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admonishing plaintiff's counsel for frivolous RICO claim
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02 Civ. 2561 (KMW) (GWG)
September 26, 2003
OPINION AND ORDER
Before the Court is a motion by defendant Merrill Lynch, Pierce, Fenner Smith, Inc. ("Merrill Lynch") for an award of sanctions under Fed.R.Civ.P. 11 against plaintiff Patricia Dangerfield's former attorney, Kevin P. Conway. For the reasons stated below, Merrill Lynch's motion is granted.
I. INTRODUCTION
A. Factual History
Dangerfield's original complaint in this case was filed on April 3, 2002. See Complaint, filed April 3, 2002 (Docket #1) ("Complaint"). The complaint named Merrill Lynch and J. William Danger-field ("Mr. Danger-field"), the plaintiff's former husband, as defendants. See id. ¶¶ 2-3. The complaint asserted claims for failure to comply with a subpoena, secuconversion and aiding and abetting conversion, breach of contract, breach of fiduciary duty, and a violation of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1961 et seq. See Id. ¶¶ 40-69. This complaint was signed by Conway as Dangerfield's attorney. See id. at 13.
The acts alleged in the complaint arose out of divorce proceedings between Dangerfield and her former husband in the District Court of Harris County, Texas. Id. ¶ 10. The final decree of divorce granted Dangerfield substantially all of the marital assets including all brokerage accounts, except for two, held with Merrill Lynch. Id. ¶ 14-17. The Texas court issued a subpoena in 1990 addressed to Merrill Lynch requesting all records involving Mr. Dangerfield or an entity called Dangerfield Enterprises, Inc. Id. ¶ 10. A letter sent prior to the subpoena also requested information on fifteen accounts. Id. ¶ 11. Merrill Lynch produced information concerning five of the accounts.Id. ¶ 12. In 1998, Dangerfield caused an additional subpoena from the Texas court to be served on Merrill Lynch requesting information on 36 other accounts that had not been disclosed previously. Id. ¶¶ 19-23. The Westheimer and Sugarland, Texas offices of Merrill Lynch refused service of the 1998 subpoena. The Westheimer office refused the subpoena because it allegedly had no accounts in Mr. Dangerfield's name while the Sugarland office refused service because Mr. Dangerfield was not an employee there. Id. ¶¶ 25-26.
Subsequently, Dangerfield had an individual identified as her "counsel," Erling R. Krosby, write to the head of compliance at Merrill Lynch about the alleged lack of compliance with the subpoenas. Id. ¶ 27. Eventually, Merrill Lynch had an attorney respond to Krosby. The response identified information about only five of the 36 accounts. Id. ¶ 29. Krosby wrote back requesting information about 30 accounts that had not been responded to. Id. ¶ 30. After receiving no response, Krosby contacted Daniel Spector, a vice-president in the legal department, regarding the subpoenas. Id. ¶¶ 31-32. Subsequently, Merrill Lynch sent a letter to Krosby that identified information about one account and promised more information would follow. Id. ¶ 33.
On September 24, 1999, Dangerfield, Krosby, and Merrill Lynch's local counsel met and discussed the subpoenas. Merrill Lynch disputed that most of the accounts were Merrill Lynch accounts but was provided with statements by Dangerfield that allegedly showed this assertion to be false. Id. ¶ 34. After receiving no further response, Dangerfield and Krosby contacted Spector. Id. ¶ 35. Spector replied that he was working on the situation and resources had been assigned to conduct further investigation. Id. ¶ 36. On December 22, 1999, Merrill Lynch's local counsel provided information with respect to the same accounts for which Merrill Lynch had previously provided information.Id. ¶ 37. After being contacted by Dangerfield and/or Krosby again, Spector wrote promising to look into the matter. Id. ¶ 38. No further response was sent by Merrill Lynch. Id.
B. Procedural History
After the complaint had been filed, on April 23, 2002 Conway wrote a letter to serve as a RICO statement pursuant to Judge Wood's individual practices. See Letter to the Honorable Kimba M. Wood from Kevin P. Conway, dated April 23, 2002 ("RICO Statement" (reproduced in Notice of Motion, filed September 23, 2002 (Docket #19), Ex. B (reproduced in Affidavit of James M. Bergen, dated August 22, 2002 ("Bergen Aff. I") (annexed to Notice of Motion, filed September 16, 2002 (Docket #14)), Ex. A)). The letter claimed that the defendants had committed RICO predicate acts through obstruction of justice by failing to comply with subpoenas issued in 1990 and 1998 by the Texas court. See Id. at 2-5. The letter alleged that the RICO enterprise consisted of Merrill Lynch and Mr. Dangerfield and that the defendants engaged in racketeering activity to hide assets from Dangerfield. See id. at 5.
Merrill Lynch's answer to the complaint was originally due on or about April 29, 2002. See Affidavit in Opposition to Defendant Merrill Lynch, Pierce, Fenner Smith, Inc.'s Motion for Sanction, filed January 7, 2003 (Docket #40) ("Conway Aff."), ¶ 6. Sometime prior to that date, Merrill Lynch obtained an extension of time to answer from someone at Conway's firm. See Id. On May 14, 2002, Merrill Lynch's attorney, James M. Bergen, wrote to Conway to request that Dangerfield dismiss her complaint. See Letter to Kevin P. Conway from James M. Bergen, dated May 14, 2002 (Bergen Aff. I, Ex. C). Bergen claimed that the complaint was false or deficient for failing to include or misstating relevant facts, that Merrill Lynch had complied with the 1990 subpoena and the 1998 subpoenas were invalid, that the claims were legally deficient, and that Conway had failed to make a reasonable inquiry prior to filing the complaint. See id. at 1-7. The letter warned Conway that if the complaint was not withdrawn Merrill Lynch was planning to seek sanctions under Fed.R.Civ.P. 11(b)(1), (2) as well as under 28 U.S.C. § 1927. See Id. at 1.
