Rule 11 Award for Conduct Unmentioned in Motion Unsustainable — Plain Error Review Where Ground for Reversal Not Raised in District Court

From Indah v. U.S. Securities and Exchange Commission, 2011 U.S. App. LEXIS 18486 (6th Cir. Sept. 6, 2011):

The plaintiffs in this case believe that they have an ownership interest in several mines in Indonesia. In pursuit of these interests, they have filed several lawsuits against the Newmont Mining Corporation ("Newmont") and others in both state and federal courts in the past ten years. Each of these lawsuits was found to be completely lacking in merit, however, and sanctions were imposed on the plaintiffs in two of these prior lawsuits. The present appeals are from a lawsuit that plaintiffs filed against Newmont and other entities on March 13, 2009. The district court dismissed all claims against all of the defendants under Federal Rule of Civil Procedure 12(b). Nonetheless, the plaintiffs filed several motions for reconsideration and relief from judgment, every one of which was denied. Eventually, Newmont filed a motion for sanctions under Rule 11, which the district court granted. The district court ordered that the plaintiffs and their counsel, Steven W. Reifman, pay over $100,000 to Newmont for its attorney fees and costs in defending against the entire lawsuit, and the court enjoined the plaintiffs and Reifman from ever filing another lawsuit arising out of the subject matter of this case in any state or federal court. The plaintiffs now appeal.***

The plaintiffs in this case are PT Pukuafu Indah, PT Lebong Tandai, PT Tanjung Sera Pung, Gideon Minerals U.S.A., Inc., and Dr. Leonard L.J. Young (collectively, "plaintiffs"). They filed this suit on March 13, 2009 against the Securities and Exchange Commission and its Chair, Mary L. Schapiro (together, "SEC"); the Export-Import Bank of the United States and its Chair, Fred P. Hochberg (together, "ExIm Bank"); and JPMorgan Chase & Co., alleging that the SEC and ExIm Bank failed to take enforcement actions against Newmont in connection with allegedly false filings made by Newmont with the SEC, and that JPMorgan "convert[ed]" a $400 million loan from ExIm Bank. R.2 (Complaint ¶ 6 at 3). The plaintiffs also sought a temporary restraining order, but this request was denied by the district court.

On May 4, 2009, the plaintiffs filed an Amended Complaint, in which they added Newmont Mining Corp., Goldman Sachs Group, Inc., and PricewaterhouseCoopers, L.L.C. as defendants. ***

Eight days later, on May 12, 2009, the plaintiffs filed a Second Amended Complaint, in which they added Devonwood Capital Partners, L.L.C.; Devonwood's CEO, James Nelson Lane; and the New Canaan Society as defendants. ***

On July 15, 2009, the district court granted Newmont's motion to dismiss on the ground that the court lacked personal jurisdiction over Newmont, and the court also denied the plaintiffs' motion for summary judgment. *** Four days later, the plaintiffs filed a motion for leave to amend their complaint again, this time to file a Third Amended Complaint. The proposed Third Amended Complaint makes additional assertions regarding the subject-matter jurisdiction of the court, but it says nothing new about personal jurisdiction over Newmont. The plaintiffs also filed a motion for reconsideration of the dismissal of Newmont, followed by an emergency motion for a preliminary injunction against the SEC and PricewaterhouseCoopers, both of which were denied.

In response to the manner in which the plaintiffs and Reifman have pursued this litigation (and similar litigation in other courts in the past), Newmont filed a motion for Rule 11 sanctions on August 21, 2009. In this motion, Newmont argued that the attempted filing of the Third Amended Complaint constituted sanctionable conduct, and Newmont sought attorney fees in defending against the entire case from the beginning of the suit. Rather than respond to this motion directly, however, the plaintiffs filed an "emergency motion for reconsideration" of the denial of their emergency motion for a preliminary injunction. The district court denied the plaintiffs' motion. ***

On October 6, 2009, the district court dismissed the remainder of the case. It granted the remaining defendants' motions to dismiss, denied the plaintiffs' motion for leave to file a Third Amended Complaint, and entered judgment in favor of the defendants. *** The district court granted Newmont's motion for sanctions on November 4, 2009, and ordered "that monetary sanctions in the form of compensation for Newmont's reasonable attorneys' fees and costs will be imposed against counsel and Plaintiffs upon Newmont's submission of adequate proofs establishing those fees and costs." *** The district court also ordered "that Plaintiffs are enjoined from filing any lawsuits against Defendants in this or any federal or state court related to the subject matter of this lawsuit." Id. at 13-14. Subsequently, Newmont produced a bill of costs, showing that it "has incurred $107,369.53 in attorneys' fees, costs and expenses in defending against this lawsuit." *** On January 19, 2010, the district court ordered that this full amount be paid by "Plaintiffs and Plaintiffs' counsel, Reifman & Glass, P.C. and Steven W. Reifman," within thirty days.***

