms. Fox did not conduct any independent
investigation into the identity or citizenship of Plaintiff’s members before she
made her jurisdiction misrepresentation to the Court in her four Court filings. She
reviewed only the e-mails exchanged between Messrs. Letzer, Carrano, and
Kahnke, and her discussions with Mr. Letzer, and she claims she filed the
pleadings she drafted in good faith, believing that the inquiry into Plaintiff’s
citizenship was sufficient, even though there is no evidence she investigated the
nature or scope of the inquiry. (Id. at 12). Plaintiff claims that Ms. Fox believed in
21
good faith that none of Plaintiff’s members or its members’ members were
residents of Minnesota or Delaware. (Id.). She reached this belief knowing,
generally, there is a difference between residency and citizenship and that the
Eleventh Circuit has specific requirements to determine the citizenship of members
of limited liability companies.
Plaintiff’s litigation lawyers assert that they did not receive a copy of the
UPRA until December 6, 2012, nearly one year after the lawsuit was removed to
this Court and months after Plaintiff had filed the Joint Preliminary
Report and Discovery Plan, the Amended Complaint, and the proposed Second
Amended Complaint. (Id. at 14). Burr & Forman’s litigation support team, not
Litigation Counsel, reviewed the UPRA, along with many other documents, for
privilege, responsiveness to Defendant’s discovery requests, and confidentiality
before producing documents, including the UPRA, to Defendant. (Id. at 14-15).
The Burr & Forman litigation support staff was not instructed to review the UPRA
for jurisdictional issues because, Plaintiff asserts, at that time, Burr & Forman’s
litigation lawyers believed “in good faith” that there was no question that the Court
had jurisdiction over this action. (Id. at 15). After this review and after Plaintiff’s
Litigation Counsel finally reviewed the UPRA, Litigation Counsel still did not
22
correct the misrepresentation it made to Defendant’s counsel or the Court in
pleadings they filed.19
Plaintiff asserts that at all times prior to its June 2014, investigation into the
citizenship of Holdings at the direction of the Eleventh Circuit it, and Litigation
Counsel, believed that FSP III was a Massachusetts limited liability company
comprised of individual residents of Massachusetts. (Id. at 16). They claim it was
only after the June 2014, investigation and their discussions with Mr. Schnabel,
that Plaintiff and its counsel
19
Plaintiff reiterated its blame-shifting strategy, arguing that Plaintiff produced
the UPRA to Defendant, and that Defendant’s counsel used the UPRA in
depositions conducted for this action. (Id. at 13). Plaintiff notes that Mr. Kahnke
referred to the UPRA during his examination of Rockbridge’s
30(b)(6) representative, Kevin Prokop, on May 30, 2013, during
which time Mr. Prokop read from the first page of the UPRA and
testified that one of the buyers of Purchasing Power, FSP III Kendrick
Purchasing Power, Inc., was a Delaware corporation.
(Pl.’s Res. at 15). Plaintiff asserts that it is
apparent that neither party connected these discrepancies in the UPRA
to the jurisdictional issue, given that no potential jurisdictional defect
was raised until the Eleventh Circuit sua sponte raised the
jurisdictional issue on appeal.
(Id. at 15-16). The Court notes that Plaintiff’s litigation lawyers apparently also
attended depositions at which the UPRA was used and did not thereafter identify
the mischaracterization of FSP III as a limited liability company.
23
discovered the typographical errors relating to the status of FSP III;
learned that FSP III, a Delaware corporation is a “blocker” entity that
exists in Plaintiff’s ownership structure between Holdings and [the
Fund] for tax purposes; and that because of the blocker’s placement in
Purchasing Power’s ownership structure, it destroys diversity
jurisdiction.
(Id.).
Plaintiff asserts that, had its counsel learned of this jurisdictional defect at
any prior point, it would have immediately informed the Court and Defendant.
(Id.).20
D.
Sanctions Motion21
On January 30, 2015, Defendant filed its Sanctions Motion. Defendant
argues that the Court should dismiss Plaintiff’s case with prejudice as a sanction
or, in the alternative, award Defendant its attorneys’ fees arising from Plaintiff’s
counsel’s misconduct. Defendant asserts that the Court should sanction Plaintiff
under the Court’s inherent authority and under Rules 16(f),22 26(g),23 and 41(b)24 of
20
Plaintiff self-servingly asserts that Burr & Forman “intend[s] to host a
firm-wide internal seminar to educate their lawyers about the facts of this case, to
make every effort to ensure that a similar situation does not occur in the future.”
(Pl.’s Res. at 25).
21
Plaintiff incorporated the fact section of its Response to the Court’s
January 6, 2015, Order to Show Cause into its Response to the Sanctions Motion.
