Category: Uncategorized

First Circuit Affirms Sanctions For Misstating the Law

The First Circuit Court of Appeals has affirmed an award of sanctions imposed where a lawyer misstated the law. Such sanctions are exceedingly rare. In this case, the bankruptcy court sanctioned David Baker for misstating the law in two briefs.

First, the court alludes to, but does not describe, other instances where Baker was sanctioned by courts.

Second, the court explains the decision to affirm the sanctions awards as follows:

On June 2, 2014, the bankruptcy court ordered Baker to show cause why he should not be sanctioned under Federal Rule of Bankruptcy Procedure 9011(b)(2). As grounds for its order, the court quoted from Paragraph 8 of Baker’s motion for sanctions against BOA, observing that the statement Baker made in that paragraph was not a correct statement of law and was not supported by the cases Baker cited therein. The bankruptcy court also pointed to Paragraph 12 of Baker’s objection to the Trustee’s motion to convert or dismiss, finding that Baker had “misquot[ed] the definition of cash collateral” and “misstat[ed] the law by claiming that the obligation of a debtor to obtain authority to use cash collateral applies only where the lien on cash is a consensual lien.

The bankruptcy court rejected Baker’s explanations on both counts. In re Hoover, No. 14-40478, 2014 WL 3893354, at *3 (Bankr. D. Mass. Aug. 6, 2014). Referring to Baker’s proffered benign reading of Paragraphs 8 and 9 as simply presenting an argument that the law should be modified to require a prompt filing of a motion for relief from the automatic stay, the court observed that the motion itself said “nothing of the kind” and that the proffered reading itself made “no sense” given what Paragraphs 8 and 9 actually said. Id. Referring to Baker’s claim that assets subject to non-consensual liens could not be “cash collateral,” the bankruptcy court found that the part of the definitional section of the applicable statute that Baker selectively omitted when directly quoting it in his objection was not only relevant to the point being made, but directly rebutted that point. Id. The court explained the difference between “paraphrasing” and “quoting” and found that Baker had “purported to quote a statutory definition,” but in doing so had “quot[ed] out of context part of a statute because quoting the statute in its entirety would have disproven his premise.” Id. The court also found that Baker’s legal analysis in support of his interpretation of § 363(a), while “beside the point,” was “absurd because the statute unambiguously states the opposite.” Id.

The bankruptcy court went on to observe that this conduct was not uncharacteristic of Baker. Id. at *4. It explained that on at least three prior occasions Baker had been sanctioned by different sessions of the court for conduct that included asserting frivolous defenses, advancing arguments contrary to express statutory provisions, and filing a meritless motion for sanctions. Id.

In fashioning an appropriate sanction in this case, the bankruptcy court observed that the “hefty” monetary penalties imposed on Baker in those prior cases had not deterred Baker from repeating such conduct. Id. at *5. The court thus decided to impose a non-monetary penalty “in the hope of effecting a more lasting behavioral modification.” Id. It ordered Baker to “enroll in and attend in person (not on-line) a one semester, minimum three credit-hour class on legal ethics or professional responsibility in an ABA accredited law school to be completed within 13 months of this order.” Id.

The Court of Appeals reviewed the sanction carefully and concluded that Baker was not mistaken, but that he had tried to mislead the court. It also noted that Baker has been sanctioned by other courts. (Again the allegations of prior sanctions are not described in the opinion). The court also noted that Baker is an experienced bankruptcy attorney.

While the legal issues raised are technical bankruptcy issues, the courts concluded that Baker was attempting to mislead. In conclusion, this is an unusual holding.

Source: IN RE HOOVER, Court of Appeals, 1st Circuit 2016 – Google Scholar

Court Applies First Filed Rule To Dismiss One of Two Competing Actions Between Insurers

Two insurance companies recognized that they had a dispute about insurance coverage for asbestos liability issues. One filed a declaratory judgment action in federal court in Illinois. Soon afterwards, the other filed a declaratory judgment action in federal court in Pennsylvania.

The Northern District of Illinois transferred the Illinois lawsuit to Pennsylvania on the ground that the material events occurred in Pennsylvania. The Pennsylvania federal court then dismissed the Pennsylvania action on the ground that it was the second action filed.

The first to file rule generally recognizes that the first case filed should take precedence over the second case that was filed if the subject matter of the two cases is identical. There are a few exceptions to the first to file rule (such as filing in a jurisdiction to obtain better law), but the Pennsylvania court held that the exceptions did not apply.

Thus, in the end the two insurance companies can only litigate one case, but that case belonged in Pennsylvania, not Illinois.

