Today, the Fourth Circuit held that a set of plaintiffs who filed suit in federal court alleging diversity jurisdiction who lost on summary judgment were entitled to vacation of the judgment because they were not "citizens" for diversity purposes.
In S. Carolina Dept. of Disabilities & Special Needs v. Hoover Universal, Inc., Nos. 07-1190, 07-1202 (4th Cir. July 30, 2008) (PDF) the South Carolina Department of Mental Health, the South Carolina Department of Disabilities and Special Needs, and the South Carolina State Budget and Control Board-Insurance Reserve Fund commenced product liability actions against Hoover Universal, Inc., invoking diversity jurisdiction and alleging damages resulting from Hoover’s sale to the plaintiffs of defective trusses and sheathing, which were incorporated into public buildings constructed in the 1970s.
Relying mainly on South Carolina’s statute of repose and statutes of limitations, the district court entered summary judgments in favor of Hoover. While appeals were pending, the plaintiffs filed a motion to vacate the judgments in the district court under Federal Rule of Civil Procedure 60(b), asserting that under 28 U.S.C. § 1332(a)(1), they were not "citizens" for diversity purposes and therefore the district court never had subject matter jurisdiction. After granting a limited remand for consideration of the jurisdiction issue, the district court granted the plaintiffs’ motion.
The Fourth Circuit affirmed, "albeit reluctantly in view of the plaintiffs’ original invocation of diversity jurisdiction and their late recognition of the lack of subject matter jurisdiction."
The following passage from the opinion best summarizes the Court's holding and reasoning:
An undoubtedly inequitable hardship results from allowing the plaintiffs to prosecute actions in federal court and, after they lose on motions for summary judgment, granting their motions to vacate the judgments because of a lack of subject matter jurisdiction. As Hoover laments, "Plaintiffs have presented the federal courts with a procedural morass of their own making, and should not be rewarded at this late stage of the proceedings with a ‘do over’ in state court." In most situations, this argument would be persuasive. But subject matter jurisdiction goes to the very power of the court to act, and regardless of the waste resulting from having completed proceedings later vacated by a late-discovered jurisdictional defect, an order or judgment entered by a court without subject matter jurisdiction is a nullity.
Of course, you could also say shame on the defendant for not raising the issue in a 12(b)(1) motion at the outset. But you can imagine they might have preferred to litigate this claim in federal court. Who knows, they might have been holding on to the jurisdictional defect as their ace in the hole if things went south for them. At any rate, this is certainly an odd outcome to a case.