One of Merrill Lynch's attorneys, Kristin Holland, subsequently contacted Conway and received an extension of time for Merrill Lynch to answer the complaint. See Opposition Affidavit of Kristin O. Holland, filed August 30, 2002 (Docket #12) ("Holland Aff. I"), ¶ 3. Merrill Lynch received additional extensions to August 21, 2002, but was warned by Judge Wood that no further extensions were likely to be granted. See Memorandum Endorsement, filed July 19, 2002 (Docket #7).
On May 29, 2002, Bergen called Conway. See Supplemental Affidavit of James M. Bergen, filed December 17, 2002 (Docket #38) ("Bergen Aff. IT"), ¶ 7. During this conversation Conway told Bergen that the case could be resolved if Merrill Lynch produced documents regarding the accounts. See Conway Aff. ¶ 8. Bergen agreed to gather documents from Merrill Lynch in the hope that Dangerfield would Withdraw her complaint. See Bergen Aff. n ¶ 7. On the same day Bergen received a letter from Krosby. See Letter to James M. Bergen from Erling R. Krosby, dated May 29, 2002 (reproduced in Bergen Aff. II, Ex. D). Krosby, purporting to be acting as an attorney for Dangerfield, disputed the claims of Bergen's May 14 letter to Conway. See id. at 1-6. In his letter, Krosby claimed that Bergen's assertions were false and violated a number of professional rules of conduct for the legal profession. See id. On May 31, 2002, Bergen called Conway and asked if he had received the Krosby letter. See Bergen Aff. II ¶ 7. Conway said that he had. Id.
Krosby has since been enjoined from practicing law in Texas by the District Court of Harris County, Texas because he had engaged in the unauthorized practice of law in connection with this lawsuit. See Temporary Injunction, dated May 30, 2003 (reproduced in Letter to the Honorable Kimba M. Wood from James M. Bergen, dated June 9, 2003), at 1-3.
On June 11, 2002, per Conway's request, a meeting took place attended by Bergen, Holland, a paralegal at Merrill Lynch, Conway, and one of his associates, Fred Van Remortel. See Holland Aff. I ¶ 5. Merrill Lynch contends that its attorneys answered Conway's questions regarding facts uncovered by a Merrill Lynch investigation into Dangerfield's allegations. See id. Conway claims that Merrill Lynch had done no factual investigation but merely collected certain documentation. See Conway Aff. ¶ 9. Merrill Lynch's attorneys subsequently agreed to produce documentation regarding the presentation made at the meeting. See id. At the end of the meeting Bergen had the impression that Conway would attempt to get Dangerfield to agree to dismiss the case. See Bergen Aff n 19. Conway disputes this allegation. See Conway Aff. ¶ 9.
On June 13, 2002, Merrill Lynch produced approximately 880 pages of documents to Conway pursuant to the discussions at the June 11 meeting.See Holland Aff. I ¶ 8. In addition, Merrill Lynch produced an affirmation, unexecuted at the time, from an attorney at Merrill Lynch, Daniel Spector, who stated that Merrill Lynch had fully complied with the Danger-field subpoenas. See Affirmation of Daniel R. Spector, dated August 1, 2002 (reproduced in Holland Aff. I, Ex. A), ¶¶ 1-4. Conway claims that "significant questions" remained even after the production of these documents and that Merrill Lynch's attorneys failed to answer those questions. See Conway Aff. ¶¶ 9-10.
On June 18, 2002, Holland spoke to Van Remortel who allegedly told her that he and Conway would speak to Dangerfield shortly about dismissing the complaint. See Holland Aff. I ¶¶ 9-10. Holland and Van Remortel spoke a number of times subsequently. During these conversations Van Remortel allegedly assured Holland that he would be speaking to Dangerfield and asked questions of Holland regarding the documents. See id. ¶¶ 10-11, 13-14.
On August 7, 2002, Van Remortel faxed to Holland a letter asking for confirmation that certain accounts belonged to Merrill Lynch and for additional statements regarding other accounts. See Letter to Kristin O. Holland from Fred Van Remortel, dated August 7, 2002 (reproduced in Holland Aff. I, Ex. B), at 1-2. The next day, Holland wrote back and refused to produce additional information and asked that Dangerfield dismiss the action. See Letter to Fred Van Remortel from Kristin O. Holland, dated August 8, 2002 (reproduced in Holland Aff. I, Ex. C). Van Remortel replied the next day questioning Holland's response and the prior production. See Letter to Kristin O. Holland from Fred Van Remortel, dated August 9, 2002 (reproduced in Holland Aff. I, Ex. D), at 1-2. Holland replied the same day with a proposed stipulation of voluntary dismissal, which was never signed by Conway or Van Remortel.See Letter to Fred Van Remortel from Kristin O. Holland, dated August 9, 2002 (reproduced in Holland Aff. I, Ex. E), atl.
