No. 00 Civ. 0648 (LAK) (RLE).
November 17, 2004
Before the Court is a motion by defendants A. Alfred Taubman ("Taubman") and Diana D. Brooks ("Brooks") for sanctions pursuant to 28 U.S.C. § 1927 against class member Caleb B. Leys. Defendants allege that Leys has prosecuted this litigation in California and in this Court in a vexatious manner, and has pursued claims which are frivolous, and maintained in bad faith. They also allege that Leys has made misrepresentations to the Court and engaged in dilatory tactics. Defendants seek reimbursement for attorney's fees and costs in responding to Leys's actions. For the reasons which follow, I find that sanctions are appropriate, and direct that defendants submit an accounting of expenses and attorney's fees within ten days of this Order.
In these consolidated cases, the plaintiff class brought suit for damages resulting from a pattern of collusive and anti-competitive practices by auction houses Sotheby's and Christie's between about 1993 and 2000. In late October 2000, this litigation culminated with preliminary entering of the Sotheby's Settlement Agreement (the "Settlement Agreement"). Leys is a member of the class encompassed in the Settlement Agreement. The agreement released defendants, including Taubman and Brooks "from any and all claims . . . based on any allegedly collusive activity . . . by, between, or among" Sotheby's and Christie's. Settlement Agreement at 12, ¶ 11.
The Sotheby's Settlement Agreement is attached as Exhibit 1 to the Affidavit of Neal A. Potischman in Support of Defendant A. Alfred Taubman's Motion for Reimbursement of Attorneys' Fees and Costs Pursuant to 28 U.S.C. Section 1927 ("Potischman Aff."). It covers claims against Sotheby's, and releases defendants named as principles of Sotheby's. A separate but interrelated agreement was created for Christie's and the Christie's defendants. Only defendants Taubman and Brooks, both Sotheby's defendants, have responded to Leys's action, and seek sanctions here.
According to the terms of the Settlement Agreement, any class members who did not validly exclude themselves would release the Auction Houses and their owners from any and all claims and liability based on the activity alleged in the complaint in this case. Id. The Settlement Agreement contained explicit language requiring the parties to bring all subsequent actions related to the claims in the Southern District of New York, and entitling the Auction Houses to stay any action brought against them in another court. Id. at ¶ 16. Jurisdiction over the implementation and enforcement of the Settlement Agreement was also vested in this District. Id. at ¶ 17.
On November 14, 2000, following preliminary approval of the settlement in this case, the Court endorsed a specific opt-out procedure for class members. Potischman Aff., Exh. 3. Under this procedure, class members were required to return a "Request for Exclusion" form by December 15, 2000. Id. at 2. This deadline was later extended to January 5, 2001. Id. , Exh. 4 Class members who did not exclude themselves could otherwise file written objections by that same date. Id. at 2. While Leys concedes that he did not follow the established opt-out procedure, he contends that he opted out of the settlement by other means.
On October 17, 2000, Leys had filed an individual lawsuit ("the First Leys Action") in California state court against Sotheby's, Christie's, Taubman, Brooks, and others. Potischman Aff., Exh. 6. The complaint contained essentially the same claims as those brought in this class action. Id. at 5-16. Three days after filing the complaint, Leys filed a summary judgment motion. In his motion, Leys admitted that he was a member of the class, but was not satisfied with the proposed settlement. In granting defendants' application to strike the summary judgment motion, the court found plaintiff had filed summary judgment papers prematurely, noting that they were filed before the defendants had been served with the complaint. In its order, the court also warned Leys that "any further frivolous filings would be sanctioned." Id. , Exh. 9, at 2.
