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In re Cendant Corp. Derivative Action Litigation

May 15, 2000

IN RE CENDANT CORPORATION DERIVATIVE ACTION LITIGATION


The opinion of the court was delivered by: Walls, District Judge

FOR PUBLICATION

OPINION

Defendants E. Kirk Shelton; Henry Silverman, Martin Edelman, John Snodgrass, James Buckman, Michael Monaco, Stephen Holmes, Robert Kunisch and E. John Rosenwald, Jr. (the "HFS defendants"); and Bartlett Burnap, T. Barnes Donnelley, Walter Forbes, Christopher McLeod, Burton Perfit, Stanley Rumbough, Jr., and Robert Tucker (the "CUC defendants") move for sanctions against plaintiff Martin Deutch; Brett Cebulash, the signer of the motion papers; and all other attorneys whose names appear for plaintiff on the motion papers. See HFS Brf. at 15. For the reasons stated, the Court concludes that the motion for summary judgment filed in the Cendant derivative action violated Federal Rule of Civil Procedure 11(b).

Rule 11

Sanctions are appropriate under Federal Rule of Civil Procedure 11 if the court determines that subdivision (b) of the Rule has been violated. Fed. R. Civ. P. 11(c) ("Rule 11"). Under subdivision (b), an attorney must certify that "to the best of [the attorney's] knowledge . . . formed after an inquiry reasonable under the circumstances":

(1) papers submitted to the court are not "being presented for any improper purpose, such as to harass or cause unnecessary delay or needless increase in the cost of

litigation;"

(2) "the claims, defenses, and other legal contentions therein are warranted by existing law or by a non-frivolous argument for the extension of, modification, or reversal of existing law or the establishment of new law;"

(3) "the allegations and other factual contentions have evidentiary support . . . ; and"

(4) "the denials of factual contentions are warranted on the evidence or, if specifically so identified, are reasonably based on a lack of information or belief." Rule 11(b)(1)-(4).

Standard

Courts must apply an objective standard of "reasonableness under the circumstances." Ford Motor Co. v. Summit Motor Prods. Inc., 930 F.2d 277, 289 (3d Cir. 1991). Thus, this Court "must determine whether a competent attorney who conducted a reasonable investigation into the facts and law pertinent to the case would have determined that the allegations . . . were well grounded in law and fact." Watson v. City of Salem, 934 F. Supp. 643, 663 (D.N.J. 1995); see also Bensalem Township v. Intl. Surplus Lines Ins. Co., 38 F.3d 1303, 1314 (3d Cir. 1994) ("Rule [11] imposes an affirmative duty on the parties to conduct a reasonable inquiry into the applicable law and facts prior to filing") (citing cases); Cohen v. Kurtzman, 45 F. Supp. 2d 423 436 (D.N.J. 1999) ("Rule 11 places a duty on the signer of a document to `make an inquiry into both the facts and the law which is reasonable under the circumstances"*). Further, "[n]o proof of subjective bad faith is required to levy sanctions." Cohen, 45 F. Supp. 2d at 436 (citing cases). Moreover, the Rule does not recognize a "pure heart and empty head" defense. See Gaiardo v. Ethyl Corp., 835 F.2d 479, 482 (3d Cir. 1987) (stating that subjective good faith is not a defense).

Moving counsel's duty under Rule 11 is counterbalanced by the concept that Rule 11 sanctions are appropriate "only in the `exceptional circumstance* where a claim or motion is patently unmeritorious or frivolous." Ford Motor Co., 930 F.2d at 289-90; Shepherdson v. Nigro, 179 F.R.D. 150, 152-53 (E.D. Pa. 1998). Courts, therefore, have denied sanctions where the law and facts, even if not adopted by the court, are ambiguous and could be reasonably interpreted in more than one way. See generally Ford Motor, 930 F.2d at 289-90.

Further, sanctions cannot be applied as a penalty against a losing party merely for losing: "[L]itigants misuse the Rule when sanctions are sought against a party or counsel whose only sin was being on the unsuccessful side of a ruling or judgment." Princeton Economics Group v. AT&T, 768 F. Supp. 1101, 1116 (D.N.J. 1991) (quoting Gaiardo v. Ethyl Corp., 835 F.2d 479, 483 (3d Cir. 1987)); Edberg v. Neogen Corp., 17 F. Supp. 2d 104, 109 (D. Conn. 1998) ("Rule 11 should ...


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