22
Rule 16(f) of the Federal Rules of Civil Procedure states that on “motion or
on its own, the court may issue any just orders . . . if a party or its
attorney . . . (B) is substantially unprepared to participate—or does not participate
in good faith—in the [pretrial] conference; or (C) fails to obey a scheduling or
24
the Federal Rules of Civil Procedure. Defendant also seeks, under 28 U.S.C.
§§ 1919 and 1447(c),25 an award of its attorneys’ fees and costs incurred following
the removal of this case.
other pretrial order.” Fed. R. Civ. P. 16(f)(1)(B-C). Defendant argues that
Plaintiff failed to comply with the Court’s Standing Order, which requires that a
plaintiff promptly advise the Court if it does not allege in its complaint the
citizenship of limited liability companies by stating the citizenship of each of their
members. (Sanctions Motion at 11); see also Standing Order,
http://www.gand.uscourts.gov/sites/default/files/Standing_Order_Re_Civil_Litigati
on.pdf, at 2). This provision was added to the Standing Order in February 2013.
(Sanctions Motion at 11). Defendant argues that this constitutes a failure to obey a
“pretrial order,” warranting sanctions under Rule 16(f) of the Federal Rules of
Civil Procedure. (Id.). Defendant argues also that Plaintiff’s denial, in the Joint
Preliminary Report and Discovery Plan, that there any objections to jurisdiction,
was incorrect and was made without a reasonable inquiry into the facts, and
Plaintiff’s failure to conduct the required inquiry warrants sanctions. (Id. at 14).
23
Rule 26(g) of the Federal Rules of Civil Procedure states that every signed
discovery request, response, or objection is a certification that it is “consistent with
these rules and warranted by existing law.” Fed. R. Civ. P. 26(g)(1)(B)(i). If the
signer violates this rule without substantial justification a court may impose
sanctions. Fed. R. Civ. P. 26(g)(3).
24
Rule 41(b) of the Federal Rules of Civil Procedure states that if “the plaintiff
fails to prosecute or to comply with these rules or a court order, a defendant may
move to dismiss the action or any claim against it.” Fed. R. Civ. P. 41(b).
25
“An order remanding the case may require payment of just costs and any
actual expenses, including attorney fees, incurred as a result of the removal.”
28 U.S.C. § 1447(c). Several courts have awarded a defendant attorneys’ fees
where the removal occurred because of a plaintiff’s actions in causing the improper
removal. See, e.g., Barraclough v. ADP Auto. Claims Servs., Inc., 818 F. Supp.
1310, 1313 (N.D. Cal. 1993). Further, “[w]henever any action or suit is dismissed
in any district court . . . for want of jurisdiction, such court may order the payment
of just costs.” 28 U.S.C. § 1919.
25
Defendant observes it served specific document requests on Plaintiff
requesting the production of documents sufficient to identify the “residence and
citizenship of all members” of Plaintiff and other limited liability companies that
Defendant believed were members of Plaintiff when the Complaint was filed. (Id.
at 3). If any of the members were limited liability companies, Defendant requested
Plaintiff to provide residence and citizenship information for those members’
members. (Id.). Plaintiff objected to his request, claiming it was overly broad,
burdensome, sought information not in Plaintiff’s possession, custody, or control,
and was not reasonably calculated to lead to the discovery of admissible evidence.
(Id. at 3-4). Relying on this objection, Plaintiff did not produce the requested
information. Defendant responded to the objection, noting that the request related
to the Court’s jurisdiction. (Id. at 4).
In her November 19, 2012, letter to Defendant’s counsel, Ms. Fox, one of
Plaintiff’s Litigation Counsel, stated that certain of the jurisdiction-related
information requested was not in Plaintiff’s possession, custody, or control.26
(Exhibit E to Kahnke Declaration [183.7] at 9). She stated also that Mr. Letzer
sent Defendant’s counsel his January 20, 2012, E-mail, identifying the citizenship
and residence information requested by Defendant for it to use in determining
26
This representation is not credible.
26
subject matter jurisdiction in this case. (Id.). This implied that, because Litigation
Counsel had expressly represented information from which Defendant could
determine citizenship, discovery on these issues was unnecessary. Ms. Fox failed
to see how the “residence or citizenship of non-parties has any bearing whatsoever
on jurisdiction in this case.” (Id.).27, 28
Defendant argues that, in addition to its authority under Rules 16(f), 26(g),
and 41(b) of the Federal Rules of Civil Procedure and 28 U.S.C. §§ 1919 and
1447(c), the Court should sanction Plaintiff under the Court’s inherent power.