In May 2001, the Court approved the Settlement Agreement. Id. , Exh. 2. On November 15, 2002, Leys filed "the Second Leys Action" in California state court. Id. , Exh. 11. That complaint alleged nearly identical claims as the First Leys Action, and again names Taubman and Brooks, along with other individual defendants. Id. In February 2003, Taubman and Brooks removed the Second Leys Action to the federal district court. Potischman Aff., Exh. 12. On or about February 6, 2003, defendants' counsel and Leys conferenced by telephone. Potischman Decl., at 6, ¶ 26. During the call, counsel told Leys that his suit was barred by the release in the Settlement Agreement, and asked him to dismiss his complaint or, in the alternative, grant defendants an extension of time to file a motion or answer the complaint. Id. Leys indicated that he would agree to an extension if the case were remanded to state court. Id.
Leys justifies his refusal to agree to additional time by asserting that he "would have been inclined to grant an extension but for defense counsel's arrogant, boorish and condescending attitude." Plaintiff's Opposition to A. Alfred Taubman's Motion for Reimbursement of Attorneys' Fees and Costs ("Pl. Opp."), at 5. He claims that this "arrogance" led him to conclude that "he would be unable to amicably work with Defendants," because it "disallowed an atmosphere of cooperation between the sides." Id. Defendants retained local counsel in California and on February 7, 2003, filed a motion to transfer venue to the Southern District of New York or, in the alternative, to dismiss the case entirely. Potischman Aff., Exh. 12. They asserted that Leys was a member of the class bound by the terms of the Settlement Agreement, and that exclusive jurisdiction lay in the Southern District of New York over the claims in the Second Leys Action. Id at 4-7.
Leys did not file a timely response to the motion. Nine days after the deadline to file opposition papers, and five days before a court ordered hearing on the motion, he filed an ex parte application to extend his time to file a response. Potischman Aff., Exh. 21. In his application, Leys stated that he had notified defendants' counsel of his ex parte request and that counsel had "not indicated any opposition thereto." Id. at 1. Elsewhere in the response, however, he stated that counsel for defendant Diana Brooks had "emphatically denied" his request for extension. Id. at 4.
In the application for an extension, Leys listed a number of health problems which he claimed affected him, his mother and his daughter, and which he claimed prevented him from properly responding to the motion. Id. at 2. Despite these alleged health issues, Leys was able to file a motion to remand to state court (February 20), and a petition seeking to have the California Attorney General intervene in the action (March 5) during the same time frame. Potischman Aff., Exhs. 18, 20. The court granted the extension, and Leys filed an opposition brief on March 10, 2003. Id., Exh. 22. In this opposition, Leys first responded to defendants' position that he had not opted out of the class. He asserted that he had voluntarily dismissed the First Leys Action based upon the promise and understanding that the claim would be resolved completely within four to six months, but no later than the end of 2001. Id. at 2.
Leys maintained that he sufficiently conveyed his desire to opt out of the class in this case. Id. at 3. Citing Rule 23(c) of the Federal Rules of Civil Procedure, he argued that:
In order to opt out from being a class member of a class action lawsuit, the request need not be explicit, but the important question is whether notice was communicated; a reasonable indication of the desire to opt out is sufficient, since flexibility is desirable in determining what constitutes an expression of a class member's desire to exclude himself, and any written evidence of the opt out should be sufficient.Id. He asserted that the filing of the First Leys Action before the January 5, 2001 deadline to seek exclusion was sufficient to notify all parties of his desire to opt out. Id. He further claimed that he had a written agreement memorializing his right to do so. Id.
On February 25, 2003, Taubman and Brooks filed a motion to stay the California proceedings, and for other relief, including reimbursement for attorney's fees and costs under 28 U.S.C. § 1927. Potischman Aff., Exh. 16. Leys did not make a timely response to the motion. On March 12, 2003, Judge Kaplan granted the motion to stay and referred the request for reimbursement of attorney's fees and costs to the undersigned. Id. , Exh. 15. In his order granting the motion, Judge Kaplan found that Leys is a member of the class, that he did not opt out, and that he is bound by the terms of the Settlement Agreement. Id. Although Leys defaulted on the motion for a stay, Judge Kaplan granted leave for him to file a motion for reconsideration of the order granting the stay. Id. , Exh. 23.
