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defining "adjudicate" and explaining: "To the extent that plaintiff voluntarily dismissed her complaint without prejudice pursuant to Rule 41, this dispute has not been 'resolv[ed]' and the Court has not 'decid[ed]' the case. Nor has it 'hear[d] and settle[d]' the case. By the plain meaning of the term, there has been no 'adjudication' in this case, let alone adjudication that is 'final.'"
Summary of this case from In re Millennial Media, Inc.Opinion
01 CIV. 11599 (DLC)
October 21, 2002
John J. Sullivan, Kirkpatrick Lockhard, LLP, New York, NY, for Plaintiff.
Donald I. Strauber, Chadbourne Parke, LLP, New York, NY, for Defendant.
OPINION AND ORDER
On December 18, 2001, plaintiff Susan Blaser ("Blaser") brought this action against defendant Bessemer Trust Company, N.A. ("Bessemer"), alleging violations of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5, common law fraud, breach of fiduciary duty, negligence and gross negligence. On March 15, 2002, following receipt of a motion for sanctions pursuant to Rule 11, Fed.R.Civ.P., but before the expiration of Rule 11's safe harbor period, Blaser voluntarily dismissed her claims pursuant to Rule 41(a)(1)(i), Fed.R.Civ.P. Bessemer now moves for sanctions against Blasser's counsel Kirkpatrick Lockhart LLP ("K P") pursuant to Section 78u-4(c) of the Private Securities Litigation Reform Act of 1995 ("PSLRA"), alleging that Blaser asserted frivolous federal securities claims. There having been no "final adjudication" of this action, as required by Section 78u-4(c)(1) of the PSLRA, 15 U.S.C. § 78u-4(c)(1), and the safe harbor provision of Rule 11 not having been exhausted, the motion for sanctions is denied.
See Fed.R.Civ.P. 11(c)(1)(A) (providing that a motion for sanctions "shall not be filed with or presented to the court unless, within 21 days after service of the motion . . ., the challenged paper . . . is not withdrawn or appropriately corrected").
BACKGROUND
The following facts are undisputed unless otherwise indicated. Blaser is a Florida resident. Bessemer is a New York corporation with its principle place of business in New York City. Bessemer Trust Company of Florida ("Bessemer Florida") is a Florida corporation with its principle place of business in Miami, Florida. Bessemer Florida is an affiliate of Bessemer.
In 1997, Blaser opened an investment management account with Bessemer Florida. On December 29, 2000, she contacted Bessemer Florida to discuss the exercise of certain stock options before December 31, 2000. Blaser alleges that Bessemer Florida misunderstood her instructions and executed an unauthorized exercise of the options and sale of the underlying shares (the "Exercise and Sale"). When Blaser learned of the Exercise and Sale, she contacted Bessemer Florida to request that the transaction be cancelled. Bessemer Florida attempted to cancel the transaction, but contacted Blaser to explain that it was unsuccessful in doing so. Blaser alleges that Bessemer Florida failed to inform her at the time of its policy of reversing unauthorized transactions at no cost to the account owner.
On July 11, 2001, K L wrote to Bessemer Florida on behalf of Blaser demanding the reversal of the Exercise and Sale. On July 31, Bessemer's General Counsel Richard R. Davis ("Davis") responded, explaining that K L's July 11 letter had been referred to him by Bessemer Florida, and rejected Blaser's demand. After Blaser filed the instant action against Bessemer on December 18, 2001, Blaser and Bessemer agreed to discuss settlement and Blaser agreed to two extensions of Bessemer's time to answer. On February 20, 2001, Bessemer moved for partial dismissal. In its memo in support, Bessemer stated that Blaser's investment management agreement was "[i]n fact . . . with Bessemer Florida, which is not a defendant in this action."
Blaser then voluntarily dismissed the instant action.
On April 5, Blaser filed an action against Bessemer Florida in Florida state court alleging the violation of Sections 517.211 and 517.301 of the Florida Securities and Investor Protection Act, Fla. Stat. Ann. §§ 517.211 and 517.301, breach of fiduciary duty, and breach of contract. On May 10, Bessemer filed the instant motion.
