Summary
denying a motion for sanctions because the parties' "numerous submissions in connection with their cross-motions for sanctions have served primarily to repeat and elaborate on the arguments made in the principal exchange of motions"
Summary of this case from Seemann v. Coastal Envtl. Grp., Inc.Opinion
01 Civ. 8066 (CSH)
June 28, 2002
MEMORANDUM OPINION AND ORDER
Plaintiff Jawbone, LLC filed this suit on August 28, 2001, against defendants James P. Donohue, Jr., an attorney, and his law firm, Gilbride, Tusa, Last Spellane, LLC ("Gilbride Tusa"). Presently pending before the Court are a series of motions and cross-motions. Defendants move to dismiss the Complaint for lack of subject matter jurisdiction under Rule 12(b)(1) of the Federal Rules of Civil Procedure and failure to state a claim under Rule 12(b)(6). Separately, defendants move for sanctions under Rule 11. Plaintiff cross-moves to drop Gilbride Tusa as co-defendant under Rule 21 and to disqualify Donohue from serving as attorney for defendants. Plaintiff also cross-moves for sanctions under Rule 11.
BACKGROUND
Plaintiffs claims arise out of the settlement of litigation involving the corporation Real Estate Asset Recovery Services, Inc. ("REARS"). The original owners of REARS were Albert Holland, Jr. and Mark Holod, each holding fifty percent of the stock. Holland and Holod were both employees of the company Active Media Services, Inc. ("AMS"), and they created REARS in order to enter into a business partnership with AMS. In 1991, REARS and AMS jointly formed Active Asset Recovery, LP ("AAR").
AMS acted through its subsidiary Active Asset Recovery, Inc. in forming AAR. For simplicity's sake, I also refer to the subsidiary as "AMS" in the following discussion.
In 1996, Holod was terminated as an employee by AMS. Subsequently, AMS filed suit in the Court of Chancery of the State of Delaware, seeking an accounting of AAR, and Holod filed suit in the Supreme Court of the State of New York, on his own behalf and derivatively on behalf of REARS, also seeking an accounting of AAR and other relief. (Both suits are referred to as the "AMS litigation.") Holod retained Gilbride Tusa to represent him and REARS in connection with the AMS litigation. Donohue was the attorney at Gilbride Tusa who principally handled the matter. The AMS litigation concluded, in October 1999, in a settlement agreement pursuant to which AMS paid over four million dollars to Gilbride Tusa in trust for distribution to REARS after payment of litigation expenses.
Holland had continued to be employed by AMS during the litigation. He signed the settlement agreement and simultaneously terminated his employment with AMS. At some point, Holland transferred his fifty percent ownership interest in REARS to his children, Watson Holland, Jonathan Holland, Alexandra Holland, and William Holland (the "Holland children"), who in turn formed Jawbone, LLC and transferred their shares to it. The timing and legitimacy of these transfers is disputed. Theresa B. D'Alton, an attorney, signed the settlement agreement in October 1999 on behalf of the Holland children and Jawbone.
In the present suit, Jawbone seeks to obtain an accounting of the money received and distributed by Gilbride Tusa in connection with the settlement agreement and recovery of that portion of the settlement proceeds to which Jawbone is entitled, allegedly over two million dollars. Jawbone alleges that defendants breached their fiduciary obligations by making wrongful distributions from the settlement proceeds to Holod, to themselves, and to accountants and by wrongfully withholding funds due to plaintiff.
While the Complaint indicates that Jawbone brings suit in its own right, counsel for plaintiff asserts, in an affidavit in support of plaintiffs cross-motion for sanctions; that Jawbone brings suit assignee of the rights of REARS and Holland. Aff. of Leonard-Shapiro dated Oct. 16, 2001, at 3.
DISCUSSION
I. Defendant's Motion to Dismiss for Lack of Subject Matter Jurisdiction and Plaintiffs Cross-Motion to Drop Gilbride Tusa as a Co-DefendantJawbone alleges in the Complaint that diversity jurisdiction exists under 28 U.S.C. § 1332 on the following basis: "Plaintiff is a limited liability company created and existing under the laws of the State of Connecticut and having its principal place of business in the State of Connecticut. Defendants are citizens of the State of New York having their residence thereat, the same being a State other than the State of Connecticut." Compl. ¶ 1. The Complaint further alleges that Donohue and Gilbride Tusa practice law in New York. Id. ¶ 3-4. Defendants move to dismiss the Complaint, contending that diversity jurisdiction is in fact lacking.
