Sanctions Reversed Where Inference of Bad Faith Drawn in Part from Conduct of Others — “[O]nly Conduct Explicitly Referred to in the Instrument Providing Notice Is Sanctionable” —

Cameron Int’l Trading Co. v. Hawk Importers, Inc., 2012 U.S. App. LEXIS 22294 (2d Cir. Oct. 25, 2012):

Movants J. Curtis Edmondson and Scott D. Frendel (collectively "movants"), defendants' counsel in this matter, appeal from a January 18, 2011, memorandum and order finding that they violated Federal Rule of Civil Procedure 11(b) and are jointly and severally liable in the amount of $4,900. ***

A "bad faith" standard applies to Rule 11 sanctions where, as here, the court initiates sanctions long after the sanctioned lawyer has the opportunity to correct or withdraw the challenged submission. In re Pennie & Edmonds LLP, 323 F.3d 86, 91 (2d Cir. 2003). The district court inferred bad faith on the part of Edmondson and Frendel from (1) the purported frivolity of the arguments movants made in defendants' motion to dismiss filed March 1, 2010, and (2) "Defendants' general course of conduct." Included in the "course of conduct" that the district court considered were a number of actions taken by defendants and their prior counsel before movants were retained. For instance, the district court noted that defendants (1) ignored "Plaintiffs' initial notice of breach" and "Plaintiffs' request to re-open this case"; (2) failed to appear at the initial status conference, which led to the Court's first Order to Show Cause; and (3) repeatedly sought adjournments of the Show Cause hearing before the magistrate judge, delaying the hearing for several months. See Cameron Int'l Trading Co. v. Hawk Imps., Inc., No. 03-CV-02496, 2011 WL 167596, at *4 (E.D.N.Y. Jan 18, 2011). The district court's inference of bad faith on the part of movants was clearly erroneous to the extent that it was drawn from behavior in which movants were uninvolved.

This faulty inference might not have been drawn had the district court given movants notice of "the specific conduct or omission for which the sanctions are being considered so that [they could] prepare a defense." Star Mark Mgmt., Inc. v. Koon Chun Hing Kee Soy & Sauce Factory, Ltd., 682 F.3d 170, 175 (2d Cir. 2012) (quoting Schlaifer Nance & Co. v. Estate of Warhol, 194 F.3d 323, 334 (2d Cir. 1999)). "[O]nly conduct explicitly referred to in the instrument providing notice is sanctionable." Id. (quoting Schlaifer Nance & Co., 194 F.3d at 334). Here, the district court ordered defendants and movants to show cause why they should not be sanctioned for filing "a totally nonsensical, legally illogical motion to dismiss." Cameron Int'l Trading Co., Inc. v. Hawk Imps., Inc., No. 03-CV-02496, 2010 WL 4568980, at *3 (E.D.N.Y. Nov. 2, 2010). The district court did not refer to the conduct preceding that filing, including but not limited to the conduct engaged in by individuals other than movants. Consequently, that conduct is not sanctionable.

The district court's order of sanctions was based on its "[c]onsider[ation of] Defendants' conduct in its entirety." Cameron Int'l Trading Co., 2011 WL 167596, at *4. Because at least a portion of that conduct was not sanctionable, did not give rise to a valid inference of bad faith, or both, we VACATE the Rule 11 sanctions. We do not reach movants' contention that, given the size of the sanction imposed, movants were entitled to additional procedural protections; the argument is rendered moot by this order. Nor do we reach movants' contention that the arguments in the motion to dismiss were not frivolous; it is unclear at this stage if the district court would consider any such frivolity, standing alone, to be sufficient ground for an inference of bad faith.

Footnote 1 We note, however, that the question of law appears to us to be much closer than the district court considered it to be. The district court had dismissed the case with prejudice without explicitly retaining jurisdiction; the motion to dismiss might be characterized as putting forth a "reasonable argument to extend . . . the law [expressed in Kokkonen v. Guardian Life Insurance Co. of America, 511 U.S. 375 (1994),] as it stands." Fishoff v. Coty Inc., 634 F.3d 647, 654 (2d Cir. 2011) (quoting Morley v. Ciba-Geigy Corp., 66 F.3d 21, 25 (2d Cir. 1995)).