Opinion
No. 01 Civ. 0216 (RWS)
August 16, 2002
Peter N. Wang, Esq., Friedman, Wang Bleiberg, Thomas J. Kavaler, Esq., Cahill Gordon Reindel, Robert J. Randell, Esq., Amicus Curiae, New York, NY, Daniel J. Popeo, Esq., Richard A. Samp, Esq., Washington Legal Foundation, Amicus Curiae, Washington, DC, for Plaintiff.
Mark C. Zauderer, Esq., Jonathan D. Lupkin, Esq., Solomon, Zauderer, Ellenhorn, Frischer Sharp, New York, NY, Abbe David Lowell, Esq., Pamela J. Marple, Esq., Manatt, Phelps Phillips, Washington, DC, for Baron Budd, Frederick Baron and Russell Budd, Storch Amini Munves, New York, NY, for Ness, Motley, Loadholt, Richardson Poole, Ronald Motley and Joseph Rice, Elkan Abramowitz, Esq., Lawrence S. Bader, Esq., Robert M. Radick, Esq., Morvillo, Abramowitz, Grand, Iason Silberberg, New York, NY, for Weitz Luxenberg, Perry Weitz Robert Gordon.
OPINION
Defendants Weitz Luxenberg, Perry Weitz and Robert Gordon (collectively the "WL Defendants") have moved pursuant to Rule 11 of the Federal Rules of Civil Procedure for sanctions against plaintiff G-I Holdings ("Holdings") as a result of the Thirteenth Claim in Holdings' Third Amended Complaint (the "Complaint"), alleging that the WL Defendants backdated complaints in the New York Supreme Court.
For the following reasons, that motion is denied.
Facts
The parties, prior proceedings and facts have been described in greater detail in G-I Holdings v. Baron Budd, 179 F. Supp.2d 233 (S.D.N.Y. 2001), familiarity with which is presumed.
At issue is Count XIII of the Complaint, which was submitted to the Court on March 16, 2002. Count XIII, which was dismissed in G-I Holdings v. Baron Budd, — F. Supp.2d —, 2002 WL 1585328 (July 17, 2002), asserts common law fraud against the WL Defendants. It alleges that Weitz Luxenberg enlisted the services of a clerk at the Supreme Court of the State of New York to backdate an amended complaint in order to avoid a statute of limitations problem. Holdings also alleges that the instance of backdating was not an isolated incident but part of a pattern of fraud engaged in by the WL Defendants on other occasions with respect to their court-filed documents.
The WL Defendants contend that Holdings (1) failed to investigate the claims adequately; (2) lacked a sufficient legal basis for making the claim; and (3) added the claim for the sole purpose of drumming up media attention.
The following facts are drawn from the moving papers and do not constitute findings of fact.
I. Investigation of the Backdating Allegations
Prior to asserting the allegations in Count XIII of the Complaint, Holdings claims to have devoted more than 850 hours to the investigation of this claim, including 570 hours of investigation by the investigative firm of Kroll Associates ("Kroll") and 280 hours of attorney time.
The Initial Interviews
One focus of Holdings' investigation into the factual matters of this case has been an effort to interview former employees of the defendant law firms in this case, including those of Weitz Luxenberg. In compliance with the procedure this Court established for the conduct of such interviews, on February 4, 2002, George Depountis, a Kroll investigator with more than seven years' experience in the investigative field ("Depountis"), interviewed a former paralegal at Weitz Luxenberg in the presence of Special Master Thomas Fitzpatrick. In an effort to safeguard the confidentiality of its investigations, Holdings refers to this paralegal as "Source 1" and similarly identifies sources by number throughout its memorandum.
During the interview, Source 1 explained that he had been a paralegal in the estates department at Weitz Luxenberg for several months in the year 2000. He described his duties as a paralegal, the structure of the department and the people to whom he reported. According to Source 1, the Weitz Luxenberg estates department prosecutes asbestos liability actions on behalf of deceased claimants.
A different paralegal, Source 6, later stated that when a claimant in an active asbestos action passes away, that individual's active case would apparently pass to the estates department, which is responsible for, among other things, amending the complaint to add a wrongful death claim. At the time of such an amendment, in addition to making the substitution for a deceased claimant, Weitz Luxenberg would also take the opportunity to ensure that all of the defendants in the action were correct and, sometimes, would add additional defendants to the action.
Source 1 also described two specific categories of what he referred to as "ethical issues" that arose during his tenure at Weitz Luxenberg, one of which was the backdating at issue here. According to Source 1, Weitz Luxenberg was pushing so many cases through the firm so quickly that, occasionally, some filings would fall through the cracks and not be timely filed. When that happened, he would be told to take the late filing to a clerk in the New York State Supreme Court building and, "as a favor," the clerk would set the date on the judge's stamp back to an earlier date and stamp the documents with the false, earlier date. On some occasions, the clerk would make an entry into a log book and place the falsely stamped document into the court files to make it appear as if it had been there since the falsely stamped date. Source 1 stated that the clerk who performed the backdating "favor" for Weitz Luxenberg was the mother of a Weitz Luxenberg paralegal.
The second issue involved purported irregularities in the firm's requests for reimbursement of disbursements. Source 1 essentially stated that disbursements would be randomly charged to various cases, irrespective of whether the expense was actually incurred in connection with that case or a different case. Further, he claimed that Weitz Luxenberg would falsely identify meal charges, which were not reimbursable, as other charges, such as Federal Express charges, which were reimbursable. Two other sources confirmed these allegations, at least in part. The WL Defendants have submitted an affidavit from Laura Perez, Assistant Controller at Weitz Luxenberg, denying the allegations.
In any case, counsel for Holdings eventually concluded that the false disbursement charges, while unethical, likely caused injury to Weitz Luxenberg's clients, but not to GAF. Therefore, they did not raise these allegations in the Complaint and only did so here as a means of showing the deliberative process that they undertook in making allegations based on Source 1's statements. Therefore, the disbursement allegations will not be addressed here.
Shortly after conducting this interview, Depountis reported what he had learned to Thomas J. Kavaler ("Kavaler") of Cahill Gordon Reindel ("Cahill"), counsel to Holdings, who in turn discussed it with his co-counsel Peter N. Wang ("Wang") of Friedman, Wang Bleiberg, and with Richard Weinberg, President and General Counsel of Holdings. Holdings claims that it and its counsel carefully considered the issues raised by Source 1 in an effort to determine how best to proceed. They concluded that more information was required on the backdating before it could be determined whether this information could form the basis of a claim against the WL Defendants. To this end, Kavaler instructed Kroll that Source 1 should be interviewed again, this time in the presence of Elaine Wood, a managing director of Kroll and a former federal prosecutor ("Wood").
