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In Re Application of Debbie Gushlak

July 2, 2012


The opinion of the court was delivered by: Nicholas G. Garaufis, United States District Judge.



The court is in receipt of Attorney Alan S. Futerfas's response to its order to show cause why Futerfas should not be sanctioned under Rule 11 of the Federal Rules of Civil Procedure for presenting a frivolous legal argument to the court. (Docket Entry # 98.) Because the court finds, based on the totality of the circumstances in this case, that Futerfas raised this argument in subjective bad faith, the court imposes sanctions under Rule 11(c)(3). Pursuant to Rule 11(c)(4), Futerfas is ORDERED to pay a penalty to the court in the form of $500, payable to the Clerk of Court.

On April 30, 2012, the court ordered Futerfas, who was at the time defending contempt proceedings against his clients Myron Gushlak and Yelena Furman, to show cause why he should not be sanctioned pursuant to Rule 11 for raising the frivolous argument that the court had been divested of jurisdiction to enforce its own facially valid subpoenas due to respondents' appeals from two orders granting leave for the applicant in this case to serve those subpoenas. Not only was this argument totally unsupported by case law or common sense, but it had been thoroughly debunked by Magistrate Judge Orenstein in a report and recommendation ("R&R") that the court ultimately adopted. Still, Futerfas persisted in raising the frivolous divestiture argument in his clients' objections to the R&R.*fn1

In relevant part, Rule 11(b) requires a lawyer to certify, "to the best of that person's knowledge, information, and belief, formed after an inquiry reasonable under the circumstances," that his or her "legal contentions are warranted by existing law or by a non-frivolous argument for extending, modifying or reversing existing law or for establishing new law." If Rule 11(b) is violated, the court may impose sanctions, either upon a motion by the opposing party or on its own initiative. See Fed. R. Civ. P. 11(c). The conduct that constitutes a violation of Rule 11(b) differs, however, depending on whether the prospect of sanctions arises by motion or by an order to show cause. In In re Pennie & Edmonds LLP, the Second Circuit drew on language in the Advisory Committee notes to the 1993 amendment to Rule 11 to hold that where, as here, the court itself initiates an inquiry into a potential Rule 11 violation, sanctions should not be imposed unless the responding attorney acted with "subjective bad faith." See 323 F.3d 86, 87 (2d Cir. 2003). This is in contrast to the mens rea standard that applies when a party makes a motion for Rule 11 sanctions. In those cases, the standard is objective unreasonableness. Id. at 90 (citing Ted Lapidus, S.A. v. Vann, 112 F.3d 91, 96 (2d Cir. 1997)). The rational for this distinction is that a motion for sanctions allows the responding attorney an opportunity to withdraw or disclaim his or her offending contention, whereas the court-initiated sanctions process does not. Id. at 91. This approach is not universally accepted, see id. at 93-102 (Underhill, J. dissenting); Young v. City of Providence, 404 F.3d 33, 40 (1st Cir. 2005), but it remains the law of the Circuit, see ATSI Commc'ns, Inc. v. Sharr Fund, Ltd., 579 F.3d 143, 150 (2d Cir. 2009).

Here, the court issued an order to show cause sua sponte, and so it cannot impose sanctions on Futerfas without first finding that he acted with subjective bad faith.

Not surprisingly, "bad faith" is a relatively loosely defined term of art. The Second Circuit has stated that cases are brought in bad faith when "the claim is entirely without color and has been asserted wantonly, for the purposes of harassment or delay." Browning Debenture Holders' Comm. v. DASA Corp., 560 F.2d 1078, 1088 (2d Cir. 1977). More recent formulations of the term dispense with any inquiry into motive, and allow bad faith to be inferred solely from the "pursuit of frivolous contentions," Dow Chem. Pac., Ltd. v. Rascator Maritime, S.A., 782 F.2d 329, 345 (2d Cir. 1986), or actions that are "completely without merit," 60 E. 80th Street Equities, Inc. v. Sapir (In re Jerasimos Papapanayotou, Esq.), 218 F.3d 109, 116 (2d Cir. 2000).

It is unclear, however, whether these more recent cases are still good law insofar as their definitions of bad faith relate to Rule 11. Their apparent disregard for motive or intent is difficult to square with the heightened culpability standard articulated in Pennie & Edmonds, and so the court does not rely on them.

