Opinion
18-CV-11211 (JLR)(KHP)
05-10-2024
AMES RAY, Plaintiff, v. BALESTRIERE FARIELLO, et al., Defendants.
REPORT AND RECCOMENDATION
Katharine H. Parker United States Magistrate Judge
TO: THE HONORABLE JENNIFER L. ROCHON, United States District Judge
Plaintiff/Counterclaim Defendant Ames Ray has moved for sanctions against Defendants/Counterclaim Plaintiffs and their counsel pursuant to Federal Rule of Civil Procedure 11 (“Rule 11”), 28 U.S.C. 1927, and the Court's inherent power. For the reasons set forth below, I recommend that the motion be denied.
BACKGROUND
The Court assumes familiarity with the facts as set forth in prior opinions in this case and provides here only a summary for context. See ECF Nos. 37, 129. Defendants served as Ray's atorneys from 2010 through 2015 in connection with two lawsuits by Ray against his former spouse (“Spouse”) and others in New York state court.The first lawsuit, filed in 2010, asserted a fraudulent conveyance claim in connection with certain transactions his Spouse conducted in 2008 and 2009. That case was dismissed at the pleading stage. See Ray v. Ray, Index No. 652314/2010 (NY Sup. Ct., Hon. C.E. Ramos) (the “First Fraudulent Conveyance Lawsuit”). The Appellate Division, First Department, affirmed the order of dismissal. See ECF 37.
Ray sued his former Spouse through different counsel in several different actions prior to the 2010 lawsuit.
In or about 2014, Ray sought Defendants' assistance in filing a second lawsuit in New York state court against his former Spouse and a related entity that asserted another fraudulent convenance claim. Defendants warned Ray that such an action could be dismissed and that his former Spouse would seek sanctions for bringing the suit, which could result in both Ray and Defendants being sanctioned for bringing the action. Ray contended in the instant action that Defendants failed to advise him that a sanctions motion could create a conflict of interest between them and that he should retain separate counsel to represent him in connection with any sanctions motion.
As predicted, the court dismissed the second lawsuit and announced its intent to impose sanctions on Ray and Defendants. Ray v. Ray, Index No. 153945/2014 (NY Sup. Ct., Hon. C.E. Ramos) (the “Second Fraudulent Conveyance Lawsuit”). The court then scheduled a hearing to determine whether sanctions would be imposed.
In addition to the above-referenced cases, Ray, through different counsel, sued his former Spouse's atorney pursuant to Section 487 of New York's Judiciary Law for allegedly deceitful and defamatory comments her counsel made about Ray in a 1998 lawsuit. This lawsuit, against the same lawyers seeking sanctions against Ray and Defendants in the Second Fraudulent Conveyance Lawsuit, complicated setlement discussions that Defendants were having with the Spouses' counsel over the amount of sanctions they would pay. Defendants allegedly pressured Ray and his other atorney not to file the Section 487 claim. This resulted in Ray hiring other counsel, not Defendants, to represent him at the sanctions hearing.
The state court ultimately found that Ray and Defendants should be sanctioned and awarded the Spouse atorneys' fees and costs in connection with their defense of the Second Fraudulent Conveyance Lawsuit. Both Ray and Defendants appealed the sanctions order. According to Ray, Defendants refused to turn over their work file to Ray unless Ray paid his outstanding legal fees.
Defendants ultimately setled with the Spouse, agreeing to pay a portion of her atorneys' fees, and withdrew their appeal. Later, the First Department vacated the sanctions order, and affirmed dismissal of all three causes of action in the Second Fraudulent Conveyance Lawsuit, but only on the basis of failure to state a claim, reversing other bases for dismissal cited by the trial court.
In 2018, Ray filed a third fraudulent conveyance lawsuit against his former Spouse and related entities in this District. See Ray v. Ray, No. 18 Civ. 7035 (GBD), 2019 WL 1649981 (S.D.N.Y. Mar. 28, 2019). That case was dismissed for failure to state a claim on March 28, 2019. See id. Ray appealed that decision to the Second Circuit. The Circuit affirmed the dismissal of Ray's case. See Ray v. Ray, No. 19-1124, Doc No. 105 (2d Cir. 2019).
Ray also commenced the instant action in 2018 against Defendants claiming breach of fiduciary duty, violations of Section 487 of the Judiciary Law, and conversion. The Defendants then brought counterclaims for breach of contract and account stated, asserting that Ray failed to pay certain legal fees and costs in connection with their representation of him. After discovery, the Court denied motions for summary judgment as to Ray's claims of breach of fiduciary duty and conversion, and as to Defendants' claim of account stated. It dismissed the remaining claims and counterclaim. ECF No. 129.
The remaining claims were then tried before a jury. The jury returned a verdict in favor of Defendants and against Ray. ECF Nos. 185-186. Ray appealed. The Second Circuit affirmed the District Court's dismissal of Ray's Judiciary Law claim and the jury verdict. ECF No. 213.
