Opinion
15 Civ. 8142 (VM)
08-02-2024
SGM HOLDINGS LLC, et al., Plaintiffs, v. A. JAMES ANDREWS, et al., Defendants.
DECISION AND ORDER
Victor Marrero, United States District Judge
This is a case originally filed in 2015 but reassigned to this Court only a few months ago. The plaintiffs assert violations of the New York Judiciary Law against three Tennessee attorneys who concededly were never admitted to the New York Bar and who never, at least as relevant here, practiced before a New York state (as opposed to federal) court. For the reasons below, the Court holds that it lacks subject matter jurisdiction over such a lawsuit and that this case therefore must be dismissed without prejudice. The Court further holds that even if the Court does have subject matter jurisdiction, issues necessarily raised in connection with the present jurisdictional inquiry also, for two independent reasons, bar further prosecution of this suit on the merits, given that the plaintiffs have had notice and opportunities to be heard.
I. BACKGROUND
The following facts are undisputed. A. James Andrews (“Andrews”), Richard Gaines (“Gaines”), and Karl Schledwitz (“Schledwitz”) are Tennessee attorneys. None of them is admitted to the bar of the State of New York. In April 2014, Andrews, Gaines, and Schledwitz filed a federal class action complaint in the Western District of Tennessee on behalf of DNV Investment Partnership, three other plaintiffs, and all others similarly situated. The defendants in that lawsuit (hereinafter the “DNV Action”) were a group of limited liability companies and natural persons. In February 2015, Judge Sheryl H. Lipman granted defendants' motion to change venue and ordered that the DNV Action be transferred to the Southern District of New York, where it was assigned to the Honorable Paul A. Crotty (“Judge Crotty”).
Shortly after the DNV Action was transferred, defendants asked Judge Crotty for 35 days to file a motion to dismiss and indicated that they wished to initiate proceedings under Federal Rule of Civil Procedure 11 (“Rule 11”), which allows a party to move for sanctions after giving the party or attorney against whom sanctions are sought an opportunity to withdraw or correct papers presented for an improper purpose or containing frivolous or baseless legal or factual contentions. See Fed.R.Civ.P. 11(b)-(c). At a pre-motion conference held March 31, 2015, Judge Crotty set a briefing schedule on the proposed motions to dismiss and for Rule 11 sanctions.
Defendants filed the motion to dismiss but not a Rule 11 motion. Instead, defendants in June 2015 filed a “crossclaim” against Andrews, Gaines, and Schledwitz under New York Judiciary Law (“Judiciary Law”) § 487, which is titled “Misconduct by attorneys” and provides,
An attorney or counselor who:
1. Is guilty of any deceit or collusion, or consents to any deceit or collusion, with intent to deceive the court or any party; or,
2. Wilfully delays his client's suit with a view to his own gain; or, wilfully receives any money or allowance for or on account of any money which he has not laid out, or becomes answerable for,
Is guilty of a misdemeanor, and in addition to the punishment prescribed therefor by the penal law, he forfeits to the party injured treble damages, to be recovered in a civil action.N.Y. Jud. Law § 487 (hereinafter “Section 487”).
Andrews, Gaines, and Schledwitz moved to dismiss the Section 487 crossclaim. They argued, among other things, that they were not properly subject to a crossclaim, as they were attorneys rather than parties in the DNV Action.
Defendants then initiated a separate lawsuit - the instant action - against Andrews, Gaines, and Schledwitz under Section 487, intending to replace the crossclaim “so as to avoid peripheral disputes as to the procedural propriety of” the crossclaim in the DNV Action. (Related Case Statement, Dkt. No. 4.) The new lawsuit, which was assigned to Judge Crotty as related to the DNV Action, alleges that Andrews, Gaines, and Schledwitz violated Section 487 by making deceitful statements in the DNV Action and seeks (see Dkt. No. 251 at 3, 15; Dkt. No. 256 at 3, 15) nearly $25 million in damages, at least, to be imposed jointly and severally. The suit does not allege any deception before a New York state court. In December 2015, Judge Crotty dismissed the crossclaim in the DNV Action and stayed this action, i.e., the newly filed Section 487 lawsuit.
In May 2020, Judge Crotty granted summary judgment in favor of defendants in the DNV Action, and the DNV Action was closed. Returning to the instant Section 487 action, the parties engaged in discovery and filed cross motions for summary judgment. Judge Crotty denied both motions in September 2023. (See Op. & Order, Dkt. No. 118.) In an order issued the following month, Judge Crotty wrote that a trial would take place during the summer of 2024. On April 15, 2024, the instant action was reassigned to this Court.
A trial was scheduled to begin in this matter on July 29, 2024. As that date approached and as the Court familiarized itself with this case, however, the Court began to doubt whether it has subject matter jurisdiction over the action. Since the issue of subject matter jurisdiction can be raised at any time before final judgment and can be raised sua sponte, the Court on July 1 ordered the parties to submit briefing on the issue. Specifically, the Court ordered the parties to address four questions:
1. Does Section 487 apply to an attorney who is not admitted to the Bar of the State of New York and whose relevant conduct took place before only a federal court? If not, does the Court lack subject matter jurisdiction over this action?
2. Has Section 487 ever been enforced against an attorney who was not admitted to the Bar of the State of New York and whose relevant conduct took place only before a federal court?
3. In federal court, is Section 487 preempted by Rule 11, 28 U.S.C. § 1927, or any other provision of federal law? If so, does the Court lack subject matter jurisdiction over this action?
4. If the Court does have subject matter jurisdiction over this action, do the issues identified above nevertheless preclude plaintiffs here from stating a claim upon which relief can be granted?(See Order, Dkt. No. 260.)
The parties filed their briefs July 8, 2024. The plaintiffs here (hereinafter “Plaintiffs”) argue that the Court does have subject matter jurisdiction over the action. (See Dkt. No. 264 [hereinafter “Pls.' Br.”]; see also Dkt. No. 268.) Andrews, Gaines, and Schledwitz (together “Defendants”) argue that the Court lacks subject matter jurisdiction. (See Dkt. No. 265 [hereinafter “Defs.' Br.”]; see also Dkt. No. 267.) Plaintiffs filed a one-page supplemental letter brief on July 10, 2024. (See Dkt. No. 270 [hereinafter “Pls.' Suppl. Br.”].) The Court heard oral argument from Plaintiffs and Defendants on these issues during a pretrial conference held July 12, 2024.
In a letter to the Court dated July 10, 2024, counsel for Schledwitz objected to the filing of Plaintiffs' supplemental letter brief, urged the Court not to consider it, and requested an opportunity to respond “if the court deems such appropriate.” (Dkt. No. 271.) At oral argument, the Court informed Defendants that it would request further briefing if the Court deemed it necessary. Additional briefing has not been necessary. The Court exercises its discretion to consider Plaintiffs' supplemental letter brief, given that it is only one page and that, with respect to the status quo, the issues raised by the Court jeopardized Plaintiffs' - not Defendants' - chances of success in this litigation.
After carefully considering the parties' written submissions and oral argument, the Court on July 17, 2024 issued a “bottom line” order dismissing this case for, among other things, lack of subject matter jurisdiction. The Court now sets forth the Court's findings, analysis, and reasoning supporting its decision.
II. GOVERNING LAW
In this case, the legal provisions applicable to courts' power to sanction attorneys for misconduct intersect with broad areas of law governing the jurisdiction of the federal courts and the way in which federal and state law interact in our federal system of dual sovereignty. Given the novel circumstances of the present litigation, the Court here sets forth the law in these areas as it stands, before endeavoring to apply that law to the unique situation at hand. The Court begins with an overview of the federal courts' subject matter jurisdiction, as relevant to this case.
A. SUBJECT MATTER JURISDICTION
“Federal courts are courts of limited subject matter jurisdiction.” Atanasio v. O'Neill, 235 F.Supp.3d 422, 424 (E.D.N.Y. 2017). And “it has been the rule since nearly the inception of our republic that subject matter jurisdiction may be raised at any time.” Ward v. Brown, 22 F.3d 516, 519 (2d Cir. 1994) (holding that defendants could raise the issue of subject matter jurisdiction for the first time on appeal). It is also black-letter law that the Court may raise the issue of subject matter jurisdiction sua sponte - and indeed has the obligation to do so if its jurisdiction is in doubt. See Capron v. Van Noorden, 6 U.S. (2 Cranch) 126, 127 (1804) ("[I]t was the duty of the Court to see that they had jurisdiction, for the consent of parties could not give it.”); Sheung Wan Gallery Ltd. v. Kagan, No. 23 Civ. 2519, 2024 WL 196671, at *4 (S.D.N.Y. Jan. 18, 2024) (“[T]he Court must satisfy itself that it has subject matter jurisdiction over this action and the relevant claims, notwithstanding that no party has raised the issue.”); Chapman v. DOJ, 558 F.Supp.3d 45, 48-49 (E.D.N.Y. 2021). “When a federal court concludes that it lacks subject-matter jurisdiction, the court must dismiss the complaint in its entirety.” Chapman, 558 F.Supp.3d at 49; see Fed.R.Civ.P. 12(h)(3).
The issue of subject matter jurisdiction was never raised before Judge Crotty, and he did not raise it himself, so there is no danger here of reversing any ruling previously made in this case. Judge Crotty did rule against Defendants on the issue of personal jurisdiction. (See Op. & Order, Dkt. No. 35, at 3-4.) Similarly, at the summary judgment stage, Judge Crotty rejected Defendants' contention that Schledwitz cannot be held liable under Section 487 because he was mostly or totally uninvolved in this litigation after it was transferred from the Western District of Tennessee to the Southern District of New York. (See Op. & Order, Dkt. No. 118, at 14 n.7.). In their brief and at oral argument regarding subject matter jurisdiction, Plaintiffs devoted much time to the argument that Schledwitz's claim of uninvolvement is false. (See Pls.' Br. at 8-11.) In support of this argument, they cite in their brief to an email, which they filed under seal and which Defendants argue is privileged. (See Dkt. Nos. 261, 266.) Defendants request that the Court strike the email from the docket and sanction Plaintiffs' counsel. (See Dkt. No. 266.). The dispute over whether Schledwitz appeared in this District or participated in this litigation after it was transferred here is irrelevant to the questions of subject matter jurisdiction raised by the Court and the issues discussed in this Decision. The Court does not disturb Judge Crotty's previous ruling regarding personal jurisdiction in any way. Accordingly, the Court declines to consider the sealed email and will order it stricken from the docket. The Court declines to sanction Plaintiffs' counsel.
“Federal court jurisdiction exists only when a ‘federal question' is presented, or when there is ‘diversity of citizenship' and the amount in controversy exceeds $75,000.00.” Id. at 48 (citations omitted); see 28 U.S.C. § 1332; U.S. Const. art. III, § 2 (extending the federal judicial power to “controversies” between “citizens of different states”). Plaintiffs here invoke the Court's diversity jurisdiction, and there appears to be no real dispute that the amount in controversy in this case exceeds $75,000 and that there is “complete diversity” among the parties, i.e., that “the citizenship of each plaintiff is diverse from the citizenship of each defendant.” Wynston Hill Cap., LLC v. Crane, 628 F.Supp.3d 540, 545 (S.D.N.Y. 2022) (citation omitted).
But there is a third requirement, taken for granted in the ordinary case, that must be satisfied for the Court to exercise jurisdiction in a diversity case: The claim must be cognizable in state court. See Fox v. Ritz-Carlton Hotel Co., 977 F.3d 1039, 1050 (11th Cir. 2020) (“[A] federal court does not have diversity subject-matter jurisdiction over a claim for which a state court would not have jurisdiction.”). This requirement - easily met when a plaintiff brings, for example, a straightforward contract or tort action - makes good sense. After all, the Constitution's provision of diversity jurisdiction was meant to establish an alternative forum for the adjudication of claims, not to create new substantive claims that otherwise would not exist. See Exxon Mobil Corp. v. Allapattah Servs., Inc., 545 U.S. 546, 553-54 (2005) (stating that the purpose of diversity jurisdiction “is to provide a federal forum for important disputes where state courts might favor, or be perceived as favoring, home-state litigants”); Meredith v. City of Winter Haven, 320 U.S. 228, 234 (1943) (stating that the purpose of diversity jurisdiction “was generally to afford to suitors an opportunity . . ., at their option, to assert their rights in the federal rather than in the state courts” (emphasis added)).
