New York Wheel Owner LLC v. Mammoet-Starneth LLC

Background

The lawsuit arose from the failed plan to build the “New York Wheel” on Staten Island. New York Wheel Owner LLC (NYW) originally relied only on federal diversity jurisdiction, which generally requires the opposing parties to be citizens of different states. Across four complaints, NYW alleged that its members were citizens of New York and New Jersey and that the defendants, or their members, were citizens of other states or countries.

The Third Amended Complaint added New York Metropolitan Regional Center, L.P. II as a plaintiff and again alleged diversity jurisdiction. In October 2020, NYW notified the court that it had not adequately determined the citizenship of some minority investor members. Its later investigation showed that NYW’s ownership structure included at least one member that shared California citizenship with defendant Mammoet USA North, Inc., as well as at least two foreign members. The court therefore lacked diversity jurisdiction and, with NYW’s consent, dismissed all claims, counterclaims, and third-party claims.

Sanctions Motion

Mammoet Holding B.V., Mammoet USA Holding, Inc., and Mammoet USA North, Inc. (the Moving Defendants) sought sanctions against NYW under the court’s inherent authority. They sought an award of attorney’s fees based on NYW’s failure to disclose the jurisdictional facts until after three years of litigation. They did not seek sanctions against NYW’s current or former lawyers.

Sanctions under a federal court’s inherent authority require the court to find that the challenged position lacked a reasonable legal basis and was pursued in bad faith, such as for harassment or delay. The bad-faith finding must be supported by clear and convincing evidence. The court also emphasized that inherent-authority sanctions are discretionary and should be imposed only in rare circumstances.

Court’s Analysis

The court assumed, without deciding, that NYW’s assertion of diversity jurisdiction may have lacked a reasonable legal basis. It nevertheless found that the Moving Defendants had not shown bad faith. They conceded that they could not identify an improper purpose and relied instead on the seriousness of the jurisdictional error.

The court recognized that NYW had not exercised due diligence. Information in NYW Investor’s operating agreement and public records should have prompted a reasonable inquiry into the citizenship of its members. The court said there was a strong case that NYW had been negligent or even reckless in alleging and repeating its citizenship allegations.

But the court held that negligence or recklessness by the client was not enough to establish bad faith in these circumstances. NYW’s complex, multi-level ownership structure made the mistake different from cases involving conduct showing that a party or lawyer knew a necessary factual or legal requirement was missing. The court also noted that NYW itself brought the jurisdictional problem to the court’s attention before discovery began. Because the record did not show that NYW’s error was motivated by harassment, delay, or another improper purpose, the court could not impose sanctions.

Disposition

The Moving Defendants’ motion for sanctions was DENIED. The court also directed any party seeking to keep documents under seal or redacted to show, in writing and on a document-by-document basis, why continued secrecy was consistent with the presumption of public access. Proposed redactions had to be narrowly tailored. If no party justified continued sealing or redaction by the deadline, the parties were directed to file the materials publicly. The Clerk of Court was directed to terminate the sanctions motion on the docket.