Purchasing Power, LLC v. Bluestem Brands, Inc.

• Decision Date: 20 March 2017
• Docket Number: No. 16-11896,16-11896
• Citation: 851 F.3d 1218
• Parties: PURCHASING POWER, LLC, Plaintiff-Appellant, v. BLUESTEM BRANDS, INC., Defendant-Appellee.
• Court: U.S. Court of Appeals — Eleventh Circuit

851 F.3d 1218

PURCHASING POWER, LLC, Plaintiff-Appellant,

v.BLUESTEM BRANDS, INC., Defendant-Appellee.

No. 16-11896

United States Court of Appeals, Eleventh Circuit.

March 20, 2017

Robert Bernard Harwood, Jr., Rosen Harwood, PA, TUSCALOOSA, AL, Ashby Kent Fox, Burr & Forman, LLP, Oscar N. Persons, Strickland Brockington Lewis, LLP, ATLANTA, GA, Joseph W. Letzer, Elizabeth Bosquet Shirley, Burr & Forman, LLP, BIRMINGHAM, AL, for Plaintiff-Appellant.

Kerry L. Bundy, Randall Eugene Kahnke, Charles F. Webber, Katrina M. Gossett, Jeffrey P. Justman, Amanda Jane Rome, Faegre Baker Daniels, LLP, MINNEAPOLIS, MN, Audra Ann Dial, George L. Murphy, Jr., Hillary Dawn Rightler, Kilpatrick Townsend & Stockton, LLP, ATLANTA, GA, for Defendant-Appellee.

Before WILSON and JILL PRYOR, Circuit Judges, and BUCKLEW,^* District Judge.

WILSON, Circuit Judge:

This case demonstrates the difficulty of applying established diversity jurisdiction principles to 21st-century business organizations. When determining citizenship of the parties for diversity jurisdiction purposes, a limited liability company (LLC) is a citizen of every state that any member is a citizen of. And it is common for an LLC to be a member of another LLC. Consequently, citizenship of LLCs often ends up looking like a factor tree that exponentially expands every time a member turns out to be another LLC, thereby restarting the process of identifying the members of that LLC. The simplest misstep has the potential to derail years of litigation and result in a massive financial sanction, as happened here. It is in everyone's best interest, both the litigants' and the courts', to verify that diversity jurisdiction exists before proceeding with the case. Everyone involved in this case trusted that diversity jurisdiction existed, but no one verified it. The law firms involved trusted their clients. The clients trusted their lawyers. The law firms trusted each other, and the district court trusted them. But there was no verification.

I. FACTS

This case began when Purchasing Power LLC (Purchasing Power), represented by the law firm Burr & Forman (B&F), sued Bluestem Brands Inc. (Bluestem) in Georgia state court in December 2011.¹ Bluestem, a citizen of Minnesota and Delaware, sought to remove the case to federal court based on diversity jurisdiction. Counsel for Bluestem, Randall Kahnke, emailed counsel for Purchasing Power, Joe Letzer, to determine the citizenship of Purchasing Power for diversity purposes.

The citizenship of an LLC is the citizenship of each member. Purchasing Power has one member—Purchasing Power Holdings LLC (Holdings). Holdings' members were individual residents of Georgia and three LLCs—(1) Rockbridge Growth Equity LLC (Rockbridge), (2) Falcon Investment Advisors LLC (Falcon), (3) and Stephens-Purchasing Power LLC (Stephens). To determine the citizenship of Purchasing Power, one would need to know the citizenship of the members of LLCs thrice removed (Purchasing Power ? Holdings ? Rockbridge/Falcon/Stephens). Letzer and other B&F attorneys instructed the officers of Purchasing Power that they needed to know the residences of the LLC members² to respond to Kahnke's request. Letzer was aware that Bluestem was a citizen of Minnesota and Delaware. After receiving several guarantees from Richard Carrano—the CEO, President, and Corporate Secretary of Purchasing Power—that none of the LLC members were from Minnesota or Delaware, Letzer responded to Kahnke in an email: "[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. We trust this gives you the essential information you requested to assess removability on diversity grounds." Kahnke attached this email to Bluestem's removal petition filed on January 25, 2012, as the only evidence that complete diversity existed.

On August 3, 2012, Bluestem served written discovery requests on Purchasing Power, which included two requests for production of documents relating to the identity, residency, and citizenship of Holdings' members (Request 41) and of the LLC members (Request 42). B&F stated that it would comply with Request 41 but asked for a confidentiality agreement first. B&F objected to Request 42 because Purchasing Power did not have the requested information in its care, custody, or control; Purchasing Power either did not know who the LLC members were or could not compel the LLC members to turn over the information. Also, B&F did not believe the information was relevant because jurisdiction had already been established and would be supported by the documents in Request 41. On November 12, 2012, Bluestem's counsel sent a letter to B&F stating that Request 42 was relevant because it related to jurisdiction. On November 19, 2012, B&F responded that (1) it could not obtain some of the information demanded in Request 42 (the identity of the LLC members) and (2) the information was irrelevant because Letzer's email was sufficient for "determining subject matter jurisdiction in this case."