(Sanctions Motion at 20-21, 23). Defendant argues that it was entitled to rely on
Plaintiff’s counsel’s repeated and unqualified representations regarding
jurisdiction. (Id. at 20). This is especially true where the jurisdiction information
it sought was only available from Plaintiff and Plaintiff assured Defendant’s
27
This representation supports that Plaintiff’s counsel’s understanding of
Eleventh Circuit precedent was either wholly inadequate or that counsel was
seeking to misdirect Defendant from demanding the jurisdictional discovery it
requested and which Plaintiff’s litigation lawyers never sought themselves.
28
Defendant argues that these specious objections to Defendant’s discovery
requests related to jurisdiction warrant sanction under Rule 26(g) of the Federal
Rules of Civil Procedure. (Sanctions Motion at 15-17). Defendant argues further
that Plaintiff’s failure to comply with the Court’s Standing Order and its failure to
conduct a thorough investigation prior to making representations about the LLC
Members’ citizenship in the Joint Preliminary Report and Discovery Plan, warrants
sanction under Rule 41(b) of the Federal Rules of Civil Procedure. Had Plaintiff’s
counsel simply responded to Defendant’s reasonable and appropriate discovery
requests, rather than speciously objecting to them, they may have discovered their
misrepresentation about FSP III.
27
counsel of its citizenship to ward off jurisdictional discovery into limited liability
company members, whose identity Plaintiff and its lawyers were committed to
keeping confidential. (Id.). Defendant argues that it is entitled to its attorneys’
fees and costs because of Plaintiff’s failure to disclose the facts necessary for it to
properly determine jurisdiction. (Id. at 24-25).
II.
DISCUSSION
A.
Legal Standard
Rule 11 of the Federal Rules of Civil Procedure provides that attorneys who
present to the Court a pleading, written motion, or other paper “certif[y] that to the
best of the person’s knowledge, information, and belief, formed after an inquiry
reasonable under the circumstances, . . . [the] legal contentions are warranted by
existing law [and] the factual contentions have evidentiary support.”
Fed. R. Civ. P. 11(b)(2-3). A district court may impose sanctions under Rule 11
“even when subject-matter jurisdiction is eventually found lacking.”
Willy v. Coastal Corp., 503 U.S. 131, 139 n.5 (1992).
Rule 11 provides that the district court, on its own initiative, may require a
party to show cause why its conduct has not violated Rule 11(b). Fed. R. Civ. P.
11(c)(3). Imposing sanctions pursuant to Rule 11 is committed to the district
court’s discretion. See Attwood v. Singletary, 105 F.3d 610, 612 (11th Cir. 1997).
28
Before sanctions are imposed, however, due process requires notice and an
opportunity to respond. Id. at 613; see also Fed. R. Civ. P. 11(c). In a proceeding
initiated by the court, the court applies a higher standard—akin to contempt—than
it applies in a party-initiated proceeding. Kaplan v. DaimlerChrysler, A.G.,
331 F.3d 1251, 1255 (11th Cir. 2003). The Rule 11 inquiry incorporates an
objective standard, which “tests the signer’s conduct by inquiring what was
reasonable to believe at the time the pleading, motion, or other paper was
submitted.” Donaldson v. Clark, 819 F.2d 1551, 1556 (11th Cir. 1987).
Rule 26(g) of the Federal Rules of Civil Procedure requires discovery
responses to be signed by at least one attorney of record, and that signature
“certifies that to the best of the person’s knowledge, information, and belief
formed after a reasonable inquiry” that the response or objection is “consistent
with these rules and warranted by existing law [and] not interposed for any
improper purpose.” Fed. R. Civ. P. 26(g)(1)(B)(i-ii). Rule 26(g)(3) provides:
If a certification violates this rule without substantial justification, the
court, on motion or on its own, must impose an appropriate sanction
on the signer, the party on whose behalf the signer was acting, or both.
The sanction may include an order to pay the reasonable expenses,
including attorney’s fees, caused by the violation.
Fed. R. Civ. P. 26(g)(3).
29
The Court also has the inherent power to police itself and those appearing
before it. See Sciarretta v. Lincoln Nat. Life Ins. Co., 778 F.3d 1205, 1212 (11th
Cir. 2015). “The key to unlocking that inherent power is a finding of bad faith.”
Id.; see also Dial HD, Inc. v. ClearOne Commc’ns, 536 F. App’x 927, 929 (11th
Cir. 2013) (“Before imposing sanctions under a district court’s inherent powers,
the district court must make a finding of bad faith.”). “Once unlocked, the power
carries with it the authority to assess attorney’s fees as a sanction for bad faith
conduct.” Sciarretta, 778 F.3d at 1212.
