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Failure to Withdraw a Claim or Respond to Discovery Is Not Sanctionable under Rule 11 — Continuing to Litigate after Baselessness Is Clear Is Sanctionable — No Right to Condition Dismissal of Baseless Claim on Stipulation from Adversary

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From Dearborn Street Bldg. Assocs., LLC v. Huntington Nat’l Bank, 411 F. App'x 847 (6th Cir. 2011):

On September 16, 2009, Dearborn prevailed on its fraudulent transfer claims with respect to defendants D&T and PCI and received a monetary judgment. However, in an opinion dated September 30, 2009, the district court granted Huntington's motion for Rule 11 sanctions, holding that Dearborn's lawsuit against the bank had been frivolous because (1) Huntington was not a necessary party; (2) Dearborn's pleadings failed to set forth viable claims; (3) Dearborn failed to conduct discovery or otherwise prosecute its action; and (4) Dearborn failed to respond to Huntington's motion for summary judgment. Citing the need to deter similar misconduct, the district court found Dearborn and Silverman & Morris jointly and severally liable for attorney fees in the amount of $14,073.39, representing all of the attorney fees and expenses that Huntington incurred during the litigation.

***Dearborn named Huntington as a defendant in its lawsuit against D&T and PCI and requested equitable relief without ever stating grounds upon which Huntington could be held liable. Although Rule 11(b)(3) permits pleadings that are "based on evidence reasonably anticipated after further investigation or discovery," Rotella v. Wood, 528 U.S. 549, 560, 120 S. Ct. 1075, 145 L. Ed. 2d 1047 (2000), Dearborn failed to conduct discovery or develop a factual foundation for its claims against Huntington when given a reasonable opportunity to do so. The district court premised its award of sanctions on this fact, stating:

[P]laintiff engaged in objectively unreasonable conduct in naming Huntington as a defendant in the amended complaint, when it failed to set forth any allegations against Huntington to establish an UFTA violation, failed to conduct discovery to investigate the possibility of such a claim, and then failed to file any response to Huntington's motion for summary judgment.

Dearborn St. Bldg. Assocs., LLC v. D&T Land Holdings, LLC, No. 1:07-cv-1056, 2009 U.S. Dist. LEXIS 91451, 2009 WL 3234133, at *6 (W.D. Mich. Sept. 30, 2009). Dearborn acknowledges that it failed to raise specific allegations against Huntington, but raises ... arguments in its defense.

***Dearborn argues that the district court erred in imposing sanctions because Rule 11 does not authorize sanctions for failing to conduct discovery or respond to dispositive motions. This argument is unsupportable. Although Rule 11 "does not apply to disclosures and discovery requests, responses, objections, and motions," Jones, 617 F.3d at 856, and "does not provide sanctions for failing to prepare and sign a document," MGIC Indem. Corp. v. Moore, 952 F.2d 1120, 1121 (9th Cir. 1991), Rule 11 sanctions are nonetheless proper where, as here, instead of withdrawing a complaint or agreeing to dismissal, a plaintiff "continued to litigate after it became clear that his claim was frivolous, unreasonable or without foundation." Bailey v. Papa John's USA, Inc., 236 Fed. App'x 200, 203 (6th Cir. June 11, 2007); see also Rentz v. Dynasty Apparel Indus., Inc., 556 F.3d 389, 395 (6th Cir. 2009) (discussing Rule 11's "continuing duty of candor"); Ridder v. City of Springfield, 109 F.3d 288, 293 (6th Cir. 1997) (same); Herron, 858 F.2d at 335-36 (discussing litigants "continuing responsibility to review and reevaluate [their] pleadings").

Finally, Dearborn argues that its refusal to grant Huntington a timely dismissal was proper because Huntington refused to submit an affidavit stating that it had not engaged in fraud in connection with the relevant transaction. However, Dearborn cites no legal authority to support its contention that it was entitled to demand such an affidavit as a precondition to agreeing to dismiss Huntington from the action, and this Court has been unable to locate any such authority. Consequently, because Dearborn failed to develop the evidentiary foundation of its claim for equitable relief against Huntington when given an opportunity to do so; failed to supplement, amend or withdraw its pleadings; and "continu[ed] to insist upon a position that is no longer tenable," Rentz, 556 F.3d at 395 (internal citations omitted), we hold that the district court did not abuse its discretion in awarding Rule 11 sanctions.

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New York Attorneys JHA handles range the gamut of complex financial and commercial litigation and arbitration, including securities, RICO, corporate and contract disputes, credit default swaps, derivatives, and class, mass, and derivative actions. The firm also represents law firms in major disputes.
New York Attorneys JHA handles range the gamut of complex financial and commercial litigation and arbitration, including securities, RICO, corporate and contract disputes, credit default swaps, derivatives, and class, mass, and derivative actions. The firm also represents law firms in major disputes.

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