On August 19, 2002, Bergen called Conway to discuss the ongoing situation. During this call Bergen informed Conway that Merrill Lynch's answer to the complaint was due shortly and that, unless the complaint was voluntarily dismissed, Merrill Lynch would file a motion to dismiss.See Bergen Aff. II ¶ 10. Conway said he would call Bergen back after speaking to Van Remortel. See Id. On August 20, 2002, Conway told Bergen that he would be speaking to Dangerfield that afternoon. See id. ¶ 11. Later in the day, Conway called Bergen and said that he had spoken with Dangerfield and that he would be filing a motion to withdraw as counsel. See Id.
In his opposition papers, Conway does not mention any phone call on August 19, 2002. Instead, Conway claims that he called Bergen on August 20, 2002, "as a courtesy" to inform Bergen that Conway and his firm would be withdrawing from the case. Conway Aff. ¶ 12.
On August 23, 2002, the parties attended a conference before Judge Wood. At this conference, Conway was directed to file a formal motion, pursuant to Local Civil Rule 1.4, to withdraw as counsel. See Bergen Aff. II ¶ 12. On August 27, 2002, Conway filed his motion to withdraw.See Notice of Motion, filed August 27, 2002 (Docket #9). Merrill Lynch opposed the motion. See Merrill Lynch, Pierce, Fenner Smith, Inc.'s Memorandum of Law in Opposition to Kevin P. Conway, Esq.'s and Conway Conway's Motion to Withdraw as Counsel, filed August 30, 2002 (Docket #11).
In September 2002, Dangerfield mailed a document to the Pro Se Office of this Court seeking sanctions against Bergen and Merrill Lynch for failing to answer the complaint. See Notice of Motion, filed October 7, 2002 (Docket #25) ("Dangerfield Motion"). According to the affidavit of service attached to this motion, Dangerfield sent a copy of this document to Bergen but not to Conway. See Certificate of Service, dated September 14, 2002 (annexed to Dangerfield Motion). Included as exhibits in the Dangerfield Motion were a number of documents sent from Dangerfield and Krosby to Conway. In this submission, Dangerfield attempted to refute a number of arguments that were apparently made to her by Conway regarding the lack of viability of the lawsuit. See, e.g., Letter to Kevin Conway from Patricia Dangerfield, dated August 15, 2002 (reproduced in Dangerfield Motion, Ex. 3), at 1 ("We are really concerned about the fact that you . . . seem to have . . . just accepted Merrill Lynch's arguments without serious investigations of the truth of these arguments."). In addition, Dangerfield averred that "Mr. Conway acted fraudulently when Mr. Conway attempted to have me dismiss the case by asserting Merrill Lynch's arguments." Affidavit of Patricia Dangerfield, dated September 13, 2002 (reproduced in Dangerfield Motion), at 14.
Subsequently, Conway, apparently unaware of Dangerfield's submission, filed an affidavit in response to Merrill Lynch's opposition to motion to withdraw. See Affidavit of Kevin P. Conway, filed September 17, 2002 (Docket #17). In his affidavit, Conway asserted that had Merrill Lynch properly responded to the subpoenas the case might have been resolved. See Id. ¶ 11. On September 23, 2002, Merrill Lynch moved to dismiss the complaint pursuant to Fed.R.Civ.P. 12(b)(6) for failure to state a claim. See Notice of Motion, filed September 23, 2002 (Docket #19).
On October 16, 2002, a conference was held before this Court during which the Court denied Dangerfield's motions for entry of a default and for sanctions. In addition, the Court granted Conway's motion to withdraw and gave Dangerfield leave to file an amended complaint pro se. While Conway was excused as the attorney of record, however, the Court noted that he would still remain part of the case for the purposes of any sanctions motions. The Court gave Merrill Lynch leave to re-file its motion for sanctions after Dangerfield had filed her amended complaint. An amended complaint was filed pro se on November 15, 2002 and a corrected copy of the amended complaint was filed on November 20, 2002. Merrill Lynch renewed its motion for sanctions against Conway and also moved to dismiss the amended complaint. See Notice of Motion, filed December 17, 2002 (Docket #35); Bergen Aff. H The parties filed various papers in opposition to and in support of the respective motions thereafter.
On April 11, 2003, this Court issued a Report and Recommendation to Judge Wood on Merrill Lynch's motion to dismiss. See Report and Recommendation, filed April 11, 2003 (Docket #50) ("Report and Recommendation"). In the Report and Recommendation, this Court recommended dismissing all of Dangerfield's claims as set forth in the amended complaint, with the exception of her claim against Merrill Lynch of aiding and abetting conversion. See id. at 10-23. On September 22, 2003, Judge Wood issued an Opinion and Order that concurred in this result and allowed Dangerfield the opportunity to replead some claims (not including the RICO claim).
II. LAW GOVERNING SANCTIONS UNDER FED. R. CIV. P. 11
Rule 11 of the Federal Rules of Civil Procedure establishes "a means by which litigants certify to the court, by signature, that any papers filed are well-founded." Bus. Guides, Inc. v. Chromatic Communications Enters., Inc., 498 U.S. 533, 542 (1991). The rule imposes an affirmative obligation upon parties signing papers filed with the court. It provides in pertinent part:
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, —
(1) it is not being presented for any improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation;
(2) the claims, defenses, and other legal contentions therein are warranted by existing law or by a nonfrivolous argument for the extension, modification, or reversal of existing law or the establishment of new law; [and]
(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. . . .
