Although this case involves a Chapter 11 debtor as a party, the issue is not based upon Bankruptcy law. However, it is an interesting holding for lawyers who practice in federal court.
In Saltire Industrial, Inc., f/k/a Scovill, Inc. v. Waller, Lansden, Dortch & Davis, PLLC (click for opinion), No. 06-5949, 2007 U.S. App. LEXIS 14347 (June 19, 2007), the issue was whether a plaintiff’s lawyers may make a secret agreement with an in-state co-defendant such that the co-defendant is kept in the case only to defeat diversity. In a prior lawsuit, Saltire was sued in state court for causes of action related to toxic torts, and it removed the case to federal court. However, it was remanded to state court because of the presence of an in-state defendant. The case lasted 10 years, and was ultimately settled.
After Saltire filed a Chapter 11 petition, it filed a lawsuit against the law firm that represented the plaintiffs in the prior case, contended that the law firm committed common law fraud by having a secret agreement with the non-diverse co-defendant.
The Sixth Circuit affirmed the District Court’s dismissal —
In the present case, the theory of Saltire’s fraud claim is based on Waller Lansden’s failure
to disclose the secret agreement. Although a third party injured by fraudulent conduct has a right to recover from the party committing fraud, see Arcata Graphics Co. v. Heidelberg Harris, Inc., 874 S.W.2d 15, 23 (Tenn. Ct. App. 1993), a tort must first be committed. There simply is no tort in the present case unless Waller Lansden had a duty to disclose.
Although the Tennessee courts have recognized that a duty to disclose can arise even where a fiduciary relationship did not exist, there has always been a contractual or other type of business relationship between the parties underlying the fraud claim. See, e.g., Simmons v. Evans, 206 S.W.2d 295, 297 (Tenn. 1947) (holding that the seller of a residence had a duty to disclose material facts to the buyer “unless common observation or such inquiry as the exercise of ordinary prudence required would have furnished such information”); Arcata, 874 S.W.2d at 23 (allowing a claim of fraud by the seller of printing presses even though the misrepresentation at issue was not made directly to the seller but to a parent company of the buyer who was not party to the original contract of sale); Macon County Livestock Mkt.,Inc. v. Ky. State Bank, Inc., 724 S.W.2d 343, 350-51 (Tenn. Ct. App. 1986) (holding that a bank had no duty to disclose material facts to a depositor or other customer relating to the shaky financial condition of the depositor’s business partner unless the bank “knows or has reason to know that the customer is placing his trust and confidence in the bank and is relying upon the bank so to counsel and inform him”). In the absence of either a fiduciary, contractual, or other business relationship in the present case, we conclude that Waller Lansden had
no duty under Tennessee law to disclose the alleged secret agreement. Thus no fraudulent
concealment occurred. …
What Waller Lansden’s actions boil down to, in our view, is litigation strategy. Litigation
strategy cannot, without more, support an action for fraud. See Jerome-Duncan, Inc. v. Auto-By-Tel, L.L.C., 176 F.3d 904, 907 (6th Cir. 1999) (holding that the “burden of proving fraudulent joinder” is on the alleging party and that the defendant’s “motive in joining [the nondiverse party] is immaterial to our determination regarding fraudulent joinder”)….
Finally, Saltire was not without a remedy in the present case if it believed that Waller
Lansden had engaged in improper litigation tactics in order to secure a more favorable forum for its clients. As the district court noted, Saltire could have sought sanctions pursuant to Rule 11 of the Federal Rules of Civil Procedure against Waller Lansden after the latter disclosed the 2002 letter in support of the plaintiffs’ second motion to remand. It chose not to do so.