Opinion
CIVIL ACTION NO. 1:20-cv-1325-AT
2022-08-17
Andrew LECHTER, et al., Plaintiffs, v. APRIO, LLP, et al., Defendants.
ATTORNEYS FOR PLAINTIFFS: David R. Deary, Donna Lee, Jeven R. Sloan, John William McKenzie, III, Tyler McLean Simpson, William Ralph Canada, Jr., Wilson Edward Wray, Jr., Loewinsohn Deary Simon Ray LLP, Dallas, TX, Edward Jon Rappaport, Saylor Law Firm LLP, Atlanta, GA. ATTORNEYS FOR DEFENDANT BAKER, DONELSON, BEARMAN, CALDWELL & BERKOWITZ, P.C.: Ryan Andrew Strain, Sam Berry Blair, Baker Donelson Bearman Caldwell & Berkowitz, PC, Memphis, TN, Steven G. Hall, Baker, Donelson, Bearman, Caldwell & Berkowitz, P.C., Atlanta, GA.
ATTORNEYS FOR PLAINTIFFS: David R. Deary, Donna Lee, Jeven R. Sloan, John William McKenzie, III, Tyler McLean Simpson, William Ralph Canada, Jr., Wilson Edward Wray, Jr., Loewinsohn Deary Simon Ray LLP, Dallas, TX, Edward Jon Rappaport, Saylor Law Firm LLP, Atlanta, GA. ATTORNEYS FOR DEFENDANT BAKER, DONELSON, BEARMAN, CALDWELL & BERKOWITZ, P.C.: Ryan Andrew Strain, Sam Berry Blair, Baker Donelson Bearman Caldwell & Berkowitz, PC, Memphis, TN, Steven G. Hall, Baker, Donelson, Bearman, Caldwell & Berkowitz, P.C., Atlanta, GA. OPINION AND ORDER AMY TOTENBERG, UNITED STATES DISTRICT JUDGE
I. Introduction
The present dispute is a significant detour in the litigation of this complex putative class action. In a nutshell, Plaintiffs are a group of investors in a series of Syndicated Conservation Easement transactions who claim that Defendants conspired to promote a fraudulent tax savings strategy, which ultimately exposed Plaintiffs and other similarly situated investors to personal tax liability. The Court entered a 113-page Order last fall resolving the 10 separate motions to dismiss that had been filed — by a total of 16 Defendants — in response to Plaintiffs' 192-page Amended Complaint. Though Plaintiffs had raised a total of 12 Counts against the various individuals and entities they had named as Defendants — including state and federal RICO claims and common law fraud and civil conspiracy claims — the Court permitted only some of those claims to move forward, and a number of the Defendants were dismissed from the case entirely. Less than two weeks later, one of those Defendants, the law firm Baker, Donelson, Bearman, Caldwell & Berkowitz ("Baker Donelson"), moved for sanctions against Plaintiffs.
In its Motion for Sanctions, Baker Donelson argues that Plaintiffs lacked a factual basis for their claims against the firm and that Plaintiffs refused to dismiss Baker Donelson from the case even after counsel presented evidence that Plaintiffs' claims were no longer tenable. Plaintiffs respond that they had a sufficient factual basis for their claims against Baker Donelson based on evidence that the firm provided other Defendants with material advice and representations in furtherance of the alleged conspiracy. Additionally, Plaintiffs claim that Baker Donelson has improperly raised two new arguments for the first time in its Reply, which Baker Donelson claims were appropriate responses to arguments raised by Plaintiffs in their Opposition.
Plaintiffs raised 8 Counts against Baker Donelson in the Amended Complaint: a Federal RICO violation, a Georgia RICO violation, conspiracy to violate Federal RICO, conspiracy to violate Georgia RICO, negligent misrepresentation, fraud, aiding and abetting the Aprio Defendants' alleged breaches of fiduciary duty, and civil conspiracy.
Currently pending before the Court are Baker Donelson's Motion for Rule 11 Sanctions [Doc. 252] and Plaintiffs' Motion to Disregard Improper Arguments [Doc. 272]. For the reasons that follow, the Court DENIES both motions.
II. Background
Plaintiffs filed the original Complaint in this matter on March 26, 2020. (Compl., Doc. 1.) A few days later, Baker Donelson's in-house counsel, Sam Berry Blair, emailed Plaintiffs' counsel informing them that Baker Donelson never worked on any of the transactions referenced in the Complaint. (See Doc. 251-1 at 59.) In light of this determination, Blair requested that Plaintiffs either voluntarily dismiss the Complaint or else provide the factual basis for their claims against Baker Donelson. (Id. at 60.)
