United States District Court, Southern District of New York
April 17, 2001
FOUR STAR FINANCIAL SERVICES, LLC., PLAINTIFF, COMMONWEALTH MANAGEMENT ASSOCIATES, BRITE BUSINESS CORPORATION, CHARLES SULLIVAN, INDIVIDUALLY, MARTIN D. FIFE, INDIVIDUALLY, RAYMOND JAMES FINANCIAL SERVICES, INC., DENNIS S. HERULA, INDIVIDUALLY, AND JOHN DOE 1-20, DEFENDANTS.
The opinion of the court was delivered by: John S. Martin, Jr., United States District Judge.
MEMORANDUM OPINION AND ORDER
In January 2000, Four Star Financial Services LLC, ("Plaintiff")
invested $11,750,000 in an investment program that was to be managed by
the Defendant Martin D. Fife ("Fife"). The following July, $7,000,000 was
returned to Plaintiff by the Defendants. Between November 2000 and the
end of January 2001, Defendant Fife repaid Plaintiff an additional
On February 22, 2001, Plaintiff filed an ex parte application for a
writ of attachment based on a Verified Complaint that stated: "Defendants
are indebted to the Plaintiff in the amount of at least $11,500,000, plus
interest and profits in an amount represented by Defendants to be in
excess of $7,000,000." (Compl. ¶ 33.) To its great regret and
embarrassment, the Court granted Plaintiff's application for a writ of
attachment directed to each Defendant in the amount of $11,500,000.
The question that naturally arises is: "How could the Court grant
Plaintiff a writ of attachment in the amount of $11,500,000 when the
Plaintiff had made an investment of only $11,750,000 and $9,600,000 had
already been returned?" The answer is that the papers in support of the
application were false and misleading.
Not only did the Verified Complaint fail to mention the $9,600,000 that
had been repaid to Plaintiff, but it conveyed the impression that there
had been no repayment despite repeated assurances that the invested money
would be returned. Indeed, paragraph thirty-two of the Verified Complaint
contains the false statement: "No funds have been received by Plaintiff."
(Compl. ¶ 32.)
The Verified Complaint was also totally misleading in its attempt to
convey a factual predicate for the allegation that the Defendants were
about "to attempt to abscond with the funds identified above with the
intent to defraud Plaintiff." (Compl. ¶ 5.) In this regard, the
Verified Complaint conveyed a picture of Defendants as itinerant
swindlers without roots in New York who continuously promised to return
Plaintiff's investment but never made any of the promised payments.
In support of the claim that Defendant Fife was about to abscond with
its funds, the Verified Complaint stated: "Fife has no real estate or
permanent residence in his name within the State of New York." (Compl.
¶ 11.) While this statement might be literally true, Plaintiff's
general counsel, who swore to the Verified Complaint, knew that Fife
lived with his wife, a former Deputy Mayor of the City of New York,*fn1
an apartment on Central Park West which was held in her name. The
Verified Complaint also made no mention of Fife's membership on the
Boards of the Dreyfus Fund Incorporated and several of its affiliated
The Court did not learn that Plaintiff and its counsel had mislead it
into granting an unwarranted writ of attachment until it received motions
from Defendants Fife and Sullivan seeking to vacate the attachment. After
hearing argument from the parties, the Court granted the motions to
vacate the attachment, invited Defendants to submit an application for
attorneys' fees against the bond, and directed Plaintiff's counsel and
its general counsel to show cause why they should not be sanctioned under
Rule 11 of the Federal Rules of Civil Procedure and why the Court should
not refer their conduct to the appropriate bar associations.
(Hereinafter, Plaintiff's attorney in this action and its general counsel
will be collectively referred to as Respondents.)
At a subsequent hearing, the Court granted the applications of defense
counsel to recover against the bond fees and expenses totaling
$70,513.53, but reserved decision on the question of Rule 11 sanctions.
