Appeal from the United States District Court for the Northern District of Illinois Eastern Division. No. 86 C 1920, James F. Holderman, Judge.
Posner and Flaum, Circuit Judges, and Eschbach, Senior Circuit Judge.
Michael J. Dubisky, Trustee for the V.S. Trust I, appeals from the district court's order sanctioning him in the amount of $36,117 under Federal Rule of Civil Procedure 11 for filing a complaint that incorrectly alleged diversity jurisdiction. On appeal, Dubisky concedes that Rule 11 sanctions were properly imposed, but argues that the defendants failed to mitigate their damages and that the district court abused its discretion by awarding the defendants the entire amount of attorney's fees incurred in defending the litigation. We reverse.
On March 19, 1986 Dubisky filed suit in the United States District Court for the Northern District of Illinois to recover a substantial investment in Comark, a California limited partnership which became insolvent. Dubisky's suit named as defendants the various parties that participated in the formation and operation of Comark, including Oppenheim, Appel, Dixon and Co. (OAD), Comark's auditors.*fn1 The complaint alleged that OAD committed professional malpractice and performed its work on behalf of Comark in a negligent manner.
Dubisky's complaint asserted that the district court had subject matter jurisdiction over the dispute under 28 U.S.C. § 1332 because there was complete diversity of citizenship between the plaintiff and defendants. The complaint, as properly construed by the district court, alleged that Dubisky was an Illinois citizen for diversity purposes. Specifically, the complaint provided that:
Plaintiff, Michael J. Dubisky, an individual, was at all times up to August, 1983 domiciled in and a citizen of the state of Illinois. . . . Subsequent to August, 1983, plaintiff has resided in Brookfield, Wisconsin, although he continues to own the residence in Downers Grove, Illinois and intends to reside there again.
The complaint also alleged that OAD was a California professional corporation with its principal place of business in California and that none of OAD's members were domiciled in or citizens of Illinois. This allegation was incorrect. It is now undisputed that OAD was a general partnership, not a corporation, and that several OAD partners were citizens and residents of Illinois.
On May 28, 1986, OAD filed a motion to dismiss the complaint for lack of subject matter jurisdiction under Rule 12(b)(1) or, in the alternative, for improper venue under Rule 12(b)(3) (hereinafter the "motion to dismiss").*fn2 Because a general partnership is deemed to be a citizen of each state in which its partners are citizens, Elston Investment, Ltd. v. David Altman Leasing Co., 731 F.2d 436 (7th Cir. 1984), OAD was a citizen of Illinois for diversity purposes, and complete diversity was therefore lacking. The district court correctly granted the motion to dismiss for lack of subject matter jurisdiction.
In conjunction with its ruling on subject matter jurisdiction, the district court also granted OAD's motion for sanctions under Rule 11. The district court stated:
The obvious failure of plaintiff and his counsel to make "reasonable inquiry" as to fundamental jurisdictional facts before the filing of the complaint and counsel's attempt to obfuscate the issues, through the filing of numerous pages of irrelevant argument on personal jurisdiction which did not address the questions of subject matter jurisdiction and venue raised by the OAD defendants' motion, constitute the basis for the court's imposition of sanctions.
Dubisky v. Owens, No. 86 C 1920, mem. op. at 10-11 (N.D. Ill. Oct. 22, 1986) (emphasis in original). The district court ordered OAD to file a "verified statement of the reasonable expenses incurred including attorneys' fees resulting from the Rule 11 violation of plaintiff and his counsel." Id. at 11. Counsel for OAD filed such a statement indicating that OAD's attorneys had spent 211 hours on the litigation and seeking a total sanction of $36,117.*fn3 The district approved the entire sum stating that "the amount sought by OAD (1) was reasonably incurred in defending the Dubisky litigation and (2) is an ...