On April 16, 2003, Leys filed a motion seeking to set aside the stay and to continue with the California case. Id. , Exh. 24. Two days after the motion to reconsider was filed, Taubman's counsel sent a letter urging Leys not to file the motion because it would not only be "untimely," but "frivolous and vexatious" as well. Id. , Exh. 25. Shortly thereafter, counsel for Brooks sent a similar letter to Leys. Id. , Exh. 26. Leys did not withdraw his papers, and defendants were forced to file an opposition. Id. , Exh. 27.
In his motion to set aside the stay, and in his opposition to the present motion for sanctions, Leys set forth additional arguments on the opt out issue. Relying on the case of In re Four Seasons Securities Law's Litig., 493 F.2d 1288 (10th Cir. 1974) (" In re Four Seasons "), he argued that "flexibility is desirable" when determining whether a class member has effectively communicated his desire to be excluded from the class. Id. , Exh. 24 at 4; Pl. Opp. at 3. Moreover, he continued to maintain that there was an agreement to resolve his claims in four to six months, and that the failure of defendants to meet these "express conditions" left him free to file his individual lawsuit. Potischman Aff., Exh. 24 at 3-4; Pl. Opp. at 5.
Defendants argued Leys is a member of the settlement class in this case, that he never opted out of the class, and that he is bound by the terms of the Settlement Agreement, which bars any proceeding in California.
A. Authority for Imposing Sanctions Under 28 U.S.C. § 1927
Pursuant to 28 U.S.C. § 1927, "[A]ny attorney . . . who so multiplies the proceedings in any case unreasonably and vexatiously may be required by the court to satisfy personally the excess costs, expenses, and attorney's fees reasonably incurred because of such conduct." Section 1927 is applicable regardless of whether the attorney in question is representing another party, or whether he is proceeding pro se. See Sassower v. Field, 973 F.2d 75, 80 (2d Cir. 1992). "[A]n award under § 1927 is proper when the attorney's actions are so completely without merit as to require the conclusion that they must have been undertaken for some improper purpose such as delay." Oliveri v. Thompson, 803 F.2d 1265, 1273 (2d Cir. 1986). A § 1927 award "must be supported by a finding of bad faith," id. , which can be established if the attorney engaged in "objectively unreasonable" conduct. Forman v. Mount Sinai Med. Ctr. , 128 F.R.D. 591, 600 (S.D.N.Y. 1989). To impose sanctions pursuant to § 1927, "the court's factual findings must be characterized by a high degree of specificity." Schlaifer Nance Co., Inc., v. Estate of Warhol, 194 F.3d 323, 338 (2d Cir. 1999) ( quoting Milltex Indus. Corp. v. Jacquard Lace Co., 55 F.3d 34, 38 (2d Cir. 1995)). Thus, "[t]o impose sanctions [under § 1927], the trial court must find clear evidence that (1) the offending party's claims were entirely meritless and (2) the party acted for improper purposes." Agee v. Paramount Communications Inc., 114 F.3d 395, 398 (2d Cir. 1997). While a court considering the application of sanctions pursuant to Federal Rule of Civil Procedure 11 focuses on "particular papers, the inquiry under § 1927 is on a course of conduct." Bowler v. I.N.S., 901 F. Supp. 597, 605 (S.D.N.Y. 1995).
"An attorney whom the court proposes to sanction must receive specific notice of the conduct alleged to be sanctionable and the standard by which that conduct will be assessed, and an opportunity to be heard on that matter, and must be forewarned of the authority under which sanctions are being considered, and given a chance to defend himself against specific charges." Sakon v. Andreo, 119 F.3d 109, 114 (2d Cir. 1997). Here, it is the opinion of the Court, that the memorandum in support of the § 1927 sanctions gave Leys specific notice of the conduct alleged to be sanctionable, the standard by which that conduct would be assessed and the authority under which sanctions were being considered. His filing of a answer to that motion gave Leys a sufficient opportunity to be heard and to defend himself. See Vishipco Line v. Charles Schwab Co., 2003 WL 1345229 at **3, 10 (S.D.N.Y. 2003) (holding that notice by opposing party's motion to show cause, and opportunity to be heard by hearing and opposition papers on that motion, were sufficient); D'Ascoli v. Roura Melamed, 2003 WL 22019730 at *3 (S.D.N.Y. 2003) (holding that order to show cause and motion for sanctions was sufficient, and that opportunity to respond to motion and telephone call seeking a response were sufficient opportunity to be heard).
