The opinion of the court was delivered by: Charles S. Haight, Senior District Judge
MEMORANDUM OPINION AND ORDER
In this diversity action, plaintiff RLS Associates, LLC ("RLS") alleges that defendant United Bank of Kuwait PLC ("UBK" or "the Bank") breached a contractual agreement to pay a post-termination fee. RLS, a United States-based limited liability company, performed consulting services for UBK, a London-based banking corporation, until UBK terminated the consulting relationship in February 2000. RLS contends that, under the terms of the consultation contract, it was entitled to an additional year's worth of consulting fees following the termination. This seemingly straightforward breach of contract claim has given rise to a number of complicated litigation issues - including the Bank's present motion to dismiss the action for plaintiff's failure to post a bond to secure costs and attorneys' fees.
In light of the cost bond's critical role in this litigation, this Opinion revisits several issues related to UBK's motion to dismiss: (1) whether the English rule on attorneys' fees applies in this case, (2) whether the Court should require RLS to post a bond in any amount, and (3) if so, the appropriate amount for the bond.
For the reasons set forth below, I hold that the English rule on attorneys' fees applies, that a cost bond is justified, and that the amount of the bond should be reduced to $75,000. Furthermore, I direct UBK to post a bond, also in the amount of $75,000.
A. Relevant Procedural History
In its March 11, 2005 Opinion, this Court found that Local Civil Rule 54.2 entitled UBK to a bond to be posted by RLS because "UBK has an understandable concern regarding RLS's real ability to pay any eventual attorneys' fees or costs, should UBK prevail in this case." 2005 WL 578917, at *2 (S.D.N.Y. Mar. 11, 2005). The record indicated that RLS had no assets. Furthermore, the Court noted that "since the English Rule applies, attorneys' fees are included in the recoverable costs, and so the amount involved is potentially significant." Id. at *4. In a subsequent opinion, the Court set the bond amount at $469,500, which incorporated attorneys' fees that UBK could potentially recover under the English fee-shifting rule if UBK prevailed in the litigation. I based that amount principally upon the affidavit of a leading English "law costs draftsman," whose calculations were not persuasively challenged by RLS. See 2005 WL 3312004, at *2 (S.D.N.Y. Dec. 7, 2005).
RLS failed to post the bond, and the Bank moved for dismissal. RLS argued that dismissal was inappropriate - indeed, barred by the Second Circuit's opinion in Selletti v. Carey, 173 F.3d 104 (2d Cir. 1999) - because RLS lacked the financial resources to post the bond.*fn1 In Selletti, the Second Circuit held that a district court abused its discretion when it dismissed an action for failure to post a bond without giving adequate consideration to the plaintiff's alleged inability to pay. Id. at 111-13. Guided by Selletti, this Court directed the plaintiff to file financial statements of RLS,
Richard Swomley, and Elaine Swomley. The record indicated that the Swomleys, husband and wife, were at the time the only equitable owners of RLS. See 2006 WL 2495039 (S.D.N.Y. Aug. 29, 2006).
The financial statements filed by the plaintiff indicate the followings facts. First, RLS has no income and no assets. In fact, the company has not generated any revenue since 2000. Second, Richard Swomley has negative net income, with expenses exceeding income by $66,000 in 2006. He holds an investment account of $105,000 and retirement accounts totaling $886,500, but Richard Swomley asserts that these accounts would be subject to significant state and federal taxes - around 40 percent - if liquidated. Third, Elaine Swomley has negative net income, with expenses exceeding income by $141,000 in 2006. She holds net home equity of about $218,000.*fn2 The Swomleys have liquidated investment and retirement accounts and taken out additional home mortgages to fund living expenses over the past several years. See Affirmation of Michael S. Devorkin To File Financial Statements of RLS Associates, LLC, Richard Swomley, Elaine Swomley (dated Sept. 14, 2006).
The Bank, in response, argues that the Swomleys actually hold about $1.4 million to $1.8 million in assets - "more than enough assets to arrange for security [of $469,500]." Def.'s Mem. in Further Resp. to Financial Disclosures (dated Nov. 1, 2006), at 4.