Plaintiff's attorney, David R. Dreary, responded to Blair via email on April 2, 2020. (Id. at 56-58.) In his response, Dreary provided Blair with a declaration that had been filed by Defendant Nancy Zak in a separate matter before the United States Tax Court, Belair Woods, LLC v. Commissioner of Internal Revenue, Docket No. 19493-17. (Id. at 57); (see Ex. A, Doc. 257-1). Dreary indicated that in paragraph 18 of her declaration, Zak stated that "attorneys from the law firm Baker Donelson" provided her with advice about how to prepare IRS Form 8283. (Doc. 251-1 at 57.) Specifically, they advised her that the section of the form requesting the "cost or adjusted basis" for the appraisals that were used to substantiate the claimed tax deductions "is not required to be provided if the taxpayer has a reasonable cause for not providing the information and the reasonable cause is explained in the attachment to the form." (Id.) Dreary added that according to Zak, she was also advised that "[i]n the case of a deduction for a qualified conservation contribution, such as an easement, a reasonable cause for not including basis information should be that the basis of the property is not taken into consideration when computing the amount of the deduction.' " (Id.) Dreary noted that Zak attached an email to her declaration, which she claimed she had received from Baker Donelson, "that contains the advice set out above." (Id.); (see Doc. 257-1 at 21).
In his email to Blair, Dreary also attached the Commissioner's Motion for Partial Summary Judgment in the Tax Court case Oakhill Woods, LLC v. Commissioner of Internal Revenue, Docket No. 26557-17. (Doc. 251-1 at 57.) Dreary explained that according to the Commissioner's motion in that case, the Form 8283 utilized in the Oakhill Woods transaction - which is one of the transactions at issue in this case - contained the same deficiencies as the Form 8283 utilized in the Belair Woods transaction referenced above. (Id. at 57-58.) He added that in Plaintiffs' view, this evidence established that Baker Donelson "provided faulty advice regarding the preparation of Form 8283" for the transactions at issue in this case, and that this faulty advice resulted in the disallowance of Plaintiffs' claimed tax deductions. (Id. at 58.)
Blair responded to Dreary's email on April 2, 2020, demanding that the claims against Baker Donelson be dismissed. (Id. at 55-56.) Blair explained that the email Zak had referenced in her declaration was an email from 2008 between two individuals named Bufkin Frazer and Bill Sylvester, neither of whom worked for Baker Donelson at the time the email was sent. (Id. at 55.) Blair added that Frazier never worked for Baker Donelson, and Sylvester did not work for Baker Donelson until sometime thereafter. (Id.) On top of that, Blair stated, "The E-mail merely refers to the IRS language on the 2008 8283 form, and does so accurately." (Id.) He continued,
If the E-mail had been prepared by Baker Donelson, at best you could claim the E-mail represents some sort of opinion (of course the lawyers in the E-mail were not provided any relevant facts and documents to review in 2008 to render any opinion for 2010 and 2011 tax returns), but an opinion cannot be the basis of a fraud claim, which requires a false statement of a past or present fact meant to deceive the recipient and cause reasonable reliance by the recipient.(Id.) Mr. Blair concluded,
A complete reading of the E-mail, even if prepared by Baker Donelson and again it was not, demonstrates no basis for fraud, RICO and conspiracy claims you have alleged against Baker Donelson. The E-mail was not sent to your clients and could not have been reasonably relied upon by your clients.
Your Complaint provides no other facts specifically relating to Baker Donelson. We demand you move to dismiss Baker Donelson Friday April 3, 2020. The damage your complaint is causing continues. As additional inducement for you to move quickly, meaning this week, we will not seek any damages against you and your clients if you move to dismiss Baker Donelson this week. To be clear, this professional courtesy {Zak's affidavit did refer incorrectly to the Firm by name, yet that does not cure all of the problems above and as expressed in our previous e-mail} will not be extended and it certainly does not mean the firm has not been damaged.(Id. at 56.)
We await to hear from you with a Motion to Dismiss Baker Donelson from the Action referenced above.
To the extent practicable, the Court has endeavored to preserve the original formatting of the emails exchanged between counsel, including counsel's emphasis and spacing conventions.
Dreary responded to Blair's email on April 3, 2020. (Id. at 53-54.) In that email, Dreary reiterated Plaintiffs' position that Zak's testimony was sufficient to establish their claims, but he said they would agree to dismiss Baker Donelson from the case if Zak admitted that she had committed perjury. (Id. at 54.) In addition, he said Plaintiffs would be willing to discuss removing Baker Donelson from the case subject to a tolling agreement until the parties received further testimony from Zak about Baker Donelson's level of involvement. He explained,
In exchange for a tolling agreement, we would agree to a nonsuit without prejudice to joining your firm as a defendant in the event Zak stands by her sworn testimony. Otherwise, we can deal with Zak's testimony during discovery; and if it is established that she committed perjury and your firm had no involvement, we will dismiss your firm then. The choice is up to you.(Id.)
I am available over the weekend if you would like to talk.
Blair responded to Dreary's email the next day rejecting Dreary's proposal to enter a tolling agreement. (Id. at 51-53.) As an initial matter, Blair emphasized, "your one factual allegation against Baker Donelson in your 175 page complaint was we provided advice and yet it is 100% clear the 'advice' came from another law firm's e-mail." (Id. at 52.) He added,
If you do not believe me as an officer of the Court and General Counsel for Baker
Donelson that neither Frazier or Sylvester worked for Baker Donelson in 2008, we will spend the time and submit sworn proof if you deem it necessary along with a Rule 11 Motion next week.(Id.) He continued,
In further response, we will most certainly not wait for discovery and spend hundreds of thousands of dollars defending these meritless claims against the firm. You must know motion practice in this case will be arduous and lengthy, especially with the claims referenced above and in addition class claims against 17 defendants. Motion practice on your 175 page complaint might take years.(Id. at 52-53.)
