Commercial Litigation and Arbitration

Breadth of Arbitral Immunity — Trivial Differences between Rule 11 Motion as Served and as Filed Do Not Vitiate It or Require Second Safe Harbor Period — Permitted Inference vs. Unpermitted Speculation

Bletas v. Deluca, 2011 U.S. Dist. LEXIS 133132 (S.D.N.Y. Nov. 14, 2011):

Pro se plaintiffs ... (collectively, the "former franchisees") former franchisees of Subway International B.V. ("SIBV") who operated sandwich shops in Greece, and plaintiff [X], a Greek attorney who represented some of the plaintiffs in arbitration proceedings, bring this suit against defendants Frederick Deluca, Patricia Demarais, SIBV, Doctor's Associates, Inc. ("DAI"), which is the franchisor of Subway sandwich shops in the United States, Gina Badalamenti, Kristin Corcoran, Tricia Lee, [Arbitrator] Edna Sussman, United States District Judge Peter C. Dorsey, Bethany Appleby, Steven Malech, Michael Kenny, and Wiggin and Dana L.L.P., asserting claims for the violation of human and constitutional rights, tax regulations, and treaties relating to tax and antitrust laws, as well as for fraud, libel, enterprise corruption, and various other criminal offenses and seeking over one billion dollars in monetary damages.***

[Following adverse arbitration awards, t]he ... siblings and Cere filed petitions in New York Supreme Court to vacate the arbitration awards issued by defendant Sussman "on the grounds of fraud, corruption, misconduct, exceeding of powers, perjury and violation of public policy." (Id.) These petitions have been dismissed because service was improper to confer personal jurisdiction over SIBV, a Netherlands corporation, and because they otherwise lacked merit....

On October 28, 2010, SIBV filed petitions seeking confirmation of the Cere arbitration award, the ... siblings arbitration award, and the [second] arbitration award in the federal District Court of Connecticut. On August 11, 2011, the district court granted a motion by Cere to dismiss SIBV's petition for lack of subject matter jurisdiction based on improper service of process. Subway Int'l B.V. v. Cere, No. 10 Civ. 1713 (PCD) (D. Conn. Aug. 11, 2011). Also on August 11, 2011, the district court denied motions by the ... siblings and by [the second person] to transfer venue to the Supreme Court of the State of New York and to dismiss. Subway Int'l B.V. v. Bletas, No. 10 Civ. 1714 (PCD) (D. Conn. Aug. 11, 2011); Subway Int'l B.V. v. Bletas, No. 10 Civ. 1715 (PCD) (D. Conn. Aug. 11, 2011). SIBV's petitions to confirm the ... siblings and [second] arbitration awards remain pending.

IV. Procedural History

On March 15, 2011, plaintiffs filed the present lawsuit. On April 6, 2011, defendant Sussman moved to dismiss the original complaint. On April 13, 2011, counsel for the Subway defendants advised plaintiffs by letter and an accompanying draft sanctions motion that the Subway defendants would seek sanctions pursuant to Federal Rule of Civil Procedure 11(c)(2), if plaintiffs did not withdraw their complaint within twenty-one days, as it appeared to be patently frivolous, unwarranted by existing law or by a nonfrivolous argument for extending, modifying, or reversing existing law, and intended solely for the purpose of harassing defendants.... On April 27, 2011, after fourteen days had passed, plaintiffs filed an Amended Complaint. On May 2, 2011, counsel for the Subway defendants informed plaintiffs' by letter that their amended complaint did not cure the problems previously identified and that, the Subway defendants still intended to move for sanctions at the appropriate time. ***

III. Arbitral Immunity

The Second Circuit has held that because "the nature of the function performed by arbitrators necessitates protection analogous to that traditionally accorded to judges . . . arbitrators in contractually agreed upon arbitration proceedings are absolutely immune from liability in damages for all acts within the scope of the arbitral process." Austern v. Chicago Bd. of Options Exch., Inc., 898. F.2d 882, 886 (2d Cir. 1990)....

Plaintiffs allege that Sussman "exceeded her powers and authority, committed misconduct, [] refused to hear pertinent and material evidence to the controversy that deprived [plaintiffs] of the right to a fair trial, and the award was procured by corruption and fraud." (Am. Compl. 38.) However, because all of these alleged actions occurred in the context of the two arbitrations presided over by Sussman, they are within the scope of the arbitral process and Sussman is immune from suit.***

[A]ll of plaintiffs' arguments should have been raised before the arbitrator or in a motion to vacate, not in an action for damages against the arbitrator. Rather, plaintiffs appear to be conflating the circumstances in which an arbitration award may be vacated, see 9 U.S.C. § 10(a)(4), with the limits of the scope of arbitral immunity. See Austern, 898 F.2d at 886 (holding that absolute immunity extends to "all functions that are integrally related to the arbitral process").

Finally, we observe that there is absolutely no factual basis for plaintiffs' over-the-top accusations that Sussman "admitted criminal conduct" or committed "tax evasion and tax fraud." It is clear that plaintiffs' claims are precisely the sort of "reprisals by dissatisfied litigants" from which arbitrators are entitled to protection by the doctrine of arbitral immunity. Austern, 898 F.2d at 886 (quoting Corey v. New York Stock Exch., 691 F.2d 1205, 1211 (6th Cir. 1982)).