DISCUSSION
Bessemer argues that Sections 78u-4(c)(1) and (2) of the PSLRA, 15 U.S.C. § 78u-4(c)(1) and (2), require this Court to conduct a review of Blaser's complaint for compliance with Rule 11(b), Fed.R.Civ.P., and to impose sanctions for Blaser's failure to meet the requirements of that Rule. Section 78u-4(c)(1), 15 U.S.C. § 78u-4(c)(1), provides for mandatory Rule 11(b) review in actions arising under the PSLRA upon their "final adjudication":
In any private action arising under this chapter, upon final adjudication of the action, the court shall include in the record specific findings regarding compliance by each party and each attorney representing any party with each requirement of Rule 11(b) of the Federal Rules of Civil Procedure as to any complaint, responsive pleading, or dispositive motion.15 U.S.C. § 78u-4(c)(1) (emphasis added). Section 78u-4(c)(2), 15 U.S.C. § 78u-4(c)(2), provides for the mandatory imposition of sanctions for any violation of Rule 11(b), Fed.R.Civ.P.:
If the court makes a finding under paragraph (1) that a party or attorney violated any requirement of Rule 11(b) of the Federal Rules of Civil Procedure as to any complaint, responsive pleading, or dispositive motion, the court shall impose sanctions on such party or attorney in accordance with Rule 11 of the Federal Rules of Civil Procedure. Prior to making a finding that any party or attorney has violated Rule 11 of the Federal Rules of Civil Procedure, the court shall give such party or attorney notice and an opportunity to respond.15 U.S.C. § 78u-4(c)(2).
The Second Circuit has explained the purpose of these provisions:
Recognizing what it termed "the need to reduce significantly the filing of meritless securities lawsuits without hindering the ability of victims of fraud to pursue legitimate claims," and commenting that the "[e]xisting Rule 11 has not deterred abusive securities litigation," the 104th Congress included in the [PSLRA] a measure intended to put "teeth" in Rule 11. H.R. Conf. Rep. No. 104-369 (1995), reprinted in 1995 U.S.C.C.A.N. 730. . . . The PSLRA . . . does not in any way purport to alter the substantive standards for finding a violation of Rule 11, but functions merely to reduce courts' discretion in choosing whether to conduct the Rule 11 inquiry at all and whether and how to sanction a party once a violation is found.
Simon DeBartolo Group, L.P. v. Richard E. Jacobs Group, Inc., 186 F.3d 157, 166-67 (2d Cir. 1999). See also Gurary v. Nu-Tech Bio-Med, Inc., 303 F.3d 212, 219 (2d Cir. 2002) (citing Simon DeBartolo); Gurary v. Winehouse, 190 F.3d 37, 47 (2d Cir. 1999) (remanding for specific findings regarding compliance with Rule 11 pursuant to PSLRA where district court "implicitly denied" motion for sanctions).
Blaser responds that the Court is not required to make findings regarding sanctions pursuant to Sections 78u-4(c)(1) and (2) because Blaser's voluntary dismissal does not constitute a "final adjudication" as that term is used in Section 78u-4(c)(1).
Blaser further argues that the Court may not otherwise impose sanctions pursuant to Rule 11 because Blaser voluntarily dismissed her complaint before Bessemer filed its motion for sanctions, thus bringing Blaser within Rule 11(c)(1)'s 21-day safe harbor period. See Hadges v. Yonkers Racing Corp., 48 F.3d 1320, 1327-28 (2d Cir. 1995) (discussing Rule 11's safe harbor period).
