Schlaifer Nance & Co., Inc. v. Warhol

• Decision Date: 03 June 1998
• Docket Number: No. 90 Civ. 1095(DC).,90 Civ. 1095(DC).
• Citation: 7 F.Supp.2d 364
• Parties: SCHLAIFER NANCE & CO., INC., Plaintiff, v. Estate of Andy WARHOL, et al., Defendants.
• Court: U.S. District Court — Southern District of New York

7 F.Supp.2d 364

SCHLAIFER NANCE & CO., INC., Plaintiff, v. Estate of Andy WARHOL, et al., Defendants.

No. 90 Civ. 1095(DC).

United States District Court, S.D. New York.

June 3, 1998.

Powell, Goldstein, Frazer & Murphy L.L.P. by John T. Marshall, Atlanta, GA, for Plaintiff.

Coblence & Warner by Paul J. Hanly, Jr., New York City, for Defendants.

OPINION

CHIN, District Judge.

In this case, plaintiff Schlaifer Nance & Co., Inc. ("SNC") alleged that it was fraudulently induced into entering a licensing agreement with the defendant Estate of Andy Warhol (the "Estate") by defendants' false representations that the Estate owned all the copyrights to all of Warhol's works of art. SNC and its attorneys knew, however, that the proposition could not be true, for many of Warhol's works had fallen into the public domain and the copyrights to certain of his other works had been granted to others. Even though SNC and its lawyers knew the truth, SNC entered into the licensing agreement nonetheless, without conducting any due diligence or doing any investigation.

Although it was clear to both SNC and its lawyers that they could not prove reasonable reliance, a necessary element of the fraud claim, they filed this action, alleging that SNC had relied on the representations. To the extent there was any doubt at the outset of the case as to the validity of the fraud claim, that doubt was eliminated in the three months before trial when SNC's own attorneys produced certain documents and gave certain testimony that revealed the frivolous nature of the claim of reasonable reliance. Moreover, although SNC's pre-contract, out-of-pocket losses from the alleged fraud amounted to no more than $63,941, or $281,441 at best, SNC's attorneys expended extraordinary resources prosecuting the claim. Unfortunately, the Estate was forced to incur substantial legal expenses itself in defense.

The Estate moves for sanctions against SNC and its attorneys — Powell, Goldstein, Frazer & Murphy LLP ("Powell Goldstein"), James C. Rawls, Esq., C. Scott Greene, Esq., and Paul K. Rooney, Esq. The motion is granted, for I find that SNC and its attorneys prosecuted a meritless claim in bad faith.

Our adversarial system of justice depends on lawyers who advocate for their clients zealously. At the same time, our system works only if attorneys also meet their obligations as counselors and officers of the court. Here, SNC's attorneys performed their role as advocates to a fault: they prevailed before a jury on a claim that never should have been brought. They failed, however, in their other two roles. As counselors, they should have advised their client to withdraw the fraud claim. Instead, they permitted their client to prosecute a claim that had no basis in fact and that was not worth pursuing and certainly not in the manner it was pursued here. As officers of the court, they pursued a meritless claim in a vindictive and vexatious manner, spurred on by the belief that they could recover attorneys' fees as punitive damages. Indeed, in the end they expended $2.6 million in time and disbursements chasing a claim that was worth only $63,941.

Accordingly, sanctions in the amount of $400,000 are imposed against SNC, Powell Goldstein, Rawls, Greene, and Rooney, jointly and severally, pursuant to 28 U.S.C. § 1927 and the Court's inherent power.

BACKGROUND

A. The Facts

The facts of this case are detailed in my prior decision, Schlaifer Nance & Co. v. Estate of Andy Warhol, 927 F.Supp. 650 (S.D.N.Y.1996), aff'd, 119 F.3d 91 (2d Cir. 1997), and may be summarized as follows:

In November 1987, SNC and the Estate entered into a licensing agreement (the "Agreement") granting SNC the right to use Warhol's artworks, name, likeness, and trademarks to develop and market fashion, home decorating, gift, toy, and entertainment products. I assume for purposes of this motion that, prior to the execution of the Agreement, the Estate and defendants Frederick Hughes and Edward W. Hayes falsely represented that the Estate owned all the rights to all of Warhol's works and that defendants failed to disclose that certain works had fallen into the public domain and that the copyrights to certain other works had been granted to others.

As set forth in more detail below, SNC was well aware of the existence of copyright problems with Warhol's works even before it entered into the Agreement. In addition, SNC's lawyers — members of the Powell Goldstein firm — also knew that certain of Warhol's works had fallen into the public domain and that the copyrights to other works had been transferred to others. Notwithstanding this knowledge, SNC did not do any due diligence or investigation and entered into the Agreement nonetheless.

