NewGen, LLC v. Safe Cig, LLC

• Decision Date: 07 September 2016
• Docket Number: 14-57015,Nos. 13-56157,No. 13-56225,s. 13-56157,13-56225
• Citation: 840 F.3d 606
• Parties: NewGen, LLC, a Wisconsin limited liability company, Plaintiff–Appellee v. Safe Cig, LLC, a California limited liability company, Defendant–Appellant NewGen, LLC, a Wisconsin limited liability company, Plaintiff–Appellant, v. Safe Cig, LLC, a California limited liability company, Defendant–Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

840 F.3d 606

NewGen, LLC, a Wisconsin limited liability company, Plaintiff–Appellee

v.Safe Cig, LLC, a California limited liability company, Defendant–Appellant

NewGen, LLC, a Wisconsin limited liability company, Plaintiff–Appellant,

v.Safe Cig, LLC, a California limited liability company, Defendant–Appellee.

Nos. 13-56157

14-57015

No. 13-56225

United States Court of Appeals, Ninth Circuit.

Argued and Submitted February 11, 2016 Pasadena, California

Filed September 7, 2016

Amended October 21, 2016

Ricardo P. Cestero (argued) and Daniel G. Stone, Greenberg Glusker Fields Claman & Machtinger LLP, Los Angeles, California, for Appellant/Cross–Appellee.

Harry E. Van Camp (argued) and Deborah C. Meiners, DeWitt Ross & Stevens S.C., Madison, Wisconsin, for Appellee/Cross–Appellant.

Before: M. Margaret McKeown and Sandra S. Ikuta, Circuit Judges, and Robert W. Pratt,^** District Judge.

ORDER

The opinion filed on September 7, 2016, and appearing at 2016 WL 4651406

, is hereby amended. An amended opinion is filed concurrently with this order.

With these amendments, the panel has voted to deny the petition for panel rehearing. Judges McKeown and Ikuta have voted to deny the petition for rehearing en banc. Judge Pratt recommends denial of the petition for rehearing en banc.

The full court has been advised of the petition for rehearing en banc, and no judge has requested a vote on whether to rehear the matter en banc. Fed. R. App. P. 35

.

The petition for panel rehearing and the petition for rehearing en banc are DENIED . No further petitions for en banc or panel rehearing shall be permitted.

OPINION

McKEOWN

, Circuit Judge:

This case is a procedural tangle complicated by the parties and their counsel and serves as a reminder that subject matter jurisdiction must exist at the outset of a suit, although it may be achieved through amended pleadings. Safe Cig, LLC challenges an almost $1.5 million default judgment awarded in NewGen, LLC's favor as void for lack of subject matter jurisdiction.

Although we are sympathetic to a party that finds itself facing a large default judgment, here the district court invoked the appropriate rules and statutes. The case presents no procedural irregularities, only procedural complexities. At the time the district court entered default judgment, neither the parties nor the court noticed that NewGen's original complaint failed to adequately allege complete diversity. Safe Cig only raised the diversity challenge in a related appeal to this court and a concurrently filed Federal Rule of Civil Procedure 60(b)

motion for relief from the judgment. The district court permitted NewGen to file an amended complaint remedying the defective jurisdictional allegations, but refused to reopen the judgment when Safe Cig protested that it lacked sufficient knowledge to confirm or deny the new allegations regarding the citizenship of the parties. Because Safe Cig never factually attacked NewGen's amended jurisdictional allegations, we accept NewGen's amended allegations of diversity of citizenship as true and conclude the district court had subject matter jurisdiction. We therefore affirm the grant of default judgment and the damages award.

BACKGROUND

Safe Cig was in the business of making and selling electronic cigarettes when it contracted with NewGen to help with online marketing. As NewGen alleges, the parties set out the terms of the deal in two contracts—an Affiliate Agreement and a Consulting Agreement—under which NewGen agreed to attract online customers to Safe Cig's sales site. According to NewGen, Safe Cig did not live up to its end of the bargain, failing to pay NewGen its lifetime 20% commission on all sales resulting from NewGen's referrals, to grant NewGen access to its sales records to verify those commissions, to pay NewGen in exchange for not launching a competitor, and to pay NewGen for general marketing and business consultant services. This suit followed.

Three days after NewGen filed its complaint, NewGen properly served Safe Cig's registered agent, despite resistance on the agent's part. The deadline to respond to the complaint came and went without a response; Safe Cig claims that, at the time, it did not think service was effective. On application from NewGen, the district court entered default. The same day, Safe Cig contacted NewGen and offered a deal: it would not contest service in exchange for a 60–day extension to respond to the complaint. NewGen rejected the proposal, and filed for default judgment. Safe Cig objected to default judgment on a number of grounds, but did not challenge the district court's subject matter jurisdiction over the dispute.