“Bad faith is an objective standard that is met if the party’s conduct was
objectively reckless . . . .” Dial HD, 536 F. App’x at 929. “[O]bjectively reckless
conduct is enough to warrant sanctions even if the attorney does not act knowingly
and malevolently.” Amlong & Amlong, P.A. v. Denny’s, Inc., 500 F.3d 1230,
1241 (11th Cir. 2007) (authorizing sanctions under 28 U.S.C. § 1927). “Reckless
conduct . . . is a gross deviation from what a reasonable person would do.”
Reckless, Black’s Law Dictionary (10th ed. 2014). “Determining whether conduct
is reckless necessarily involves comparing the conduct objectively against the
conduct of a reasonable attorney.” Amlong, 500 F.3d at 1240. “If particularly
egregious, the pursuit of a claim without reasonable inquiry into the underlying
30
facts can be the basis for a finding of bad faith.” See Barnes v. Dalton,
158 F.3d 1212, 1214 (11th Cir. 1998).
B.
Analysis
1.
Sanctions Against Plaintiff Directly
Defendant argues that the Court should sanction Plaintiff by dismissing
Plaintiff’s claims with prejudice. Defendant argues further that the Court should,
in addition to or in lieu of dismissal with prejudice, award it attorneys’ fees and the
costs in this action, in the amount of $4,361,442.43, plus additional attorneys’ fees
to prepare the Sanctions Motion. (Sanctions Motion at 25).
The Court declines to sanction Plaintiff directly. The record established at
the August 20, 2014, Hearing and the October 22, 2014, Hearing, shows that
Plaintiff’s Litigation Counsel failed completely to provide Mr. Carrano with any
instructions regarding the information counsel needed to determine Plaintiff’s
citizenship and the importance of the information relating to determining whether
the Court had jurisdiction in this matter. (Tr. of August 20, 2014, Hearing at 22,
50-52). In its responses to the Show Cause Order and the Sanctions Motion,
Plaintiff now has provided some additional detail regarding Plaintiff’s counsel’s
investigation into jurisdiction, more than Mr. Carrano provided on
August 20, 2014. Nothing in Plaintiff’s latest submission contradicts
31
Mr. Carrano’s testimony that he did not receive any instructions or guidance
regarding what federal jurisdiction requires or what information needed to be
provided to Plaintiff’s litigation lawyers to determine the citizenship of Plaintiff’s
members.
The issue before the Court is whether Plaintiff’s litigation lawyers failed in
their duties, including to the Court, under the Federal Rules of Civil Procedure, and
under this Court’s Local Rules, to assert proper objections to discovery and to
properly investigate whether jurisdiction existed before they signed and filed the:
1) Joint Preliminary Report and Discovery Plan; 2) Amended Complaint;
3) Proposed Second Amended Complaint; and 4) Proposed Revised Second
Amended Complaint. It is undeniable that they failed to conduct a minimally
competent investigation to develop the citizenship information they knew
Defendant needed to remove and failed completely to evaluate whether jurisdiction
existed when they filed pleadings alleging that the Court had jurisdiction over this
case. The representations made to the Court are legal representations, which
Plaintiff entrusts its lawyer to make—and to make properly. It would, in the
Court’s view, be unwarranted to hold Plaintiff directly responsible for a failing for
which Plaintiff’s litigation lawyers were responsible. The Court concludes that
32
involuntary dismissal of Plaintiff’s claims with prejudice,29 or imposition of
monetary sanctions against Plaintiff, 30 is not appropriate here.
2.
Sanctions Against Plaintiff’s Litigation Counsel
a)
Findings of Fact
Plaintiff’s counsel, on five separate occasions, misrepresented to Defendant,
to the Court, or both, that diversity of citizenship existed in this case because
Plaintiff was not a citizen of Minnesota or Delaware. Mr. Letzer made the first
misrepresentation to Mr. Kahnke in his January 20, 2012, E-mail, when he wrote
that he was “informed by our client that none of the members of the LLC are
resident citizens of either the states of Minnesota or Delaware.” (January 20, 2012,
E-mail at 2). Mr. Letzer knew why Defendant wanted this information, knew
Plaintiff did not want to disclose information about Plaintiff’s members, and made
29
The Parties dispute whether the Court has the authority, in the absence of
subject matter jurisdiction, to dismiss Plaintiff’s claims with prejudice as a
sanction. The Court was instructed in the Eleventh Circuit’s February 2, 2015,
Order, to remand the case to state court because the Parties are not completely
diverse. The Court concludes that is the correct disposition of the claims in this
case.
30
Where an attorney has violated Rule 11(b)(2) of the Federal Rules of Civil
Procedure by presenting a pleading to the Court that asserts legal contentions
formed without a reasonable inquiry, Rule 11 prohibits the imposition of monetary
sanctions against the party represented by that attorney. See Fed. R. Civ. P.
