Royce v. Michael R. Needle, P.C.

• Court: U.S. District Court — Northern District of Illinois
• Writing for the Court: Milton I. Shadur, Senior United States District Judge
• Citation: Royce v. Michael R. Needle, P.C., 158 F.Supp.3d 708 (N.D. Ill. 2016)
• Decision Date: 02 February 2016
• Docket Number: Case No. 15 C 259
• Parties: Merle L. Royce, Plaintiff, v. Michael R. Needle, P.C., et al., Defendants.

158 F.Supp.3d 708

Merle L. Royce, Plaintiff,

v.Michael R. Needle, P.C., et al., Defendants.

Case No. 15 C 259

United States District Court, N.D. Illinois, Eastern Division.

Signed February 2, 2016

Alan R. Borlack, Bailey Borlack and Nadelhoffer LLC, Chicago, IL, for Plaintiff.

Anthony F. Fata, Cafferty Clobes Meriwether & Sprengel LLP, Terrence Buehler, The Law Office of Terrence Buehler, Richard J. Cochran, David Ryan Shannon, Timothy Kevin Travers, Tenney & Bentley, LLC, Blake T. Hannafan, James Andrew McGuinness, Hannafan & Hannafan Ltd., Chicago, IL, Michael R. Needle, Michael R. Needle PC, Robert M. Gamburg, Law Offices of Robert Gamburg, Philadelphia, PA, for Defendants.

MEMORANDUM OPINION AND ORDER

Milton I. Shadur, Senior United States District Judge

Merle L. Royce (“Royce”) brought this interpleader action to determine the proper distribution of settlement funds resulting from a civil RICO suit (the “Amari litigation”) in which he and Michael R. Needle (“Needle”) served as plaintiffs' counsel. Aligned with Royce are 15 of the 16 prevailing plaintiffs (the “Amari Group”), four of whom also served as a “Management Committee.” On the other side of the “v.” sign are (1) the professional corporation of Royce's former co-counsel, Michael R. Needle, P.C. (“Needle, P.C.”), joined by (2) the sixteenth plaintiff, John Cardulo & Sons, Inc. (“Cardulo & Sons”).¹

Initially Needle, P.C. targeted Royce and the Amari Group with nearly identical attacks that it listed as “Counterclaims.” Those attacks began with identical allegations comprising 298 numbered paragraphs and occupying well over 60 pages each, then followed with brief assertions as to different theories of relief to which Needle, P.C. claimed to be entitled, with each of those theories advanced in a separate “count.”²

In any event, this Court asked Royce and the Amari Group to move expeditiously as to certain of those so-called Counterclaims (N. Am. Cc. IV against R. and N. Am. Cc. III against A.) on the assurance that they would not thereby waive their right to challenge the amended pleadings in other respects later (see May 19, 2015 Tr. [Dkt. No. 82] at 39:18–23). When they did so this Court did not address Needle, P.C.'s other “Counterclaims” or affirmative defenses, dealing instead with the above-cited “Counterclaims” in an opinion (the “Dismissal Order,” Dkt. No. 128).

Thereafter Royce and the Amari Group brought twin motions under Rule 11(c)(2) against Needle, P.C., its (now former) counsel Anthony F. Fata (“Fata”) and Fata's law firm, Cafferty Clobes Meriwether & Sprengel, LLP (“Cafferty Clobes”). This opinion now revisits the Needle, P.C. contentions (hereafter termed the “Dismissed Counterclaims”) that were dispatched in the Dismissal Order, in order to determine whether sanctions are warranted.

Rule 11 Sanctions Standards

As explained by Brunt v. Serv. Employees Int'l Union, 284 F.3d 715, 721 (7th Cir.2002) (internal quotation marks and citations omitted):

Rule 11 imposes a duty on attorneys to ensure that any papers filed with the court are well-grounded in fact, legally tenable, and not interposed for any improper purpose. The rule is principally designed to prevent baseless filings. Sanctions will be imposed if counsel files a complaint with improper motives or without adequate investigation.

To be sure, not every doomed argument has violated Rule 11 : “[S]anctions do not inevitably flow from being wrong on the law” (Harlyn Sales Corp. Profit Sharing Plan v. Kemper Fin. Servs., Inc., 9 F.3d 1263, 1270 (7th Cir.1993) ). But Rule 11(b)(2) does require that all legal contentions be “warranted by existing law or by a nonfrivolous argument for extending, modifying, or reversing existing law or for establishing new law.”

On that score Fries v. Helsper, 146 F.3d 452, 458 (7th Cir.1998) (internal quotation marks and citation omitted) has explained that “a frivolous argument or claim is one that is baseless and made without a reasonable and competent inquiry.” Whether a contention fails to clear that bar is determined by “an objective inquiry into whether the party or his counsel should have known that his position is groundless” (Cuna Mut. Ins. Soc. v. Office & Prof'l Employees Int'l Union, Local 39, 443 F.3d 556, 560 (7th Cir.2006) ). And while litigants need not specifically identify when they are seeking to break new legal ground (see Advisory Committee note to the 1993 amendment to Rule 11(b)(2) ) or even address unfavorable precedent so long as some principled basis exists for distinguishing it ( Thompson v. Duke, 940 F.2d 192, 197–98 (7th Cir.1991) ), simply ignoring controlling precedent in the hope that a judge will fail to heed it “is a paradigm of frivolous litigation” (Nisenbaum v. Milwaukee County, 333 F.3d 804, 809 (7th Cir.2003) ). For example, an unabashed disregard of the basic and uncontested principles of contract law plainly deserves sanctions.