On February 4, 2002, Kavaler spoke to Special Master Fitzpatrick, a former federal prosecutor and lawyer with more than thirty-five years' experience, to ask if he had found Source 1's claims about "backdating" to be credible; Fitzpatrick stated that he did and pointed to certain indicia of truthfulness that impressed him. During that conversation, he also told Kavaler that it was not possible to tell from Source 1's account what kind of documents he was talking about. Special Master Fitzpatrick has since stated that he did not intend to suggest that Kavaler could rely on Source 1's statements absent any further evidence of wrongdoing and further noted that although he believed Source 1 was telling the truth, there have been instances in his career as a litigator where persons that he believed to be telling the truth turned out to have been mistaken or to have lied.
On February 6, 2002, Source 1 was interviewed a second time. Wood and Depountis were both present, and Special Master Fitzpatrick participated by conference call. Source 1 stated that the Weitz Luxenberg paralegal whose mother backdated the documents was named Alisha ("Ostacher"). He said she was the "right-hand woman" of the head of asbestos litigation in Weitz Luxenberg's estates group, Marie Occhigrossi. He said that one judge handled most of the Weitz Luxenberg caseload in the New York Supreme Court and identified that judge as the Honorable Helen Freedman. Source 1 stated that he was asked to take documents to "Alisha's mother" (later identified as Elba Aguilar) for backdating on approximately five or six times in the four or five months that he worked at Weitz Luxenberg and that it was his understanding that he did so because the statute of limitations had run on the filings.
Ostacher was misidentified in the Complaint as "Alicia Ostracher."
Occhigrossi's surname was misspelled in the complaint, as "Ochigrassi."
Source 1 described the procedure by which the documents were backdated. When it was necessary to have "Alisha's mother" stamp a document, he would be called into Occhigrossi's office along with Ostacher. Ostacher would then call her mother and make arrangements for Source 1 to meet with her with the documents. On these occasions, Occhigrossi would hand Source 1 the documents for backdating. Source 1 would then take these documents to Ostacher's mother, and she would backdate them with the judge's stamp.
On one occasion, Source 1 said, in addition to backdating the documents and returning them to him, Ostacher's mother also made a notation in the record book and had him sign out a record as well. Source 1 stated that the log book was kept in close reach of the clerk and resembled a "notebook." They then photocopied the document and placed it in the file to make it look as if it had been there the entire time.
Source 1 said he formed the impression that Ostacher's mother had performed similar actions with other paralegals at the firm because, when Occhigrossi sent him out to meet Ostacher's mother for the first time, she told him, "She'll know what to do." Source 1 was not certain what kinds of documents were backdated, but he recalled that they were blue-backed documents, perhaps orders of some kind. He also could not recall the names of any defendants on the backdated documents, but he did remember seeing the name of GAF regularly on Weitz Luxenberg complaints.
Shortly after the second interview with Source 1, Wood and Depountis reported what they had learned to Kavaler, who discussed Source 1's claims with both Wang and his colleagues at Cahill. Holdings claims that the specificity of the facts cited by Source 1 and the fact that the information he reported was against his own interest led counsel to conclude that they should investigate Source 1's claims to determine to what extent his claims could be corroborated by other court records, GAF's files or other witnesses. It was decided that Cahill attorneys would conduct the review of court records, files and procedures and, with the help of GAF's asbestos litigation counsel, review relevant GAF files. Kroll was assigned the tasks of conducting additional witness interviews and investigating Source 1's specific claims about the court clerk, her family and their relationship with Weitz Luxenberg.
Cahill's Factual Investigation
After consulting with GAF's counsel in asbestos personal injury actions in New York County and obtaining a spread sheet of relevant cases, two Cahill attorneys, Maura McLoughlin ("McLoughlin") and David Owen ("Owen"), began searching records in the New York State Supreme Court records room the next day in an attempt to determine whether the backdated documents could be identified by viewing the face off the documents.
McLoughlin is the Managing Attorney at Cahill and is responsible, on a daily basis, for maintaining the firm's litigation docket, supervising filings with the various courts before which the firm appears on behalf of its clients and advising Cahill litigators on state and federal procedural issues. She has more than ten years' experience working in the New York State court system.
Owen, an associate at Cahill, has been working on the matter for more than one year, having returned to the firm at the conclusion of his clerkship with the Honorable William Bassler of the United States District Court for the District of New Jersey.
McLaughlin and Owen reviewed files at the New York County clerk's office in numerous cases brought by Weitz Luxenberg during the relevant time period. Between them, they examined minute books for cases filed by Weitz Luxenberg prior to 1993; they questioned staff at the clerk's office to understand the procedures used in asbestos cases generally; and they inquired specifically about the procedures for filing new litigation. They learned that it would be impossible to backdate an initial complaint, given the computerized index numbering system employed at the clerk's office. But they also discovered that Weitz Luxenberg routinely filed amended complaints in their cases. The amended complaints substituted plaintiffs, added defendants or claims against previously named defendants, and included new claims for wrongful death.
Cahill attorneys also consulted GAF's former asbestos liability defense attorneys, who confirmed that GAF was served with amended complaints throughout the year 2000 and also confirmed that GAF was a defendant in all or substantially all of the asbestos liability actions brought by Weitz Luxenberg in New York County.
Kroll' s Continuing Investigative Efforts
Kroll investigators learned that Elba Aguilar ("Aguilar") was a clerk for Justice Freedman at the time and that Aguilar has three daughters who are, or were, paralegals at Weitz Luxenberg: Alisha Ostacher, Vanessa Ostacher and Mary Jo Sci.
Kroll also learned that Aguilar's ex-husband, Joseph Sci, with whom she has reconciled, was represented in a matrimonial dispute with his prior ex-wife, Deborah Sci — in which his interests appeared to be aligned with Aguilar's — by William Nugent, a Weitz Luxenberg attorney who reported directly to Occhigrossi. Kroll also learned that Weitz Luxenberg provided that representation free of charge. Kroll discovered as well that during the course of that litigation, Weitz Luxenberg was sanctioned by the court for understating to Sci's employer, the New York City Police Department, the amount of Sci's income that was to be paid pursuant to a court order. The false order was reported to have been signed by Occhigrossi.
Sci, an evidence specialist for property at the New York City Police Department's car lot on College Point Boulevard, was described as a "high roller" in Atlantic City.
Kroll also learned that Aguilar owns one home in Richmond Hill, New York and, with one of her daughters, two homes in Savannah, Georgia.
The investigation also revealed two additional incidents where Aguilar purportedly used her position as a court clerk to benefit a family member. According to another source identified by Kroll, when Aguilar and Sci started a process service business, Aguilar would allow Sci access to the file room at 60 Centre Street to obtain information to aid him in that business. Also, according to a verified answer in an action between Aguilar and Deborah Sci, Deborah Sci's attorney stated that Aguilar tampered with a court file, claiming that the documents in that file had "mysteriously disappeared."
Kavaler and Wang determined that Source 1 should be interviewed again after learning the results of Kroll's further investigations. This time, Owen would attend in light of his knowledge of the nature of the files in and procedures for handling asbestos personal injury cases in New York County.
