PATEL v. SMITH et al

Filing 27

MEMORANDUM AND ORDER THAT DEFTS' 7/29/2011 MOTION FOR SANCTIONS PURSUANT TO RULE 11 OF THE FEDERAL RULES OF CIVIL PROCEDURE IS DENIED. FURTHER, UPON CONSIDERATION OF DEFTS' 9/9/2011 MOTION FOR INVOLUNTARY DISMISSAL UNDER RULE41(b) OF THE FEDERAL RULES OF CIVIL PROCEDURE, THE MOTION IS DISMISSED AS MOOT. SIGNED BY HONORABLE LOUIS H. POLLAK ON 3/26/12. 3/28/12 ENTERED AND COPIES E-MAILED.(kw, )

IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA

HIREN PATEL,
Plaintiff,
Civil Action
v.
No. 10-4165
SHARON K. SMITH, NICOLE
JOHNSON, and SJ SUBS, LLC,
Defendants.

MEMORANDUM/ORDER
Presently before the court is a motion filed by the defendants on July 29, 2011, for
sanctions against the plaintiff and plaintiff’s counsel (Docket No. 17). The motion,
brought under Rule 11 of the Federal Rules of Civil Procedure, claims that the plaintiff’s
counsel failed to conduct reasonable pre-filing investigation into the citizenship of the
parties for jurisdictional purposes. For the reasons that follow, the motion will be denied.
Plaintiff Hiren Patel commenced this action by filing a complaint in federal court
against Sharon K. Smith, Nicole Johnson, and SJ Subs LLC on August 18, 2010 (Docket
No. 1). The complaint concerned a soured business transaction in which Smith and
Johnson allegedly agreed to transfer to Patel an exclusive contract to serve as a regional
overseer (“Development Agent”) for Subway restaurant franchises in southern New
Jersey. Transfer of the contract was contingent on Subway’s approval, which was denied.

The complaint alleged, in substance, that Patel was induced by Smith and Johnson to pay
a non-refundable deposit shortly before Subway denied the proposed transfer. The
complaint further alleged that Patel had been induced by Smith and Johnson to purchase
from them (and from SJ Subs LLC, an entity they controlled) several New Jersey Subway
franchises in an effort to make himself a more attractive candidate for transfer of the
Development Agent contract, and that Smith and Johnson had interfered with Patel’s
efforts to sell the New Jersey franchises after Subway denied the proposed transfer.
The complaint contained seven claims for relief. Four counts sounded in state law:
conversion; fraud; civil conspiracy; and tortious interference with business relations.
Three counts sounded in federal law: restraint of trade, 15 U.S.C. § 1; civil racketeering
(RICO), 18 U.S.C. § 1962(c); and securities fraud, 18 U.S.C. § 1343.
Paragraph five of Patel’s complaint asserted that the latter three counts conferred
federal-question jurisdiction, 28 U.S.C. § 1331, and that the state-law claims could be
heard in pendent or supplemental jurisdiction. However, the complaint also alleged that
jurisdiction was proper based on the diversity of citizenship of the parties and the amount
in controversy. Id. § 1332(a). The citizenship of the parties was not alleged in express
terms. The complaint referred, instead, only to the principal place of business of each of
the parties: Patel in Pennsylvania; Smith, Johnson, and SJ Subs LLC in New Jersey.
On October 15, 2010, the defendants moved to dismiss the complaint for lack of
subject-matter jurisdiction, Fed. R. Civ. P. 12(b)(1), and for failure to state a claim, Fed.

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R. Civ. P. 12(b)(6) (Docket No. 4). Patel opposed that motion on November 1, 2010
(Docket No. 6). In pertinent part, Patel argued that diversity jurisdiction was proper
because “Patel is from Pennsylvania” and “[t]he Defendants are two individuals and a
limited liability company, each from New Jersey.” Those statements were supported by
citations to paragraphs in the complaint alleging the “principal place of business” of each
of the parties.
I granted the defendants’ motion and dismissed the complaint by order and
accompanying memorandum, dated July 11, 2011 (Docket Nos. 15, 16). All three federal
claims were dismissed pursuant to Rule 12(b)(6) for failure to state a claim. Count 3 of
the complaint, asserting a violation of 18 U.S.C. § 1343, was dismissed with prejudice,
since there is no recognized private right of action to recover for violations of § 1343; the
other two federal counts were dismissed without prejudice. Having dismissed the federal
claims, I declined to exercise supplemental jurisdiction over the remaining state-law
claims. 28 U.S.C. § 1367(c).
In the memorandum, I also explained that 28 U.S.C. § 1332(a) was not available as
an alternate source of jurisdiction to hear the state-law claims, because the complaint
failed to allege the citizenship of Patel, Smith, or Johnson. Allegations concerning the
“principal place of business” of a natural person are insufficient. The citizenship of a
natural person is determined by domicile. See, e.g., Walls v. Ahmed, 832 F. Supp. 940,
942 (E.D. Pa. 1993). Patel was given leave to amend the complaint to correct the defect.

