Opinion
NO. 4:99-CV-1007-A
July 18, 2001
MEMORANDUM OPINION AND ORDER
Came on for consideration the motion of defendant City Bank Trust Company of Natchitoches ("City Bank") for sanctions. The court, having considered the motion, the response of plaintiff, Trinity Gas Corporation, the reply, the record, and applicable authorities, finds that the motion should be granted in part as set forth herein.
Plaintiff labels its response a reply.
City Bank urges that sanctions should be imposed against plaintiff, its counsel, Van Oliver ("Oliver"), and his firm, Andrews Kurth, L.L.P., pursuant to FED. R. Civ. P. 11 and against Oliver and his firm pursuant to 28 U.S.C. § 1927. Attached to the motion is a copy of a letter dated July 14, 2000, to Oliver giving notice of City Bank's intent to file the motion, unless corrective action was taken within twenty-one days. See FED. R. Civ. P. 11(c)(1)(A). Plaintiff thereafter filed a motion for leave to file a first amended complaint to correct some of the issues addressed by the motion for sanctions. Recognizing that plaintiff was attempting to address some of the deficits, City Bank revised its motion for sanctions and filed a version addressing only the violations not corrected in the proposed first amended complaint. Plaintiff's statement that "City Bank proceeded to file the very same motion that it submitted in draft form, without taking into account any changes made in the Amended Complaint," Pl.'s Reply to City Bank's Mot. for Sanctions at 2, is false. City Bank has complied with the requirements of FED. R. Civ. P. 11(c)(1)(A).
A simple page-by-page comparison shows that the briefs are not identical. The brief filed August 7, 2000, specifically addresses the changes proposed to be made in the first amended complaint.
City Bank alleges that plaintiff violated Rule 11(b)(3) in five instances. The rule provides:
(b) Representations to Court. By presenting to the court (whether by signing, filing, submitting, or later advocating) a pleading, written motion, or other paper, an attorney or unrepresented party is certifying that to the best of the person's knowledge, information, and belief, formed after an inquiry reasonable under the circumstances, —
. . . .
(3) The allegations and other factual contentions have evidentiary support or, if specifically so identified, are likely to have evidentiary support after a reasonable opportunity for further investigation or discovery. . . .
First, City Bank contends that the statement in paragraph 9 of the complaint that Sers "developed a close relationship with Joe Pierson, Jr., the president of City Bank" is utterly false, inflammatory, and designed to malign Mr. Pierson, a reputable banker, by associating him with Sers, who is currently a fugitive from justice. In response, plaintiff merely states that in paragraph 18 of its proposed amended complaint it says: "In October 1996, Sers, Trinity's former president, established a business relationship with City Bank." Pl.'s Reply at 3. The implication is that the offensive statement has been omitted. In fact, the very same statement is repeated in paragraph 10 of the proposed amended complaint. Plaintiff does not dispute that this allegation has no basis in fact, i.e., no evidentiary support.
Second, City Bank urges that a statement in paragraph 20, revised in the proposed amended complaint to state "upon information and belief", that neither plaintiff nor its shareholders received an economic benefit from plaintiff's paying Sers's personal loan is false. City Bank contends that both plaintiff and Oliver knew that the funds from Sers's personal loan were used to pay a judgment against both plaintiff and Sers, thus benefitting plaintiff. Plaintiff does not address this contention. Rather, it contends that there are facts and legal issues as to what type of benefit plaintiff received and in what amount. Plaintiff does not dispute that it did receive a benefit of some type. Thus, the statement is false.
Third, City Bank contends that there is no evidentiary support for the allegations in paragraphs 46, 47, 48, 60, and 61 of the complaint (paragraphs 82 to 84, 96 to 97, 110 to 112, and 126 to 127 of the proposed amended complaint) as a basis for the allegation that plaintiff was essentially insolvent at the times of the various transfers. Plaintiff's only response is to state that Sers perpetrated a number of fraudulent acts and that financial statements presented by Bill Ruth, general counsel, board member and board secretary of plaintiff, in March 1997 were made without knowledge of Sers's fraud. However, the fact that a financial statement may be suspect does not provide evidentiary support for a contention that plaintiff was insolvent. City Bank represents that plaintiff has not produced any evidence of insolvency despite discovery requests for documents to establish plaintiff's financial condition at the times of the transfers. Plaintiff offers no response. The court can only conclude that plaintiff had no evidentiary support for the insolvency allegations when made.