Fed.R.Civ.P. 11(b). Thus, "[a] signature certifies to the court that the signer has read the document, has conducted a reasonable inquiry into the facts and the law and is satisfied that the document is well grounded in both, and is acting without any improper motive." Bus. Guides, 498 U.S. at 542 (citation omitted). Subdivision (c) of the rule also provides for sanctions for violations of subdivision (b). "In deciding whether the signer of a pleading . . . has crossed the line between zealous advocacy and plain pettifoggery, the court applies an objective standard of reasonableness." United States v. Int'l Bhd. of Teamsters, 948 F.2d 1338, 1344 (2d Cir. 1991) (footnote and citation omitted); see also Margo v. Weiss, 213 F.3d 55, 65 (2d Cir. 2000) ("the standard for triggering the award of fees under Rule 11 is objective unreasonableness") (citation omitted). The objective standard is "intended to eliminate any 'empty-head pure-heart' justification for patently frivolous [legal] arguments." Fed.R.Civ.P. 11 advisory committee's note, 1993 amend.
Rule 11 sanctions are a drastic remedy, however, and should be imposed with care so as to not "stifle the enthusiasm or chill the creativity that is the very lifeblood of the law." Eastway Constr. Corp. v. City of New York, 762 F.2d 243, 254 (2d Cir. 1985), cert. denied, 484 U.S. 918 (1987): see also G-I Holdings, Inc. v. Baron Budd, 2002 WL 1934004, at *12 (S.D.N.Y. Aug. 21, 2002) ("Sanctions must be imposed carefully, lest they chill the creativity essential to the evolution of the law.") (citation omitted). Thus, "[w]hen divining the point at which an argument turns from merely losing to losing and sanctionable . . . district courts [must] resolve all doubts in favor of the signer."Associated Indem. Corp. v. Fairchild Indus., 961 F.2d 32, 34-35 (2d Cir. 1992) (emphasis in original) (citations and internal quotations omitted). In addition, a court must evaluate the reasonableness of the challenged action as of the time the relevant pleading was signed. See, e.g., Savino v. Computer Credit, Inc., 164 F.3d 81, 88 (2d Cir. 1998). Rule 11 sanctions are not normally mandatory and the rule provides that the sanction must be "limited to what is sufficient to deter repetition of such conduct or comparable conduct by others similarly situated." Fed.R.Civ.P. 11(c)(2).
Of particular relevance to the motion here, an attorney's withdrawal from a case does not prevent the imposition of Rule 11 sanctions for papers filed prior to the withdrawal. See, e.g., Cross Cross Props., Ltd. v. Everett Allied Co., 886 F.2d 497, 505 (2d Cir. 1989) (a "late effort to withdraw [does] not resolve the problem if counsel failed to make a reasonable inquiry before the counterclaim was filed") (emphasis in original) (citations omitted); Gold v. The Last Experience. 1999 WL 156005, at *4 (S.D.N.Y. Mar. 22, 1999) ("withdrawal does not absolve [an attorney] of liability for Rule 11 sanctions");
III. DISCUSSION
In its motion, Merrill Lynch argues that Conway should be sanctioned for failing to conduct a reasonable inquiry into a number of the claims in the complaint as well as initiating the lawsuit for an improper purpose. See Merrill Lynch, Pierce, Fenner Smith, Inc.'s Supplemental Memorandum of Law in Support of Motion for Sanctions Pursuant to Rule 1 1(c)(1)(A), filed December 17, 2002 (Docket #37) ("Def. Mem."), at 7-15. Merrill Lynch argues that Conway failed to conduct a reasonable inquiry into whether Danger-field could assert claims under RICO and for securities fraud. See id. at 9-12. Merrill Lynch has not moved for sanctions as to the other claims in the complaint — failure to abide by a subpoena, conversion and aiding and abetting conversion, breach of contract, and breach of fiduciary duty. Accordingly, the Court will not examine whether these claims violated Rule 11. Because it is clear that the inclusion of the RICO claim represents sanctionable conduct under Rule 111(b)(2), the Court will not award sanctions based on Merrill Lynch's remaining arguments. While there is evidence to support an award of sanctions for these arguments, either the evidence is not so strong that an award of sanctions would be appropriate or the evidence relies on disputed issues of fact. Accordingly, the Court exercise its discretion not to impose sanctions on these other bases.
Dangerfield's complaint included a cause of action asserting that Merrill Lynch had violated the RICO statute. See Complaint ¶¶ 65-69. As was discussed in the Report and Recommendation (at p. 10), a plaintiff must plead seven initial elements to state a claim for a violation of RICO: "(1) that the defendant (2) through the commission of two or more acts (3) constituting a 'pattern' (4) of 'racketeering activity' (5) directly or indirectly invests in, or maintains an interest in, or participates in (6) an 'enterprise' (7) the activities of which affect interstate or foreign commerce." Moss v. Morgan Stanley her, 719 F.2d 5, 17 (2d Cir. 1983) (quoting 18 U.S.C. § 1962(a)-(c)), cert. denied, 465 U.S. 1025 (1984). In this case, the complaint alleged that Merrill Lynch had violated three subsections of the RICO statute, 18 U.S.C. § 1962(a), (c), and (d), by committing a series of predicate acts — specifically, the obstruction of justice under 18 U.S.C. § 1503. Complaint ¶¶ 66-67; RICO Statement 5. For the reasons stated below, the RICO claim is frivolous because it failed to allege a viable predicate act or allege a violation of subsections (a), (c), or (d) of section 1962.