With the usual litigation delays, we are not interested in a tolling agreement. Our firm had no contact with your clients regarding these underlying transactions, so what exactly would we be tolling an investigation about the E-mail. We already know with 100% certainty the E-mail was written in 2008 by a lawyer that never worked at Baker Donelson. Besides the various statutes of limitations have run and bar all claims against the firm, especially so when your claims are all based upon a May 2008 E-mail.
I too will make myself available this weekend (how is early Sunday afternoon, 12:30 pm central time?) and extend our previous offer through Monday to waive all claims against the plaintiff group, if you move to dismiss Baker Donelson between now and the end of the day Monday and never re-file any claims against us.
Dreary responded on April 5, 2020 stating that in his view there was no point in having a call given that Baker Donelson would not consider entering a tolling agreement. (Id. at 50.) He added,
Both parties have stated their positions and though it goes without saying, we stand by ours and refute yours. In particular, we reiterate that: the evidence we have provided you is, without more, enough to show the good faith basis of our allegations against your firm and to legally state a RICO claim and the other claims asserted in our Complaint; but also that there exists other supporting evidence as well.(Id.) Later that same afternoon, Blair responded,
We can at least agree that we have stated our respective positions and disagree. We cannot understand how you believe the 2008 Walston Wells e-mail can be a sole basis for fraud, much less RICO and criminal conspiracy, and since Bufkin Frazier never worked for Baker Donelson, it certainly did not come from Baker Donelson. We also cannot understand how the statute of limitations has not run and barred all claims against Baker Donelson. Regardless send your proposed tolling agreement. My firm has not authorized a tolling agreement and our carrier also has to authorize and I cannot say if either of them will so authorize. But no matter how good our potential recovery for fees is (and in this case we believe all defense costs should be recovered), a great claim is not as good as a dismissal. To be crystal clear, our agreement to waive all claims against the plaintiff group is withdrawn. Send the tolling agreement and I will send it up the flag pole.(Id.)
Blair emailed Dreary again on May 12, 2020 and May 15, 2020. (Id. at 48-49.) In the May 12 email, Blair indicated that another Defendant had been voluntarily dismissed from the case and repeated his request that Baker Donelson be voluntarily dismissed from the case as well. (Id. at 49.) Plaintiffs did not respond. In his May 15, 2020 email, Blair provided Dreary with an affidavit from Baker Donelson's Director of Human Resources stating that Frazier never worked for Baker Donelson and Sylvester did not work there until 2009. (Id. at 48-49.) Blair concluded, "the firm had nothing to do with the May 2008 e-mail, the sole basis of the complaint against the firm, and we ask you to voluntarily dismiss the firm from this case." (Id. at 49.) Again, Plaintiffs did not respond.
Blair emailed Dreary again on May 22, 2020 saying the affidavit from Baker Donelson's Director of Human resources was "definitive proof" that the claims were no longer tenable and that Plaintiffs therefore had an obligation to dismiss their claims under Rule 11 of the Federal Rules of Civil Procedure. (Id. at 45-48.)
On May 28, 2020, Dreary sent Blair the following response:
In my initial email to you on April 2nd, I informed you that we declined your invitation to engage in informal preliminary discovery, but that we were sending you the Zak Declaration as a courtesy. On April 5th, I clarified to you that the Zak Declaration was not the only item of evidence on which we were relying in making the allegations against your firm. Nevertheless, you continue to assert that, by contesting the email referenced in the Zak Declaration, Baker Donelson has rebutted the "sole" evidence on which we rely for our claims against Baker Donelson. As we have previously advised you, we disagree that (1) you have rebutted the averments made in the Zak Declaration and (2) either the email or even the totality of the Zak Declaration is the sole basis of our claims against Baker Donelson.(Id. at 45.)
Once again, we will not engage in informal discovery with your firm. Our allegations against Baker Donelson are well-grounded. We will provide additional evidence through the normal course of discovery.
Baker Donelson served Plaintiffs with a draft motion for sanctions on July 10, 2020. (Id. at 3.) In the draft motion, Baker Donelson argued that Plaintiffs' claims had "no reasonable factual basis," "no reasonable chance of success," and "appear[ ] to have been filed against Baker Donelson in bad faith for an improper purpose." (Id. at 2.) In addition, Baker Donelson argued, "the information Baker Donelson's counsel provided Plaintiffs' counsel in March, April, and May 2020 . . . as well as the information Plaintiffs had before filing suit, demonstrates Plaintiffs' claims against Baker Donelson are objectively frivolous." (Id.) Plaintiffs did not dismiss the case after receiving Baker Donelson's draft motion. However, on August 28, 2020, Plaintiffs amended the Complaint and included additional allegations against Baker Donelson. (See Am. Compl., Doc. 155.) Baker Donelson did not re-serve Plaintiffs with the motion for sanctions after Plaintiffs amended the Complaint or otherwise notify Plaintiffs of their position that the Amended Complaint was similarly sanctionable. (See Decl. of Jeven R. Sloan, Doc. 257-1 ¶ 19.)