The district court entered default judgment, finding that service was effective and holding that it had diversity jurisdiction under 28 U.S.C. § 1332

. The court concluded that NewGen was entitled to a default judgment as to its claims of breach of contract and breach of the covenant of good faith and fair dealing, but rejected NewGen's claims of fraud as insufficiently pleaded. The district court awarded NewGen $1,483,075.84 in damages.

Safe Cig launched a two-pronged attack on the default judgment. It appealed to this court, claiming relief from judgment because the entry of default was an abuse of discretion under Eitel v. McCool , 782 F.2d 1470 (9th Cir. 1986)

. In the appeal, for the first time in the litigation, Safe Cig argued that NewGen failed to plead diversity jurisdiction in its original complaint and failed to prove jurisdiction prior to entry of the default judgment. On the same day, Safe Cig filed in the district court a Rule 60(b) motion for relief from the judgment, asking the court to declare the default judgment void for lack of subject matter jurisdiction.

At that stage, NewGen, Safe Cig, and the district court all agreed that NewGen failed to properly plead diversity jurisdiction in the original complaint—with respect to a limited liability company, the citizenship of all of the members must be pled. See Johnson v. Columbia Props. Anchorage, LP , 437 F.3d 894, 899 (9th Cir. 2006)

. The question was how to proceed next. In response to the Rule 60(b) motion, the district court ordered additional briefing on diversity jurisdiction. NewGen submitted a declaration with respect to the citizenship of the parties and reasserted that the parties were diverse, while Safe Cig protested that the citizenship of the parties was “uncertain.” Armed with the additional briefing, the district court concluded that while NewGen had not adequately pled subject matter jurisdiction in its original complaint, NewGen could amend the complaint to cure the defective allegations. The court found the record supported the allegations: it established that “none of the members of Safe Cig were domiciliaries of Wisconsin when the case was filed,” and thus, “[b]ecause NewGen and Safe Cig were not citizens of the same state when the case was filed, the Court had jurisdiction over this matter.” The district court also held that because Safe Cig had not denied NewGen's factual allegations of diversity, NewGen had no affirmative obligation to prove diversity with affidavits, although it did submit a declaration; and that NewGen “could have met [Safe Cig's] facial challenge simply by amending the jurisdictional allegations in the Complaint.” The district court thus denied the Rule 60(b) motion on condition that NewGen amend its complaint to cure the original, “defective” allegations of jurisdiction pursuant to 28 U.S.C. § 1653.

When NewGen filed its amended complaint alleging that the parties were of diverse citizenship and cited to supporting evidence of the citizenship or residence of each member of NewGen and Safe Cig, Safe Cig filed an answer challenging the allegations based on Safe Cig's purported lack of knowledge and information about the citizenship of its members. The district court struck much of Safe Cig's answer as “immaterial [or] impertinent” pursuant to Rule 12(f), noting that it had “made it clear” in the Rule 60(b)

order that it “was not reopening the final judgment” and that “the merits of Plaintiff's claims are not open to dispute.” Because the district court determined Safe Cig had not actually challenged the veracity of NewGen's factual allegations of citizenship, it likewise determined that the answer did not upset “the Court's previous finding that the judgment in this case was not void for want of subject matter jurisdiction.”

There was another jurisdictional wrinkle, however: in May 2014, when the district court denied the motion for relief from judgment, the case was still pending on appeal in this court. It was not until September 2014, after the district court had conducted hearings and issued its orders,¹ that we remanded to the district court “to consider Safe Cig's Federal Rule of Civil Procedure 60(b)

motion.” Following remand, the district court reissued its May 2014 order denying the Rule 60(b) motion with leave to amend the jurisdictional allegations. The parties then refiled the amended complaint and answer, and Safe Cig filed its notice of appeal in the current appeal.

ANALYSIS

I. Amending the Complaint Under 28 U.S.C. § 1653

When the default judgment was entered, neither the parties nor the court recognized that NewGen's jurisdictional allegations were defective. Only later did Safe Cig challenge the district court's subject matter jurisdiction in the original appeal and in a Rule 60(b)

motion for relief from judgment. Rather than tear up the default judgment, however, the district court denied the motion on the condition that NewGen amend its complaint to cure the defective allegations of diversity jurisdiction—a condition that NewGen met. Safe Cig urges that the proper course of action was to reopen the judgment and permit Safe Cig to respond to the complaint and litigate the case on the merits. We disagree: the district court properly permitted NewGen to amend its complaint under 28 U.S.C. § 1653 without reopening the judgment.²

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