The Third Interview of Source 1
On February 23, 2002, Owen and Depountis interviewed Source 1 at the Hyatt Regency Hotel in Houston, Texas. Special Master Fitzpatrick attended as well. Owen was instructed to question Source 1 fully on the backdating of documents without making suggestive comments or in any way leading Source 1 to give any particular response. Cahill partner Edward P. Krugman was available to the interviewers by telephone in order to provide any guidance necessary. At this interview, Source 1 gave an even more detailed account of the document backdating.
Source 1 confirmed that the paralegal "Alisha" to whom he had referred earlier was Alisha Ostacher, whom Kroll had learned was the daughter of Justice Freedman's clerk, Aguilar. He also confirmed that Ostacher's mother's name was Elba Aguilar, and that it was Aguilar who participated in the backdating scheme. Source 1 repeated many of the details previously provided to Kroll. He also stated that, on different occasions, he would meet Aguilar at different spots at the courthouse. He described her demeanor on all of these occasions as "sneaky," as if she knew that what she was doing was "not right." He knew that Aguilar was backdating documents for Weitz Luxenberg because, on one of his early visits to Aguilar, he opened the envelope after leaving the courthouse and noticed that the documents were stamped with dates earlier than the date on which they had been taken to the courthouse. He knew that those earlier-dated stamps had been affixed that day by Aguilar because the documents had been freshly printed at Weitz Luxenberg that day and bore no stamps when they were brought to the courthouse.
Source 1 recalled her first name because of its similarity to the surname of actor Jessica Alba.
On the first backdating occasion, Source 1 handed Aguilar an envelope with several thin blue-backed documents in it. She took him upstairs, where he waited for her on a bench. She returned with the envelope, which he brought back to Weitz Luxenberg. On another occasion, Source 1 met Aguilar at the courthouse, and she had him follow her behind a column. That day, she affixed the backdated stamps right in front of him, behind the column, continually looking back to ensure she was not observed. She affixed two stamps to the documents, a date stamp and a signature stamp.
On one occasion, in or around May 2000, Source 1 again met Aguilar at the courthouse with a document to be backdated. This document was unlike the other documents, most of which were very thin and most of which, Source 1 believed, were most likely orders of some kind. The document he brought this day was almost an inch thick and its caption went on for pages listing all the defendants in the case. The other documents that he had taken to be backdated did not have full captions such as this one. After describing the document and volunteering that it was an "amended something," Source 1 was shown a typical Weitz Luxenberg amended complaint by Owen. Source 1 confirmed that it was exactly the type of document he had taken to be backdated in May 2000. When asked if he was sure, he stated that he was "positive."
According to Source 1, the May 2000 backdating incident was also different because Aguilar did not simply stamp the document and return it to him. Instead, she sent Source 1 to the records room to retrieve a file and to copy the document, which he did. When Aguilar arrived minutes later, she showed her badge to the clerk behind the desk, indicated that Source 1 could take the file with him and requested a log book, which was handed to her. Aguilar took the book and Source 1 took the file to an area near the copy machine in the records room. There Aguilar placed three separate stamps on the document — a hand stamp, a time stamp, and a signature stamp — and inserted the newly-backdated document into the file. Source 1 pointed to the "filed" stamp on the amended complaint he was shown at the interview and stated that that stamp was one of the stamps that Aguilar affixed to the amended document on this occasion. While Source 1 could not recall the name of any of the defendants listed in the document's caption, he stated that the defendants in most of the cases were usually the same, and he identified GAF, Ingersoll Rand and others as examples of habitual defendants in Weitz Luxenberg asbestos actions.
Kroll's Interviews of Aguilar
Kroll interviewed Aguilar on two occasions. Both occasions were when Aguilar was at work and apparently uncooperative as a result.
On the first occasion, Aguilar flatly denied knowing anyone at Weitz Luxenberg other than Mr. Weitz and Mr. Gordon, notwithstanding that one of her daughters was working at the firm and that her two other daughters had been employed there. She also declined to reveal that she knew Nugent or that he was representing her reconciled ex-husband free of charge. She also claimed never to have been asked to backdate anything.
It was determined that the Kroll investigators should seek to interview Aguilar the next day to ask her about known facts. When asked if it was true that her three daughters had worked for Weitz Luxenberg, she responded that her daughters' work was their own business. When asked about the free legal services provided for her ex-husband, with whom she lived, she responded that she did not really know Nugent and that Weitz Luxenberg did a lot of pro bono work. When told that Kroll had an eyewitness to the backdating of documents, Aguilar walked away.
Holdings' Counsel's Evaluation of the Facts
After receiving, reviewing and considering the above information, Holdings' counsel concluded that Source 1 was a credible witness. Holdings concedes that some details conveyed by Source 1 were not fully understood, but they believed his account of the events to be too detailed to be fabricated and some of his statements had been corroborated by other witnesses. None of his statements were contradicted. Further, Holdings' counsel noted that Aguilar had lied to the Kroll investigators in the first interview. They also considered Weitz Luxenberg's representation of Sci free of charge; the employment of Aguilar's daughters at Weitz Luxenberg; and what they deemed to be a Aguilar's history of questionable integrity. As a result, they concluded that Aguilar had an incentive to do a "favor" for Weitz Luxenberg, and that Source 1 had told the truth with regard to the backdating allegations.
The WL Defendants' Contentions
The WL Defendants performed an investigation of their own and, as a result, contest some of Holdings' assertions in the Complaint.
First, according to the Complaint, Aguilar had to show the filing clerk her badge so that a file could be removed from the clerk's view. Compl. ¶ 104. However, James A. Rossetti, the Chief Deputy County Clerk for New York County ("Rossetti") stated that one need not present a badge to remove a Court file from the clerk's view. Employees of the Clerk's Office do not oversee or monitor an individual's review of the Court files.
Holdings now claims that Aguilar showed her badge in order to access the "log book." The Complaint, however, states that Aguilar showed the badge "so that the file could be removed from the clerk's view." Compl. ¶ 104.
Second, according to the Complaint, Aguilar obtained a "log book" in which she made a manual, false entry. Compl. ¶ 104. The WL Defendants claim that, according to their investigation, the "log book" is in fact referred to as a "minute book," and that such books are maintained in a public area of the Clerk's office and are readily accessible to anyone who want to view them. Further, these "minute books" are used only for cases commenced prior to 1993, according to a public document available on the Internet, the Litigator's Guide to Supreme Court, Civil Branch, New York County. For cases commenced on January 1, 1993 and thereafter, entries are made in a computer database in the County Clerk's Office. As a result, the WL Defendants conclude that the purported false entry must have been made in the minute book relating to a case commenced prior to January 1, 1993.
See http://www6.law.com/ny/links/civindex.html. The Guide states:
The County Clerk maintains a list of entries made in the official record ("minutes") of each case. Prior to 1993, the County Clerk used only minute books in which each new entry in a case was made by hand. If an order or an affidavit of service were filed, each would be recorded in a listing for the case in a minute book. Beginning in 1993 with new cases, the Country Clerk began to automate his records; each is now recorded in an electronic database.
