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Georgene M. Vairo

Given the confusing rules on when there is federal subject-matter jurisdiction, it is not surprising that the parties make mistakes. Thus, just as it is important to know the standards for determining citizenship, it is also important to understand the burdens of the parties who may challenge jurisdiction. A 2d U.S. Circuit Court of Appeals case, Herrick Co. v. SCS Communications Inc., 251 F.3d 315 (2d Cir. 2001), involves a complicated jurisdictional problem and provides the tools for resolving jurisdictional problems. Herrick sued its co-venturers in a planned joint acquisition of a bicycle accessories manufacturer. Herrick also sued the law firm and the partner in the law firm who had served as counsel to the joint venture. After dealing with multiple summary judgment motions, the remaining claims went to trial. During the trial, the plaintiff and all of the defendants, except for SCS/SWID, reached a settlement. The district judge entered orders dismissing the claims against the settling defendants, and retained jurisdiction over any disputes relating to the settlement. The jury returned a verdict in excess of $10.5 million in damages in favor of the plaintiff. SCS/SWID then argued, for the first time, that the presence of the law firm in the action destroyed diversity, and that therefore the judgment could not be entered. The district court rejected SCS’ challenge to jurisdiction, noting the law firm’s settlement and SCS’ delay in raising the jurisdictional problem, as a matter of law. An example of resolving jurisdictional challenges The 2d Circuit’s opinion provides a textbook example of how to resolve complicated jurisdictional challenges. The court begins with the axiom that no matter how complex or expensive a lawsuit may be, “subject matter jurisdiction remains ‘an unwaivable sine qua non for the exercise of federal judicial power.’ ” 251 F.3d 321, quoting Curley v. Brignoli, Curley & Roberts Assocs., 915 F.2d 81, 83 (2d Cir. 1990). Therefore, even after an expensive trial, an appellate court may not avoid addressing the threshold question of whether jurisdiction exists. Moreover, the legal conclusions of the district court of jurisdictional matters must be reviewed de novo. The only possible basis for federal jurisdiction in Herrick was diversity jurisdiction. The problem that SCS raised was that the law firm had partners who were U.S. citizens but who, SCS alleged, were domiciled in foreign countries. As discussed above, the citizenship of a partnership is that of each of its partners. Carden v. Arkoma Assoc., 494 U.S. 185, 192-95 (1990). Also, there is no federal jurisdiction on ground of diversity if one of the parties is a U.S. citizen domiciled abroad. Cresswell v. Sullivan & Cromwell, 922 F.2d 60, 68 (2d Cir. 1990). Having set out the basic principles, the 2d Circuit next turned to the burdens of the parties when jurisdiction is challenged. First, the party seeking jurisdiction bears the burden of demonstrating that jurisdiction exists-the so-called McNutt principle. See McNutt v. General Motors Acceptance Corp., 298 U.S. 178 (1936). But when the party relies on a change of domicile to make its jurisdictional argument (here, the change of a U.S.-based partner’s domestic domicile to a foreign country), the burden of proof on the issue of domicile rests with that party-the so-called Desmare principle. See Desmare v. United States, 93 U.S. 605 (1876). On the combination of facts in Herrick, there was a clash between the McNutt principle and the Desmare principle. Under McNutt, Herrick, as the party that filed suit in federal court, had the burden of demonstrating that there was federal jurisdiction. But, under Desmare, SCS had the burden of showing that one or more of the law firm’s partners had changed their domicile. The courts have differed on how to resolve such tensions. The 5th Circuit has ruled that the Desmare duty is actually one of production alone, and the ultimate burden of proving that jurisdiction exists remains with the proponent of jurisdiction. See Coury v. Prot, 85 F.3d 244, 250 (5th Cir. 1996). The 2d Circuit, on the other hand, found that the 5th Circuit’s approach “misconceives the purpose of [the] hallowed [Desmare] presumption.” Id. at 323-24. Accordingly, it ruled that the burden of proving a change of domicile rests with the party asserting it. However, the 2d Circuit further found that if the party invoking federal jurisdiction has failed to establish the specific initial domiciles that support jurisdiction, the duty to demonstrate a change in domicile does not arise. In Herrick, nobody challenged jurisdiction until after a trial, when the losing party challenged the power of the court to enter the judgment. However, the only proof that Herrick supplied to the district court once the court’s jurisdiction was challenged was the admission of the law firm in its answer that there was jurisdiction. The specific domiciles of the firm’s partners had not been alleged in the complaint. The 2d Circuit found that although the firm’s admission was a strong factor and may be sufficient for a prima facie case, SCS had submitted its own evidence, based on the