Where a paper presented to a federal court exhibits either frivolousness or an improper purpose, Rule 11(c)(1) provides:

[T]he court may impose an appropriate sanction on any attorney, law firm, or party that violated the rule or is responsible for the violation. Absent exceptional circumstances, a law firm must be held jointly responsible for a violation committed by its partner, associate, or employee.

In that regard, however, a monetary sanction may not be imposed on a represented party where the paper is deficient only in advancing unwarranted legal contentions (Rule 11(c)(5)(A) ).

While a court “has wide latitude to determine what sanctions should be imposed for a Rule 11 violation” (United States Bank Nat'l Ass'n, N.D. v. Sullivan–Moore, 406 F.3d 465, 471 (7th Cir.2005) ), both Rule 11(c)(4) and opinions from our Court of Appeals have provided some guidance as to what sanctions are appropriate. Under that Rule this Court is instructed that sanctions “must be limited to what suffices to deter repetition of the conduct or comparable conduct by others similarly situated.”

Yet Brandt v. Schal Assocs., Inc., 960 F.2d 640, 646 (7th Cir.1992) serves as a reminder that “[c]ompensation and deterrence are not only not mutually exclusive, they are sometimes compatible.” And so a district court may impose sanctions by ordering a rule violator to make good its opponent for the harm caused by its violation (see, among other cases, Divane v. Krull Elec. Co., 319 F.3d 307, 314 (7th Cir.2003) ). In that regard Wade v. Soo Line R.R., 500 F.3d 559, 564 (7th Cir.2007) has expressed a preference for monetary sanctions, observing that “[t]he punishment should fit the crime, so fees and fines—which can be scaled as appropriate—often are the best sanctions.”

Background

This interpleader action concerns the proper distribution of a settlement resulting from a civil RICO suit. In this Court's (ultimately unsuccessful) pursuit of greater brevity in this lengthy opinion, this background section will provide only a sketch of what has transpired to this point, reserving many of the details for the places where they become relevant to the analysis so as to avoid too much repetition.

Amari Litigation and Associated Agreements

Both Royce and Needle, P.C. came to represent the Amari litigation plaintiffs after the underlying litigation had already been filed in this District Court in March 2007 by an attorney who—having since withdrawn as counsel in July 2008—is not a party to this action (N. Am. Ans. to R. ¶¶ 8–9, 15–19). Needle, P.C. joined that case in October 2008 (together with two other attorneys who also subsequently withdrew and so are also not before this Court), with Royce following suit some 13 months later (id. ). Apart from the Amari litigation, Royce also agreed to defend eight members of the Amari Group against actions brought by an entity controlled by the Amari litigation defendants (the “Lake County litigation”) (Am. Compl. ¶¶ 14, 20; N. Am. Cc. against R. and A. ¶¶ 131, 136).

When Needle, P.C. began representing the Amari litigation plaintiffs, Needle himself took the lead in drafting a new Contingent Fee Agreement (Am. Compl. ¶ 28; A. Ans. ¶ 28; N. Am. Cc. against R. and A. ¶¶ 72–73, 81). Two provisions of that agreement bear special mention. First, its Section IV.1 described the amounts due to the lawyers:

We will be entitled to a contingent fee equal to the greater of: (A) any fee paid to us pursuant to a judgment and award of fees under the RICO or other fee-shifting statute or pursuant to any settlement agreement, or (B) one-third of any recovery actually received, with the recovery to be computed as any and all damages, treble damages, punitive damages, costs, expenses, attorney's fees or other compensation actually paid, whether pursuant to settlement agreement or judgment, less any retainer paid pursuant to Section V below.

And second, its Section IX.12 required that all waivers or modifications of any rights be in writing signed by the disadvantaged party.

Following two unsuccessful mediation sessions in September 2013, on November 14 of that year Judge John Tharp, Jr. of this District Court brokered a global settlement in the Amari and Lake County litigations for $4.2 million and directed the parties to reduce its terms to writing (N. Am. Ans. to R. ¶ 4; N. Am. Cc. against R. and A. ¶¶ 2, 229^a). Eight days later that produced the written Settlement Agreement (N. Am. Cc. against R. and A. ¶¶ 3, 229^b), a document that made no mention of attorneys' fees, specifying only the amount to be paid to the plaintiffs and the schedule for doing so (Settlement Agreement § 2). Crucially the writing did contain a classic integration provision (id. § 18):

Entire Agreement. This Agreement represents the entire agreement between the parties hereto with respect to the transactions contemplated hereby and supersedes all prior agreements thereto, whether written or oral.

With the Settlement Agreement having been signed by or on behalf of the parties, the Amari litigants stipulated to a dismissal that Judge Tharp granted (N. Am....