The Research Foundation for the State University of New York v. Telluric Labs, LLC

UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF NEW YORK

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THE RESEARCH FOUNDATION FOR

THE STATE UNIVERSITY OF NEW

YORK, MEMORANDUM

AND ORDER

Plaintiff/Counterclaim-Defendant,

21-CV-1898 (JS)(SIL)

-against-

TELLURIC LABS, LLC,

Defendant/Counterclaim-Plaintiff,

-against-

STATE UNIVERSITY OF NEW YORK AT

STONY BROOK, PETER I. BERNSTEIN,

MICHAEL FERDMAN, PETER MILDER,

FARID SAMANDI, TIANCHU JI and

SHENGSUN CHO,

Third-Party Defendants.

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STEVEN I. LOCKE, United States Magistrate Judge:

Presently before the Court in this diversity-breach of contract action, referred

for decision by the Honorable Joanna Seybert, is Third-Party Defendant the State

University of New York at Stony Brook’s (“SUNY”) unopposed motion for attorneys’

fees and expenses as a sanction against Defendant Telluric Labs LLC (“Defendant”

or “Telluric”) pursuant to 28 U.S. § 1927 and the Court’s inherent powers. See Third-

Party Defendant’s Motion for Attorneys’ Fees and Costs (“SUNY’s Motion” or “SUNY

Mot.”), Docket Entry (“DE”) [217]. Given that SUNY has failed to establish that

Defendant acted in bad faith, SUNY’s Motion is denied in its entirety.

I. BACKGROUND

By way of Complaint dated April 8, 2021, the Plaintiff The Research

Foundation of the State University of New York (“Plaintiff” or the “Foundation”)

commenced this action against Telluric for: (i) breach of contract; (ii) unjust

enrichment; (iii) account stated; (iv) promissory estoppel; (v) quantum meruit; and

(vi) breach of the implied covenant of good faith and fair dealing. See generally

Complaint (“Compl.”), DE [1]. On June 11, 2021, Defendant denied the material

allegations, and filed third-party claims against SUNY, Peter Bernstein, Michael

Ferdman, Peter Milder, Faird Samandi, Tianchu Ji, and Shengsun Cho (together,

“Third-Party Defendants”), see Answer with Counterclaims and Third-Party

Complaint (“Ans.”), DE [6], later modified by an Amended Answer with Counterclaim

and Third-Party Complaint on July 9, 2021. See First Amended Answer with

Counterclaims and First Amended Third-Party Complaint (“Am. Ans.”), DE [9].1

Telluric was initially represented by Michael Ivanciu (“Ivanciu”) and Codrut

Radu Radulescu (“Radulescu”), Defendant’s President and Vice President,

respectively, as well as attorneys admitted to practice in New York. See DEs [6], [10].

On August 27, 2021, Plaintiff moved to disqualify Ivanciu and Radulescu as counsel

for Telluric. See DE [20]. This Court granted the Foundation’s motion on November

1 Telluric asserted sixteen causes of action in its Amended Third-Party Complaint, consisting of: (i)

three breach of contract claims; (ii) two causes of action for “anticipatory breach of contract”; and (iii)

one claim each for: fraud, conversion, promissory estoppel, fraud in the inducement, unjust

enrichment, breach of fiduciary duty, “tortious idea misrepresentation,” “coercion/intentional tortious

disclosure of IP,” “intentional interference with a contractual relationship,” and Violation of the

Defendant Trade Secrets Act. See Am. Ans. ¶¶ 155- 392.

17, 2021 and stayed this litigation for 30 days to allow Defendant to obtain new

counsel. See DE [57].2

SUNY initially sought a premotion conference on its proposed motion to

dismiss on October 14, 2021, arguing that Defendant’s counterclaims should be

dismissed based on Eleventh Amendment sovereign immunity and/or failure to state

a claim. See DE [45]. Judge Seybert denied this application without prejudice to

renew following resolution of the motion to disqualify Ivanciu and Radulescu. See

Electronic Order dated Oct. 15, 2021. SUNY renewed its request for a premotion

conference on January 5 and February 16, 2022. See DEs [62], [69].

David Postolski (“Postolski”) of Gearhart Law LLC filed a notice of appearance

on behalf of Telluric on January 11, 2022 and discovery proceeded. See DE [63]. On

August 24, 2022, Judge Seybert set a briefing schedule on Plaintiff’s and Third-Party

Defendants’ motions to dismiss Defendant’s counterclaims. See Electronic Order

dated Aug. 24, 2022. Shortly thereafter, Postolski moved to withdraw as counsel. See

DE [96]. Judge Seybert ordered that the briefing schedule on the motions to dismiss

be held in abeyance pending the outcome of Postolski’s motion. See Electronic Order

dated Sep. 7, 2022. On October 6, 2022, this Court granted Postolski’s motion and

stayed this action so that Telluric could again obtain new counsel. See DE [110].

