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Bradgate Associates Inc. v. Fellows

argued: March 16, 1993.



Before: Stapleton, Roth And Lewis, Circuit Judges.

Author: Lewis


LEWIS, Circuit Judge.

This appeal requires us to determine whether a district court may remand a case, originally brought in federal court and later consolidated with a removed state court action, after it has correctly concluded that it lacked jurisdiction over either component of the consolidated cases. We hold that it may only remand the removed state court action, and therefore we will reverse the remand order in part. Because we also find that the district court erred in its consideration of whether the federal plaintiff conducted a reasonable inquiry into its jurisdictional allegations, we will remand the case for further proceedings to determine whether sanctions under Federal Rule of Civil Procedure 11 ("Rule 11") are appropriate.


In June, 1990, Bradgate Associates, Inc. ("Bradgate Delaware") brought a diversity action alleging fraud, negligence and breach of contract against Fellows, Read & Associates, Inc. ("Fellows, Read") in the United States District Court for the District of New Jersey. Sometime later, Bradgate Delaware removed a related state court case between the two parties to the district court. The two cases were consolidated by a consent order for discovery and trial. In August, 1992, however, the district court remanded the entire consolidated case to state court after concluding that it lacked diversity jurisdiction, and denied a motion for sanctions filed by Fellows, Read.

The focus of this appeal is the existence of diversity jurisdiction; thus, a review of the citizenship of the entities involved is necessary.

Bradgate Delaware is a real estate development firm incorporated under the laws of Delaware and having its principal place of business in New Hampshire. According to the affidavit of one of its officers, Bradgate Delaware was formed on September 2, 1986, to act as a successor in interest to a related entity, which we will refer to as Bradgate New Jersey. Bradgate New Jersey is a New Jersey corporation that was formed in 1983. Fellows, Read, a provider of engineering services, is organized under the laws of New Jersey.

On January 9, 1987, either Bradgate Delaware or Bradgate New Jersey contracted with Fellows, Read to provide engineering services in connection with a real estate development project in New Jersey.*fn1 By April, 1990, however, the relationship between the contracting parties had deteriorated. Fellows, Read sued Bradgate Delaware in the Superior Court of New Jersey to recover payment for engineering services rendered during the course of the project. Bradgate Delaware responded by filing a federal lawsuit and removing Fellows, Read's case to federal court.

To establish subject matter jurisdiction in federal court, Bradgate Delaware alleged in its complaint and removal petition that both suits were between diverse litigants. Specifically, Bradgate Delaware alleged that it was the successor in interest to Bradgate New Jersey, the entity which Fellows, Read claimed was the real party in interest to the engineering services contract. It thus did not include Bradgate New Jersey in the federal lawsuit since its presence in the suit would, of course, frustrate diversity.

Following discovery, Fellows, Read challenged Bradgate Delaware's allegations in a motion to dismiss for lack of subject matter jurisdiction. Fellows, Read argued that the district court lacked diversity jurisdiction because Bradgate Delaware had not in fact succeeded to Bradgate New Jersey's interests. Fellows, Read claimed that since Bradgate New Jersey continued as a viable corporate entity it, not Bradgate Delaware, was the real party in interest to the engineering services contract and consequently a proper party to the lawsuit.

In seeking dismissal, Fellows, Read also moved for sanctions pursuant to Rule 11, claiming that the sole reason counsel for Bradgate Delaware named Bradgate Delaware as plaintiff in the federal suit was to manufacture diversity jurisdiction. Had counsel conducted a reasonable pre-filing investigation, Fellows, Read contended, he would have learned that Bradgate New Jersey was both a viable New Jersey corporation and the real party in interest in the federal lawsuit.

To support its claim, Fellows, Read offered a corporate standing certificate showing that Bradgate New Jersey remained a viable New Jersey corporation at the time it filed its motions. Fellows, Read also pointed to a number of documents bearing the name "Bradgate New Jersey." These documents included two contracts for the sale of land and a document reflecting an assignment of Bradgate New Jersey's contractual interests to a third party. Although Bradgate Delaware claimed that it was the entity which had assigned Bradgate New Jersey's interests, the document provides explicitly that Bradgate New Jersey made the assignment.

Bradgate Delaware relied on the affidavit of William S. Barnes, the vice president of both Bradgate Delaware and Bradgate New Jersey, in responding to Fellows, Read's claims. Barnes stated that in September, 1986, four months before Fellows, Read entered into any contract with a Bradgate entity, Bradgate New Jersey was "liquidated, reorganized and merged" into Bradgate Delaware pursuant to a plan of reorganization. Barnes also claimed that "as of September 7, 1986, Bradgate New Jersey ceased to exist and was liquidated." In his affidavit, Barnes explained that the New Jersey Secretary of State may have issued a certificate of good standing because that office misinterpreted a tax return for a related Bradgate entity filed in 1987; that Bradgate Delaware, rather than Bradgate New Jersey, entered into the engineering contract with Fellows, Read; and that Bradgate Delaware paid for the engineering services with checks drawn from an account shared by all of the Bradgate entities.*fn2

The district court found that Bradgate New Jersey was a viable entity within New Jersey because a certificate of merger had not been filed with the Secretary of State as required by N.J.S.A. §§ 14A:10-4(2) and 7(1)(a). The district court's findings left unclear, however, whether Bradgate New Jersey was the real party in interest in the federal lawsuit. For purposes of its jurisdictional inquiry, the district court assumed that Bradgate Delaware was at least one of several proper parties under Rule 17 of the Federal Rules of Civil Procedure and stated that it was quite possible that Bradgate New Jersey should have been joined as a real party in interest under that rule.*fn3 District court opinion at 9. In considering whether to impose sanctions under Rule 11, however, the court stated that it had ...

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