On September 30, 2021, the Court entered an Order dismissing Baker Donelson from the case. (MTD Order, Doc. 248.) Less than two weeks later, Baker Donelson filed the Motion for Sanctions that it had previously served on Plaintiffs in July 2020, which had been specifically directed at the original Complaint. (Mot. for Sanctions, Doc. 252.) Plaintiffs opposed Baker Donelson's Motion, and separately moved for the Court to disregard two arguments that they claim Baker Donelson raised for the first time in its Reply: first, that Baker Donelson was not involved in the Belair Woods transaction; second, that even if the motion for sanctions is procedurally defective, the Court can still impose sanctions under its inherent authority. (Docs. 257, 272.)
III. Legal Standard
"Rule 11 [of the Federal Rules of Civil Procedure] grants courts the power to sanction litigants and attorneys who make assertions without proper evidentiary support." Battles v. City of Ft. Myers, 127 F.3d 1298, 1300 (11th Cir. 1997) (citing Fed. R. Civ. P. 11(c)). "Rule 11 sanctions are warranted when a party files a pleading that '(1) has no reasonable factual basis; (2) is based on a legal theory that has no reasonable chance of success and that cannot be advanced as a reasonable argument to change existing law; and (3) is filed in bad faith for an improper purpose.' " Homecare CRM, LLC v. Adam Grp. of Middle Tenn., 952 F. Supp. 2d 1373, 1380 (N.D. Ga. 2013) (quoting Baker v. Alderman, 158 F.3d 516, 524 (11th Cir. 1998)). The purpose of Rule 11 sanctions is to "reduce frivolous claims, defenses, or motions" and "to deter costly meritless maneuvers." Donaldson v. Clark, 819 F.2d 1551, 1557 (11th Cir. 1987) (internal quotation marks omitted). "If warranted, the court may award to the prevailing party the reasonable expenses, including attorney's fees, incurred for the motion." Fed. R. Civ. P. 11(c)(2).
"In considering a motion for sanctions pursuant to Fed.R.Civ.P. 11, a court conducts a two-step inquiry: '(1) whether the party's claims are objectively frivolous; and (2) whether the person who signed the pleadings should have been aware that they were frivolous.' " Byrne v. Nezhat, 261 F.3d 1075, 1105 (11th Cir. 2001) (footnote omitted) (quoting Baker, 158 F.3d at 524). "The objective standard for assessing conduct under Rule 11 is 'reasonableness under the circumstances' and 'what [it] was reasonable to believe at the time' the pleading was submitted." Riccard v. Prudential Ins. Co., 307 F.3d 1277, 1294 (11th Cir. 2002) (quoting Baker, 158 F.3d at 524). A court should impose sanctions when a party displays "deliberate indifference to obvious facts" that require rejection of the party's position, not merely when a party "used poor judgment in pursuing their allegations." Davis v. Carl, 906 F.2d 533, 537 (11th Cir. 1990); see also Homecare, 952 F. Supp. 2d at 1380 ("Although sanctions are warranted when the claimant exhibits a 'deliberate indifference to obvious facts,' they are not warranted when the claimant's evidence is merely weak but appears sufficient, after a reasonable inquiry, to support a claim under existing law." (quoting Baker, 158 F.3d at 524)). "The use of Rule 11 is particularly appropriate when a party knowingly makes allegations that are objectively frivolous and persists in that 'position after it is no longer tenable.' " Miccosukee Tribe of Indians of Fla. v. Cypress, 686 F. Appx 823, 827 (11th Cir. 2017) (quoting Peer v. Lewis, 606 F.3d 1306, 1311 (11th Cir. 2010)).
Rule 11(c)(2) also requires notice and an opportunity for the offending party to retract its motion or pleading. The safe harbor provision of Rule 11(c)(2) states, "The motion must be served under Rule 5, but it must not be filed or be presented to the court if the challenged paper, claim, defense, contention or denial is withdrawn or appropriately corrected within 21 days after service or within another time the court sets." Thus, a motion for sanctions must be served on the opposing party, but not filed with a court, for at least 21 days so as to allow the offending party time to withdraw its allegedly sanctionable pleading. Thompson v. RelationServe Media, Inc., 610 F.3d 628, 696 (11th Cir. 2010). In addition, a motion for sanctions must be filed reasonably promptly after the offending pleading is filed. See Fed. R. Civ. P. 11 Advisory Committee Note of 1993 ("Ordinarily the motion should be served promptly after the inappropriate paper is filed, and, if delayed too long, may be viewed as untimely."). "Given the 'safe harbor' provisions . . . a party cannot delay serving its Rule 11 motion until the conclusion of the case (or judicial rejection of the offending contention)." Id.
IV. Discussion
A. Sanctions Under Rule 11
In its Motion for Sanctions, Baker Donelson argues that Plaintiffs' claims were objectively frivolous because Baker Donelson never worked on any of the conservation easement transactions at issue, and Plaintiffs' only evidence of Baker Donelson's involvement was a 2008 email between two individuals, neither of whom were employees of Baker Donelson at that time. Baker Donelson further argues that Plaintiffs refused to dismiss their claims even after Baker Donelson identified these deficiencies, and that Plaintiffs should be required to compensate Baker Donelson for the costs that it incurred defending against Plaintiffs' claims.
