Sussman v. Bank of Israel

• Decision Date: 02 June 1995
• Docket Number: 1035,D,Nos. 1034,s. 1034
• Citation: 56 F.3d 450
• Parties: , 32 Fed.R.Serv.3d 978 Erwin SUSSMAN, and Ira Guilden, deceased, by & through Paul Guilden, his personal representative, Plaintiffs, Nathan Lewin, Esq., Appellant-Cross-Appellee, v. BANK OF ISRAEL, Ministry of Finance of the Government of Israel, Bank Hapoalim Ltd., Moses Mandelbaum, Galia Maor, Zeev Eveles, and John Does, 1-5, Defendants-Appellees-Cross-Appellants. ockets 94-7437, 94-7481.
• Court: U.S. Court of Appeals — Second Circuit

Page 450

56 F.3d 450

63 USLW 2773, 32 Fed.R.Serv.3d 978

Erwin SUSSMAN, and Ira Guilden, deceased, by & through Paul Guilden, his personal representative, Plaintiffs Nathan Lewin, Esq., Appellant-Cross-Appellee, v. BANK OF ISRAEL, Ministry of Finance of the Government of Israel, Bank Hapoalim Ltd., Moses Mandelbaum Galia Maor, Zeev Eveles, and John Does 1-5 Defendants-Appellees-Cross-Appellants.

Nos. 1034, 1035, Dockets 94-7437, 94-7481.

United States Court of Appeals, Second Circuit.

Argued Feb. 9, 1995.

Decided June 2, 1995.

Kenneth W. Starr, Washington, DC (Alex M. Azar II, Christopher Landau, Kirkland & Ellis, Washington, DC; Herbert J. Miller, Jr., Miller, Cassidy, Larroca & Lewin, Washington, DC, on the brief), for appellant-cross-appellee.

Jonathan J. Lerner, New York City (Angela G. Garcia, Skadden, Arps, Slate, Meagher & Flom, New York City, on the brief), for defendants-appellees-cross-appellants.

Before: OAKES, KEARSE, and CABRANES, Circuit Judges.

KEARSE, Circuit Judge:

Nathan Lewin, Esq., an attorney for the plaintiffs herein whose complaint was dismissed on the ground of forum non conveniens, appeals from so much of a judgment of the United States District Court for the Southern District of New York, Charles S. Haight, Jr., Judge, as imposed a $50,000 sanction against Lewin pursuant to Fed.R.Civ.P. 11 and the court's inherent power on the ground that the complaint, signed by Lewin, had been filed in part for an improper purpose. The court held that, although plaintiffs were also motivated in part by a proper purpose, the presence of an improper purpose warranted the imposition of sanctions. On appeal, Lewin contends principally (1) that the criticized purpose was not improper, and (2) that sanctions could not properly be imposed because the claims asserted in the complaint were not frivolous. Defendants cross-appeal, contending that the sanctions should have been more severe. For the reasons that follow, we agree with Lewin that the award of sanctions was an abuse of discretion. We therefore reverse the judgment and dismiss the cross-appeal.

I. BACKGROUND

For the purposes of this appeal, the events are not in dispute. The plaintiffs are Erwin Sussman and the estate of Ira Guilden (Guilden and/or the estate referred to as "Guilden"), who died in 1984. Sussman, a Swedish citizen who lives in the United States, and Guilden, a United States citizen who resided in New York, were founders, directors, and shareholders of North American Bank Ltd. ("NAB"), an Israeli bank. Defendants are

the Bank of Israel ("BOI"), which insured deposits in Israeli banks, and several other Israeli entities and individuals.

A. The Collapse of NAB and the Litigation in Israel

In 1985, NAB collapsed after years of fraud, embezzlement, and mismanagement by its senior managers in Israel. BOI made payments to NAB depositors and obtained the appointment of the Official Receiver of the State of Israel (the "Receiver") to liquidate NAB's remaining assets. In 1989, the Receiver commenced a civil action in Israel in the name of the State of Israel (the "Israeli action"), naming as defendants Sussman, Guilden, and several other officers and directors of NAB, and alleging, inter alia, that the NAB directors had been negligent and had breached their fiduciary duties by failing to monitor adequately the management of NAB and to ensure that NAB operated in compliance with Israeli banking regulations. The Receiver's complaint sought recovery from the defendants, jointly and severally, of more than $100 million dollars to compensate for losses allegedly incurred by BOI as a result of NAB's collapse.