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Patel did not submit an amended federal complaint. Instead, in a letter dated July
22, 2011, Patel notified the court of the absence of diversity jurisdiction (Docket No. 18,
docketed Aug. 8, 2011). The letter, from the plaintiff’s counsel, Marc A. Zaid, stated:
I have reviewed Your Honor’s Memorandum and Order, each dated July 11,
2011, and also conducted additional research into the residence addresses
for the named individual Defendants. That research reveals the absence of
diversity jurisdiction effective as of the date when this case had been
commenced.
Accordingly, Plaintiff will not be filing an amended complaint in this
case. Instead, Plaintiff intends to transfer the matter to the appropriate state
court forum. I have communicated with the Office of the Clerk of Court for
[the] United States District Court for the Eastern District of Pennsylvania
for guidance to obtain the requisite certified transcript and pleadings in
order to accomplish such transfer.
No order transferring or remanding the case was ever sought or entered in these federal
proceedings.1
On July 29, 2011, the defendants moved for Rule 11 sanctions against both the
plaintiff, Patel, and the plaintiff’s counsel, Zaid (Docket No. 17). The defendants’ motion
argues that the complaint’s defective jurisdictional allegation could have been avoided

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Pennsylvania law permits what is considered, under state law, to be a “transfer” of
a case from a federal court in Pennsylvania to a state court in Pennsylvania, after the case
is dismissed from the federal court for want of jurisdiction. 42 Pa. Cons. Stat. Ann.
§ 5103(b); see also Lafferty v. St. Riel, 495 F.3d 72, 83 (3d Cir. 2007) (describing the
procedure of § 5103(b) to be akin to “refiling” rather than transferring). On September
22, 2011, Patel filed a “First Amended Complaint” against Smith and Johnson in the
Court of Common Pleas of Bucks County, Pennsylvania. That action was removed to this
court by Smith and Johnson on October 24, 2011. See Patel v. Smith, Civ. No. 11-6650
(E.D. Pa. Oct. 24, 2011). It has not been consolidated with the present action and is not
addressed in this memorandum/order.
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had the plaintiff’s counsel diligently researched the citizenship of the parties prior to
filing the complaint.
The plaintiff filed a response in opposition to the motion for sanctions on August
12, 2011 (Docket No. 19). The response asserts that counsel reasonably believed that
defendants Smith and Johnson were domiciled in New Jersey prior to filing the
complaint—a belief based, allegedly, on: (1) Patel’s experience with Subway
Development Agent contracts, which generally required that a Development Agent reside
in the region for which the Agent was responsible (which would have been New Jersey,
for Smith and Johnson); (2) a copy of Patel’s own Development Agent contract for areas
in Pennsylvania, which contained such a residency requirement; and (3) counsel’s search
of public residence information, which showed that multiple individuals with the names
“Sharon K. Smith” and “Nicole Johnson” appeared to reside in New Jersey. The response
further claims that the complaint was drafted to speak of the defendants’ principal places
of business because counsel was uncertain which of the New Jersey residence addresses
were correct. Finally, the response acknowledges that research after the dismissal of the
complaint “indicated that the individual Defendants owned a residential property together
in Bucks County, Pennsylvania, and seemed to have owned the Pennsylvania property at
the time the Complaint was filed.” The response gives no explanation for why this
information could not have been discovered prior to the filing of the complaint.
The defendants were permitted to file a further reply in support of sanctions on