In addition to contesting Baker Donelson's Motion for Sanctions on the merits, Plaintiffs argue that the Motion is procedurally deficient on the ground that Baker Donelson failed to satisfy Rule 11's safe harbor requirement before moving for sanctions based on the Amended Complaint. Plaintiffs emphasize that although Baker Donelson provided Plaintiffs with the requisite notice that it sought to move for sanctions based on the original Complaint, Baker Donelson never provided Plaintiffs with notice of its intent to move for sanctions based on the Amended Complaint. Plaintiffs assert that their filing of the Amended Complaint triggered an additional notice requirement for Baker Donelson to inform Plaintiffs of its intent to move for sanctions based on the new operative pleading. And because Baker Donelson never provided that requisite notice, Plaintiffs argue that the Motion for Sanctions should therefore be denied.
Plaintiffs rely on two cases in support of this argument: Lawrence v. Richman Group of CT LLC, 620 F.3d 153 (2d Cir. 2010), and Lomax v. Ruvin, No. 09-23293-CIV, 2011 WL 13267206 (S.D. Fla. Aug. 19, 2011).
In Lawrence, the defendants moved for Rule 11 sanctions in conjunction with moving to dismiss the first amended complaint, but did not file their motion for sanctions that was directed at the second amended complaint until after the second amended complaint had been dismissed. 620 F.3d at 155. Although the district court had initially granted the defendants' motion for sanctions, on appeal, the Second Circuit observed that under Rule 11's safe harbor requirement, a motion for sanctions "must not be presented to the court until the alleged violator is afforded twenty-one days to withdraw or correct the offending document." Id. at 156 (emphasis added). The court emphasized that "the filing of an amended pleading resets the clock for compliance with the safe harbor requirements of Rule 11(c)(2) before a party aggrieved by the new filing can present a sanctions motion based on that pleading to the district court." Id. at 158 (emphasis added). And the court noted that while the defendants had provided the plaintiff with the requisite notice with respect to the first amended complaint, the plaintiff "was . . . not afforded any notice of defect with respect to the second amended complaint." Id. at 157. Under the circumstances, the court found that "the proper course was not to ignore the rule's safe harbor requirements, but to alert Lawrence and the court to any perceived defect in the second amended complaint and to seek clarification and agreement as to the schedule for formal filing of the sanctions motion." Id. at 159. But by that point the district court had already dismissed the plaintiff's claim, so it was too late for the defendants to cure the notice deficiency and "sanctions could not be awarded under Rule 11(c)(2)." Id. at 158.
The court reached a similar conclusion in Lomax. There, the defendant served the plaintiff with a motion for sanctions directed at the plaintiff's original complaint and the plaintiff did not withdraw the complaint within 21 days. Lomax, 2011 WL 13267206, at *8. However, like in this case, the plaintiff subsequently amended the complaint, but the defendant did not serve the plaintiff with a new motion for sanctions directed at the amended pleading; instead, the defendant simply filed a motion to dismiss the amended complaint. Id. at *9. The day after the amended complaint was dismissed, just like Baker Donelson did in this case, the defendant filed a motion for sanctions that had been directed at the original complaint, which was served on the plaintiff before she filed her amended complaint. Id. Based on these factually analogous series of events, the court concluded, "to the extent that Defendant Taylor is seeking sanctions predicated upon the Amended Complaint, his Rule 11 Motion fails to comply with the safe harbor requirements of Rule 11 and therefore should be denied." Id. at *8.
Just like the defendants in Lawrence and Lomax, Baker Donelson never provided Plaintiffs with notice of its intent to move for sanctions based on the operative Amended Complaint. And now that the Court has resolved Baker Donelson's motion to dismiss based on the Amended Complaint and removed Baker Donelson from the case, it is too late for Plaintiffs to correct any deficiencies in that operative pleading. Therefore, according to Plaintiffs, Baker Donelson has failed to comply with Rule 11's safe harbor requirement and the Court cannot award sanctions based on Rule 11.
In its Reply, Baker Donelson argues that Rule 11's safe harbor requirement should not be strictly enforced in these specific circumstances, and that Lawrence and Lomax are not controlling authority. Baker Donelson emphasizes that the underlying purpose of Rule 11's safe harbor requirement is to "reduce, if not eliminate, the unnecessary expenditure of judicial time and adversary resources." Lawrence, 620 F.3d at 158. And because, in its view, the Amended Complaint contained the same defects as the original Complaint, Baker Donelson contends that, rather than reducing the unnecessary expenditure of adversary resources, requiring additional notice would "make[ ] the party who is the target of repeated Rule 11 misconduct do even more work." (Baker Donelson's Reply, Doc. 270 at 9 n.1.) To be sure, Baker Donelson would have to do "more work" to notify Plaintiffs of their position that the Amended Complaint contained the same deficiencies as the original Complaint. But all that would entail would be the minimal effort of emailing Plaintiffs' counsel to inform them of their position. And though Baker Donelson correctly observes that neither Lawrence nor Lomax is binding authority, Eleventh Circuit caselaw appears to be in accord with these decisions. Just recently, in Huggins v. Lueder, Larkin & Hunter, LLC, 39 F.4th 1342 (11th Cir. 2022), the Eleventh Circuit affirmed that after a party is served with a Rule 11 motion, "if the opponent withdraws or properly amends the challenged document, the proposed Rule 11 motion has served its purpose and cannot be filed." Id. at 1346.