The PSLRA does not define the term "final adjudication" and there is little case law on its meaning as it is used in Section 78u-4(c)(1). "In the absence of [a statutory] definition," a court "construe[s] a statutory term in accordance with its ordinary or natural meaning." FDIC v. Meyer, 510 U.S. 471, 476 (1994). Black's Law Dictionary defines adjudication as "[t]he legal process of resolving a dispute; the process of judicially deciding a case." Black's Law Dictionary 42 (7th ed. 1999). The American Heritage Dictionary defines adjudicate as "[t]o hear and settle (a case) by judicial procedure." The American Heritage Dictionary of the English Language 21 (4th ed. 2000). Cf. Sellan v. Kuhlman, 261 F.3d 303, 311 (2d Cir. 2001) ("When Congress uses a term of art such as `adjudicated on the merits' [in 28 U.S.C.S. § 2254(d)], we presume that it speaks consistently with the commonly understood meaning of this term. `Adjudicated on the merits' has a well settled meaning: a decision finally resolving the parties' claims, with res judicata effect, that is based on the substance of the claim advanced, rather than on a procedural, or other, ground."). To the extent that plaintiff voluntarily dismissed her complaint without prejudice pursuant to Rule 41(a)(1)(i), this dispute has not been "resolv[ed]" and the Court has not "decid[ed]" the case. Nor has it "hear[d] and settle[d]" the case. By the plain meaning of the term, there has been no "adjudication" in this case, let alone adjudication that is "final." Cf. DeMarco v. Depotech Corp., 131 F. Supp.2d 1185, 1187 (S.D.Cal. 2001) (where action is dismissed with prejudice, Rule 11 finding is required); High View Fund, L.P. v. Hall, 27 F. Supp.2d 420, 430 (S.D.N.Y. 1998) (dismissal with leave to amend does not constitute a final adjudication of an action; no Rule 11 finding required); Scone Investments, L.P. v. American Third Market Corp., 97 Civ. 3802 (SAS), 1998 WL 205338, at *11 n. 3 (S.D.N.Y. 1998) (same).
Furthermore, if, as Bessemer argues, a voluntary dismissal without prejudice were to constitute a "final adjudication" under the PSLRA, then, under the mandatory review provisions of Section 78u-4(c)(1), a district court would be required to conduct a Rule 11 inquiry and make specific findings as part of that inquiry in every action filed under the PSLRA which is voluntarily dismissed, including actions in which no answer has been filed or where the parties have stipulated to dismissal. On Bessemer's theory of Sections 78u-4(c)(1) and (2), such voluntary dismissals could occur "without order of court," Fed.R.Civ.P. 41(a)(1)(i), but would nevertheless require the district court to make specific Rule 11 findings. If Congress actually intended to saddle district courts with this task, it would have stated so explicitly instead of using the phrase "final adjudication" as the trigger for the Rule 11 review.
Bessemer cites Smith v. Smith, 184 F.R.D. 420 (S.D.Fla. 1998), for the proposition that Sections 78u-4(c)(1) and (2) require a district court to conduct a Rule 11(b) inquiry in any action filed under the PSLRA even when that action is voluntarily dismissed without prejudice. In Smith, the plaintiff voluntarily dismissed his complaint and refiled in state court after being served with a motion for Rule 11 sanctions. The Smith court held that the Rule 11 safe harbor does not apply to federal securities actions brought under the PSLRA. Id. at 422.
Even if Section 78u-4(c) has the effect of eliminating any requirement that a Rule 11 motion be served or if one is served that the 21-day safe harbor has expired, Section 78u-4(c)(1) still requires that the Rule 11(b) review be conducted "upon final adjudication of the action." It is important in construing statutory language to give effect to each word Congress has chosen to use in drafting the statute, and there has been no "final adjudication" of the instant action. Cf. Reiter v. Sonotone Corp., 442 U.S. 330, 339 (1979) ("In construing a statute we are obliged to give effect, if possible, to every word Congress used."). This Court cannot otherwise impose sanctions pursuant to Rule 11 because Blaser withdrew her complaint well before the expiration of Rule 11(c)(1)'s 21-day safe harbor period. See Fed.R.Civ.P. 11(c)(1).
CONCLUSION
For the reasons stated, defendant's motion for sanctions is denied.
SO ORDERED.