Montauk U.S.A., LLC v. 148 South Emerson Associates LLC
No. 16-3912-cv
United States Court of Appeals For the Second Circuit
April 20, 2018
AUGUST TERM, 2017
ARGUED: OCTOBER 5, 2017
DECIDED: APRIL 20, 2018
MARK HOROWITZ, Plаintiff, MONTAUK U.S.A., LLC, Plaintiff-Appellant, v. 148 SOUTH EMERSON ASSOCIATES LLC, Defendant-Appellee.
Before: WALKER, RAGGI, and HALL, Circuit Judges.
Appeal from the United States District Court for the Eastern District of New York.
No. 16-cv-02741 – Sandra J. Feuerstein,
Plaintiff-Appellant Montauk U.S.A., LLC (“Montauk“) appeals from (i) the district court‘s dismissal without prejudice of its Lanham Act claims and motion for preliminary injunction under the “first-filed” rule, and (ii) the district court‘s order, pursuant to
Because New York law allows for derivative representation on the facts presented, we conclude at the outset that the district court correctly rejected Montauk‘s request to hold Associates in default. We nevertheless vacate the district court‘s dismissal of Montauk‘s complaint and preliminary injunction motion in favor of a first-filed federal Georgia action because the Georgia suit has been transferred to the Eastern District of New York, so the reasoning behind the first-filed ruling no longer pertains. We affirm the district court‘s
MICHAEL BOWE, Kasowitz Benson Torres & Friedman LLP, New York, NY, for Plaintiff-Appellant.
JAMES M. CATTERSON, Arnold & Porter Kaye Scholer, LLP, New York, NY (Michael Burrows, Greenberg Traurig, LLP, New York, NY, on the brief), for Defendant-Appellee.
JOHN M. WALKER, JR., Circuit Judge:
Plaintiff-Appellant Montauk U.S.A., LLC (“Montauk“) appeals from (i) the district court‘s dismissal without prejudice of its Lanham Act claims and motion for preliminary injunction under the “first-filed” rule, and (ii) the district court‘s order, pursuant to
Because New York law allows for derivative representation on the facts presented, we conclude at the outset that the district court correctly rejected Montauk‘s request to hold Associates in default. We nevertheless vacate the district court‘s dismissal of Montauk‘s complaint and preliminary injunction motion in favor of a first-filed federal Georgia action because the Georgia suit has been transferred to the Eastern District of New York, so the reasoning behind the first-filed ruling no longer pertains. We affirm the district court‘s award of costs under
BACKGROUND1
This case is one in a series of bitterly contested suits adjudicating rights associated with The Sloppy Tuna, a restaurant in Montauk, NY. See App‘x 707-09. In this installment, Montauk, the holding company for intellectual property associated with The Sloppy Tuna, and Montauk‘s alleged manager, Mark Horowitz, sued Associates, the owner and operator of The Sloppy Tuna, claiming that Associates’ use of Montauk‘s trademarks violates various provisions of the Lanham Act.
The individual players at the heart of the suit, Drew Doscher, Michael Meyer, Stephen Smith, and Michael Meagher, are former business partners at The Seaport Group, a Wall Street investment firm. They and their respective entities share a long history, the relevant parts of which we discuss below.
In 2010, Doscher pioneered the idea for The Sloppy Tuna while working at The Seaport Group and sought out as partners and investors then-colleagues Meyer, Smith, and Meagher. Doscher thereafter formed Montauk, a Georgia limited liability company of which he always has been the sole member. Doscher created Montauk as a vehicle to hold The Sloppy Tuna‘s intellectual property and to license that intellectual property to Associates for use at the restaurant.
In March 2011, Doscher, Meyer, Smith, and Meagher together formed two New York limited liability companies: (i) Associates, to own and operate The Sloppy Tuna; and (ii) 148 South Emerson Partners, LLC (“Partners“), to рurchase the property on which The Sloppy Tuna would operate. Following various ownership disputes not relevant here, the stakeholders in The Sloppy Tuna consist of: (i) Montauk, with Doscher as the sole 100% partner; (ii) Associates, with Meyer and Doscher as 50% partners; and (iii) Partners, with Doscher, Meyer, Smith, and Meagher each as 25% partners.