Unlike federal courts, state courts are often courts of general subject matter jurisdiction. See, e.g., Sohn v. Calderon, 387 N.E.2d 807, 811 (N.Y. 1991) (stating that New York Supreme Court is “‘competent to entertain all causes of action unless its jurisdiction has been specifically proscribed'” and that “to that extent its powers are ‘unlimited and unqualified'” (citations omitted)). There are situations, however, in which state courts lack subject matter jurisdiction. See Morrison v. Budget Rent a Car Sys., Inc., 657 N.Y.S.2d 721, 725 (A.D.2d Dep't 1997) (collecting cases). In New York, one such situation occurs when a plaintiff brings a state-law cause of action that is preempted by federal law. See Klingsberg v. Council of Sch. Supervisors & Adm'rs-Local 1, 122 N.Y.S.3d 335, 336-37 (A.D.2d Dep't 2020) (holding that court lacked subject matter jurisdiction over Section 487 claim that was preempted by federal Labor Management Relations Act of 1947); Pellechia v. Partner Aviation Enters., Inc., 916 N.Y.S.2d 130, 132 (A.D.2d Dep't 2011) (holding that court lacked subject matter jurisdiction over claims preempted by Federal Aviation Act of 1958, as amended), appeal dismissed, 948 N.E.2d 926 (N.Y. 2011); Osarczuk v. Associated Univs., Inc., 830 N.Y.S.2d 711, 714-15 (A.D.2d Dep't 2007) (affirming dismissal for lack of subject matter jurisdiction of state common-law claims that were preempted by federal Atomic Energy Act of 1954, as amended), limited on other grounds by Caronia v. Philip Morris USA, Inc., 5 N.E.3d 11, 17 & n.2 (N.Y. 2013); In re Metro. Transp. Auth., 823 N.Y.S.2d 88, 90 (A.D.2d Dep't 2006) (“Where a state-law proceeding is preempted by federal law, the courts of this state lack subject matter jurisdiction over that proceeding.”); Eastdil Realty, Inc. v. Gallagher, 543 N.Y.S.2d 453, 453-54 (App. Div. 1st Dep't 1989) (holding that state courts lacked subject matter jurisdiction over state-law claim preempted by Employee Retirement Income Security Act of 1974).
Pellechia was later called into doubt by Rivers v. Birnbaum, 953 N.Y.S.2d 232 (A.D.2d Dep't 2012), but on grounds not relevant here. See Rivers, 953 N.Y.S.2d at 242-43.
It is somewhat unclear whether these New York cases held that this rule of preemption and subject matter jurisdiction is compelled by federal law. If they did, it is similarly unclear whether the application of such a rule on federal law grounds would be correct in every preemption case. See Haudrich v. Howmedica, Inc., 662 N.E.2d 1248, 1253-54 (Ill. 1996) (“The defendants in this case argue . . . that the claim of preemption is not in the nature of an affirmative defense but is a jurisdictional matter which cannot be waived and which may be raised at any time. . . . We reject this argument.”); 21 C.J.S. Courts § 272 (May 2024 update) (“The preemption doctrine does not deprive state courts of subject matter jurisdiction over claims involving federal preemption unless Congress has given exclusive jurisdiction to a federal forum.”); see also Tafflin v. Levitt, 493 U.S. 455, 459 (1990) (discussing “deeply rooted presumption in favor of concurrent state court jurisdiction” over a federal claim that can be rebutted “‘by an explicit statutory directive, by unmistakable implication from legislative history, or by a clear incompatibility between state-court jurisdiction and federal interests'” (citation omitted)).
But the New York courts may have based the holdings in cases like Klingsberg on state law. Nothing prohibits New York courts from holding as a matter of New York law that state courts lack subject matter jurisdiction over claims that are preempted by federal law. See Tafflin, 493 U.S. at 459 (“[I]f exclusive [federal] jurisdiction be neither express nor implied, the State courts have concurrent jurisdiction whenever, by their own constitution, they are competent to take it.” (emphasis added) (quoting Claflin v. Houseman, 93 U.S. 130, 136 (1876))).
B. FEDERAL PREEMPTION
“Under the Supremacy Clause of the Constitution, state and local laws that conflict with federal law are without effect.” Figueroa v. Foster, 864 F.3d 222, 227 (2d Cir. 2017) (citation omitted). “In general, three types of preemption exist” - express preemption, field preemption, and conflict preemption. Id. at 227-28. “The latter two are forms of implied preemption.” Id. at 228. State law can be federally preempted “as applied.” See Liberty Mut. Ins. v. Donegan, 746 F.3d 497, 500, 508 (2d Cir. 2014); Rust v. Johnson, 597 F.2d 174, 179 (9th Cir. 1979).
The two forms of implied preemption are closely related. Field preemption occurs when Congress “has legislated so comprehensively that federal law occupies an entire field of regulation and leaves no room for state law.” Figueroa, 864 F.3d at 227 (citation omitted). Conflict preemption occurs where “local law conflicts with federal law such that it is impossible for a party to comply with both” or where “the local law is an obstacle to the achievement of federal objectives.” Id. at 228 (citation omitted). The Supreme Court “has warned against assigning too much importance” to the labels “field preemption” and “conflict preemption,” as the “categories are not ‘rigidly distinct' and may overlap.” In re Jackson, 972 F.3d 25, 33 n.4 (2d Cir. 2020) (emphasis removed) (citation omitted); see English v. Gen. Elec. Co., 496 U.S. 72, 79 n.5 (1990) (stating that field preemption “may be understood as a species of conflict pre-emption,” as “a state law that falls within a pre-empted field conflicts with Congress' intent . . . to exclude state regulation”).
Congress is not the only federal institution that can preempt state law. “[A] few areas, involving ‘uniquely federal interests,' are so committed by the Constitution and laws of the United States to federal control that state law is pre-empted and replaced, where necessary, by federal law of a content prescribed (absent explicit statutory directive) by the courts - so-called ‘federal common law.'” Boyle v. United Techs. Corp., 487 U.S. 500, 504 (1988); see also City of New York v. Chevron Corp., 993 F.3d 81, 90 (2d Cir. 2021) (“Where federal common law exists, it ‘pre-empt[s] and replace[s]' state law.” (quoting Boyle, 487 U.S. at 504)).
In diversity cases, provisions in the Federal Rules of Civil Procedure have been held to preempt contrary state law. See Shady Grove Orthopedic Assocs., P.A. v. Allstate Ins., 559 U.S. 393, 410-11 (2010) (holding that, difference in approaches of plurality and concurrence notwithstanding, federal rule governing class actions applied rather than New York law); Burlington N. R.R. v. Woods, 480 U.S. 1, 8 (1987) (holding that Federal Rule of Appellate Procedure 38 displaced Alabama statute imposing penalties on appellants who obtain stays of judgments pending unsuccessful appeals); Hanna v. Plumer, 380 U.S. 460, 463-64 (1965) (holding that federal rule regarding service of process applied rather than Massachusetts statute); see also Virginia Uranium, Inc. v. Warren, 587 U.S. 761, 774 (2019) (Gorsuch, J.) (lead opinion) (describing Shady Grove as a field preemption case). “Federal courts have interpreted the Federal Rules, however, with sensitivity to important state interests and regulatory policies.” Gasperini v. Ctr. for Humans., Inc., 518 U.S. 415, 427 n.7 (1996).
The Court notes that while the lead Virginia Uranium opinion described Shady Grove as a field preemption case, none of the Shady Grove opinions uses the term “field preemption.” Shady Grove instead reads more like a conflict preemption case. See Shady Grove, 559 U.S. at 399 (majority portion of opinion) (reversing Second Circuit with respect to conclusion that state law and federal rule “d[id] not conflict” (emphasis added)); see also Burlington, 480 U.S. at 4-5 (describing “test for resolving conflicts between state law and the Federal Rules” (emphasis added)). Shady Grove thus may provide further evidence that the categories of field and conflict preemption “overlap.” Jackson, 972 F.3d at 33 n.4; see also Burlington, 480 U.S. at 7 (stating that Federal Rule of Appellate Procedure 38 “occupies the [state] statute's field of operation so as to preclude its application in federal diversity actions” (emphasis added)).
The choice-of-law approach under Erie Railroad v. Tompkins, 304 U.S. 64 (1938), is similar. When courts sitting in diversity apply federal rules rather than contrary state rules under the Erie doctrine, they effectively decide that state law is preempted. See, e.g., Byrd v. Blue Ridge Rural Elec. Coop., 356 U.S. 525, 538 (1958) (holding that “federal policy favoring jury decisions of disputed fact questions” should not yield to South Carolina rule under which relevant issue was for the judge, not the jury); see also Jeffrey L. Rensberger, Erie and Preemption: Killing One Bird with Two Stones, 90 Ind. L.J. 1591, 1593, 1616 (2015) (arguing that “any Erie issue, whether the federal law in question is embodied in a federal rule of civil procedure (or federal statute) or is instead judicially created, is a preemption issue,” albeit an issue of “partial preemption, obviating state [procedural] law in federal courts but not in state courts”) .
There is also overlap between the doctrines of preemption and subject matter jurisdiction, as evidenced by the distinction between field preemption and so-called “complete” preemption. The latter “creates federal subject-matter jurisdiction over preempted state-law claims.” Sullivan v. Am. Airlines, Inc., 424 F.3d 267, 273 n.7 (2d Cir. 2005) (distinguishing the two types of preemption). Complete preemption is an exception to the well-pleaded complaint rule in that the doctrine authorizes removal of claims “pleaded in terms of state law” from state to federal court on the basis of federal question jurisdiction under certain circumstances. Beneficial Nat'l Bank v. Anderson, 539 U.S. 1, 8 (2003). The complete preemption doctrine was established in Avco Corp. v. Aero Lodge No. 735, International Ass'n of Machinists, 390 U.S. 557 (1968), in which the Supreme Court held not only that section 301 of the federal Labor Management Relations Act of 1947 (“LMRA”), see 29 U.S.C. § 185 (hereinafter “LMRA § 301”), preempted a state law contract claim but also that the claim, thus preempted, arose under LMRA § 301 and could accordingly be removed to federal court. See Beneficial Nat'l Bank, 539 U.S. at 6-7 (discussing Avco).
The well-pleaded complaint rule is used to determine whether a federal court has federal question jurisdiction over a claim. The rule provides that federal question jurisdiction exists “only when the plaintiff's statement of his own cause of action shows that it is based upon [federal law].” Louisville & Nashville R.R. v. Mottley, 211 U.S. 149, 152 (1908). “It is not enough that the plaintiff alleges some anticipated defense to his cause of action . . . .” Id.
Complete preemption occurs where the “federal statute[] at issue provide[s] the exclusive cause of action for the claim asserted” and the federal statute “set[s] forth procedures and remedies governing that cause of action.” Id. at 8. But the presence of these necessary components of complete preemption might not always be sufficient to invoke the doctrine, as the Supreme Court “has recognized the existence of such ‘exclusive' causes of action in only three federal statutes:” the LMRA, the Employee Retirement Income Security Act of 1974, and the National Bank Act. New York by Schneiderman v. Charter Commc'ns, Inc., No. 17 Civ. 1428, 2017 WL 1755958, at *4 (S.D.N.Y. Apr. 27, 2017); see Beneficial Nat'l Bank, 539 U.S. at 6-11.
In El Paso Nat. Gas Co. v. Neztsosie, 526 U.S. 473, 484 n.6 (1999), the Supreme Court said the complete preemption doctrine “resembles” the structure of the Atomic Energy Act of 1954, as amended by the Price-Anderson Act and as further amended in 1988 (hereinafter the “AEA”) - which was the law at issue in Osarczuk, where a New York appellate court affirmed the dismissal for lack of subject matter jurisdiction of state common-law claims that were preempted by the AEA. See 830 N.Y.S.2d at 714-15. The AEA's “unusual” preemption provision “not only gives federal courts jurisdiction over tort actions arising out of nuclear accidents but also expressly provides for removal of such actions brought in state court even when they assert only state-law claims.” Beneficial Nat'l Bank, 539 U.S. at 6. But as the Osarczuk court noted, the AEA permits such an action “to be commenced and tried in a state court, which has concurrent jurisdiction with the appropriate federal district court.” 830 N.Y.S.2d at 713.
C. SANCTIONS AGAINST ATTORNEYS
As Plaintiffs have acknowledged, Section 487 is a sanctions statute. It appears in New York Judiciary Law art. 15 (“Article 15”), titled “Attorneys and Counsellors.” Meanwhile, under federal law, “[t]hree primary sources of authority enable courts to sanction parties or their lawyers for improper conduct: (1) Federal Rule of Civil Procedure 11, . . . (2) 28 U.S.C. § 1927, . . . and (3) the court's inherent power.” Fink v. Gomez, 239 F.3d 989, 991 (9th Cir. 2001). The Court examines each sanctions provision in turn.
See the letter from attorney Dan Schulman (“Schulman”) to Judge Crotty, dated July 10, 2015 and filed at Docket No. 75 in the DNV Action (No. 15 Civ. 1255 (S.D.N.Y.)), at page 3 (stating that “sanctions were assessed pursuant to N.Y. Jud. Law § 487” in another case). In the instant action, Schulman represents all plaintiffs except pro se plaintiff James Hughes (“Hughes”). Hughes has joined in positions taken by Schulman in proceedings before this Court, including in the proceedings related to the Court's inquiry into whether subject matter jurisdiction exists over this action.
1. Section 487
As described above, Section 487 allows a person injured by an attorney's misconduct to recover treble damages in a civil action if the attorney intentionally deceives “the court” and also provides that such an attorney is “guilty of a misdemeanor.” The law “descends from the first Statute of Westminster, which was adopted by the Parliament summoned by King Edward of England in 1275.” Amalfitano v. Rosenberg, 903 N.E.2d 265, 267 (N.Y. 2009). In 1787 - two years before the United States Constitution took effect - the New York State Legislature adopted a law “strikingly similar” to the English provision and “added an award of treble damages”; and that law survives today, modified only slightly, as Section 487. Id. at 267-68.
