11-2457-cv
Castillo Grand, LLC v. Sheraton Operating Corporation

                         UNITED STATES COURT OF APPEALS

                              FOR THE SECOND CIRCUIT

                                  August Term 2011

          Heard: June 25, 2012                    Decided: June 18, 2013

                              Docket Nos. 11-2457-cv

- - - - - - - - - - - - - - - - - - - - - -
CASTILLO GRAND, LLC,

      Plaintiff-Appellant,

                    v.

SHERATON OPERATING CORPORATION,

     Defendant-Appellee.
- - - - - - - - - - - - - - - - - - - - - -

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

      Appeal from the December 23, 2010, order of the United States

District Court for the Southern District of New York (Robert P.

Patterson, Jr., District Judge), awarding $200,000 in attorney’s fees

and $30,000 in costs for refiling a lawsuit after non-diverse members

of a limited liability corporation were dropped in an attempt to

invoke diversity of citizenship jurisdiction.

      Order vacated and remanded with directions to delete the award of

attorney’s fees.

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

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

                                      -2-
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, 

, 195-96 (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.




                                           -3-
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., 

 (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, 

 (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




                                   -4-
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, 

 (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, 

 (S.D.N.Y. May 6, 2011).


                                   5
                                      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, 

, 245 (1975).                      This rule may be

modified by statute, id. at 263-64, or relaxed under common law

principles in “the most extraordinary of instances,” Fleischer v.

Paramount Pictures Corp., 

, 426 (2d Cir. 1964); see

Alyeska, 421 U.S. at 258-59.          Furthermore, in the absence of statute,

federal courts lack authority to assess costs when subject matter

jurisdiction is lacking.           See W.G. v. Senatore, 

, 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

                                             6
fees, incurred as a result of the removal” (emphasis added). In Marek

v. Chesny, 

, 8 (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., 

, 1159 (9th Cir.

2012); Wilkinson v. D.M. Weatherly Co., 

, 49 (5th Cir.

1981); Signorile v. Quaker Oats Co., 

, 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, 

, 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.




     1
      In 2004, one district court awarded attorney’s fees “under the
rubric of section 1919,” ruling that this provision “does not provide
the unique basis” for an award of fees, but that fees were warranted
because the plaintiff’s action was “wrongful” in that it knew that
subject matter jurisdiction was lacking. See Correspondent Services
Corp. v. JVW Investment, LTD., No. 99 Civ. 8934, 

, at
*16 (S.D.N.Y. Sept. 29, 2004).

                                    7
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., 

, 138 (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 Congress

intended to say anything about attorney’s fees in enacting section

1919, we think the statute neither authorizes such fees nor precludes

their award under common law principles.

       Federal   courts   have    identified    only    a   limited    number     of

circumstances where an award of attorney’s fees as part of costs is

merited under common law principles.            These circumstances include

“willful disobedience of a court order,” see Alyeska, 421 U.S. at 258

(internal    quotation    mark    omitted),    acts    taken   “in    bad     faith,

vexatiously, wantonly, or for oppressive reasons,” id. at 258-59

(internal quotation marks omitted), or suits where one litigant’s

expenses benefit a larger class, see Mills v. Electric Auto-Lite Co.,

                                       8


, 392 (1970).      See also Hall v. Cole, 

, 5-6

(1973).

     In the pending case, the most relevant exception is the one for

acts taken “in bad faith.”    Sheraton argues that Castillo’s decision

to file the second action, if not exactly bad faith, was similarly

blameworthy because Castillo knew or should have known that it was not

entitled to alter the membership of its limited liability company to

satisfy diversity jurisdiction.          This is so, Sheraton contends,

because Castillo’s maneuver violated section 1359 and was prohibited

by the Supreme Court’s decision in Grupo Dataflux.

     Whether Castillo violated section 1359 is not entirely clear.

The District Court thought this provision was violated because, in the

Court’s words, “the plain language of the statute . . . prohibits

improper   or   collusive   invocation    of   federal   jurisdiction   ‘by

assignment or otherwise.’” Dismissal Op., 

, at *3

(emphasis in original).     We are not so sure.

     What the plain language of section 1359 does is bar a federal

court from exercising jurisdiction of an action in which “any party,

by assignment or otherwise, has been improperly or collusively made or

joined to invoke jurisdiction of such court.” 28 U.S.C. § 1359.

Clearly no assignment occurred in the pending case, but, as the

District Court noted, section 1359 applies where a party has been




                                    9
improperly made or joined to invoke jurisdiction by assignment “or

otherwise.” Dismissal Op. at *3 (emphasis in original).        Equally

clearly, no party has been “joined.”   Whether a party has been “made”

is less clear.

     We have located no decision explicitly interpreting the word

“made” in section 1359.   As used in this provision, the word seems to

have two possible meanings.   It could mean that a party was “made” in

the sense of being created. Or, with only the slightest rearrangement

of the text, it could mean that a person or entity was “made to become

a party.”   The first interpretation is perhaps illustrated by Lehigh

Mining & Manufacturing Co. v. Kelly, 

 (1895), where the

Supreme Court, considering a precursor to section 1359,2 ruled that a

plaintiff corporation could not establish diversity jurisdiction by

re-incorporating itself in a diverse state. See id. at 342. Doing so,

the Court said, “should be regarded as a case of an improper and

collusive making of parties for the purpose of creating a case

cognizable in the [federal] court.” Id. (emphasis added).   The second

interpretation is perhaps illustrated by cases rejecting jurisdiction

where a diverse person is selected as an administrator and then made

to become a party for the purpose of obtaining federal jurisdiction.


