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June 30, 2019 Practice Points

Willful or Wanton? District Court Sets Forth Standard on Sanctionable Attorney Conduct

Counsel should be aware of the narrow grounds on which a court may grant an award for sanctions under its inherent authority.

By Margaret A. Viator

A federal court has inherent authority to impose sanctions on a party. Usually the authority is reserved to punish a party who “has acted in bad faith, vexatiously, wantonly, or for oppressive reasons,” and a court should do so “with restraint.” However, the standard to be applied by courts in determining whether a party’s behavior is sanctionable has always been unclear.

In a recent case, Atkins Nuclear Secured, LLC v. Aptim Federal Services, LLC, 18-cv-1112, 2019 WL 1793137 (E.D. Va. Apr. 24, 2019), the court provides what is ultimately a tough standard for sanctioning attorney conduct. The underlying attorney conduct in Atkins revolved around a failure to properly investigate the standard for diversity of citizenship for purposes of subject-matter jurisdiction. When Atkins planned on filing a lawsuit against Aptim, Atkins’s counsel forwarded Aptim’s in-house counsel a draft of the complaint with a letter requesting that Aptim confirm the citizenships of the company’s members. Aptim’s counsel responded that “Aptim had no plans to object to subject matter jurisdiction in the Eastern District of Virginia.”

Atkins proceeded with filing the action, alleging diversity of citizenship of the parties “upon information and belief.” Aptim then retained outside counsel. Aptim filed a motion to dismiss together with its corporate disclosure statement, which stated that Aptim’s sole member was another LLC, APTIM Government Solutions, LLC. The court denied the motion to dismiss but granted Atkins leave to file an amended complaint. The amended complaint contained the same jurisdictional allegations as the original complaint.

Aptim’s counsel claims that it first discovered the jurisdictional defect in drafting the answer to Atkins’s amended complaint. The discovery: Aptim’s sole member had as its sole member, a Delaware corporation, the same citizenship as Atkins. Following a motion to dismiss based on lack of subject-matter jurisdiction filed by Aptim, Atkins moved for sanctions.

The district court ultimately found that a subjective bad-faith standard applies to sanctions under the court’s inherent power. The court emphasized that its inherent sanctioning authority is narrower than its authority to impose sanctions under Rule 11 or 28 U.S.C. § 1927. Under a subjective bad-faith standard, a party would have to be culpable of serious misconduct. To meet the subjective bad-faith standard, a party must demonstrate that counsel possessed a subjective bad-faith state of mind or otherwise engaged in conduct evincing bad faith.

Applying the standard to the facts of Atkins, the court found that neither Aptim’s in-house or outside counsel possessed any intent to delay or disrupt the litigation in failing to investigate Aptim’s corporate citizenship sooner. Instead, the court seemed to place the onus on Atkins, noting that Atkins made no further inquiry or investigation before filing twice in the court when they alleged “upon information and belief.”

Following Atkins, counsel should be aware of the narrow grounds on which a court may grant an award for sanctions under its inherent authority. Specifically, in the context of alleging subject-matter jurisdiction, a party is under a duty to make further investigation into jurisdictional facts. Opposing counsel who makes representations of their client’s citizenship for diversity purposes may not be held responsible for misconduct, absent willful or wanton behavior.

Margaret A. Viator is a litigation associate in the New Orleans, Louisiana, office of Phelps Dunbar, LLP.

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