Opinion
01 Civ. 1290 (CSH) (DF).
August 28, 2006
MEMORANDUM OPINION AND ORDER
The seemingly simple question of whether Plaintiff should post security for costs has become enormously complicated.
There is Second Circuit authority for the proposition that if Plaintiff lacks the financial resources to post a bond for costs in the amount this Court has directed, a dismissal of the action for failure to post that bond would be an abuse of this Court's discretion. This Court has directed further discovery into the corporate Plaintiff's finances, has included within that inquiry the personal finances of the corporation's two beneficial owners, Mr. and Mrs. Swomley, and has designated Magistrate Judge Freeman to supervise that discovery. The Defendant has served comprehensive interrogatories and document production demands addressing those issues. The former partners of the dissolved Spitzer law firm, who this Court held remained responsible for representing or arranging for the representation of the Plaintiff, say that they are not required to pay for this discovery. Mr. Swomley says that they are. Confronted by that dispute, Mr. Devorkin of the Golenbock Eiseman firm, retained by the Spitzer partners, asks the Court for guidance, while at the same time filing a motion on behalf of Plaintiff for an order setting a prompt trial date and requiring Defendant to post security for costs. Ms. Selznick of the Dailey Selznick firm, counsel for Defendant, has obtained an extension of time to answer that motion for medical reasons. Both parties, all the individuals and attorneys involved, and the Court surely agree upon wishing Ms. Selznick a quick and full recovery. That exhausts the areas of agreement. A further need for Court intervention is manifest.
I
An order under Local Civil Rule 54.2 requiring a party to post security for costs rests within the discretion of the District Court. In exercising that discretion, the trial judge fulfills the roles of both a Common Law Judge and a Chancellor in Equity. Equitable principles underlie the Second Circuit cases holding that it would be unfair to deprive a plaintiff of its day in court if it is financially unable to post security. For that reason, I have directed that Plaintiff's professed inability be tested by discovery.
Equitable principles also apply to the continuing responsibility of the former Spitzer partners to fund Plaintiff's legal representation in connection with that discovery. A strict legal analysis would require that they do so. The Spitzer firm's undertaking to represent the corporate Plaintiff on a contingent basis extended to the litigation efforts inherent in that representation; and the Spitzer partners, members of the Bar of this Court, had at least constructive knowledge of Local Civil Rule 54.2 and a conceptual awareness that Defendant might invoke it.
Notwithstanding those circumstances, I do not think it is equitable to require the former Spitzer partners to fund Plaintiff's representation by Mr. Devorkin and the Golenbock firm in connection with the rather elaborate financial discovery generated by the bond issue, which extends to the Swomleys as well as the corporate party the Spitzer firm agreed to represent. That satellite litigation, while conceptually possible at the time the Spitzer firm accepted its professional responsibility, was not reasonably foreseeable.
I do not understand the former Spitzer partners to suggest that, under the Court's prior ruling on the issue, they would not be responsible for funding Plaintiff's legal representation during a trial.
However, the Chancellor in Equity must also be concerned with the position of Plaintiff. Assume for the purpose of analysis that neither the corporate Plaintiff, RLS Associates LLC, nor the Swomleys can presently afford (1) to post the security directed by the Court, or (2) to pay the fees of the Golenbock firm in litigating that issue. Plaintiff would then default in responding to discovery, its inability to post security would not be established, and its complaint would presumably be dismissed, all on account of a lack of financial resources, which the Second Circuit has indicated cannot be a ground for dismissal of an action.
In these circumstances, equitable principles suggest that the requisite financial information, corporate and personal, can and should be made available by less expensive means. Accordingly, the Court makes the following Order:
1. All outstanding interrogatories and demands for production served by Defendant are vacated.
2. The corporate Plaintiff, RLS Associates, is directed to file and serve itemized and complete financial statements showing Plaintiff's present financial condition. These statements need not be independently audited. But they must be sworn to as accurate and complete by Richard Swomley, the principal beneficial owner of the corporation.
3. The beneficial owners of RLS Associates, Richard Swomley and Elaine M. Swomley, are each directed to file and serve an itemized and complete statement of present individual net worth, of the sort that would be submitted to a bank in connection with a loan application or to the directors of a cooperative apartment building in connection with an application to purchase an apartment. These statements need not be independently audited. But each statement must be sworn to as accurate and complete by the individual who prepared it.
4. The documents described in paragraphs 2 and 3 of this Order must be filed and served not later than September 15, 2006.
5. Counsel for Defendant may file and serve papers responding to the foregoing statements not later than September 27, 2006. The purpose of this exchange will be to determine whether or not the statements furnished in compliance with paragraphs 2 and 3 of this Order sufficiently address the issue of Plaintiff's financial ability to post security for costs.
6. Given the foregoing Orders, Plaintiff's motion for a prompt trial and for the posting of security for costs by the Defendant is stayed pending the Court's further Order. Defendant need not respond to that motion at this time.
II
Certain assertions made by Mr. Devorkin in his motion on behalf of Plaintiff, now stayed by paragraph 6 in the Order contained in Part I of this Opinion, prompt these sua sponte observations by the Court, made in the course of the Court's continuing responsibility to supervise the case.
Counsel states that on two occasions, RLS Associates offered to drop this action against Defendant The Bank of Kuwait in consideration of an exchange of mutual releases, and the Bank twice refused. The only discernible reason for the Bank's refusal is its hope of recovering from RLS, based upon the contractually governing English law, the very considerable amount of legal fees the Bank has incurred to date.
It is for RLS to balance in the first instance the potential rewards and risks of sending the case to trial. Assume for the moment that RLS is relieved of the necessity of posting security for costs, the case goes to trial, and RLS loses. Presumably the Bank would then recover judgment in a considerable amount against RLS for legal fees under the English rule, and if RLS lacks the assets to pay it, the Bank might consider attempting to pierce the corporate veil and reach the Swomleys' personal assets. On the other hand, if RLS wins on the trial — and the Court of Appeals has held that it has a viable claim — the Bank would be liable not only for the amount of RLS's damages but its attorney's fees as well.
The careful reader will understand that this assumption is made solely for the purpose of analysis, and is not intended to intimate any view as to how the Court would decide the issue.
If, after pondering these circumstances, RLS decides to dismiss its complaint and avoid any liability to the Bank for the latter's legal fees, its procedural vehicle is to move the Court under Federal Rule of Civil Procedure 41(a)(2) for an order dismissing its complaint free of conditions. The Rule provides that in the procedural posture of the case at bar, "an action shall not be dismissed at the plaintiff's instance save upon order of the court and upon such terms as the court deems proper." Such a motion would require the Bank to argue that the dismissal should be conditioned on RLS paying its legal fees. Again, the Court's discretion is engaged; again, equitable as well as legal principles would inform the exercise of that discretion. I express no present view upon whether an order dismissing the action on RLS's motion would be so conditioned, except to say that the question would seem to be one of substance. The parties will, of course, proceed as they think best.
III
The case will proceed in the manner directed in Part I of this Opinion.It is SO ORDERED.