According to the Complaint, the amended complaint that was backdated in May 2000 "is one that GAF incurred expenses in defending, including settlement costs" between May 2000 and January 2001. Compl. ¶ 316. The WL Defendants claim that GAF could not have been a defendant in the purportedly backdated complaint because it must have been commenced prior to January 1, 1993, and all pre-1993 cases in which Weitz Luxenberg had named GAF as a defendant were resolved by a November 1993 settlement agreement with the Center for Claims Resolution ("CCR"). The WL Defendants further claim that Holdings was or reasonably should have been aware of this agreement entered into by its agent on its behalf. The only other scenario in which a minute book would have been used is if GAF was not named a defendant in a pre-1993 case, and therefore it was not settled by the 1993 Agreement, but GAF was later added as a defendant. The WL Defendants state that Weitz Luxenberg did not add GAF as a defendant in any pre-1993 case that was still pending as of May 2000.
Twenty-one companies racing asbestos-related claims formed the CCR on September 28, 1988, for the express purpose of administering and arranging for the evaluation, settlement, payment or defense of asbestos-related claims on behalf of its members companies. GAF was a member company. In fulfilling this mandate, CCR reached an agreement in principle with Weitz Luxenberg on November 9, 1993. This agreement settled every then-pending asbestos-related action that Weitz Luxenberg had commenced against CCR members. The agreement was confirmed in writing on April 15, 1994, thereby conclusively resolving any and all pending cases that Weitz Luxenberg had commenced against GAF prior to January 1, 1993.
Further Investigations By Holdings
Since the time the Third Amended Complaint was filed on March 18, 2002, Kroll has uncovered additional facts, including:
• Shortly after the filing of the motion for leave to amend, the litigation between Joseph Sci and Deborah Sci was settled. At the request of Weitz Luxenberg attorney Nugent, the terms of the settlement were made confidential.
• Source 4, a former paralegal in the Weitz Luxenberg estates department, confirmed that Aguilar would often assist in expediting court filings with the New York County Supreme Court at the request of her daughter.
• Source 5, another former Weitz Luxenberg paralegal, reported that Ostacher was paid $65,000 per year, while the rest of the paralegals were paid $25,000 per year. Source 5 noted that other paralegals always suspected that the firm benefitted from Ostacher's mother's being the clerk to Justice Freedman, but they were not sure how.
Cahill has also continued its factual investigation. In response to the WL Defendants' service of the Rule 11 motion, Cahill attorneys examined the books and records at the Clerk's Office at 60 Centre Street. As a result, they challenge the WL Defendant's "impossibility" argument, which was described above.
1. Log Books
First, Holdings contends that the "log books" referred to by Source 1 are not the "minute books" described by the WL Defendants. Source 1 described the "log book" as an "ordinary notebook." He said it was located behind the counter and that Aguilar had to show an official badge to obtain it.
As noted supra, the Complaint alleges that Aguilar showed her badge so that Source 1 could remove the case file from the clerk's view, rather than so that Aguilar could obtain the "log book."
McLoughlin, Cahill's Managing Attorney, observed that minute books were approximately 18 inches high and 12 inches wide and, in her estimation, would not comport with a description of an ordinary "notebook." She also observed that the minute books are maintained on the shelves along the perimeter of the walls of the New York State Supreme Court record room and County Clerk's Office and that they are readily accessible to the public and may be reviewed by the public without any formal or informal request to a clerk.
McLoughlin also observed that a set of books are located behind the counter in the Law and Equity section of the Clerk's office and are inaccessible to the public. They were later identified to McLoughlin as "Order Books" or "Part Books."
An investigator for the WL Defendants discovered that there is another unrelated type of "Part Book." This term refers to books maintained solely by each individual part of Supreme Court, New York County. These Part Books consist of a daily record of the events that take place in a given courtroom or part on a given day, and the entries are made by court employees affiliated with each part. The New York County Clerk's Office does not maintain these Part Books, nor does it have any involvement with them.
McLoughlin asked Steve Kubinec, a Supervisor in the County Clerk's Office ("Kubinec"), to explain a "Part Book" to her. Kubinec stated that Part Books are kept in the Law and Equity section of the Clerk's Office. In them, part clerks log the activity of the Part and record the Orders issued by the Part. Kubinec further stated that the completeness of the book would depend on "the level of conscientiousness of the Part Clerk." Kubinec also confirmed that the "Part Books" are not affected by the Court's 1993 conversion to the computer and are still in use today. The Part Books are maintained on a counter behind the glass divider separating the public from the materials used by the clerks in the Law and Equity area, and are transported to and from the area by court employees.
Upon receipt of Holdings' motion in opposition to the Rule 11 motion, the WL Defendants also investigated the existence of "Part Books." The following arises from their investigation.
Part Books are also called "Order Books," "Receipt Books," or "Transmittal Books." These books are used to record the receipt by the County Clerk's Office of documents generated by or filed with individual parts. Each part maintains its own Part Book, and the front cover bears the name or number of the appropriate part. A Part Book is not maintained for any fixed period of time, but is used only until it is filled, at which point the part starts a new Part Book.
When a part generates or receives a document that is to be brought to the County Clerk's Office for filing, a court employee affiliated with that part is to enter into the Part Book the index number of the case to which the document relates, the name of the case, the number of the Part where the document was received or generated, the date the document was received or generated, and a general description of the document. A court employee then brings the Part Book to the County Clerk's Office, along with the documents to be filed.
After a court employee brings to the County Clerk's Office the Part Book and the documents to be filed, employees of the County Clerk's Office review the Part Book and the documents to be filed, and write their initials next to the corresponding entry in the Part Book in order to indicate that the County Clerk's Office has received the relevant documents. The documents received are then stamped with a New York County Clerk's Office "Filed Stamp," and are placed in entry bins for entry by employees of the County Clerk's Office into either the minute books (for documents filed in cases initiated prior to January 1, 1993) or the electronic database located on computers in the County Clerk's Office (for documents filed in cases initiated after January 1, 1993). If an employee of the County Clerk's Office did not enter a document received from a part into the minute book or the electronic database, the records of the County Clerk's Office would not be complete. Documents not entered into the New York County Clerk's minute books are not considered filed documents.
After the filing of documents received from the individual parts is recorded in the County Clerk's minute books or the County Clerk's electronic database, the documents are placed into the file jacket for the case to which they relate.
In any action pending in Supreme Court, New York County, amended complaints are to be filed in the New York County Clerk's Office, rather than with the individual parts. When an amended complaint is filed in the County Clerk's Office, employees of the County Clerk's Office affix a "Filed Stamp" to that amended complaint. They do not affix a time stamp or a signature stamp to an amended complaint.
2. Pre-1993 Cases
Holdings also argues that not all pre-1993 cases filed by Weitz Luxenberg against Holdings have been settled by the CCR.