Of course, one could argue that Baker Donelson's motion for sanctions that was directed at the original Complaint can still be filed in this case on the theory that the Amended Complaint was not a "proper[ ] amend[ment]." But a comparison of the two pleadings belies that theory.
As Baker Donelson notes, the original Complaint contained only a single substantive allegation against Baker Donelson, which the Court has copied below:
(d) Baker, Donelson, Bearman, Caldwell & Berkowitz, P.C. ("Baker Donelson") and Large & Gilbert, Inc. ("Large & Gilbert"). Baker Donelson is a law firm, and Large & Gilbert is an accounting firm. These professional firms provided advice and services regarding the preparation of the Appraisal Summary Form 8283 for each Syndicate. As discussed below, each of these Appraisal Summary Forms 8283 were improperly prepared and resulted in the disallowance of the charitable contribution deductions.(Compl. ¶ 58(d).) The upshot of this allegation was that Baker Donelson - jointly with another Defendant - provided some form of unspecified advice to unknown individuals related to the preparation of each Form 8283. These allegations plainly could not have formed the basis for any claims against Baker Donelson, as Mr. Blair pointed out in his initial email to Plaintiffs' counsel. But Plaintiffs managed to provide some additional clarity in the Amended Complaint.
For example, in paragraph 58(c) of the Amended Complaint, Plaintiffs clarified that Baker Donelson allegedly provided the advice in question to Zak and the other Forever Forests Defendants, jointly with Large & Gilbert, and that the Forever Forests Defendants subsequently prepared the Form 8283s for the relevant transactions "pursuant to and in reliance on this advice and services." Plaintiffs also clarified that they were basing their allegations on Zak's declaration in the Belair Woods transaction, in which she had stated that she received advice and consultation from Baker Donelson and Large & Gilbert "in preparing a template Appraisal Summary (Form 8283) to be used in all SCE Strategy transactions." (Id. ¶¶ 90, 121, 148.) More specifically, Plaintiffs added that the Forever Forests Defendants
sought out the expertise of Baker Donelson and Large & Gilbert for the purpose of circumventing the reporting of the cost basis in line 5 of page 2 of the Form 8283, while at the same time making it appear this was a permissible deviation from reporting the basis and fair market value in a transparent manner (as required by the applicable Code sections and related regulations).(Id. ¶ 177.) Plaintiffs added that Baker Donelson and Mr. Sylvester, along with Large & Gilbert, provided Zak with this advice with the full knowledge that it would be used to support large charitable contribution deductions in Syndicated Conservation Easement transactions, that this advice would be relayed to the other Defendants in furtherance of the alleged conspiracy, and that it would be relied upon by Plaintiffs and other investors to support their claimed tax deductions. (Id. ¶ 178.)
Plaintiffs also mentioned that Zak had identified Sylvester as a potential witness in another conservation easement case before this Court, (id. ¶ 178 n.27), and that Sylvester had been actively promoting conservation easement transactions since 2002, (id. ¶ 210). Based on these allegations, Plaintiffs claimed,
For instance, Plaintiffs alleged, "Baker Donelson was so involved in the promotion and implementation of syndicated conservation easement strategies, that they published a webinar as late as September 2017 continuing to push the bona fides of syndicated conservation easement transactions even after the IRS issued 2017-10 that designated the SCE Strategy as a listed transaction subject to greatly increased scrutiny." (Am. Compl. ¶ 210.)
Baker Donelson played a critical and important role in the preparation of the Appraisal Summaries (Form 8283) for every SCE Strategy transaction and did so with full knowledge that Baker Donelson's actions were in furtherance of the conspiracy alleged herein to design promote, sell, and implement the SCE Strategy.(Id. ¶ 242(h).)
Although the allegations against both Baker Donelson and Large & Gilbert were insufficient to survive a Motion to Dismiss, they were still a substantial improvement over the bare bones allegations in the original Complaint. More importantly, there were enough new allegations in the Amended Complaint to trigger Baker Donelson's obligation to provide renewed notice to Plaintiffs of its intent to seek sanctions. Baker Donelson subsequently moved to dismiss Plaintiffs' claims in the Amended Complaint, but the mere filing of a motion to dismiss did not provide Plaintiffs with notice of Baker Donelson's intent to seek sanctions. See In re Miller, 414 F. Appx. 214, 217-18 (11th Cir. 2011) (noting that "motions to dismiss and motions for sanctions serve different purposes and are governed by different standards" and that "many arguments which might support a motion to dismiss would fail to provide a sufficient basis for a motion for sanctions").
As the Court stated in its September 30, 2021 Order, Plaintiffs could not satisfy the heightened pleading requirement for fraud-based claims under Rule 9(b) of the Federal Rules of Civil Procedure by "lumping multiple defendants together in such generalities." (MTD Order at 79) (quoting Burgess v. Religious Tech. Ctr., Inc., 600 F. Appx 657, 663 (11th Cir. 2015)).