The statutory source of the federal courts' diversity jurisdiction, 28 U.S.C. § 1332, provides in pertinent part: "The district courts shall have original jurisdiction of all civil actions where the matter in controversy exceeds the sum or value of $75,000, exclusive of interests and costs, and is between . . . citizens of different States." § 1332(a). "When a plaintiff sues more than one defendant in a diversity action, the plaintiff must meet the requirements of the diversity statute for each defendant or face dismissal." Newman-Green, Inc. v. Alfonzo-Larrain, 490 U.S. 826, 829 (1989), citing Strawbridge v. Curtiss, 3 Cranch 267, 2 L.Ed. 435 (1806).
For purposes of diversity jurisdiction, a person is a citizen of the state in which he or she is domiciled. Palazzo v. Corio, 232 F.3d 38, 42 (2d Cir. 2000). A limited liability company has the citizenship of each of its members. Handelsman v. Bedford Village Assoc. L. P., 213 F.3d 48, 51-52 (2d Cir. 2000); 15 James Wm. Moore et al., Moore's Federal Practice § 102.57 (8] (3d ed. 2001). There is no dispute that Donohue is domiciled in New York and therefore is a citizen of that state, as the Complaint alleges. The Complaint's jurisdictional allegations as to Jawbone and Gilbride Tusa are obviously flawed, however, because both of those entities are limited liability companies. The Complaint does not identify the members of those entities or state where those members are domiciled.
Plaintiff makes much of the fact that Donohue has not advised the Court that he is a New York resident. . . It is plaintiffs burden to allege facts giving rise to jurisdiction. Since defendants do not contest plaintiffs allegation that Donohue is a New York resident, I take that fact to be true.
In support of their motion to dismiss, defendants undertake to demonstrate the citizenship of Jawbone and Gilbride Tusa for diversity purposes. According to defendants, the members of Jawbone are the four Holland children, two of whom reside in Connecticut, one of whom resides in Massachusetts, and one of whom resides in Washington. Exs. C, D to Aff. of James P. Donohue, Jr. dated Sept. 18, 2001. There are six members of Gilbride Tusa, four of whom reside in Connecticut and two of whom reside in New York. Donohue Aff. ¶ 6. Therefore, defendants contend, Jawbone and Gilbride Tusa are both citizens of Connecticut, among other states, and complete diversity is lacking.
Plaintiff responds to defendants' contention that diversity jurisdiction is lacking as follows:
Attorney DONOHUE, who upon information and belief, resides in Bronxville, New York, merely argues that certain of the partners in his firm reside in Connecticut. He also states that the limited liability company-defendant was formed in Connecticut. Apparently, the individual Defendant DONOHUE has tactically omitted any disclosure to the effect that he is a New York citizen but merely states that the additional defendant law firm ". . . consists of six equity members, four of whom reside in Fairfield County Connecticut and two of whom reside in New York.["]
Pl. brief dated Sept. 28, 2001, at 1 (in opposition to motion to dismiss and in support of cross-motion under Rule 21). While it seems that plaintiff misunderstands the relevant analysis for determining the existence of diversity jurisdiction, plaintiff does not dispute defendants' characterization of the jurisdictional facts or the conclusion that this suit as filed does not give rise to diversity jurisdiction. Rather, plaintiff cross-moves for an order pursuant to Rule 21 dismissing any nondiverse party in order to preserve jurisdiction.
