Carousel Foods of America, Inc. v. Abrams & Co.

Citations: 423 F. Supp. 2d 119; 64 Fed. R. Serv. 3d 621; 2006 U.S. Dist. LEXIS 15425; 2006 WL 856238Docket: 05 CIV.8076 CM

Court: District Court, S.D. New York; February 17, 2006; Federal District Court

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Defendants' motion for sanctions against plaintiff Carousel Foods of America, Inc. and its counsel, Randy S. Steinhauser, has been granted by the District Court. This decision follows an earlier Order to Show Cause issued on January 18, 2006. The court reviewed Steinhauser's declaration in response to the Order but found no satisfactory justification for including the Ruskin Law Firm in a RICO conspiracy claim. The court noted that the firm was implicated based on a letter it sent to Steinhauser, which he claimed constituted participation in a RICO enterprise. However, the court concluded that the letter merely reiterated the defendants' legal position in an ongoing state court lawsuit, which does not equate to RICO activity.

Steinhauser argued that the Ruskin Firm's position was "patently frivolous" due to a lack of supporting contract language. In response, the Ruskin Firm pointed out relevant contractual provisions justifying their stance. The court emphasized that it would not adjudicate the merits of the contract dispute, which is appropriately before the State Supreme Court. The court determined that Steinhauser improperly invoked the RICO statute against the Ruskin Firm, clarifying that even if the firm's legal arguments were weak, they did not constitute a RICO violation. The court dismissed claims of fraud, noting that the essential elements of misrepresentation and reliance were absent in this contractual dispute. Ultimately, the court characterized the defendants’ actions as possibly sharp business practices, but not fraudulent.

Attorney Steinhauser's understanding of fraud and RICO is critically flawed, as evidenced by his reliance on the case of First Capital Asset Management v. Satinwood and United States v. Allen. In Allen, the defendants admitted to bribery, but the Second Circuit reversed a summary judgment due to factual questions regarding their involvement in the enterprise's operation, which is not applicable to this case. The Ruskin Firm merely presented a legal argument in response to Steinhauser's letter and did not admit to any criminal activity. The court notes that it need not examine whether The Ruskin Firm conducted the affairs of a RICO enterprise because there is no evidence of criminal activity or an enterprise. Steinhauser's claims fail to raise a legal question and demonstrate a misunderstanding of RICO law. His interpretation of the operation or management test is misleading and taken out of context. Furthermore, his argument about a "threat of continued criminal activity" is unfounded, as the dispute only involves differing contract interpretations, not actual criminal conduct. Steinhauser's assertion of open-ended continuity lacks evidence, particularly since defendants had already remitted over $350,000 before the complaint and the withheld checks were subject to a restraining order. Overall, Steinhauser's allegations of a RICO conspiracy are based on insufficient research and unsupported claims of wrongdoing.

A simple inquiry could have clarified that the checks mentioned in the amended complaint were not negotiated, indicating that The Ruskin Firm could not have benefited from their proceeds. A lawyer, representing his brother, employed aggressive legal tactics—specifically RICO allegations, fraud suits, and criminal complaints—to intimidate rather than legitimately pursue a legal position in a business dispute. This behavior is deemed unethical, particularly given the serious implications of racketeering accusations, which carry a significant stigma, especially for law firms that may lack professional liability coverage for RICO claims. Despite a previous denial of a sanctions motion as premature, the defendants served a sanctions motion that went unwithdrawn for 21 days, making the plaintiff and Attorney Steinhauser subject to Rule 11 sanctions due to their continued unfounded RICO claims. The amended complaint did not alter the allegations that triggered the initial sanctions motion, and the ethical violation persisted until January 9, 2006, long after the notice was given. The RICO claim was withdrawn only after further expenses were incurred by the defendant, and the notice of dismissal was filed late, resulting in a technical default. The court revived the sanctions motion upon reviewing the amended pleading and concluded that Attorney Steinhauser failed to rectify his Rule 11 violation, allowing the court to invoke Rule 11 sanctions based on the frivolous nature of the RICO action, consistent with precedents in the Circuit.

Sanctions may be imposed under Section 1927 of the Judicial Code for attorneys who unreasonably and vexatiously multiply proceedings. District courts possess inherent authority to impose sanctions when a party misuses the judicial process, which is broader than the authority under Rule 11 or 28 U.S.C. 1927. Courts can sanction attorneys, parties, or both using this inherent power. In this case, sanctions are awarded in favor of the defendants against Carousel and Attorney Steinhauser. 

The defendants proposed that the sanction amount should include $50,020.50 in legal fees and $782.50 in disbursements. While the reimbursement of counsel fees is deemed appropriate, the court cannot make a determination based on the current record due to insufficient information about hourly rates and the credentials of the lawyers involved. The requested hourly rate of $435 seems excessive compared to rates for similar firms in the region. Additionally, some fees, particularly $10,701.50 incurred after the sanctions motion was filed, appear excessive. The court will accept further submissions from The Ruskin Firm regarding these issues, due by February 27, 2006. Sanctions will be allocated equally, with 50% against Carousel and 50% against Attorney Steinhauser personally. Furthermore, the court finds it implausible that a criminal complaint could arise from this contract dispute, despite Attorney Steinhauser's suggestion that such a complaint has been filed.