11(c)(5)(A) (“The court must not impose a monetary sanction . . . against a
represented party for violating Rule 11(b)(2).”).
33
the misrepresentation knowing Defendant and the Court would rely upon it.31
Considering the slipshod “investigation” Plaintiff’s counsel made into the
citizenship of Plaintiff’s members and knowing the complexity of its business
organization, the Court necessarily concludes that Plaintiff’s litigation lawyers
failed completely to perform their professional duties to the Parties and the Court
in this matter.
It was this wholly inadequate investigation, the misrepresentations that
resulted from it, and Plaintiff’s lawyers’ decision to continue to rely upon it, that
resulted in Ms. Fox misrepresenting to the Court, in the March 2, 2012, Joint
Preliminary Report and Discovery Plan, in the August 16, 2012, Amended
Complaint, and in two proposed second amended complaints, that the Court had
subject matter jurisdiction. Competent investigation into Plaintiff’s members’
citizenship would have shown that diversity jurisdiction was not present. Ms. Fox,
in Plaintiff’s Proposed Second Amended Complaint, expressly and plainly asserted
that the “Court has original subject matter jurisdiction over the claims in this action
pursuant to 28 U.S.C. § 1332, because there is complete diversity of citizenship
between the parties, and the amount in controversy exceeds the $75,000 statutory
minimum, exclusive of interest and costs.” (Proposed Second Am. Compl. ¶ 4).
31
Plaintiff’s counsel also made certified objections to discovery requesting
information related to Plaintiff’s citizenship.
34
Plaintiff’s Litigation Counsel seeks to excuse its conduct by maintaining that
the only error they made in the assessment of jurisdiction was incorrectly
identifying FSP III as a limited liability company, instead of a Delaware
corporation. As the Court noted in its Show Cause Order, this framing of
Plaintiff’s counsel’s mistake disguises the inadequacy and incompleteness of
counsel’s conduct. On the record here, any reasonable lawyer, especially ones
employed by a large corporate law firm, would have thoughtfully and sufficiently
investigated the citizenship of Plaintiff and its members because that was required
to ascertain whether federal diversity jurisdiction existed. That is especially true
where, as here, the Eleventh Circuit’s requirements for evaluating the citizenship
of limited liability companies is well established. See Rolling Greens MHP,
L.P. v. Comcast SCH Holdings L.L.C., 374 F.3d 1020, 1022 (11th Cir. 2004);
RES-GA Creekside Manor, LLC v. Star Home Builders, Inc., No. 10-cv-207,
2011 WL 6019904, at *3 (N.D. Ga. Dec. 2, 2011). Plaintiff’s litigation lawyers, in
January 2012, and each time they made jurisdictional allegations in this case, failed
to conduct the fundamental investigation required by the Federal Rules of Civil
Procedure. Failure to make that inquiry here, considering the number of LLC
Members, was reckless.
35
Mr. Letzer, Ms. Fox, and Ms. Shirley, before this case was filed, discussed
with Messrs. Carrano and Delp the issue of federal jurisdiction to determine where
Plaintiff could file suit against Defendant. (Pl.’s Res. at 3-4). At that meeting,
they realized Plaintiff’s corporate structure was complex and confusing, and that
individual members of the LLC Members were people of high net worth whom
Plaintiff did not want to identify. The facts show that Messrs. Carrano and Delp
focused on avoiding disclosure of the identity of individuals involved in Plaintiff’s
financing. Because these individuals’ identities would have to be disclosed to
show federal diversity jurisdiction, Plaintiff and its litigation lawyers decided to
file in state court.
The issue of Plaintiff’s membership, however, arose when Defendant asked
for discovery about the members to determine if the case could be removed.
Plaintiff’s litigation lawyers, despite knowing the relationship of the requested
discovery to determining if this case was removable, frivolously objected that the
information requested was not relevant.32 The strategy to avoid the disclosure of
individual members’ identities was to develop a representation sufficient to assure
32
This objection violated litigation counsel’s obligations under Rule 26(g)(1)
of the Federal Rules of Civil Procedure because the objection was to discovery of
information necessary to evaluate jurisdiction and was an objection that was
calculated to avoid discovery of information Plaintiff told its lawyers it did not
want disclosed. The objection alone warrants sanctions for violation of counsel’s
Rule 26(g) certification. See Fed. R. Civ. P. 26(g)(3).