Rule 21 provides that "[p]arties may be dropped or added by order of the court on motion of any party or of its own initiative at any stage of the action and on such terms as are just." "[I]t is well settled that Rule 21 invests district courts with authority to allow a dispensable nondiverse party to be dropped at any time. . . ." Newman-Green, 490 U.S. at 832 (emphasis added). Courts considering whether to drop a party to preserve diversity follow the guidelines of Rule 19, entitled "Joinder of Persons Needed for Just Adjudication." See, e.g., Handelsman, 213 F.3d at 42, 44. Under Rule 19(b), a person is indispensable to a court action if the court determines, "in equity and good conscience," that the action should not proceed in his absence; the court's determination is based on consideration of the following factors:
Parties to litigation are commonly classified as "proper," "necessary," or "indispensable"; Rules 19 and 20 of the Federal Rules of Civil Procedure, dealing respectively with compulsory joinder and permissive joinder;. give content to these common classifications but use somewhat different terminology. 15 Moore's Federal Practice § 19.02[2] [a].
first, to what extent a judgment rendered in the person's absence might be prejudicial to the person or those already parties; second, the extent to which, by protective provisions in the judgment, by the shaping of relief, or other measures, the prejudice can be lessened or avoided; third, whether a judgment rendered in the person's absence will be adequate; fourth, whether the plaintiff will have an adequate remedy if the action is dismissed for nonjoinder.
Plaintiff contends that Gilbride Tusa is dispensable because "[t]he firm had been added merely because the funds were deposited in DONOHUE's firm's Trust account which is under the firm's name." Pl. brief dated Sept. 28, 2001, at 6 (in opposition to motion to dismiss and in support of cross-motion under Rule 21). Furthermore, plaintiff argues:
There is no testimony which cannot be given by Defendant DONOHUE needed for the determination of all the issues involved in this action. On the other hand, it would seem that there is no required testimony on the part of Defendant law firm; the deposit of funds in the firm account in New York is a matter of objective record and, if necessary, can be confirmed by Defendant DONOHUE.
Pl. brief dated Oct. 12, 2001, at 3 (reply in support of cross-motion for sanctions).
The fact that Gilbride Tusa controls the trust account which is at the heart of this case is critical, because the determination of whether a person is indispensable focuses on the relief sought by the plaintiff. On the other hand, the fact that members of Gilbride Tusa other than Donohue will not be needed as witnesses is irrelevant to the determination of whether Gilbride Tusa is an indispensable party. Nonparties may be called upon to produce evidence and to give testimony at trial. See Fed.R.Civ.P. 45 (governing issuance of subpoenas).
In terms of relief, plaintiff first seeks an accounting of the AMS litigation settlement proceeds and the distribution of those proceeds. Compl. ¶ 16. Second, plaintiff asks the Court to determine that certain distributions made by defendants were wrongful and to order defendants to pay to plaintiff the portion of the proceeds to which plaintiff is entitled, namely 50%. Compl. ¶¶ 18, 20. Plaintiff alleges in the Complaint that Gilbride Tusa received in trust the proceeds of the AMS litigation settlement for distribution, and plaintiff reiterates in its brief that the proceeds are held in a trust account in Gilbride Tusa's name. Compl. ¶ 14; pl. brief dated Sept. 28, 2001, at 6.
It is apparent that the Court can only grant the relief sought by plaintiff if Gilbride Tusa is a party defendant. The trust account is controlled by Gilbride Tusa. Any actions taken by Donohue with respect to the trust account, whether in the past or in response to any future court order, would be as a representative of Gilbride Tusa.
The Second Circuit considered comparable circumstances, and came to the same conclusion, in the recent case of Handelsman v. Bedford Village Assoc. L.P., 213 F.3d 48 (2d Cir. 2000). That case involved a settlement agreement converting multiple real estate partnerships into limited liability companies. The plaintiffs were Burton Handelsman, who was the general partner of Bedford Village Associates Limited Partnership ("Bedford LP"), and Village Green Associates Limited Liability Company ("Village Green LP"), an entity controlled by Handelsman. The defendants were Mark Kronman, who was the representative of the limited partners in Bedford LP, Bedford LP itself, and Bedford Village Associates Limited Liability Company ("Bedford LLC"). After the district court held a bench trial and entered judgment for the defendants, the plaintiffs moved to vacate the judgment for lack of subject matter jurisdiction. Finding a lack of complete diversity among the parties, the district court dismissed all non-diverse parties, leaving only Handelsman and Kronman.