Thus, plaintiffs' claims against defendant Sussman are dismissed, pursuant to Federal Rule of Civil Procedure 12(b)(6).***

V. Sanctions Under Federal Rule 11

***As discussed, on April 13, 2011, the Subway defendants served plaintiffs with a letter conveying their intent to move pursuant to Rule 11(c)(2) with which they enclosed a draft sanctions motion.... On May 2, 2011, the Subway defendants informed plaintiffs by letter that the recently filed Amended Complaint did not cure the problems previously identified and that the Subway defendants still intended to move for sanctions.... On May 26, 2011, this Court confirmed at the initial conference that the Subway defendants had previously served a draft sanctions motion on plaintiffs and planned to move for sanctions. On June 16, 2011, the Subway defendants separately moved to dismiss and for sanctions.***

In opposing sanctions, plaintiffs principally rely on a procedural argument. They claim, that the safe-harbor provision of Rule 11(c)(2) was not "triggered" here because the draft [ed. note: i.e., served but unfiled] sanctions motion that the Subway defendants served on them on April 13, 2011 and again referenced on May 2, 2011 was not "identical" to the sanctions motion ultimately filed on June 16, 2011. (Pl.'s Affirm. Opp'n Def.'s Mot. Sanctions 6). The differences that plaintiffs identify are trivial and commonsensical. (See id. at 6-8 (noting "Complaint" was changed to "Amended Complaint").) Plaintiffs received clear notice of the defects that the Subway defendants perceived in their original complaint and Amended Complaint, which defects were specifically described, well over twenty-one days prior to the filing of the sanctions motion. Such notice is all that Rule 11(c)(2) requires. See Lawrence v. Richman Group of CT L.L.C, 620 F.3d 153, 159 (2d Cir. 2010) ("Rule 11(c)(2) permits sanctions to be imposed on a party who has violated Rule 11(b) only after that party is provided with notice of the pleading defect and afforded an opportunity to correct or withdraw the defective filing"). See also American Home Assur. Co. v. Merck & Co., No. 03 Civ. 3850 (VM) (JCF), 2004 WL 2149103, at *5 (S.D.N.Y. Sept. 23, 2004) (Francis, M.J.) (rejecting argument that amended but allegedly still defective paper required renewal of sanctions motion because safe harbor only shields a "withdrawn or appropriately corrected" paper).

Transitioning from this procedural question to address whether sanctions are substantively merited here, we emphasize at the outset that Rule 11 does not exempt pro se plaintiffs, though "their status is certainly relevant to a court's inquiry into whether to impose sanctions. See Maduakolam v. Columbia Univ., 866 F.2d 53, 56 (2d Cir. 1989) (courts "may consider the special circumstances of litigants who are untutored in the law"). Indeed, "sanctions may be particularly appropriate when the offending party, although proceeding pro se, has demonstrated . . . competence in finding and understanding the applicable law." Smith v. Educ. People, Inc., 233 F.R.D. 137 (S.D.N.Y. 2005). See also Cornett v. Bank of New York, No. 91 Civ. 0605 (CSH), 1992 WL 88197, *6 (S.D.N.Y. Apr. 17, 1992) (finding plaintiff who "has shown an ability to find the law and to make legal arguments . . . may be held to a somewhat higher standard than other pro se parties").

Because Rule 11 requires that a party's inquiry must be "reasonable under the circumstances," liability for sanctions "'requires only a showing of objective unreasonableness.'" ATSI Commc'ns, Inc. v. Shaar Fund, Ltd., 579 F.3d 143, (2d Cir. 2009) (quoting Ted Lapidus, S.A. v. Vann, 112 F.3d 91, 96 (2d Cir. 1997)). In this context, a complaint is not generally reviewed as an "indivisible unit." Perez v. Posse Comitatus, 373 F.3d 321, 325 (2d Cir. 2004). Instead, "claims are analyzed individually," id., and with awareness that the imposition of sanctions is a serious matter in which a court must "'resolve all doubts in favor of the signer of the pleading.'" Abdelhamid v. Altria Group, Inc., 515 F. Supp. 2d 384, 392 (S.D.N.Y. 2007) (quoting Rodick v. City of Schenectady, 1 F.3d 1341, 1350 (2d Cir. 1993)). "Merely incorrect legal statements are not sanctionable under Rule 11(b)(2)." Storey v. Cello Holdings, L.L.C., 347 F.3d 370, 391 (2d Cir. 2003). Pursuant to that provision, a sanctionable "legal contention" must not be "warranted by existing law or by a nonfrivolous argument for extending, modifying, or reversing existing law or establishing new law." Fed. R. Civ. P. 11(b)(2). "With regard to factual contentions, sanctions may not be imposed unless a particular allegation is utterly lacking in support." Storey, 347 F.3d at 388 (internal quotation marks omitted).

While Rule 11(b)(3) permits parties to specifically identify "factual contentions . . . [that] will likely have evidentiary support after a reasonable opportunity for further investigation or discovery," this, allowance cannot be understood to give parties free reign to fire shots into the proverbial dark because a reasonable inquiry must still support the likelihood of the inference drawn. See Profile Publ'g and Mgmt. Corp. APS v., Inc., 242 F. Supp. 2d 363 (S.D.N.Y. 2003) (imposing sanctions where affirmative defenses and counterclaims, some of which were premised on "information and belief," were made without reasonable inquiry); Fed. R. Civ. P. 11 advisory committee's note ("[t]olerance of factual contentions in initial pleadings by plaintiffs or defendants when specifically identified as made on information and belief does not relieve litigants from the obligation to conduct an appropriate investigation into the facts that is reasonable under the circumstances"). See also Gregory P. Joseph, Sanctions: The Federal Law of Litigation Abuse § 9(E) (4th ed. 2008) ("[t]here is a distinction between a reasonable inference — one based upon and rationally linked to the evidence known to the presenter — and rank speculation").

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