No Bad Faith Required for § 1927 Sanctions in Sixth Circuit — Test Is Whether Lawyer Knew or Should Have Known Position Was Frivolous — No Separate (or Any) Motion Required — Request in Brief for § 1927 Sanctions Suffices

Meathe v. Ret, 2013 U.S. App. LEXIS 22295 (6th Cir. Oct. 29, 2013)

Plaintiff Cullan Meathe appeals the district court's grant of summary judgment in this direct shareholder suit alleging breach of fiduciary duty, breach of contract, silent fraud, civil conspiracy, and minority shareholder oppression. Meathe argues that the district court erred in holding that he did not have standing to pursue his claims. The defendants filed a cross-appeal alleging that the district court erred in not considering whether to impose sanctions against Meathe's counsel, even though the district court had on multiple occasions opined that the Meathe's case was frivolous. Because Meathe should have brought most of his claims in a derivative action and he failed to allege an injury for which the court could provide a remedy, the district court properly dismissed the entire case on summary judgment. However, because the defendants raised the issue of sanctions, which had been placed squarely before the district court in the defendants' response in opposition to a motion for leave to amend, the district court should have at least briefly considered the issue.

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Finally, with respect to the cross-appeal, the district court erred in entirely failing  to address the issue of sanctions after Ret squarely presented before the court the close issue of whether sanctions against Meathe were warranted. Ret requested sanctions against Meathe for violating 28 U.S.C. § 1927, which states, "Any attorney . . . who so multiplies the proceedings in any case unreasonably and vexatiously may be required by the court to satisfy personally the excess costs, expenses, and attorneys' fees reasonably incurred because of such conduct."   Ret raised this issue in his brief opposing Meathe's motion for leave to amend the complaint. In disposing of Meathe's motion, the district court did not mention sanctions at all. In the context of this case, the district court should not have failed to mention sanctions, in light of statements by the district court suggesting that Meathe's counsel had indeed multiplied the proceedings unreasonably and vexatiously.

In this case the issue of whether sanctions are warranted was close enough to warrant at least some discussion by the district court. Under our precedents, "[t]he proper inquiry is not whether an attorney acted in bad faith; rather, a court should consider whether an attorney knows or reasonably should know  that a claim pursued is frivolous." Hall v. Liberty Life Assur. Co. of Bos., 595 F.3d 270, 275 (6th Cir. 2010). There are reasons to believe that Meathe's attorney should reasonably have known that Meathe's claims were frivolous: all of Meathe's claims were futile and he even attempted to request a declaratory judgment for an equitable defense that had already been voluntarily dismissed in the case in which it belonged. Indeed, as Ret points out, the district court questioned the merits of the case and its purpose on multiple occasions. The court called the allegations "imaginary," characterized the case as a "smoke screen, an imaginative way of avoiding a claim of infringement," and called the motion to disqualify "close to a perverse use of disqualification."

As here, when the issue of sanctions is close and the district court fails to address the issue, a remand may be appropriate. In United States ex rel. Williams v. Renal Care Group., Inc., we noted that "[w]e have previously remanded close questions regarding a motion for sanctions if the district court's denial of sanctions lacks explanation." 696 F.3d 518, 526 (6th Cir. 2012). In Michigan Division-Monument Builders of North America v. Michigan Cemetery Ass'n, we stated that "this court has required an analysis and discrete findings in close or serious sanction cases, an approach that makes particular sense when the explanation for the ruling is not otherwise apparent from the record."   524 F.3d 726, 740 (6th Cir. 2008) (internal quotation marks omitted) (citation omitted). In contrast, in another case the issue of sanctions was deemed "not so close . . . that the district court's lack of explanation constitute[d] an abuse of discretion." Moross Ltd. P'ship v. Fleckenstein Capital, Inc., 466 F.3d 508, 520 (6th Cir. 2006). Because of the lack of merit of many of Meathe's claims and the court's espoused skepticism of the meritoriousness and propriety of the case, a limited remand is warranted in this case in order for the district court to determine in the first place whether sanctions should be imposed against Meathe's counsel.

Meathe's argument that the subject of sanctions was never placed squarely before the lower court are flawed. A separate motion is not necessarily required to request § 1927 sanctions. Cases regarding the separate motion requirement for Rule 11 sanction are not applicable. Ret placed  [*22] the issue of sanctions before the district court by raising it in the statement of issues in his brief opposing Meathe's motion to amend and devoting an entire two-page section of the brief to make the case for sanctioning Meathe's counsel.

 

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