Smith & Green v. Trustees of Const. Industry, CV-S-02-0912-LRH(PAL).

• Decision Date: 31 January 2003
• Docket Number: No. CV-S-02-0912-LRH(PAL).,CV-S-02-0912-LRH(PAL).
• Citation: 244 F.Supp.2d 1098
• Parties: SMITH & GREEN CORPORATION, Plaintiff, v. TRUSTEES OF THE CONST. INDUTRY & LABORERS HEALTH & WELFARE TRUST, et al., Defendants.
• Court: U.S. District Court — District of Nevada

244 F.Supp.2d 1098

SMITH & GREEN CORPORATION, Plaintiff, v. TRUSTEES OF THE CONST. INDUTRY & LABORERS HEALTH & WELFARE TRUST, et al., Defendants.

No. CV-S-02-0912-LRH(PAL).

United States District Court, D. Nevada.

January 31, 2003.

COPYRIGHT MATERIAL OMITTED

Brian J. Pezzillo, Gibbs Giden Locher & Turner, LLP, Las Vegas, NV, for Plaintiff.

Michael V. Infuso, Adam P. Segal, Schreck Brignone, Las Vegas, NV, for Defendants.

ORDER

LEEN, United States Magistrate Judge.

This matter is before the court on defendants' Motion for Rule 11 Sanctions (# 3) filed September 9, 2002. Plaintiff filed its Opposition to Motion for Rule 11 Sanctions (# 4) September 24, 2002, and defendants filed a Reply in Support of Motion for Rule 11 Sanctions (# 5) October 8, 2002.

Plaintiff filed a Complaint in state court June 28, 2002, alleging claims for intentional interference with contractual relations breach of contract, and breach of the covenant of good faith and fair dealing. Defendants removed this case to federal court July 2, 2002, on the grounds the Complaint arises out of ERISA, 29 U.S.C. §§ 1001, et seq., and is therefore subject to removal pursuant to 28 U.S.C. §§ 1331, 1441 and 1446. The Notice of Removal asserts plaintiffs state-law claims are preempted by ERISA.

BACKGROUND

Defendants ("Joint Trust Funds") seek an order awarding sanctions pursuant to Fed.R.Civ.P. 11 against the plaintiff Smith & Green Corporation ("Smith & Green") and the law firm filing the Complaint. Joint Trust Funds seek an award of attorneys' fees for responding to the Complaint, "and any other sanctions sufficient to deter the repetition of such conduct or comparable conduct by others similarly situated." Joint Trust Funds allege that the current action was filed by Smith & Green in response to Joint Trust Funds two pending federal lawsuits asserting Smith & Green owe the Joint Trust Funds approximately 1.4 million dollars for its failure to report and pay all employee benefit contributions due for hours of covered work performed by its employees. Summary Judgment motions are pending in both cases, CV-S-01-0009-LDG (PAL) and CV-S-00-1052-LDG (LRL).

While these two cases were pending counsel for Smith & Green wrote to counsel for the Joint Trust Funds threatening to bring a state-law action for defamation because of notifications given to general contractors with whom Smith & Green performed work that Smith & Green was not current in its payments of trust fund benefits. (See, 5/14/2002 Itr., Ex. 2 to Defendants' motion.) Counsel for Joint Trust Funds responded to the letter the same day outlining their position that the Trust Funds would continue to "notify any and every general contractor for whom Smith & Green has worked during the period of these delinquencies, as is permitted under Smith & Green's labor agreement, The Trust Agreement, and required pursuant to NRS 608.150." The letter also advised counsel for Smith & Green that a state claim for defamation would be preempted by ERISA, and as such frivolous, and that Rule 11 sanctions would be sought if such an action was brought. (See, 5/14/2002 Itr. Ex. 3 to Defendants' motion.)

Counsel for defendants argue that counsel for plaintiff has violated Rule 11 by failing to conduct a reasonable inquiry of the legal and factual basis for the complaint prior to filing, and that sanctions are appropriate to deter plaintiff and plaintiffs counsel from engaging in similar conduct in the future. Defendants argue plaintiff and plaintiffs counsel should be sanctioned for the attorneys' fees and costs incurred in bringing the instant motion and responding to a frivolous, ERISA preempted complaint. Counsel for plaintiff acknowledges that the current complaint originates from the two pending cases referred to by defense counsel, CS-01-0009-LDG (PAL) and CV-S-00-1052-LDG (LRL). Smith & Green's counsel also acknowledges that counsel for the Joint Trust Funds sent written notification to parties doing business with Smith & Green claiming Smith & Green was deficient in its contributions to the Trust Funds, based on allegations contained in those two complaints. Counsel for Smith & Green argues that: 1) the defendants' Rule 11 motion is "nothing more than a poorly authored personal attack" on him; 2) he has met the statutory requirements to file a complaint; 3) Rule 11 should not be used to raise issues of legal sufficiency that can more properly be disposed of by motion to dismiss or for summary judgment; and 4) he has met his Rule 11 obligations in bringing the complaint.