One of the legislative modifications to Section 487 apparently divorced criminal punishment from civil liability. The 1830 version of the law provided that an attorney liable under the statute “shall be deemed guilty of a misdemeanor, and on conviction shall be punished by fine or imprisonment, or both, at the discretion of the court. He shall also forfeit to the party injured . . . treble damages, to be recovered in a civil action.” Id. (emphasis added) (citation omitted). This language suggests that a criminal conviction may have been a condition precedent to a civil action for treble damages. The 1881 version of the statute, on the other hand, provided that the deceptive lawyer was “guilty of a misdemeanor, and in addition to the punishment prescribed therefor by this Code, he forfeits to the party injured treble damages, to be recovered in a civil action”; this statute, moreover, was mirrored in a provision of the Code of Civil Procedure in force at the time. Id. at 268 (citation omitted); accord Schindler v. Issler & Schrage, P.C., 692 N.Y.S.2d 361, 362 (App. Div. 1st Dep't 1999) (stating that a “criminal conviction is not a condition precedent to a civil action pursuant to” Section 487).
Between 1881 and 1965, the law was a part of New York's penal code; “[i]n conjunction with the Legislature's adoption of the revised Penal Law of 1965,” the statute was transferred to the Judiciary Law. Id. at 268. Section 487 nevertheless continued to be used, albeit rarely, in the criminal context as well as in civil cases. See People v. Canale, 658 N.Y.S.2d 715, 717 (A.D.3d Dep't 1997) (stating in criminal action that there “is a dearth of criminal cases brought under” Section 487); People v. Matalon, 400 N.Y.S.2d 303, 305-06 (Sup. Ct. N.Y. Cnty. 1977) (dismissing count of indictment charging Section 487 violation without prejudice). Given the law's history as a penal statute, the New York Court of Appeals has held that Section 487 “is not a codification of a common-law cause of action for fraud” but is rather “a unique statute of ancient origin in the criminal law of England.” Amalfitano, 903 N.E.2d at 268; see also id. at 269 (endorsing proposition that the “more appropriate context for analysis” of Section 487 “is not the law applicable to comparable civil torts but rather criminal law” (citation omitted)); Dupree v. Voorhees, 876 N.Y.S.2d 840, 847 (Sup. Ct. Suffolk Cnty. 2009) (“[T]he history of [Section 487] is rooted in criminal law, not tort law, as was outlined by the Court of Appeals.”).
In the civil context, a person can generally bring an independent lawsuit under Section 487 rather than asserting the Section 487 claim in the pending or prior action in which the alleged attorney misconduct occurred. See Urias v. Daniel P. Buttafuoco & Assocs., PLLC, No. 18, ___ N.E.3d ___, 2024 WL 1160485, at *4 (N.Y. Mar. 19, 2024); Kimbrook Route 31, L.L.C. v. Bass, 47 N.Y.S.3d 203, 204 (App. Div. 4th Dep't 2017). Further, a civil Section 487 plaintiff need not prove his or her case beyond a reasonable doubt. See Papa v. 24 Caryl Ave. Realty Co., 804 N.Y.S.2d 112, 113 (A.D.2d Dep't 2005).
2. Rule 11
Rule 11 provides that when filing papers in court, an attorney certifies that to the best of his or her knowledge, formed after a reasonable inquiry, that
(1) [the papers are] not being presented for any improper purpose, such as to harass, cause unnecessary delay, or needlessly increase the cost of litigation;
(2) the claims, defenses, and other legal contentions are warranted by existing law or by a nonfrivolous argument for extending, modifying, or reversing existing law or for establishing new law;
(3) the factual contentions have evidentiary support or, if specifically so identified, will likely have evidentiary support after a reasonable opportunity for further investigation or discovery; and
(4) the denials of factual contentions are warranted on the evidence or, if specifically so identified, are reasonably based on belief or a lack of information.Fed. R. Civ. P. 11(b).
Rule 11(b)(2), (b)(3), and (b)(4) together require attorneys to make reasonable inquiries into the law and the facts; thus, the standard for liability under those paragraphs is objective unreasonableness and is not based on the subjective beliefs of the attorney. See China AI Cap. Ltd. ex rel. Link Motion Inc. v. DLA Piper LLP (US), No. 21 Civ. 10911, 2024 WL 964596, at *5 (S.D.N.Y. Mar. 6, 2024). Unlike Section 487, “Rule 11 does not create an independent cause of action.” Sean Michael Edwards Design, Inc. v. Pyramid Designs, 45 Fed. R. Serv. 3d 627, 627 (S.D.N.Y. 1999).
Sanctions imposed under Rule 11 “must be limited to what suffices to deter repetition of the conduct or comparable conduct by others similarly situated.” Fed.R.Civ.P. 11(c)(4). “[T]he main purpose of Rule 11 is to deter improper behavior, not to compensate the victims of it or punish the offender.” Universitas Educ., LLC v. Nova Grp., Inc., 784 F.3d 99, 103 (2d Cir. 2015) (citation omitted). “Since the purpose of Rule 11 sanction is to deter rather than to compensate, the rule provides that, if a monetary sanction is imposed, it should ordinarily be paid into the court as a penalty.” Id. (citation omitted). Rule 11 does, however, authorize “an order directing payment to the movant of . . . the reasonable attorney's fees and other expenses directly resulting from the violation” if such a sanction is “warranted for effective deterrence.” Fed.R.Civ.P. 11(c)(4).
There is also a statutory basis for sanctions in federal court. See 28 U.S.C. § 1927 (hereinafter “Section 1927”) . That law, contained in Part V (“Procedure”) of Title 28 (“Judiciary and Judicial Procedure”), provides that an attorney “who so multiplies the proceedings in any case unreasonably and vexatiously may be required by the court to satisfy personally the excess costs, expenses, and attorneys' fees reasonably incurred because of such conduct.” To impose sanctions under Section 1927, “a court must find clear evidence that (1) the offending party's claims were entirely without color, and (2) the claims were brought in bad faith - that is, motivated by improper purposes such as harassment or delay.” Huebner v. Midland Credit Mgmt., Inc., 897 F.3d 42, 55 (2d Cir. 2018) (quoting Kim v. Kimm, 884 F.3d 98, 106 (2d Cir. 2018)). The statute does not create an independent cause of action. See Abouelmakarem v. MDNMA Inc., No. 21 Civ. 10625, 2022 WL 1620302, at *2 (S.D.N.Y. May 20, 2022).
4. Inherent Power of the Court
Finally, “[f]ederal courts possess certain ‘inherent powers,' not conferred by rule or statute, ‘to manage their own affairs so as to achieve the orderly and expeditious disposition of cases.'” Goodyear Tire & Rubber Co. v. Haeger, 581 U.S. 101, 107 (2017) (quoting Link v. Wabash R.R. Co., 370 U.S. 626, 630-31 (1962)). This judge-made power includes the power to sanction attorneys. See id.; Fink, 239 F.3d at 991; Wilder v. GL Bus Lines, 258 F.3d 126, 130 (2d Cir. 2001) (stating that a court has “inherent equitable power to sanction an attorney”). The showing of bad faith required to support sanctions under a court's inherent power is similar to that necessary to trigger sanctions under Section 1927; in practice,
the only meaningful difference between an award made under § 1927 and one made pursuant to the court's inherent power is . . . that awards under § 1927 are made only against attorneys or other persons authorized to practice before the courts while an award made under the court's inherent power may be made against an attorney, a party, or both.Enmon v. Prospect Cap. Corp., 675 F.3d 138, 144 (2d Cir. 2012) (alteration in original) (quoting Oliveri v. Thompson, 803 F.2d 1265, 1273 (2d Cir. 1986)). A party can make a motion for fees pursuant to a court's inherent power, see id. at 143, but the power does not authorize an independent cause of action, see Sabre Int'l Sec. v. Torres Advanced Enter. Sols., LLC, 13 F.Supp.3d 62, 73 (D.D.C. 2014).
“[L]egal fees awarded under a court's inherent sanctioning authority have to be compensatory rather than punitive when civil litigation procedures are used.” Haeger, 581 U.S. at 111. “In other words, the fee award may go no further than to redress the wronged party ‘for losses sustained'; it may not impose an additional amount as punishment for the sanctioned party's misbehavior.” Id. at 108 (quoting Int'l Union, Mine Workers of Am. v. Bagwell, 512 U.S. 821, 829 (1994)). “To level that kind of separate penalty, a court would need to provide procedural guarantees applicable in criminal cases, such as a ‘beyond a reasonable doubt' standard of proof.” Id. “When . . . those criminaltype protections are missing, a court's shifting of fees is limited to reimbursing the victim.” Id.; accord United States v. Providence J. Co., 485 U.S. 693, 701 (1988) (holding that federal courts have inherent authority to initiate criminal contempt proceedings and to appoint private attorneys to prosecute contempt actions); Arunachalam v. IBM Corp., 989 F.3d 988, 997 (Fed. Cir. 2021) (stating that imposition of sanctions under a court's inherent power serves purpose of vindicating judicial authority “without resort to the more drastic sanctions available for contempt of court” (quoting Chambers v. NASCO, Inc., 501 U.S. 32, 46 (1991))).
III. DISCUSSION
While the above principles of law provide a framework for the Court's decision, no single statute, rule, or holding appears to control the issues presented here. The Court is not aware of - nor have Plaintiffs cited - any case in which Section 487 was enforced against an attorney who was not admitted to the New York Bar and whose relevant conduct took place only before a federal court, let alone such a case in which the issue of federal subject matter jurisdiction was litigated. The question here is thus one of first impression.
After considering the parties' arguments and carefully applying the above principles to the unique facts presented by this case, however, the Court concludes that, as explained in greater detail below, this lawsuit must be dismissed for three independent reasons. First, because Section 487, as sought to be applied here, is preempted by Rule 11, Section 1927, and the inherent power of federal courts to sanction attorneys, the Court lacks subject matter jurisdiction over this action. Second, even if the preemption issue is not jurisdictional, it bars the present suit on the merits. Finally, even if it is not preempted by federal law in any respect, Section 487 does not apply to attorneys, such as Defendants, who were never admitted to the New York Bar and whose alleged misconduct took place only before a federal court. The Court sets forth its reasons for these conclusions below.
A. SECTION 487 IS PREEMPTED AS SOUGHT TO BE APPLIED HERE
Plaintiffs argue that Section 487 constitutes a “garden variety tort” (Pls.' Br. at 6 (emphasis removed) (quoting Rudow v. City of New York, 822 F.2d 324, 330 (2d Cir. 1987))) of the type that courts have held is not preempted by federal statute or rule (see Pls.' Suppl. Br.). They contend that Section 487 is substantive rather than procedural law that under Erie must therefore be followed in this case. (See Pls.' Br. at 6-7.) Under Erie, Plaintiffs say, the Court should “adjudicate [their Section 487] claims just as those claims would have been adjudicated in state court.” (Id. at 7.)
Defendants contend that enforcement of Section 487 is barred because of field preemption, since Section 1927 and the Federal Rules of Civil Procedure - as authorized by the Rules Enabling Act, see 28 U.S.C. §§ 2071-77 - “regulate an entire field to the exclusion of the states” with respect to the “conduct of attorneys in federal court proceedings.” (Defs.' Br. at 12.) Defendants argue that Section 487 is not a substantive tort; rather, given its history as a penal statute, it sets forth a “penalty for attorney misconduct” that is mirrored by a federal procedural rule - Rule 11. (Id. at 11 (quoting Cox v. Microsoft Corp., 737 N.Y.S.2d 1, 3 (App. Div. 1st Dep't 2002))).
The Court - keeping in mind that field preemption and conflict preemption “are not ‘rigidly distinct' and may overlap,” Jackson, 972 F.3d at 33 n.4 (citation omitted) - agrees with Defendants. Section 487 both (1) regulates in the field of attorney misconduct, in which Congress has comprehensively legislated with respect to the federal courts, and (2) “actually conflicts” with Rule 11, Section 1927, and a third source of legal authority not mentioned by Defendants: the common law authority under which federal courts have inherent power to sanction attorneys. N.Y. State Telecomms. Ass'n, Inc. v. James, 101 F.4th 135, 147 n.9 (2d Cir. 2024) (citation omitted). Moreover, the Court is not persuaded that the Erie doctrine would require a different conclusion.
Plaintiffs do acknowledge this third source of authority. (See Pls.' Br. at 13.).
While the federal courts' inherent power to sanction is not typically described as derived from federal common law, the Supreme Court has acknowledged that the power is “not conferred by rule or statute.” Haeger, 581 U.S. at 107; see also Calucci v. Piper Aircraft Corp., 775 F.2d 1440, 1447 (11th Cir. 1985) (“Even absent explicit legislative enactment, deeply rooted in the common law tradition is the power of any court to ‘manage its affairs [which] necessarily includes the authority to impose reasonable and appropriate sanctions upon errant lawyers practicing before it.'” (alteration in original) (citation omitted)); Dirksing v. Safeco Ins., 544 F.Supp.3d 767, 770 (E.D. Ky. 2021) (stating that “district courts have inherent authority to . . . sanction under federal common law”); Rensberger, Erie and Preemption, 90 Ind. L.J. at 1613 (“As examples of federal common law controlling procedural matters, federal courts have the ‘inherent power to impose sanctions for . . . bad-faith conduct' by litigants appearing before them.” (citation omitted)).