B. Nos. 10-1477/10-1837: Motion for Relief and the Separate Sanctions Judgment

In Nos. 10-1477/10-1837, the plaintiffs challenge the district court's order denying the plaintiffs' motion for relief from the sanctions orders, and the district court's separate sanctions judgment. The plaintiffs' first argument is that the district court erred in finding a Rule 11 violation based on conduct that was not specifically identified in Newmont's motion for sanctions. We see merit in this argument.

We ordinarily review an order imposing sanctions under Rule 11 for abuse of discretion. B&H Medical, L.L.C. v. ABP Admin., Inc., 526 F.3d 257, 269 (6th Cir. 2008). In their motion for relief from judgment before the district court, however, the plaintiffs did not make the argument that the sanctions order was based on conduct that was not identified in Newmont's motion for sanctions.... As a result, we review this claim only for plain error. United States v. Graham, 622 F.3d 445, 455 & n.9 (6th Cir. 2010). "To establish plain error, a defendant must show (1) that an error occurred in the district court; (2) that the error was plain, i.e., obvious or clear; (3) that the error affected defendant's substantial rights; and (4) that this adverse impact seriously affected the fairness, integrity or public reputation of the judicial proceedings." Id. (quotation marks omitted).***

The identification of the specific conduct that is allegedly sanctionable is critical to a finding of a Rule 11 violation. Where a motion for sanctions is made, it "must describe the specific conduct that allegedly violates Rule 11(b)." Fed. R. Civ. P. 11(c)(2). Similarly, where a court acts sua sponte, it must first issue a show-cause order requiring the alleged violator "to show cause why conduct specifically described in the order has not violated Rule 11(b)." Fed. R. Civ. P. 11(c)(3). Furthermore, a district court may not impose a sanction until the violator has had "notice and a reasonable opportunity to respond." Fed. R. Civ. P. 11(c)(1).

In its motion, Newmont identified the plaintiffs' attempted filing of the Third Amended Complaint as the specific conduct that constituted a Rule 11 violation. The district court agreed with Newmont and found that the motion seeking leave to file the Third Amended Complaint was "not 'warranted by existing law' or the facts alleged" and that the proposed Third Amended Complaint "appear[s] to have been presented only for the improper purpose of harassing Newmont, causing unnecessary delay in these proceedings, and needlessly increasing the cost of this litigation." R.102 (Op. at 6). After this, however, the district court also stated that it

believes that Plaintiffs failed to conduct a reasonable inquiry before filing their lawsuit to ensure that their factual allegations and the law supported this Court's personal jurisdiction over Newmont. Therefore, the Court finds that Newmont is entitled to the reasonable attorneys' fees and costs and expenses it incurred in defending against the lawsuit.

Id. at 6-7 (emphasis added). The district court therefore entered an injunction prohibiting the plaintiffs and Reifman "from filing any lawsuits against Defendants in this or any federal or state court related to the subject matter of this lawsuit," R.102 (Op. at 13-14), and it ordered, after Newmont provided a bill of costs, that the plaintiffs and Reifman pay $107,369.53 for Newmont's attorney fees, costs, and expenses in defending against the entire lawsuit, R.111 (Op. Jan. 19, 2010 at 3).

The plaintiffs complain that "the trial [court] broadened the sanctions arena to the entire period of the litigation from the beginning of the case," rather than the filing of the motion for leave to file the Third Amended Complaint, and that the sanctions included "an extensive monetary award for actions that were not part of the specified alleged Rule 11 violations that were the subject of the motion for sanctions." Pl. Br. in Nos. 10-1477/10-1837 at 10, 17. Newmont responds that the district court's Rule 11 order was entirely correct because, although the motion seeking leave to file the Third Amended Complaint was the specific conduct identified as a violation of Rule 11 in the motion for sanctions, the motion requests relief in the form of attorney fees for the entire case. This, according to Newmont, was sufficient to permit the district court to order the plaintiffs and Reifman to pay Newmont's costs and attorney fees in defending against the entire case.