Fourth, City Bank contends that the statement in paragraph 70 of the original complaint (paragraph 132 of the proposed amended complaint) that City Bank debited $800,000.00 from Sers's account on December 10, 1997, in violation of a temporary restraining order entered by a judge of this court is false. In response, plaintiff contends that this is a fact or legal issue not proper for the subject of a Rule 11 motion. Plaintiff focuses on the timing of events following Sers's request for wire transfer of the funds, in particular, a statement for the account showing that a wire transfer debit of $800,000.00 was made on December 10, 1997. As discussed in the court's memorandum opinion and order on City Bank's motion for summary judgment, the undisputed evidence establishes that the wire transfer was initiated at 9:55 a.m. on December 9, 1997, and that City Bank received notice of the temporary restraining order later that afternoon. Pursuant to the Uniform Commercial Code, the transaction was complete when the payment order was accepted by the beneficiary's bank, later bookkeeping entries notwithstanding. There is no evidence that City Bank knew of the TRO before it received the fax on the afternoon of December 9, 1997.
Fifth, City Bank contends that the statement in paragraph 72 of the complaint (paragraph 136 of the proposed amended complaint) that City Bank and Pierson entered into a civil conspiracy with Sers to wrongfully and fraudulently transfer assets, including $800,000.00 from Sers's account, is false. In response, plaintiff cites a number of facts purportedly demonstrating "Pierson's and City Bank's unusual banking relationship with Sid Sers and heightened involvement in his difficulties." Pl.'s Reply at 14. None of the facts supports the conspiracy contention. Summary judgment evidence establishes that neither Pierson nor City Bank had any knowledge of the temporary restraining order until after the wire transfer was made. The court notes that the allegation was not made with the qualifying language that it was "likely to have evidentiary support after a reasonable opportunity for further investigation or discovery." Rather, it was plainly stated without any evidentiary support.
City Bank additionally asserts that Oliver and his firm violated Fed.R.Civ.P. 11(b)(2) by including in the complaint legal claims and contentions not warranted by existing law or by a non-frivolous argument for the extension, modification, or reversal of existing law or the establishment of new law. First, City Bank contends that Counts 1 through 4, alleging fraudulent transfer, are legally improper because (a) there is no evidence that the transfers were made with actual intent to hinder, delay, or defraud plaintiff's creditors; (b) City Bank provided value in exchange for the transfers; and (c) there is no evidence of plaintiff's insolvency. Plaintiff has no response other than to try to shift the burden to City Bank to show that there is no evidence to support the claims. Without factual support, the claims are legally improper.
City Bank next contends that there is no legal basis to support the conversion claim in Count 6 of the original complaint (Count 9 of the proposed first amended complaint) because plaintiff cannot show legal ownership or an immediate superior right of possession to the $800,000.00 that was transferred. Further, City Bank contends that the bankruptcy court had already determined that plaintiff had no interest in the funds. In re Trinity Gas Corp., 242 B.R. 344 (Bankr. N.D. Tex. 1999). Plaintiff merely responds that it and its shareholders "were and always have been the real party in interest, the real intended beneficiary of that December 9, 1997, TRO." Pl.'s Reply at 20. Plaintiff offers no support for this contention. Once again, if there is no evidence to support the claim, it is legally improper. For the reasons discussed by Judge Akard in the aforementioned case, there is no legal basis for the conversion claim.
Finally, City Bank contends that there is no legal support for plaintiff's civil conspiracy claim. Plaintiff simply refers to its response to the factual insufficiency claim under Rule 11(b)(3). Plaintiff makes no attempt to address the law. Without factual support, the claim is legally improper.
As an additional basis for sanctions, City Bank urges that Oliver and his firm have violated 28 U.S.C. § 1927. The contentions are apparently uncontested, as no response has been made to this ground of the motion. Sanctions under § 1927 lie within the court's sound discretion. Travelers Ins. Co. v. St. Jude Hosp. of Kenner, La., Inc., 38 F.3d 1414, 1417 (5th Cir. 1994). They must be predicated on actions that are both unreasonable and vexatious; that is, there must be evidence of bad faith, improper motive, or reckless disregard of the duty owed to the court. Edwards v. General Motors Corp., 153 F.3d 242, 246 (5th Cir. 1998). As discussed supra, certain of the allegations made by plaintiff in its original complaint are without evidentiary support. Asserting those claims was unreasonable. Moreover, plaintiff asserted other claims that were wholly without support and thus unreasonable, and agreed to delete such claims by the filing of an amended complaint, thus showing those claims to be vexatious as well.