Before further discussing these conclusions, the Court notes as an initial matter that to the extent that New York's sovereign interests are relevant to this analysis, see Gasperini, 518 U.S. at 427 n.7 (stating that federal courts “have interpreted the Federal Rules . . . with sensitivity to important state interests and regulatory policies”), New York has little, if any, legitimate interest in regulating attorneys such as Defendants as it relates to actions and practice before federal courts. New York certainly has an important interest in regulating and supervising attorneys who are admitted to its own Bar or who practice law before its state courts. See Schertenleib v. Traum, 589 F.2d 1156, 1166 (2d Cir. 1978) (stating that “[n]o one questions the power of the State of New York to impose disciplinary sanctions against New York attorneys” and interpreting Section 487 to regulate “the conduct of litigation before the New York courts”). But Defendants do not fit into either of these categories. And “practice before federal courts is not governed by state court rules.” Amusement Indus., Inc. v. Midland Ave. Assocs., LLC, 820 F.Supp.2d 510, 525 (S.D.N.Y. 2011) (citation omitted); see also id. (“‘Admission to practice law before a state's courts and admission to practice before the federal courts in that state are separate, independent privileges.' Thus, this Court's rules, rather than the New York Judiciary Law, govern this action.” (citation omitted)).
1. Field Preemption
Congress accomplishes field preemption by “manifest[ing] an intent to occupy an entire regulatory field to the exclusion of the states.” Telecomms. Ass'n, 101 F.4th at 147. Such intent “can be inferred from a framework of regulation ‘so pervasive . . . that Congress left no room for the States to supplement it' or where there is a ‘federal interest . . . so dominant that the federal system will be assumed to preclude enforcement of state laws on the same subject.'” Arizona v. United States, 567 U.S. 387, 399 (2012) (alterations in original) (emphasis added) (quoting Rice v. Santa Fe Elevator Corp., 331 U.S. 218, 230 (1947)).
Here, the pervasive framework of regulation established by Rule 11, Section 1927, and the inherent power of courts to sanction lawyers supports the inference that Congress intended to exclude New York from regulating - via tort law, procedural law, or otherwise - the conduct before federal courts of attorneys who are not admitted to the New York Bar and who have not practiced before the New York state courts. Indeed, a holistic consideration of the three sources of the federal courts' sanctioning authority reveals a framework dominant enough to provide a solution to which a federal judge or injured party can turn in any situation involving attorney misconduct before a federal court in which sanctions might be warranted.
The Court “presume[s]” that when Congress passed the Rules Enabling Act and Section 1927, it was “knowledgeable about existing law pertinent to the legislation it [was] enact[ing].” Goodyear Atomic Corp. v. Miller, 486 U.S. 174, 185 (1988) . Such existing law would have included the baseless claim in bad faith, Section 1927 provides a vehicle for requiring the lawyer to personally satisfy attorneys' fees reasonably incurred because of the misconduct. See inherent power of federal courts to sanction lawyers, which is “deeply rooted in the common law tradition.” Carlucci, 775 F.2d at 1447; see also id. (quoting Blackstone's Commentaries regarding power to discipline for “rude and contumelious behaviour” that “must necessarily be as ancient as the laws themselves” (citation omitted)).
The different parts of the federal framework serve different purposes. For instance, if deterrence of further attorney misconduct - or even deterrence of further attorney negligence - is the goal, Rule 11 offers the means to achieve it. See Fed.R.Civ.P. 11(c)(4) (stating that sanctions imposed under Rule 11 “must be limited to what suffices to deter repetition of the conduct or comparable conduct by others similarly situated”); China AI Cap., 2024 WL 964596, at *5 (stating that standard under Rule 11(b) (2)-(3) is objective unreasonableness and is not based on attorney's subjective beliefs). If, on the other hand, there is a need to make whole a party injured by a lawyer who pressed a Enmon, 675 F.3d at 143-44. The courts' inherent power, more broadly, authorizes compensatory sanctions against not only attorneys, but also parties, for conducting themselves in bad faith. See id. And to the extent that these three sources of federal authority cannot sufficiently deter or punish “more drastic” attorney misconduct, a federal court is additionally empowered to address such misconduct by initiating contempt proceedings, provided appropriate procedural guarantees are in place. Arunachalam, 989 F.3d at 997 (citation omitted); see Haeger, 581 U.S. at 108; Providence J. Co., 485 U.S. at 701; see also Adams v. N.Y. State Educ. Dep't., 959 F.Supp.2d 517, 520-521 (S.D.N.Y. 2013) (directing U.S. Marshals Service to, given attorney's continued refusal to pay Rule 11 sanction even after contempt proceedings, arrest and imprison attorney if he did not pay sanction within specified timeframe).
As Adams shows, there are additional sources of sanctioning authority beyond Rule 11, Section 1927, and the inherent powers of courts to impose sanctions and to initiate contempt proceedings. See 959 F.Supp.2d at 519 (discussing criminal contempt statute, see 18 U.S.C. § 401, allowing court to punish contempt by fine or imprisonment); see also Fed.R.Civ.P. 37 (providing for sanctions against parties or attorneys unjustifiably resisting discovery); In re Volpert, 110 F.3d 494, 500 (7th Cir. 1997) (holding that 11 U.S.C. § 105(a) authorizes bankruptcy courts to sanction attorneys who “unreasonably and vexatiously multipl[y]” proceedings). These additional provisions only bolster the Court's conclusion that Congress accomplished field preemption with respect to sanctions imposed for misconduct committed in federal court against attorneys such as Defendants.
Congress and the federal courts have thus created an intricate system of sanctions law under which numerous federal legal provisions interact with each other and serve different purposes. Under the circumstances of this litigation, the careful balance of this system would be upset by allowing New York sanctions law to interfere in the pervasive field of operation created by Rule 11, Section 1927, the inherent power of federal courts, and other federal sources of sanctioning authority. Cf. Stone Crushed P'ship v. Kassab Archbold Jackson & O'Brien, 908 A.2d 875, 880 (Pa. 2006) (holding that federal Bankruptcy Code preempted state law claim of abuse of process based upon a frivolous claim filed in bankruptcy court because “Congress evinced an intent to govern the whole field” and because Rule 11, Section 1927, and the Bankruptcy Code “potentially provide for the equivalent protection afforded [via abuse of process claims] by this Commonwealth to its citizens”).
Though the Supreme Court promulgates the Federal Rules of Civil Procedure, it does so pursuant to the Rules Enabling Act. See 28 U.S.C. § 2072(a). And “Congress . . . has ultimate authority over the Federal Rules of Civil Procedure; it can create exceptions to an individual rule as it sees fit - either by directly amending the rule or by enacting a separate statute overriding it in certain instances.” Shady Grove, 559 U.S. at 400 (majority portion of opinion).
The Court acknowledges that “the mere existence of a [detailed] federal regulatory or enforcement scheme . . . does not by itself imply pre-emption of state remedies.” English, 496 U.S. at 87. But where, as here, none of the attorneys facing sanctions have been barred in New York or are alleged to have committed misconduct in a New York state court, the federal interest is “so dominant” over any legitimate interest of New York's that “the federal system will be assumed to preclude enforcement of [New York] laws on the same subject.” Arizona, 567 U.S. at 399 (citation omitted). Moreover, there are further reasons, to which the Court now turns, why Section 487 is preempted in this case.
2. Conflict Preemption
Section 487 also “is an obstacle to the achievement of federal objectives” and “conflicts with federal law such that it is impossible . . . to comply with both” Section 487 and with certain attributes of the federal scheme of sanctions against lawyers. Figueroa, 864 F.3d at 228 (citation omitted). This conflict is most apparent when comparing the civil remedy available under Section 487 to those available under the three main federal provisions authorizing such sanctions.
Section 487 provides that parties injured by certain attorney misconduct shall recover treble damages in a civil action. This sanction has been characterized by the New York courts as punitive. For example, in Cox, the Appellate Division observed that New York law had “long . . . recognized that a provision for the trebling of damages is penal.” 737 N.Y.S.2d at 2. The Cox court added, “The idea that multiple damage awards are punitive finds support in the ancestry of numerous treble damages provisions having their origins in equivalent provisions of former criminal statutes. For example, the penalty for attorney misconduct found in Judiciary Law § 487 is derived from former Penal Law § 273.” Id. at 3; accord Vt. Agency of Nat. Res. v. U.S. ex rel. Stevens, 529 U.S. 765, 784 (2000) (describing False Claims Act's treble damages provision as “essentially punitive in nature”).
The Supreme Court appeared to walk back its statement in Stevens three years later. See PacifiCare Health Sys., Inc. v. Book, 538 U.S. 401, 405 (2003) (“Our cases have placed different statutory treble-damages provisions on different points along the spectrum between purely compensatory and strictly punitive awards.”). But in 2016, the Supreme Court again characterized the False Claims Act's civil penalties as “essentially punitive in nature.” Universal Health Servs., Inc. v. United States, 579 U.S. 176, 182 (2016) (quoting Stevens, 529 U.S. at 784). In any case, the Court finds in light of Section 487's history as a penal statute and its status as a state rather than federal law that it resides on the “punitive” end of “the spectrum between purely compensatory and strictly punitive awards.” Book, 538 U.S. at 405; see Cox, 737 N.Y.S. at 2-3 (characterizing Section 487 as punitive and stating that federal law is ”largely irrelevant to a peculiarly local question such as whether the New York State Legislature considers multiple damages provisions to be punitive or compensatory”).
The punitive nature of trebled Section 487 sanctions squarely conflicts with the federal scheme. A court can impose a penalty under Rule 11 for attorney misconduct, but the purpose of such a penalty is “to deter improper behavior, not to compensate the victims of it or punish the offender.” Universitas Educ., 784 F.3d at 103 (citation omitted). Indeed, such a penalty should, unlike Section 487 damages, “ordinarily . . . be paid into the court” rather than to the opposing party. Id. (citation omitted). And any penalty under Rule 11 “must be limited to what suffices to deter repetition of the conduct or comparable conduct by others similarly situated.” Fed.R.Civ.P. 11(c)(4). The design of Rule 11 is at odds with Section 487, which provides the injured party (not the court) with treble damages regardless of whether such a steep penalty has been found to be the minimum amount necessary to “deter repetition of the conduct or comparable conduct.” Id.
The same is true of Section 1927. That statute expressly limits sanctions for an attorney's bad faith conduct to the “excess costs, expenses, and attorneys' fees reasonably incurred because of such conduct.” See Williams v. Mt. Diablo Unified Sch. Dist., 284 Fed.Appx. 513, 514 (9th Cir. 2008) (stating that the statute “does not authorize imposition of sanctions in excess of costs reasonably incurred because of” misconduct (quoting United States v. Blodgett, 709 F.2d 608, 610-11 (9th Cir. 1983))). Section 487 would triple that amount.
The Court's research has left it unsure whether Section 487 allows an injured party to treble his or her actual damages, i.e., the actual amount of costs and attorneys' fees incurred because of attorney misconduct, or merely - as under Section 1927 - the amount of costs and attorneys' fees reasonably incurred. If the former, the conflict between the two statutes becomes even starker.
Yet the clearest conflict between Section 487 and federal law comes in the context of the federal courts' inherent sanctioning power. In Haeger, the Supreme Court held that fee awards “under a court's inherent sanctioning authority have to be compensatory rather than punitive when civil litigation procedures are used.” 581 U.S. at 111. “[T]he fee award may go no further than to redress the wronged party ‘for losses sustained'; it may not impose an additional amount as punishment for the sanctioned party's misbehavior.” Id. at 108 (citation omitted).
Section 487's treble damages provision is directly at odds with this Supreme Court command. Treble damages can be imposed under Section 487 in the absence of proof beyond a reasonable doubt. See 24 Caryl Ave. Realty Co., 804 N.Y.S.2d at 113. But the Supreme Court in Haeger explicitly warned that courts seeking to impose punitive sanctions pursuant to their inherent power must “provide procedural guarantees applicable in criminal cases, such as a ‘beyond a reasonable doubt' standard of proof.” 581 U.S. at 108. “When . . . those criminal-type protections are missing, a court's shifting of fees is limited to reimbursing the victim.” Id. Such protections are missing in a Section 487 suit, making it “impossible” for Plaintiffs and this Court “to comply with both” Section 487 and with Haeger and presenting “an obstacle to the achievement of federal objectives” in this litigation. Figueroa, 864 F.3d at 228 (citation omitted).
Haeger, of course, does not mean that an attorney who commits extreme misconduct in a federal court cannot be made to suffer a harsher punishment than the imposition of compensatory damages. As outlined above, federal courts have authority to impose punitive sanctions in satisfaction of Haeger by, for example, initiating criminal contempt proceedings. See Providence J. Co., 485 U.S. at 701.
