Commercial Litigation and Arbitration

Motion and Counterclaim Filed at Eleventh Hour Stricken as Filed in Bad Faith — Inherent Power Sanction

From Strategic Turnaround Equity Partners, LP (Cayman) v. Fife, 2010 U.S. Dist. LEXIS 63629 (E.D. Mich. June 28, 2010):

In this corporate dispute, Plaintiff Strategic Turnaround Equity Partners, L.P. ("Strategic") claims that Defendants United American Healthcare Corporation ("UAHC"), Thomas Goss, St. George Investments, LLC ("St. George"), John Fife, Fife Trading, Inc., Iliad Research and Trading, L.P., and Iliad Management, LLC, have, though their business dealings violated UAHC's Articles of Incorporation, as well as various Michigan statutes. Strategic also claims that Defendants have violated section 14(a) of the Securities Exchange Act of 1934, as amended, 15 U.S.C. § 78a, et. seq. ***

After the close of business on Friday, June 25, 2010, four days before UAHC's annual meeting, Defendants UAHC and Goss filed a renewed motion to dismiss aimed at the second amended complaint. The motion simply seeks to challenge the second amended complaint and incorporates by reference the arguments made in the initial motion to dismiss. In addition, UAHC filed a counterclaim against Strategic and a third-party complaint against members of Strategic and others not parties to the original action. In the counterclaim and third-party complaint, UAHC alleges that Strategic and the third-party defendants violated section 14(a) of the Securities and Exchange Act by making false or misleading statements in Strategic's definitive proxy statements beginning March 23, 2010.

The Court finds that UAHC's decision to wait until eve of the Court's decision on the various motions in this case just prior to UAHC's annual meeting, when the basis for the counterclaim and third-party complaint was known before this action was even filed, smacks of bad faith. UAHC has sandbagged Strategic and this Court by filing its pleadings this late in the litigation and this close to UAHC's annual meeting. UAHC was aware of the strict deadline the Court set for Strategic to submit amended jurisdictional allegations due to the necessity of deciding the issues prior to the impending June 29 meeting. The primary relief sought in UAHC's recent pleadings — that the Court order corrective disclosures covering Strategic's misleading statements and omissions in its proxy solicitation for upcoming meeting — would have to be granted before the annual meeting set to take place on June 29, 2010 in order to avoid mooting the claims. This effectively prevents Strategic and the third-party defendants from challenging the counterclaim and third-party complaint prior to the vote.

The Court will strike the pleadings under its inherent powers to sanction conduct undertaken in bad faith. See First Bank of Marietta v. Hartford Underwriters Ins. Co., 307 F.3d 501, 517 (6th Cir. 2002) ("A court may impose sanctions pursuant to its inherent powers ... when it finds the action in question was taken in bad faith.") (internal quotation marks omitted). A district court's inherent powers are "governed not by rule or statute but by the control necessarily vested in courts to manage their own affairs so as to achieve the orderly and expeditious disposition of cases." Chambers v. NASCO, Inc., 501 U.S. 32, 43 (1991). Furthermore, the Sixth Circuit has long recognized the power of a district court to dismiss cases involving flagrant abuses of the judicial [process]. See Reid v. Prentice-Hall, Inc., 261 F.2d 700, 701 (6th Cir. 1958); Mitan v. Int'l Fidelity Ins. Co., 23 Fed. Appx. 292, 298 (6th Cir. 2001) (unpublished). This is one of those cases. There is quite simply no justification for UAHC's decision to wait until the very last minute before filing a counterclaim it was aware existed before this case began. Had it filed its counterclaim sooner, Strategic would have had the chance to answer the pleading or move to dismiss it, and the Court would have had time to decide the matter accordingly. With the annual meeting taking place on June 29, 2010, it is simply impossible for this to be done. The Court will strike the pleadings.

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