JOHN J. O'SULLIVAN, Magistrate Judge.
THIS MATTER is before the Court on the Defendants' Re-Submitted Motion for Sanctions Pursuant to Fed. R. Civ. P. 11, 28 USC § 1927, and/or the Court's Inherent Power (DE# 124, 5/23/12) and Fox Rothschild's Motion for Leave to File Sur-Reply (DE# 143, 8/1/12). Having reviewed the re-submitted motion, response (DE# 7/20/12), reply (DE# 138, 7/30/12), and the respective declarations and exhibits thereto, and being duly advised in the premises, it is
ORDERED AND ADJUDGED that the Defendants' Re-Submitted Motion for Sanctions Pursuant to Fed. R. Civ. P. 11, 28 USC § 1927, and/or the Court's Inherent Power (DE# 124, 5/23/12) is DENIED for the reasons set forth below. It is further
ORDERED AND ADJUDGED that Fox Rothschild's Motion for Leave to File Sur-Reply (DE# 143, 8/1/12) is DENIED.
The defendants' initial motion for sanctions was filed on June 7, 2011. The Court held a hearing on June 27, 2011 and a status conference on June 30, 2011. On July 1, 2011, the Court issued an Order Staying the Case until September 30, 2011, denied as moot all pending motions, and set the matter for a status conference on October 12, 2011. The case remained stayed except as to the conflict issue that defendants raised regarding Fox Rothschild's representation of Mitchell in this action and Mr. Discount in the Pennsylvania action. On October 24, 2011, which was before the deadline for the defendants to file their motion to disqualify, the Court granted Fox Rothschild's motion to withdraw. New counsel appeared on the plaintiff's behalf that same day. On December 9, 2011, the defendants filed their Motion to Lift the Stay of Litigation. On March 29, 2012, the plaintiff filed his Notice of Voluntary Dismissal. On May 10, 2012, the Court granted in part the Motion to Lift Stay; granted in part the Motion to Deem the sanctions motion re-filed; and granted Mitchell's subsequent counsel's motion to withdraw. (DE# 120).
The defendants seek sanctions against the plaintiff's former law firm Fox Rothschild
The defendants appear to rely on all three sub-sections of Rule 11 to obtain sanctions against Fox Rothschild. In support of their re-submitted motion for sanctions, the defendants submit the Declaration of Clifton M. Mitchell (DE# 124-1, 5/23/12); the hearing transcript (DE# 124-2, 5/23/12); the Answer of Defendant, Stuart Discount, with New Matter and Counterclaim to Plaintiffs' Amended Complaint (DE# 124-3, 5/23/12); the Second Amended Joinder Complaint against Jason Fine in the Pennsylvania action (DE# 124-4, 5/23/12); Excerpt of the transcript of the Deposition of Stuart M. Discount 2/21/12 (DE# 124-5, 5/23/12); Affidavit of Stuart Discount filed in opposition to the motion to disqualify Fox Rothschild in the Pennsylvania action (DE# 124-6, 5/23/12); and the Declaration of Antonio F. Uccello, III in Opposition to Plaintiffs' Emergency Ex-Parte Motion for Temporary Injunction in the Florida state court action (DE# 124-7, 5/23/12).
In support of its response in opposition (DE# 138; 7/20/12), Fox Rothschild submits the Declaration of Brett Berman and exhibits. (DE# 139, 139-1 through 139-26; 7/20/12). The defendants filed a reply (DE# 142; 7/30/12) that attaches a Reply Declaration of Clifton Mitchell in Response to Declaration of Brett Berman (DE# 142-1, 7/30/12) and other exhibits.
This action arises from a dispute concerning the right to acquire a call center known as 1-2-1 Direct located in Pennsylvania. TRC and Jason Fine ("Fine"), who is TRC's sole shareholder, asserted that in May 2010, TRC acquired the call center from International Consolidated Companies, Inc. ("ICCI") by closing on a Stock Purchase Agreement "("SPA"), dated May 12, 2010. The SPA provides for the sale to TRC of all of ICCI's shares in Tele Response Center, Inc. and Tele Star, Inc. d/b/a "1-2-1 Direct."