Having thus concluded that Section 487 conflicts with the federal scheme of court sanctions, the Court proceeds to the next analytical step - at least with respect to Rule 11 - and applies the test of Hanna and its progeny, which asks whether the federal rule is authorized under the Rules Enabling Act (which provides that federal “rules of practice and procedure” shall “not abridge, enlarge or modify any substantive right,” 28 U.S.C. § 2072(a)-(b)) and the Constitution. See Hanna, 380 U.S. at 463-64; Burlington, 480 U.S. at 4-5 (“Rules which incidentally affect litigants' substantive rights do not violate [the Rules Enabling Act] if reasonably necessary to maintain the integrity of th[e] system of rules [governing federal practice and procedure].”). Plaintiffs do not argue that Rule 11 is invalid under Hanna, and in any case such an argument is foreclosed by Supreme Court precedent. See Bus. Guides, Inc. v. Chromatic Commc'ns Enters., Inc., 498 U.S. 533, 552 (1991) (rejecting Rules Enabling Act challenge to Rule 11 and stating that there is “little doubt that Rule 11 is reasonably necessary to maintain the integrity of the system of federal practice and procedure, and that any effect on substantive rights is incidental”); see also Royalty Network, Inc. v. Harris, 756 F.3d 1351, 1360 (11th Cir. 2014) (stating that Rule 11 is “valid under the Rules Enabling Act”). Section 487 thus must yield under the Supremacy Clause to federal law under the circumstances of this case.
Plaintiffs' reliance on United States v. Quest Diagnostics Inc., 734 F.3d 154 (2d Cir. 2013), is misplaced, as that case involved facts very different from the facts here. Quest Diagnostics was a False Claims Act (“FCA”) case in which the trial court dismissed the complaint because one of the plaintiff's general partners, who was a New York lawyer, violated the New York Rules of Professional Conduct by making use of his former client's confidential information in the lawsuit. 734 F.3d at 161-62. The Second Circuit affirmed and rejected an argument that the FCA preempted New York's ethical rules. The Second Circuit acknowledged potential tension between the ethical rules' protection of client confidences and the FCA's interest in encouraging individuals aware of fraud against the government to come forward, but the Second Circuit ultimately observed that the ethical rules “have consistently been relied upon by the courts of this district and circuit in evaluating the ethical conduct of attorneys.” Id. at 163 (citation omitted). The Court here does not purport to hold that New York's ethical rules are preempted in any fashion. Moreover, attorneys admitted to practice in this Court agree under the Local Rules of this District to follow the New York Rules of Professional Conduct, see Local Civ. R. 1.5(b)(5); id. R. 1.3(c)(6)-(7); there is no similar provision in the Local Rules with respect to the New York Judiciary Law. Regardless, any conflict in Quest Diagnostics between the FCA and New York's ethical rules was incidental; Section 487, on the other hand, addresses a subject - attorney misconduct - that is expressly and comprehensively regulated by federal sanctions law.
3. Erie Doctrine
Erie does not require a different conclusion. Seeking to discourage the forum shopping that would occur if different substantive rules applied to an action depending on whether it was filed in state or federal court, that case instructed federal courts sitting in diversity to “apply state substantive law and federal procedural law.” Hanna, 380 U.S. at 465. From the beginning, however, it has been observed that the “line between procedural and substantive law is hazy.” Erie, 304 U.S. at 92 (Reed, J., concurring in the judgment); see also Walker v. Armco Steel Corp., 446 U.S. 740, 744 (1980) (“The question whether state or federal law should apply on various issues arising in an action based on state law which has been brought in federal court under diversity of citizenship jurisdiction has troubled this Court for many years.”). Stepping into Erie's haze, the Court finds Section 487 to be more procedural than substantive under these circumstances. And in any case, the Court is not persuaded that Erie somehow shields Section 487 from the foregoing preemption analysis or that applying preemption principles here “disserve[s] the . . . ‘twin aims of the Erie rule: discouragement of forum-shopping and avoidance of inequitable administration of the laws.'” Stewart Org. v. Ricoh Corp., 487 U.S. 22, 27 n.6 (1988) (citation omitted).
Initially, the Court notes that if there is, after the above application of preemption doctrine, any Erie question remaining, the question applies only to the judge-made inherent power of federal courts to sanction attorneys, not to Rule 11 or Section 1927. See Shady Grove, 559 U.S. at 406 (plurality opinion) (“Erie involved the constitutional power of federal courts to supplant state law with judge-made rules. . . . Congress has undoubted power to supplant state law . . . .” (emphasis added)). In the context of the Federal Rules of Civil Procedure, courts should - like this Court in the discussion above - apply the preemption test from Hanna, Burlington, and Shady Grove rather than Erie. See Shady Grove, 559 U.S. at 398 (“We do not wade into Erie's murky waters unless the Federal Rule is inapplicable or invalid.”); Virginia Uranium, 587 U.S. at 774 (Gorsuch, J.) (lead opinion) (describing Shady Grove as a field preemption case). And Section 1927 is a federal statute to which ordinary preemption principles apply if the statute is constitutional. See Stewart, 487 U.S. at 25-27 & n.6 (stating that if federal statute covers disputed issue and is constitutional, “that is the end of the matter”). Moreover, even when procedural rules are derived from federal common law, Erie does not mandate that they be reflexively cast aside in favor of state law. See Byrd, 356 U.S. at 538 (holding that federal common law policy should not yield to South Carolina rule under which relevant issue was for the judge, not the jury); see also Id. at 537 (acknowledging that “the outcome” in the case might “be substantially affected” by the choice between federal and state rules but nevertheless holding that the “strong federal policy against allowing state rules to disrupt the judge-jury relationship in the federal courts” must be vindicated); Rensberger, Erie and Preemption, 90 Ind. L.J. at 1598 (describing Byrd as involving a conflict between state law and “an unwritten federal practice”).
As “Article III of the Constitution, augmented by the Necessary and Proper Clause of Article I, § 8, cl. 18, empowers Congress to establish a system of federal district and appellate courts and, impliedly, to establish procedural Rules governing litigation in these courts,” Burlington, 480 U.S. at 5 n.3, Section 1927 is constitutional. Cf. Bus. Guides, 498 U.S. at 552 (stating that there is “little doubt” that sanctions provision “is reasonably necessary to maintain the integrity of the system of federal practice and procedure”).
The Court now proceeds to apply this doctrine and, assuming for the sake of argument that an Erie issue exists with respect to a choice between Section 487 and federal law, concludes that under the facts presented by this litigation, Section 487 is procedural for Erie purposes. The New York Court of Appeals's discussion of Section 487 in Amalfitano makes clear that the law does not codify a substantive tort but is rather a “unique statute” originating in ancient criminal law. 903 N.E.2d at 268. This history suggests that - like Rule 11, Section 1927, and the inherent power of federal courts to sanction attorneys - Section 487 is primarily meant not to create a substantive rule of private law but rather to protect the integrity of proceedings before public institutions, i.e., courts. Compare N.Y. Jud. Law § 487 (subjecting a deceitful attorney to a criminal penalty) with Fed.R.Civ.P. 11(c)(4) (subjecting sanctioned attorney to “an order to pay a penalty into court”). Like federal sanctions law, Section 487 accomplishes this goal by way of a “rule[] of practice and procedure,” 28 U.S.C. § 2072(a), whose prohibition of deceptive lawyering governs an attorney regardless of the substantive content of the claim he or she prosecutes or defends. See Shady Grove, 559 U.S. at 432 (Stevens, J., concurring in part and concurring in the judgment) (stating that state rule was procedural because it applied regardless of the substantive law on which a claim was based).
This conclusion is supported by the observation that even when it removed the attorney-misconduct provision from the state's penal code and created Section 487, New York put the new version of the statute in Article 15 of the Judiciary Law, whose “purpose and underlying policy considerations . . . relate . . . to ‘the professional licensure and regulation of lawyers, qua lawyers,'” not to (as would be the case if Section 487 were properly considered as analogous to a tort) the liability to others of private citizens who happen to be lawyers. In re UAW Legal Servs. Plan, 416 N.Y.S.2d 133, 134 (App. Div. 4th Dep't 1979) (citation omitted); cf. China AI Cap., 2024 WL 964596, at *9 n.6 (stating that legal malpractice is a “species of negligence” under which the duty of care is created by the attorney-client relationship). For example, Judiciary Law § 471 (“Section 471”), also found in Article 15, mandates that the “law partner or clerk of a judge shall not practice before him, as attorney or counsellor in any cause, or be employed in any cause which originated before him.” Provisions like Section 471 and Section 487 simply do not - as tort law does - promulgate generally applicable rules governing conduct between private parties. See Arthur Ripstein, Theories of the Common Law of Torts, Stan. Encyc. of Phil. (June 2, 2022) (stating that tort law “focuses on interpersonal wrongdoing primarily between private persons”). The Court thus rejects Plaintiffs' contention that Section 487 is a “garden-variety tort.” (Pls.' Br. at 6 (emphasis removed) (quoting Rudow, 822 F.2d at 330).)
Available at https://plato.stanford.edu/entries/tort-theories/[https://perma.cc/ZHC5-GTJA].
As the Court has already recognized, Rudow's “garden-variety tort” statement has been discredited by the New York Court of Appeals's later discussion of Section 487 in Amalfitano. See Polanco v. NCO Portfolio Mgmt., Inc., 23 F.Supp.3d 363, 376-77 (S.D.N.Y. 2014) (stating that “it may no longer be appropriate to rely on Rudow” in light of Amalfitano).
Accordingly, Plaintiffs' citation (see Pls.' Suppl. Br.) to National Jewish Democratic Council v. Adelson, 417 F.Supp.3d 416 (S.D.N.Y. 2019), is inapposite. In that case, which arose out of a prior federal defamation action, the defendant argued that enforcing Nevada's “anti-SLAPP” statute against him would violate the Supremacy Clause because it would punish him for exercising his right to a federal forum, i.e., punish him for bringing the prior defamation suit. See 417 F.Supp.3d at 422. The District Court rejected that argument, noting that the anti-SLAPP statute was part of Nevada defamation law and thus substantive for Erie purposes and observing that federal courts “have readily imposed state-law tort liability on litigants bringing abusive or meritless claims in federal court.” Id. at 424; see also U.S. Express Lines Ltd. v. Higgins, 281 F.3d 383, 393 (3d Cir. 2002) (stating that the Federal Rules of Civil Procedure “do not preempt claims for abuse of process and similar torts providing relief for misconduct in federal litigation”). As discussed above, the New York Court of Appeals has explained that Section 487 does not codify a tort. Instead, it is a prohibition, procedural for current purposes, on attorney misconduct during court proceedings.
“SLAPP” stands for “strategic lawsuit against public participation.” Adelson, 417 F.Supp.3d at 420.
The distinction between Section 487 and substantive torts becomes apparent when considering that in Adelson, the plaintiffs sought to impose Nevada's anti-SLAPP law upon the person who was the plaintiff in the prior litigation, not upon his attorneys. See 417 F.Supp.3d at 420-21. Indeed, the defendant in a lawsuit asserting the abuse-of-process tort can be an attorney or the client. See Board of Education v. Farmingdale Classroom Tchrs. Ass'n, Inc., 343 N.E.2d 278, 280, 283 (N.Y. 1975) (holding that plaintiff stated claim for abuse of process against attorney and his client). Abuse of process is thus a typical tort in the sense that it forbids intentionally injuring another; that the injury occurs through the abuse of court proceedings (and thus the issue of whether the court is a state or federal court) is incidental. As previously discussed, the same is not true of Section 487, which applies only to attorneys' conduct in court; Plaintiffs here cannot bring any Section 487 claim against the opposing parties from the DNV Action because Section 487 could never apply to them. Cf. Bus. Guides, 498 U.S. at 553 (rejecting argument that Rule 11 “creates a federal common law of malicious prosecution” and warning against “us[ing] sanctions as substitutes for tort damages”). Section 487 is therefore procedural for Erie purposes under these circumstances.
See Adelson v. Harris, 973 F.Supp.2d 467 (S.D.N.Y. 2013).
Similarly, Higgins was a lawsuit for abuse of process, wrongful use of civil proceedings, and other torts under Pennsylvania law, originally filed in Pennsylvania state court against lawyers and their clients, although the clients were never served. See 281 F.3d at 387. It is unclear from the opinions of the Third Circuit and the court below whether Higgins can be further distinguished on the basis that unlike Defendants here, the defendant attorneys in Higgins were attorneys admitted to the bar in the state (in their case, Pennsylvania) whose law was invoked against them.
But even if Section 487 is more fairly characterized as substantive, Erie still does not help Plaintiffs. The ultimate inquiry under Erie is whether the Court's conclusion that Section 487 is preempted “disserve[s] the . . . ‘twin aims of the Erie rule: discouragement of forum-shopping and avoidance of inequitable administration of the laws.'” Stewart, 487 U.S. at 27 n.6 (citation omitted); cf. Shady Grove, 559 U.S. at 406 (plurality opinion) (stating that under Erie, “it made no difference whether the rule was technically one of substance or procedure; the touchstone was whether it ‘significantly affect[s] the result of a litigation'” (citation omitted)). These concerns are not present in this case. The Court's finding here that Section 487, as sought to be enforced by Plaintiffs, is preempted as a matter of federal law would apply equally if Plaintiffs brought the same suit in the courts of New York. (See Pls.' Br. at 7 (stating that under Erie, the Court should “adjudicate [Section 487] claims just as those claims would have been adjudicated in state court”).)