Sussman and Guilden, represented by Israeli counsel, raised affirmative defenses to the Receiver's claims and asserted third-party claims against BOI and two of its officials. In addition to alleging that BOI and the officials had been negligent in failing to carry out their supervisory duties with respect to NAB, the third-party claims alleged that BOI and the officials had deliberately misrepresented NAB's financial condition and concealed from NAB's non-Israeli directors certain financial transactions stemming from a 1983 banking scandal in Israel, which came to be known as the "Bank Shares Crisis" following revelations that many Israeli banks were artificially and unlawfully inflating the market prices of their respective shares. The third-party claims alleged that BOI and the Israeli Ministry of Finance (the "Ministry") had sought to avert the financial collapse of NAB by extending it a secret $10 million loan in order to allow NAB's senior managers to continue their manipulation of NAB's stock price; that the third-party-defendant officials, despite learning of the NAB managers' improper activities, had continued to misrepresent NAB's situation to its nonresident directors and sought to prevent public disclosure of BOI's role in the NAB stock-manipulation scheme; and that NAB would not have collapsed but for the actions of BOI and the defendant officials. Sussman and Guilden sought contribution and indemnification for any amounts that they might be required to pay in the Israeli action.

B. The Preparation and Filing of the New York Complaint

Thereafter, Sussman and Guilden retained Lewin, a partner in the Washington, D.C. law firm of Miller, Cassidy, Larroca & Lewin, to investigate the circumstances underlying the Israeli suit and to evaluate the prospects for further litigation against BOI and other Israeli officials involved in the events at NAB. In 1991, as the Israeli action was nearing its scheduled trial date, Lewin drafted a complaint to be filed in New York (the "New York complaint"), naming as defendants BOI; the Ministry; three BOI officials, including the two named as third-party defendants in the Israeli action; and Bank Hapoalim, Ltd. ("Bank Hapoalim"), an Israeli bank with a branch office in New York.

The New York complaint substantially repeated Sussman and Guilden's assertions in the Israeli action that BOI and its officials had helped NAB managers to manipulate the price of NAB stock following the Bank Shares Crisis. It also alleged that the secrecy of the scheme was maintained by routing the Ministry's clandestine $10 million loan to NAB through Bank Hapoalim's New York office; that BOI and Ministry officials contemporaneously assured Sussman that NAB was well-managed and financially stable, thereby inducing him not to sell his NAB shares; that BOI knew that the directorships held by NAB's foreign investors were largely honorary and that the investors were relying on BOI to monitor NAB's Israeli operations; and that Sussman and Guilden had relied on the representations of BOI and the Ministry in not taking action to protect their investments. The complaint also alleged that the filing of the Israeli action was itself part of Before filing the complaint, Lewin sent identical letters dated May 30, 1991 (the "May 1991 warning letter"), to several Israeli government officials, including then-Prime Minister Yitzchak Shamir, then-Minister of Finance Yitzchak Moda'i, and BOI Governor Michael Bruno, warning them of Sussman and Guilden's intention to bring the present suit, and proposing settlement discussions. After describing the general nature of the charges contained in the draft complaint, the letter stated:

BOI's continuing scheme to force Sussman and Guilden to bear the costs of BOI's failure to rectify the fraud and mismanagement at NAB. Sussman and Guilden sought, inter alia, damages totaling $17 million for the lost value of their investments in NAB.

This is a matter of extreme urgency because, in the absence of any satisfactory resolution of our differences, the lawsuit will be filed in New York within the next ten days. The agencies of the Government of Israel that are engaged in an effort directed against our clients are also pressing a trial in the Jerusalem District Court that is scheduled to begin shortly.

If this controversy erupts into public view with the filing of our lawsuit and the inception of the Israeli proceeding, it will not only result in a grave injustice to individuals who have been among Israel's most constant and generous supporters, but will seriously damage foreign investment in Israel in the future.

(May 1991 warning letter at 1.) The letter further asserted that Sussman and Guilden "were, at most, honorary directors of [NAB]" (id.), and that they had had no involvement in the improper activities of NAB's managers and had "relied on [BOI] and its inspectors to supervise [NAB] and to insure that its business was run properly" (id. at 2). It then concluded:

The case now pending in Jerusalem is the culmination of years in which improprieties at North American Bank were overlooked or deliberately ignored by the Bank of Israel. It is grossly unjust for the Bank of Israel now to shift the blame for its own conduct to individuals who have always supported Israel emotionally and financially and seek to hold these foreign supporters liable, in an amount exceeding 200 million shekalim, for the losses caused by the failure of [NAB].

In addition to the loss of their investments, which amounted to millions of dollars, our clients estimate that they have been forced to spend in excess of one million dollars fighting baseless claims made in the Israeli courts. Our lawsuit in federal court in New York will seek recovery against the Ministry of Finance, the Bank of Israel and individual government officials for these losses and for other harm caused to our clients.

Our clients have heretofore been reluctant to take the step of filing suit because a full airing of this outrageous conduct by the Government of Israel will surely deter many potential foreign investors who might otherwise be interested in lending financial resources to Israel. However, the enormity of this injustice and the relentless prosecution of the case in Jerusalem leaves them no option.

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