Opinion
01 Civ. 1290 (CSH)(DF).
July 11, 2006
MEMORANDUM OPINION AND ORDER
Having considered the most recent submissions of counsel, the Court makes the following Order with respect to the posting of a cost bond by the Plaintiff.
A number of opinions by the Court have decided or raised three issues: (1) whether Plaintiff should be required to post a pre-trial bond for costs including Defendant's estimated attorney's fees; (2) whether, if Plaintiff fails to post a bond in the amount ordered, its complaint should be dismissed with or without prejudice; and (3) who will act as counsel for the Plaintiff. Those opinions, familiarity with which is assumed, are reported at 2006 WL 1085614 (S.D.N.Y. April 24, 2006); 417 F.Supp.2d 417 (S.D.N.Y. 2006); 2005 WL 3312004 (S.D.N.Y. Dec. 7, 2005); and 2005 WL 578917 (S.D.N.Y. March 11, 2005).
Plaintiff has now secured the assistance of successor counsel, who in their recent brief remind this Court of the Second Circuit's opinion in Selletti v. Carey, 173 F.3d 104 (2d Cir. 1999). Selletti contains two rulings pertinent to the case at bar. First, Selletti holds that where the governing law provides for the shifting of a prevailing party's attorney's fees to the adverse party, the district court has discretion under Local Civil Rule 54.2 to require a plaintiff to file a security bond for costs and attorney's fees which may be awarded to a defendant who prevails at trial. 173 F.3d at 110-11. Second, Selletti holds that when a plaintiff is financially unable to post security in the required amount, the district court abuses that discretion by dismissing the complaint and thereby depriving plaintiff of a fair chance to be heard. Id. at 111-12.
Plaintiff's successor counsel use the first of Seletti's holdings to invite this Court to revisit its decision to require plaintiff to post a cost bond in the amount of $465,900, that being the amount of the Defendant's anticipated attorney's fees for the litigation if it prevails at trial. I decline that invitation. The first holding in Seletti affirms my discretion to require such security, and I adhere to my previously expressed view that the circumstances of the case justify it. English law, which the parties agreed in their contract governs, contains fee-shifting provisions comparable to those in the Copyright Act involved in Seletti.
However, Seletti's second holding necessarily gives me pause. Richard Swomley, the chairman of RLS Associates, LLC, the Connecticut-registered limited liability company Plaintiff, professes in an affidavit the financial inability of the Plaintiff to post security in the amount specified by the Court's prior order. Swomley makes the same protestation with respect to his personal finances and the other companies he has established. Swomley's affidavit characterizes his personal finances as irrelevant to the present issue. I do not agree with him, for reasons stated infra. Nonetheless, if there is on the Plaintiff's side of the case, as construed infra, a true and total inability to post security in the required amount, Seletti strongly suggests that I would abuse my discretion by dismissing the complaint.
The Second Circuit concluded in Seletti that while other circumstances in the case argued in favor of dismissing the complaint, "we nevertheless conclude that the district court abused its discretion by failing to accord any significant weight to plaintiff's inability to pay the sanction or post security in the required amount, a consideration relevant to plaintiff's interest in having a fair chance to be heard." 173 F.3d at 111. The plaintiff in Seletti "had requested a hearing concerning his professed inability to comply with those requirements, but the [district] court stated that such a hearing was unnecessary," id. at 107, and dismissed the complaint. The Second Circuit rejected that view, remanding the case so that the district court, inter alia, "may consider whether dismissal is appropriate based on a finding that plaintiff was in fact able to pay the sanctions or post the required bond," id. at 113.
The question is fact intensive, and a sufficient evidentiary record must be made to support or negate a finding of financial inability. That evidentiary necessity is made explicit in Seletti, and in the cases from other circuits which the Second Circuit cited and quoted with approval:
See, e.g., English v. Cowell, 969 F.2d 465, 473 (7th Cir. 1992) ("If the plaintiffs were truly unable to pay the sanctions, they might have had a valid excuse for their noncompliance. . . . Without a more developed record on whether [plaintiffs] were unable to pay, we cannot determine conclusively whether the district court abused its discretion in dismissing these claims for failure to comply with the sanctions orders."); Hornbuckle v. Arco Oil Gas Co., 732 F.2d 1233, 1237 (5th Cir. 1984) (finding of fact as to ability to pay sanctions is "essential" for appellate consideration of whether dismissal for failure to pay sanctions was abuse of discretion); see also Aggarwal v. Ponce School of Medicine, 745 F.2d 723, 728 (1st Cir. 1984) (in decision to dismiss due to plaintiff's failure to comply with security requirement, "a plaintiff's ability to post surety for costs must weigh in the balance").Seletti, 173 F.3d at 111-12.