It is worth recalling that Plaintiffs, as defendants in the DNV Action, originally tried to bring their Section 487 claim as a “crossclaim” in the DNV Action, in a similar fashion as a party filing an ordinary sanctions motion during the course of federal litigation. The instant Section 487 action was commenced separately only after Defendants argued in the DNV Action that they were not parties to the DNV Action and thus not properly subject to a crossclaim. But suppose there was no dispute about the propriety of the crossclaim - suppose, instead, that Defendants here had been pro se attorney plaintiffs in the DNV Action and therefore procedurally subject to a Section 487 counterclaim. The same analysis regarding whether Section 487 is preempted by Rule 11, Section 1927, and the inherent power of federal courts would be required. But questions about forum-shopping and “inequitable administration of the laws,” Stewart, 487 U.S. at 27 n.6 (citation omitted), would simply not be present.
The case of Great Western Bank v. Southeastern Bank, 507 S.E.2d 191 (Ga.Ct.App. 1998), is instructive. There, Great Western Bank filed a federal diversity action against Southeastern Bank, alleging that Southeastern had participated in a check-kiting scheme. Southeastern threatened to move for sanctions under Rule 11 and a Georgia abusive litigation statute if the claims against it were not withdrawn. The federal court later granted Southeastern's motion to dismiss. Instead of moving for Rule 11 sanctions, however, Southeastern then filed an action in Georgia state court against Great Western and its attorneys, invoking the Georgia abusive litigation statute. The statute was similar to Section 487 in that it “create[d] an independent cause of action,” but it also codified and consolidated the torts of malicious use of civil proceedings, malicious abuse of civil process, and abusive litigation and applied against “any person who takes an active part in litigation and acts with malice and without substantial justification,” not just attorneys. Great W. Bank, 507 S.E.2d at 192. Further, the statute did “not expressly limit its applicability to actions brought in state court.” Id.
The Georgia Court of Appeals, noting that its holding was “consistent with views espoused by the majority of federal courts which have been presented with claims for abusive litigation under Georgia law,” held that Southeastern's only remedy was to seek Rule 11 sanctions in the prior federal action. Id. at 193. In reaching that conclusion, the court noted that in only one of the six federal cases it reviewed did the federal court hold that it had jurisdiction of a Georgia abusive litigation claim and that two of the federal courts had held that such a state-law claim “may not be raised in federal court even if as a permissive counterclaim it satisfies requirements for diversity jurisdiction, because it is arguably a procedural device which federal courts would not be subject to follow under the Erie doctrine and not a substantive cause of action.” Id. Those two federal courts had “reasoned that Rule 11 provides an adequate remedy for abusive litigation in federal courts.” Id.
The Court emphasizes that its conclusions here with respect to preemption and to Erie apply only to Section 487 as sought to be enforced in this case, i.e., to the attempted enforcement of Section 487 against out-of-state attorneys who practice only in federal court. See Donegan, 746 F.3d at 500, 508 (holding that preemption can occur “as applied”). The Court's holding here should not be read to diminish the viability of Section 487 claims asserted in federal court against New York attorneys and/or arising out of prior litigation that took place in New York state courts.
It seems clear that the preemption analysis set forth in this Decision would not be applicable to a Section 487 claim arising from prior state court litigation - in which, of course, federal sanctions provisions would not have been available - that is brought in (or removed to) federal court based on diversity of citizenship. Where a Section 487 claim arises out of prior federal litigation but is asserted against a New York lawyer, New York's legitimate interest in overseeing and regulating attorneys admitted to its Bar, see Schertenleib, 589 F.2d at 1166 (stating that “[n]o one questions” that New York has such regulatory power), may be strong enough to overcome any preemptive force that federal law would otherwise have in such a case, see Gasperini, 518 U.S. at 427 n.7 (stating that courts “have interpreted the Federal Rules . . . with sensitivity to important state interests and regulatory policies”); cf. Sentry Corp. v. Harris, 802 F.2d 229, 244 (7th Cir. 1986) (quoting characterization of Supreme Court's Walker decision as a holding that federal procedural rule was broader in certain types of cases and narrower in others). But the instant matter is not such a case.
B. THE PREEMPTION ISSUE IS JURISDICTIONAL
Having decided that Section 487 is preempted as sought to be applied in this case, the Court now must decide whether it lacks subject matter jurisdiction by reason of such preemption. For the following reasons, the Court concludes that the preemption issue is jurisdictional.
As discussed above, New York courts routinely hold that they lack subject matter jurisdiction over claims that are preempted by federal law. See, e.g., Pellechia, 916 N.Y.S.2d at 132; Osarczuk, 830 N.Y.S.2d at 714-15; Metro. Transp. Auth., 823 N.Y.S.2d at 90. One of these cases involved Section 487. See Klingsberg, 122 N.Y.S.3d at 336-37 (holding that court lacked subject matter jurisdiction over Section 487 claim that was preempted by LMRA § 301). And since it finds no reason to believe that the New York courts would depart from this practice if Plaintiffs file their Section 487 claims in state court, the Court holds that it lacks diversity jurisdiction over this case. See Fox, 977 F.3d at 1050 (“[A] federal court does not have diversity subject-matter jurisdiction over a claim for which a state court would not have jurisdiction.”).
Plaintiffs urge the Court not to follow Klingsberg. In that case, the plaintiff was a school principal and union member. The New York City Department of Education (the “DOE”) had commenced disciplinary proceedings against her, and the union had an obligation under a collective bargaining agreement to represent her at those proceedings. One of the union's staff attorneys represented the plaintiff “until it was made known by the end of the proceedings that [the attorney] sought a position with the DOE.” 122 N.Y.S.3d at 336. The plaintiff then sued the attorney in state court under Section 487, and the trial court granted the attorney's motion to dismiss. The Appellate Division affirmed, holding that there was no subject matter jurisdiction because the claim against the attorney was preempted by LMRA § 301. See id. at 337 (“Attorneys such as [the defendant] who perform services for and on behalf of a union may not be held liable . . . where the services performed constitute part of the collective bargaining process.”).
Plaintiffs argue that Klingsberg “is inapposite for at least two reasons,” neither of which is persuasive. (Pls.' Br. at 12.) First, Plaintiffs contend that the underlying action in Klingsberg was an administrative proceeding rather than a civil lawsuit. But this contention lacks merit; the Appellate Division's analysis placed no weight on the character of the underlying proceeding. Second, Plaintiffs say Klingsberg is distinguishable because federal courts have exclusive jurisdiction over LMRA § 301 claims, whereas Rule 11 and Section 1927 have “[n]ever been held to constitute the exclusive remedy or cause of action that governs alleged misconduct before federal courts.” (Id. at 13.)
But this argument is simply incorrect. As a matter of federal law, state courts have concurrent jurisdiction over lawsuits brought under LMRA § 301. See Charles Dowd Box Co. v. Courtney, 368 U.S. 502, 506 (1962) (“The statute does not state nor even suggest that [federal court] jurisdiction shall be exclusive. It provides that suits of the kind described ‘may' be brought in the federal district courts, not that they must be.”); Dist. No. 1-Pac. Coast Dist., Marine Eng'rs' Beneficial Ass'n v. Trinidad Corp., 583 F.Supp. 262, 265 (S.D.N.Y. 1984) (stating it was “well settled that state courts have concurrent jurisdiction” over LMRA § 301 claims). Plaintiffs conflate exclusive jurisdiction with complete preemption. That, as a matter of federal law, LMRA § 301 “completely preempts” certain state law contract claims such that they can be removed upon request to federal court on the basis of federal question jurisdiction, see Beneficial Nat'l Bank, 539 U.S. at 6-7, does not mean that, as a matter of federal law, a state court cannot hear a claim under LMRA § 301 if the defendant decides not to request removal.
The Court thus finds that the holdings in Klingsberg and other New York cases in which preempted claims were dismissed for lack of subject matter jurisdiction must be state-law holdings, not federal-law holdings. As just discussed, nothing about federal law prohibits a state court from hearing a LMRA § 301 claim. See Courtney, 368 U.S. at 506; Trinidad Corp., 583 F.Supp. at 265; see generally 21 C.J.S. Courts § 272 (stating that federal preemption doctrine “does not deprive state courts of subject matter jurisdiction over claims involving federal preemption unless Congress has given exclusive jurisdiction to a federal forum” (emphasis added)). Accordingly, although Klingsberg was not explicit about the source of the rule it applied, the rule's source must be in state law, as it applied to the Section 487 claim in Klingsberg even where Congress had not “given exclusive jurisdiction to a federal forum.” 21 C.J.S. Courts § 272; see Tafflin, 493 U.S. at 459 (stating that if “exclusive [federal] jurisdiction be neither express nor implied,” state courts have concurrent jurisdiction “whenever, by their own constitution, they are competent to take it” (emphasis added) (citation omitted)).
The distinction is important here because this Court is bound to apply New York state law as interpreted by New York state courts, but the Court is not bound by New York state courts' interpretation of federal law. See United States v. Miami Univ., 294 F.3d 797, 811 (6th Cir. 2002) (stating that federal courts “must defer to a State court's interpretation of its own law” but “owe no deference” to a state court's interpretation of federal law).
New York is not the only state whose courts set forth a rule that they lack subject matter jurisdiction over claims preempted by federal law. See Williams v. Aona, 210 P.3d 501, 510 (Hawaii 2009) (“[W]hen a federal statute preempts a state law claim, preemption fully divests the statelaw court of all subject-matter jurisdiction over a particular issue.”); M & I Marshall & Ilsley Bank v. Guar. Fin., MHC, 800 N.W.2d 476, 483 (Wis. Ct. App. 2011) (“Federal preemption of a matter deprives a state court of subject matter jurisdiction.” (citation omitted)); Osband v. United Airlines, Inc., 981 P.2d 616, 619 (Colo.App. 1998) (“If federal law preempts state law, the state trial court lacks subject matter jurisdiction to hear a claim.”). Other states have adopted the alternative rule. See Foster v. Foster, 983 N.W.2d 373, 382 n.9 (Mich. 2022) (rejecting assertion that “all types of federal preemption deprive state courts of subject-matter jurisdiction”); Haudrich, 662 N.E.2d at 125354.
Klingsberg was not a one-off holding. For example, in Pellechia, the Appellate Division held that subject matter jurisdiction was lacking over claims preempted by the Federal Aviation Act of 1958, as amended, see 953 N.Y.S.2d at 24243, even though nothing about federal law prohibits state courts from adjudicating such claims on the merits, see Musson Theatrical, Inc. v. Fed. Express Corp., 89 F.3d 1244, 1253 (6th Cir. 1996) (“[W]e see no evidence that Congress intended the federal courts to have exclusive subject matter jurisdiction over the preemption defenses to state law claims against air carriers.”). Osarczuk is similar. There, the Appellate Division affirmed the dismissal for lack of subject matter jurisdiction of state common-law claims that were preempted by the Atomic Energy Act of 1954, as amended by the Price-Anderson Act and as further amended in 1988 (hereinafter the “AEA”). But the court also held that there was jurisdiction over a claim arising under the AEA itself because “the defendant did not request removal to federal court” and because the AEA permits such a claim “to be commenced and tried in a state court, which has concurrent jurisdiction with the appropriate federal district court.” 830 N.Y.S.2d at 713-15.
Even when addressing issues that can be adjudicated only by federal courts, New York courts broadly set forth the general rule that state courts lack subject matter jurisdiction over federally preempted claims. See, e.g., Astro Ready Mix, LLC v. MTA Long Island R.R., 192 N.Y.S.3d 131, 132 (A.D.2d Dep't 2023) (“Where a cause of action is preempted by federal law, a party may move . . . to dismiss . . . on the ground that the court lacks subject matter jurisdiction.”); Metro. Transp. Auth., 823 N.Y.S.2d at 90 (similar). This language is evidence that - especially in light of Klingsberg, Pellechia, and Osarczuk - the rule applies, as a matter of state law, in all preemption cases, not just with respect to subjects over which federal courts or agencies have exclusive jurisdiction.
New York state courts therefore recognize that their rule of subject matter jurisdiction - under which they lack jurisdiction over claims preempted by federal law - is not federally compelled in every preemption case; it instead is a state-law rule. Indeed, Osarczuk would be puzzling if it held that federal law allowed the state court to hear an AEA claim but divested it of subject matter jurisdiction over an AEA defense. Such a holding might be an incorrect application of federal law. See Haudrich, 662 N.E.2d 1248 at 1253-54 (rejecting argument that preemption “is not in the nature of an affirmative defense but is a jurisdictional matter which cannot be waived and which may be raised at any time”); 21 C.J.S. Courts § 272. Osarczuk is more naturally read as applying New York's rule that its courts lack subject matter jurisdiction over federally preempted claims.
There is also evidence that these jurisdictional holdings are not in fact merits holdings in disguise. In Pellechia, the court dismissed the preempted claim for lack of subject matter jurisdiction even though “preemption was first raised by the defendant in its reply papers” because the preemption defense “involve[d] subject-matter jurisdiction, which may be raised at any time.” 916 N.Y.S.2d at 132. Similarly, in Klingsberg, the court expressly relied on N.Y. C.P.L.R. 3211(a)(2), which allows a party to move to dismiss for lack of subject matter jurisdiction - not C.P.L.R. 3211(a)(7), which permits a motion to dismiss for failure to state a cause of action. See 122 N.Y.S.3d at 337.