Source: ST. PAUL FIRE & MARINE INSURANCE COMPANY v. R&Q REINSURANCE COMPANY, Dist. Court, ED Pennsylvania 2016 – Google Scholar

District Court Declines to File an Ethics Complaint Against a Lawyer

This case caught my eye because the opinion denies an unusual sanctions motion. Plaintiff’s counsel filed a motion for sanctions against Defendant’s counsel on the ground that the defense lawyer had been pressuring the plaintiff to settle or drop the claim. The sanctions motion was based on the inherent authority of the court. The court explained:

Plaintiff alleges defense counsel is “using threats and intimidation to extract settlement, is making settlement offers without authority from his clients, is threatening administrative actions against Plaintiff’s counsel and her son in order to gain tactical advantage in this action, is tampering with a witness by offering free representation, is demanding that Plaintiff’s counsel agree to restrict her future practice of law, and is conducting this litigation with a wanton disregard for civility and professionalism.” (Doc. 82, p. 2.) Plaintiff asks the Court to (1) refer defense counsel to the State bar for further investigation; (2) admonish defense counsel that should his allege conduct continue, he will be subject to disqualification from representing Defendant, and (3) award monetary sanctions in the amount of Plaintiff’s attorney’s fees incurred in bringing and defending the motion for sanctions. (Doc. 82-1, p. 18.)

The district court denied the sanctions motion because it was based on out-of-court activity. Moreover, plaintiff could file his own ethics complaint against defense counsel if he wished to. This case is worth reading because it correctly distinguishes between out-of-court activity and in-court activity.

My take on this case is that plaintiff’s counsel was whining about defense counsel but was unwilling to file his own ethics complaint but chose to hide behind the district court. The court ruled correctly in denying the motion.

Source: Moore v. CHASE, INC., Dist. Court, ED California 2016 – Google Scholar

New Jersey Sends Legal Malpractice Plaintiff Back to Federal Court

This is an unusual result in a legal malpractice case. The plaintiff was a member of a class that obtained a recovery in a securities class action. The class action had been pending in the United States District Court for the Eastern District of Michigan. Upon receiving a recovery of 3 cents, Ms. Loures sued the lawyers for the class for legal malpractice. She brought her lawsuit in New Jersey.

The lawyer defendants moved to dismiss on the ground that the court lacked personal jurisdiction over them. A motion to dismiss for lack of personal jurisdiction essentially argues that the defendant has insufficient ties to New Jersey to expect to litigate in that state.

The New Jersey court declined to exercise jurisdiction on the ground that the Eastern District of Michigan retained exclusive jurisdiction to enforce the securities class action settlement. In sum, the court dismissed the case and instructed the plaintiff to refile it in the Eastern District of Michigan. The court said that the plaintiff could refile in New Jersey if the federal court declined to exercise jurisdiction.

What makes this case so unusual is that it is almost always the federal court that declines to exercise jurisdiction. State courts are courts of general jurisdiction and almost never decline to hear a justiciable matter. This outcome of this case is extremely rare and worth noting for that reason.

Source: LOURES v. WOLF HALDENSTEIN ADLER FREEMAN & HERZ, LLP, NJ: Appellate Div. 2016 – Google Scholar

District Court Declines to Reopen Case To Allow A Party To File A Rule 11 Motion

This opinion, denying a motion for Rule 11 sanctions, is unusual except that, two months after judgment, the defendant attempted to reopen the case to file a Rule 11 motion. The court declined the invitation ruling that the motion was untimely. The court’s reasoning is as follows:

Defendants served Plaintiff’s counsel with the Motion for Sanctions on June 15, 2015, and waited twenty-one days (during which Plaintiff did not take any “corrective action,” although with summary judgment granted and the case “closed,” the only “corrective action” Plaintiff could take was to pay Defendants’ claimed attorney’s fees) to file the motion, in accordance with the letter of Fed. R. Civ. P. 11(c)(2). Defs.’ Mot. to Reopen ¶ 14. Yet, more is required: “It is important that [a Rule 11] motion be `served promptly after the inappropriate paper is filed, and, if delayed too long, [it] may be viewed as untimely.'” Hunter v. Earthgrains Co. Bakery, 281 F.3d 144, 152 (4th Cir. 2002) (quoting Fed. R. Civ. P. 11 Advisory Committee’s Note (1993) (“Rule 11 Note”)). Less than two weeks before serving Plaintiff, Defendants first notified her of the perceived Rule 11 violations, “twenty-six (26) days after this Court issued its final Memorandum Opinion granting summary judgment in favor of the Ourisman Defendants.” Defs.’ Mot. to Reopen ¶ 5 (emphasis added). Defendants view this as timely, insisting that “[i]t was not until this court issued its decision on Defendants’ Motion for Summary Judgment that the full effect of Plaintiff’s conduct became evidence or that Defendants were fully aware of the extent of Plaintiff’s counsel’s inappropriate conduct.” Defs.’ Reply 2. But, Defendants should have known of the alleged unfounded factual allegations in the Complaint as early as Ms. Sterling’s deposition on March 27, 2014, or in June 2014, when she supplemented her discovery responses, or, at the very latest, September 2, 2014, when they completed and filed their summary judgment motion. Their June 2015 notification and service and July 2015 filing were unnecessarily (and unreasonably) delayed, rendering their motion untimely. SeeHunter, 281 F.3d at 152; Rule 11 Note.

