Concept
Time of Filing
Diversity jurisdiction
Time of Filing
Lawsuits last long enough for parties to move, companies to relocate, and partners to come and go, so a court applying the diversity statute must know on which day to look at citizenship. Grupo Dataflux v. Atlas Global Group supplies the answer: diversity must exist when the suit is instituted. It need not have existed when the cause of action arose, and a later change in a party’s citizenship does not defeat jurisdiction that has properly attached.1 The rule comes from case law, because § 1332(a) speaks only of civil actions “between” parties of the listed kinds and does not say on what day the alignment is judged.2
The tests taught earlier in this chapter tell the court where a party is a citizen: domicile for an individual, state of incorporation and nerve center for a corporation, the citizenship of every member for a partnership. The time-of-filing rule tells the court when to ask. A single date has practical value. A judge who has supervised discovery and part of a trial should not lose the power to finish the case because a party later moved, and a party unhappy with the forum should not be able to end the case by changing States.
This unit takes up the rule itself, the recognized way to repair a defect that existed at filing, and the limits on arranging the parties at filing to produce diversity.
The Time-of-Filing Rule
The filing-day snapshot cuts in two directions. A change in citizenship after filing cannot destroy jurisdiction that existed on the filing date, and a change after filing cannot create jurisdiction that was missing on that date.3 Both halves trace to Chief Justice Marshall’s statement in 1829 that, where there is no change of party, a jurisdiction depending on the condition of the party is governed by that condition as it was at the commencement of the suit.4
Each half blocks a different maneuver. The first stops a losing party from announcing, after summary judgment or an adverse verdict, that all bets are off because someone has moved, and even the dissenters in Dataflux endorsed that refusal.5 The second stops a plaintiff who sued a co-citizen from repairing the filing by relocating, because such a plaintiff could not “give jurisdiction by removing himself, and becoming a citizen of a different state.”6
The day of the accident or the signing of the contract therefore drops out. In the standard illustration, P is domiciled in Ohio when he collides with D, also an Ohio citizen, and moves to Michigan before filing. The suit is diverse, because P is a citizen of Michigan, his domicile on the filing date.7 A plaintiff may even move on purpose, since the inquiry asks only where each party is a citizen on the day the action is commenced.8 The move must be genuine, however. The court asks whether the party has established a new permanent home in good faith, with an actual move and no present intention to live elsewhere; if so, it upholds the change even when the sole or a central reason was to obtain, or defeat, access to a federal forum.9
Later events fail in the same way whichever way they cut. If diversity existed when the action was filed, it is not defeated because one of the parties later becomes a citizen of the same State as his opponent, and a change of parties by intervention or substitution does not divest the court of jurisdiction either. If diversity was lacking at filing, a later change of domicile cannot create it, although a new suit may then be possible.10 Exam fact patterns exploit the rule by moving a party between the accident and the complaint, or between the complaint and the verdict. The date to test is the filing date.
Dataflux shows how strictly the Court applies the rule. Atlas Global Group, L.P., a limited partnership created under Texas law, sued Grupo Dataflux, a Mexican corporation. A partnership is a citizen of every State or foreign country of which any partner is a citizen, and Atlas had two Mexican-citizen partners at the time of filing, along with partners from Delaware and Texas. Atlas was therefore a citizen of Mexico, Delaware, and Texas, aliens stood on both sides of the case, and the required diversity was absent.11
No one raised the defect until after the trial. In a transaction unrelated to the lawsuit, completed in September 2000, all the Mexican-citizen partners withdrew from Atlas, so complete diversity existed when trial began the next month. Only after a six-day jury trial ended in a verdict for Atlas did Dataflux move to dismiss and draw the jurisdictional flaw to the court’s attention.12 The timing did not matter, because a party or the court may challenge subject-matter jurisdiction at any time, even for the first time on appeal, and Rule 12(h)(3) codifies that norm.13
The Fifth Circuit nonetheless kept the verdict by recognizing an exception to the time-of-filing rule. Under it, jurisdiction survives when an action is filed without satisfying the jurisdictional requirements, neither the parties nor the judge raise the error until after a verdict or dispositive ruling, and the defect is cured before that verdict or ruling.14
The Supreme Court rejected the exception. The Fifth Circuit had relied on Caterpillar Inc. v. Lewis, which said that once a diversity case has been tried, considerations of finality, efficiency, and economy become overwhelming. The Court read Caterpillar more narrowly. The jurisdictional defect there had been cured by dismissing the party that destroyed diversity, a method long recognized as an exception to the time-of-filing rule, and the finality statement addressed a leftover statutory defect, the failure to satisfy the removal statute’s requirement of complete diversity at removal.15 The next subsection returns to Caterpillar.