A. The Rule 11 Standard
In considering the issue of sanctions in this case, it is appropriate
to start with the observation of Judge Pratt in Oliveri v. Thompson,
803 F.2d 1265, 1267 (2d Cir. 1986)
Most lawyers who litigate in our federal courts
perform their function at a commendable level of
professionalism, advancing claims and defenses with
the zeal of a trained advocate, but properly tempering
enthusiasm for a client's cause with careful regard
for the obligations of truth, candor, accuracy, and
professional judgment that are expected of them as
officers of the court. Because, we suppose, in a
system as large and diverse as our federal court
system, it is inevitable that a few attorneys will
occasionally fall short in these professional
obligations, sanctions against attorneys play a
limited but necessary role in the administration of
our civil justice system. Severe forms of misconduct
have traditionally been subject to contempt
citations, review by bar association grievance
committees, and in extreme cases, suspension or
disbarment. In recent years, however, increasing
attention has been focused upon lesser sanctions as a
means of fine-tuning our litigation system to weed out
some of its abuses and to improve its
In their response to the Order to Show Cause, Respondents admit that
the Verified Complaint contains misstatements of fact and acknowledge an
understanding of why the Court would consider it misleading and be upset
by their conduct. They contend, however, that they acted in good faith on
the belief that they had been defrauded by Defendants, and that
Defendants had told them that they were moving their assets offshore to
prevent Plaintiff from collecting any judgment that it might obtain.
Even accepting Respondents' assertion that they did not deliberately
set out to mislead the Court and that any errors in their papers resulted
from the time pressures involved in preparing an application for
emergency relief, subjective good faith is not a defense. Rule 11
sanctions are judged under an objective reasonableness standard. See
Lapidus v. Vann, 112 F.3d 91, 96 (2d Cir. 1997); Int'l Telepassport
Corp. v. USFI, Inc., 89 F.3d 82, 86 (2d Cir. 1996); K.M.B. Warehouse
Distribs., Inc. v. Walker Mfg. Co., 61 F.3d 123, 131 (2d Cir. 1995).
Indeed, in United States v. International Brotherhood of Teamsters,
948 F.2d 1338 (2d Cir. 1991), Judge McLaughlin noted: "In deciding whether
the signer of a pleading, motion, or other paper has crossed the line
between zealous advocacy and plain pettifoggery, the court applies an
objective standard of reasonableness." Id. at 1344.
In so far as is relevant here, Rule 11 provides:
By presenting to the court (whether by signing,
filing, submitting, or later advocating) a pleading,
written motion, or other paper, an attorney or
unrepresented party is certifying that to the best of
the person's knowledge, information, and belief,
formed after an inquiry reasonable under the
(2) the claims, defenses, and other legal contentions
therein are warranted by existing law or by a nonfrivolous
argument for the extension, modification, or reversal of
existing law or the establishment of new law;
(3) the allegations and other factual contentions have
evidentiary support or, if specifically so identified, are
likely to have evidentiary support after a reasonable
opportunity for further investigation or discovery. . . .
Fed. R. Civ. P. 11(b) (emphasis added).
Plaintiff's counsel submitted to the Court an application for a writ of
attachment seeking to attach the assets of each of the Defendants*fn2
"as will satisfy $11,500,000.00 the amount of Plaintiff's demand. . . ."
(Mot. Short Notice.) This was based on the allegation in the Verified
Complaint, signed by Plaintiff's general counsel, that: "Defendants are
indebted to the Plaintiff in the amount of at least $11,500,000.00, plus
interest and profits in an amount represented by Defendants to be in
excess of $7,000,000.00. . . ." (Comp. ¶ 33.)
When pressed by the Court as to how they could state in the Verified
Complaint that Defendants were indebted to Plaintiff in the amount of
$11,500,000 plus interest and profits when $9,600,000 of the original
investment of $11,750,000 had been returned to Plaintiff by the time the
Verified Complaint was prepared, Respondents offered the following
According to Plaintiff's general counsel, less than three months after
the initial investment of $11,750,000 was made, he was told that the
investment had already earned $4,000,000, and Respondents considered this
to be reinvested money. In addition, Defendant Sullivan had promised to
pay Plaintiff $5,500,000, and Defendant Fife, who had already repaid
$9,600,000, had promised to pay Plaintiff an additional $2,000,000.
Thus, by adding the $4,000,000 profit earned in the first three months,
the $5,500,000 that Sullivan had agreed to repay, and the additional
$2,000,000 promised by Fife, Respondents claim that there was a total
indebtedness of $11,500,000.
Among the problems with this response are the following: 1) the
Verified Complaint contains no allegation that Plaintiff earned a profit
of $4,000,000 in three months that was reinvested, and 2) while Fife and
Sullivan may have individually promised to repay Plaintiff the original
investment, combining these amounts as an amount owed by each of them was
Even giving Respondents the benefit of the doubt that the $4,000,000
alleged profit could be added to the original investment of $11,750,000
and thus considered part of the principal,*fn3 in light of the repayment of
$9,600,000, the most that Plaintiff could have properly alleged as the
amount of the outstanding indebtedness was $6,150,000.