The Second Circuit agreed that complete diversity was lacking among the original parties. Id. at 51-52. Plaintiff Handelsman was a citizen of Florida. Id. at 51. The court explained that a limited partnership has the citizenship of each of its members and that a partnership has the citizenship of each of its general and limited partners, and, applying that standard, the court concluded that Village Green LP, Bedford LP, and Bedford LLC were all citizens of Florida. Id. at 51-52. The court further explained that Kronman, who was a New York resident, would be treated as a New York citizen in his individual capacity but would be deemed to have the citizenship of each of the limited partners in his representative capacity and thus would be treated as a citizen of Florida. Id. at 52, citing E.R. Squibb Sons, Inc. v. Accident Casualty Ins. Co., 160 F.3d 925, 931 (2d Cir. 1998) ("[F]ederal courts must look to the individuals being represented rather than their collective representative to determine whether diversity of citizenship exists.") (internal quotation marks and citation omitted). Therefore, diversity jurisdiction could exist only if the court dropped all defendants except Kronman in his individual capacity, which is what the district court decided to do, finding that doing so would not violate Rule 19(b). 213 F.3d at 52.
The Second Circuit reversed, concluding that "any attempt to restructure the lawsuit to salvage both diversity jurisdiction and the judgment would be futile." Id. at 53. The court found that the rights asserted by Kronman under the settlement agreement belonged "to the limited partners of Bedford Partnership as a group and not to Kronman individually." Id. Furthermore, the court found that "[u]nder New York law, a partnership cause of action belongs only to the partnership itself or the partners jointly, and an individual member of the partnership may only sue and recover on a partnership obligation on the partnership's behalf." Id. at 43 (internal quotation marks and citations to New York cases omitted). Finally, the court found that "the limited partners' interests may not necessarily coincide with Kronman's individual interests." Id. at 54. For those reasons, the court concluded that the limited partners, or Kronman in his representational capacity, were indispensable parties under Rule 19(b). Id.
Similarly, in the present case, dismissing Gilbride Tusa as a defendant would deprive the Court of the ability to grant the relief requested by plaintiff. Because the trust account holding the AMS litigation settlement proceeds was established in the name of Gilbride Tusa, any control that Donohue may exercise over those funds is only as a representative of Gilbride Tusa. Since it is clear that plaintiff would have no adequate remedy in a federal court suit against Donohue in his personal capacity but would have an adequate remedy in a state court suit with Gilbride Tusa as a defendant, Gilbride Tusa is an indispensable party under Rule 19(b). Therefore, plaintiffs motion to drop Gilbride Tusa as a defendant under Rule 21 is denied, and defendants' motion to dismiss the complaint for lack of subject matter jurisdiction is granted.
Defendants also argue that two persons who are not currently named as parties, and who are Connecticut residents, are indispensable defendants to plaintiffs suit. They are Albert Holland and Theresa B. D'Alton. Considering that both Holland and D'Alton have submitted affidavits in support of Jawbone on these cross-motions, and are obviously allied with Jawbone and the Holland children, it is difficult to take seriously, defendants' contention that Holland and D'Alton should be added as parties adverse to plaintiff I need not consider it in any event, given that I find that Gilbride Tusa is an indispensable party.
II. Defendants' Motion to Dismiss for Failure to State a Claim
Defendants request dismissal of the complaint on the alternative basis that plaintiff has failed to state a claim upon which relief can be granted. Specifically, defendants argue: 1) that defendants owed a fiduciary duty in managing the trust account to REARS, not to Jawbone, and therefore that Jawbone has no standing to demand an accounting, 2) that Jawbone does not have standing to challenge actions taken with respect to REARS before Jawbone became a shareholder in REARS, 3) that the Holland children are estopped from challenging distributions of funds which they ratified, 4) that defendants' distributions from the trust account at the instruction of the directors and shareholders of REARS cannot render them liable for conversion, and 5) that there is no basis on which Jawbone can challenge a distribution made by defendants to Holod which was approved by the directors and shareholders of REARS.