A. The Complaint Failed to Allege a Cognizable RICO Predicate Act
The only alleged RICO predicate act in the complaint was obstruction of justice for failing to comply with the Texas subpoenas. See Complaint ¶ 66. A violation of the federal obstruction of justice statute, 18 U.S.C. § 1503, can constitute a predicate act of racketeering activity. See 18 U.S.C. § 1961(1). However, "[t]o constitute an offense under [ 18 U.S.C. § 1503], the act must relate to a proceeding in a federal court of the United States." O'Malley v. New York City Transit Auth., 896 F.2d 704, 707 (2d Cir. 1990) (citing cases).
The alleged obstruction of justice in this case, violating the subpoenas issued by the Texas state court, is not a cognizable violation of section 1503 and cannot form a predicate act for RICO purposes. See id. at 708; Kashelkar v. Rubin Rothman, 97 F. Supp.2d 383, 392 (S.D.N.Y. 2000) ("the federal obstruction of justice statute only applies to proceedings in federal court") (citation omitted), aff'd. 2001 WL 11047 (2d Cir. Jan. 2), cert. denied, 534 U.S. 896 (2001); Capasso v. CIGNA Ins. Co., 765 F. Supp. 839, 843 (S.D.N.Y. 1991) ("The divorce proceeding was a state proceeding and therefore 18 U.S.C. § 1503 would not apply to any obstruction that may have occurred."); Bologna v. Allstate Ins. Co., 138 F. Supp.2d 310, 321 (E.D.N.Y. 2001) ("[N]one of [the] allegations relate to proceedings in a federal court as required by 18 U.S.C. § 1503. . . . Thus, [plaintiffs] allegations are insufficient to establish the predicate act of obstruction of justice.") (citation omitted); accord Fla. Evergreen Foliage v. E.I. DuPont De Nemours Co., 165 F. Supp.2d 1345, 1354 (S.D. Fla. 2001), aff'd sub nom. Green Leaf Nursery v. E.I. DuPont De Nemours Co., — F.3d —, 2003 WL 21949591 (11th Cir. Aug. 15, 2003); In re Am. Honda Motor Co., Inc. Dealerships Relations Litig., 958 F. Supp. 1045, 1055 (D. Md. 1997); Clayton v. Stephens, 6 F. Supp.2d 480, 486 (E.D.N.C. 1996), aff'd, 145 F.3d 1323 (4th Cir. 1998); Streck v. Peters, 855 F. Supp. 1156, 1162 (D. Haw. 1994); Albarran v. Peoples Gas Light Coke Co., 1990 WL 141465, at *4 (N.D. Ill. Sept. 21, 1990). One court has specifically stated that a defendant's "alleged refusal to comply with a deposition subpoena in connection with [a state court lawsuit] . . . does not constitute a violation of 18 U.S.C. § 1503," and cannot constitute a RICO predicate act. Atuahene v. Shermet Indus., Inc., 2000 WL 1277933, at *4 (E.D. Pa. Sept. 7, 2000).
The Second Circuit has addressed a situation similar to the instant case. In O'Malley, the court reversed a district court's refusal to impose Rule 11 sanctions for a frivolous RICO claim. The plaintiff in that case alleged that the defendants had committed four RICO predicate acts under 18 U.S.C. § 1503 by committing perjury before a state administrative law judge and before New York state courts. See 896 F.2d at 707-08. The Second Circuit found the claim to be "preposterous" and "obvious[ly] deficien[t]" and indicated that "from the outset [plaintiffs] obstruction of justice claim had no chance." Id. In an attempt to avoid Rule 11 sanctions, the plaintiff argued that since JRICO should be broadly construed the court should interpret 18 U.S.C. § 1503 to apply to state court proceedings. See id. at 708. In rejecting this "lame" argument, the Second Circuit stated:
Given [the] clear indicia of congressional intent to limit RICO's obstruction of justice to federal court proceedings, [plaintiffs] argument to extend the statute to include state judicial and administrative proceedings is simply unreasonable. We cannot accept it as a good faith argument for the extension of existing law.Id. Thus the case was remanded to the lower court to impose sanctions.See id. at 709-10.
Under O'Malley there is no question that the RICO claim asserted in the complaint here is frivolous and "from the outset . . . had no chance."Id. at 708. Moreover, unlike the attorney in O'Malley, Conway has not even bothered to make an argument that the allegations in the complaint were supported by a "nonfrivolous argument for the extension, modification, or reversal of existing law or the establishment of new law." Fed.R.Civ.P. 1 1(b)(2); see Section III.C below.
B. The Complaint Failed to Allege a Violation of RICO
As just discussed, the complaint failed to allege the existence of a predicate act for RICO purposes and is sanctionable on this basis alone. However, even if the complaint had met this requirement, the RICO claim would still be frivolous because no violation of any of the substantive RICO provisions was alleged.
1. The Complaint Failed to Allege a Violation of 18 U.S.C. S 1962(a)
The allegation that the defendants violated 18 U.S.C. § 1962(a) fails because the complaint does not allege an investment injury. As was discussed in the Report and Recommendation, the Second Circuit has held that a violation of section 1962(a)
consists of investing income derived from a pattern of racketeering activity to acquire an interest in, establish, or operate an enterprise; the violation is not established by mere participation in predicate acts of racketeering. Accordingly, under the plain terms of the statute . . . for a violation of § 1962(a) [to occur], a plaintiff must allege injury "by reason of" defendants' investment of racketeering income in an enterprise.Ouaknine v. MacFarlane, 897 F.2d 75, 82-83 (2d Cir. 1990) (citations omitted); see Report and Recommendation at 10-12.