36
Defendant that diversity existed but without disclosing the identity of individual
members. The representation made was that none of the LLC Members were
citizens of either Delaware or Minnesota. By stating this information was sourced
from their client they suggested a responsible investigation into citizenship had
been conducted. We now know that was not done. There is no evidence that
Litigation Counsel investigated Plaintiff’s citizenship. These express
representations, thus, were made with the scantest of inquiries, knowing Defendant
intended to rely on them in its jurisdictional analysis. The result was that
Plaintiff’s litigation lawyers were able to accomplish Plaintiff’s objective of not
having to disclose the identity of the LLC Members’ members.
Plaintiff and Litigation Counsel thereafter engaged in tunnel-vision reliance
on their inadequately determined initial position that no member was a citizen of
Delaware or Minnesota. In doing so, and content to rely on the superficial
investigation they conducted, Plaintiff’s Litigation Counsel repeatedly filed
pleadings assuring opposing counsel and the Court that diversity existed and that
there was no question regarding jurisdiction. This they did in four Court filings.
Their “investigation” in January 2012, consisted of a conversation with Mr. Delp,
and a single exchange of e-mails with Mr. Carrano, who testified at the
August 20, 2014, Hearing, that Mr. Letzer never told him what federal jurisdiction
37
requires, the importance of the issue, or what information was needed to determine
the citizenship of Plaintiff’s members. He was not asked by Litigation Counsel
even to identify the members of the LLC Members, and, even if they had, and as
unbelievable as it may be, he would not have been able to identify the members.
(Tr. of August 20, 2014, Hearing at 22, 43-46, 50-52). Asking that question
alone—as simple a question as it is—likely would have put Litigation Counsel on
notice that they needed to investigate the LLC Members’ citizenship further.
Litigation Counsel’s misrepresentations about Plaintiff’s citizenship were
not simply a misidentification of FSP III as a limited liability company. The
deficiency here was Mr. Letzer’s failure to provide any guidance to Mr. Carrano
about the facts needed to determine the citizenship of limited liability companies,
the importance of the determination, and that it would be relied on to invoke this
Court’s jurisdiction. Mr. Letzer failed to conduct the most basic jurisdictional
investigation or to properly advise Mr. Carrano what he needed, choosing instead
to rely on the Member List Mr. Carrano prepared, not even knowing the basis for
its conclusions or the source of the facts used to prepare it. It was not reasonable,
and professionally inadequate, to do so.
Indeed, the Member List, a half-page document, on its face would cause any
lawyer to question whether it was sufficiently reliable to support the representation
38
Mr. Letzer intended to make to Defendant. It does not list the individual members
of the LLC Members. (See Tr. of August 20, 2014, Hearing at Pl.’s Ex. 3). It
identifies only the nine individual members of Holdings, all residents of Georgia,
and conclusorily lists the “State of Residence” of Rockbridge as Michigan, “FSP
III Kendrick Purchasing Power Holdings, LLC” as Massachusetts, and Stephens as
Arkansas. On its face, it does not provide the information necessary to make the
representations Mr. Letzer provided to Defendant’s counsel. Mr. Letzer knew that
neither he nor Mr. Carrano knew who the individual members of the LLC
Members were, and it is evident he did not ask Mr. Carrano where he got the
information provided. If Mr. Letzer had conducted the shallowest of inquiries, he
would have learned that Mr. Carrano obtained it from the notice provision of the
UPRA, and then would have realized that a further investigation was required.
Plaintiff seeks to sidestep its counsel’s professionally deficient conduct by
asserting repeatedly that it was Defendant, as the removing party, who had the
burden to establish jurisdiction. (Pl.’s Res. in Opp. to Sanctions Mot. [193] at 18).
That is true, but in this case Plaintiff actively sought to avoid providing the factual
information Defendant requested and Plaintiff’s counsel maneuvered Defendant
into accepting factual representations that would avoid Plaintiff having to disclose
the LLC Members’ members’ identities. This was done in a calculated way,
39
knowing that Defendant could not have obtained the jurisdictional information it
needed from any source other than Plaintiff. It is a hollow defense indeed to say
you should not have believed what Litigation Counsel—officers of the court—told
you.
Litigation Counsel’s professional derelictions continued with subsequent
filings in this matter. Ms. Fox, when she filed pleadings, had an independent
professional obligation to investigate the allegations she asserted. See
Pavelic & LeFlore v. Marvel Entm’t Grp., 493 U.S. 120, 125 (1989) (“The signing
attorney cannot leave it to some trusted subordinate, or to one of his partners, to
satisfy himself that the filed paper is factually and legally responsible; by signing
he represents not merely the fact that it is so, but also the fact that he personally
has applied his own judgment.”). The certification requirements of Rule 11(b)
make that clear. See Fed. R. Civ. P. 11(b). Ms. Fox abdicated that responsibility,
compounding the problem here by blindly relying on Mr. Letzer’s inadequate
inquiry. The result was that Ms. Fox, in four filings, wrongfully alleged that
diversity of citizenship existed. It is indisputable that Plaintiff’s litigation lawyers
knew early that a filing in federal court would require disclosure of Plaintiff’s
members. Their response when Defendant considered removal was to stonewall
40
jurisdictional discovery and dissuade Defendant from seeking it, by promising to
provide the information Defendant sought about members’ citizenship.