Miguel Villarreal, an associate at Cahill, conducted an investigation into this issue. He obtained a copy of the 1993 Settlement Agreement and reviewed its terms. He then communicated with GAF's asbestos liability counsel and obtained records from them in an effort to determine whether any pre-1993 cases brought by Weitz Luxenberg against GAF remain on the books. Based on his review of those records, Villarreal was unable to determine whether any pre-1993 cases were pending against GAF because of the large volume of documents involved and the nature of the alleged fraud.
Marc Kurzman, GAF's outside counsel with respect to asbestos liability actions; and Richard O'Leary, a McCarter English lawyer who had previously served as asbestos liability counsel to GAF; and Villarreal then visited a document storage facility used by McCarter English in Newark, New Jersey. They reviewed documents and records in an attempt to determine the truth of the assertions that no pre-1993 cases were pending. Because of the high volume of documents to be reviewed and the nature of the alleged fraud, this search did not result in the disclosure of information that either confirmed or contradicted the allegations of the Third Amended Complaint.
Next, McLaughlin, Cahill's Managing Attorney, performed research using a spreadsheet of pre-1993 cases initiated by Weitz Luxenberg in which GAF was a defendant. McLoughlin spent approximately two hours examining the 1992 minute books. The volume of cases made it impossible to check every index number but her random examination over the course of two hours produced twelve cases filed by Weitz Luxenberg before 1993 in which GAF was a defendant in which a Stipulation of Discontinuance, Notice of Discontinuance, or Order of Settlement, Comp(ensation) and Dis(tribution) had been recorded in May of 2002. In two of the cases, there was more than one filing in May 2002. McLoughlin proceeded to copy the names of the cases, the index numbers, the minute entries and the dates thereof.
Holdings does not contend that these stipulations or orders involved GAF. The WL Defendants performed an internal search and also assert that they did not involve GAF.
She then directed her clerk, Brian Simpson ("Simpson"), to go the Court's Archive Section located at 31 Chambers Street, where cases filed before 1993 are housed, and examine the files for the cases she had listed. His examination revealed that there currently exist pre-1993 Weitz Luxenberg cases filed against GAF in the Supreme Court that are still open and in which there is no indication in the file that the action was discontinued or settled as against GAP.
The WL Defendants allege that the lack of such a stipulation or order does not mean that the cases were not settled as against GAP. They claim that the CCR, upon settling a case, did not generally request that a stipulation of discontinuance be filed, but instead sought only a release.
II. The Legal Basis for the Claim
In determining that Holdings had a legal basis to assert a claim against Weitz Luxenberg for common law fraud, Holdings' counsel relied heavily on GAF's former asbestos liability counsel's assurance that GAF was a named defendant in all or substantially all of the asbestos cases filed by Weitz Luxenberg. Holdings asserts that its counsel also knew that, by definition, GAF would suffer injury by the service of a fraudulently backdated amended complaint regardless of whether the backdated complaint was amended in any respect relating to GAF due to transaction costs associated with responding thereto.
Krugman, a Cahill partner with more than twenty-three years' experience as an attorney, was responsible for the initial draft of the Third Amended Complaint. Cahill partner Susan Buckley, a litigator for more than twenty-four years, then revised the draft. The claim was reviewed and amended many times by Krugman, Buckley, Kavaler, Wang, and Cahill senior partner Floyd Abrams. Prior to the filing of the motion for leave to amend, each of these attorneys reached an independent conclusion that the allegations stated a claim for common law fraud.
On March 18, 2002, six weeks after the first interview with Source 1, Holdings filed its motion for leave to file the Third Amended Complaint asserting its new claim for common law fraud against the WL Defendants. Shortly before the motion was filed, Kavaler spoke with Cahill partner P. Kevin Castel, Cahill's expert on matters of professional responsibility, as to whether, in light of Kavaler's good faith belief in the facts pleaded, he had an obligation to report the matter to the appropriate authorities. Castel advised him that he did. Within twenty-four hours of the filing, Kavaler forwarded a copy of the papers to the Disciplinary Committee of the Appellate Division, First Department, and instructed Kroll to present the same to the Office of the Manhattan District Attorney.
III. Media Attention Surrounding the Third Amended Complaint
The media has followed the case closely since the time of its commencement. E.g., Colleen DeBaise, "G-I Holdings Sues Asbestos Lawyers Over Bankruptcy Filing," Dow Jones News Service (Jan. 10, 2001); "G-I Sues Three Law Firms Over Piling of Asbestos Claims," New York Times (Jan. 12, 2001); "G-I Sues Law Firms Known for Pioneering Asbestos Litigation," Wall Street Journal (Jan. 12, 2001); "G-I Holdings Sues Personal Injury Lawyers," Los Angeles Times (Jan. 12, 2001); Mark Hamblett, "Asbestos Attorneys Face Civil Suit," New York Law Journal (Jan. 12, 2001).
On March 19, 2002, the day after Holdings filed its proposed Third Amended Complaint that included the backdating allegations, Weitz Luxenberg was contacted by Chrisopher Mumma, a reporter with Bloomberg News, and Mark Hamblett, a reporter with the New York Law Journal. Both requested a comment on allegations against Weitz Luxenberg that Holdings had set forth in the proposed Third Amended Complaint and both later wrote articles about them. Christopher Mumma, "G-I Holdings Says Firm Backdated Asbestos Lawsuits," Bloomberg News (March 19, 2002); Mark Hamblett, "Weitz Luxenberg Accused of Falsifying Documents," New York Law Journal (March 20, 2002).
On April 3, 2002, Weitz Luxenberg was contacted by Holman W. Jenkins, Jr., a reporter with the Wall Street Journal. Jenkins also asked about the allegations set forth in the proposed Third Amended Complaint and later wrote an article about them. Holman W. Jenkins, Jr., "Tort Wars Get Personal — Part Deux," Wall Street Journal (April 10, 2002).
IV. Conclusions of Holdings' Experts
In response to the filing of this motion, Cahill also retained two experts in Rule 11 litigation, Gregory P. Joseph ("Joseph") and Professor Georgene Vairo ("Vairo"), to review counsel's investigation and to offer their opinions as to its adequacy. The admissibility of these reports is disputed.
Joseph, the former Chairman of the litigation department at Fried, Frank, Harris, Shriver Jacobson in New York and former Chairman of the 60,000-member Section of Litigation of the American Bar Association, is the author of Sanctions: The Federal Law of Litigation Abuse (3d ed. 2000) and was the principal drafter of the American Bar Association Section of Litigation's Standards and Guidelines for Practice Under Rule 11 of the Federal Rules of Civil Procedure, 121 F.R.D. 101 (1988). He is a former chairman of the Committee on Professional Responsibility of the Association of the Bar of the City of New York and was a member of the Advisory Committee on the Federal Rules of Evidence of the United States Judicial Conference from 1993 to 1999. He is a member of the American Law Institute, serves on the Advisory Board of the Stein Center on Law Ethics at Fordham University School of Law and is a Fellow of the American College of Trial Lawyers.
