Montrose Chemical Corp. v. American Motorists Insurance
Docket: Nos. 96-55091 to 96-55097
Court: Court of Appeals for the Ninth Circuit; June 30, 1997; Federal Appellate Court
Montrose Chemical Corporation, represented by Latham & Watkins, initiated seven lawsuits against Travelers Indemnity Company, American Motorists Insurance Company (AMICO), and Insurance Company of North America (INA), alleging bad faith for failing to defend against seven environmental damage claims. The district court dismissed these claims due to lack of subject matter jurisdiction. Following this dismissal, Travelers filed a motion for sanctions against Montrose under Federal Rule of Civil Procedure 11(c)(1)(A), which the district court granted, imposing sanctions on Latham & Watkins. Montrose, primarily inactive and dependent on rental income and financial investments managed by its sole officer, Frank C. Bachman, filed its first suit against Travelers on August 12, 1994, then voluntarily dismissed it the same day. A week later, Montrose filed a second suit against the same insurers for a different underlying environmental lawsuit. Subsequently, Montrose filed six additional complaints, five of which were new claims, while one was a refiled version of the initially dismissed case. Each of these actions was assigned to different judges, and their civil cover sheets indicated they were related, except for the refiled action which mentioned the earlier dismissal. The case ultimately led to an appeal against the imposition of sanctions by Latham & Watkins, which was reversed.
Montrose filed seven complaints alleging federal subject matter jurisdiction based solely on diversity of citizenship. In these complaints, Montrose detailed the state of incorporation and principal place of business for each defendant: Travelers (Connecticut), AMICO (Illinois), and INA (Pennsylvania). However, Montrose did not specify its own principal place of business, only stating its incorporation in Delaware. Following the filing of six additional complaints on August 26, 1994, the Clerk of Court transferred these actions to Judge Kenyon, who was assigned to an earlier related case. Montrose subsequently filed notices of related cases asserting that the six actions were connected to the earlier Alderman action. In these notices, Montrose referenced a previously filed and dismissed case, the Brown. Bryant action.
On October 21, 1994, Travelers and AMICO requested that all seven complaints be transferred to Judge Keller, who had overseen the Brown. Bryant action. Judge Keller issued an order for the parties to show cause regarding the transfer and expressed concerns about potential "judge shopping" by Montrose. After a hearing, he decided against imposing Rule 11 sanctions but ordered the consolidation and transfer of the actions to him. Montrose later moved for Judge Keller's recusal due to a conflict of interest and the cases were transferred back to Judge Kenyon.
On October 21, 1994, Travelers, AMICO, and INA moved to dismiss Montrose's actions, arguing lack of complete diversity as both Montrose and Travelers were citizens of Connecticut. Montrose responded, claiming citizenship in both Delaware and Nevada, asserting that its principal place of business was in Nevada. Ultimately, on June 20, 1995, the district court dismissed Montrose’s actions for lack of subject matter jurisdiction.
Montrose's business activities, as determined by the district court, include managing investment accounts, supervising lawyers for pollution liability and insurance lawsuits, and leasing a facility in Nevada. All activities are conducted by Mr. Frank C. Bachman and his small staff from their sole office in Connecticut, leading to the conclusion that Montrose's principal place of business is Connecticut. Consequently, since Travelers also has its principal place of business in Connecticut, the district court ruled that diversity jurisdiction was lacking and dismissed Montrose's actions.
On July 27, 1995, Travelers filed a motion for sanctions against Montrose, alleging that Montrose had filed multiple lawsuits in federal court to judge shop despite an obvious lack of subject matter jurisdiction. Travelers sought a total of $131,693.23 in attorney’s fees and costs. On September 29, 1995, the court granted Travelers’s motion but imposed sanctions on Montrose's counsel, Latham & Watkins, rather than on Montrose itself. The court found Montrose's complaints frivolous due to the improper assertion of subject matter jurisdiction.
The district court concluded there was no viable argument for Nevada being Montrose's principal place of business and stated that parties could be sanctioned for filing complaints known to lack a factual basis for federal jurisdiction. It held that Montrose's counsel should have been aware of the limited nature of Montrose’s contacts with Nevada, undermining their claim for jurisdiction. The court also considered Montrose's pattern of filing complaints without proper notification and its initial failure to plead its principal place of business as factors supporting sanctions. Ultimately, the court sanctioned Latham & Watkins for the attorneys’ fees incurred by Travelers in defending against the complaints, allowing the firm to dispute the fee amount.