To allege an investment injury under section 1962(a), a plaintiff must plead two elements: "first, that the defendants used or invested racketeering income to acquire or maintain an interest in the alleged enterprise, and second, that the plaintiff suffered an injury as a result of that investment by the defendants." Alien v. New World Coffee, Inc., 2002 WL 432685, at *2 (S.D.N.Y. Mar. 19, 2002) (internal quotations omitted). "Failure to satisfy this two part test will result in the dismissal of the plaintiffs' claims." Protter v. Nathan's Famous Sys., Inc., 925 F. Supp. 947, 954 (E.D.N.Y. 1996) citing R.C.M. Executive Gallery Corp. v. Rols Capital Co., 901 F. Supp. 630, 642 (S.D.N.Y. 1995)). The complaint fails to allege either part of this test.
First, the complaint contains no allegations that the defendants used or invested any racketeering income in the alleged enterprise. The only allegation of even marginal applicability states that the defendants "received income which was used in operation of an enterprise which affected interstate commerce." Complaint ¶ 67. However, the enterprise is described as "a full service broker/dealer engaged in providing financial services to its investors." RICO Statement ¶ 6(b). Thus, the complaint alleges only that the defendants obtained income for use in Merrill Lynch's business as a financial services company — an entity that was also the alleged RICO enterprise. Case law makes clear that such an allegation is insufficient. See, e.g.,Lightning Lube, Inc. v. Witco Corp., 4 F.3d 1153, 1188 (3d Cir. 1993) ("we have recognized repeatedly that . . . the use and investment of racketeering income [to] keep the defendant alive so that it may continue to injure plaintiff . . . is insufficient to meet the injury requirement of section 1962(a)"); Report and Recommendation at 12.
As an additional defect, the complaint also fails to allege any injury suffered by Dangerfield as a result of any investment. Danger-field's alleged injury — the concealment of funds awarded to her under the divorce decrees — was accomplished through the scheme to obstruct justice in the Texas courts. See Complaint ¶¶ 41-43, 47, 51; RICO Statement ¶ 4. However, these allegations assert only that Dangerfield was injured through the commission of the predicate acts, which is insufficient under section 1962(a). See, e.g., Alien v. New World Coffee, Inc., 2001 WL 293683, at *7 (S.D.N.Y. Mar. 27, 2001) ("there are no factual allegations indicating that plaintiffs' injury was the result of the investment of racketeering income as opposed to the alleged predicate fraudulent acts"); Report and Recommendation at 13-14. Accordingly, the complaint fails to allege facts that would establish a violation of 18 U.S.C. § 1962(a).
It appears that the Fourth Circuit does not require a claim under section 1962(a) to allege injury distinct from the predicate acts. See Busby v. Crown Supply, Inc., 896 F.2d 833, 836-40 (4th Cir. 1990). Were this the only infirmity in the RICO claims, Conway might have been able to make a good faith argument for the adoption of the Fourth Circuit standard. As discussed in this Opinion, however, the RICO claims in this case suffer from numerous other defects and thus are plainly frivolous.
2. The Complaint Failed to Allege a Violation of 18 U.S.C. § 1962(c)
The complaint also asserted that Merrill Lynch violated subsection (c) of the substantive RICO statute. See Complaint ¶ 67. This subsection of the RICO statute makes it unlawful "for any person employed by or associated with any enterprise engaged in, or the activities of which affect, interstate or foreign commerce, to conduct or participate, directly or indirectly, in the conduct of such enterprise's affairs through a pattern of racketeering activity." 18 U.S.C. § 1962(c). To allege a violation of this subsection, "a plaintiff must show '(1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity." De Falco v. Bernas, 244 F.3d 286, 306 (2d Cir.) (quoting Sedima v. Imrex Co., 473 U.S. 479, 496 (1985)),cert. denied, 534 U.S. 891 (2001). "The requirements of section 1962(c) must be established as to each individual defendant." Id. (citing United States v. Persico, 832 F.2d 705, 714 (2d Cir. 1987), cert. denied, 486 U.S. 1022 (1988)).
The alleged enterprise in this case consisted of "Merrill Lynch, its corporate representatives and Mr. Dangerfield," RICO Statement ¶ 6(a), which engaged in a pattern "designed to hide and conceal assets" from Dangerfield. Id. ¶ 7. However, the complaint and the RICO statement are completely devoid of any allegations regarding what role Mr. Dangerfield played in this alleged scheme. Instead the allegations concerning a RICO enterprise focus solely on Merrill Lynch and its actions. See Id. ¶ 6(b) ("[t]he structure, purpose, function and course of conduct of the enterprise is that of a full service broker/dealer engaged in providing financial services to its customers"); id. ¶ 7 ("The usual and daily activities of the enterprise are to provide financial and brokerage services to its customers. The pattern of racketeering activity is designed to hide and conceal assets from the rightful owner of those assets."); id. ¶ 8 ("This particular racketeering activity is not a part of the usual and daily activities of Merrill Lynch."). The Supreme Court has made clear that a RICO defendant must have "some part in directing the enterprise's affairs" to establish a violation of section 1962(c). Reves v. Ernst Young, 507 U.S. 170, 179 (1993) (emphasis in original). No statement in the complaint alleges that Mr. Dangerfield was ever involved in directing the affairs of the enterprise.