The issue now is whether Plaintiff’s counsel’s performance warrants
sanctions under the Federal Rules of Civil Procedure, the Court’s inherent powers,
or both.
b)
Analysis
To sanction Plaintiff’s counsel under the Court’s inherent powers, the Court
must determine whether Plaintiff’s counsel’s performance, and their failure to
perform a reasonable inquiry into Plaintiff’s citizenship before they affirmatively
represented to Defendant’s counsel and to the Court that diversity jurisdiction
existed, constituted bad faith.
“Bad faith is an objective standard that is met if the party’s conduct was
objectively reckless . . . .” Dial HD, 536 F. App’x at 929. “Reckless
conduct . . . is a gross deviation from what a reasonable person would do.”
Reckless, Black’s Law Dictionary (10th ed. 2014). “Determining whether conduct
is reckless necessarily involves comparing the conduct objectively against the
conduct of a reasonable attorney.” Amlong, 500 F.3d at 1240. “If particularly
egregious, the pursuit of a claim without reasonable inquiry into the underlying
facts can be the basis for a finding of bad faith.” See Barnes, 158 F.3d at 1214.
41
The issue here, thus, is whether Plaintiff’s litigation counsel’s specious inquiry into
Plaintiff’s jurisdiction and their jurisdictional misrepresentations were reckless.
The record in this case shows that Plaintiff’s counsel failed entirely to give
even basic instructions to Mr. Carrano when he was investigating the residence—
and not citizenship—of Holdings’ members. Mr. Letzer, after receiving the
Member List from Mr. Carrano, failed to inquire from where this information was
obtained in order to ensure that the representation he made to Mr. Kahnke was
accurate.
Mr. Letzer knew—as did the litigation lawyers in his firm with whom he
was working—of the investigation needed to determine federal diversity
jurisdiction. Indeed, Mr. Letzer and his partners considered that issue in making
their initial decision in what court to file this action. They knew equally well, and
their subsequent litigation conduct in seeking to qualify wide swaths of
information as confidential shows, that their client did not want to disclose its
investor sources. The Court now having a clear and more complete record
concludes that Plaintiff’s litigation counsel was reckless and was motivated largely
by the desire to accommodate their client’s expressed outcome of not having to
42
disclose the identity of wealthy individuals who, the record shows, are very
important to Plaintiff.33
Ms. Fox stated in response to Defendant’s jurisdictional discovery request
that she failed to see how the “residence or citizenship of non-parties has any
bearing whatsoever on jurisdiction in this case.” (Exhibit E to Kahnke Declaration
at 9). This continued position is incredible, obstructionist, and falls well below the
standard expected of lawyers in our courts. It violated her Rule 26(g)
certifications. See Fed. R. Civ. P. 26(g)(1)(B)(i-ii) (“By signing, an attorney or
party certifies that to the best of the person’s knowledge, information, and belief
formed after a reasonable inquiry [it is] consistent with these rules and warranted
by existing law [and] not interposed for any improper purpose.”).
When she offered this objection she knew full well that Defendant was
considering removal and her colleagues at her firm knew their client’s strong
objection to having to provide the information requested. Ms. Fox, and Plaintiff’s
counsel in general, knew that the citizenship of non-party members of limited
liability companies have a critical bearing on diversity jurisdiction when a party is
33
Litigation Counsel, in response to the Court’s direction at the
August 20, 2014, Hearing, provided the Court with information about the LLC
Members’ members. These documents were not filed publically, and Plaintiff
made clear that these documents were considered, by Plaintiff, to be highly
confidential. (See Notice of Hand Delivered Letter with Highly Confidential
Exhibits to Judge Duffey [178]).
43
a limited liability company. See Rolling Greens, 374 F.3d at 1022 (noting that a
limited liability company, unlike a corporation, is a citizen of any state of which
one of its members is a citizen, not of the state where the company was formed or
has it principal office); RES-GA, 2011 WL 6019904, at *3 (“[W]hen an entity is
composed of multiple layers of constituent entities, the citizenship determination
requires an exploration of the citizenship of the constituent entities as far down as
necessary to unravel fully the citizenship of the entity before the court.”). Yet,
Ms. Fox, without knowing the citizenship of the non-party members of the LLC
Members, affirmatively represented to Defendant and the Court on multiple
occasions that diversity jurisdiction existed in this case.