In other words, its not fair to wait sixty days after the court has granted your summary judgment motion to seek sanctions.

Source: Sterling v. OURISMAN CHEVROLET OF BOWIE INC., Dist. Court, D. Maryland 2016 – Google Scholar

Appeal From Bankruptcy Court Dismissed For Lack of Diligence

Senior Judge Shadur has dismissed an appeal from bankruptcy court because the appellant and his lawyer did not diligently prosecute the appeal.

The court explained:

On December 15, 2015 appellant Ayad Nahlawi (“Nahlawi”) filed a Notice of Appeal (“Notice”) to this Court from two orders of the Bankruptcy Court: its October 27, 2015 Order granting the motion of debtors Mark and Carol Anderson (collectively “the Andersons”) for compensation relating to their motion to enforce the automatic stay provided by 11 U.S.C. § 362 (“Section 362”) and its December 1, 2015 order denying Nahlawi’s motion for reconsideration of that October 27 Order. But then, having filed the Notice, Nahlawi and his counsel totally neglected to comply with their obligation to file and serve a designation of the appellate record and of the issues on appeal — and that neglect extended to their failure to file a timely motion either seeking an extension for that purpose or providing any explanation for their noncompliance with the applicable requirements.

As for excusability vel non, this Court will accept for present purposes the assertion by Nahlawi’s counsel that he has other legal commitments (and, indeed, extensive ones). But that does not at all justify or excuse his total failure to spend the fraction of an hour that would have been needed to prepare and submit a simple and timely request for an extension of time. And as for counsel’s other “excuse” set out in Paragraphs 31 and 32 of his responsive memorandum,[1] it brought to mind Charles Dickens’ reference to Mr. Micawber:

“In case anything turned up,” which was his favorite expression.

The district court then dismissed the appeal.

In sum, when judges quote Dickens, they are usually referring to some sort of delay.

Source: NAHLAWI v. Anderson, Dist. Court, ND Illinois 2016 – Google Scholar

Rule 37(e) Electronically Stored Information

There is a new provision of Rule 37. Rule 37(e), effective on December 1, 2015, provides in part that:

(e) Failure to Preserve Electronically Stored Information. If electronically stored information that should have been preserved in the anticipation or conduct of litigation is lost because a party failed to take reasonable steps to preserve it, and it cannot be restored or replaced through additional discovery, the court:

(1) upon finding prejudice to another party from loss of the information, may order measures no greater than necessary to cure the prejudice; or

(2) only upon finding that the party acted with the intent to deprive another party of the information’s use in the litigation may:

(A) presume that the lost information was unfavorable to the party;

(B) instruct the jury that it may or must presume the information was unfavorable to the party; or

(C) dismiss the action or enter a default judgment.

According to the Committee notes, the new rule was enacted to allow the district courts to address issues that arise when electronic information is lost.

The Advisory Committee notes discuss the new rule in detail:

“Subdivision (e)(1). This subdivision applies only if information should have been preserved in the anticipation or conduct of litigation, a party failed to take reasonable steps to preserve the information, information was lost as a result, and the information could not be restored or replaced by additional discovery. In addition, a court may resort to (e)(1) measures only “upon finding prejudice to another party from loss of the information.” An evaluation of prejudice from the loss of information necessarily includes an evaluation of the information’s importance in the litigation.

The rule does not place a burden of proving or disproving prejudice on one party or the other. Determining the content of lost information may be a difficult task in some cases, and placing the burden of proving prejudice on the party that did not lose the information may be unfair. In other situations, however, the content of the lost information may be fairly evident, the information may appear to be unimportant, or the abundance of preserved information may appear sufficient to meet the needs of all parties. Requiring the party seeking curative measures to prove prejudice may be reasonable in such situations. The rule leaves judges with discretion to determine how best to assess prejudice in particular cases.

Once a finding of prejudice is made, the court is authorized to employ measures “no greater than necessary to cure the prejudice.” The range of such measures is quite broad if they are necessary for this purpose. There is no all-purpose hierarchy of the severity of various measures; the severity of given measures must be calibrated in terms of their effect on the particular case. But authority to order measures no greater than necessary to cure prejudice does not require the court to adopt measures to cure every possible prejudicial effect. Much is entrusted to the court’s discretion.