The immediate question before the Court is whether plaintiff's complaint should be dismissed for failure to post the bond required by the Court's December 7, 2005 Opinion and Order. Given the importance of the bond issue, however, this Opinion revisits several related issues: (1) whether the English rule on attorneys' fees applies in this case; (2) whether the Court should require RLS to post a bond in any amount; and (3) if so, the appropriate amount for the bond. The third inquiry necessarily implicates (4) whether the bond requirement should look beyond the corporate plaintiff, RLS, to the assets of Richard Swomley or Elaine Swomley; and (5) what bond amount would appropriately balance the equitable interests at stake.*fn3
II. THE ENGLISH RULE ON ATTORNEYS' FEES
RLS and the Bank entered into a set of Consultancy Agreements, which provide that the contracts "shall be governed by and construed in accordance with the laws of England." See 2003 WL 22801918, at *1 (S.D.N.Y. Nov. 24, 2003). This Part of the Opinion considers whether the English rule on attorneys' fees ("the English rule") applies to the current litigation as a result of this choice of law clause. Under the English rule, the prevailing party can generally recover its attorneys' fees from the losing party.
The issue of attorneys' fees has become central to the litigation. The Bank's anticipated legal fees of $469,500 significantly exceed the amount of plaintiff's underlying claim, which is about $275,000. Furthermore, the Bank has twice rejected RLS's offer to drop the action for an exchange of mutual releases. As this Court has noted, "[t]he only discernible reason for the Bank's refusal is its hope of recovering from RLS, based upon the contractually governing English law, the very considerable amount of legal fees the Bank has incurred to date." 2006 WL 2495039, at *2 (S.D.N.Y. Aug. 29, 2006). Therefore, the Court will examine this issue in greater detail.
1. The Court's Previous Analysis
The Court's March 11, 2005 Opinion concluded that the English rule was "consistent with New York choice of law principles and prior precedent." 2005 WL 578917, at *4 (S.D.N.Y. Mar. 11, 2005). I noted that: "Other courts have ruled in circumstances similar to the present case, that under New York choice of law principles, English laws allowing recovery of attorneys' fees by the prevailing party are applicable." Id. at *3 (citing Katz v. Berisford Int'l PLC, 2000 WL 959721 (S.D.N.Y. July 10, 2000); Csaky v. Meyer, 1995 WL 494574 (S.D.N.Y. Aug. 18, 1994); Browne v. Prentice Dry Goods, Inc., 1986 WL 6496, at *3 (S.D.N.Y. June 5, 1986)). As a result, I took attorneys' fees into account when setting the bond amount under Rule 54.2.
In a subsequent opinion, I explained: "[A]lthough the cost bond UBK requests in the case at bar is much larger than those requested by the defendants in Tri-Ex [a case where the bonds requested by the defendants totaled $34,000], that is the inevitable consequence of the parties' agreeing that English law would govern. Under the English rule the prevailing party is entitled to attorney's fees as part of the costs. Presumably RLS perceived some benefit to itself when it agreed that the contracts in suit 'shall be governed by and construed in accordance with the laws of England,' but whether or not that is so, RLS accepted English law cum onere, and one of those burdens (to mix metaphors) has come home to roost." 2005 WL 3312004, at *3 (S.D.N.Y. Dec. 7, 2005).
2. The Parties' Arguments
RLS contends that the Court's determination was mistaken and that the English rule should not apply because: "First, it is a fundamental principle of American and English law that absent some specific substantive English statute, an American court will not borrow an attorneys' fee provision. Second, there is no such statute in this case; attorneys' fees under English law are purely procedural. Thus, the choice of law clause in this contract does not, in fact, import English law on attorneys' fees." Letter of Michael S. Devorkin to the Court (dated Oct. 3, 2006).*fn4 RLS cites Conte v. Flota Mercante del Estado, 277 F.2d 664 (2d Cir. 1960), where the Second Circuit refused to apply an Argentine attorneys' fee statute that followed the English rule in an admiralty case with claims governed by Argentine law. RLS also cites Bensen v. American Ultramar Ltd., 1997 WL 317343 (S.D.N.Y. June 12, 1997), where the court characterized attorneys' fees as "procedural" under New York law and declined to import the English cost-shifting rule. Pl.'s Mem. of Law in Opp'n to UBK's Mot. to Dismiss (dated June 9, 2006), at 21.