It is evident that defendants' arguments raise issues of fact which, if subject matter jurisdiction in this case existed, would be properly dealt with in a motion for summary judgment, not a motion to dismiss. Indeed, defendants submit multiple affidavits and exhibits outside of the pleadings in support of their motion. In order to consider defendants' arguments on the merits, I would have to convert defendants' motion to dismiss into one for summary judgment, as provided by Rule 12(b). However, because I grant defendants' motion on the ground that subject matter jurisdiction is lacking, I need not further consider defendants' challenges to the merits of plaintiffs claims and intimate no view with respect to them.
III. Plaintiffs Cross-Motion to Disqualify Donohue from Serving as Attorney for Defendants
In its cross-motion, plaintiff contends that Donohue should be disqualified from representing himself and his law firm Gilbride Tusa in this case, citing Disciplinary Rule 5-102 of the New York Code of Professional Responsibility ("Lawyers as Witness"). Since I have decided that the Court lacks subject matter jurisdiction over this case, I need not consider plaintiffs motion to disqualify Donohue.
IV. The Parties' Cross-Motions for Sanctions
Although the Court lacks subject matter jurisdiction to adjudicate the merits of this case, the Court nevertheless has the power to consider and rule upon the parties' cross-motions for sanctions based upon their conduct in this litigation to date. Willy v. Coastal Corp., 503 U.S. 131, 133 (1992); see also 2 Moore's Federal Practice § 11.23[4].
Rule 11 of the Federal Rules of Civil Procedure provides that a party may seek sanctions if another party makes representations to the court with an improper purpose or without legal or factual support. Defendants move for sanctions against plaintiff and plaintiffs attorney on the grounds that plaintiff "presented a complaint solely in order to harass or cause needless expense of litigation" and that the complaint:
a) alleges diversity jurisdiction when no such jurisdiction exists;
b) alleges Plaintiff was a shareholder of Real Estate Asset Recovery Services, Inc. in 1999, when Plaintiff was not a shareholder of such corporation during the events complained of,
c) seeks an accounting when one has already been provided;
d) alleges conversion of assets that were distributed in accordance with the direction of the officers and directors and approved by the shareholders; [and]
e) seeks to interfere with or modify a contract to which the Plaintiff is not a party. . . .
Defs. Notice of Motion for Sanctions at 1-2. Defendants have withdrawn the portion of their Rule 11 motion concerning diversity jurisdiction since plaintiff effectively concedes that the case as filed does not give rise to diversity jurisdiction. Donohue letter dated Oct. 15, 2001.
It is readily apparent that plaintiff and defendants have a genuine dispute concerning defendants' distributions of funds from the trust account, the persons to whom defendants owed a fiduciary duty, and the timing and legitimacy of the stock transfers from Holland to the Holland children and from the Holland children to Jawbone. I therefore cannot find that plaintiff commenced this action for an improper purpose. Furthermore, I cannot find at this early stage of the litigation, without the benefit of discovery and a thorough analysis of the merits of the case, that plaintiffs factual allegations are completely without support. The arguments made by defendants in support of their Rule 11 motion are substantially identical to the arguments made by defendants in support of their motion to dismiss for failure to state a claim. "[Rule 11 motions] should not be employed . . . to test the legal sufficiency or efficacy of allegations in the pleadings. . . . Nor should Rule 11 motions be prepared to emphasize the merits of a party's position . . . ." Fed.R. Cit. P. 11, Advisory Committee Note on 1993 Amendments. Defendants' motion for sanctions against plaintiff is denied.
Plaintiff cross-moves for sanctions against Donohue, as attorney for defendants, on the basis that he filed "a frivolous Application for Sanctions." Pl. Cross Notice of Motion for Sanction at 1. Defendants contend that plaintiffs cross-motion for sanctions cannot be granted because it is procedurally defective. Rule 11 requires that:
A motion for sanctions under this rule shall be made separately from other motions or requests and shall describe the specific conduct alleged to violate subdivision (b). It shall be served as provided in Rule 5, but shall not be filed with or presented to the court unless, within 21 days after service of the motion (or such other period as the court may prescribe), the challenged paper, claim, defense, contention, allegation, or denial is not withdrawn or appropriately corrected.
