The Securities and Exchange Commission

[thepennyking]

Diversity of Citizenship — Exceptions to "Time-of-Filing" Rule. Article III, section 2 of the U.S. Constitution extends the judicial power of the federal courts to suits in which there is complete diversity of citizenship among the parties to the action, i.e., suits between citizens of different states, or between a state (or a citizen thereof) and a foreign state (or a citizen thereof). Ordinarily, complete diversity must exist at the time the suit is filed in order to establish federal jurisdiction. The Supreme Court granted certiorari in Atlas Global Group, L.P. v. Grupo Dataflux, No. 02-1689, to decide whether a suit that has proceeded to a jury verdict must be dismissed when there existed no diversity of citizenship at the time suit was filed, but a unilateral business transaction by the plaintiff created diversity before trial began.

Atlas Global Group, L.P. ("Atlas Global") sued Grupo Dataflux ("Dataflux") in federal district court asserting claims for breach of contract and quantum meruit. Jurisdiction was predicated solely, and erroneously, upon the parties’ alleged diversity of citizenship. At the time the complaint was filed, Atlas Global’s partnership consisted of five members, two of which were citizens of Mexico. Because the Supreme Court has held that a partnership is a citizen of each jurisdiction in which its individual partners are citizens, Atlas Global therefore was a citizen of Mexico when it filed its complaint, as was the defendant, Dataflux. Despite the absence of diversity, the case proceeded in the district court for three years. Then, shortly before trial, Atlas Global completed a business transaction that removed its two Mexican partners, thereby creating complete diversity between the parties.

Trial was held on the breach of contract claim, and the jury returned a verdict in favor of Atlas Global. Before the court entered judgment on the verdict, Dataflux moved for the first time to dismiss the case on the ground that diversity jurisdiction did not exist when the complaint was filed. The district court granted the motion and denied Atlas Global’s motion to alter or amend the judgment.

A divided panel of the Fifth Circuit reversed, holding that an action need not be dismissed for lack of diversity when, "before the verdict is rendered, or a ruling is issued, the jurisdictional defect is cured." 312 F.3d 168, 174 (2002). In so holding, the court created a third exception to the "time-of-filing" rule for diversity jurisdiction. Previously, in Newman-Green, Inc. v. Alfonso-Larrain, 490 U.S. 826 (1989), the Supreme Court held that a federal court may, under Federal Rule of Civil Procedure 21, dismiss a dispensable non-diverse party from a case in order to perfect diversity jurisdiction. And in Caterpillar, Inc. v. Lewis, 519 U.S. 61 (1996), the Supreme Court held that it was not necessary to vacate the judgment of a district court that had failed to remand a case that was improperly removed on diversity grounds when complete diversity was established before the trial commenced. The Fifth Circuit held that its exception serves the very same principles on which the Supreme Court had grounded the prior exceptions to the "time-of-filing" rule — namely, promotion of judicial economy and of finality.

The Fifth Circuit’s decision creates a split among the federal courts of appeals. While the Fifth Circuit interprets Newman-Green and Caterpillar broadly to allow for additional exceptions to the time-of-filing rule where considerations of judicial economy and finality are promoted thereby, the District of Columbia Circuit has held that those considerations "are insufficient [outside of the removal context] to warrant a departure * * * from the bright-line rule that citizenship and domicile must be determined as of the time a complaint is filed." See Saadeh v. Farouki, 107 F.3d 52, 57 (D.C. Cir. 1997).

Because the Fifth Circuit’s exception permits a plaintiff unilaterally to rectify defects in diversity jurisdiction, this case is important to all businesses that litigate in federal court.