Mitchell was a large shareholder in North America Life ("NAL"), which was a shareholder of ICCI. Mitchell feared that ICCI might sell or pledge 1-2-1 Direct without proper shareholder approval. In early 2010, Mitchell, through NAL, sued defendant Ucello in Texas state court ("Texas Action") and on March 9, 2010 obtained a temporary restraining order ("TRO") barring Uccello from entering into any agreements to sell the assets of ICCI without first obtaining ICCI shareholder approval. On April 8, 2010, the Texas court issued an injunction against Ucello barring him, among other things, from "[i]mpairing the value of the Pledged Collateral or making fraudulent transfers by directly or indirectly causing ICCI to dispose of the 1-2-1 Direct subsidiaries or any other significant assets of ICCI without first obtaining approval from the shareholders at a duly-called shareholders' meeting...." (DE# 139-7, 7/20/14). In a letter dated June 5, 2010 (the "Graves Letter"), the defendants were advised of the Texas TRO, which prohibited the sale of and even the entering into of any agreement to sell 1-2-1 Direct without ICCI shareholder approval. The defendants continued their efforts to acquire 1-2-1 Direct into January 2011 when TRC and ICCI filed a Settlement Agreement waiving the closing conditions of the May 2010 SPA. Fox Rothschild alleged "on information and belief" that the defendants knew of the Texas TRO before the June 5, 2010 Graves Letter was sent. Fox Rothschild maintains that the defendants had notice of the Texas TRO before the SPA closing occurred.
Fox Rothschild argues further that the sale of 1-2-1 Direct did not occur in May 2010 based on the Access Capital Agreement. Access Capital was purchasing 1-2-1 Direct's receivables. ICCI and TRC, through Uccello and Fine as signatories, and Access Capital executed a tri-party letter agreement (the "Access Capital Agreement") affirming that the sale had not closed, requiring consent of Access Capital to any sale, and requiring the parties to allow Access Capital the opportunity to review proposed closing documents. Amended Complaint ¶¶ 98-100; Berman Decl. ¶ 31 & Ex. K. Fox Rothschild argues that the Access Capital Agreement reveals that ICCI and TRC, and their representatives, acknowledged that the transaction had not closed.
Mitchell had filed a shareholder derivative action against the officers and directors of ICCI in Sarasota County, Florida. In the shareholder derivative action, in the Settlement Agreement and Release dated October 14, 2010, which was executed by both Uccello and Mitchell, Uccello represents that the SPA closing did not take place and that ICCI was rescinding its SPA with TRC. Berman Decl. ¶ 30. This was five months after the purported ICCI-TRC closing. On December 9, 2010, Jonathan Leinwand, outside counsel for ICCI, sent a formal written notice of termination to TRC and Fine advising them that TRC had failed to fulfill the terms and conditions of the SPA (the "Leinwand Letter"). The Leinwand Letter states that TRC interfered with 1-2-1 Direct and caused irreparable harm to the company. It also demands that TRC return any property of 1-2-1 in its possession. Amended Complaint ¶ 113; Berman Decl. ¶ 32 & Ex. L.
In December 2010, TRC, knowing that a dispute existed concerning its claimed ownership of 1-2-1 Direct, filed suit against ICCI, Uccello and others in Miami-Dade County Circuit Court seeking to determine its ownership rights. Amended Complaint ¶ 109-110; Berman Decl. ¶ 38. On January 18, 2011, TRC, ICCI and Uccello filed a Joint Motion for Approval of Settlement Agreement and Dismissal of Claims Without Prejudice. The Joint Motion attached the Settlement Agreement as an exhibit. The parties asked the Florida state court to approve the Settlement Agreement and enter an order of dismissal without prejudice. The Miami-Dade County state court entered a routine settlement order titled "Final Order Approving Settlement Agreement and Dismissal Without Prejudice" on January 19, 2011. Berman Decl. ¶ ¶ 40-42 & Exs. P & Q. The Florida state court did not actually adjudicate any issues. Although Mitchell was named a defendant, he was never served with a summons and complaint. Berman Decl. ¶ ¶ 42-43. He was never a party to the Settlement Agreement. Eight months after the purported closing, the parties found it necessary to waive pre-closing conditions.