law firm’s statements, that some of the law firm’s partners were domiciled in foreign countries. The 2d Circuit said that although that evidence would not be enough on the question of whether there had been a change in domicile, it was sufficient to cast doubt that the district court had jurisdiction. Because Herrick had the initial burden, its failure to address the 2d Circuit’s doubts was fatal to a finding of jurisdiction. Normally, such a finding would result in dismissal or a remand to the district court for further findings on the jurisdictional issues. But, in Herrick, there were several arguments that the 2d Circuit explored that would cure the jurisdictional defect. First, it explored whether supplemental jurisdiction under 28 U.S.C. 1367 would support jurisdiction over the claims involving the law firm. The court quickly dispatched that argument, noting that � 1367(b) prohibits the assertion of supplemental jurisdiction over parties that has the effect of eviscerating the complete diversity rule. Id. at 325 & n. 7. Next, the court considered whether the doctrine of ancillary jurisdiction would support the claims against the law firm. In Kokkonen v. Guardian Life Ins. Co., 511 U.S. 375 (1994), the Supreme Court held that a district court lacks jurisdiction to enforce a settlement agreement unless the court had retained jurisdiction. Since the law firm in Herrick had settled and the district court had retained jurisdiction over the settlement in the event of any disputes about it, Herrick argued that the application of supplemental jurisdiction to the settlement (in contrast to the law firm’s role in the original lawsuit) supported the district court’s exercise of supplemental jurisdiction at least from the time the settlement was approved. The 2d Circuit rejected this rather convoluted argument. First, Kokkonen assumes that the original case was properly in federal court in the first place. Thus, the settlement in Herrick was dependent on the district court’s prior proper exercise of subject-matter jurisdiction. Because there was no properly authorized jurisdiction in Herrick prior to the settlement, there could be no jurisdiction over the settlement agreement. Finally, the court considered whether it was possible to cure the jurisdictional defect. In Caterpillar Inc. v. Lewis, 519 U.S. 61, 64 (1996), the Supreme Court held that if a jurisdictional defect is cured prior to the entry of judgment, the district court has jurisdiction to enter the judgment. Here, the argument goes, because the law firm, the only party creating a jurisdictional problem, settled, the jurisdictional defect was cured. Because the district court retained jurisdiction to enforce the settlement, the law firm effectively was still involved in the case. Additionally, the 2d Circuit refused to cure the defect by letting the law firm out of the case because of the prejudice that may ensue to the remaining parties. The court did, however, remand the case to the district court so that it could determine the citizenship of the law firm. Higher courts will delve into threshold jurisdiction One lesson of the Herrick case is that the parties on both sides of the “v.” need to consider jurisdiction carefully to ensure that time and money are not wasted. The courts of appeals, and the Supreme Court, will delve into that threshold jurisdiction question whether the parties, or the district court, like it or not. Another way that a jurisdictional defect can be cured at the district court level is to convince the court to divide the case into two or more cases and then enter a judgment in each case. The 4th Circuit upheld such a remedy in C.L. Ritter Lumber Co. v. Consolidated Coal Co., 283 F.3d 226 (4th Cir. 2002). There, a jury found for the plaintiffs against several defendants. After other post-trial maneuvering, the defendants finally moved to vacate the judgments on the ground that there was no subject-matter jurisdiction because there were citizens of Texas on both sides of the case. Rather than dismiss, the district court divided the case into two cases to ensure that there was complete diversity in each case. The 4th Circuit ruled that it was not an abuse of discretion to cure the defect in that manner, rather than dismiss. A final point: Citizenship is assessed at the time a complaint is first filed. LeBlanc v. Cleveland, 248 F.3d 95, 100 (3d Cir. 2001). Thus, if the plaintiff and defendant are of diverse citizenship at the time of filing, any subsequent change in citizenship is irrelevant. However, what if the jurisdictional allegations are deficient? May the plaintiff amend the complaint to correct the problem? The Supreme Court has answered the question in the affirmative. See Newman-Green Inc. v. Alfonzo-Larrain, 490 U.S. 826 (1989) (allowing amendment of pleadings to correct statements about jurisdiction that actually exists rather than jurisdictional facts themselves). Fed. R. Civ. P. 15 provides that any such amendments relate back to the time of filing. LeBlanc, 248 F.3d at 99-100. Georgene M. Vairo is a professor of law and William M. Rains Fellow at Loyola Law School, Los Angeles. She can be reached at [email protected]

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