THE INSTANT MOTION
Defendants brought a lawsuit against Ray and his other counsel in New York state court asserting claims of malicious prosecution, tortious interference with prospective business relations and Section 487 of the Judiciary Law. Balestriere PLLC v. Ray et al., Index No. 154425/2023 (NY Sup. Ct., May 15, 2023) (“Defendants' Countersuit”). In the complaint, Defendants alleged that Ray refused to participate in good faith in a setlement conference held by the undersigned in the instant action. Ray objected to this allegation on the grounds it violated mediation confidentiality and the undersigned's rules for the conduct of mediations and he provided Defendants with a “Rule 11” safe harbor leter. Defendants filed an amended pleading removing the allegation.
Ray then filed a motion to dismiss the Defendants' Countersuit. He asserts that the countersuit was a sham lawsuit filed to pressure him not to appeal the judgment against him in this case. In their brief opposing the motion to dismiss, Defendants asserted that Ray did not participate in good faith in the mediation conducted by the undersigned.
Ray then brought the instant motion for sanctions against Defendants for including the assertion that Ray did not participate in good faith in the mediation conducted by the undersigned in their state court brief. Defendants contend that Ray's motion is consistent with his vexatious litigation tactics and is unwarranted under Rule 11 because there was no safe harbor leter filed in connection with inclusion of the allegedly inappropriate information in Defendants' state court opposition brief. Defendants also contend that no confidential setlement information was revealed in any event and, as such, sanctions are not warranted.
DISCUSSION
1. Rule 11
Under Rule 11, an attorney, by signing, filing, submitting, or advocating a pleading, written motion, or other paper, certifies four aspects of the document: (1) that it is not being presented for an improper purpose; (2) the legal arguments are supported by existing law or are not frivolous; (3) the factual contentions have been investigated and are supported; and (4) denials are also likewise well-supported. Fed.R.Civ.P. 11(b)(1)-(4). Sanctions may be imposed on an attorney who violates Rule 11. Star Mark Mgmt., Inc. v. Koon Chun Hing Kee Soy & Sauce Factory, Ltd., 682 F.3d 170, 177 (2d Cir. 2012); Lawrence v. Richman Grp. of CT LLC, 620 F.3d 153, 158 (2d Cir. 2010). In some instances, Rule 11 sanctions also may be imposed against a represented party when the party “is responsible for the violation.” Fed.R.Civ.P. 11(c)(1); see Braun ex rel. Advanced Battery Techs., Inc. v. Zhiguo Fu, 2015 WL 4389893, at *12 (S.D.N.Y. July 10, 2015).
Given the aim of Rule 11 is to minimize expenditure of judicial resources and encourage correction or withdrawal of defective documents, see Lawrence, 620 F.3d at 158; Perpetual Secs., Inc. v. Tang, 290 F.3d 132, 141 (2d Cir. 2002), the rule also requires a notice and cure period. Specifically, its safe-harbor provision requires the moving party first provide notice and a draft of the motion for sanctions to the non-moving party giving them 21 days to cure. Fed.R.Civ.P. 11(c)(2). It also requires service of the notice and motion in accordance with Rule 5. Only after the safe-harbor period has passed may a party file a Rule 11 motion. Additionally, only conduct explicitly referred to in the safe harbor leter is sanctionable. Storey v. Cello Holdings,L.L.C., 347 F.3d 370, 389 (2d Cir. 2003). And, where a party has withdrawn a pleading after receipt of a Rule 11 safe harbor leter and then files another objectionable pleading, the objecting party must serve a new safe harbor leter directed to the subsequent pleading. See Lawrence v. Richman Group of CT LLC, 620 F.3d 153, 158-159 (2d Cir. 2010).
Additionally, because it is a federal rule, Rule 11 does not apply to filings in state court. See Mareno v. Jet Aviation of Am., Inc., 970 F.2d 1126, 1128 (2d Cir. 1992) (holding Rule 11 has no retrospective application to a complaint filed in state court but may apply to papers filed in the federal forum once an action has been removed).
In this case, Ray's motion for sanctions under Rule 11 should be denied because it is aimed at state court filings. Also, the only safe harbor letter that Ray provided was directed to the amended pleading, not the opposition brief. Thus, the motion should be denied for this reason as well.
2. Inherent Power and Section 1927
28 U.S.C. § 1927 provides that “[a]ny atorney or other person admited to conduct cases in any court of the United States ... 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 atorneys' fees reasonably incurred because of such conduct.” Section 1927 is only applicable to atorneys or other persons authorized to practice before the courts and not against a party. Oliveri v. Thompson, 803 F.2d 1265, 1273 (2d Cir. 1986).
