The opinion of the court was delivered by: WEINFELD
This action was the aftermath of an arbitration proceeding, the parties to which were Anthony W. Tedeschi ("Tedeschi"), a registered broker, and his former employer, Smith Barney, Harris Upham & Co., Inc., an investment broker. The basic issue submitted to the arbitrators was whether Tedeschi, as the account executive servicing the account of a customer knew or should have known, and failed to report, that the latter ("the defalcating customer") had received stock to which he was not entitled. Smith Barney sought recovery from Tedeschi for the loss sustained as a result of the transaction and Tedeschi interposed a counterclaim for defamation of character. Neither party prevailed upon the respectively asserted claims. Smith Barney was represented in the proceeding by Martin S. Berglas ("Berglas"), assistant general counsel on its legal staff. Tedeschi was represented by Merrill J. Chapman ("Chapman").
Soon after the termination of the arbitration Tedeschi, represented by Chapman, commenced this action against Smith Barney, Berglas and John Maine ("Maine"), the manager of the Smith Barney branch where plaintiff had been employed who had testified before the arbitrators with respect to matters pertaining to the defalcating customer's account. The complaint, among other matters, alleged that when Maine learned that Tedeschi decided to leave Smith Barney to become affiliated with another investment firm, Maine threatened to sue Tedeschi for money owed by the defalcating customer; that thereafter Smith Barney instituted the arbitration proceeding under the New York Stock Exchange rules. The amended complaint
sought recovery of damages under five separate claims:
(1) false and malicious prosecution because the arbitration was instituted without probable cause;
(2) abuse of process because Smith Barney had, prior to the arbitration, instituted an action against the defalcating customer in a New Jersey state court and that action was its sole remedy;
(3) defamation based upon an unsigned employment verification questionnaire allegedly prepared by Maine that falsely stated Tedeschi had been "discharged" by Smith Barney and that he was of "questionable loyalty and ethics";
(4) fraud on the court (the arbitration panel) allegedly committed by Berglas in violation of New York Judiciary Law § 487; and
(5) emotional, mental and psychic distress.
A sixth and separate claim was asserted on behalf of Lois Tedeschi, plaintiff's wife, seeking recovery of damages because, as she alleged, by reason of defendants' conduct her husband became "ill, sick, nervous, irritable" and as a result she was deprived of his services as a husband and a father to their children.
After a series of motions made by the defendants, this Court eventually dismissed all plaintiffs' claims and judgment was entered in favor of the defendants. Familiarity is assumed with the various rulings and other actions taken, which set forth the reasons therefor.
The defendants now move for an order pursuant to 28 U.S.C. § 1927, Rule 11 of the Federal Rules of Civil Procedure
and the inherent equitable power of the Court, for an award of reasonable attorneys' fees and costs to be assessed against plaintiffs and Chapman. While under the traditional "American Rule" each side ordinarily bears its own litigation fees and expenses, the Supreme Court has excepted the instance where the losing party has "acted in bad faith, vexatiously, wantonly, or for oppressive reasons . . . ."
Our Court of Appeals has observed that the exception is to be applied with caution so that those with legitimate claims are not deterred from their enforcement, but it must be enforced in appropriate cases to spare parties the financial expense and waste of time in defending against baseless allegations.
Preliminarily, procedural objections are advanced to defeat the motion. First, it is argued that the motion seeks to alter or amend the final judgment and was not made within ten days after its entry as required by Rule 59(e) of the Federal Rules of Civil Procedure. However, the Supreme Court has held that Rule 59(e) is inapplicable to a post judgment request for counsel fees made pursuant to 42 U.S.C. § 1988.
There is no sound basis for applying a different rule in an action where the fees are sought under the authority of the Federal Rules of Civil Procedure and the Court's inherent equitable power.
The application for fees "raises legal issues collateral to the main cause of action -- the issues to which Rule 59(e) was never intended to apply."
Next, it is contended that since this is a diversity action it presents, as the Supreme Court noted in Alyeska, a "very different situation,"
and that New York State rigidly enforces the American Rule. However, despite plaintiffs' contention to the contrary, New York State does acknowledge exceptions to the rule, particularly when a litigant's malicious acts cause a person to incur legal fees.
But even if the New York rule were otherwise, it does not supersede the inherent equitable power of this Court, the provisions of section 1927 of Title 28 and Rule 11 of the Federal Rules of Civil Procedure. Once the litigation was instituted in this Court, plaintiffs, as well as the defendants, were subject to those and other authorities which govern and apply to their conduct and that of their counsel. Thus, plaintiffs' procedural challenge to the motion fails and we consider it on the merits.
An essential requirement underlying fee shifting, contrary to the general American Rule, is a finding of bad faith on the part of the unsuccessful litigant. An action is brought in bad faith when the claim is entirely without color and has been asserted wantonly, for the purpose of harassment or delay, or for other improper reasons.
The bad faith exception justifying an award of counsel fees and other expenses of the litigation extends both to the filing and the prosecution of the litigation.
The sanction ...