Following the November 19 response, neither Bluestem, nor B&F, nor the district court took additional steps to verify that subject matter jurisdiction existed. On May 19, 2014, the district court granted summary judgment in favor of Bluestem on all claims. On appeal, we noted that the pleadings did not sufficiently allege Purchasing Power's citizenship. This started an inquiry, more than two years after removal, that led to the realization that there was no diversity jurisdiction.

What B&F failed to realize, and no one bothered to investigate, was that Falcon, one of the LLCs, did not own an interest in Holdings directly. Falcon's interest in Holdings was owned by a corporation that Falcon had set up for tax purposes. Hence, instead of the ownership flow chart being Falcon LLC ? Holdings ? Purchasing Power, it was Falcon LLC ? Falcon Inc. ? Holdings ? Purchasing Power. The relevant party for Purchasing Power's diversity citizenship was Falcon Inc., the corporation that owned the interest in Holdings. Falcon Inc. was incorporated in Delaware, of which Bluestem was a citizen, and destroyed diversity jurisdiction.

After this realization, the district court sanctioned B&F under the court's inherent power and Rule 26(g)(3) of the Federal Rules of Civil Procedure.³ The district court found that B&F misrepresented to either the court or Bluestem on five occasions that diversity of citizenship existed—(1) in Letzer's email, (2) in the Joint Preliminary Report and Discovery Plan, (3) in the Amended Complaint, and (4–5) in proposed amended complaints. The district court found that the B&F lawyers "failed completely to perform their professional duties to the Parties and the Court in this matter" and ordered B&F to pay Bluestem $582,385 in fees and costs.

B&F appeals the sanctions order. We reverse the district court's sanction.

II. STANDARD OF REVIEW

We review sanctions orders for an abuse of discretion. See Amlong & Amlong, P.A. v. Denny's, Inc. , 500 F.3d 1230, 1237 (11th Cir. 2007). "An abuse of discretion occurs when the district court applies an incorrect legal standard, applies the law in an unreasonable or incorrect manner ... or ignores or misunderstands the relevant evidence."

Sciarretta v. Lincoln Nat'l Life Ins. , 778 F.3d 1205, 1212 (11th Cir. 2015) (internal quotation marks omitted).

III. INHERENT POWER SANCTIONS

Courts have the inherent power to police those appearing before them. Chambers v. NASCO, Inc. , 501 U.S. 32, 46, 111 S.Ct. 2123, 2133, 115 L.Ed.2d 27 (1991). A court's inherent power is "governed not by rule or statute but by the control necessarily vested in courts to manage their own affairs so as to achieve the orderly and expeditious disposition of cases." Id. at 43, 111 S.Ct. at 2132 (citing Link v. Wabash R.R. , 370 U.S. 626, 630–31, 82 S.Ct. 1386, 1389, 8 L.Ed.2d 734 (1962) ). This power "must be exercised with restraint and discretion" and used "to fashion an appropriate sanction for conduct which abuses the judicial process." Id. at 44–45, 111 S.Ct. at 2132–33. A court may exercise this power "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." Marx v. Gen. Revenue Corp. , 568 U.S. 371, ––––, 133 S.Ct. 1166, 1175, 185 L.Ed.2d 242 (2013) (citing Chambers , 501 U.S. at 45–46, 111 S.Ct. at 2133–34 ). The dual purpose of this power is to vindicate judicial authority without resorting to a contempt of court sanction and to make the prevailing party whole. See Chambers , 501 U.S. at 46, 111 S.Ct. at 2133. The key to unlocking a court's inherent power is a finding of bad faith. See Sciar r etta , 778 F.3d at 1212.

The district court found that B&F acted in bad faith when it failed to investigate adequately Purchasing Power's citizenship before it represented to Bluestem and the court that diversity jurisdiction existed. We hold that this was an abuse of discretion because the district court applied an incorrect standard for inherent power sanctions and ignored or misunderstood relevant evidence. While the specific reasons justifying reversal are examined below, the general reason we reach this conclusion is that B&F's conduct did not amount to conduct that "abuse[d] the judicial process." See Chambers , 501 U.S. at 45, 111 S.Ct. at 2133.

A. Incorrect Standard

In laying out the standard for inherent power sanctions the district court stated that: "The issue here, thus, is whether [B&F's] specious inquiry into [Purchasing Power]'s jurisdiction and their jurisdictional misrepresentations were reckless." Also, the district court relied on cases discussing sanctions under 28 U.S.C. § 1927 and Rule 11 to state that inherent power sanctions are governed by an objective standard. 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...