The court notes that § 1927 does not reach conduct that cannot be construed as part of the proceedings presently before the court. Travelers Ins. Co. v. St. Jude Hosp. of Kenner, La., Inc., 38 F.3d 1414, 1417 (5th Cir. 1994). Accordingly, the court is not taking into account the other instances of alleged contumacious conduct recited in paragraph 22 of the motion.
In finding the conduct toward City Bank to be unreasonable and vexatious, the court is taking into account the actions of Oliver with regard to other parties. In other words, that he has acted in bad faith and with an improper motive as to other defendants leads the court to believe that the same type of conduct has occurred with regard to City Bank. See, e.g., orders of July 21 and August 25, 2000, granting the motion of Patricia Sers for Rule 11 sanctions. The conduct illustrated herein is thus typical of conduct throughout the case.
Another example of unreasonable and vexatious conduct was the inclusion of Counts 5, 8, and 9 in the original complaint. In its motion for leave to amend, plaintiff now contends that those counts are being resolved by other litigation. If that is the case, then those counts should never have been brought here. Plaintiff put City Bank to the trouble of filing a motion for summary judgment before admitting that it did not intend to pursue those claims in this case.
The court further finds confirmation that sanctions under § 1927 are appropriate in counsel's reckless disregard of the duty owed to the court. The response of plaintiff, Oliver, and his firm to the motion for sanctions is typical of the papers that have been filed by it in this action. A number of the statements made are highly misleading, if not outright false. An example is the false statement that the motion for sanctions is procedurally defective because "City Bank proceeded to file the very same motion that it submitted in draft form, without taking into account any changes made in the amended complaint." At every turn, Oliver has injected irrelevant matters in an attempt to obfuscate the real issues. The proceedings have been unreasonably and vexatiously multiplied as a result.
According to Rule 11(c)(2), a sanction imposed for violation of Rule 11 must be limited to what is sufficient to deter repetition of the conduct or comparable conduct by others similarly situated. And, the sanction may consist of an order to pay a penalty into court. The court has determined that this would be an appropriate deterrent for the conduct described in this memorandum opinion and order.
Rule 11(c)(1)(A) provides, in pertinent part: "Absent exceptional circumstances, a law firm shall be held jointly responsible for violations committed by its partners, associates, and employees." There has been no showing of exceptional circumstances why Andrews Kurth, L.L.P., should not be held jointly responsible with Oliver for violations committed by Oliver. The court further finds and concludes that the least severe sanction appropriate to deter repetition of comparable conduct by others similarly situated to Oliver and Andrews Kurth, L.L.P., would be the payment by each of them of $5,000 into the registry of the court.
The court further finds that, pursuant to 28 U.S.C. § 1927, Oliver should be made to pay the excess costs, expenses, and attorneys' fees reasonably incurred by City Bank as a result of having been made a party to this action.
For the reasons discussed herein,
The court ORDERS that by 4:30 p.m. on August 10, 2001, Oliver and Andrews Kurth, L.L.P., each pay to the registry of the court the sum of $5,000 as a sanction for their violations of Rule 11 of the Federal Rules of Civil Procedure in the respects mentioned above.
The court further ORDERS that, if City Bank wishes to pursue the matter of excess costs, expenses, and attorneys' fees under § 1927, it file by 4:30 p.m. on August 10, 2001, an appropriate document, supported by an affidavit or declaration, giving (1) a description of each item of work performed, (2) the date on which each item of work was performed, (3) the identity of the attorney who performed each item of work, (4) the amount of time devoted by each attorney to performance of each item of work, and (5) the hourly rate charged by each attorney performing work, and (6) any other matter City Bank wishes the court to consider on the issue of the amount to be awarded pursuant to § 1927.
The court further ORDERS that Oliver file by 4:30 p.m. on August 17, 2001, his response, if any, to said document