Leventhal v. New Valley Corp.

Citations: 148 F.R.D. 109; 1993 U.S. Dist. LEXIS 4543; 1993 WL 107846Docket: No. 91 Civ. 4238 (CSH)

Court: District Court, S.D. New York; April 6, 1993; Federal District Court

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Plaintiff, a former corporate officer, initiated a lawsuit against New Valley Corporation for damages due to a breach of a separation agreement, subsequently moving for summary judgment, which the Court granted on January 16, 1992. Before this ruling, several creditors filed an involuntary bankruptcy petition against New Valley on November 15, 1991. Following the summary judgment, New Valley's counsel requested the Court to withdraw its opinion, citing the bankruptcy filing; however, the Court denied this request, stating that while entry of judgment against New Valley would be stayed pending the bankruptcy proceedings, potential future actions against individuals might still proceed.

Due to the bankruptcy proceedings indicating that the plaintiff might be unable to collect his judgment exceeding $600,000, he sought sanctions against several attorneys involved in New Valley's defense. The sanctions were requested under Rule 11 of the Federal Rules of Civil Procedure, 28 U.S.C. § 1927, and the court's inherent powers, with the plaintiff seeking reimbursement for attorney's fees, costs, and liability for the uncollectible judgment. The attorneys named included John C. Walters, the senior vice president and general counsel of New Valley’s predecessor; Michael D. Brown and Ivy S. Fischer, associated with the law firm Ohrenstein, Brown; and the firm itself. The plaintiff acknowledged that Rule 11 sanctions apply only to the signing attorney, while sanctions under § 1927 can be applied to the firm. Brown and Fischer signed various documents on behalf of New Valley, while Walters provided an affidavit in opposition to the summary judgment.

The discussion section clarifies the three bases for sanctions, starting with Rule 11, which requires that all pleadings, motions, and papers filed by a party represented by an attorney must bear the signature of at least one attorney of record. It also notes the abolition of the rule requiring the testimony of two witnesses or corroborating circumstances to overcome sworn statements in answers.

An attorney's or party's signature on legal documents certifies that the signer has read the document and believes, based on reasonable inquiry, that it is factually and legally sound, and that it is not filed for improper purposes such as harassment or delay. A document lacking a signature will be stricken unless signed promptly after the omission is noted. Violating these signing requirements may result in sanctions, which can include orders to pay the opposing party's reasonable expenses and attorney’s fees. Additionally, 28 U.S.C. 1927 allows courts to impose personal liability for excess costs incurred due to the unreasonable multiplication of proceedings by attorneys. The Supreme Court has recognized the trial court's inherent power to impose sanctions for bad faith conduct, which is broad and flexible. 

In the context of liability for sanctions, Walters, as New Valley’s senior vice president and general counsel, is not liable under Rule 11, as he was neither the 'attorney of record' nor a 'party' defined by the Rule. Liability for sanctions can be imposed on the party New Valley, but Walters, while an attorney, was acting as an affiant and not as a signatory for the purpose of Rule 11's sanctions. The case of Business Guides, which the plaintiff cites, does not contradict this conclusion, as it involved a corporate officer who was not an in-house attorney. Therefore, there are no grounds for sanctioning Walters under Rule 11, 28 U.S.C. 1927, or the court's inherent powers.

The court finds that the attorneys representing New Valley have filed papers in opposition to the summary judgment motion that warrant sanctions under Rule 11, due to their frivolous defenses lacking substance. Although opposing counsel attempts to argue that subsequent discovery provided justification for their position, this argument fails to mask the fundamental invalidity of New Valley's opposition, which was evident to an objective observer. 

While the court determines that sanctions are necessary against the Ohrenstein firm attorneys, complicating factors are noted, including the significant role of corporate officer Walters in the defense and the aggressive litigation pace set by the plaintiff. The plaintiff initiated the complaint on June 20, 1991, and moved for summary judgment shortly thereafter, with the Ohrenstein firm being newly retained and unfamiliar with the case. The plaintiff's counsel opposed all extensions for responding to the motion, leading to a decision prior to any discovery.

The court finds Walters’ affidavit sanctionable but ultimately decides that New Valley, as the client, should bear the sanctions, as Rule 11 allows for discretion in imposing sanctions on the signer or the represented party. Although enforcing the sanction against New Valley may be impractical, the court believes it is the correct outcome. 

However, the court declines to impose sanctions under 1927 or the court's inherent powers due to a lack of evidence suggesting bad faith on the part of the attorneys. Despite the plaintiff's claims that New Valley's legal tactics aimed to delay proceedings to achieve bankruptcy protection, the court does not find substantial delays or voluntary bankruptcy to support allegations of bad faith. The attorneys, unfamiliar with the case details and guided by Walters, are not deemed to have acted with improper motives.

The Supreme Court emphasizes the need for restraint and discretion in exercising a court's inherent power, as highlighted in United States v. International Brotherhood of Teamsters. In this case, the conduct of the attorneys does not warrant severe sanctions. The decision focuses on appropriate sanctions under Rule 11, determining that the plaintiff is entitled to recover reasonable expenses related to the summary judgment motion, including reasonable attorneys' fees, but excluding costs related to the original investigation and complaint preparation. The court denies the plaintiff's request to hold New Valley’s attorneys responsible for the judgment recovered against New Valley, stating that existing case law does not support such a severe penalty. The plaintiff's cited case, Davis v. Veslan Enterprises, is deemed inapplicable because it involved a direct causal link between a frivolous removal and lost interest on a judgment, which is not present here. Since New Valley was placed into bankruptcy shortly after the complaint was filed, any judgment obtained would be vulnerable to avoidance under the Bankruptcy Code, particularly due to timing constraints. The court concludes that it is unrealistic to assume a judgment exceeding $600,000 could have been collected before the bankruptcy petition was filed, given the procedural timelines involved in the summary judgment motion.

Damages as a Rule 11 sanction are not recoverable in this case due to the absence of a causal connection between the sanctionable conduct and the plaintiff's losses. Attorneys Brown and Fischer are each sanctioned to pay one-half of the plaintiff's litigation costs and attorneys' fees, with neither attorney liable for the other's failure to respond regarding the determined amount. If the plaintiff pursues sanctions, they must file affidavits and time sheets within 30 days from this opinion. The attorneys may respond with opposing papers within 21 days after receiving those filings. The Court will decide whether an evidentiary hearing is necessary. Additionally, a lack of causal connection would also prevent recovery under 1927 and the Court's inherent powers, even if liability were found under those theories.