As an alternative, Baker Donelson argues that Rule 11's safe harbor requirement should not be enforced in this case because it was clear that Plaintiffs would not have withdrawn their claims even if they had been given the opportunity. Baker Donelson relies on Malvar Egerique v. Chowaiki, 19 Civ. 3110, 2020 WL 1974228 (S.D.N.Y. Apr. 24, 2020). There, the defendants served the plaintiff's counsel with a motion for sanctions, and the very next day the plaintiff's counsel responded by stating, "we are not withdrawing the first amended complaint or case. In my opinion, your Rule 11 motion lacks any merit." Id. at *29. The defendants then proceeded to file their motion with the court before the 21-day safe harbor period had expired. Id. Even though the defendants failed to comply with the safe harbor requirement, the court found that "[a]ny technical violation of the safe harbor provision should be excused" because, based on the plaintiff's counsel's response to the motion, the court was "certain that Plaintiff would not have withdrawn or amended the Complaint, even if he had been provided the full 21 days." Id.
Here, unlike in Malvar Egerique, Plaintiffs never received a motion for sanctions directed to the challenged pleading in the first place. Though Baker Donelson may be correct that Plaintiffs would not have withdrawn their claims against Baker Donelson even if Baker Donelson had provided Plaintiffs with notice of its intent to move for sanctions, that does not excuse Baker Donelson's failure to provide that requisite notice. The court's decision in Malvar Egerique does not suggest otherwise. Rather, Malvar Egerique stands for the narrower proposition that once the defendant provides the plaintiff with notice of his intent to move for sanctions based on the operative pleading, and the plaintiff provides a response clearly and unequivocally stating that he will not withdraw his claims, the defendant is not required to wait a full 21 days before filing his motion with the court. That is not what happened here.
Further, once the Court dismissed Plaintiffs' claims against Baker Donelson in the Amended Complaint, it was too late for Baker Donelson to correct the deficiency. At that point, any effort to provide Plaintiffs with the requisite notice was untimely. Granted, the movant may wait until after final judgment to file its motion for sanctions "if the 21-day safe harbor period expires without action to cure the challenged filing." Huggins, 39 F.4th at 1346 (emphasis added). But in this case, Plaintiffs were never afforded a 21-day heads up to cure "the challenged filing." Although Baker Donelson properly notified Plaintiffs of their Rule 11 challenge to the original Complaint, it did not notify Plaintiffs of its challenge to the Amended Complaint until after Plaintiffs' claims had been resolved. As a consequence, Plaintiffs "did not have an opportunity to correct or withdraw the filing that [Baker Donelson] takes issue with" until after Plaintiffs' claims were dismissed. Shaw v. OneWest Bank, No. 1:16-cv-2864, 2017 WL 10942232, at *2 (N.D. Ga. Aug. 15, 2017) (emphasis added). The Court is precluded from imposing Rule 11 sanctions against Plaintiffs on that basis alone. Id.
The Court is cognizant of the reputational concerns that come into play in RICO cases, and the fact that "[c]ourts have not hesitated to impose sanctions under Rule 11 when RICO claims have been found to be frivolous." Malvar Egerique, 2020 WL 1974228, at *27. But the Eleventh Circuit has held that even a meritorious motion for sanctions should be denied when the movant fails to comply with Rule 11's strict procedural requirements. As Plaintiffs point out, in Peer v. Lewis, 606 F.3d 1306 (11th Cir. 2010), the court concluded that even though the plaintiff's claims were "objectively frivolous," Rule 11 "d[id] not permit the imposition of sanctions" because by the time the defendant moved for sanctions "the district court had already rejected the offensive pleading." Id. at 1312-13. In this case, the Court has already rejected the alleged offensive pleading by granting Baker Donelson's Motion to Dismiss. Therefore, even if Plaintiffs' claims against Baker Donelson were objectively frivolous, the Court would still lack the authority to impose sanctions under Rule 11.
B. Sanctions Under the Court's Inherent Authority
As Baker Donelson notes, the Court still has the inherent authority to impose sanctions on a party even when the Court would otherwise be prohibited from doing so under Rule 11. See In re Mroz, 65 F.3d 1567, 1575 (11th Cir. 1995) (noting that Rule 11 "does not displace a court's inherent power to impose sanctions for a parties' bad faith conduct"). In their Motion to Disregard, Plaintiffs argue that Baker Donelson has waived this argument because Baker Donelson did not raise it until its Reply.
In its Opposition to Plaintiffs' Motion to Disregard, Baker Donelson contends that its argument that the Court still has the inherent authority to impose sanctions is a valid response to Plaintiffs' contention that Baker Donelson's Motion for Sanctions should be denied as procedurally improper. As such, Baker Donelson argues, these arguments "squarely respond[ ] to the arguments in Plaintiffs' response brief, and do[ ] not advance new arguments." Henley v. Turner Broad. Sys., 267 F. Supp. 3d 1341, 1349 (N.D. Ga. 2017). The Court agrees with Baker Donelson on this point.
