Washington Frontier League Baseball, LLC v. Zimmerman

          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 ...