Thus, it was not objectively reasonable for Respondents to file a
Verified Complaint alleging that Defendants were indebted to Plaintiff in
the amount of $11,500,000 plus interest and profits, or to seek a writ of
attachment for that amount as to each Defendant. It was also objectively
unreasonable for Plaintiff to seek a writ of attachment in the amount of
$11,500,000 against Defendant Fife who had already been responsible for
the return to Plaintiff of $9,600,000 of the original investment.
Moreover, the problem with seeking such an attachment against Fife is
exacerbated by the misleading allegations in the Verified Complaint that
he was about "to abscond" and that he had "no . . . permanent residence
in his name within the State of New York." (Compl. ¶ 11.)
Rule 11 does not explicitly prohibit failing to set forth facts
necessary to prevent the facts that are stated in a filing from
misleading the Court. However, the requirement that the facts alleged
have "evidentiary support" requires, at a minimum, that there is reason
to believe that, when all the facts are known, the Court will find that
they support the relief requested. Here, no reasonable attorney could
believe that a Judge would issue an ex parte order of attachment against
Fife in the amount of $11,500,000 if informed that Fife resided in an
apartment in New York City which was owned by his wife and that he had
been responsible for returning $9,600,000 of Plaintiff's original
B. The Sanctions to be Imposed
Having found that Respondents' conduct violated Rule 11, the Court must
determine the sanctions to be imposed. Rule 11 gives a court "significant
discretion in determining what sanction, if any, should be imposed for a
Fed. R. Civ. P. 11(c) (Advisory Committee Note). The sanction "should
not be more severe than necessary to deter repetition of the conduct by
the offending person or comparable conduct by similarly situated
persons." Id.; see Margo v. Weiss, 213 F.3d 55, 64 (2d Cir. 2000);
Schlaifer Nance & Co. v. Estate of Warhol, 194 F.3d 323, 333 (2d Cir.
1999); Benton v. G&O Mfg. Co., 921 F. Supp. 905, 908 (D. Conn. 1995)
In this case, Respondents have vigorously asserted that they acted in
good faith and did not intend to mislead the Court. While a cold review
of the facts gives reason to be skeptical of that assertion, this Court
is not willing to stigmatize two attorneys, who apparently have
unblemished reputations, by making a finding that is contrary to their
sworn assertions of good faith. For that reason, the Court has not
referred to Respondents by name in this Opinion.
However, as noted above, good faith is not the issue. As Judge Pratt
noted in Oliveri v. Thompson, one of the purposes of Rule 11 is to
provide sanctions less severe than those previously available to punish
wilful misconduct "as a means of fine-tuning our litigation system to
out some of its abuses and to improve its dispute-resolving
function." Oliveri, 803 F.2d at 1267.
Even accepting Respondents assertions that they acted in good faith,
their objectively unreasonable conduct violated Rule 11. The Court must
exercise its discretion to order a sanction, not merely to deter these
Respondents from engaging in similar conduct in the future but, as noted
above, "to deter . . . comparable conduct by similarly situated persons."
Fed. R. Civ. P. 11(c) (Advisory Committee Note).
In considering the appropriate sanction to be applied in this case, it
is important to recognize that we are not dealing simply with the
allegations of an unverified complaint filed simply to commence contested
litigation. The false and misleading assertions in this case were
contained in a Verified Complaint which was the basis for an ex parte
application for the extraordinary remedy of a writ of attachment. Because
in making the application for a writ of attachment Respondents knew that
the Court would be required to place particular trust in the truth of the
Verified Complaint's sworn statements, they had a heightened obligation
to insure that the facts were accurately portrayed.
Sanctions must be imposed here to make it clear to all who practice in
the federal courts that when they come before a Judge seeking
extraordinary relief ex parte, they will be held to the highest standards
of candor. It is not a defense to claim that, while factual statements to
the Court were materially misleading, they were not literally false.
Attorneys are officers of the Court, and our system of justice cannot
operate efficiently if the Court cannot rely on the candor of counsel
presenting an application for ex parte relief.
The Court is persuaded that, in responding to the Court's Order to Show
Cause and being called to task by the Court for the false and misleading
assertions in the Verified Complaint, Respondents have been sufficiently
chastened so that it is unlikely that they will engage in similar conduct
in the future. However, some additional sanction is necessary to insure
that other attorneys will be deterred from submitting a similar
application for ex Parte relief which so grossly misleads the Court as to
the merits of their claim
Therefore, each of Respondents is ordered to pay the amount of $2,500
to the Clerk of the Court as a sanction for the violation of Rule 11.