In defending the legal sufficiency of the complaint, counsel for plaintiff acknowledges that ERISA has broad preemption restrictions, but argues that federal common law rights applicable to employers have developed under ERISA that are not governed by the same broad preemption restrictions as those that apply to participants and beneficiaries. Smith & Green argues that the letters defendants sent to its general contractors were not sent for a legitimate purpose, but solely for the purpose of intentionally interfering with the business relationships of Smith & Green. Thus, counsel for plaintiff argues that plaintiff has a federal common law right to file the current action "based on the pattern of behavior the defendant trust funds have engaged in that have caused Smith & Green to sustain damages." (Plaintiffs Opposition, p. 4)

DISCUSSION

I. Federal Rule of Civil Procedure 11

A. Magistrate Judge Jurisdiction

Before turning to the merits of the motion, the court must determine whether a magistrate judge has jurisdiction to order Rule 11 sanctions. 28 U.S.C. § 636(b)(1) and Fed.R.Civ.P. 72 authorize a magistrate judge to enter orders in non-dispositive matters. Fed.R.Civ.P. 72(a) defines nondispositive matters as "not dispositive of a claim or defense of a party." 18 U.S.C. § 636(b)(1)(A) lists motions which may not be determined by a magistrate judge. Any motion not listed generally falls within the non-dispositive group of matters which a magistrate judge may determine. Local Rule IB 1-3 provides: "A magistrate judge may hear and finally determine any pretrial matter not specifically enumerated as an exception in 28 U.S.C. § 636(b)(1)(A)." Non-dispositive motions are automatically referred to magistrate judges in this district pursuant to LR IB 1-1 and LR IB 1-3.

The Ninth Circuit has held that magistrate judges have jurisdiction to order non-dispositive Rule 11 sanctions. Maisonville v. F2 America, Inc. 902 F.2d 746, 748 (9th Cir.1990). A challenge to a magistrate judge's ruling on a motion for non-dispositive Rule 11 sanctions is reviewed by the district judge for clear error. Fed.R.Civ.P. 72(a), 28 U.S.C. § 636(b)(1)(A). Maisonville, id. at 748. A district court's award of Rule 11 sanctions is reviewed by the Court of Appeals for abuse of discretion. Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 405, 110 S.Ct. 2447, 2460-61, 110 L.Ed.2d 359 (1990), Townsend v. Holman, 929 F.2d 1358, 1365-66 (9th Cir.1990) (en banc).

In the current motion defendants seek an award of attorneys' fees for responding to the complaint "and any other sanctions sufficient to deter the repetition of such conduct or comparable conduct by others similarly situated." Because dispositive sanctions are not sought, this matter is a non-dispositive matter which this court has jurisdiction to decide.

B. General Rule 11 Principles

Fed.R.Civ.P. 11 "provides for the imposition of sanctions when a motion is frivolous, legally unreasonable, or brought for an improper purpose." McMahon v. Best, 2000 WL 1071828, *6 (N.D.Cal.2000), See, Fed.R.Civ.P. 11(b); Conn v. Borjorquez, 967 F.2d 1418, 1420 (9th Cir. 1992). The rule requires the moving party to serve a copy of the motion requesting sanctions upon the adverse party at least 21 days prior to filing the motion with the court. Id., at *7, See, Fed.R.Civ.P. 11(c)(1)(A). This 21-day time period provides the offending party the opportunity to withdraw or correct the allegedly defective filing. Counsel for defendants complied with this requirement by serving Smith & Green on August 19, 2002, with the Motion for Rule 11 Sanctions, waiting more than 21 days, and then filing its motion with the court. The motion was accompanied by a letter indicating that, pursuant to Fed.R.Civ.P. 11(c)(1)(A) the Trust Funds were requesting that Smith & Green immediately dismiss its Complaint within 21 days. (See, Ex. 8 to Defs. Motion.) Defendants assert, and plaintiff does not dispute, that counsel for plaintiff did not respond to the letter or motion prior to the time it was filed.

A court considering a motion pursuant to Rule 11 must do two things: (1) decide whether a Rule 11 violation has occurred, and (2) decide whether to impose sanctions. McMahon, 2000 WL 1071828 at *7, citing, Warren v. Guelker, 29 F.3d 1386 at 1389. If the Court determines that Fed.R.Civ.P. 11(b) has been violated, it may impose appropriate sanctions upon the attorneys, law firms, or parties that are responsible for the violation. The main objective of Rule 11 is to deter baseless filings and curb litigation abuses. Salman v. State of Nevada Comm. On Judicial Discipline, 104 F.Supp.2d 1262 (D.Nev.2000). Pursuant to Rule 11 sanctions must be imposed upon litigants and counsel who file baseless papers without first conducting a reasonable and competent inquiry. Schutts v. Bentley Nevada Corp., 966 F.Supp. 1549 (D.Nev.1997). The test for determining whether a Rule 11 violation has occurred is one of objective reasonableness. Operating Engineers Pension Trust v. G.C. Wallace, Inc., 159 F.R.D. 536 (D.Nev.1994).

The Ninth Circuit has held an attorney has a duty prior to filing a complaint to conduct a reasonable factual investigation and perform adequate legal research to confirm whether the theoretical underpinnings of the complaint are "warranted by existing law or a good faith argument for an extension, modification or reversal of existing law." Christian v....