U.S. District Judge Gerald Austin McHugh, Jr. of the Eastern District of Pennsylvania.

A federal judge in Delaware has refused an attempt by Cliffs Natural Resources Inc. to tack racketeering claims onto its breach of contract suit against a Virginia coal producer in a last-ditch attempt to establish federal jurisdiction over the case.

In an 11-page opinion issued Monday, U.S. District Judge Gerald Austin McHugh Jr. said he “clearly” lacked diversity jurisdiction over the case because the plaintiff and a member of defendant Seneca Coal Resources were both from Ohio. That discovery, McHugh said, stripped the court of jurisdiction and barred Cleveland-Cliffs' bid to save the lawsuit.

Cliffs, now known as Cleveland-Cliffs Inc., had originally sued Seneca in Ohio federal court under federal diversity jurisdiction, accusing Seneca in 2016 of working with two other firms to defraud Cliffs and avoid paying money it owed pursuant to a unit-purchase agreement the companies had signed a year earlier.

Seneca later won its motion to transfer the case to the U.S. District Court for the District of Delaware, and the parties have since been engaged in extensive discovery. Seneca, a limited liability company, moved to dismiss the case in March, saying that ENCECO Inc., which has a 10 percent ownership interest in Seneca, was also incorporated in Ohio.

“The presence of Ohio citizens on both sides of the caption destroys diversity jurisdiction,
and the absence of diversity jurisdiction cannot be waived,” Seneca's Gibbons attorneys said in a brief signed by Christopher Viceconte.

According to McHugh's opinion, Cliffs “effectively conceded the point,” and instead asked for leave to amend its complaint to include conspiracy claims under the federal Racketeer Influenced and Corrupt Organizations Act.

On Monday, McHugh said that courts do, on occasion, allow plaintiffs to amend complaints in order to show that jurisdiction exists, but he noted that Cliffs had never raised a federal question in a prior complaint and now sought to assert a “new and fundamentally different” cause of action.

“Plaintiffs are correct that under certain limited circumstances courts have granted leave to amend to correct jurisdictional defects in a complaint,” wrote McHugh, who was visiting the District of Delaware from the Eastern District of Pennsylvania.

“But my review of the relevant law leads me to conclude that a court does not have authority in a diversity case to grant leave to amend where jurisdiction in fact never existed, and the plaintiff asks the court to allow an entirely new claim arising under a federal statute based upon materially different facts.”

In the ruling, McHugh acknowledged Cliffs' “palpable and understandable” frustration because—in seeking transfer—Seneca had argued that the Delaware court would have jurisdiction. Still, he said, his hands were tied.

“From the perspective of the court, plaintiffs appear to have diligently prosecuted claims involving substantial amounts with the goal of avoiding delay and reaching trial. But that does not alter this court's lack of power to act,” McHugh said. “Because diversity jurisdiction does not exist, this case must be dismissed.”

Attorneys from both sides were not immediately available to comment.

Cliffs was represented by Pilar G. Kraman of Young Conaway Stargatt & Taylor; Kristin S.M. Morrison and Robert S. Faxon of Jones Day; and E. Sean Medina and Robert J. Fogarty of Hahn Loeser.

Seneca was represented by Viceconte, Caroline E. Oks, Debra A. Clifford and Kevin W. Weber of Gibbons and Joshua Berman, Mark Gustafson and Ronald Gorsich of White & Case.

The case was captioned Cliffs Natural Resources v. Seneca Coal Resources.