B. Imposition of Sanction Pursuant to § 1927
The Court is reluctant to impose sanctions where they might discourage vigorous pursuit of valid claims. But where an attorney so multiplies proceedings and engages in vexatious conduct in bad faith the Court must impose its authority to curb the abuse of the legal process and the waste of judicial resources. Such bad faith conduct is evident in this case. Leys has made arguments in support of claims, submitted in official papers, that rely on factual misrepresentations, and questionable legal analysis. He has failed to offer legal and factual justification for those claims, and he has engaged in this course of behavior for four years.
In prosecuting the Second Leys Action, Leys has pursued claims in California that he should have known were, at least initially, required to be brought before this Court. It is evident, and Leys, by the terms of the Settlement Agreement, should have absolutely known the following: that defendants were released by class members who had not validly excluded themselves from the class; that defendants, as released parties, were entitled to a stay of any action in which they claimed the terms of the Settlement Agreement as a defense; and that this Court retained jurisdiction over any claim brought by a member of the class bound by the terms of the Settlement Agreement.
Leys does not dispute that he failed to follow the clearly defined opt-out procedure to exclude himself from the class bound by the Settlement Agreement. Nor does he dispute that, because of the time period in which he made purchases from the Auction Houses, he was a member of the class prior to filing the First Leys Action. Therefore, the primary issue to be determined for purposes of sanctions is whether there was any reasonable good faith belief by Leys that he was no longer a member of the class bound by the terms of the Settlement Agreement when he filed the Second Leys Action. The Court finds that there was not.
Leys's legal position that he "effectively opted out" of the class by filing the First Leys Action can only be maintained by the most cursory reading and interpretation of relevant law. His reliance on the In re Four Seasons case is misplaced. In that case, Bank of America had received notice of the settlement and the required opt-out date. The bank made timely written and telephone inquiries to find out if they could modify the terms of the "Proof of claim" form they were required to return. 493 F.2d at 1289-90. These inquiries were not responded to until just before the deadline to file a form for exclusion, when the bank was told that a modified "Proof of claim" form would not be accepted. Id. at 1290 The bank requested a form for exclusion one day after the deadline to file. Id. Approximately fourteen days later, the bank sent in a modified proof of claim form, stating that if the modified form was not accepted, the bank would regard itself as having opted out of the class. Id. The trial court found that Bank of America had elected to remove itself from the class. Id. The Tenth Circuit affirmed. Id. at 1292.
Leys argues that the circuit court endorsed the use of a "flexible" approach to determine when communication of a desire to opt out is sufficient. Id. at 1291; quoting 7A Wright Miller, Federal Practice and Procedure § 1787 (1972), 156 ( discussing Bonner v. Texas City Independent School Dist. of Texas, 305 F. Supp. 600 (S.D.Texas 1969 (teachers' testimony at trial sufficient to constitute request to be excluded)). The party seeking to opt out must give "[a] reasonable indication" of its intent. Id. Leys submits that he clearly conveyed his intent to be excluded from the class by filing the First Leys Action.
