A review of sanctions and discovery decisions under the Federal Rules of Civil Procedure by Ed Clinton, Jr.
fedcivilprocedure
Another Sad Adventure in Diversity Jurisdiction Leads To An Award of Attorney Fees
This is an unpublished case Zausa v. Zausa v. Pellin, 18-1896 (7th Circuit 2018). The case is noteworthy because the plaintiff's counsel believed he could cure a diversity jurisdiction problem by filing the same case in another state. When that failed, he tried again before a second district judge. The second district judge awarded sanctions to the defendant for having to deal with the same meritless jurisdictional arguments twice.
Diversity jurisdiction requires that plaintiff and defendant be citizens of different states. Here, they were both citizens of Illinois. There could never be diversity of citizenship because the parties were from the same state. It would not matter if the case was filed in Illinois or Alaska – there was no diversity of citizenship.
Here, the lawyer made things worse by refiling a dismissed lawsuit before another federal judge. The first attempt to file the lawsuit was dismissed because there was no diversity of citizenship. The plaintiff's lawyer then made a second such attempt by refiling the same case in another district. The court set forth the procedural history of the case as follows:
Terri Zausa obtained a multi-million-dollar judgment against Jack in Illinois state court before this became a federal case. Jack has not been able to pay. Jack's former business partner, Michael Pellin, allegedly owes him roughly $1.8 million for Jack's share of their business, which Pellin purchased in 1990. In recent years, Pellin has not met the schedule of payments he owes Jack. Although Jack and Pellin executed a release from the purchase agreement in 2004, Terri says that there was no consideration given for the release, which was solely "for tax purpose[s]." And Pellin purportedly continued to make payments to Jack until 2010. Terri now attempts to collect directly from Pellin to satisfy Jack's debt to her.
Terri's first crack at collecting from Pellin began when attorney Salem represented her in filing an enforcement action in the Northern District of Illinois. Judge St. Eve dismissed Terri's claims against Pellin with prejudice for lack of standing because Terri was not a party to Jack and Pellin's agreements. Since Terri, the original creditor, and Jack, the original debtor, were not completely diverse, Judge St. Eve dismissed the case without prejudice for lack of subject-matter jurisdiction.
[Plaintiff's attorney Maurice J.] Salem then brought another lawsuit against Jack on Terri's behalf, this time in the Northern District of Indiana. The complaint also named Pellin as "Third-Party Respondent." Contrary to Judge St. Eve's conclusion, Salem stated that federal jurisdiction existed "by reason of complete diversity of citizenship" because Terri and Jack Zausa are Illinois residents and Pellin is an Indiana resident.
Pellin moved to dismiss the complaint for lack of subject-matter jurisdiction. He pointed to the previous litigation in front of Judge St. Eve and her explanation that complete diversity did not exist because, although Terri was attempting to discover Indiana-citizen Pellin's assets, her ex-husband (an Illinois citizen) was the judgment debtor.
The jurisdictional theory Salem presented to Judge Moody was:
[I]n Indiana, there is complete diversity jurisdiction because neither Defendant Jack Zausa, nor Plaintiff Terri Zausa are domiciled in Indiana. In other words, Pellin, the only citizen of Indiana is the party of interest that does not share the state of Indiana with any other party. Compared to Illinois where Defendant Jack Zausa, another party of interest, shares the state with Plaintiff. However, the issue is not whether there is complete diversity jurisdiction in Illinois, because we are not in Illinois, the issue is whether there is complete diversity jurisdiction in Indiana.
(Emphasis in original). Unpersuaded, Judge Moody granted Pellin's motion to dismiss, citing Terri's (Salem's) attempt to establish federal jurisdiction "with a skewed logic that is nearly impossible to follow." He also noted that Terri, as plaintiff, could not sue Pellin as a "Third-Party Respondent." Because Judge St. Eve had already explained the substantial defects in Terri's lawsuit, and Salem then maintained the absurd approach to jurisdiction, Judge Moody ordered Salem to show cause why he should not be sanctioned under Federal Rule of Civil Procedure 11(b)(1) or (2). He also cautioned the plaintiff to refrain from asserting any more baseless jurisdictional theories.
In response to the show-cause order, Salem reiterated his incorrect understanding of diversity jurisdiction. He argued "as long as the parties with interest are not in the same state, then complete diversity jurisdiction exists." Judge Moody concluded that there was no credible explanation for Salem's conduct and granted all parties leave to move for attorney's fees. Salem moved for reconsideration and asserted yet again that diversity jurisdiction existed. This time he attempted to explain in greater detail that moving the case to federal court in Indiana had solved the jurisdictional problem.