Defendant was ordered to obtain new counsel by January 12, 2023 and a status

conference before this Court was scheduled for that date. See id. On January 9, 2023,

Ivanciu wrote a letter to the Court, requesting that the status conference be

2 Telluric appealed this Court’s order disqualifying Ivanciu and Radulescu as counsel to Judge Seybert,

who ultimately affirmed the order. See DEs [58], [95].

adjourned for 30 days, given that Telluric had been unsuccessful in obtaining counsel.

This Court denied the motion to adjourn and the conference proceeded. See Electronic

Order dated Jan. 10, 2023. The Court cautioned Defendant that its failure to obtain

counsel could result in default on any future motions. See DE [116].

On January 17, 2023, Judge Seybert reinstated the briefing schedule for

Plaintiff’s and Third-Party Defendants’ motions to dismiss. See Electronic Order

dated Jan. 17, 2023. SUNY filed its motion to dismiss on February 17, 2023, arguing

that Telluric’s counterclaims should be dismissed based on Eleventh Amendment

sovereign immunity under Rule 12(b)(1) or, in the alternative, for failure to state a

claim pursuant to Rule 12(b)(6) and failure to prosecute under Rule 41(b). See DE

[128].

On February 27, 2023, after the Third-Party Defendants’ motions to dismiss

were filed, Ivanciu attempted to seek a further stay of this litigation via letter. See

DE [135]. Judge Seybert denied this application, noting that Ivanciu was disqualified

from representing Telluric and that Defendant’s failure to obtain counsel “will not

prevent this case from moving forward.” Electronic Order dated Mar. 1, 2023; see

Electronic Order dated Mar. 8, 2023 (reiterating warning that failure to respond to

the motions to dismiss through retained counsel “may result in the Court deeming

the motions unopposed and/or result in a default on those motions”).

Telluric did not obtain counsel or respond to any of the motions to dismiss –

including SUNY’s – by the March 17, 2023 deadline. See SUNY’s Memorandum of

Law in Support of its Motion for Attorneys’ Fees (“SUNY Mem.”), DE [217-1], 3.

Defendant sought a further stay of this action on March 23, 2023, via a letter to Judge

Seybert from Michael Miller of Steptoe & Johnson LLP. See DE [141]. Given,

however, that Miller stated that his firm was not representing Telluric, Judge

Seybert declined to consider this application. See Electronic Order dated Mar. 24,

2023. On April 5, 2023, SUNY informed the Court that it intended to rest on its

existing motion to dismiss and would not file a reply memorandum. See DE [151].

The following day, Radulescu filed a motion to intervene in this action based

on a purported lien on Defendant’s property as well as an alleged assignment of

claims. See DEs [153] – [154], [178]. On referral from Judge Seybert, this Court

recommended that Radulescu’s motion be denied. See Electronic Order dated Apr.

11, 2023; Electronic Order dated Sep. 6, 2023; DE [182]. After granting Radulescu

an extension of time to file his objections, Judge Seybert adopted the Report and

Recommendation and denied Radulescu’s motion to intervene. See Electronic Order

dated Oct. 2, 2023; DE [203]. To date, Defendant has not obtained counsel.

On September 28, 2023, Judge Seybert granted SUNY’s motion to dismiss

Telluric’s counterclaims with prejudice. See DE [184]. Specifically, Judge Seybert

dismissed Defendant’s counterclaims against SUNY pursuant to Rule 41(b), based on

Telluric’s failure to prosecute its claims and comply with the court orders to obtain

counsel. See id., 18. The Court did not consider SUNY’s arguments for dismissal

pursuant to Rules 12(b)(1) or 12(b)(6). See id.

SUNY filed the present motion on January 24, 2024, which Judge Seybert

referred to this Court for decision on April 19, 2024. See DE [217]; Electronic Order

dated Apr. 19, 2024. As a result of its involvement in this action, SUNY asserts that

it has incurred $122,787.50 in attorneys’ fees and $695.42 in costs, for a total of

$123,482.92. See SUNY Mem., 5.

II. DISCUSSION

SUNY seeks an award of attorneys’ fees and costs against Telluric as a sanction

pursuant to 28 U.S. § 1927 and the Court’s inherent power. Specifically, SUNY

argues that sanctions are warranted because Defendant and its principals: (1)

purposefully ignored SUNY’s sovereign immunity defense, (2) delayed this litigation

to prevent SUNY from exiting via motion to dismiss, and (3) repeatedly violated court

orders directing Telluric to obtain counsel. See SUNY Mem., 7-10. As a result, SUNY

seeks an award of attorneys’ fees and costs of $123,482.92. Id., 12. For the reasons

set forth below, given that SUNY has failed to establish that Defendant acted in bad

faith, SUNY’s Motion is denied.

