United States District Court, S.D. New York
MEMORANDUM OPINION AND ORDER
J. NATHAN, DISTRICT JUDGE.
January 18, 2017, the Court required Plaintiff Errant Gene
Therapeutics, LLC ("Errant Gene") and its counsel
to show cause why Errant Gene and/or its counsel should not
be sanctioned pursuant to Rule 11(c) for misrepresenting that
Errant Gene was not a citizen of New York for purposes of
diversity jurisdiction. Dkt. No. 124 at 6. After receiving
briefing from both parties on that question, the Court
concludes that sua sponte sanctions are not warranted.
Court has recited the facts of this action elsewhere and
assumes the parties' familiarity therewith. See
Dkt. No. 124. The Court briefly describes the background of
this case before turning to the instant issue.
Gene first filed a complaint in this action on March 18,
2015. See Dkt. No. 1. The only basis for the
Court's subject matter jurisdiction over this lawsuit was
diversity of citizenship pursuant to 28 U.S.C. § 1332.
On October 28, 2016, Errant Gene submitted a motion to
dismiss the action, asserting that one of its members was a
limited liability company whose members include citizens of
New York, the same state where Defendant Sloan-Kettering
Institute for Cancer Research ("SKI") is a citizen.
Dkt. No. 99 at ¶ 1.
January 18, 2017, the Court granted Errant Gene's motion
to dismiss this action without prejudice for lack of subject
matter jurisdiction. Dkt. No. 124. The Court explained that
because Errant Gene had at least one individual member who
was a citizen of New York at the time this action was
commenced and at least two limited liability company members
that were citizens of New York at the time this action was
commenced, Errant Gene was a citizen of New York at the time
the action was commenced. Id. at 5. Accordingly, the
Court lacked diversity jurisdiction.
Court thus granted Errant Gene's motion to dismiss, but
it also ordered Errant Gene and its counsel to show cause why
Errant Gene and/or its counsel should not be sanctioned
pursuant to Rule 11 (c) for misrepresenting to the Court the
existence of diversity between the parties. Id. at
response to the Order to Show Cause, Errant Gene's
counsel have sought to explain how the "incorrect
determination that diversity of jurisdiction existed"
was made. Dkt. No. 131 at 3. Kenneth Sussmane, one of the
attorneys representing Errant Gene, acknowledges that it was
his "responsibility to determine whether diversity
jurisdiction existed in this action." Dkt. No. 139 at
¶ 8. According to Sussmane, he "first addressed the
question of diversity" in 2011. Id. at ¶
7; Dkt. No. 138 at 8-9; Dkt. No. 140 at 2. Then, in advance
of a conference before this Court, Sussmane requested from
Errant Gene a copy of its books and records showing Errant
Gene's members and their residences. Dkt. No. 139 at
¶¶ 8-9. The document that Sussmane received did not
list a New York address for any member; instead, those
records showed that one of the company's members, Charles
Columbus, was a Delaware resident. Dkt. No. 131 at 3; Dkt.
No. 139 at ¶ 10. Sussmane relied on that list in filing
a letter regarding jurisdiction on April 6, 2016. Dkt. No.
139 at ¶ 9. During document discovery in October 2016,
counsel learned that Columbus was in fact a New York
resident. Dkt. No. 131 at 3; Dkt. No. 139 at ¶ 13.
Similarly, Sussmane had an "understanding" that Sam
Salman, the president of Errant Gene and a member of a
limited liability company that was itself a member of Errant
Gene, "owned his membership interest in [the limited
liability company] through a corporation that was not a
citizen of New York." Dkt. No. 131 at 4; see
also Dkt. No. 139 at ¶ 13 ("I]t was my
understanding that [Salman] owned an interest in a
corporation that was not a New York citizen, which in turn
owned a membership interest in [the limited liability
company]."). In fact, Salman, a resident of New York,
owned his membership interest directly. Dkt. No. 131 at 4.
Shortly after learning of the jurisdictional defects, Errant
Gene filed a motion to dismiss based on lack of jurisdiction.