Within a few weeks after the Agreement was signed, SNC started communicating with the Estate and its lawyers about copyright problems. SNC continued to bring public domain problems to the Estate's attention throughout 1988. See 927 F.Supp. at 658. Although SNC had the right to terminate the Agreement for a "material breach," it never sought to do so. Instead, SNC continued to work on the project until February 16, 1990, when it brought the instant lawsuit. Id. at 659, 664.

B. The Pleadings and Pre-Trial Motions

SNC's original complaint in this action, which was initially assigned to Judge Stanton, alleged fraudulent inducement and breach of the Agreement against the Estate only.¹ The crux of the fraudulent inducement claim was that the Estate represented to SNC that "it had acquired all of Andy Warhol's rights, title and interests to his works of art, including, without limitation, paintings, drawings, sculpture and works of applied art (`Existing Artwork')," that the representation was false because "the Estate did not have the sole and exclusive rights to the copyrights in all of the Existing Artwork," and that had SNC "known that the representations and warranties were false, it would not have entered into the Agreement with the Estate." (Compl. ¶¶ 14, 17, 40; see also Am.Compl. ¶¶ 19, 22, 38, 43, 47; Sec.Am. Compl. ¶¶ 29, 34, 50, 55, 59).

SNC later filed a second lawsuit against the Estate on February 22, 1991 for breach of the Agreement. See Schlaifer Nance & Co. v. Estate of Warhol, 764 F.Supp. 43 (S.D.N.Y.1991) (Stanton, J.). The Agreement, however, contained an arbitration clause that required some of SNC's claims to be arbitrated. SNC commenced arbitration proceedings and obtained an arbitration award on June 18, 1991 of $4,086,646, of which $1.5 million was awarded as punitive damages. In their award, the arbitrators explained that the $1.5 million in punitive damages, or virtually all of it, was intended to reimburse SNC for its $1.46 million in attorneys' fees and costs incurred in the arbitration.

On October 21, 1991, after the arbitration award, SNC filed an amended complaint in this case, which included the original fraud claim against the Estate as well as new fraud and civil RICO claims against the three individual defendants, Frederick Hughes, Edward W. Hayes, and Vincent Fremont.² Defendants moved to dismiss, both the instant action as well as the second case, on the basis that SNC had prevailed on its claims in the arbitration.

By memorandum endorsement dated September 16, 1992, Judge Stanton denied the motion as to the instant case and granted, on consent, the motion as to the second case. Judge Stanton held that the arbitrators had sought to restore the parties to the position they would have been in had there been no Agreement, but they did not award SNC damages for pre-contract expenses (which the arbitrators described as amounting to $281,441) because the Estate's liability for those expenses had not been submitted for arbitration. Judge Stanton concluded that the arbitrators had awarded damages only for post-contract expenses. In addition, Judge Stanton noted that the individual defendants were not parties to the arbitration and that the RICO claims had not been presented to the arbitrators.

Defendants moved for partial reargument with respect to the RICO claims. Judge Stanton denied the motion by memorandum endorsement filed January 21, 1993. On February 26, 1993, he entered an order formally dismissing the second case.

On May 18, 1993, SNC filed a second amended complaint in this case, containing a fraud claim against the Estate and fraud and civil RICO claims against the three individual defendants.³ Defendants moved to dismiss, and, by memorandum endorsement filed February 18, 1994, Judge Stanton granted the motion in part, dismissing the RICO claims against all parties. He also dismissed the fraud claim as to Hayes and Fremont, with leave to replead. He denied the motion insofar as it sought dismissal of the fraud claim against the Estate and Hughes, holding that the fraud claim was pled with sufficient particularity as to them.

SNC then filed a third amended complaint on April 4, 1994, repleading fraud as to Hayes but not as to Fremont, and omitting the RICO claims that had been dismissed.⁴ Defendants moved to dismiss the third amended complaint pursuant to Fed.R.Civ.P. 12(b)(6), arguing that, as a matter of law, SNC could not have relied on the alleged misrepresentations because they were contradicted by the language of the Agreement. Judge Stanton denied the motion, holding that the provisions of the Agreement cited by defendants did not "foreclose SNC's claim of justifiable reliance." Schlaifer Nance & Co. v. Estate of Warhol, No. 90 Civ. 1095, 1995 WL 66408, at *1 (S.D.N.Y. Feb. 15, 1995). Judge Stanton based his analysis, however, only on the allegations of the third amended complaint and the provisions of the Agreement; he did not consider any extrinsic evidence, as the motion challenged only the sufficiency of the pleading.

C. The Final Pre-Trial Preparations

On February 23, 1995, the case was reassigned to the undersigned for trial. Only one claim remained, the fraud claim against the Estate, Hughes, and...