Atlas’s cure was different in kind. The Mexican partners’ withdrawal changed the composition of Atlas, and so its citizenship, but Atlas itself, the single artificial entity created under Texas law, remained the party before the court. The cure came from a change in the citizenship of a continuing party, not from a change in the parties to the action, and the Court had never approved a departure from Marshall’s rule. It declined “to do today what the Court has refused to do for the past 175 years.”16 Carden, the Court added, adopted an understanding of the limited partnership as an entity rather than an aggregation.17
A finality exception would also have been hard to confine. The Court called the Fifth Circuit’s limit, which allowed dismissal only if the objection came before the verdict, unsound in principle and certain to be ignored in practice, and it would not create an exception of indeterminate scope.18 The dismissal costs the plaintiff the verdict but not the claim, because a jurisdictional dismissal is not a decision on the merits and res judicata does not attach.19
The dissent would have left the verdict intact. It accepted the refusal to let a losing party unwind a judgment on the ground that jurisdiction was divested after filing, but it argued that salvage operations are ordinarily preferable to the wrecking ball, and it objected to exposing Atlas and the courts to the “exorbitant cost” of relitigation.20 It also distinguished the lone plaintiff who moves to another State after suing a co-citizen: no semblance of Article III diversity existed at the outset, so the move manufactures diversity that was never there.21 The majority answered that each of the five decisions the dissent cited for a post-filing cure involved a change of party, and that the dissent could not identify a single case in which one party’s change of citizenship cured an existing jurisdictional defect.22
Curing Defects by Dropping Parties
Federal Rule of Civil Procedure 21 provides that “[p]arties may be dropped or added by order of the court on motion of any party or of its own initiative at any stage of the action and on such terms as are just.” The Supreme Court has read that power to let district courts drop a dispensable nondiverse party “at any time, even after judgment has been rendered,” and in Newman-Green, Inc. v. Alfonzo-Larrain it held that courts of appeals may do the same.24 A nondiverse party is dispensable when its interests are severable, so that a decree can be entered without prejudice to its rights. Dropping such a party is a long-recognized exception to the time-of-filing rule, so a case that lacked complete diversity at filing can still end in a valid judgment.25
The exception works because of what dropping a party does to the caption. Complete diversity asks whether any plaintiff shares a State with any defendant, so one co-citizen pair defeats jurisdiction over the whole action. Remove one member of that pair, and everyone left was diverse from everyone on the other side all along: the less-than-complete diversity that subsisted throughout the action becomes complete diversity among the parties who go to final judgment.26 The court then decides a case it could have heard from the start, and Rule 21 permits the repair even after the verdict.27
The power reaches only parties the case can do without. If their interests are severable and a decree without prejudice to their rights may be made, the court keeps jurisdiction and dismisses the suit as to them.28 Rule 19 governs indispensability, so a court may preserve complete diversity by dismissing a nondiverse party without prejudice only when that party is not indispensable under Rule 19.29 A party who ought to be joined under Rule 19 is joined, and dismissal of the action is called for only if the party cannot be served or its presence would destroy diversity.30
Newman-Green shows the same cure at the appellate stage. The diversity spoiler there was an individual, and the Seventh Circuit, sitting en banc, concluded that an appellate court lacks authority to drop him. The Supreme Court reversed, holding that federal appellate courts have “the authority to grant motions to dismiss dispensable nondiverse parties.”32 The cure therefore does not depend on the stage of the case.