A. 28 U.S.C. § 1927 and the Court’s Inherent Power

28 U.S.C. § 1927 provides:

Any attorney or other person admitted to conduct cases in any court of

the United States or any Territory thereof who so multiplies the

proceedings in any case unreasonably and vexatiously may be required

by the court to satisfy personally the excess costs, expenses, and

attorneys’ fees reasonably incurred because of such conduct.

Id. “By its terms, § 1927 looks to unreasonable and vexatious multiplications of

proceedings; and it imposes an obligation on attorneys throughout the entire

litigation to avoid dilatory tactics.” United States v. Int’l Bhd. of Teamsters,

Chauffeurs, Warehousemen & Helpers of Am., AFL-CIO, 948 F.2d 1338, 1345 (2d Cir.

1991) (citing Oliveri v. Thompson, 803 F.2d 1265, 1274 (2d Cir. 1986)). “Bad faith is

the touchstone of an award under this statute.” Id. (citing McMahon v.

Shearson/Am. Exp., Inc., 896 F.2d 17, 21 (2d Cir. 1990)).

The Court also “has the inherent power to sanction for improper conduct, which

derives from ‘the very nature of courts and their need to be able to manage their own

affairs so as to achieve the orderly and expeditious disposition of cases.’” Steimel v.

Inc. Vill. of Rockville Ctr., 965 F. Supp. 366, 374 (E.D.N.Y. 1997) (quoting United

States v. Int’l Bhd. of Teamsters, Chauffeurs, Warehousemen & Helpers of Am., AFL-

CIO, 948 F.2d 1338, 1345 (2d Cir. 1991)). Sanctions under the Court’s inherent power

“must be exercised with restraint and discretion,” to be granted upon a showing of

“bad faith, vexatious[], [or] wanton[] acts or actions otherwise undertaken for

oppressive reasons.” International Techs. Mktg., Inc. v. Verint Sys., Ltd., 991 F.3d

361, 368 (2d Cir. 2021) (internal quotations omitted). In any event, “[a] finding of bad

faith, and a finding that conduct is without color or for an improper purpose, must be

supported by a high degree of specificity in the factual findings.” Huebner v. Midland

Credit Mgmt., Inc., 897 F.3d 42, 55 (2d Cir. 2018).

The Second Circuit has held:

the only meaningful difference between an award made under § 1927

and one made pursuant to the court’s inherent power is . . . that awards

under § 1927 are made only against attorneys or other persons

authorized to practice before the courts while an award made under the

court’s inherent power may be made against an attorney, a party, or

both.

Oliveri v. Thompson, 803 F.2d 1265, 1273 (2d Cir. 1986). The same type of conduct,

however, is sanctionable under both theories “because both require a similar finding

of bad faith.” In re Khan, 488 B.R. 515, 531 (Bankr. E.D.N.Y. 2013) (citation omitted),

aff’d sub nom. Dahiya v. Kramer, No. 13-cv-3079, 2014 WL 1278131 (E.D.N.Y. Mar.

27, 2014), aff’d sub nom. In re Khan, 593 F. App’x 83 (2d Cir. 2015). Consequently,

“requests for sanctions under [§] 1927 and pursuant to the court’s inherent authority

may be decided in a single inquiry.” Id. (quoting In re Green, 422 B.R. 469, 474

(Bankr. S.D.N.Y. 2010)). Thus, “to impose sanctions under either 1927 or the court’s

inherent power, a court must find clear evidence that: (1) the offending party’s claims

were entirely without color, and (2) the claims were brought in bad faith – that is,

motivated by improper purposes such as harassment or delay.” McCune v. Rugged

Entertainment, LLC, No. 08-cv-2677, 2010 WL 1189390, at *3 (E.D.N.Y. Mar. 29,

2010) (quoting Eisemann v. Greene, 204 F. 3d 393, 396 (2d Cir. 2000)).

B. SUNY’s Motion for Attorneys’ Fees and Costs

As noted above, SUNY argues that sanctions are warranted against Telluric

due to: (1) Defendant’s persistence in its claims against SUNY despite its sovereign

immunity defense; (2) Telluric’s repeated delay of the adjudication of this action and

(3) Ivanciu’s and Radulescu’s violation of multiple court orders to obtain counsel. See

SUNY Mem., 7-10. While the Court acknowledges Defendant’s role in the tortured

history of this litigation, sanctions are inappropriate.

For one, while Telluric’s claims against SUNY may have been barred by

Eleventh Amendment sovereign immunity, that fact alone does not warrant

sanctions. See Maren v. Rowe, 910 F.2d 1043, 1047 (2d Cir. 1990) (“[N]ot all

unsuccessful legal arguments are frivolous or warrant sanction.”); JGIAP RH 160

LLC v. CRI Holding Corp., No. 21-CV-02489-DG-JRC, 2023 WL 5979125, at *24

(E.D.N.Y. Aug. 16, 2023), report and recommendation adopted, No.