In May 2011, The Sloppy Tuna opened for business. At that time, Montauk, wholly owned and controlled by Doscher, began to successfully register several trademarks specifically designed for The Sloppy Tuna with the United States Patent and Trademark Office. See App‘x 42, 44-49. According to the complaint, Montauk subsequently permitted Associates to use those trademarks for The Sloppy Tuna subject to an оral licensing agreement. App‘x 11, 36; see also App‘x 234. The parties operated under this arrangement for several years, during which time the restaurant enjoyed considerable success.
In January 2013, however, conflict erupted between the partners and The Seaport Group abruptly ended its relationship with Doscher. See generally Doscher v. Sea Port Grp. Sec., LLC, 832 F.3d 372 (2d Cir. 2016). The record evinces the open and personal hostility between the parties, most especially between Doscher and Meyer. See App‘x 629, 631.
On October 18, 2013, amidst this conflict, Montauk and Associates entered into a written license agreement regarding Associates’
In 2014, Doscher, Meyer, Smith, and Meagher, as individuals and through their respective entities, began litigating in various fora numerous issues related to the ownership and operation of The Sloppy Tuna. Pertinent to the issues on appeal are the following four lawsuits, each adjudicating the rights to the intellectual property that is the subject of the instant action.
First, on December 23, 2014, Montauk brought a declaratory judgment action in the Northern District of Georgia against Associates seeking a ruling that Montauk owns the relevant trademarks and that Associates does not. As will be discussed, on August 14, 2017, more than two and one-half years later, the Georgia federal action was transferred to the Eastern District of New York.
Second, on January 29, 2015, Meyer sued Montauk in New York state court alleging that the License Agreement was not a valid arms-length agreement and is therefore void ab initio, which ultimately resulted in the Georgia federal action being stayed. On February 19, 2015, because Doscher and Meyer were deadlocked as co-owners of Associates, the court appointed a temporary receiver (Receiver) for Associates. On March 16, 2016, after Doscher failed to fully comply with the Receiver, the New York state court further ordered that: (i) the Receiver shall take full control of The Sloppy Tuna; (ii) Doscher must surrender all of his restaurant-related property to the Receiver; and (iii) Doscher is “restrained from interfering in any way with the Court-apрointed Temporary Receiver in his operation and management of the company.” App‘x 134. Shortly thereafter, on March 24, 2016, Montauk terminated the License Agreement purportedly because the New York state court‘s order wrested too much control of the restaurant from Doscher.
Third, on March 24, 2016, Montauk sued Associates in Georgia state court for breach of contract, unjust enrichment, and quantum meruit, relating to Associates’ continued use of The Sloppy Tuna marks following Montauk‘s termination of the License Agreement. Montauk simultaneously moved for a temporary restraining order (TRO) and preliminary injunction (PI). On April 26, 2016, that court, after a hearing, denied the TRO and at the same time suggested that Montauk‘s filing of that action interfered with the state action in New York in violation of that court‘s
Fourth and lastly, on May 31, 2016, Montauk and Horowitz brought the instant action against Associates in the Eastern District of New York. They alleged that Associates’ continued use of The Sloppy Tuna marks after termination of the License Agreement violated several provisions of the Lanham Act. Montauk and Horowitz asserted four claims: (i) trademark infringement,
On July 1, 2016, Montauk and Horowitz moved for a TRO and PI in the instant action. That same day, the TRO was denied, and attorneys James M. Catterson and Michael Burrows filed notices of appearance “for Michael J. Meyer, derivatively on behalf of Defendant 148 South Emerson Associates.” App‘x 220-21. No other counsel appeared for Associates. Days later, Meyer, on behalf of Associates, filed a motion to dismiss, raising three arguments: (i) the complaint must be dismissed under the “first-filed” rule in favor of the earlier-filed and still extant federal action Montauk brought in Georgia; (ii) Montauk and Horowitz failed to state their cybersquatting claim; and (iii) Montauk should be ordered to pay the costs, including attorneys’ fees, Associates incurred defending the discontinued state action in Georgia under the anti-forum shopping provision of
Meyer, on behalf of Associates, also rеsponded to Montauk and Horowitz‘s PI motion, arguing that Montauk and Horowitz failed to meet the standard for such relief. In reply, Montauk and Horowitz argued not only that they had met the standard, but that the district court should disregard any submissions filed by Meyer on behalf of Associates. Specifically, they argued that “[t]here is no basis for a non-party [such as Meyer] to defend this action ‘derivatively’ simply because it disagrees with the Receiver‘s business judgment or seeks to litigate with plaintiffs for its own self-interested reasons.” No. 16-cv-02741, Dkt. No. 18 at 4 (E.D.N.Y. July 13, 2016). Because Meyer‘s “derivative” submissions were not properly before the court, Montauk and Horowitz contended, and Meyer‘s was the only opposition to the PI motion, the court should have granted the PI motion by default. Meyer filed a sur-reply, still purportеdly on behalf of Associates, attaching a declaration of the New York state court Receiver, Charles C. Russo, in which he stated that he eagerly consented to Meyer‘s derivative defense of the case and that, in his judgment, Meyer‘s derivative representation was in Associates’ best interest. App‘x 665-68.