In an appropriate case, it may be that serious measures are necessary to cure prejudice found by the court, such as forbidding the party that failed to preserve information from putting on certain evidence, permitting the parties to present evidence and argument to the jury regarding the loss of information, or giving the jury instructions to assist in its evaluation of such evidence or argument, other than instructions to which subdivision (e)(2) applies. Care must be taken, however, to ensure that curative measures under subdivision (e)(1) do not have the effect of measures that are permitted under subdivision (e)(2) only on a finding of intent to deprive another party of the lost information’s use in the litigation. An example of an inappropriate (e)(1) measure might be an order striking pleadings related to, or precluding a party from offering any evidence in support of, the central or only claim or defense in the case. On the other hand, it may be appropriate to exclude a specific item of evidence to offset prejudice caused by failure to preserve other evidence that might contradict the excluded item of evidence.

Subdivision (e)(2). This subdivision authorizes courts to use specified and very severe measures to address or deter failures to preserve electronically stored information, but only on finding that the party that lost the information acted with the intent to deprive another party of the information’s use in the litigation. It is designed to provide a uniform standard in federal court for use of these serious measures when addressing failure to preserve electronically stored information. It rejects cases such as Residential Funding Corp. v. DeGeorge Financial Corp., 306 F.3d 99 (2d Cir. 2002), that authorize the giving of adverse-inference instructions on a finding of negligence or gross negligence.

Adverse-inference instructions were developed on the premise that a party’s intentional loss or destruction of evidence to prevent its use in litigation gives rise to a reasonable inference that the evidence was unfavorable to the party responsible for loss or destruction of the evidence. Negligent or even grossly negligent behavior does not logically support that inference. Information lost through negligence may have been favorable to either party, including the party that lost it, and inferring that it was unfavorable to that party may tip the balance at trial in ways the lost information never would have. The better rule for the negligent or grossly negligent loss of electronically stored information is to preserve a broad range of measures to cure prejudice caused by its loss, but to limit the most severe measures to instances of intentional loss or destruction.

Similar reasons apply to limiting the court’s authority to presume or infer that the lost information was unfavorable to the party who lost it when ruling on a pretrial motion or presiding at a bench trial. Subdivision (e)(2) limits the ability of courts to draw adverse inferences based on the loss of information in these circumstances, permitting them only when a court finds that the information was lost with the intent to prevent its use in litigation.

Subdivision (e)(2) applies to jury instructions that permit or require the jury to presume or infer that lost information was unfavorable to the party that lost it. Thus, it covers any instruction that directs or permits the jury to infer from the loss of information that it was in fact unfavorable to the party that lost it. The subdivision does not apply to jury instructions that do not involve such an inference. For example, subdivision (e)(2) would not prohibit a court from allowing the parties to present evidence to the jury concerning the loss and likely relevance of information and instructing the jury that it may consider that evidence, along with all the other evidence in the case, in making its decision. These measures, which would not involve instructing a jury it may draw an adverse inference from loss of information, would be available under subdivision (e)(1) if no greater than necessary to cure prejudice. In addition, subdivision (e)(2) does not limit the discretion of courts to give traditional missing evidence instructions based on a party’s failure to present evidence it has in its possession at the time of trial.

Subdivision (e)(2) requires a finding that the party acted with the intent to deprive another party of the information’s use in the litigation. This finding may be made by the court when ruling on a pretrial motion, when presiding at a bench trial, or when deciding whether to give an adverse inference instruction at trial. If a court were to conclude that the intent finding should be made by a jury, the court’s instruction should make clear that the jury may infer from the loss of the information that it was unfavorable to the party that lost it only if the jury first finds that the party acted with the intent to deprive another party of the information’s use in the litigation. If the jury does not make this finding, it may not infer from the loss that the information was unfavorable to the party that lost it.

Subdivision (e)(2) does not include a requirement that the court find prejudice to the party deprived of the information. This is because the finding of intent required by the subdivision can support not only an inference that the lost information was unfavorable to the party that intentionally destroyed it, but also an inference that the opposing party was prejudiced by the loss of information that would have favored its position. Subdivision (e)(2) does not require any further finding of prejudice.

Courts should exercise caution, however, in using the measures specified in (e)(2). Finding an intent to deprive another party of the lost information’s use in the litigation does not require a court to adopt any of the measures listed in subdivision (e)(2). The remedy should fit the wrong, and the severe measures authorized by this subdivision should not be used when the information lost was relatively unimportant or lesser measures such as those specified in subdivision (e)(1) would be sufficient to redress the loss.”

This new provision of Rule 37(e) is important and should be reviewed by all practitioners. The most important part of the Rule is that it provides the district court with a series of escalating sanctions depending on the violation. Those who purposely delete stored information are subject to the most serious and severe sanctions.

Practitioners should also be aware that it is routine to obtain the services of a forensic computer consultant who can often locate and obtain information that was deleted. Where lawyers are involved in the deliberate deletion of documents, they can expect to receive professional discipline.

Edward X. Clinton, Jr.