Grupo Dataflux v. Atlas Global Group, et al. (05/17/2004)

Questions presented: (1) Did the court of appeals err by creating a new exception to the longstanding rule that diversity jurisdiction must be determined based on a party's citizenship and circumstances as they existed at the time suit was filed? (2) Did the court of appeals err by allowing a unilateral change in a party's citizenship during the course of litigation to create diversity jurisdiction that did not exist at the time suit was filed?

BY JOSH DROBNYK, MEDILL NEWS SERVICE

It was a standard breach of contract lawsuit. In 1997, Atlas Global Group, LP sued Grupo Dataflux in federal court in Texas. Atlas alleged Dataflux owed it $1.4 million in fees for securing investment capital. The jury awarded $750,000 to the plaintiff. Case closed.

Well, not quite. The reason the case was being tried in a federal court, as opposed to a Texas court, was Dataflux was a Mexican corporation, while Atlas partners were from Texas and Delaware. Under principles of diversity jurisdiction, the citizenship of a partnerships partners determines the companys citizenship for federal jurisdiction purposes.

Just before the court entered judgment on the verdict, Dataflux moved to dismiss the case; the suit, it argued, was wrongfully being considered in federal court.

At the time Atlas filed its complaint - three years earlier - two of the companys five partners were Mexican citizens. Atlas was then a Mexican partnership under the rules of federal jurisdiction. Because a cases jurisdiction is based on the citizenship of the parties as it existed when the complaint is filed, Dataflux argued that the case didnt belong in federal court.

Atlas claimed it didnt matter. Prior to trial, the companys two Mexican partners were removed as part of a business transaction. That left only two partners from Texas and one from Delaware. So at the time of trial, the case was rightly in federal court under the rules of diversity jurisdiction, Atlas argued.

The district court disagreed and granted Datafluxs motion to dismiss.

Atlas appealed to the 5th Circuit Court of Appeals, basing its argument in large part on two U.S. Supreme Court cases involving diversity jurisdiction: Caterpillar, Inc. v. Lewis from 1996 and Newman-Green, Inc. v. Alfonzo-Larrain from 1989.

In both cases, the Court held there were exceptions involving the long-standing rule that jurisdiction is based on a corporations citizenship at the time a complaint is filed. The decisions in the two cases focused on the burden on the parties involved in retrying cases that were already fairly decided.

Dataflux argued that neither case cited by Atlas applied in this instance, claiming that neither case addressed the time-of-filing issue. It also claimed this case differed because the district court had not entered judgment when Dataflux moved to dismiss the case for lack of diversity jurisdiction.

On Nov. 22, 2002, a divided 5th Circuit reversed.

While the court recognized the long-standing rule that jurisdiction is based on a corporations citizenship at the time a complaint is filed, it agreed with Atlas claim that the two previous U.S. Supreme Court decisions served as adequate precedent. There was no reason to retry the case, it wrote.

"The parties and the court have committed ample resources to [this cases] adjudication," the court wrote. "They have had the benefit of a full assessment of the evidence by an impartial jury during a six-day trial."

In addition, the court wrote that for all intents and purposes the district court had ruled before Dataflux moved to dismiss the case. While it acknowledged that at the time Dataflux moved to dismiss the case, the trial was technically not yet over, all that remained was for the court to issue its opinion.

Writing for the dissent, Judge Emilio Garza argued that the majority had erroneously applied the Caterpillar and Newman-Green cases as precedents, thereby creating an altogether new exception to the time-of-filing rule.

"This case should be easy," he wrote, later adding: "It is irrelevant that...Atlas may have filed its complaint in good faith, genuinely failing to recognize the jurisdictional defect. Under the rule crafted by the majority, a less scrupulous party could deliberately file suit in federal court when diversity was lacking."

Dataflux sought review from the U.S. Supreme Court, arguing the 5th Circuit had erred.

"Even if some degree of wasted effort occasionally may result from strict adherence to the bright-line rules concerning diversity jurisdiction, that is the price of policing the boundaries of federal jurisdiction in the service of federalism," Dataflux argued in its brief to the court.

Dataflux also brought up an additional diversity jurisdiction case, Saadeh v. Farouki, in which the D.C. Circuit Court of Appeals refused to apply the holding in Caterpillar. There was therefore precedent for not applying the case, Dataflux wrote in its brief.

William Boyce, Datafluxs attorney, added: "It is important because you expend much effort trying to figure out what court you might be in. The question we are fighting about is: When do you measure citizenship?"

Atlas, however, stands by its argument that Caterpillar and Newman-Green set precedents for allowing exceptions to the time-of-filing rules.

"A strong policy of judicial economy weighs in favor of avoiding the waste of judicial resources by dismissing a case after substantial resources have been devoted to its litigation, especially when the complained-of jurisdictional defect was cured before a trial ever commenced," Atlas wrote.

Atlas attorney, Roger Greenberg, said the real irony would be if his client lost the case.

"The deja vu is that it would go right back to the same court," said Greenberg. That's because if Atlas had to file the case again, the time-of-filing rule would now give them appropriate jurisdiction to file the case in federal court.

The Court accepted review of the case on Oct. 14, 2003.