Without the participation of Mr. Dangerfield, the only alleged enterprise consists solely of Merrill Lynch and its employees. But in order to establish a violation of section 1962(c), a "RICO 'person' must conduct the affairs of the RICO 'enterprise' through a pattern of racketeering activity." Riverwoods Chappaqua Corp. v. Marine Midland Bank, 30 F.3d 339, 344 (2d Cir. 1994). In other words, 'the person and the enterprise referred to must be distinct" and "a corporate entity may not be both the RICO person and the RICO enterprise under section 1962(c)." Id. (citations omitted). Without any allegations that Mr. Dangerfield directed the alleged enterprise, the only participant in the alleged racketeering activity is Merrill Lynch and its employees. Standing alone, this is insufficient to establish a RICO enterprise and thus fails to allege a violation of section 1962(c).
3. The Complaint Failed to Allege a Violation of 18 U.S.C. § 1962(d)
Finally, the complaint claimed that Merrill Lynch engaged in a conspiracy to violate the RICO statute. See Complaint ¶ 67. This section of the RICO statute is only applicable, however, upon a showing of a violation of the substantive sections of the RICO statute. See 18 U.S.C. § 1962(d) ("It shall be unlawful for any person to conspire to violate any of the provisions of subsection (a), (b), or (c) of this section."); Cofacredit v. Windsor Plumbing Supply Co., 187 F.3d 229, 244 (2d Cir. 1999) ("To establish the existence of a RICO conspiracy, a plaintiff must prove "'the existence of an agreement to violate RICO's substantive provisions."'") (quoting United States v. Sessa, 125 F.3d 68, 71 (2d Cir. 1997), cert. denied, 522 U.S. 1065 (1998) (quoting United States v. Benevento, 836 F.2d 60, 73 (2d Cir. 1987), cert. denied, 486 U.S. 1043 (1988))). As no violation of the substantive provisions has been alleged in this complaint, no violation of section 1962(d) was stated.
C. Conway's Response
Incredibly, Conway makes no effort whatsoever to assert that there was any legal basis for the RICO claim. Instead, Conway's response focuses almost exclusively on his assertion that he was entitled to rely on the factual allegations conveyed to him by Dangerfield and Krosby. See Kevin P. Conway's Response to Merrill Lynch, Pierce, Fenner Smith Inc.'s Supplemental Memorandum of Law in Support of its Motion for Sanctions Pursuant to Rule 1 1(c)(1)(A), filed January 7, 2003 (Docket #41) ("Conway Opp."), at 14-15; Conway Aff. ¶¶ 2-3. Thus Conway does not explain, as required by Rule 11, why the legal claims asserted in the complaint had any "chance of success under the existing precedents" or how there was any "reasonable argument . . . to extend, modify or reverse the law as it stands." Eastway Constr. Corp., 762 F.2d at 254. Conway does not assert that he conducted any legal analysis or research into whether the facts asserted by Dangerfield and Krosby stated a cause of action under RICO.
"Rule 11 makes it . . . clear that an attorney is entitled to rely on the objectively reasonable representations of the client." Hadges v. Yonkers Racing Corp., 48 F.3d 1320, 1329-30 (2d Cir. 1995). However, Rule 11 is explicit and unambiguous in requiring an attorney to examine the legal viability of any assertion in a paper filed with the court. Specifically, the attorney, "after an inquiry reasonable under the circumstances," must determine that the claims "are warranted by existing law or by a nonfrivolous argument for the extension, modification, or reversal of existing law or the establishment of new law." Fed.R.Civ.P. 1 1(b)(2).
If Conway is attempting to assert that he was entitled to rely on Danger-field's and/or Krosby's legal conclusions, such an assertion would not meet the standards of Rule 11. See Hendrix v. Naphtal, 971 F.2d 398, 400 (9th Cir. 1992) (per curiam) ("Blind reliance on a lay client's ability to decide the legal question of domicile does not constitute a reasonable inquiry under Rule 11.") (footnote omitted); see also S. Bravo Sys., Inc. v. Containment Techs. Corp., 96 F.3d 1372, 1375 (Fed. Cir. 1996) ("If . . . [plaintiffs] attorneys conducted no investigation of the factual and legal merits of [plaintiffs] claims other than to rely on [plaintiffs] lay opinion that [defendant] was infringing the . . . patent, it would be difficult to avoid the conclusion that sanctions are appropriate.") (citation omitted); Kennedy v. Fenton, 1990 WL 39885, at *3 (ED. Pa. Apr. 3, 1990) ("Clients have a right to rely on their attorney for sound legal advice. It is the lawyer who must assume responsibility for fashioning and asserting frivolous legal theories and claims based on the client's version of the facts.") (citation omitted); In re Chi. Midwest Donut Inc., 82 B.R. 943, 949 (Bankr. N.D. III. 1988) ("Notwithstanding an attorney's sincere belief in the merits of his client's position, that attorney has a duty to ascertain the facts and review the law to determine whether the facts fit within a recognized entitlement to relief or defense.") (citations omitted).