Mitchell never advised Fox Rothschild that he accepted TRC's ownership of 1-2-1 Direct. He retained Fox Rothschild for the purpose of either enforcing his right to acquire the business or, if that was not possible, seeking damages from the parties responsible for interfering with his rights. Berman Decl. ¶ 27. Mitchell never advised Fox Rothschild that he was satisfied with Fine's management of the call center. He advised Fox Rothschild that he was gravely concerned that Fine's mismanagement of the business would destroy its value. Mitchell wanted Fox Rothschild to pursue the immediate appointment of a receiver and injunctive relief. Berman Decl. ¶ 27. The Lienwand Letter confirmed TRC's mismanagement. Berman Decl. ¶ 33. Stuart Discount (hereinafter "Discount"), a client of Fox Rothschild in the Philadelphia litigation involving the call center, also confirmed TRC's mismanagement of the call center. Berman Decl. Ex. O (¶¶ 15-16). Fox Rothschild asked Mitchell to review every substantive filing in the case. Mitchell either approved the filings or did not respond with any comments or objections. He never objected to any of the factual assertions that Fox Rothschild made on his behalf in the filed documents. Berman Decl. ¶ 51. Mitchell repeatedly advised Fox Rothschild that he was the only party with the right to acquire the call center. Berman Decl. ¶¶ 52-53 & Ex. V and W. Mitchell reviewed and agreed with Fox Rothschild's response letter to the defendants' Rule 11 notice. Berman Decl. ¶ 55 & Ex. Y.
In the present action, Mitchell asserted in his Complaint and Amended Complaint that TRC did not close on this transaction in May 2010 and that, in October 2010, when Mitchell obtained the right to engage in a similar transaction with ICCI, the pre-conditions that had to be met by TRC to close the SPA had failed, and ICCI did not intend to sell 1-2-1 Direct to TRC. On October 14, 2010, Mitchell and defendant Anthony Uccello (CEO and Chairman of ICCI) entered into a Settlement Agreement and Release granting Mitchell the right to acquire 1-2-1 Direct. The Settlement Agreement resolved a shareholder derivative action filed by Mitchell in Sarasota County, Florida against Uccello and other members of ICCI's management. Fox Rothschild did not represent Mitchell in the Sarasota action.
In the present action, Mitchell alleged that TRC and Fine interfered unlawfully with Mitchell's right to acquire ownership of 1-2-1 Direct. The original Complaint included five claims against TRC and Fine. In Count III, Mitchell alleged that Fine and TRC had engaged in a conspiracy with Uccello to sell 1-2-1 Direct to TRC despite having clear knowledge that a Texas court had issued an injunction preventing Uccello from entering into any agreement to sell ICCI's assets without shareholder approval. In Count V, Mitchell alleged that ICCI, Uccello, Fine and TRC, through the same conduct, unlawfully deprived Mitchell of his right to pursue 1-2-1 Direct. In Count VII, Mitchell alleged an intentional interference with prospective business relationship by TRC and Fine, based on their conduct in unlawfully preventing ICCI and Uccello from selling 1-2-1 Direct to Mitchell. In Count VIII, Mitchell sought an accounting by ICCI concerning the call center business and joined TRC and Fine to the extent that they had de facto control over 1-2-1 Direct. In Count IX, Mitchell sought an injunction to prevent TRC and Fine from wrongfully retaining any assets of the call center business that they had unlawfully obtained and sought the appointment of a receiver to prevent mismanagement and waste in the conduct of the business of 1-2-1 Direct.
Mitchell's Amended Complaint added new and more detailed factual allegations in support of his five claims and asserted one additional claim. In Count X, Mitchell alleged that Fine defamed him and engaged in a smear campaign against Mitchell by making false and slanderous statements about Mitchell to third parties, including insurance regulators, intended to destroy Mitchell's reputation and to pressure Mitchell into dismissing this action.
