United States District Court, S.D. Indiana, Indianapolis Division
REPORT AND RECOMMENDATION ON PLAINTIFFS' MOTION
FOR SANCTIONS
Tim A.
Baker United States Magistrate Judge
I.
Introduction
At
issue is Plaintiffs' motion for sanctions against
attorneys Kevin L. Murphy and Joseph Jeffrey Landen, who
represented Frontier League Baseball, Inc. (the
“League”) in this matter. Plaintiffs ask the
Court to invoke both its inherent authority and 28 U.S.C.
§ 1927 to sanction Murphy and Landen personally a
minimum of $324, 037.26. Plaintiffs' motion focuses on a
legal argument Murphy and Landen made in a variety of
motions. Plaintiffs contend that Murphy and Landen knowingly
asserted a baseless defense, thereby perpetrating a fraud on
the Court and unreasonably and vexatiously multiplying the
proceedings.
To be
sure, Murphy and Landen's conduct should not be emulated.
But does this conduct support assessing over $324, 000 in
sanctions? It does not. Murphy and Landen at least have some
explanation for each allegation against them. Given that this
litigation has stretched on for three and a half years, there
has been ample opportunity for missteps. Ultimately, the
parties reached a settlement, only to result in more
litigation and, now, a motion seeking a hefty sanctions
award. Given all involved, further action by way of sanctions
is not appropriate. Prior to his elevation to the Seventh
Circuit Court of Appeals, Judge John Daniel Tinder likewise
faced a motion for sanctions. Judge Tinder observed that
“winning ought to be enough . . . . There is no need to
scorch the field on which the battle was fought.”
McDaniel v. Eaglecare, Inc., IP 00-0413-C-T/K, slip
op. at 7 (S.D. Ind. Sept. 27, 2002). Judge Tinder's
wisdom applies equally here. As discussed below,
Plaintiffs' motion for sanctions [Filing No. 311] should
be denied.
II.
Background
Plaintiffs
Washington Frontier Baseball, LLC, and Stuart A. Williams
brought suit against several individuals and entities,
including W. Chris Hanners and Michael Zimmerman, both
personally and derivatively on behalf of the League.
Plaintiffs alleged that Defendants worked together to make a
deal with the City of Kokomo for a new baseball team, and in
so doing, conspired to breach fiduciary duties Hanners owed
to the League, tortuously interfered Plaintiffs'
contracts, and unjustly enriched themselves. After years of
litigation, Plaintiffs and Defendants settled their disputes.
In
response to the suit, the League formed a Special Litigation
Committee, and that SLC issued a report recommending the
League oppose Plaintiffs' derivative suit.[1] The League
adopted the recommendation and opposed Plaintiffs' suit
throughout the litigation. The League filed two motions to
dismiss based on multiple arguments, including that the
SLC's determination is entitled to deference and the suit
should be dismissed. The League succeeded in a motion to stay
discovery, which the Court granted in part due to questions
regarding “whether any pleaded derivative claims can
survive despite the League's decision, in accordance with
the findings of the [SLC], not to pursue those claims.”
[Filing No. 61, at ECF p. 5.] The League convinced
the Court to reject (temporarily) a settlement Plaintiffs and
defendants reached, with the Court again pointing to the
SLC's decision as its reason for deferring to the League.
[Filing No. 152, at ECF pp. 2.] Murphy and Landen reiterated
this argument and asserted two others in the motion for
summary judgment they filed on behalf of the League. [Filing
No. 177, at ECF p. 6-8.]
The
Court denied the League's motion for summary judgment,
finding that the League's decision not to pursue the
claims in court was not entitled to deference under the
business judgment rule. Under Ohio law, [2] courts defer to
an entity's business judgment regarding whether to pursue
a derivative claim when the decision is made following a
thorough, good faith investigation conducted by a litigation
committee comprised of independent, disinterested members.
Miller v. Bargaheiser, 591 N.E.2d 1339, 1343 (Ohio
Ct. App. 1990). The Court expressed “serious
doubts” about whether the elements of the rule were
satisfied. [Filing No. 238, at ECF p. 23.] In
finding that the SLC's decision was not entitled to
deference at the summary judgment stage, the Court noted that
“[t]he evidence suggests that the SLC members
predetermined not to pursue the claims and to quickly end the
litigation without fully investigating the facts and
determining the value of the claims.” [Id.]