Conway has cited one case for the proposition that it is inappropriate to impose sanctions for the failure to establish missing elements of a RICO claim. See Conway Opp. at 14 (citing Clifford v. Hughson, 992 F. Supp. 661, 671 (S.D.N.Y. 1998)). In Clifford, however, the court decided not to sanction because it had repeatedly encouraged the party to amend the complaint to supply missing elements of the RICO claim. 992 F. Supp. at 671-72. Here, by contrast, no attorney conducting a reasonable inquiry into the legal viability of Dangerfield's RICO claim could have thought it had any chance to succeed. Moreover, Conway does not elucidate what inquiry he performed or what statutes or case law suggested that the complaint stated a viable claim.
If the only deficiencies involved the substantive RICO claims, as opposed to the predicate acts, Conway would have a much stronger argument. Here, however, the lack of a predicate act for the racketeering activity, see Section III.A above, makes the claim patently frivolous. "[F]ew courts have hesitated very long over the problem relevant to this case: what is or is not a predicate act of racketeering activity. Mere lack of clarity in the general state of some areas of RICO law cannot shield every baseless RICO claim from rule 11 sanctions." O'Malley, 896 F.2d at 709. A simple evaluation of 18 U.S.C. § 1503, and the legion of cases interpreting it, would have made clear to a reasonable attorney that this claim was doomed from the start.
While the Court has discretion not to award sanctions for the deficient RICO claims, such discretion should not be exercised in this case. Most significantly, Conway has not even shown that he could have believed in good faith that the RICO claim was viable. Even now, he makes no attempt to justify the legal basis for the inclusion of the RICO claim.
"Civil RICO is an unusually potent weapon — the litigation equivalent of a thermonuclear device." Miranda v. Ponce Fed. Bank, 948 F.2d 41.44 (1st Cir. 1991). Accordingly, "Rule 11's deterrence value is particularly important in the RICO context, as the commencement of a civil RICO action has 'an almost inevitable stigmatizing effect' on those named as defendants." Katzman v. Victoria's Secret Catalogue, 167 F.R.D. 649, 660 (S.D.N.Y. 1996) (quoting Figueroa Ruiz v. Alegria, 896 F.2d 645, 650 (1st Cir. 1990)), aff'd, 113 F.3d 1229 (2d Cir. 1997). Courts have not hesitated to impose sanctions under Rule 11 when RICO claims have been found to have been frivolous. See, e.g., O'Malley, 896 F.2d at 709; Katzman, 167 F.R.D. at 660; McLoughlin v. Altman, 1995 WL 640770, at *2-*4 (S.D.N.Y. Oct. 31, 1995); Lew v. Aaron Faber. Inc., 148 F.R.D. 114, 123 (S.D.N.Y. 1993). This case is no different. Most egregious here was the attempt to base RICO predicate acts on a statute that has no applicability to state court proceedings. The RICO count thus was patently frivolous and at best "manifest[s] a total lack of legal research and preparation" by Conway.McLoughlin 1995 WL 640770, at *2.
D. The Nature of the Appropriate Sanction
Rule 11 makes clear that sanctions must be "limited to what is sufficient to deter repetition of such conduct or comparable conduct by others similarly situated." Fed.R.Civ.P. 1 1(c)(2). Thus, "the least severe sanction adequate to serve the purpose of the penalty should be imposed." Vollmer v. Publishers Clearing House, 248 F.3d 698, 710-11 (7th Cir. 2001). The Advisory Committee's Notes to the Rule list a number of factors that should govern the choice of sanction, many of which suggest that a lesser sanction is appropriate in this case than what otherwise might have been awarded for the inclusion of a frivolous claim. Among these factors are "whether the conduct was part of a pattern of activity, or an isolated event; whether it infected the entire pleading, or only one particular count or defense; whether the person has engaged in similar conduct in other litigation; [and] what effect it had on the litigation process in time or expense." Fed.R.Civ.P. 11 advisory committee's note, 1993 amend.
Several factual circumstances operate in Conway's favor here. First, the RICO claim was but one of many claims in the complaint. Thus its inclusion did not mean that Merrill Lynch was required to defend a lawsuit that otherwise would not have been brought. Second, an amended complaint that included a similar RICO claim was filed by the pro se plaintiff in this case, thus requiring Merrill Lynch to defend against the RICO claim anyway. Third, Conway has never had a Rule 11 motion submitted against him in the past.See Conway Aff. ¶ 13. Fourth, Conway did not attempt to press the inclusion of the RICO claim through any subsequent defense of the suit. Instead, he moved to withdraw as counsel. Thus, while Conway should not have included the RICO claim in the complaint in the first instance, at least he did not compound his error by seeking to justify its inclusion in any subsequent filing with the Court.
Taken together, these circumstances suggest that a significant sanction is not necessary to achieve the only purpose of a Rule 11 sanction: to deter Conway and others from repeating future sanctionable conduct. See Fed.R.Civ.P. 1 1(c)(2). Accordingly, the Court exercises its discretion not to impose a monetary sanction and instead will impose a non-monetary sanction: specifically, an admonishment.
Conclusion
For the foregoing reasons, Merrill Lynch's motion for an award of sanctions is granted. Conway is adjudged to have violated Rule 11 through his inclusion of the RICO claim. The Court hereby admonishes Conway to carefully research the legal bases underlying claims set forth in any future complaint. In addition, if he is ever again the subject of a Rule 11 motion, he is directed to disclose the existence of this Opinion and Order either to the court hearing the motion or to his adversary.