In Klingsberg and cases like it, the New York courts do not say whether the dismissal is with or without prejudice. But under New York law, dismissal is “not on the merits for res judicata purposes unless the court expressly says so” even when dismissal is for failure to state a cause of action under C.P.L.R. 3211(a) (7) . Pretzel Time, Inc. v. Pretzel Int'l, Inc., No. 98 Civ. 1544, 1998 WL 474075, at *5 (S.D.N.Y. Aug. 10, 1998) (citing New York cases); see Unkechaug Indian Nation v. N.Y. State Dep't of Env't Conservation, 677 F.Supp.3d 137, 153 (E.D.N.Y. 2023) (same); Wilder v. Fresenius Med. Care Holdings, Inc., 187 N.Y.S.3d 610, 613 (App. Div. 1st Dep't 2023) (“To the extent defendants rely on the doctrine of res judicata, this reliance is misplaced because a dismissal under CPLR 3211(a)(7) for failure to state a claim is not a dismissal on the merits with res judicata effect.”); cf. Overview Books, LLC v. United States, 755 F.Supp.2d 409, 415-16 (stating that dismissal under Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim is a judgment on the merits for res judicata purposes).
But even if the holdings in Klingsberg, Osarczuk, and Pellechia are based on an erroneous understanding of federal law - in other words, even if the Appellate Division wrongly thought federal law compelled it to hold that New York courts lacked subject matter jurisdiction over the preempted claims - Plaintiffs' claims in this case are different because the Court finds here that federal law would require dismissal for lack of subject matter jurisdiction of Plaintiffs' Section 487 claims if they are asserted in state court. The Court concluded above that Plaintiffs' Section 487 claims are preempted by Rule 11, Section 1927, and the inherent power of federal courts to sanction attorneys. Thus, the question is whether a state court could exercise subject matter jurisdiction over a claim arising under Rule 11, Section 1927, or the federal courts' inherent power. See Int'l Longshoremen's Ass'n, AFL-CIO v. Davis, 476 U.S. 380, 381-93 (1986) (holding that preemption by National Labor Relations Act was nonwaivable jurisdictional defense and that due to such preemption, state court would lack subject matter jurisdiction over tort claim couched in state-law terms). The answer is no. As an initial matter, no independent cause of action exists under any of these authorities. See Pyramid Designs, 45 Fed. R. Serv. 3d at 627; Abouelmakarem, 2022 WL 1620302, at *2; Sabre Int'l, 13 F.Supp.3d at 73. Further, there is a "clear incompatibility” between the federal interest in an independent federal judiciary and state court jurisdiction over disputes concerning the behavior of attorneys appearing before federal courts. Tafflin, 493 U.S. at 459. Thus, the presumption in favor of concurrent state court jurisdiction is rebutted with respect to these federal sources of sanctioning authority. See id.
In a footnote, the Davis court said its conclusion that National Labor Relations Act preemption was jurisdictional “does not apply to pre-emption claims generally but only to those pre-emption claims that go to the State's actual adjudicatory or regulatory power.” 476 U.S. at 391 n.9. Similarly, the Court holds here that, assuming that in Klingsberg, Osarczuk, and Pellechia the pre-emption claims did not “go to the State's actual adjudicatory or regulatory power,” the preemption in this case of Section 487 does go to New York's “actual adjudicatory or regulatory power,” or rather lack thereof, over the behavior of out-of-state attorneys in federal court. Id.
For all these reasons, the Court concludes that a New York court would, on state or federal law grounds, dismiss Plaintiffs' preempted Section 487 claims for lack of subject matter jurisdiction. And since there would be no subject matter jurisdiction over the claims in state court, there cannot be diversity jurisdiction here. See Fox, 977 F.3d at 1050.
There is also no federal question jurisdiction over this suit. The Court's finding that it lacks diversity jurisdiction because the doctrines of field preemption and conflict preemption would deprive a New York court of subject matter jurisdiction over Plaintiffs' Section 487 claims, see id., does not equate to a finding that Section 487 is “completely preempted” by Rule 11, Section 1927, and the federal courts' inherent power such that federal question jurisdiction exists here. Complete preemption has been found to apply to just three federal statutes and occurs only where a federal provision “provide[s] the exclusive cause of action for the claim asserted.” Beneficial Nat'l Bank, 539 U.S. at 8. But, as just stated, there is no independent cause of action under Rule 11, Section 1927, or the federal courts' inherent power. This case is thus a good example of why the Second Circuit has held that the concepts of field preemption and complete preemption are “better considered distinct.” Sullivan, 424 F.3d at 273 n.7.
In sum, the Court lacks subject matter jurisdiction over this lawsuit. Accordingly, this case shall be dismissed.
Dismissal shall be without prejudice. See Smith v. City of New York, 385 F.Supp.3d 323, 345 n.21 (S.D.N.Y. 2019) (stating that when a court dismisses for lack of subject matter jurisdiction, the dismissal “must be without prejudice” (quoting Siegel v. Apergis, 610 Fed.Appx. 15, 16 (2d Cir. 2015))). The Court expresses no opinion here about the continuing availability, if any, of sanctions in the DNV Action under Rule 11, Section 1927, or the federal courts' inherent authority.
C. EVEN IF THE COURT HAS JURISDICTION, THE PREEMPTION ISSUE BARS THIS SUIT ON THE MERITS
As a formal matter, the Court need not say more. But as a practical matter, it is clear that the Court's conclusion above with respect to preemption - set forth in the context of an inquiry into the Court's subject matter jurisdiction - bars Plaintiffs' Section 487 claims on the merits even if the Court does have subject matter jurisdiction over this lawsuit. As Plaintiffs have been given notice and an opportunity to be heard in writing and at oral argument, it is appropriate for the Court to reach the independent holding that this action would be dismissed on the merits for failure to state a claim if the Court had jurisdiction to do so. See Fed. R. Civ. P. 12(b)(6); Thomas v. Scully, 943 F.2d 259, 260 (2d Cir. 1991) (per curiam) (stating that a District Court has “the power to dismiss a complaint sua sponte for failure to state a claim on which relief can be granted” as long as the plaintiff has “an opportunity to be heard”).
The Court's July 1 order directing the parties to submit briefing regarding subject matter jurisdiction made clear that the Court was considering dismissing the complaint on the merits and ordered the parties to respond to that issue, as well. (See Dkt. No. 260 at 4 (citing Scully, 943 F.2d at 260).) Curiously, Plaintiffs' brief urges the Court not to abstain under the doctrine of Railroad Commission of Texas v. Pullman Co., 312 U.S. 496 (1941), or Younger v. Harris, 401 U.S. 37 (1971), from deciding this case. (See Pls.' Br. at 13-14.) The Court never suggested that it might abstain from hearing or deciding this case and, as this Decision makes clear, does not abstain from deciding dispositive issues. Plaintiffs also argue in the alternative that the Court should not decide it lacks subject matter jurisdiction but rather stay all proceedings “and certify the matter to the Second Circuit for consideration pursuant to 28 U.S.C. § 1292(b) and/or Rule 54(b), Fed. R. Civ. P.” (Pls.' Br. at 14.) These provisions concern interlocutory review, see Tantaros v. Fox News Network, LLC, 465 F.Supp.3d 385, 389 (S.D.N.Y. 2020), and the Court's power to direct entry of judgment as to one or more, but fewer than all, claims or parties. The Court declines Plaintiffs' invitation to stay proceedings. This Decision will be immediately appealable, and thus Second Circuit review (and potentially certification to the New York Court of Appeals) will be readily available to Plaintiffs if they choose to appeal.
The Court is mindful that Defendants had nine years to raise a preemption defense and did not do so. The Court is further cognizant of the “principle of party presentation,” under which courts typically rely on the parties to a lawsuit to “frame the issues for decision and assign to courts the role of neutral arbiter of matters the parties present.” United States v. Sineneng-Smith, 590 U.S. 371, 375 (citation omitted). But the Court finds that under the unique circumstances of this case, reaching the merits is warranted. See Piuggi v. Good for You Prods. LLC, ___ F.Supp.3d ___, No. 23 Civ. 3665, 2024 WL 3274638, at *5 (S.D.N.Y. July 2, 2024) (collecting cases in which courts dismissed claims sua sponte).
Sineneng-Smith was a criminal case in which the defendant was convicted after trial of violating a federal immigration statute. On appeal, the Ninth Circuit named three amici “and invited them to brief and argue issues framed by the panel,” including a First Amendment overbreadth question that the defendant “never raised earlier.” 590 U.S. at 374. The Ninth Circuit concluded, “in accord with the invited amici's arguments,” that the immigration statute was unconstitutionally overbroad. Id. at 375. The Supreme Court then granted review and held that the Ninth Circuit panel “departed so drastically from the principle of party presentation as to constitute an abuse of discretion.” Id. The Supreme Court, however, emphasized that the party presentation principle is “supple, not ironclad” and acknowledged that there are “no doubt circumstances in which a modest initiating role for a court is appropriate.” Id. at 376.
Here, the Court is well within its discretion in proceeding to the merits because the merits issues that will be discussed have already been raised in the context of an inquiry into subject matter jurisdiction - a subject that the Court is obligated to raise if no party does. See Henderson ex rel. Henderson v. Shinseki, 562 U.S. 428, 434 (2011) (“Courts do not usually raise claims or arguments on their own. But federal courts have an independent obligation to ensure that they do not exceed the scope of their jurisdiction, and therefore they must raise and decide jurisdictional questions that the parties either overlook or elect not to press.”). Further, although this is a nine-year-old case, the current procedural context is somewhat unusual: This matter was reassigned from Judge Crotty to this Court only a few months ago, and this Court raised the issue of subject matter jurisdiction as soon as it reasonably could.
This matter is therefore very different from Sineneng-Smith, in which the federal courts' jurisdiction over the case was not in doubt. Accordingly, and given Plaintiffs' opportunities to be heard on the relevant issues, the Court makes explicit the obvious implication of the preemption discussion above: The complaint fails to state a claim upon which relief can be granted because Rule 11, Section 1927, and the inherent power of federal courts to sanction attorneys preempt Section 487 under the unique circumstances presented here. See Scully, 943 F.2d at 260.
D. EVEN IF THERE IS NO PREEMPTION, SECTION 487 CANNOT BE ENFORCED AGAINST DEFENDANTS
Plaintiffs' case fails on the merits for another reason. Above, the Court held that Section 487 is preempted by federal law as sought to be applied in this case, i.e., against attorneys who were not admitted to practice in New York and whose relevant conduct did not take place in the context of any New York state court proceeding. For the purposes of its preemption analysis, the Court assumed that Section 487 can be read to extend to such attorneys its proscription of certain misconduct. But the Court is not in fact persuaded that the statute can be interpreted so broadly.
As stated above, Plaintiffs have not cited any case in which Section 487 was enforced against attorneys such as Defendants. Every Section 487 case that the Court has reviewed involved either a defendant attorney who was admitted to the New York Bar and/or whose alleged misconduct occurred in the context of a New York state proceeding, as opposed to federal court litigation. Moreover, the case law interpreting Section 487, the history of the statute, and the content and structure of the New York Judiciary Law support the conclusion that Section 487 applies only to attorneys admitted to the New York Bar and to attorneys who practice in New York state courts.
The Court begins with the case law. In Schertenleib, the Second Circuit interpreted Section 487 as follows:
No one questions the power of the State of New York to impose disciplinary sanctions against New York attorneys for acts occurring outside the state that are deemed to render them unfit to practice inside the state. However, we believe that section 487 is not an exercise of that power, but is rather intended to regulate, through criminal and civil sanctions, the conduct of litigation before the New York courts. We doubt it was the purpose of the New York State legislature to fasten on its attorneys criminal liability and punitive damages for acts occurring outside the state. It seems more likely that the concern is for the integrity of the truth-seeking processes of the New York courts, not for injury to foreign litigants.589 F.2d at 1166 (emphasis added) (citation omitted). Plaintiffs note that Schertenleib “did not distinguish between the federal or state courts of New York when it referenced ‘New York courts' generally.” (Pls.' Br. at 5.) But courts in this Circuit have interpreted Schertenleib as referring to state courts, not federal courts. See Lindner v. Am. Express Corp., No. 06 Civ. 3834, 2009 WL 54493, at *1 (S.D.N.Y. Jan. 8, 2009) (stating that Section 487 “does not provide a basis for sanctioning a party or attorney for misconduct in an ongoing federal action” and that “[r]ather, it allows for a state law claim for conduct that occurred in a prior state court action”), objections overruled, No. 06 Civ. 3834 (S.D.N.Y. Feb. 12, 2009), ECF No. 129; In re Zucaro, 617 B.R. 18, 28-29 (Bankr. E.D.N.Y. 2020) (stating that the "purpose of Section 487 is to allow New York courts to supervise the conduct of attorneys admitted before their bar” and that “Section 487 extends only to misconduct by attorneys before New York state courts”). But see In re Blue Dog at 399 Inc., No. 15-10694, 2020 WL 6390674, at *7 (Bankr. S.D.N.Y. Oct. 30, 2020) (“Defendants have . . . argued that a [S]ection 487 claim can only be based on conduct that occurs in the state courts. I am not at all convinced that this is correct.”).