In the case at bar, Richard Swomley's professions of financial inability are conclusory and unaccompanied by details or supporting documents. There will have to be a more fully developed record on the question. I had previously inferred from the Plaintiff's conduct of the litigation, including a successful appeal to the Second Circuit, that it had resources to post the security for Defendant's costs and fees. But the subsequent skirmish over Plaintiff's legal representation revealed that its original attorneys were handling the case on a contingent fee basis, which did away with the basis for my inference. In addition, Swomley had not at that time made an explicit protestation of financial incapacity; that has come only in his recent affidavit.
The requisite evidentiary record will be created in the first instance by discovery, which Magistrate Judge Freeman will supervise under a reopened reference from this Court. After completion of discovery, either party may, if so advised, make a motion before this Court for a resolution of the question on the record thus made. If it should appear that a further evidentiary hearing is required, Judge Freeman will conduct it and then make a Report and Recommendation to this Court. The Plaintiff having alleged its financial inability to post security, it bears the burden of proof on the issue.
It is now necessary to consider the boundaries of this inquiry. The impression created by the present record is that RLS Associates, LLC, the company Plaintiff, is a closely held family-owned entity whose sole beneficial owners are Richard Swomley and his wife, Elaine M. Swomley. If that is in fact the case, then it is appropriate for the Defendant to inquire into the present financial condition of the company Plaintiff; and Defendant may also obtain discovery with respect to (a) Richard Swomley's present personal financial resources, (b) any personal property jointly owned by Richard Swomley and Elaine Swomley, and © any real property inhabited or used by both Richard and Elaine Swomley, even if title to that property is vested solely in Elaine Swomley. Defendant may not inquire into personal property owned solely by Elaine Swomley. These lines of ownership, use and title are drawn as of the date of this Opinion and Order. Any transfers of property, real or personal, subsequent to that date will be scrutinized with care.
Richard Swomley was deposed in the underlying case on October 29, 2002. He testified that RLS Associates was one of the companies he currently worked for. Counsel for Defendant then asked: "And who is the owner of RLS Associates?" Swomley answered: "My wife and I." Tr. 17.
I make these rulings with respect to the scope of the inquiry because, contrary to Swomley's seeming impression, this is not a question of a whether a corporate veil should be pierced. That question typically arises when a creditor seeks to hold the beneficial owners or shareholders of a company personally liable for the company's debt. Whether or not in that circumstance the corporate form should be disregarded is a question of law, the answer depending upon well recognized factual considerations. If the facts demonstrate that the corporate form is a sham or should otherwise be disregarded, a trial court does so as a matter of law; the judge's discretion does not enter into the process. In contrast, whether to require a party to give security for costs and the amount thereof are entrusted to the trial court's discretion, an exercise with equitable as well as legal implications. In the case at bar, RLS, the company Plaintiff, wishes to submit its claim against Defendant to trial but says it cannot afford to post the required security. If the Plaintiff recovers a judgment after trial, the proceeds will go to Richard and Elaine Swomley. Equity requires that their assets be looked to, as well as any assets of RLS, when the Court determines whether those for whose benefit the action is pressed can afford to post security required to protect the legitimate interests of the Defendant.
That equitable principle extends to the Swomleys' dwelling in Colorado, even though informal inquiries conducted by Defendant indicate that the house was purchased in 2002 and title vested solely in Elaine Swomley. Both beneficial owners of RLS use that house (or so I assume) and, to the extent either Richard or Elaine Swomley has a present equity in that or any other real property in excess of any existing encumbrances, that value must be included in the calculus required by the Court's inquiry into the Plaintiff's financial ability to post security.
Judge Freeman will administer the manner in which this discovery will be conducted and the time limit for its completion. Ordinarily the Plaintiff, having selected this district as its forum, would have to produce its witnesses and documents within the district for discovery, or pay the out-of-pocket expenses of opposing counsel if that discovery is to be conducted in another place, such as Colorado. But I leave it to Judge Freeman to make such orders as she thinks right. When the discovery contemplated by this Opinion and Order has been completed, I request Judge Freeman to certify that fact to this Court, on notice to counsel for the parties.
The foregoing is SO ORDERED.