21CV02489DGJRC, 2023 WL 6307320 (E.D.N.Y. Sept. 28, 2023) (noting that even if

claims were entirely frivolous, movant must still demonstrate bad faith). Here,

SUNY has failed to offer any evidence that Telluric brought its counterclaims against

SUNY in bad faith. See Doe v. 239 Park Ave. S. Assocs., LLC, No. 21-cv-279, 2022

WL 4592713, at *9 (S.D.N.Y. Sep. 30, 2022) (declining to award sanctions where

defendant offered no evidence to support conclusory allegation of bad faith); McCune,

2010 WL 1189390, at *5 (denying motion for sanctions were movant set forth only

“bald, conclusory allegations of bad faith”). SUNY simply asserts that Defendant

“despite being informed of SUNY’s immunity from suit, refused to reconsider [its]

claims.” SUNY Mem., 8. Moreover, while SUNY asserts that all claims against it

were barred by sovereign immunity, that issue was never decided. Judge Seybert

dismissed Defendant’s claims against SUNY based on Telluric’s failure to prosecute

this action or obtain counsel. See DE [184] (declining to address remaining

arguments for dismissal).3

Similarly, although there is ample documentation of Defendant’s attempts to

delay adjudication of this action, SUNY has not established that these actions were

taken in bad faith. While Telluric’s efforts to delay the litigation – and Radulescu’s

3 SUNY cites caselaw from outside this Circuit to support the proposition that the Court has the

authority to award fees as a sanction where a party engages in litigation against an adversary that is

immune from suit. See Cotterill v. City & Cnty. of San Francisco, No. C 08-2295 JSW JL, 2010 WL

1223146, at *13 (N.D. Cal. Mar. 10, 2010), report and recommendation adopted, No. C 08-02295 JSW,

2010 WL 1910528 (N.D. Cal. May 11, 2010), aff’d in part, remanded in part sub nom. Haynes v. City

& Cnty. of San Francisco, 474 F. App’x 689 (9th Cir. 2012). In that case, however, the Court concluded

that Eleventh Amendment immunity “had been clearly established” and yet counsel continued to

pursue the plaintiff’s claims. Here, there is no evidence that SUNY’s immunity was clearly

established, nor was such a determination made by this Court or Judge Seybert.

attempt to intervene and become a party in his own right – may have been meritless,

there is no evidence to suggest they were undertaken for an improper purpose. SUNY

asserts – without further explanation or corroboration – that Defendant was

motivated exclusively to delay this action and prevent SUNY from exiting. See SUNY

Mem., 9. It is equally likely, however, that Telluric’s actions were driven by its desire

to obtain counsel and prosecute its counterclaims. In any event, without evidence of

bad faith, this Court cannot award sanctions. See Doe, 2022 WL 4592713, at *9;

McCune, 2010 WL 1189390, at *5.

Lastly, SUNY argues that sanctions are warranted because Defendant failed

to comply with multiple court orders and that a finding of bad faith is not required

when awarding sanctions on that basis. See SUNY Mem., 9-10. There is an exception

to the bad faith requirement where a court sanctions an attorney for misconduct or

violation of court orders relating to his or her professional responsibility, rather than

actions taken for the benefit of a client. See Rossbach v. Montefiore Med. Ctr., 81

F.4th 124, 143 (2d Cir. 2023); Gortat v. Capala Bros., Inc., No. 07 CV 3629 (ILG), 2009

WL 10706564, at *13 (E.D.N.Y. June 3, 2009) (“[W]hen the district court invokes its

inherent power to sanction misconduct by an attorney that involves . . . violation of a

court order or other misconduct that is not undertaken for the client’s benefit the

district court need not find bad faith before imposing a sanction under its inherent

power.”). “A sanction of attorneys’ fees, [however], . . . must always be supported by

a finding of bad faith.” Rossbach, 81 F.4th at 143 (citing U.S. v. Seltzer, 227 F.3d 36,

41-42 (2d Cir. 2000)). Here, SUNY seeks attorneys’ fees, so a finding of bad faith is

still required. Although Telluric repeatedly violated court orders to obtain counsel,

there is no evidence that they did so in bad faith. Accordingly, sanctions are

unwarranted, either pursuant to § 1927 or the Court’s inherent power.

I. CONCLUSION

For the reasons set forth above, SUNY’s Motion is denied in its entirety.

Dated: Central Islip, New York

August 6, 2024 SO ORDERED:

/s/ Steven I. Locke

STEVEN I. LOCKE

United States Magistrate Judge