Plaintiff’s litigation lawyers’ conduct fell well outside the bounds of
acceptable conduct in litigation and it can be characterized as calculatingly
reckless. See Barnes, 158 F.3d at 1214 (noting that the pursuit of a claim without
reasonable inquiry into the underlying facts can be the basis for a finding of bad
faith.). The result was the considerable expenditure, now all for naught, for
Defendant to successfully defend against Plaintiff’s claims. Defendant now is
required, on remand, to litigate in Georgia state court.
Plaintiff’s litigation counsel here engaged in conduct that is sanctionable
under Rule 26(g)(3) of the Federal Rules of Civil Procedure and the Court’s
44
inherent powers.34 The proper sanction here is an award of attorneys’ fees and
costs.35 Defendant seeks reimbursement of $4,361,442.43 in attorneys’ fees and
costs it incurred after this case was removed to this Court.36 Defendant also seeks
attorneys’ fees and costs incurred in having to brief its Sanctions Motion.
34
Having granted Defendant’s Sanctions Motion, and in view of the
representations of Plaintiff’s counsel that it intends to host a firm-wide internal
seminar to educate their lawyers about this case, the Court declines to sanction
Plaintiff’s counsel further under its authority under Rule 11. The Court notes,
however, that Plaintiff’s counsel’s jurisdictional representations in their four Court
pleadings violated Rule 11(b) of the Federal Rules of Civil Procedure. See
Fed. R. Civ. P. 11(b)(2-3) (“By presenting to the court a pleading, written motion,
or other paper--whether by signing, filing, submitting, or later advocating it--an
attorney or unrepresented party certifies that to the best of the person’s knowledge,
information, and belief, formed after an inquiry reasonable under the
circumstances . . . the claims, defenses, and other legal contentions are warranted
by existing law [and] the factual contentions have evidentiary support . . . .” ).
Rule 11 makes clear the importance of an attorney’s certification that he performed
an “inquiry reasonable under the circumstances” by authorizing sanctions,
including monetary sanctions, where Rule 11(b) is violated. See Fed. R. Civ. P.
11(c).
35
The Court declines to authorize sanctions pursuant to Rule 16(f) of the
Federal Rules of Civil Procedure because the Court’s Standing Order that requires
a plaintiff to promptly advise the Court if it does not allege in its complaint the
citizenship of limited liability companies by stating the citizenship of each of their
members, was not in force at the time Plaintiff’s counsel conducted its shallow
investigation into Plaintiff’s citizenship.
36
As a practical matter, any attorneys’ fees and costs awarded for Plaintiff’s
counsel’s conduct in violation of Rule 26(g) will be subsumed in the attorneys’
fees and costs awarded under the Court’s inherent powers on account of Plaintiff’s
counsel’s inadequate investigation into jurisdiction and their misrepresentations to
Defendant and the Court.
45
While Defendant, on remand, likely will be required to relitigate issues in
this matter, the Court concludes that a portion, maybe even a substantial one, of its
work can be used in the state court case. That is, the fees it has paid and the
resultant product are not valueless. For example, discovery and depositions taken
in this action are not required to be retaken. Motions filed in this case will likely
be refiled in Georgia state court, likely with modest revisions. To award to
Defendant all of its fees and costs thus would not be reasonably tailored to remedy
the harm Defendant suffered as a result of Plaintiff’s counsel’s misrepresentations
about Plaintiff’s citizenship. Defendant must be required to take reasonable
measures to identify the attorneys’ fees and costs it incurred in this action that it
would not have incurred if the case had not been removed. The Court anticipates
this will result in a material reduction of the fees and costs claimed.
III.
CONCLUSION
For the foregoing reasons,
IT IS HEREBY ORDERED that Defendant Bluestem Brands, Inc.’s
Motion for Involuntary Dismissal, Attorneys’ Fees, and Costs [183] is GRANTED
IN PART. Defendant is entitled to an award of the attorneys’ fees and costs that it
would not have otherwise incurred in this action if the case had not been removed
to this Court. Defendant shall file, on or before October 26, 2015, a motion for
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attorneys’ fees and costs. Defendant may include only the attorneys’ fees and
costs that it would not have otherwise incurred if the case had not been removed to
this Court. Defendant also shall disclose the criteria it used in making this
determination in detail sufficient to show it is claiming only attorneys’ fees and
costs it would not otherwise have incurred.
IT IS FURTHER ORDERED that Defendant’s Motions to Provisionally
File Under Seal [186, 196] are DENIED AS MOOT.
SO ORDERED this 25th day of September, 2015.
_______________________________
WILLIAM S. DUFFEY, JR.
UNITED STATES DISTRICT JUDGE
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