Reference to recent district court cases similarly fails to provide clear guidance. Since the Circuit clarified the standard for court-initiated sanctions, district courts have found subjective bad faith in a variety of cases, ranging from those involving overtly dishonest or contemptuous behavior, see, e.g., Gollomp v. Spitzer, 06-CV-802 (FJS/RFT), 2007 U.S. Dist. LEXIS 8524, at *28-29 (N.D.N.Y. Feb. 5, 2007), aff'd, 568 F.3d 355 (2d Cir. 2009) (imposing sanctions on counsel under 28 U.S.C. § 1927 for lying to the magistrate judge about his disciplinary record); SEC v. Smith, 798 F. Supp. 2d 412, 426 (N.D.N.Y. 2011) (imposing sanctions on a party for intentionally misrepresenting her financial interest in a trust); Washington 1993, Inc. v. Hudson (In re Hudson), No. 00-11683, Adversary No. 00-90091, 2010 Bankr. LEXIS 3003, at *16-17 (Bankr. N.D.N.Y. Aug. 30, 2010) (imposing sanctions on pro se litigant for filing recusal motion that included the baseless allegation that the bankruptcy judge committed a crime by altering the content of a submission), down to those where the court simply regarded an argument as frivolous, see, e.g. McGuire v. Village of Tarrytown, No. 08-CIV-2049 (KTD), 2011 U.S. Dist. LEXIS 10321, at *4 (S.D.N.Y. Sept. 14, 2011).

The court concludes that the best interpretation of subjective bad faith must fall somewhere in between these two extremes. The standard can neither be so strict as to require a lie about a historical fact or contempt, nor can it be so lenient as to allow the court to impose sanctions for nothing more than a frivolous argument. If it were the former, then the court would be unable to impose sanctions for conduct prohibited by several important provisions of Rule 11, cf. Fed. R. Civ. P. 11(b)(2) (allowing for sanctions for "legal contentions" not warranted by law), which are expressly made grounds for court-imposed sanctions by subsection (c)(3) of that rule. If it were the latter, sanctions could be imposed for mere negligence. Instead, the court concludes that, in the context of this case, a finding of subjective bad faith requires evidence of what might be referred to as "frivolous-plus." That is, it is not sufficient to find that a legal argument is frivolous. There must also be either direct or circumstantial evidence that counsel knew that the argument was without merit. One type of circumstantial evidence of such knowledge is evidence that the argument was made for an improper purpose. Subsection (b)(1) of Rule 11 provides examples of such improper purposes such as "to harass, cause unnecessary delay, or needlessly increase the cost of litigation." Where these motives are present, it is fair to conclude that counsel was aware that the frivolous argument was baseless, but raised it anyway because success on the merits was not the ultimate objective.

Cameron International Trading Co. v. Hawk Importers, Inc., No. 03-CV-2496 (JS), 2011 U.S. Dist. LEXIS 4976 (E.D.N.Y. Jan. 18, 2011), provides a good example of this standard in practice. There, the court imposed sanctions on defense counsel after finding that two of counsel's arguments were frivolous and that these arguments were raised for improper purposes.

The case arose after the court dismissed a complaint pursuant to a stipulation of settlement and dismissal. See id. at *2-5. The court also "so ordered" the settlement itself, which, among other things, allowed either party to invoke the court's jurisdiction in the future for the purposes of enforcing the terms of the settlement. See id. The so-ordered settlement thus in effect became a consent decree. When the plaintiffs later sued on the decree, seeking to remedy the defendants' alleged breach, the defendants moved to dismiss on the grounds of lack of jurisdiction. See id. They argued that the court did not adopt the settlement agreement's continued-jurisdiction provision because the court did not rewrite the terms of the settlement agreement into its decree, but rather incorporated them through reference. See id. at *8-11. According to the defendants, the "logical construct" of the court's orders was that jurisdiction to enforce the settlement agreement would terminate upon dismissal of the underlying complaint. See id. at *7-8.

These arguments were frivolous. In imposing sanctions, the court examined the depth of the frivolity, the relationship of the frivolous argument to other positions taken by the defendants, and the defendants' overall course of conduct. See id. at *12-16. It found that because the court had expressly incorporated the terms of the settlement into its decree, the defendants' arguments were "absurd" and "nonsensical." See id. at *12, *15. It also found that the defendants had taken a number of positions contrary to these arguments, including seeking to invoke the court's jurisdiction after dismissal of the complaint. See id. at *12-13. Finally, the court found that, "[c]onsidering Defendants' conduct in its entirety," the conduct reflected "a manifest and calculated disrespect for the Court and its authority." Id. at 15. The defendants had failed to appear at several conferences, appeared unprepared, made other frivolous arguments, and generally employed a strategy of delay. See id. at 14-15. In short, the court concluded that "Defendants' counsel . . . endeavored to 'harass, cause unnecessary delay, and needlessly increase the cost of litigation.'" Id. at 16 (quoting Fed. R. Civ. P. 11(b)(1)). Having found the presence of these ulterior motives, the court concluded that the defendant's frivolous argument was made in bad faith. Id.

In this case, Futerfas is subject to sanctions for similar reasons. Not only was the divestiture argument utterly frivolous, but the court finds that Futerfas knew the argument was ...

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