On October 19, 2016, the district court resolved the pending motions substantially3 in Associates’ favor and dismissed the action. Special App‘x (“SA“) 1-31. First, the district court rejected Montauk and Horowitz‘s contention that Meyer did not have a derivative right to defend on behalf of Associates under New York law. SA 19-22. Second, the district court dismissed Montauk and Horowitz‘s complaint without prejudice under the “first-filed” rule based on the action‘s similarity to the earlier-filed federal action in Georgia. SA 22-26.
DISCUSSION
Montauk contends on appeal that the district court erred in three ways: (i) allowing Meyer to defend the suit derivatively on behalf of Associates; (ii) dismissing the action under the “first-filed” rule; and (iii) awarding Associates costs under
We conclude that controlling New York law provides Meyer with derivative rights to defend this suit on behalf of Associates and we therefore find no error in the district court‘s consideration of Associates’ submissions. We conclude, however, that the district court‘s dismissal of the complaint under the “first-filed” rule should be vacated in light of the subsequent transfer of the Georgia federal action to the Eastern District of New York. We therefore vacate the dismissal of Montauk‘s complaint, which restores the preliminary injunction motion which was never decided. We affirm in full, however, the awarding of costs under
I. Meyer‘s Derivative Right to Defend
The district court rejected Montauk‘s contention that Meyer has no right to defend this suit derivatively on behalf of Associates. The district court did so by looking to state law, specifically, New York‘s rules for derivative representation. The district court noted New York‘s general disfavor of derivative litigation, but identified an excеption: New York law will allow for derivative representation in certain contexts to avoid the “intolerable grievance” created where a corporate entity refuses to act and a stakeholder is left without a remedy. SA 20-21. The district court concluded that to reject Meyer‘s right to defend derivatively here would be an “intolerable grievance,” where one of the two 50% “owners of a[n] [LLC] cause[d] his wholly-owned company, and the purported manager of that company, to commence a lawsuit against th[at] LLC.” SA 20. Stated differently, the district court concluded that to enter default against the LLC in this instance would be inequitable because it would effectively require the LLC to pay license fees to one 50% member (Dosсher) at the expense of the other 50% member (Meyer) who would be barred from appearing in the suit.
The district court correctly concluded that New York law governs whether Meyer may derivatively defend Associates in this matter. See
Under New York law, a shareholder has no general right to litigate on behalf of a corporation. See
The question here is whether thеse derivative representation rules allow Meyer to represent Associates’ interests in defense against the instant suit. Montauk contends the answer is no, arguing that derivative representation is unavailable on the present facts. It rests its argument on two asserted principles of New York law: (i) derivative representation is available only where a managing body‘s decision not to litigate was negligent, fraudulent, or in bad faith, a showing that Meyer has not made as to Associates; and (ii) derivative representation rights do not extend to litigation defense. Finding no support for either principle, we conclude that Meyer was free to derivatively defend this case on behalf of Associates.