     2
      Act of March 3, 1875, c. 137, 18 Stat. 470, codified at 28 U.S.C.
§ 80 (1940).




                                  10
See O’Brien v. AVCO Corp., 

, 1036 (2d Cir. 1969); Lester

v. McFaddon, 

, 1102-06 (4th Cir. 1969) (administrator

with only nominal duties).3

       We have some doubt whether Castillo’s action in dropping its non-

diverse members violated section 1359.      Castillo did not join a party

by assignment or otherwise, and it strains the word to say that it

“made” a party (or caused itself to be made a party) by dropping its

non-diverse members.      Our doubt is reinforced by noting that when the

Supreme Court decided a case with facts extremely close to those of

the pending case, it never mentioned section 1359. See Grupo Dataflux,

supra. In that case, two non-diverse members of a limited partnership

left the partnership after a complaint was filed. See id., 541 U.S. at

569.       The Supreme Court invoked the time-of-filing rule, id. at 569-

77, a rule of ancient lineage, see Mollan v. Torrance, 22 U.S. (9

Wheat.) 537, 539 (1824) (R. Donaldson ed. 1824), and upheld a district

court’s dismissal for lack of diversity jurisdiction. See Grupo

Dataflux, 541 U.S. at 570-80.      The Court distinguished the case from

one where dispensable non-diverse parties are dropped to cure a lack

of complete diversity, see id. at 574-75, pointing out that, as in our

case, the dropping of the non-diverse partners was not “a change in



       3
      Going beyond the words of section 1359, we have stated in dictum
that “we construe section 1359 broadly to bar any agreement whose
‘primary aim’ is to concoct federal diversity jurisdiction.” Airlines
Reporting Corp. v. S and N Travel, Inc., 

, 862 (2d Cir.
1995) (quoting O’Brien, 425 F.2d at 1034 (dictum)).


                                      11
the parties to the action, but . . . a change in the citizenship of a

continuing party.” Id. at 575.

      In the pending case, the District Court acknowledged that the

partnership in Grupo Dataflux had not violated section 1359 because

“there was no suggestion that the non-diverse partners were dropped in

order to create federal subject matter jurisdiction.” Dismissal Op.,

at *6.    Nevertheless, the Court deemed Castillo to have violated

section 1359 because the non-diverse members were dropped for the

purpose of creating jurisdiction.       As we have pointed out, however,

that action does not appear to fit within the literal wording of the

actions proscribed by section 1359.

      We need not rule definitively on the coverage of section 1359

because other language in Grupo Dataflux afforded Castillo a good-

faith basis to believe that its action was permissible. In that case,

the   partnership   had   unsuccessfully   sought   to   sustain   diversity

jurisdiction   by   contending   that   the   change   in   its   citizenship

permitted it to continue with the same action that it had originally

filed.   “[T]he obvious course,” the Court instructed, “for a litigant

whose suit was dismissed as [the partnership’s] was, would have been

immediately to file a new action.” Grupo Dataflux, 541 U.S. at 581.

That is precisely what Castillo did here.       The reconstituted company

filed a new action and paid a new filing fee, and the new action was

assigned a new docket number.     The District Judge reasonably thought

that such refiling saves jurisdiction for an entity only where its

non-diverse members leave for unknown reasons, as in Grupo Dataflux,
                                 12
and not where they are dropped in order to create jurisdiction.

Without deciding whether the Supreme Court intended to make that

distinction, which is at least debatable, we conclude that Castillo

was not in bad faith in thinking that the Supreme Court’s language

rendered its refiling permissible.

     Moreover, Castillo advised the District Court, prior to the

dismissal of the first action, of its intent to refile the complaint

after “curing” the jurisdictional defects, as well as its belief that

Supreme Court precedent permitted such a step.   This candid admission

that Castillo intended to drop the non-diverse members in order to

create diversity jurisdiction is evidence that Castillo believed in

good faith that its proposed action would be effective.     And Castillo

was entitled to take some comfort from the District Court’s decision,

based on Castillo’s proposed course of action, to hold the original

trial date in anticipation of Castillo’s refiling its complaint, see

Dismissal Op. at *1, a step the Court was unlikely to have taken if

jurisdiction would clearly not be available for the refiled complaint.

     Although   the   District   Judge   thoroughly   and   thoughtfully

considered the matter before him, we conclude, for all of the reasons

stated, that this is a rare instance where he exceeded his discretion

in awarding attorney’s fees.4


     4
      Sheraton attempts to bolster the District Court’s award of
attorney’s fees by analogizing this case to Correspondent Services.
That case, however, is distinguishable. In Correspondent Services,
the District Court awarded attorney’s fees because the sanctioned


                                   13
                                Conclusion

     The   District   Court’s   order   is   vacated   and   remanded   with

directions to delete the award of attorney’s fees.




party knew that subject matter jurisdiction was lacking, yet invoked
the court’s power to attach property anyway.      See Correspondent
Services, 

, at *15-*16. Here, Castillo had reason to
believe that subject matter jurisdiction existed.
                                 14