While it is true that there is some language in the opinion could be interpreted to support Leys's position, a broad reading of the case on this issue is unwarranted. For example, the court noted that Rule 23(c)(2) is designed to impose the "binding effect of a judgment on members of a class who have not expressly requested exclusion," and seeks "to eliminate the practice of waiting to see if the adjudication was favorable to the class before deciding whether to enter it." Id. Moreover, though Leys argues theoretically that the rule does not specify how to indicate a desire to be excluded, he completely ignores the fact that there was a clearly defined procedure in this case. And unlike the bank in In Re Four Seasons, he did not attempt to comply with the procedures established by the Court. In contrast to Leys, the bank made its position known in the forum court by seeking to modify the claim form before the deadline expired. The trial court found that counsel for the class knew prior to the deadline that the bank intended to opt out. This good faith effort at compliance supported the court's conclusion that the bank had excluded itself from the class. The same cannot be said of Leys. He has attempted to proceed on the kind of wait-and-see basis condemned by the Tenth Circuit, and has sought to litigate the issues in a different court.
Even if the Court were to find that Ley's position is supported by the Tenth Circuit, it is contrary to well-established authority in this and other circuits. See, e.g., In re Prudential Securities, Inc. Ltd. Partnerships, 164 F.R.D. 362, 370 (S.D.N.Y. 1996) ("It is well established that `pendency of an individual action' does not excuse a class member from filing a valid request for exclusion.") ( quoting Berman v. L.A. Gear, Inc., No. 91 Civ. 2653, 1993 WL 437733 at *5 n. 1 (S.D.N.Y. Oct. 26, 1993), aff'd., 29 F.3d 621 (2d Cir. 1994)); see also Supermarkets Gen. Corp. v. Grinnell Corp., 59 F.R.D. 512, 513 (S.D.N.Y. 1973), aff'd., 490 F.2d 1183 (2d Cir. 1974) (individuals not excluded from class by mere fact of having filed an independent action); Penson v. Terminal Transp. Co., 634 F.2d 989, 996 (5th Cir. 1981) (observing that class action binds absent class members who filed individual actions prior to final judgment); In re VMS Ltd. Partnership Sec. Litig., 1992 WL 203832, at *3-4 (N.D.Ill. Aug. 13, 1992) (concluding that the pendency of an individual action did not excuse class members from filing valid opt-out request); Holmes v. CSX Transp. , 1999 WL 447087, at *3-4 (E.D.La. June 24, 1999) (simply continuing with a lawsuit, in a different court than a class action suit, is not sufficient to provide the court overseeing the class action suit with notice of plaintiffs's intent to opt-out of the class).
The Court must view the decision through the lens of § 1927. If there were arguably some legal support for Leys's position, that would be reason for the Court to find that his position was reasonable enough to preclude a finding of bad faith on this issue. See Nemeroff v. Abelson, 620 F.2d 339, 348 (2d Cir. 1980) ("A claim is colorable . . . when it has some legal and factual support considered in light of the reasonable beliefs of the individual making the claim."). Sanctions are thus not warranted where counsel supports his position by reasonably relying on a relevant case. See Pepsico. Inc, v. Dunlop Tire Rubber Corp., 578 F. Supp. 196, 201 (S.D.N.Y. 1984) (at least one case supported defendant's position; sanctions not appropriate under § 1927). Were he a layman, Leys's dogged reliance on this Tenth Circuit case might be excusable. However, given the existing case law, it was not reasonable for an attorney to conclude that he could opt out of a case in the Southern District of New York by filing a state court case in California. There were specific governing provisions in the Settlement Agreement, and specific case law in this district. Yet, Leys seeks to rely on language from a single thirty-year old case in a different circuit.
Leys's position is further undermined because he has shifted arguments to suit his ends. For example, while he maintains that he "effectively opted out" of the settlement class by filing the First Leys Action, Pl. Opp. at 4., he argues that he subsequently entered an agreement whereby he "would reenter the class, under the condition that [his] interests would be resolved within 4 to 6 months from the date of signing the Agreement." Id. at 5. Moreover, he argues that this side contract is "outside the purview of [this Court]." Id. Not withstanding the crucial nature of this document, Leys has failed to produce a copy of this purported private, conditional settlement agreement, and appears to admit that one does not exist. Finally, this novel concept that individual class members can enter into agreements which somehow take precedence over established court procedures is put forth without any legal support.