Since 1995 Vairo has been a professor of law and William Rains Fellow at Loyola of Los Angeles School of Law. She has studied developments under Rule 11 since its passage in 1983 and is the author of the 1200-page treatise, Rule 11 Sanctions: Case Law Perspectives and Preventive Measures (2d ed. 1992 Supps.). Vairo has written numerous articles about Rule 11, including Rule 11 and the Profession, 67 Fordham L. Rev. 58 (1998). She was an invited speaker at the Advisory Committee on the Civil Rules Hearings on Rule 11 in February 1992.
Joseph and Vario have each been provided with the papers filed by the WL Defendants in support of their motion for Rule 11 sanctions and have reviewed the affidavit of Kavaler and the attachments thereto. Both conclude that Rule 11 has not been violated.
Discussion
I. Expert Reports
Holdings has submitted as part of its opposition papers the reports of two Rule 11 experts who conclude that Holdings has not violated Rule 11. As an initial matter, the WL Defendants argue that these reports impermissibly state legal conclusions based on the facts and usurp the role of the court. Media Sport Arts s.r.l. V. Kinney Shoe Corp., No. 95 Civ. 3901, 1999 WL 946354, at *1 (S.D.N.Y. Oct. 19, 1999) (citing United States v. Bilzerian, 926 F.2d 1285, 1294 (2d Cir. 1991)). They further suggest that expert reports should be rejected in most Rule 11 cases. E.g. Brandt v. Schal Assocs. Inc., 121 F.R.D. 368, 389-90 (N.D.Ill. 1988) (refusing to consider expert affidavits submitted on Rule 11 motion because compliance with Rule 11 is question for the court and opinion of an attorney carries no evidentiary weight). But see Ware v. United States, 154 F.R.D. 291, 292 (M.D.Fla. 1994) (referring to expert report by Rule 11 expert, Vairo, but rejecting its conclusions).
The entirety of Joseph's report, and Paragraphs 11 to 13 of Vairo's report, will be stricken as they contain impermissible legal conclusions. The stricken portions may be considered, at most, as the equivalent of a supplemental brief. Brandt, 121 F.R.D. at 390.
II. Rule 11
The WL Defendants claim that Holdings has violated the rule by (1) failing to conduct a reasonable investigation into the facts; (2) neglecting to find legal support for its claims; and (3) making the allegations for the improper purpose of garnering media attention.
Fed.R.Civ.P. 11 confers on a district court the authority to exercise its discretion in sanctioning a litigant or its counsel. Cooter Gell v. Hartmarx Corp., 496 U.S. 384, 400 (1991). In pertinent part, Rule 11(b) provides:
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 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;
(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.
"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. International Brotherhood of Teamsters, Chauffeurs, Warehousemen, and Helpers of America, AFL-CIO, 948 F.2d 1338, 1344 (2d Cir. 1991); see also Margo v. Weiss, 213 F.3d 55, 65 (2d Cir. 2000) (standard of objective reasonableness); Eastway Constr. Corp. v. City of New York, 762 F.2d 243, 254 (2d Cir. 1985) ("A showing of subjective bad faith is no longer required to trigger the sanctions imposed by the rule."). The conduct of the signer is judged at the time of the signing. Greenberg v. Hilton Int'l Co., 870 F.2d 926 (2d Cir. 1989). Sanctions must be imposed carefully, lest they chill the creativity essential to the evolution of the law. Murphy v. Cuomo, 913 F. Supp. 671, 682 (N.D.N.Y. 1996); see also Knipe v. Skinner, 19 F.3d 72, 78 (2d Cir. 1994).
A. Rule 11(b)(3): Evidentiary Support Existed and the Investigation Was Sufficient
The WL Defendants claim that Holdings has failed to satisfy Rule 11(b)(3) because Holdings could not reasonably rely on allegations supported only by a single witness and because a reasonable investigation would have uncovered the fact that the backdating could not have occurred as Holdings averred.
1. Reliance on Interview with Paralegal
The WL Defendants assert that Holdings cannot make allegations based on a single non-party witness without further corroboration and that Holdings failed to so corroborate Source 1's story. Holdings asserts, however, that a single witness's statement is sufficient.
Pursuant to Rule 11(b)(3), an attorney who signs a pleading or other paper submitted to the Court certifies that the factual allegations contained therein either have or are likely to have "evidentiary support." This standard "requires, at a minimum, that there is reason to believe that, when all the facts are known, the Court will find that they support the relief requested." Four Star Fin. Servs., L.L.C. v. Commonwealth Mgmt. Assocs., 166 F. Supp.2d 805, 809 (S.D.N.Y. 2001).
Neither party has cited Rule 11 case law to support its argument as to whether the statement of one witness constitutes sufficient "evidentiary support."
Holdings referred to the blackletter rule of criminal law that a criminal conviction can be sustained on the basis of the uncorroborated identification testimony of a single witness. E.g. United States v. Danzey, 594 F.2d 905, 916 (2d Cir. 1979) ("the testimony of a single, uncorroborated witness is generally sufficient to support a conviction"). The WL Defendants retorted by citing case law involving whether an informant's allegations have been sufficiently corroborated such that a search warrant should issue. E.g. United States v. Khounsavanh, 113 F.3d 279, 284 (1st Cir. 1997) ("[W]hen does verification of part of the informant's story make it sufficiently likely that the crucial part of the informant's story (i.e., allegations that criminal activity has occurred and that evidence pertaining thereto will be found in the location to be searched) is true . . . ?"). Because this is neither a criminal trial nor a disposition as to whether a search warrant should issue, these cases will not be discussed.
The court in In re Air Disaster at Lockerbie, Scotland, 144 F.R.D. 613, 617 (E.D.N.Y. 1992), the case arising out of the terrorist bombing of Pan American Flight 103, faced a somewhat similar situation. There, the defendants relied on the statements of two witnesses and related information in an effort to implead the United States Government on the theory that it had failed to warn the defendant of certain activities by those who may have been responsible for blowing up the jet. The court noted that "[p]arties and their attorneys . . . are entitled to base their complaints . . . on statements of witnesses, reports of their investigators and hearsay reports and statements of others until such time, if ever, as they are satisfied that the statements and other evidence are not competent or are otherwise untrustworthy." Id. (citing Oliveri v. Thompson, 803 F.2d 1265, 1279 (2d Cir. 1986) ("A plaintiff does not have to be prepared to meet a summary judgment motion as soon as the complaint is filed."); Samuels v. Wilder, 906 F.2d 272, 274 (7th Cir. 1990) ("Counsel must investigate, but need not have in hand before filing enough proof to establish the case.")).
In the absence of any controlling authority to the contrary, the rule stated in In re Air Disaster with regard to the statements of two witnesses also applies where a party relies on the statement of one witness. Therefore, Rule 11 sanctions should only adhere if Holdings was "satisfied that the statements [of Source 1] and other evidence [we]re not competent or are otherwise untrustworthy." Prior to filing the Complaint, Holdings did not uncover any evidence that contradicted Source 1's statement or that would cause it to doubt the competence of those statements. Therefore, it could rely on his statements. Whether Holdings failed to investigate the matter adequately — and would have uncovered such information if it had — is a separate question, addressed below.