Plaintiffs cross-motion for sanctions was served and filed on October 16, 2001. Twenty-one days earlier, on September 25, 2001, counsel for plaintiff informed defendants by letter that he intended to file a cross-motion for sanctions. That letter stated:
I advise you that, pursuant to Rule 11 of the Federal Rules of Civil Procedure, we will file a Cross-Application for sanctions against you in this action if you do not withdraw said frivolous Motion on the following basis:
1. You have not advised the Court in any fashion that you, yourself, are a resident and citizen of the State of New York and practice therein and that, accordingly diversity is appropriate as to you;
2. You have misled the Court into thinking that there was an accounting, whereas, there was merely a listing of deductions wrongfully taken by you, authorized by Mr. Holod, including unauthorized, illegal and unethical monies paid to Holod as a sinecure.
3. You have frivolously argued that an attorney who receives money from a party in Trust for his clients is not a fiduciary and have violated every fiduciary rule under the law;
4. As the attorney for the defendants, you are in violation of the Advocate Witness Rule under the Canons of Ethics and Ethical Considerations; and
5. Frivolous applications for sanctions, such as yours, pursuant to Rule 11, are themselves sanctionable.
Letter of Leonard N. Shapiro dated Sept. 25, 2001, Ex. A to Pl. Cross Notice of Motion for Sanctions.
The first four grounds for sanctions raised in counsel for plaintiffs letter largely reiterate arguments made by plaintiff in opposition to defendants' motion to dismiss and in support of plaintiffs cross-motion for disqualification; these grounds do not appear in plaintiffs formal cross-motion for sanctions. Plaintiffs cross-motion for sanctions is made only on the basis that defendants' motion for sanctions is frivolous.
The September 25 letter of plaintiffs counsel does not satisfy the requirement of Rule 11 that motions for sanctions be served twenty-one day prior to filing. Rule 11 does not provide for informal notice of an intent to file a motion for sanctions, for example by letter. Because plaintiff failed to follow the required procedure, I deny plaintiffs cross-motion for sanctions.
Notwithstanding the procedural defect in plaintiff's cross-motion for sanctions, the Court has the power to award expenses and attorney's fees to plaintiff for its efforts in successfully opposing defendants' motion for sanctions; by the same token, the Court has the power to award expenses and attorney's fees to defendants for their efforts in successfully opposing plaintiffs cross-motion for sanctions. Rule 11 authorizes a court to "award to the party prevailing on the motion the reasonable expenses and attorney's fees incurred in presenting or opposing the motion." Fed.R.Civ.P. 11(c)(1)(A); see also Advisory Committee Note to 1993 Amendments ("[S]ervice of a cross motion under Rule 11 should rarely be needed since under the revision the court may award to the person who prevails on a motion under Rule 11 — whether the movant or the target of the motion — reasonable expenses, including attorney's fees, incurred in presenting or opposing the motion.").
Under the present circumstances, I am not inclined to award fees and costs to either party. Both plaintiff's counsel and defendants' counsel have misunderstood the proper function of motions for sanctions and in so doing have needlessly multiplied the submissions made to the Court. Their numerous submissions in connection with their cross-motions for sanctions have served primarily to repeat and elaborate on the arguments made in the principal exchange of motions.
It is not just in connection with the cross-motions for sanctions that both counsel in this case have generated needless submissions as a result of their failure to research adequately the applicable law and proper procedure. Several such instances should be clear from this Opinion's resolution of the multiple pending motions. Additionally, both counsel submit. affidavits which make legal arguments, essentially duplicating the briefs.
CONCLUSION
Plaintiffs cross-motion to drop Gilbride Tusa as a co-defendant is denied. Defendants' motion to dismiss the Complaint for lack of subject matter jurisdiction is granted. It is not necessary to rule on defendants' motion to dismiss the Complaint for failure to state a claim under Rule 12(b)(6) or on plaintiff's cross-motion to disqualify Donohue from serving as attorney for defendants. Defendants' motion for sanctions and plaintiff's cross-motion for sanctions are denied. The Clerk of the Court is directed to dismiss the Complaint without prejudice.It is SO ORDERED.