In his opposition to the motion to dismiss the Second Leys Action, Leys notes: "Defendants may argue that there was no written proof or evidence of a temporal limitation or other intervening circumstances . . . allowing Plaintiff the right to opt out prior to fulfillment of the conditions precedent. . . ." Potischman Aff., Exh. 22 at 3. Rather than simply producing such proof, he offers the rather oblique statement that he will counter the claim of lack of evidence with an argument that "what constitutes a reasonable time is to be determined from all of the circumstances of the individual case." Id.
The failure of Leys to produce any support for the alleged "4 to 6 month" condition indicates that this assertion is a misrepresentation or an outright attempt to mislead the Court. Leys's argument for allowing him to proceed with this action against defendants outside of the Southern District is entirely dependent on his establishing that he opted out of the settlement class, and was therefore not bound by the terms of the Settlement Agreement. The Court must either conclude that an attorney would lose the one document crucial to his case or that no such document ever existed. In the absence of any explanation from Leys, the evidence points to the latter conclusion. The fact that Leys has employed these tactics to avoid this Court's scrutiny of his actions leads to the conclusion that he has proceeded in bad faith.
It is clear that Leys engaged in a course of conduct designed to evade the consequences of his agreement to participate in the settlement of the instant case. With unreasonable and vexatious conduct, he has caused defendants to incur excess costs, expenses and attorney's fees in defending against the Second Leys Action and having the matter properly brought before the Court, where it should originally have been brought. The courts in the Second Circuit have sanctioned such conduct pursuant to § 1927 in the past. See, e.g., Burgos v. Murphy, 692 F. Supp. 1571, 1577-78 (S.D.N.Y. 1988) (awarding sanctions pursuant to § 1927 where counsel prosecuted claims that he should have known to be baseless and asserted claims without legal justification.), aff'd 876 F.2d 890 (2d Cir. 1989) (table decision); Pentagen Techs. Int'l., Ltd. v. United States, 172 F. Supp. 2d 464, 473-74 (S.D.N.Y. 2001) (finding § 1927 sanctions appropriate where litigant filed successive lawsuits that were "designed to evade previous rulings" and that caused "needless occupation of judicial resources"); Durban Confectionary Works, Ltd. v. Schnapp's Confections. , 1989 WL 139227, at *4 (S.D.N.Y. Nov. 15, 1989) (stating that party who agreed to settlement but later engaged in conduct to undercut settlement had "clearly evinced bad faith, and which, if he were a lawyer, would be punishable under § 1927"); Forman v. Mount Sinai Med. Ctr. , 128 F.R.D. 591, 600 (S.D.N.Y. 1989) (granting sanctions under § 1927 where attorney failed to communicate reasonably with his adversary and the court, and engaged in conduct that disrupted agreed terms of settlement).
Accordingly, I find that sanctions against Caleb P. Leys, under 28 U.S.C. § 1927, for unreasonably and vexatiously multiplying proceedings by engaging in bad faith conduct in the pursuit of baseless claims and making misrepresentations of fact to the court for improper purposes. Therefore, the Court orders that Leys should pay the reasonable costs, expenses, and attorney's fees incurred by defendants in responding to the Second Leys Action. For the Court to determine this amount, counsel for defendants must submit an accounting of expenses and attorney's fees within ten days from the date of this order, keeping in mind that an assessment of attorney's fees "requires more than simply a report of the number of hours spent and the hourly rate." McGuire v. Russell Miller, Inc., 1 F.3d 1306, 1315 (2d Cir. 1993). The Court has the authority and reserves the right to adjust the amount of the sanctions award as justice requires, taking into account fairness and the ability of the sanctioned party to pay. See Sassower v. Field, 973 F.2d at 81; ( citing Toliver v. County of Sullivan, 957 F.2d 47, 49-50 (2d Cir. 1992); Johnson v. New York City Transit Authority, 823 F.2d 32, 33 (2d Cir. 1987); Faraci v. Hickey-Freeman Co., 607 F.2d 1025, 1029 (2d Cir. 1979)).