2. Reasonable Investigation
The WL Defendants assert that a reasonable investigation would have uncovered that the allegations of fraud could not possibly be true. Their argument in essence is that even if the backdating occurred, GAF could not have been affected by it because the backdating had to have occurred in a case commenced prior to 1993, and GAF had settled all pre-1993 cases with Weitz Luxenberg prior to May 2000, when the backdating allegedly occurred.
Rule 11(b)(3) provides that by signing a pleading or paper submitted to the Court, an attorney certifies that he or she has "conducted a reasonable inquiry into the facts and the law and is satisfied that the document is well-grounded in both." Storey v. Cello Holdings, LLC, No. 01 Civ. 208, 2002 WL 91618, at *8 (S.D.N.Y. Jan. 24, 2002) (to be reported at 182 F. Supp.2d 355) (internal quotation marks omitted). In conducting such an inquiry, it is not sufficient for an attorney simply to rely on the word on a client when additional sources are available. Abner Realty Inc. v. Administrator of General. Servs. Administration, No. 97 Civ. 3075, 1998 WL 410958, at *4 (S.D.N.Y. July 22, 1998) ("[W]here an attorney can get the information necessary to certify the validity of a claim in a public fashion and need not rely solely on his client, he must do so.").
Holdings, its counsel, and its private investigators expended 850 hours in investigating and pursuing these charges. Holdings' counsel did not act precipitously upon receiving the initial statement of Source 1, but pursued further investigation. That investigation included two further interviews of Source 1 by professional investigators, one of which included an associate who had familiarized himself with the procedures in the County Clerk's Office, and a methodical search for corroboration of, or evidence of error or untruth by, Source 1. Counsel then deliberated among themselves and other members of Cahill before determining to assert the allegations.
The only failure to investigate that the WL Defendants identify is Holdings' failure to explore what Source 1 meant when he referred to Aguilar's writing in a "log book" and how such a "log book" fits in to the New York County Supreme Court filing procedures. The Court of Appeals has instructed "that in imposing Rule 11 sanctions, the Court is to avoid hindsight and resolve all doubts in favor of the signer." Oliveri, 803 F.2d at 1275. Even assuming that the WL Defendants have now proven without a doubt that Source 1's story could not be true, the issue of whether Holdings adequately investigated does not turn on whether a particular stone left unturned would have disproved their theory unless they intentionally avoided finding unfavorable information. As part of its investigation, Holdings verified that there were in fact books in the filing room that could have been the "log books" to which Source 1 referred. That detail at the time likely appeared to be a minor one, albeit one that has turned out to have major implications. Failure to inquire into what has turned out to be an extremely opaque matter of procedure is not sanctionable in light of the other thorough investigation performed by Holdings prior to asserting Count XIII and in the absence of any proof that Holdings intentionally refused to investigate the "log book" issue.
It is unclear whether the WL Defendants have proven the "impossibility" of the charges against them as it relates to GAF.
The WL Defendants first rely on the premise that the "log book" in which Aguilar allegedly recorded the false date was in fact a "minute book," and that such books are only used in cases commenced prior to 1993. There exists a disputed issue of fact about whether the book cited by Source 1 was in fact a "minute book." Source 1 described the log book as being similar to a notebook, and specified that it was located within reach of the filing clerk. Moreover, Aguilar apparently had to show an official badge to access the book. Minute books, on the other hand, are large volumes that are not located near the clerk and are accessible by the public.
The WL Defendants also rely on the contention that all pre-1993 cases in which Weitz Luxenberg had named GAF as a defendant were resolved by a 1993 settlement agreement with the Center for Claims Resolution ("CCR"). This too is disputed. After being served with this motion, Holdings found a number of pre-1993 cases in which a stipulation of discontinuance had not been entered as against GAF.
Most persuasive, however, is evidence only recently uncovered by the WL Defendants. An investigator learned that amended complaints are filed directly with the County Clerk's Office rather than with the individual parts. This fact casts doubt on any nefarious role that Aguilar could have played with regard to an amended complaint.
Therefore, the WL Defendants' motion is denied on the basis of its claims pursuant to Rule 11(b)(3). Because this Court granted Holdings permission to replead Count XIII in the event that it was able to assert that the backdated case was among at least a group of cases in which GAF was a defendant, it is possible that Holdings will replead the Count. In such event, Holdings should carefully analyze the results of the investigations by the WL Defendants discussed herein before reasserting the claim, as Rule 11 sanctions would be a very real possibility at that time.
B. Rule 11(b)(2): Count XIII Was Not Legally Insufficient
The Second Circuit has ruled that a court should sanction a party for legally insufficient pleadings only "[w]here it is patently clear that a claim has absolutely no chance of success under the existing precedents, and where no reasonable argument can be advanced to extend, modify or reverse the law as it stands. . . ." Eastway Constr. Corp. v. City of New York, 762 F.2d 243, 254 (2d Cir. 1985); see also O'Malley v. New York City Transit Authority, 896 F.2d 704, 706 (2d Cir. 1990) ("[I]f it is clear that the action was destined to fail based on the fact and the existing precedent, and where no reasonable argument could be advanced to change or extend the present law, rule 11 requires a sanction.").
A number of courts have imposed such sanctions where a litigant asserted a fraud claim that was undermined by potential pleading defects and could not possibly withstand a motion to dismiss. E.g. Polar Int'l Brokerage Corp. v. Reeve, 196 F.R.D. 13, 17-18 (S.D.N.Y. 2000), aff'd in part, dismissed in part on other grounds sub nom. Corroon v. Reeve, 258 F.3d 86 (2d Cir. 2001) (imposing Rule 11 sanctions with respect to securities fraud claim that was in "clear violation of the pleading requirements of Rule 9(b)"); Abner Realty Inc. v. Administrator General Servs. Admin., No. 97 Civ. 3075, 1998 WL 410958, at *6-7 (S.D.N.Y. July 22, 1998) (imposing Rule 11 sanctions where plaintiff fraud claim was "woefully inadequate" and "fatally flawed"); Gold v. Field, No. 92 Civ. 6680, 1993 WL 212672, at *2-3 (S.D.N.Y. June 14, 1993) (imposing sanctions where fraud claim failed to satisfy Rule 9(b) pleading requirements and thus was "destined to fail"); West Indian Sea Island Cotton Assoc., Inc. v. Threadtex, 761 F. Supp. 1041, 1055 (S.D.N.Y. 1991) ("Rule 11 requires a sanction" when claim is "clearly destined to fail"). The important facet of these cases is that the claims be "patently inadequate" or "unreasonable." Stern v. Leucadia Nat'l Corp., 844 F.2d 997, 1005-06 (2d Cir. 1988) (affirming 9(b) dismissal but reversing sanctions award).