Montauk cites no authority, and we are aware of nоne, intimating that derivative representation is only permissible under New York law where a managing body‘s decision not to litigate was negligent, fraudulent, or in bad faith. Tomczak v. Trepel, 724 N.Y.S.2d 737 (1st Dep‘t 2001), cited repeatedly by Montauk for this proposition, is instructive. There, the First Department affirmed the dismissal of a derivative suit because the plaintiffs failed to allege sufficient wrongdoing on the part of the board. Id. at 738. Contrary to Montauk‘s contention, however, the court did not imply that board wrongdoing was the only avenue to derivative representation; it simply addressed the board‘s wrongdoing because that was the reason the plaintiffs proffered in that case for why the board was not properly representing the interests of the shareholders. Tomczak makes clear that, at bottom, the inquiry in a derivative rights question is an assessment of the managing
While plaintiffs allege that unsuccessful demands were made on the Club‘s Board of Directors to initiate legal action, the complaint provides no indication as to who made the demands, when they were made, which Board members they were made to, the content of the demands or why the Board refused to take action.
Id. (emphasis added).
If the board or other managing body‘s intent in making its litigation decision was to further the interests of the shareholders, New York courts defer to that choice. If its intent was otherwise, they may not.
With this basic principle in mind, it becomes clear that there is little sense in a rule that confines derivative representation to situations where a managing body‘s decision not to litigate is made with some malfeasance. The flaw in Montauk‘s contention is notably apparent in the present context, which is distinct from the usual derivative standing question in a significant way: the derivative litigant and the company here fully agree as to the best litigation strategy, specifically, that Meyer defend the action. New York‘s concerns behind its general reluctance to allow derivative litigation are simply not present in this case.
A board‘s malfeasance becomes relevant only where the board and the shareholder disagree as to the path forward, i.e., where the corporation affirmatively “decide[s] to terminate” litigation that the shareholder desired, Amalgamated Sugar Co. v. NL Industries, Inc., 825 F.2d 634, 641 (2d Cir. 1987), or “decline[s] to institute . . an action” “that the plaintiff [shareholder] has requested the receiver to maintain,” Koral v. Savory, Inc., 276 N.Y. 215, 219-20 (1937). This is because, as discussed, New York law looks to a board‘s malfeasance only to the extent it may provide a reason to reject the board‘s chosen litigation strategy in favor of a different one proposed by a shareholder.
But, we have no battle here between conflicting litigation positions and therefore no need to show the Receiver‘s malfeasance. The Receiver—which is obligated as a fiduciary to act in the best interest of Associates, see Insurance Co. of N. Am. v. City of New York, 71 N.Y.2d 983, 985 (1988)—wholly and eagerly consents to Meyer‘s derivative defense. The Receiver explained in the record its insistence that it was in the best interest of Associates for Meyer to defend this litigation. App‘x 666, 672. This decision is properly subject to the business judgment rule, and it makes no difference that the governing corporate entity is a receiver. See Golden Pac. Bancorp v. F.D.I.C., 2002 WL 31875395, at *9 (S.D.N.Y. Dec. 26, 2002) (under New York law, “receivers, just like corporate directors, are entitled to the deference of the business judgment rule“). Montauk does not contend that Meyer‘s derivative defense is somehow counter to the interests of Associates or that the Receiver‘s decision to allow Meyer to defend this case was itself made in bad faith. In sum, Montauk‘s argument that Meyer was required to demonstrate malfeasance on the part of the Receiver was proрerly rejected by the district court.
Montauk also argues that even if LLC members may bring derivative lawsuits, they may not derivatively defend lawsuits. Montauk cites no law, or reasoning, to support this contention, and the argument is not pressed in its reply brief. The argument is meritless nonetheless. As discussed, the core question in a derivative
In sum, Meyer both (i) took efforts to get Associates to defend the action,
II. The “First-Filed” Rule
The district court dismissed Montauk‘s complaint without prejudice under the “first-filed” rule, which provides that “where there are two competing lawsuits, the first suit should have priority, absent the showing of balance of convenience or special circumstances giving priority to the second.” AEP Energy Servs. Gas Holding Co. v. Bank of Am., N.A., 626 F.3d 699, 722 (2d Cir. 2010) (internal quotation marks omitted). The rule “embodies considerations of judicial administration and conservation of resources, and recognizes that a party who first brings an issue into a court of competent jurisdiction should be free from the vexation of concurrent litigation over the same subject matter.” Id. (internal quotation marks and citation omitted).