Caterpillar Inc. v. Lewis applied the same cure after a full trial. The case was removed to federal court when complete diversity was lacking. Almost three years after the district court denied a motion to remand, but before trial, the diversity-destroying defendant settled and was dismissed, and a six-day jury trial produced a judgment for Caterpillar.33 The Sixth Circuit accepted the plaintiff’s argument that dismissal was obligatory because diversity was incomplete at removal. The Supreme Court reversed unanimously: a district court’s error in failing to remand an improperly removed case “is not fatal to the ensuing adjudication if federal jurisdictional requirements are met at the time judgment is entered.”34 The postsettlement dismissal cured the jurisdictional defect just as the dismissal in Newman-Green had, converting the less-than-complete diversity that subsisted throughout the action into complete diversity between the remaining parties to the final judgment.35
Caterpillar also contains the sentence the Fifth Circuit later invoked: once a diversity case has been tried, “considerations of finality, efficiency, and economy become overwhelming.” That statement supplied the reasoning for the decision in Caterpillar, but it did not announce a new way of deciding whether a jurisdictional defect has been cured.36 It addressed the statutory removal defect that remained after the dismissal of the spoiling defendant had already satisfied jurisdiction.37 A student who quotes it as a free-standing reason to keep any tried case has taken it out of that setting.
Dataflux falls on the other side of the line. The Mexican partners withdrew from Atlas after the suit was filed, so the partnership was no longer a co-citizen of its Mexican opponent by trial, and the Court still required dismissal, because no party had left the case.38 The dissent acknowledged that the spoiler was a corporation in Caterpillar, an individual in Newman-Green, and a partnership in Atlas, yet it pressed the analogy among the three.39 The majority located the difference in how the defect disappeared. In Caterpillar and Newman-Green the party whose citizenship spoiled diversity left the action, and the parties who reached judgment had been diverse from one another throughout. In Atlas the party whose citizenship spoiled diversity stayed in the action and later became diverse. Every one of the post-filing cures the dissent cited involved a change of party.40
The line follows from what each event does to the judgment. Dropping a party changes who is bound by it, so the court decides only among parties who always satisfied the statute. A change in a continuing party’s citizenship leaves the same party in the case, and that party’s status defeated jurisdiction on the only day the court must test. If such a change could cure, a plaintiff who filed without jurisdiction could repair the filing by moving to another State and keep the verdict, and the Court would be left with an exception of indeterminate scope.41
The two tellings differ in one fact: the distributor either left the case or stayed in it with a new citizenship. A defendant who leaves changes the lineup the judgment binds, while a defendant who relocates changes only a fact the court had to test on the filing date. When an exam stem reports that the nondiverse party is gone by trial, ask how the party left.
Collusion and Manufactured Diversity
A lawyer who controls who the parties are can try to choose their citizenship in advance. Congress limited that strategy in 28 U.S.C. § 1359, which prohibits jurisdiction over an action to which a party has been improperly or collusively joined, as when one party assigns a promissory note or other valuable instrument to another to manufacture diversity.43 The statute asks why the party is in the case. The court must decide whether the party was brought in to supply jurisdiction or holds a real stake in the dispute.
The bar rests on what diversity jurisdiction measures, which is the citizenship of the parties before the court. If the caption alone settled that question, the owner of a claim against a co-citizen could hand the claim to an out-of-state friend, and a dispute that no federal court could hear would become one that it could, although the facts, the defendant, and the real owner of the claim had not changed. Jurisdiction also divides power between the United States and the States, and every expansion of federal jurisdiction diminishes the power of the States, so a private arrangement should not be able to produce one.44
In Kramer v. Caribbean Mills, Inc., the Supreme Court held that an assignment for collection only, motivated by a desire to make diversity jurisdiction available, falls within the “very core” of § 1359.45 The assignment changed the caption but not the dispute: the assignee served as a collection agent for a claim that was still, in substance, the assignor’s. Ordinary sales of claims are different. Earlier decisions held that an absolute transfer, in which the transferor keeps no interest in the subject matter, is not improperly or collusively made whatever the motive, and Kramer found it unnecessary to reexamine them.46 The question is therefore whether the assignee is the genuine owner of the claim or only a conduit, and an interest retained by the assignor is strong evidence of a conduit.
