Castillo Grand, LLC v. Sheraton Operating Corp.

719 F.3d 120

CASTILLO GRAND, LLC, Plaintiff–Appellant,

v.SHERATON OPERATING CORPORATION, Defendant–Appellee.

Docket No. 11–2457–cv.

United States Court of Appeals, Second Circuit.

Heard: June 25, 2012.

Decided: June 18, 2013.

Todd Evan Soloway, (Joshua D. Bernstein, on the brief), Pryor Cashman LLP, New York, N.Y., for Appellant.

Alexander Widell, (William A. Brewer III, James S. Renard, on the brief), Bickel & Brewer, New York, N.Y., for Appellee.

Before: NEWMAN, WINTER, and RAGGI, Circuit Judges.

JON O. NEWMAN, Circuit Judge:

This appeal presents two issues concerning an award of attorney's fees. The first is whether the “just costs” authorized by 28 U.S.C. § 1919 when an action is dismissed for lack of jurisdiction include attorney's fees. The second, arising if a statutory basis for attorney's fees is lacking, is whether, on the facts of this case, fees were properly awarded for a litigant's maneuvering to re-assert diversity jurisdiction after failure of an initial attempt. These issues arise on an appeal by Plaintiff–Appellant Castillo Grand, LLC, (“Castillo”) from the December 23, 2010, order of the District Court for the Southern District of New York (Robert P. Patterson, Jr., District Judge), awarding attorney's fees of $200,000 and costs of $30,000 to Defendant–Appellee Sheraton Operating Corporation (“Sheraton”). Castillo does not challenge the award of costs.

We conclude that section 1919 does not authorize an award of attorney's fees and that, although such fees may be awarded on a non-statutory basis for bad faith in the conduct of litigation, fees were not warranted under the circumstances of this case. We therefore vacate the order and remand with directions to delete the award of attorney's fees.

Background

Castillo filed a complaint (“the first action”) against Sheraton in the District Court, alleging state law claims and invoking subject matter jurisdiction based on diversity of citizenship pursuant to 28 U.S.C. § 1332(a). Castillo alleged that it is a Florida limited liability company with its principal place of business in Florida and that Sheraton is a Delaware corporation with its principal place of business in New York. Sheraton filed an answer and eight counterclaims, also invoking diversity jurisdiction. Discovery proceeded for three years, during which the parties took thirty-four fact depositions and eight expert witness depositions. Sheraton filed a motion for partial summary judgment on an affirmative defense, which the District Court denied.

One month before the scheduled start of the trial, Sheraton moved to dismiss for lack of subject matter jurisdiction on the ground that two of the members of Castillo's limited liability company were New York citizens at the time Castillo filed its complaint. Sheraton, relying on Carden v. Arkoma Associates, 494 U.S. 185, 195–96, 110 S.Ct. 1015, 108 L.Ed.2d 157 (1990), which held that the citizenship of all members of a limited liability corporation (like the partners of a partnership) controls for diversity purposes, contended that complete diversity did not exist. In response, Castillo conceded that one of its constituent members was a New York citizen at the time Castillo had filed its complaint and did not oppose Sheraton's motion to dismiss. The District Court dismissed the first action without prejudice for lack of jurisdiction. Prior to dismissal of the first action, Castillo's counsel advised the Court that Castillo intended to “cure” the jurisdictional defect by dropping the non-diverse member of its company and filing a “new action” alleging the same claims between the same parties. Castillo contended that it was entitled to pursue this course on the authority of Grupo Dataflux v. Atlas Global Group, L.P., 541 U.S. 567, 124 S.Ct. 1920, 158 L.Ed.2d 866 (2004), which we discuss below. Thereafter, Sheraton advised the Court that any attempt by Castillo to alter the citizenship of the company would violate 28 U.S.C. § 1359. Section 1359 provides: “A district court shall not have jurisdiction of a civil action in which any party, by assignment or otherwise, has been improperly or collusively made or joined to invoke the jurisdiction of such court.”

Castillo then filed in the District Court a new complaint (“the second action”) against Sheraton, which contained almost identical substantive claims. Castillo paid a new docketing fee, and the second action was assigned a docket number different from that of the first action. On Sheraton's motion, the District Court dismissed the second action for lack of subject matter jurisdiction. Castillo Grand LLC v. Sheraton Operating Corp., No. 09 CV 7197, 2009 WL 4667104 (S.D.N.Y. Dec. 9, 2009) (“Dismissal Op.”).The Court stated that Castillo's reorganization was undertaken to invoke the jurisdiction of the Court and that “[t]he law is clear in this circuit that transactions engineered by a party for the purpose of creating federal diversity jurisdiction are precisely the sort of conduct prohibited by § 1359.” Id. at *2. An appeal from that dismissal was withdrawn with prejudice by stipulation, pursuant to Rule 42(b) of the Federal Rules of Appellate Procedure. No. 09–5143 (2d Cir. Apr. 28, 2010).