TRC and Fine sought dismissal of the Amended Complaint on various grounds. Due to the stay of the litigation, the mediation and the settlement, the Court never ruled on the sufficiency of the Amended Complaint. After defendants disclosed their intent to move to disqualify Fox Rothschild in the present action, but before any motion was filed, Mitchell voluntarily dismissed the Amended Complaint in this action while he was represented by new counsel.
The purpose of Rule 11 sanctions is to reduce frivolous claims, defenses, or motions, and to deter costly meritless maneuvers.
Rule 11(b) states as follows:
Fed. R. Civ. P. 11(b). "[A] federal district court is required to evaluate whether the motion, pleading or other paper reflected what could reasonably have been believed by the signer at the time of signing."
The Eleventh Circuit has determined that three types of conduct warrant Rule 11 sanctions: when a party files a pleading with no "reasonable factual basis" (Rule 11(b)(3)), files a paper based on a legal theory with "no reasonable chance of success and that cannot be advanced as a reasonable argument to change existing law" (Rule 11(b)(2), or files a paper in "bad faith for an improper purpose" (Rule 11(b)(1)).
The undersigned finds that the claims raised by the plaintiff in the Complaint and the Amended Complaint were not objectively frivolous. The sanctions motion is premised on a factual dispute regarding whether and when TRC acquired 1-2-1 Direct and whether Mitchell or Discount had any ownership interest in 1-2-1 Direct. In the present action, Mitchell claims an ownership interest in 1-2-1 Direct by virtue of his shareholder status in NAL, which was a large shareholder of ICCI. In the Pennsylvania action, Discount claims an ownership interest in 1-2-1 Direct by virtue of his equity in TRC.
The defendants contend that TRC acquired 1-2-1 Direct in May 2010 based on the SPA between ICCI and TRC dated May 12, 2010. The defendants base their sanctions motion on the assertion that Fox Rothschild knew this and falsely represented otherwise. Fox Rothschild argues that "the issue is when, if ever, the transaction closed." Response at 2 (DE# 138, 7/20/12). Fox Rothschild maintains that "[b]ased on the available documentary evidence, which is substantial, the transaction did not close in May 2010. It closed in January 2011, at the earliest, when ICCI and TRC purportedly settled their disputes concerning the sale. Even then, it may not have closed lawfully, if shareholder approval was not obtained as required."
The defendants rely primarily on the Declaration of the plaintiff and Fox Rothschild's former client, Clifton M. Mitchell. Additionally, the defendants rely on pleadings filed by Fox Rothschild on behalf of another client, Stuart Discount, in the Philadelphia litigation involving the call center but misstate the facts as to Discount's position. Fox Rothschild explains that Discount's position in the Philadelphia action
In his declaration filed in support of the defendants' motion for sanctions, Mitchell accuses Fox Rothschild of having a conflict of interest in representing him and Discount in the cases involving the call center. Response at 3, n.3; Berman Declaration ¶¶ 24-25. Mitchell knew Fox Rothschild was representing Discount, understood the nature of Discount's claims, agreed to the joint representation and signed a conflict waiver. Berman Declaration ¶24-25. The defendants argue that Mitchell had no dispute with TRC and Fine, but that Fox Rothschild convinced him to sue them. According to Fox Rothschild, Mitchell came to Fox Rothschild with the express purpose of pursuing his claims against TRC and Fine for interfering with his opportunity to acquire 1-2-1 Direct. Berman Declaration ¶ 27. The claims asserted in the present case are not objectively frivolous. The factual dispute concerning ownership of 1-2-1 Direct cannot justify an award of Rule 11 sanctions.
The purpose of 28 U.S.C.A. § 1927 is "to deter frivolous litigation and abusive practices by attorneys ... and to insure that those who create unnecessary costs also bear them."
The inherent power of the Court to sanction is similar to the authority to sanction pursuant to Section 1927. Both require a finding of bad faith measured against objective standards of conduct.