The Bank argues that the English Rule should apply because: "[T]he bond RLS seeks to avoid is the inevitable consequence of the parties agreeing that English law would govern. Plaintiff knew this meant the losing party would pay attorney fees and it was the first to seek them on summary judgment." Def.'s Mem. in Resp. to Financial Disclosures (dated Sept. 27, 2006), at 3 (citations and quotations omitted). The Bank notes that in a brief prepared by predecessor counsel on an earlier summary judgment motion, RLS argued: "All of the Consultancy Agreements between RLS and UBK provide (at paragraph 18) that they 'shall be governed by and construed in accordance with the laws of England.' Under English law, the prevailing party can recover its attorneys' fees from the losing party. . . . As such, UBK is liable to RLS for the attorneys' fees incurred by RLS in this action." Def.'s Reply Mem. in Supp. of Mot. to Dismiss with Prejudice (dated June 26, 2006), at 4 (quoting Pl.'s Mem. in Supp. of Summ. J. (dated May 16, 2003), at 7-9).
Whether the English rule should be applied in this case raises the following issues: (1) whether, under the Erie doctrine in this diversity case, attorneys' fees are governed by state or federal law, (2) whether the contract clause selecting English law would be recognized under New York choice of law principles, and (3) if so, the scope of that choice of law clause - specifically, whether it includes the English rule for attorneys' fees. As explained below, it is clear that attorneys' fees are governed by state law under the Erie doctrine, and that the contract clause selecting English law would be recognized under New York choice of law principles. Thus, the key issue is whether the choice of law clause incorporates the English rule on attorneys' fees. Because choice of law clauses only apply to substantive issues, the question becomes whether the English rule on attorneys' fees would be considered procedural or substantive under New York choice of law principles.
The primary substance-procedure framework adopted by the New York Court of Appeals labels issues relating closely to the underlying right as substantive and issues dealing with the remedy, or the means by which the right is enforced, as procedural. Under this framework, I conclude that the English rule would be characterized as substantive. In addition, the Court of Appeals has identified several policy considerations that underlie the substance-procedure dichotomy, which relate to judicial efficiency, forum-shopping, fairness to all parties, and the public policy of New York. A balance of these considerations also weighs in favor of characterizing the English rule as substantive in this case.
This case is in federal court based on diversity jurisdiction. Under Erie Railroad Co. v. Tompkins, 304 U.S. 64 (1938), and its progeny, federal courts sitting in diversity apply federal procedural law and state substantive law. See, e.g., Gasperini v. Ctr. for Humanities, Inc., 518 U.S. 415, 427 (1996). But the distinction between substance and procedure is sometimes unclear.
1. Substance-Procedure Analysis under the Erie Doctrine
In Guaranty Trust Co. v. York, 326 U.S. 99 (1945), the Supreme Court announced an "outcome-determination" test, whereby a rule would be considered substantive under the Erie doctrine if it would "significantly affect the result of a litigation for a federal court to disregard [the state law]." Id. at 109. But this test has no clear stopping point; almost any procedural rule can have a significant effect on the outcome of a case. In Hanna v. Plumer, 380 U.S. 460 (1965), the Court refined and qualified the outcome-determination test. The Court explained that the outcome-determination test should be read with "reference to the twin aims of the Erie rule: discouragement of forum-shopping and avoidance of inequitable administration of the laws." Id. at 468.*fn5
2. Attorneys' Fees under the Erie Doctrine
A preliminary issue is whether, under the Erie doctrine, the Court should apply state or federal law to attorneys' fees. Two courts in the Southern District of New York have concluded that "[u]nder Erie principles, attorney's fees are considered substantive and [are] controlled by state law in diversity cases." Bensen v. Am. Ultramar Ltd., 1997 WL 317343, at *13 (S.D.N.Y. June 12, 1997) (quoting Whiteside v. New Castle Mut. Ins. Co., 595 F. Supp. 1096, 1100 (D. Del. 1984), citing Alyeska Pipeline Serv. Co. v. Wilderness Soc'y, 421 U.S. 240, 259 n.31 (1975)); Katz v. Berisford Int'l PLC, 2000 WL 959721, at *7 (S.D.N.Y. July 10, 2000). Bensen and Katz cite the Supreme Court's opinion in Alyeska, which states: "[I]n an ordinary diversity case where the state law does not run counter to a valid federal statute or rule of court, and usually it will not, state law denying the right to attorney's fees or giving a right thereto, which reflects a ...