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September 8, 2011 (Docket No. 22). The following day, September 9, 2011, the
defendants submitted a “Motion Under Fed. R. Civ. P. 41(b) for Involuntary Dismissal”
(Docket No. 23). The motion requests dismissal of the state-law claims of the complaint,
as well as conversion of the court’s prior dismissal without prejudice of two of the federal
claims into a dismissal with prejudice. On September 15, 2011, the plaintiff filed a
“Notice of Voluntary Dismissal” (Docket No. 25). The plaintiff also submitted a
response in opposition to the defendants’ motion for involuntary dismissal (Docket No.
26).
I begin with the issue of sanctions. Because the defendants challenge both the
legal and factual basis for asserting diversity jurisdiction in the complaint, two provisions
of Rule 11 are implicated. Rule 11(b) provides in part:
By presenting to the court a pleading, written motion, or other
paper—whether by signing, filing, submitting, or later advocating it—an
attorney or unrepresented party certifies that to the best of the person’s
knowledge, information, and belief, formed after an inquiry reasonable
under the circumstances:
...
(2) the claims, defenses, and other legal contentions are warranted by
existing law or by a nonfrivolous argument for extending, modifying, or
reversing existing law or for establishing new law;
(3) the factual contentions have evidentiary support or, if specifically
so identified, will likely have evidentiary support after a reasonable
opportunity for further investigation or discovery . . . .
The procedure for seeking sanctions is set forth in Rule 11(c). Under the so-called “safe
harbor” provision, the party seeking sanctions must serve a motion for sanctions on the
opposing party under Rule 5, prior to presenting the motion to the court; the opposing
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party then has twenty-one days in which the challenged pleading may be “withdrawn or
appropriately corrected.” Fed. R. Civ. P. 11(c)(2).
It is doubtful that the safe harbor procedure established by Rule 11(c) was
followed in this case. The defendants’ motion for sanctions was filed with the court on
July 29, 2011, and the motion quotes from the July 22, 2011, letter to the court from
plaintiff’s counsel. Failure to observe the safe harbor procedure is itself a sufficient
reason to deny the motion for sanctions. In re Schaefer Salt Recovery, Inc., 542 F.3d 90,
99 (3d Cir. 2008).
It is also difficult to see how the purpose of the Rule 11(c) safe harbor could have
been honored under these circumstances. The safe harbor is intended “to give parties the
opportunity to correct their errors.” In re Schaefer Salt Recovery, Inc., 542 F.3d at 99.
By waiting to file the motion for sanctions until after dismissal of the complaint, the
defendants failed to afford the plaintiff any opportunity to correct the allegedly
sanctionable errors of the complaint. “Given the ‘safe harbor’ provisions . . . , a party
cannot delaying serving its Rule 11 motion until conclusion of the case (or judicial
rejection of the offending contention.” Fed. R. Civ. P. 11 Advisory Committee Notes to
1993 Amendments; see also 5A Charles A. Wright & Arthur R. Miller, Federal Practice
and Procedure § 1337.2, at 727 & n.10 (collecting cases).2

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Indeed, even prior to the 1993 amendments to Rule 11—which established the
twenty-one-day safe harbor—it was the law of this circuit that a motion for sanctions
must be filed prior the entry of final judgment. Mary Ann Pensiero, Inc. v. Lingle, 847
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There are, however, two countervailing considerations regarding the timing of the
defendants’ motion for sanctions. First, the plaintiff has not objected to the possible
failure to honor the Rule 11(c) safe harbor. See Brickwood Contractors, Inc. v. Datanet
Eng’g, Inc., 369 F.3d 385, 390 (4th Cir. 2004) (holding that safe harbor provisions of
Rule 11(c) may be waived). Second, one motivation for the motion for sanctions appears
to have been the letter from plaintiff’s counsel dated July 22, 2011—i.e., after dismissal
of the complaint. The July 22 letter could be read to imply that the citizenship of the
parties could have been discovered in the exercise of reasonable pre-complaint diligence,
and thus it might serve to explain the post-dismissal timing of the defendants’ motion for
sanctions. Therefore, notwithstanding my doubts concerning compliance with Rule 11(c),
I will address the merits of the request for sanctions.
On the merits, I find no conduct in the record that would justify the imposition of
Rule 11 sanctions. Sanctions are to be imposed sparingly. See, e.g., Simmerman v.
Corino, 27 F.3d 58, 62 (3d Cir. 1994) (“We have emphasized that Rule 11 targets abuse,
making sanctions appropriate only if the filing of the complaint constituted abusive
litigation or misuse of the court’s process.” (internal quotation marks omitted)). The
mistakes in the jurisdictional allegations of the complaint—judged, as they must be,
objectively and without the “wisdom of hindsight,” CTC Imps. & Exps. v. Nigerian