The district judge, over Montauk‘s objection, сoncluded that the instant action should give way to the Georgia federal action under the “first-filed” rule. On August 14, 2017, however, the district court judge presiding over the Georgia federal action transferred that case to the Eastern District of New York where it was assigned to the district judge in this case. No. 17-cv-4747, Dkt. Nos. 103-04 (E.D.N.Y. Aug. 14 & 16, 2017). Consequently, none of the considerations motivating the district court‘s application of the “first-filed” rule remain. The “first-filed” rule has no import where, as here, the two cases at issue reside on the docket of the same district judge. The able district judge is perfectly capable of consolidating them as necessary. We therefore vacate the district court‘s dismissal of this action under the “first-filed” rule, as well as its dismissal of Montauk‘s motion for a preliminary injunction.
III. Associates’ Rule 41(d) Motion
Thе district court concluded that Montauk must pay Associates the costs, including attorneys’ fees, it incurred in the Georgia state action pursuant to
If a plaintiff who previously dismissed an action in any court files an action based on or including the same claim against the same defendant, the court . . . may order the plaintiff to pay all or part of the costs of that previous action.
Montauk asserts that there are two errors in the district court‘s analysis. First, it argues that the district court abused its discretion in concluding that the instant action is “based on or includ[es] the same claim” as the Georgia state action. Second,
a. The District Court Did Not Abuse its Discretion in Concluding that the Instant Action is “[B]ased on ... the [S]ame [C]laim[s]” as the Georgia State Action
It is quite clear to us that the instant action is “based on . . . the same claim[s]” as the Georgia state action. Montauk‘s claims in both actions depend on the same corе showing about the same trademarks: that Associates has no legal ownership of or right to use The Sloppy Tuna marks. If Associates owns the marks or otherwise has rights to their use, Associates likely neither breached the License Agreement (the subject of the Georgia state action) nor violated the Lanham Act (the subject of the instant action). On the other hand, if Montauk owns the marks or if Associates had no right to their use, Associates may have breached the License Agreement or violated the Lanham Act. The different assertions in these actions are certainly “based on” the same underlying claims of ownership and use rights.
Montauk‘s arguments to the contrary are unpersuasive. Montauk points to the fact that the Georgia state aсtion was contract-based and the instant action is brought under the Lanham Act. That two actions involve different theories of recovery, however, is not dispositive for
Montauk‘s other contention that the actions are distinct for purposes of
The record makes clear that Associates has utilized the at-issue marks at the restaurant and elsewhere since opening without interruption and with Montauk‘s knowledge. Consequently, Montauk knew
Finally, relying on Phunware, Inc. v. Excelmind Group Ltd., 117 F. Supp. 3d 613 (D. Del. 2015), Montauk argues that the instant action is not sufficiently related to the Georgia state action for purposes of Rule 41(d) because Montauk seeks distinct relief in each action. The argument is meritless. For one, in Phunware, the plaintiff had a good-faith concern that the relief sought in the second-filed action, money damages, would have been unavailable in the first-filed forum, a court of equity, id. at 623-24 & n.9, and Montauk makes no showing that there was a form of relief available in the Eastern District of New York that was unavailable in the Georgia state court. More fundamentally, however, Montauk did not seek different relief in the two relevant actions; in both, Montauk sought injunctive relief and damages.
The district court did not abuse its discretion in granting Associates’
b. The District Court Did Not Err in Awarding Associates Attorneys’ Fees as Part оf Costs
As discussed,
We have not addressed whether attorneys’ fees are available as part of “costs” under
There is no uniformity across federal authorities as to whether the term “costs” includes attorneys’ fees. For example, the term “costs” in Rule 39 of the Federal Rules of Appellate Procedure, as well as an earlier version of
Two relevant lessons emerge from the case law on how to assess the availability of attorneys’ fees pursuant to a provision, such as
Second, in this situation—where the term “costs” is entirely undefined, either expressly or by reference—we look to see “if the statute otherwise evinces an intent to provide for [attorneys‘] fees.” Key Tronic Corp. v. United States, 511 U.S. 809, 815 (1994). Consequently, we disagree with the Sixth Circuit‘s conclusion that attorneys’ fees are unavailable under
Here, as the great weight of district court authority has concluded in this circuit, see Pelczar v. Pelczar, 2017 WL 3105855, at *2 (E.D.N.Y. July 20, 2017) (collecting cases), the entire
especially acute in the
CONCLUSION
We find the parties’ remaining contentions to be without merit, and, for the reasons stated above, we AFFIRM in part and VACATE in part the judgment of the district court and REMAND for proceedings consistent with this opinion.