The edge of the line is a question of fact, so an exam answer should set out the facts on each side of it, including whether the assignor kept an interest in the recovery, instead of announcing that a valid assignment always passes.
A party who really changes citizenship stands on different ground. The court asks whether the party has established a new permanent home in good faith and has no present intention to live elsewhere, and if the move is genuine it counts even when the sole or a central reason for it was to obtain, or defeat, access to a federal forum.47 A plaintiff may change domiciles just before filing in order to create diversity.48 The difference lies in who is before the court. After a genuine move the party really is a citizen of the new State, so the diverse citizenship the statute requires is real and the motive adds nothing. After a sham assignment the owner of the claim is still the defendant’s co-citizen, and only the name on the complaint has changed. A claimant who cannot reach diversity by assigning the claim to an out-of-state cousin can therefore reach it by moving, so long as the move is real.
Congress handled the representative device by rule rather than by inquiry. In 1988 it amended the diversity statute so that the legal representative of a decedent’s estate is deemed a citizen only of the decedent’s State, and the representative of an infant or incompetent a citizen only of that person’s State.49 No incentive remains to appoint an out-of-state representative to create diversity, and the rule works as well against appointments made to defeat it.50 Section 1332(c)(2) and § 1359 are two answers to the same temptation.51
Entities follow the same logic. A corporation cannot get into federal court merely by transferring its claim to a subsidiary incorporated in a State chosen with diversity in mind, although, apparently, a corporation that is dissolved with all its assets transferred to a new corporation chartered in the new State can succeed, and the new corporation is also a citizen of the State of its principal place of business.52
Choosing which parties to name is not always suspect. In an ordinary diversity class action the court looks only to the citizenship of the named representatives, so when some class members would spoil diversity, counsel may name only representatives of the right citizenship. On the same principle, a stockholders’ derivative suit may be brought in federal court if a qualified stockholder who is not a co-citizen of the corporation or the other named defendants can serve as plaintiff.53 Class actions under the Class Action Fairness Act follow different rules, which a later section develops.
Two further rules reinforce the policy at the pleading stage. A party cannot create diversity by aligning the parties in the pleadings contrary to their real interests, because the court realigns them to decide the jurisdictional question. Nor can a plaintiff avoid complete diversity by leaving out a party whose citizenship would destroy it if that party is indispensable under Rule 19; if joinder is not required, however, it is permissible not to join the party, and federal jurisdiction can be obtained.54
Plaintiffs also shape the lineup in the other direction, to stay in state court. No federal statute bars collusive joinder made to defeat jurisdiction, so the controls are judge-made, and courts now refuse to let artificial devices work as well as they once did.55 A partial assignment to a co-citizen of the defendant is disregarded when it is used to block removal, and joining as a defendant a co-citizen against whom the plaintiff has no bona fide claim does not defeat removal. If the plaintiff does have a genuine claim against the co-citizen, the joinder holds even though that defendant may be unable to pay a judgment and was joined solely to prevent removal.56 The test is whether the claim against the spoiler is real, and a defendant may answer these tactics by showing that the plaintiff has no substantial or colorable claim against the spoiler or that the true amount in dispute exceeds the threshold.57 A plaintiff who pleads just under $75,000 is taken at the figure claimed, because the court looks to the amount actually claimed and not the amount that might have been claimed. The choice is a very expensive way of buying a forum when the claim is worth far more, and the plaintiff must make it from the beginning.58
Step 2 usually decides the problem, because an assignor who sells outright keeps nothing, while an assignor who passes most of the recovery back keeps the claim in everything but name.