Month: October 2012

Case is Remanded To State Court – But Sanctions Are Denied

Faust v. Menard, Inc., Dist. Court, ND Indiana 2012 – Google Scholar.

After this case was removed to federal court, the plaintiff filed a motion to remand it. The motion was granted and the case was remanded to state court.

Plaintiff then sought legal fees and costs pursuant to Rule 11 and 28 U.S.C. Section 1447 (c). The Rule 11 motion was denied.The court explained: “Although the court thinks that defendant’s legal decisions in this case were ill-conceived and may have flirted with RULE 11, it does not believe that a violation occurred. Plaintiff’s motion for sanctions will be denied.”

However, the court granted plaintiff’s motion for fees and costs under Section 1447(c).

Edward X. Clinton, Jr.

Bank Sues on Guarantee – Court Orders Defense Counsel to Explain Its Conduct

BANK OF THE OZARKS v. KINGSLAND HOSPITALITY, LLC, Dist. Court, SD Georgia 2012 – Google Scholar.

This is a typical case, with an unusual outcome. The bank sues to collect on a promissory note. It also sues the individuals who guaranteed the note. The Defendants (who probably have no defense to the bank’s claims) assert numerous defenses in their answers to the complaint. The Bank then serves discovery requests and the Defendants admit that they have no factual support for the defenses.

The court then enters summary judgment and orders the defense lawyer to show cause why he should not be sanctioned for including bogus defenses in the answer.

The relevant discussion is included:

“Attorneys, moreover, have a duty of candor to the Court that prohibits them from knowingly alleging claims and defenses that have no basis in law or fact. See Ga. Rules of Prof’l Conduct R. 3.3(a).[2] Attorneys also may not “assert a position, conduct a defense … or take other action on behalf of the client when … it is obvious that such action would serve merely to harass or maliciously injure another.” Id. at R. 3.1.

All four defendants in this case share counsel. And in all four answers, counsel chose to sign pleadings that asserted defenses unsupported by any known facts. See Docs. 13, 15, 17, 19. All the answers assert, for example, the defenses of insufficiency of process and failure to join an indispensable party. Yet, no facts in support of either defense appear to exist in the record. More importantly, any investigation “reasonable under the circumstances” likely should have revealed facts indicating adequacy of process or failure to join an indispensable party. See Fed. R. Civ. P. 11(b).

If Defendants’ counsel failed to conduct a Rule 11 investigation, they violated their obligations to this Court when they submitted signed pleadings containing uninvestigated defenses. See Fed. R. Civ. P. 11(b). Counsel likewise violated Rule 11 if they chose to plead defenses they knew to be unsupported or unlikely to be supported by future discovery. See id. at (2), (3). Without more, however, the Court cannot determine whether Rule 11 sanctions are appropriate at this time.

Defendants’ answers also may run afoul of the applicable rules of professional conduct. When the Bank inquired about the factual basis for the defenses in question, counsel for Defendants responded by stating that “Defendants] included this objection to preserve Defendant[s’] right to raise this objection. No facts supporting this defense exist at this time.” See, e.g.. Doc. 28-3 at 17 (emphasis added). Certainly the Federal Rules of Civil Procedure require parties to plead certain defenses—including those pleaded here—by the time they submit responsive pleadings or risk waiving them. See Fed. R. Civ. P. 12(b). But if no basis exists for pleading a defense, adding to an answer simply to preclude waiver borders on a violation of counsel’s duty of candor to the Court. See Ga. Rules of Prof’l Conduct R. 3.3(a) (prohibiting the allegation of defenses known to have no basis in law or fact).

“It is axiomatic that attorneys owe a duty of candor to the court[,]” and that “[fjhe judicial machinery is dependent on the full support of all members of the bench and bar.” Malautea v. Suzuki Motor Corp., 148 F.R.D. 362, 374 (S.D. Ga. 1991) (quoting Pesaplastic, C.A. v. Cincinnati Milacron Co., 799 F.2d 1510, 1522 (11th Cir. 1986)). When attorneys misuse that machinery by averring to the Court that fallacies are truth, the Court must respond accordingly.

Because of the grave concerns raised by defense counsel’s assertion of possibly specious defenses, the Court is compelled to require counsel to show cause why their conduct “has not violated Rule 11(b).” Fed. R. Civ. P. 11(c)(3). The Court will also use Defendants’ response in evaluating the propriety of sanctions under LR 83.5(d) for any violation of Georgia’s Rules of Professional Conduct. Therefore, the Court ORDERS defense counsel to show cause within fourteen (14) days of this order why their conduct did not violate Rule 11.”

Comment: the defense lawyer has a significant problem on his hands as he appears to have admitted that there was no factual basis to support the defenses to the complaint. The second problem is that the court has initiated the inquiry – the Bank’s lawyers were silent. The defense lawyers are in significant trouble and need to consider their response the sanctions motion very carefully.

Edward X. Clinton, Jr.

Second Circuit Enforces Arbitration Clause And Declines Sanctions

IPCON COLLECTIONS LLC v. Costco Wholesale Corp., Court of Appeals, 2nd Circuit 2012 – Google Scholar.

The plaintiff was a maker of karaoke systems, which it sold to Costco on a consignment basis. The parties had a contract which required that any dispute between them be arbitrated. As is often the case, the plaintiff filed a lawsuit and attempted to avoid arbitration. The district judge entered an order compelling arbitration and Costco moved for sanctions. The Second Circuit affirmed the order to arbitrate the dispute but declined to award sanctions.

The Second Circuit concluded that the arguments were “weak” but not weak enough to be sanctionable.

Edward X. Clinton, Jr.