Section 1927 sanctions are imposed only “when the atorney's actions are so completely without merit as to require the conclusion that they must have been undertaken for some improper purpose.” Johnson v. Univ. of Rochester Med. Ctr., 642 F.3d 121, 125 (2d Cir. 2011) (citation omited). Prior to imposing sanctions under § 1927, a court must provide the atorney an opportunity to be heard. Id. at 126. To impose monetary sanctions under § 1927, “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.” See Huebner v. Midland Credit Mgmt., Inc., 897 F.3d 42, 55 (2d Cir. 2018) (citation omited); see also Oliveri, 803 F.2d at 1273 (“An award under § 1927 is proper when the atorney's actions are so completely without merit as to require the conclusion that they must have been undertaken for some improper purpose such as delay.”). When assessing an atorney's conduct, “[t]he question is whether a reasonable atorney could have concluded that facts supporting the claim might be established, not whether such facts actually had been established.” Sierra Club v. U.S. Army Corps of Engineers, 776 F.2d 383, 390 (2d Cir. 1985). The fact that judgment was entered against the party is “a necessary, but not a sufficient, condition for a finding of a total lack of a colorable basis.” Schlaifer Nance & Co. v. Est. of Warhol, 194 F.3d 323, 337 (2d Cir. 1999). But when an atorney continues to defend a complaint even after learning of facts rendering the complaint “fatal[ly] flaw[ed],” he has engaged in bad faith conduct sanctionable under § 1927. Liebowitz v. Bandshell Artist Mgmt., 6 F.4th 267, 282-83 (2d Cir. 2021).
The Court may impose sanctions against a party and its attorneys pursuant to its inherent power. The standard for determining whether sanctions are appropriate pursuant to the Court's inherent power is the same as the one for assessing whether sanctions are appropriate against an attorney pursuant to § 1927. Int'l Technologies Mktg., Inc. v. Verint Sys.,Ltd., 991 F.3d 361, 367 (2d Cir. 2021); United States v. Prevezon Holdings, Ltd., 305 F.Supp.3d 468, 478 (S.D.N.Y. 2018). Specifically, there must be 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.” Prevezon Holdings, Ltd., 305 F.Supp.3d at 479 (quoting Eismann, 204 F.3d 393, 396 (2d Cir. 2000)). Therefore, courts often consider motions for sanctions pursuant to § 1927 and their inherent power together. Prevezon Holdings, Ltd., 305 F.Supp.3d at 478.
A district court's inherent power to sanction also includes the power to “sanction a party ... to deter abuse of the judicial process and prevent a party from perpetrating a fraud on the court.” Yukos Cap. S.A.R.L. v. Feldman, 977 F.3d 216, 235 (2d Cir. 2020).
A “court's inherent power must be exercised with restraint and discretion.” Int'l Technologies Mktg., Inc. v. Verint Sys., Ltd., 991 F.3d at 368 (quoting Chambers v. NASCO, Inc., 501 U.S. 32, 44 (1991)). Just as with sanctions under § 1927, before issuing sanctions under its inherent power, the court must provide the atorney or party facing sanctions with “adequate notice and opportunity to be heard.” Shepherd, 921 F.3d at 97.
Here, sanctions against Defendants' counsel are inappropriate under Section 1927 because the focus of Ray's motion is a filing in state court. This Court is not in a position to evaluate whether that filing was frivolous and, indeed, the motion to dismiss in that case is still pending. Further, Section 1927 concerns conduct in federal court. Again, there is no basis for finding that Defendants' counsel multiplied the proceedings in this case.
Sanctions against Defendants and their counsel inherent powers. The conduct complained of took plac while it is true that setlement conferences are confide disclosing specific statements made during the setlem disclosure of any demands or counters. This Court doe did because the allegation in their brief concerning Ray appears superfluous to Defendants' position in state co subject of setlement discussions into that action. But, compromise any setlement position and, for this additi sanctions, especially in light of the fact that imposition power must be exercised with restraint and discretion.
CONCLUSION
For the reasons set forth above. I respectfully recommend that the motion for sanctions be denied.
NOTICE
The parties shall have fourteen days from the service of this Report and Recommendation to file writen objections to the Report and Recommendation, pursuant to 28 U.S.C. § 636(b)(1) and Rule 72(b) of the Federal Rules of Civil Procedure (i.e., until February 1, 2018). See also Fed. R. Civ. P. 6(a), (d) (adding three additional days only when service is made under Fed.R.Civ.P. 5(b)(2)(C) (mail), (D) (leaving with the clerk), or (F) (other means consented to by the parties)).
If any party files writen objections to this Report and Recommendation, the opposing party may respond to the objections within fourteen days after being served with a copy. Fed.R.Civ.P. 72(b)(2). Such objections shall be filed with the Clerk of the Court, with courtesy copies delivered to the chambers of the Honorable Jennifer L. Rochon at the United States Courthouse, 40 Foley Square, New York, New York 10007, and to any opposing parties. See 28 U.S.C. § 636(b)(1); Fed.R.Civ.P. 6(a), 6(d), 72(b). Any requests for an extension of time for filing objections must be addressed to Judge Rochon. The failure to file these timely objections will result in a waiver of those objections for purposes of appeal. See 28 U.S.C. § 636(b)(1); FED. R. Civ. P. 6(a), 6(d), 72(b); Thomas v. Arn, 474 U.S. 140 (1985).