F.2d 90, 99-100 (3d Cir. 1988); cf. In re Schaefer Salt Recovery, Inc., 542 F.3d at 99 &
n.5 (noting that the Pensiero rule has been applied even after 1993 amendments).
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Petroleum Corp., 951 F.2d 573, 578 (3d Cir. 1991) (quoting Fed. R. Civ. P. 11 Advisory
Committee Notes to 1983 Amendments)—are not sanctionable. Under the circumstances
as represented by the plaintiff’s counsel, it was not unreasonable to think that the
defendants were citizens of New Jersey. Counsel’s reasonable belief to that effect was
based on the client’s experience with Development Agent contracts, the Pennsylvania
Development Agent contract, and the multiple possible New Jersey addresses for persons
named Sharon Smith and Nicole Johnson. Cf. Mary Ann Pensiero, Inc., 847 F.3d at 95
(noting that “necessity for reliance on a client for the underlying factual information” may
be considered in determining reasonableness of an attorney’s pre-filing inquiry). The prefiling investigation conducted by the plaintiff’s counsel does not warrant sanctions.
The defendants, particularly in their reply memorandum, emphasize the putative
legal error committed by plaintiff’s counsel in pleading the “principal place of business”
of the parties, rather than the parties’ domicile. A complaint that relies on diversity
jurisdiction but that fails to plead the domicile of the parties is rightly subject to dismissal,
not sanctions. That is particularly true in the context of this case, where the plaintiff
relied on diversity jurisdiction only as an alternative to federal-question jurisdiction.3
Given the plaintiff’s belt-and-suspenders approach, the complaint’s claims would have

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The plaintiff’s complaint successfully invoked the latter. Dismissal of the three
counts of the complaint which sounded in federal law was itself an exercise of this court’s
federal-question jurisdiction. See Bell v. Hood, 327 U.S. 678, 682 (1946) (“[I]t is well
settled that the failure to state a proper cause of action calls for a judgment on the merits
and not for a dismissal for want of jurisdiction.”).
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been properly before the court even without the defective allegations of citizenship.
My conclusion that sanctions are not appropriate is bolstered by a review of cases
in which sanctions were awarded for defects in the complaint regarding diversity
jurisdiction. For example, in Hussey Copper, Ltd. v. Oxford Financial Group, the
plaintiff was sanctioned for alleging that the parties were diverse, when in fact the
defendant partnership had members who were domiciled in the same state as the plaintiff.
121 F.R.D. 252, 253 (W.D. Pa. 1987). But in that case, a member of the law firm
representing the plaintiff was himself one of the non-diverse partners in the defendant
entity—a circumstance that strongly bespoke “the lack of a good faith investigation and
reasonable inquiry” concerning diversity jurisdiction. Id. at 254; see also Clark v. State
Farm Ins. Co., Civ. No. 89-977, 1990 WL 139382, at *3 (E.D. Pa. Sept. 20, 1990)
(awarding Rule 11 sanctions where plaintiff submitted an amended complaint that failed
to allege the proper amount in controversy, after already being on notice of the problem).
No such glaring circumstances are present here.
Finally, I turn to the defendants’ pending motion for involuntary dismissal and the
plaintiff’s “Notice of Voluntary Dismissal.” Both submissions invoke Rule 41. Rule
41(a) governs the circumstances in which a plaintiff may voluntary dismiss an action;
Rule 41(b) governs the circumstances in which an action may be dismissed for a
plaintiff’s failure to prosecute or for misconduct. It is a necessary predicate to the
invocation of either Rule 41(a) or Rule 41(b) that there be a pending “action” or “claim”

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to be dismissed. All of the plaintiff’s claims in this case were dismissed pursuant to Rule
12 by the order dated July 11, 2011. As described above, the dismissal of some of the
claims was without prejudice to the filing of an amended complaint, but the plaintiff has
never filed such an amended complaint. No claims are pending between the parties in
this matter. Accordingly, the defendants’ motion for involuntary dismissal will be
dismissed as moot. The plaintiff’s “Notice of Voluntary Dismissal” was and is a nullity.
The dismissal of all claims was already effectuated by the order of July 11, 2011.
*****
AND NOW, this 26th day of March, 2012, upon consideration of the defendants’
July 29, 2011, motion for sanctions pursuant to Rule 11 of the Federal Rules of Civil
Procedure (Docket No. 17) and the response and reply thereto, it is hereby ORDERED
that the motion is DENIED.
Further, upon consideration of the defendants’ September 9, 2011, motion for
involuntary dismissal under Rule 41(b) of the Federal Rules of Civil Procedure (Docket
No. 23) and the response thereto, it is hereby ORDERED that the motion is
DISMISSED as moot.
BY THE COURT:

/s/ Louis H. Pollak
Pollak, J.

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