After the motion for reconsideration was denied, Pellin petitioned for reimbursement of the attorney fees that he had incurred. Salem opposed the motion by maintaining—for the fourth time—that diversity jurisdiction existed. He also asked Judge Moody to defer the issue of sanctions to the Northern District of Illinois, where he had filed a third lawsuit against Pellin that apparently was moving forward.
Judge Moody rejected Salem's arguments, and in bold-face type declared one final time: "[C]omplete diversity means that no plaintiff may be from the same state as any defendant." The judge ordered Salem to pay all of Pellin's attorney's fees. Judge Moody reasoned that sanctions were proper under either Rule 11(b)(1) or (2). He found that Salem filed the complaint with either "an unreasonable lack of legal basis" or "an intent to harass" Pellin and increase his litigation costs. Judge Moody also declined to defer the issue of sanctions to the Northern District of Illinois because that court would have no jurisdiction to rule on sanctionable conduct occurring in this case. Salem filed a motion for reconsideration, insisting Terri was not really suing "defendant" Jack, so it did not matter that the two of them were domiciled in the same state. Judge Moody denied the motion because it presented nothing new, and he renounced any further efforts "on this frivolous matter."
Salem now appeals the district court's order awarding attorney fees against him and the order denying his second motion for reconsideration.
Essentially, the court faulted Salem for not understanding the basics of diversity jurisdiction. The Court of Appeals for the Seventh Circuit affirmed the sanctions award against Salem because he raised the same frivolous arguments time and again before two separate federal judges.
The explanation:
Salem's contentions are better viewed as restatements of his consistently confused theory of diversity jurisdiction, rather than "new" arguments. And, waiver aside, Salem's arguments are frivolous and sanctionable, just as Judge Moody concluded. No matter how Salem phrases it, his core assertion is that federal subject-matter jurisdiction over a given case exists or does not depending on the state in which the federal court sits. He habitually misunderstands the tenets of diversity jurisdiction and confuses jurisdiction with venue.[3] He was so told, by both Judge St. Eve and Judge Moody, yet in this appeal he persisted with this faulty assertion.
This persistence in asserting frivolous arguments warrants sanctions against an attorney. A district court may sanction a lawyer who submits frivolous legal arguments not warranted "by existing law or by a nonfrivolous argument for extending, modifying, or reversing existing law or for establishing new law." FED. R. CIV. P. 11(b)(2); see Berwick Grain Co., Inc. v. Ill. Dep't of Agric., 217 F.3d 502, 504 (7th Cir. 2000). A "frivolous" argument is one that is baseless or made without a reasonable inquiry into the facts and law. Berwick Grain Co., Inc., 217 F.3d at 504. A district judge may also sanction a lawyer or party who presents a pleading to the court "for any improper purpose, such as to harass, cause unnecessary delay, or needlessly increase the cost of litigation." FED. R. CIV. P. 11(b)(1). Consistently asserting a theory—as attorney Salem did here—directly contrary to federal statute (28 U.S.C. § 1332) as interpreted by all federal case law is frivolous.
The Seventh Circuit affirmed the sanctions award. The lesson here is an old one – you have to know the law. In federal court it is especially important to understand the procedural and jurisdictional rules.
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Federal Question Jurisdiction
Inherent Authority of Court
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Pro Hac Vice Admission
Removal Sanctions
Rule 11 Safe Harbor
Rule 11 Sanctions
Rule 12(b)(6)
Rule 26(a) Disclosures
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Deposition Issues (5)
Discovery Sanctions (42)
Diversity Jurisdiction (18)
Electronic Discovery (2)
False Allegations (5)
False Statement (6)
Federal Question Jurisdiction (2)
Forum Selection Clauses (1)
Inherent Authority of Court (1)
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Limits On Discovery (2)
Litigation Privilege (1)
Personal Jurisdiction (1)
Pleading Issues (6)
Pro Hac Vice Admission (1)
Protective Orders (1)
Reconsideration (1)
Removal Sanctions (7)
Rule 11 Safe Harbor (20)
Rule 11 Sanctions (12)
Rule 12(b)(6) (1)
Rule 26(a) Disclosures (6)
Rule 38 (1)
Rule 41 Dismissal (1)
Sanctions For Frivolous Lawsuits (148)
Section 1927 Sanctions (18)
Spoliation of Evidence (1)
Subject Matter Jurisdiction (1)
Undisclosed Expert Opinions (1)