The bankruptcy judge in Blue Dog noted that Bill Birds, Inc. v. Stein Law Firm, P.C., 149 N.E.3d 888 (N.Y. 2020), involved a Section 487 claim “based on conduct that occurred during a prior federal court litigation” and that the New York Court of Appeals “did not express any concern with the fact that the underlying litigation had proceeded in federal court in New York rather than in the state court.” 2020 WL 6390674, at *7. But the record in Bill Birds shows that the attorney against whom Section 487 damages were sought was alleged to have been barred in New York, and the attorney did not dispute that allegation. See Record on Appeal at 31, 3637, Bill Birds, Inc. v. Stein Law Firm, P.C., No. APL-2019-00006 (N.Y. Apr. 14, 2019). The same is true of the attorney in Trepel v. Dippold, which Plaintiffs also cite. See Pl.'s Opp'n to Defs.' Statement of Material Facts ¶¶ 2-3, No. 04 Civ. 8310 (S.D.N.Y. Aug. 11, 2006), ECF No. 131. The Court may take judicial notice of these publicly filed documents. See Press v. Primavera, 685 F.Supp.3d 216, 224 (S.D.N.Y. 2023). In any case, the bankruptcy judge in Blue Dog expressly declined to decide whether Section 487 applies outside of the state courts of New York. See 2020 WL 6390674, at *5.
New York state courts have reached similar conclusions. See All. Network, LLC v. Sidley Austin LLP, 987 N.Y.S.2d 794, 807 (Sup. Ct. N.Y. Cnty. 2014) (“The use [in Section 487] of the term ‘the court' means a court of the State of New York.” (quoting S. Blvd. Sound, Inc. v. Felix Storch, Inc., 629 N.Y.S.2d 635, 637 (Civ. Ct. N.Y. Cnty. 1995))). Even in Cinao v. Reers, 893 N.Y.S.2d 851 (Sup. Ct. Kings Cnty. 2010), where the court declined to follow Schertenleib with respect to extraterritoriality, it did so on the ground that a “New York court has sufficient interest in supervising the conduct of attorneys admitted before its bar . . . to apply [Section 487] to the attorney's conduct no matter where the [underlying] action is pending.” 893 N.Y.S.2d at 859 (emphasis added).
Further, the history of Section 487 and the content and structure of the Judiciary Law show that the statute does not apply to attorneys who are not admitted to practice in New York and whose relevant conduct did not take place before a New York state court. As Amalfitano shows, Section 487's predecessor was first codified in New York in 1787 - before federal courts even existed in the United States. See 903 N.E.2d at 267-68. Thus, at least with respect to the original version of the law, New York lawmakers could not possibly have been thinking of regulating practice before federal courts. Further, Judiciary Law Article 15, which contains Section 487, is full of provisions concerning attorneys admitted or seeking to be admitted to the New York Bar.
See, e.g., N.Y. Jud. Law § 460 ("Examination and admission of attorneys”); id. § 463 ("Times and places of examinations”); id. § 464 (stating that those who “pass the examination” shall be “certified by the state board of law examiners to the appellate division of the supreme court of the department specified in the rules of the court of appeals, provided such person shall have in other respects complied with the rules regulating admission to practice as attorneys and counsellors”).
Plaintiffs are wrong to argue that the Judiciary Law refers specifically to the New York state courts (and accordingly excludes federal courts) only when it uses the term “courts of record.” (See Pls.' Br. at 3-4.) The Judiciary Law repeatedly makes clear that the terms “court of record” and “court not of record” both refer to state courts, foreclosing Plaintiffs' contention that the New York State Legislature would have written “courts of record” in Section 487 if it wanted to make specific reference to state courts. See, e.g., N.Y. Jud. Law § 3 (reserving the term “court” for “reference to a court of record or a court not of record, duly organized and existing under the laws of the state as a part of the judicial system of the state” (emphasis added)).
To support their claim that Section 487 should be enforced under these circumstances, Plaintiffs cite to two sections of Judiciary Law Article 15 that they say apply in federal court. The first is Judiciary Law § 475 (“Section 475”), which creates an attorney's lien “upon his or her client's cause of action, claim or counterclaim.” The Second Circuit has held that liens created by this section are enforceable in federal court. See Iter-Tass Russian News Agency v. Russian Kurier, Inc., 140 F.3d 442, 448-49 (2d Cir. 1998).
But Section 475 is distinguishable from Section 487 in three important respects. First, Section 475 expressly applies to federal proceedings. It explicitly states that the attorney's lien is created “[f]rom the commencement of an action, special or other proceeding in any court or before any state, municipal or federal department, except a department of labor.” N.Y. Jud. Law § 475 (emphasis added). Section 487 contains no such language. See Hunter v. Debmar-Mercury LLC, No. 22 Civ. 1686, 2023 WL 5671527, at *14 (S.D.N.Y. Sept. 1, 2023) (stating that where a legislature “includes particular language in one section of a statute but omits it in another section of the same Act, it is generally presumed that [the legislature] acts intentionally” (alteration in original) (quoting Ziparo v. CSX Transp., Inc., 15 F.4th 153, 161 (2d Cir. 2021))). Second, the Court is unaware of any federal legal provision that creates such a lien; therefore, as a general matter, no federal law conflicts with Section 475 in the way that Rule 11, Section 1927, and the federal courts' inherent power to impose sanctions conflict with Section 487. Third, in contrast to the Court's conclusion above with respect to Section 487, courts in this Circuit have characterized Section 475 as establishing substantive rather than procedural law. See, e.g., Application of Kamerman, 278 F.2d 411, 412 n.1 (2d Cir. 1960); Paolillo v. Am. Exp. Isbrandtsen Lines, Inc., 305 F.Supp. 250, 251 n.2 (S.D.N.Y. 1969).
Plaintiffs also point to Judiciary Law § 484 (“Section 484”), which provides in relevant part,
No natural person shall ask or receive, directly or indirectly, compensation for appearing for a person other than himself as attorney in any court or before any magistrate, or for preparing deeds, mortgages, assignments, discharges, leases or any other instruments affecting real estate, wills, codicils, or any other instrument affecting the disposition of property after death, or decedents' estates, or pleadings of any kind in any action brought before any court of record in this state, or make it a business to practice for another as an attorney in any court or before any magistrate unless he has been regularly admitted to practice, as an attorney or counselor, in the courts of record in the state . . . .N.Y. Jud. Law § 484. There is an exception for attorneys “admitted to practice pro hac vice in the State of New York within the limitations prescribed in the rules of the court of appeals.” Id. Violation of Section 484 is a crime. See N.Y. Jud. Law §§ 485, 485-a. Plaintiffs say Section 484 applies in federal court, citing to two cases to support that proposition: Burton v. City of New York, No. 97 Civ. 202, 1997 WL 793105 (E.D.N.Y. Nov. 28, 1997), and United States v. Reese, No. 12 Cr. 629, 2022 WL 4467049 (S.D.N.Y. Sept. 26, 2022).
In Burton, a plaintiff brought a civil rights action pro se against New York City, alleging that police officers illegally searched and arrested him and his wife. The District Court held that he had no standing to bring claims on behalf of his wife and that he could not “represent his wife on claims brought in her own name since under New York law . . . only persons admitted to practice before the courts of New York State may do so on behalf of parties other than themselves.” 1997 WL 793105, at *2. Citing Section 484 and Erbacci, Cerone, and Moriarty, Ltd. v. United States, 923 F.Supp. 482 (S.D.N.Y. 1996), the Burton court said the rule extends to proceedings in federal courts sitting in New York. The Erbacci court, in turn, held that a motion was not properly before it because plaintiffs' counsel “has not been admitted to practice before this Court.” 923 F.Supp. at 485. The Erbacci court found that the attorney violated this District's Local Rules “by bringing a motion despite the fact that he is not admitted to practice before this Court.” Id. The Erbacci court then said the attorney “may have violated” Judiciary Law § 478 (“Section 478”). Id. Section 478, another criminal statute, forbids a person from practicing or appearing as an attorney for a person other than himself or herself “in a court of record in this state” without first having been admitted to practice law “in the courts of record of this state.” When quoting this statute, the Erbacci court omitted the language “court of record in this state” and “courts of record of this state.” See 923 F.Supp. at 485. The Erbacci court then quoted case law stating that Section 478 extends to advice involving federal law. See id. Finally, the Erbacci court noted that although Section 478 is not violated by an attorney admitted to practice pro hac vice in federal court, the relevant attorney had not been so admitted. See id.
Like Section 484, Section 478 contains an exception for attorneys “admitted to practice pro hac vice in the state of New York within the limitations prescribed in the rules of the court of appeals.”
Here, the Court is not persuaded that these cases compel the conclusion that Section 487 should apply to Defendants in this case. The Section 478 language omitted by the Erbacci court is crucial; the phrase “courts of record of this state” makes clear that the statute refers to practice before the New York state courts. See N.Y. Jud. Law § 3 (reserving the term “court” for “reference to a court of record or a court not of record, duly organized and existing under the laws of the state as a part of the judicial system of the state”). Further, the fact that New York has the power to prohibit nonlawyer residents of the state from holding themselves out as attorneys and collecting payment in return for advice about federal law does not mean that the state can regulate a federal court's policies with respect to the admission of attorneys to practice before it. See Amusement Indus., 820 F.Supp.2d at 525 (“‘Admission to practice law before a state's courts and admission to practice before the federal courts in that state are separate, independent privileges.' Thus, this Court's rules, rather than the New York Judiciary Law, govern this action.” (citation omitted)). As the Erbacci court acknowledged, the state statute does not prohibit an attorney, admitted in New York or not, from practicing before a federal court sitting in New York if he or she is duly admitted by the federal court to do so. See 923 F.Supp. at 485. Finally, the Erbacci court did not actually hold that the attorney before it violated Section 478. See id. (stating merely that the attorney “may” have violated the statute). Erbacci and Burton are therefore distinguishable, and to the extent they are not, the Court declines to follow them in light of federal courts' prerogative to establish their own procedures for attorney admission and discipline, see Amusement Indus., 820 F.Supp.2d at 525, and in light of the language of the statutes at issue, which clearly shows they are concerned with the unauthorized practice of law before New York state courts and by nonlawyer New Yorkers who hold themselves out as attorneys.
Plaintiffs' second Section 484 case, Reese, is also inapplicable here. In that criminal case, defendant Christopher Reese (“Reese”), a New York resident, was sentenced to imprisonment for violating conditions of supervised release and filed a pro se motion for compassionate release under 18 U.S.C. § 3582(c)(1)(A). The conditions of release forbade him from associating with known convicted felons. The Court denied his motion for compassionate release because he failed to exhaust his administrative remedies. See 2022 WL 4467049, at *1. The Court further labeled as “meritless” Reese's argument that his association with felons was legal under Section 484. Id. at *1, *3. Reese, conceding that he was not an attorney, had nevertheless argued that his association with felons constituted legitimate employment because he provided them legal assistance in criminal matters pending in federal courts and that this activity was not the unauthorized practice of law because federal courts are not “courts of record” under Section 484. The Court observed that Reese “may be correct” that federal courts are not “courts of record” under the Judiciary Law but noted that Section 484 also prohibits making “it a business to practice for another as an attorney in any court.” Id., at *3 (quoting N.Y. Jud. Law § 484). Although the Reese opinion did not make it explicit, Section 484 is incorporated by federal law via the Assimilative Crimes Act, which provides federal criminal jurisdiction over a person who commits an act on federal property that would be a crime if committed in the state in which the federal property sits. See 18 U.S.C. § 13(a). Thus the unauthorized practice of law in federal courts sitting in New York constitutes a federal crime notwithstanding Reese's argument about Section 484's use of the phrase “courts of record.” Reese cannot be read to hold that Section 484 can be enforced in federal courts by its own force.
In fact, Reese himself is facing a new federal criminal unauthorized-practice-of-law charge under an Assimilative Crimes Act theory. See Indictment ¶ 39, United States v. Reese, No. 24 Cr. 402 (S.D.N.Y. June 24, 2024), ECF No. 2 (charging Reese with unauthorized practice of law in a federal enclave under Section 484 as incorporated by federal Assimilative Crimes Act).
In short, Plantiffs' arguments are unavailing. The Court therefore holds that Section 487 of the New York Judiciary Law, even if it is not preempted by federal law, cannot be enforced against the Defendants in this case because it does not apply to them.
IV. ORDER
For the foregoing reasons, it is hereby
ORDERED that the Complaint (see Dkt. No. 1) and the Amended Complaint (see Dkt. No. 44) of plaintiffs SGM Holdings LLC, Syndicated Geo Management Corp., Richard Featherly, Lawrence Field, and Premier Natural Resources LLC are hereby DISMISSED without prejudice for lack of subject matter jurisdiction; and it is further
ORDERED that for the foregoing reasons, the Clerk of Court is respectfully directed to enter judgment in favor of defendants A. James Andrews, Richard Gaines, and Karl Schledwitz dismissing this action without prejudice for lack of subject matter jurisdiction; and it is further
ORDERED that the Clerk of Court is respectfully directed to terminate any pending motions and to close this case; and it is further
ORDERED that the Clerk of Court is respectfully directed to strike the documents filed at Docket No. 262 from the docket in this matter.
SO ORDERED.