Dkt. No. 139 at ¶¶ 14-15.
the dismissal of the underlying action, a court "retains
the authority to decide collateral issues such as the
appropriateness of sanctions." ED Capital, LLC v.
Bloomfield Inv. Res. Corp., 316 F.R.D. 77, 80-81
Rule of Civil Procedure 11 provides that "[b]y
presenting to the court a pleading, written motion, or other
paper" an "attorney . . . certifies that to the
best of the person's knowledge, information, and belief,
formed after an inquiry reasonable under the circumstances,
" the "legal contentions are warranted by existing
law" and the "factual contentions have evidentiary
support." Fed.R.Civ.P. 11(b) & (b)(2)-(3). Rule
11(c) authorizes a court, "on its own, " to order
"an attorney, law firm, or party to show cause why
conduct specifically described in the order has not violated
Rule 11(b)." Fed.R.Civ.P. 11(c)(3). In determining
whether to impose sanctions sua sponte, the Court does not
ask whether an attorney acted in an objectively reasonable
manner, i.e., as "any competent attorney would have
done." See Muhammad v. Walmart Stores East,
L.P., 732 F.3d 104, 108-09 (2d Cir. 2013). Instead, the
Court may issue sanctions sua sponte under Rule 11 "only
upon a finding of subjective bad faith." Id. at
108. One district court has described subjective bad faith as
"deliberate dishonesty" or a "willful intent
to deceive, " Centauri Shipping Ltd. v. Western Bulk
Carriers KS, 528 F.Supp.2d 197, 201 (S.D.N.Y. 2007),
while another has defined it as "deliberate fraud or
wrongdoing, " Cardona v. Mohabir, No.
14-CV-1596 PKC, 2014 WL 1804793, at *3 (S.D.N.Y. May 6, 2014)
(quoting Sees. & Exch, Comm 'n v. Smith, 798
F.Supp.2d 412, 424 (N.D.N.Y. 2011), aff din part,
dismissed in part, 710 F.3d 87 (2d Cir. 2013)).
the evidence does not support a conclusion that Errant Gene
acted with subjective bad faith in falsely stating that
Errant Gene and Sloan Kettering Institute ("SKI")
were diverse parties. According to Errant Gene's counsel,
Errant Gene's records indicated that Charles Columbus was
a Delaware resident. Dkt. No. 131 at 3. It is thus likely
that Errant Gene's counsel was honestly mistaken about
the residency of Charles Columbus, not "deliberate[ly]
dishonest" about it. Centauri Shipping Ltd.,
528 F.Supp. at 201. And although Errant Gene's counsel
have not explained how Sussmane came to have an
"understanding" about Salman's membership or
why Sussmane never confirmed his "understanding"
with Salman, the Court finds no basis to conclude that
counsel deliberately misrepresented or concealed the contours
of Salman's membership in the limited liability company.
Indeed, soon after learning that diversity was lacking,
Errant Gene filed a motion to dismiss the action.
See Dkt. No. 139 at ¶¶ 14-15.
Errant Gene's seeming failure to conduct an initial
investigation into diversity jurisdiction constitutes
subjective bad faith is a harder question. On the one hand,
Errant Gene's counsel have not provided any description
of the initial investigation into diversity jurisdiction that
they took before filing the complaint in this action, and
they have not alleged that they were unaware such an
investigation was necessary. To the contrary, Sussmane knew
that it was his "responsibility to determine whether
diversity jurisdiction existed in this action." Dkt. No.
139 at ¶ 8. Yet Sussmane suggests that he only attempted
to make that determination in 2011, four years before the
instant action was filed, and then again in advance of a
conference, a year after the case was filed. Inquiring into
the company's citizenship four years before the action
was commenced and then one year after the action was
commenced does not satisfy the duty to ascertain the
citizenship of parties at the time the action was commenced.
other hand, counsel have not admitted that they filed the
complaint knowing that they had failed to satisfy their duty.
Cf. Cardona, 2014 WL 1804793, at *4 (explaining that
the attorney there had intentionally removed the case to what
he knew was the wrong district). While "any competent
attorney" would have known that simply relying on his
years-old understanding of his client's citizenship was
insufficient to determine ...