Significantly, in Peer, a case upon which Plaintiffs rely, the Eleventh Circuit acknowledged that even when a court lacks the authority to impose sanctions under Rule 11, it can still impose sanctions based on its inherent authority. See 606 F.3d at 1314 (noting that that " 'if in the informed discretion of the court, neither the statute nor the Rules are up to the task, the court may safely rely on its inherent power' to sanction bad faith conduct in the course of litigation" (citing Chambers v. NASCO, Inc., 501 U.S. 32, 33, 111 S.Ct. 2123, 115 L.Ed.2d 27 (1991))). More specifically, even though the court in Peer held that the moving party's motion for sanctions was untimely, the court still recognized that the district court had the inherent authority to impose sanctions on its own. In fact, the court reversed the district court's decision to deny sanctions under its inherent authority based on the "overwhelming evidence" that the plaintiff's original lawyer "knowingly pursued a frivolous claim, and thus acted in bad faith." Id. at 1316. Plaintiffs omitted this point in their Opposition. Therefore, it was entirely proper for Baker Donelson to raise the point in its Reply as a direct response to Plaintiffs' arguments about the Eleventh Circuit's decision in Peer. The argument has not been waived, and the Court declines to disregard it.
Plaintiffs also argue that Baker Donelson waived its argument that it never worked on the Belair Woods transaction. But as Baker Donelson notes, that argument was merely a refinement of Baker Donelson's initial argument that it was not involved in any of the relevant transactions at issue. Thus, Baker Donelson has not waived this argument either.
However, unlike for Rule 11 sanctions, the imposition of sanctions based on the Court's inherent authority "requires a finding of bad faith." In re Mroz, 65 F.3d at 1575. "Bad faith is an objective standard that is satisfied when an attorney knowingly or recklessly pursues a frivolous claim." Peer, 606 F.3d at 1314. Notably, this was not a situation in which there was "overwhelming evidence in [Plaintiffs'] possession that directly refutes [their] own factual allegations," such that Plaintiffs and their counsel "should have been aware that the claim was frivolous." Homecare, 952 F. Supp. 2d at 1380, 1384; cf. Peer, 606 F.3d at 1312 (finding that plaintiff's FCRA claim was objectively frivolous and plaintiff's lawyer was aware of this when "there were no facts to support Peer's contention that Lewis accessed his credit report" and plaintiff's lawyer "already possessed Peer's credit report," which "showed that Lewis never accessed it"). Instead, Plaintiffs were primarily relying on evidence that was in the possession of a third party — Nancy Zak. Although by the time they filed the Amended Complaint Plaintiffs possessed evidence that Frazer and Sylvester did not work for Baker Donelson at the time of their 2008 email exchange, that alone arguably did not tell the full story. Plaintiffs also possessed evidence that Sylvester started working for Baker Donelson the following year, and they possessed at least some evidence that Sylvester may have provided Zak with a copy of the 2008 email exchange — and potentially other unspecified tax advice — at some point thereafter.
Plaintiffs' evidence in support of these allegations was certainly weak; however, their course of conduct up through the filing of the Amended Complaint does not suggest that their claims against Baker Donelson were " 'filed in bad faith for an improper purpose.' " Homecare, 952 F. Supp. 2d at 1380 (quoting Baker, 158 F.3d at 524). Significantly, Plaintiffs offered to enter a nonsuit agreement with Baker Donelson — subject to a tolling agreement — until they could get further clarification from Zak about the scope of Baker Donelson's involvement in the transactions at issue. And they also represented to Baker Donelson's in-house counsel that they would dismiss their claims if it turned out that Zak had been mistaken about Baker Donelson's role.
Although as Baker Donelson's counsel previously indicated, it appears that — at least to some extent — Plaintiffs adopted a "shoot first, make claims in the press and then ask questions later approach" to their claims, (Doc. 252-1 at 52), the record does not suggest that Plaintiffs "knowingly pursued a frivolous claim, and thus acted in bad faith," Peer, 606 F.3d at 1316. At most, it appears that Plaintiffs demonstrated quite "poor judgment in pursuing their allegations." Davis, 906 F.2d at 537. Accordingly, Baker Donelson's Motion for Sanctions is denied.
For instance, Plaintiffs speculate that Sylvester could have provided the 2008 email to Zak sometime after he joined Baker Donelson back in 2009, but they provide no specific evidence to explain how this may have occurred. Additionally, Plaintiffs argue that according to Zak, the 2008 email was just one of example of the advice provided to her by Baker Donelson, yet Plaintiffs fail to provide any other specific examples of such advice in the Amended Complaint. Clearly, Plaintiffs' likelihood of success based on these allegations was dubious at best.
V. Conclusion
Two things are clear from the saga of Baker Donelson's Motion for Sanctions. First, the Court cannot impose Rule 11 sanctions on Plaintiffs in this instance because Baker Donelson failed to comply with Rule 11's safe harbor requirement. Second, however weak — and likely ill-advised — Plaintiffs' claims may have been, the Court cannot conclude on this record that Plaintiffs acted in bad faith. As a consequence, the Court also lacks the authority to impose sanctions under its inherent authority. Baker Donelson's Motion for Rule 11 Sanctions [Doc. 252] is therefore DENIED. And for the reasons discussed above, Plaintiffs' Motion to Disregard Improper Arguments [Doc. 272] is also DENIED.
Though the Court does not reach the issue of whether Rule 11 sanctions would have been warranted if Baker Donelson had complied with the safe harbor requirement, suffice it to say, that question would be a much closer call. Moving forward, the Court urges Plaintiffs to be cautious about both their future factual and legal representations in this case as well as their designation of RICO defendants in litigation hereafter.
IT IS SO ORDERED this 17th day of August, 2022.