Travelers’s counsel presented itemized monthly invoices, leading the district court to impose sanctions of $71,678.58 on Latham & Watkins after Travelers sought $79,239.38 for fees related to Montrose’s complaints, subtracting $7,560.80 for unnecessary services. Latham & Watkins appealed both the imposition of Rule 11 sanctions and their amount, arguing the district court abused its discretion. The appellate court reviews such sanctions for abuse of discretion, noting that while the district court is better positioned to understand the facts and apply legal standards, it must not err in law or evidence assessment.
The district court misapplied the standard for sanctions, mistakenly stating that a party could be sanctioned for filing a complaint known to lack a factual foundation for federal subject matter jurisdiction. The correct standard requires a complaint to completely lack such a foundation to be deemed frivolous. The appellate court found Montrose's assertion of subject matter jurisdiction was not frivolous, as it met only the second prong of the frivolity test, indicating the district court's conclusion was based on a misinterpretation of the law. Consequently, the imposition of sanctions was deemed an abuse of discretion.
For diversity jurisdiction over the seven actions brought by Montrose, complete diversity was required, meaning Montrose's citizenship must differ from that of the three defendants. A corporation is considered a citizen of both its state of incorporation and its principal place of business, thus typically being a citizen of two states for diversity jurisdiction purposes.
Montrose exhibits diversity concerning both AMICO and INA, as well as with Travelers regarding their states of incorporation. Travelers has its principal place of business in Connecticut. The principal issue is whether Montrose's principal place of business is also Connecticut, which could hinder complete diversity. The court employs two tests to ascertain a corporation's principal place of business: the place of operations test and the nerve center test. The place of operations test identifies the state where a corporation performs a "substantial predominance" of its operations, while the nerve center test applies when no state significantly dominates the corporation's activities.
In determining the principal place of business, several factors are considered, including the locations of employees, tangible assets, production activities, income sources, purchases, and sales. Since Nevada likely contains a substantial predominance of Montrose’s business activities, the place of operations test is applicable. Montrose owns a chemical facility in Nevada that generates rental income, which is deemed more visible than administrative functions conducted in Connecticut. Furthermore, this facility is the source of Montrose’s only operating income.
Although rental income is collected in Connecticut, it originates entirely from the Nevada facility, supporting the argument that Nevada serves as Montrose's principal place of business. Thus, Latham. Watkins's assertion of diversity jurisdiction has a factual basis, as evidenced by the principles established in prior cases, such as Industrial Tectonics and Danjaq, S.A. v. Pathe Communications Corp.
In Co-Efficient Energy Sys. v. CSL Indus. Inc., the court determined that an inactive Nevada corporation was a citizen of California due to its prior business activities in the state. The case assessed whether Latham & Watkins conducted a reasonable inquiry before filing multiple complaints for bad faith failure to defend on behalf of Montrose. The court criticized Latham & Watkins for initially failing to plead Montrose’s citizenship, deeming the inquiry insufficient given their long-standing representation of the client. When faced with a motion to dismiss for lack of diversity jurisdiction, Latham & Watkins incorrectly asserted Montrose was a citizen of Nevada without supporting case law, despite evidence indicating its principal place of business was Connecticut. Although Latham & Watkins faced potential Rule 11 sanctions, the court concluded that the failure to plead citizenship did not warrant sanctions, as there was no evidence of improper intent. The court emphasized that parties typically have the opportunity to amend complaints to correct jurisdictional defects, aligning with Federal Rule of Civil Procedure 15(a). Ultimately, the district court's imposition of sanctions was deemed an abuse of discretion, as the factors considered did not substantiate the motion for sanctions.
The court reversed the decision of the lower court. Local Rule 4.2.1 prohibits the improper refiling of actions to obtain a different judge, while Local Rule 4.2.2 mandates that if an action is dismissed and a similar one is refiled, it must be assigned to the same judge. Attorneys are required to disclose such facts to the court. The case involved Latham. Watkins, which faced allegations of judge shopping on behalf of Montrose. However, Judge Keller's ruling that Latham. Watkins should not be sanctioned for this conduct was not appealed, leaving the issue unaddressed in this ruling. The district court had suspected judge shopping but did not impose sanctions on Latham. Watkins, attributing any misfiled notice to inadvertence rather than intentional misconduct. The court's sanctions were based on the determination that Latham. Watkins filed a frivolous suit. The question of Montrose's citizenship for jurisdiction purposes was left unresolved, but the court acknowledged that the argument for Montrose being a Nevada citizen was nonfrivolous. Additionally, Travelers' motion for sanctions against Latham. Watkins for filing a frivolous appeal was denied, as the earlier sanctions were deemed an abuse of discretion, making the appeal not frivolous.