As discussed in the July 10 Opinion, the fraud claim here was dismissed for failure to comply with Rule 9(b). However, there is no blackletter rule that sanctions are warranted whenever a motion to dismiss succeeds on Rule 9(b) grounds. E.g., Baskin v. Lagone, 1993 U.S. Dist. LEXIS 2505, at *17 (S.D.N.Y. March 3, 1995) (declining to impose sanctions despite the fact that plaintiff failed to allege fraud with particularity in bring claims under 10(b), RICO and common law fraud); Morin v. Trupin, 711 F. Supp. 97, 114 (S.D.N.Y. 1989) (denying motion for sanctions under Rule 11 even when plaintiff failed to allege all of the required elements of both RICO and common law fraud claims); MacMillan Inc. v. American Express Co., 125 F.R.D. 71, 78-79 (S.D.N.Y. 1989) ("Even assuming [plaintiff's] complaint in fact fell short of the pleading requirements . . ., that alone would not support Rule 11 sanctions. Rule 11 requires conduct more egregious than failure to comply with technical pleading requirements."); see also Rotter v. Leahy, 93 F. Supp.2d 487, 502-03 (S.D.N.Y. 2000) (stating that sanctions were inappropriate despite fact that summary judgment was granted because "a colorable claim" existed when the allegations were first asserted); Clifford v. Hughson, 992 F. Supp. 661, 671 (S.D.N.Y. 1998) ("Of primary importance is the fact that plaintiffs amended their complaint each time with leave of the Court, in a good faith effort to supply the missing elements of a RICO claim . . . it would be inappropriate to impose sanctions for plaintiffs' ultimate failure to do so.").
The Court agreed with the WL Defendants that the allegations failed to satisfy Rule 9(b) because Holdings failed to specify a case or group of cases in which it was a defendant and in which the alleged backdating took place. G-I Holdings, 2002 WL 1585328 at *26 ("Holdings must do more than conclusorily allege that GAF was a defendant in that complaint and so 'incurred expenses in defending' it."). Moreover, it was determined that Holdings should have been able to at least present a group of cases in which the backdating could have occurred. Id. Holdings argues in response to the WL Defendants' motion for sanctions on Rule 11(b)(2) grounds that it was premature as the motion to dismiss had not yet been decided. The decision cited above vitiates this argument, but in discussing the WL Defendants' arguments as to why the claim is purportedly insupportable, the findings of the Court will be discussed rather than the arguments that they put forward.
Sanctions are not warranted in this case because it was not evident that Count XIII was destined to fail. The Complaint was the first time that Holdings had asserted the claims in Count XIII, and therefore it did not have any prior guidance regarding potential limitations in its pleadings on this particular topic. Further, there is nothing to suggest that Holdings' argument for failing to state its claim with greater particularity — that the information that it sought was particularly within the possession of the WL Defendants and thus could not be supplied — was not reasonable nor made in good faith.
C. Rule 11(b)(1): Count XIII Was Not Provably Promulgated in Bad Faith or for an Improper Purpose
The WL Defendants finally argue that Holdings asserted its fraud claims in bad faith and for the purpose of negative publicity, and that sanctions should therefore be imposed.
The WL Defendants argue first that the claim is meritless and that "bad faith may be inferred where the action is completely without merit." In re 60 East 80th Street Equities, Inc. v. Sapir, 218 F.3d 109, 116 (2d Cir. 2000). As discussed above, the claim is not utterly without merit; it merely lacked requisite specificity because Holdings believed more specific information was uniquely within the WL Defendants' purview.
Second, the WL Defendants suggest that the claim was interposed for an "improper purpose" pursuant to Rule 11(b)(1) — the purpose of disseminating baseless and defamatory allegations to the media. The Second Circuit has held that efforts to generate media attention are insufficient to show an improper purpose "[t]o the extent that a complaint is not held to lack foundation in law or fact." Sussman v. Bank of Israel, 56 F.3d 450, 459 (2d Cir. 1995). "It is not the role of Rule 11 to safeguard a defendant from public criticism that may result from the assertion of nonfrivolous claims . . . [and] unless such measures are needed to protect the integrity of the judicial system or a criminal defendant's right to a fair trial, a court's steps to deter attorneys from, or punish them for, speaking to the press have serious First Amendment implications." Id. As it has already been decided above that Count XIII had a foundation in law and fact, sanctions are not warranted on this ground.
The cases cited by the WL Defendants merely underscore the rule above. In Kramer v. Tribe, 156 F.R.D. 96 (D.N.J. 1994), the court found an improper purpose because of the counsel's storied history of unethical conduct and assertion of frivolous claims. Further, Galonsky v. Williams, No. 96 Civ. 6207, 1997 WL 759445 (S.D.N.Y. Dec. 10, 1997) specifically distinguishes its case from that presented in Sussman because unlike in Sussman, counsel "had been specifically told by the Court that there was no basis for his application to amend the complaint to add the claims of Medina." Id. at *6 n. 8.
There, the plaintiff asserted various claims against four attorneys and the Harvard Law School, and subsequently "began litigating th[e] case in the press, sending copies of his Complaint to newspapers and journals, including student-run papers at Harvard." Id. at 103. The plaintiff "engineered" front-page articles in certain publications, additional articles appeared in the Wall Street Journal and the New Jersey Law Journal, and the defendants and their counsel received inquiries from a reporter who had received a copy of the complaint. Noting that the plaintiff failed to contest his involvement in distributing the complaint to the media, the court imposed sanctions under Rule 11(b)(1) on the ground that the action was prosecuted for an improper purpose. Id. at 103, 109. Among the improper conduct noted by the Court was the plaintiff's "broadcasting of his dispute . . . for no other purpose than to make good on a threat and 'ruin' [a defendant's] reputation," and his "apparent approach to litigating this case . . . not in the court room, but in the media." Id. at 109.
There, the plaintiff's counsel distributed copies of a proposed amended complaint to members of the media, despite knowing that the claims asserted therein were defective and would not be able to survive a motion to dismiss. Id. at *3 The district court noted that the claims "had no support in law" and the "allegations relating to them were apparently made for their public relations value and as tactical moves in this litigation." Id. at *4. Further, the "baseless claims" were filed "as part of a public relations campaign in order to embarrass the defendants." Id. at *6.
III. Attorney's Fees
Rule 11(c)(1)(A) permits a court to award attorney's fees on a Rule 11 motion only to the "prevailing party" if such an award is "warranted." Holdings is the prevailing party.
Holdings asserts that the WL Defendants utilized the Rule 11 motion as a tactical ploy to access discovery that would otherwise not be available and that the motion is "grounded in ignorance and anger rather than fact or law." Pl.'s Mem. at 38. The WL Defendants' motion was not clearly frivolous and in fact presented a close question. As a result, fees are not warranted.
Conclusion
For the foregoing reasons, the motion for sanctions is denied, and Holdings' request for attorney's fees is denied.
It is so ordered.