Sheraton thereafter moved for “just costs” including attorney's fees pursuant to 28 U.S.C. § 1919. Section 1919 provides: “Whenever any action or suit is dismissed in any district court ... for want of jurisdiction, such court may order the payment of just costs.” Sheraton contended that Castillo had filed the second action in violation of section 1359, causing Sheraton to incur legal fees and costs in moving for dismissal.

The District Court granted the motion pursuant to section 1919, awarding Sheraton its requested attorney's fees of $200,000 and costs of $30,000. See Castillo Grand LLC v. Sheraton Operating Corp., No. 09 Civ. 7197, 2010 WL 5298179 (S.D.N.Y. Dec. 23, 2010). The Court stated:

[C]ounsel for Sheraton made clear, prior to the filing of the new complaint, that Plaintiff would run afoul of Section 1359 if it attempted to reconfigure Castillo, LLC to manufacture diversity jurisdiction and that any effort to do so would result in failure. The plain reading of Section 1359 as well as case law supported Sheraton's counsel's warning.

Id. at *3. The Court subsequently denied Castillo's motion for reconsideration. See Castillo Grand LLC v. Sheraton Operating Corp., No. 09 CV 7197, 2011 WL 1793352 (S.D.N.Y. May 6, 2011).

Discussion

I. Are Attorney's Fees Authorized by Section 1919?

The United States follows the “American Rule” regarding attorney's fees: “[T]he prevailing party may not recover attorneys' fees as costs or otherwise.” Alyeska Pipeline Service Co. v. Wilderness Society, 421 U.S. 240, 245, 95 S.Ct. 1612, 44 L.Ed.2d 141 (1975). This rule may be modified by statute, id. at 263–64, 95 S.Ct. 1612, or relaxed under common law principles in “the most extraordinary of instances,” Fleischer v. Paramount Pictures Corp., 329 F.2d 424, 426 (2d Cir.1964); see Alyeska, 421 U.S. at 258–59, 95 S.Ct. 1612. Furthermore, in the absence of statute, federal courts lack authority to assess costs when subject matter jurisdiction is lacking. See W.G. v. Senatore, 18 F.3d 60, 64 & n. 1. (2d Cir.1994). Section 1919 clearly modifies this rule to provide statutory authority for costs when subject matter jurisdiction is lacking, but the initial issue in this case is whether the “just costs” authorized by section 1919 include attorney's fees so as to provide a statutory exception to the “American Rule.”

We think they do not. Congress has usually been explicit when it wants costs to include attorney's fees. For example, 28 U.S.C. § 1447, which specifies procedures following removal of a case from state court to federal court, provides: “If at any time before final judgment it appears that the district court lacks subject matter jurisdiction, the case shall be remanded ... [and] may require payment of just costs and any actual expenses, including attorney fees, incurred as a result of the removal” (emphasis added). In Marek v. Chesny, 473 U.S. 1, 8, 105 S.Ct. 3012, 87 L.Ed.2d 1 (1985), the Supreme Court listed several statutes that explicitly include attorney's fees as part of “costs.” In contrast,section 1919 neither defines “just costs” nor makes any mention of attorney's fees.

Other circuits considering the issue have ruled that section 1919 does not provide a statutory exception to the “American Rule”. See Otay Land Co. v. United Enterprises Ltd., 672 F.3d 1152, 1159 (9th Cir.2012); Wilkinson v. D.M. Weatherly Co., 655 F.2d 47, 49 (5th Cir.1981); Signorile v. Quaker Oats Co., 499 F.2d 142, 145 (7th Cir.1974). As of 1997, another district court could say, “[T]here is not a single reported case in the history of American jurisprudence in which attorney's fees have been awarded under § 1919.” Barron's Educational Series, Inc. v. Hiltzik, 987 F.Supp. 224, 225 (E.D.N.Y.1997).¹

In light of the statutory text and the decisions of other circuits considering the issue, we conclude that section 1919 does not provide a statutory exception to the “American Rule”.

II. Are Attorney's Fees Warranted Under Common Law Principles?

Even if statutory authorization for attorney's fees is lacking, a district court may award attorney's fees under one of the common law exceptions to the “American Rule”. Because the common law power to award attorney's fees derives from the court's equitable powers and is unrelated to the merits of an action, a court may still award fees even though it lacks subject matter jurisdiction. See Willy v. Coastal Corp., 503 U.S. 131, 138–39, 112 S.Ct. 1076, 117 L.Ed.2d 280 (1992).

It is arguable that, because Congress did not define “costs” in section 1919 to include attorney's fees, Congress expected section 1919 to displace whatever equitable power federal courts might otherwise have to award such fees under common law principles. We reject that argument. In the absence of any indication that Co...