We agree with the plaintiffs. The district court did not comply with Rule 11 because it found a Rule 11 violation in conduct that went beyond the specific conduct identified in Newmont's motion for sanctions. Although the district court clearly found that the motion requesting leave to file the Third Amended Complaint violated Rule 11(b)(1) and (2), the court also made a finding that indicates that it believed that the plaintiffs additionally violated Rule 11(b)'s basic requirement that an attorney must base his "knowledge, information, and belief" regarding the propriety of a submission to the court on "an inquiry reasonable under the circumstances." See R.102 (Op. at 6-7) ("Plaintiffs failed to conduct a reasonable inquiry before filing their lawsuit to ensure that their factual allegations and the law supported this Court's personal jurisdiction over Newmont. Therefore, the Court finds that Newmont is entitled to the reasonable attorneys' fees and costs and expenses it incurred in defending against the lawsuit."). Indeed, the monetary sanctions appear to be directly tied to this finding — that Reifman did not meet Rule 11(b)'s requirement to make "an inquiry reasonable under the circumstances" — not the finding that the Third Amended Complaint violated Rule 11.

The fact that the district court's finding of a Rule 11 violation includes conduct that goes beyond the conduct identified by Newmont in its motion for sanctions is especially problematic given that Rule 11 is particularly focused on ensuring that the alleged violator has notice of the specific conduct that is said to constitute a Rule 11 violation. Even though district courts are given considerable discretion to determine the proper scope of a sanctions award, see Fed. R. Civ. P. 11 advisory committee's note to 1993 amendments ("Whether a violation has occurred and what sanctions, if any, to impose for a violation are matters committed to the discretion of the trial court[.]"), Rule 11 is absolutely clear that a motion for sanctions "must describe the specific conduct that allegedly violates Rule 11(b)." Fed. R. Civ. P. 11(c)(2); see also Fed. R. Civ. P. 11 advisory committee's note to 1993 amendments ("Explicit provision is made for litigants to be provided notice of the alleged violation and an opportunity to respond before sanctions are imposed."); id. (same for sanctions imposed on a court's own initiative). As other circuits have recognized, "[t]he purpose of particularized notice is to put counsel 'on notice as to the particular factors that he must address if he is to avoid sanctions.'" Nuwesra v. Merrill Lynch, Fenner & Smith, Inc., 174 F.3d 87, 92 (2d Cir. 1999) (quotation marks omitted); 1-10 Indus. Assocs., LLC v. United States, 528 F.3d 859, 867-68 (Fed. Cir. 2008) (same); Anjelino v. New York Times Co., 200 F.3d 73, 100 (3d Cir. 2000) (same); see also 5A Charles Alan Wright, Arthur R. Miller, Mary Kay Kane & Richard L. Marcus, Federal Practice and Procedure §§ 1337, 1337.3 n.1 (3d ed. 2011) (collecting cases holding that procedural due process requires notice and an opportunity to be heard before sanctions are imposed and that "a failure to comport with these requirements is enough to merit reversal."). Furthermore, the First Circuit has noted, under the pre-1993 Amendment version of Rule 11, that "the determination of what process is due is, in part, a function of the type and severity of the sanction." Media Duplication Servs., Ltd. v. HDG Software, Inc., 928 F.2d 1228, 1238 (1st Cir. 1991).

The plaintiffs and Reifman did not have clear notice that the initial filing of the lawsuit was the conduct asserted to be the subject of sanctions. Although Newmont's motion requested reimbursement for all of its costs in defending against the entire suit, the only conduct of the plaintiffs and Reifman that was specified as sanctionable was the filing of the motion for leave to file the Third Amended Complaint. ***

Furthermore, given Rule 11's clear focus on the specific conduct that is subject to sanctions and its requirement that the alleged violator be given notice and an opportunity to be heard, this error was plain. In addition, given the great amount of the monetary sanction that resulted from the violation, and the difference that may exist between what is needed to deter a frivolous lawsuit as opposed to a single frivolous filing, this error affects the plaintiffs' and Reifman's substantial rights and "seriously affected the fairness, integrity or public reputation of the judicial proceedings." Graham, 622 F.3d at 455. We therefore reverse the district court's finding of a Rule 11 violation, vacate its sanctions orders, and remand for the district court to consider anew Newmont's allegations of a Rule 11 violation by the plaintiffs and Reifman.10 On remand, the district court will be able to consider the parties' arguments regarding the propriety of Rule 11 sanctions and, if sanctions are found to be warranted, the proper scope of those sanctions, keeping in mind the requirements of Rule 11 and this circuit's precedents, especially as they relate to the need to deter sanctionable conduct, the need to protect the district court's ruling on personal jurisdiction over Newmont in Michigan, and the propriety of federal court injunctions against future lawsuits in state court, along with any other relevant consideration.

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