In
The defendants argue that Fox Rothschild committed a fraud on the court by maintaining polar opposite positions on the ownership of 1-2-1 in the Pennsylvania action and the present action for two different clients, Discount and Mitchell, respectively. The defendants contend that Fox Rothschild pursued Mitchell's federal action without factual or legal support to extort a settlement from the defendants. Reply at 1-2 (DE# 142, 7/30/12). The defendants maintain that TRC Acquisition acquired 1-2-1 Direct from ICCI in May 2010, when they entered the SPA. Re-Submitted Motion for Sanctions at 2-3 (DE# 124, 5/23/12). The defendants argue that "[i]t is now known that Fox Rothschild agrees that the sale took place in May 2010 and is estopped from arguing otherwise."
Consent judgments are not binding on non-parties.
Although Mitchell was listed as a defendant, he was never served in the Florida state court case and there is no evidence that Mitchell evaded service in that action. Additionally, the state court action was voluntarily dismissed without prejudice. "The effect of a voluntary dismissal without prejudice is to render the proceedings a nullity and leave the parties as if the action had never been brought."
Likewise, the Consent Judgment in the Florida state court action is not binding on Mitchell because he was not served and the Florida state court thus, lacked jurisdiction over him. The Consent Judgment in the Florida state court has no res judicata effect on Mitchell because he was not served in the action and he was not a party to the Settlement Agreement.
At the time the plaintiff filed this action, Florida law "held that a tort action is barred where a defendant has not committed a breach of duty apart from a breach of contract."
The defendants contend that Mitchell's conversion, conspiracy, accounting and receiver claims are derivative claims because they belong to ICCI, not Mitchell. Under Florida law, whether a shareholder's claim is derivative or direct is based on "the nature of the injuries alleged and the wrongs sought to be remedied."
Mitchell's claims stem from his position that he had the contractual right, as of October 14, 2010, to pursue a transaction for the acquisition of 1-2-1 Direct, that TRC did not have the right to acquire 1-2-1 Direct at that time, and that TRC and its principal, Jason Fine, interfered with Mitchell's contract rights. Mitchell's claims arise from this central claim. Mitchell asserted the receiver claim to preserve the value of the business pending resolution of the litigation. The injuries alleged by Mitchell are injuries personal to him, not the corporation.
Mitchell's tortious interference claim included the allegation that the May 2010 SPA did not close. The defendants argue that the tortious interference claim was not chronologically possible. Whether and when the May 2010 SPA closed is a disputed issue of fact that does not warrant imposition of sanctions against Fox Rothschild.
Mitchell's conversion claim is based on allegations that he entered into a binding contract to purchase 1-2-1 Direct from ICCI and that the defendants seized possession of 1-2-1 Direct without authorization.
The defendants argue that Mitchell's accounting claim is sanctionable because he did not have a fiduciary relationship with the defendants. "Under Florida law, a party seeking an equitable accounting must show the existence of a fiduciary relationship or a complex transaction and must demonstrate that the remedy at law is inadequate."
Mitchell's receiver claim asserts 1) the inadequacy of legal remedies; 2) a substantial likelihood of success on the merits; 3) the possibility of irreparable injury to his right to acquire 1-2-1 Direct; and 4) that the possible injury to the defendants from the appointment of a receiver was outweighed by the potential damage to Mitchell resulting from mismanagement of the business.
Fox obtained information from Mitchell and others that TRC and Fine had seized control of the call center without complying with material closing conditions and that Fine was mismanaging the business. Response at 19 (DE# 138, 7/20/12); Berman Decl. ¶ 27. The parties settled before any discovery regarding mismanagement was taken. Fox Rothschild did not pursue appointment of a receiver after the parties' settlement fell through. Instead, Fox Rothschild withdrew as counsel. Defendants' contention that the call center was well managed by Fine presents a disputed issue of fact. As such, sanctions are not warranted.
The undersigned finds that Mitchell's claims are not objectively frivolous and that Fox Rothschild's conduct did not constitute a fraud on this Court or bad faith. Additionally, neither res judicata nor the economic loss rule bars Mitchell's claims. Accordingly, sanctions are not warranted against Fox Rothschild under Rule 11 or 28 U.S.C.A. § 1927 or the inherent power of this Court.
DONE AND ORDERED.