The Court also questioned the independence of the SLC, citing
evidence that some SLC members failed to disclose to the
League's directors and the other SLC members that they
had “business dealings . . . directly related to the
subject matter of this litigation.” [Id.]
Following
settlements with Defendants, the League obtained its file
from the law firm at which Murphy and Landen worked when they
represented the League in this matter. The League provided
this file, which contained its communications with attorneys
Murphy and Landen, to Plaintiffs. Based on this and other
evidence they acquired through discovery, Plaintiffs argue
Murphy and Landen knew the SLC did not meet the requirements
for deference, but nonetheless repeatedly and in bad faith
argued otherwise. Murphy and Landen respond that the
SLC's decision was entitled to deference and their
arguments were made in good faith.
III.
Discussion
In
support of their request for sanctions of at least $308,
797.92 in attorney fees and $15, 239.34 in costs and
expenses, Plaintiffs argue Murphy and Landen committed fraud
on the Court and repeatedly relied on the SLC's decision
in bad faith, which caused this case to drag on at great
expense to Plaintiffs. Plaintiffs point to evidence
suggesting that, at the behest of SLC member Clint Brown,
Murphy and Landen fabricated much of the support for the SLC
theory in an effort to quickly end the litigation. Plaintiffs
also contend that Murphy's dealings with Brown made him
aware that Brown had an interest in the events underlying the
derivative suit, which would mean Murphy knew at least one
SLC member was not independent and disinterested. Murphy and
Landen respond, not only that they had a good faith basis to
make the business judgment rule arguments, but that the rule
was satisfied and the SLC should have been given
deference.[3] They further argue that Ohio law regarding
whether an SLC member is independent and disinterested favors
their position.
Under
the business judgment rule, courts are required to dismiss
derivative claims in deference to an entity's business
judgment when the entity adopts the findings of an SLC that
meets certain conditions. Miller v. Bargaheiser, 591
N.E.2d 1339, 1341-42 (Ohio Ct. App. 1990). Unlike some
states, Ohio prohibits courts from making an independent
determination of the business's best interests.
Id. at 1342 (citing Zapata Corp. v.
Maldonado, 430 A.2d 779, 786-87 (Del. 1981). Instead,
courts must defer to the SLC's decision “where: (1)
the SLC is comprised of independent, disinterested trustees;
(2) the SLC conducts its inquiry in good faith; and (3) the
committee's recommendation is the product of a thorough
investigation.” Id. at 1343. Plaintiffs allege
Murphy and Landen knew none of the elements was satisfied.
a.
Authenticity of the SLC's First Report
In
support of the League's first motion to dismiss, the
League filed a report purporting to contain the SLC's
recommendation and analysis. [Filing No. 35-1.]
Plaintiffs allege that Murphy and Landen committed fraud on
the Court by submitting a fabricated report. In sum, the
report stated that the SLC concluded Plaintiffs' suit was
not in the League's best business interest because the
League only had standing to seek a maximum of $50, 000, a
public feud would be harmful to the league's efforts to
attract new owners, and the claims against Zimmerman were
likely governed by Ohio law, which did not recognize the
cause of action. Plaintiffs allege the SLC did not reach this
conclusion, but rather it was Murphy and Landen's, and
the report itself was faked. Murphy and Landen respond that
the report unquestionably reflects the SLC's opinion, and
even if it was not adopted, they had no reason to suspect the
report was not authentic.
Plaintiffs
cite evidence that calls into question the authenticity of
the report. First, Murphy and Landen controlled the drafting
process. Murphy and Landen's colleague Nathaniel Swehla
drafted an outline of the report and gave it to League
attorney Tom Ysursa, who was a non-voting member of and legal
counsel to the SLC. [Filing No. 331-29.] Ysursa turned the
outline into a draft report. [Compare Filing No.
35-1 with Filing No. 331-29.] Swehla then redlined
the draft, and Murphy approved it, noting that it would
“just kill” Plaintiff Williams. [Filing No.
331-30, at ECF pp. 1, 3.]
Second,
and more disturbing, it appears that the SLC may not have
adopted the report. The only SLC member to sign the report
was Clint Brown, who Plaintiffs allege conspired with Murphy
to try to get the suit dismissed as quickly as possible. The
other SLC members testified that they did not remember seeing
this report. Ysursa testified that he emailed the report to
them all, but Plaintiffs point out ...