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Martinsville Corral, Inc. v. Society Insurance

United States District Court, S.D. Indiana, Indianapolis Division

June 1, 2018



          Debra McVicker Lynch, Judge

         Defendant Society Insurance moves the court to enter sanctions under Rule 11 on the ground that the plaintiffs' complaint “is not supported by existing law or a non-frivolous argument for establishing new law” and “was filed for an improper purpose.” It asks the court to require the plaintiffs and their counsel to pay Society's fees in this case, including fees incurred in bringing the Rule 11 motion. The plaintiffs seek sanctions too. They contend that Society's filing of its Rule 11 motion was “unreasonable and vexatious” conduct for which Society's counsel should be sanctioned under 28 U.S.C. § 1927.

         Procedural History

         A procedural history is necessary to understand the context of both sanctions motions. The plaintiffs (Martinsville Corral, Inc. and its two principals) first sued Society Insurance in August 2016 in the Marion Superior Court, alleging that Society breached the parties' insurance contract, and acted in bad faith in doing so, by refusing to defend (and ultimately to indemnify) the plaintiffs against two lawsuits brought against them by DirecTV. Society Insurance removed the coverage lawsuit to this court on September 16, 2016, and it was assigned No. 1:16-cv-2487-LJM-MPB.[1] The parties later reached a partial settlement, approved by the court on May 15, 2017, that dismissed with prejudice all of the plaintiffs' claims except their breach of contract claim (but including the dismissal of the bad faith claim, which was characterized by the plaintiffs in their complaint variously as bad faith, tortious breach of contractual duties to defend and to indemnify, breach of fiduciary duty, and breach of covenant of good faith and fair dealing). Nearly immediately after the settlement, the plaintiffs on May 23, 2017, raised during a conference with Judge McKinney the prospect of filing an amended complaint and, two weeks later, they moved for leave to amend their complaint. See 16-2487, Dkts. 33 and 34. Their proposed amended complaint asserted claims that Society Insurance was liable for breach of contract (for defense and indemnity). It also pled the same bad faith theories as the original complaint had, but this time based on a provision of the insurance contract (an employment endorsement) that the plaintiffs claimed they had been unaware of when they filed the suit initially and apparently also when they settled all the other bad faith/tort type claims. (See Case 16-2487, Dkt. 34). Society opposed the motion to amend on numerous grounds, including that the plaintiffs had already settled all claims except for breach of contract. Society also maintained that the amendment was being brought in bad faith, and that the plaintiffs' counsel's assertion that he had only recently become aware of the employment endorsement was wrong. Society demonstrated that a complete copy of the insurance policy was attached to its answer filed in October 2016.

         Judge McKinney denied the plaintiffs' motion to amend on July 13, 2017. Case 16-2487, Dkt. 53. He found that the plaintiffs had had the full policy since October 2016, including the employment endorsement, and that they would not be permitted to raise claims based on this clause that they already had settled. Id. at pp. 2-3 (“After failing to avail themselves of any perceived relevance of the [employment endorsement] clause to their position, and after having settled the matter on the same assertions under different clauses, Plaintiffs cannot be permitted to bring an amended complaint on these issues.”)

         About two weeks later on July 28, 2017, the plaintiffs filed a motion for summary judgment in Case 16-2487, arguing that Society Insurance had breached the insurance contract because, among other reasons, it had refused defense and coverage under the employment endorsement. See Dkt. 55 in Case 16-2487, including at pp. 13, 24.

         The plaintiffs then filed a new lawsuit against Society Insurance in Marion Superior Court on August 11, 2017, seeking relief based on the employment endorsement clause under the same tort-type claims (bad faith, tortious breach, breaches of fiduciary duty and of covenant of good faith and fair dealing) for which Judge McKinney had denied leave to amend and found had been settled. See Dkt. 1-7. The plaintiffs included statements in their new state court complaint designed to prevent removal to federal court: paragraph 6 states that “Plaintiffs seek to recover less than $75, 000 in damages” and the WHEREFORE clause states that they seek “an amount not to exceed $75, 000.” Society Insurance nevertheless removed the new case to this court on September 7, 2017. The plaintiffs immediately moved to remand based on the complaint's statements that they were seeking less than $75, 000 in damages. Society then (1) moved to consolidate the case with the 16-2487 case already pending before Judge McKinney; (2) moved to dismiss the complaint because the breach of contract claim was duplicated in the case already before Judge McKinney, because the bad faith/tort-type claims had been settled, and because Judge McKinney had refused to allow them to be raised by an amended complaint; (3) opposed the remand motion; and (4) moved for Rule 11 sanctions.

         The plaintiffs then (1) moved for and were granted a stay from responding to Society's motion to dismiss until after their remand motion was decided, and (2) moved for sanctions against Society under 28 U.S.C. § 1927 on the ground that Society's Rule 11 motion was vexatious and unreasonable conduct.

         The court denied the plaintiffs' motion to remand on February 23, 2018, and the plaintiffs filed their notice of voluntary dismissal of this case five days later, on February 28, 2018.

         Any reasonable reader of the foregoing chronology easily could conclude that the plaintiffs' filing of their complaint in state court-seeking relief based on contract claims already pending in this court and on which they had filed a motion for summary judgment and bringing bad faith/tort-type claims that Judge McKinney had found could not be brought and had been settled-was beyond the bounds of reasonable advocacy and in bad faith. But that conclusion does not mean that this court can impose sanctions under Rule 11. The court will first address Society's motion for Rule 11 sanctions and then address the plaintiffs' motion for Section 1927 sanctions.


         Society Insurance's Motion for Rule 11 Sanctions I. A Rule 11 sanction must be based on filings in federal court.

         Rule 11 governs a party's filing of a “pleading, written motion, or other paper, ” and provides that an attorney's presenting to the court any such paper- “whether by signing, filing, submitting, or later advocating it”-is a certification that, among other things, the paper is not being presented for an improper purpose and the claims or legal contentions in the paper are warranted by law or a nonfrivolous argument for changing existing law or making new law. Fed.R.Civ.P. 11(b)((1), (2).

         Rule 11, like all of the federal rules of civil procedure, applies after a case is removed from state court. See Fed. R. Civ. P. 81(c)(1) (“These rules apply to a civil action after it is removed from a state court.”) Thus, a sanction under Rule 11 cannot apply to what a litigant did in state court; it must be grounded on the attorney's actions in signing, filing, submitting, or later advocating a paper in federal court. As the Seventh Circuit found in Bisciglia v. Kenosha Unified SchoolDistrict No. 1,45 F.3d 223 (7th Cir. 1995), Rule 11 sanctions cannot be imposed based on a complaint the plaintiff filed in state court before removal or based on the plaintiff's opposition to the defendant's motion for ...

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