The opinion of the court was delivered by: Rosemary M. Collyer United States District Judge
Mr. and Mrs. Morton A. Bender, dissident shareholders, sued five members of the Board of Directors of Independence Federal Savings Bank ("Bank" or "IFSB") and its Acting President*fn1 for alleged violations of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78a et seq. The Court issued a preliminary injunction in the Benders' favor and Defendants appealed. The appeal was withdrawn before briefs were filed. The Benders now seek their attorneys' fees and costs in the amount of $1,211,579.38, pursuant to the Private Securities Litigation Reform Act ("PSLRA"), 15 U.S.C. § 78u-4(c). See Mot. for Att'y Fees [Dkt. # 96].
The current lawsuit represents only one of a number of suits for control of the Bank, filed by the Bank and its Board of Directors or Mr. Bender over a period of years.*fn2 In this case, the Court issued a preliminary injunction on July 21, 2006, enjoining Defendants and the Bank from holding shareholder meetings or disseminating proxy materials until further order of the Court because of improprieties associated with an October 2005 Shareholders' Meeting. Bender v. Jordan, 439 F. Supp. 2d 139 (D.D.C. 2006). Although Defendants immediately appealed, they withdrew the appeal before briefs were filed. Thereafter, the Court dismissed the suit as moot in light of changed circumstances. See Dkt. # 90. The Court's July 2006 Memorandum Opinion on the preliminary injunction thereby became the final word on events surrounding the 2005 Shareholders' Meeting. Certain ancillary matters having since been resolved (i.e., litigation between the Bank and the remaining defendants, see Dkt. ## 102-103 & 112-113), the motion for attorneys' fees and costs is ready for decision.
The Benders assert that the very Answers to their Amended Complaint filed by the remaining Defendants violated Rule 11(b), Fed. R. Civ. P., the touchstone for liability under the PSLRA. That Rule provides, in relevant part:
Representations to the Court. By presenting to the court a pleading, written motion, or other paper - whether by signing, filing, submitting, or later advocating it - an attorney or unrepresented party certifies that to the best of the person's knowledge, information, and belief, formed after an inquiry reasonable under the circumstances
(1) it is not being presented for any improper purpose, such as to harass, cause unnecessary delay, or needlessly increase the cost of litigation;
(3) the factual contentions have evidentiary support or, if specifically so identified, will likely have evidentiary support after a reasonable opportunity for further investigation or discovery; and
(4) the denials of factual contentions are warranted on the evidence or, if specifically so identified, are reasonably based on belief or a lack of information.
Fed. R. Civ. P. 11(b). Rule 11(c) provides that a court may sanction any party or attorney for failure to comply with Rule 11(b). Using Rule 11(b) as its standard, the PSLRA requires a court to consider sanctions for abusive litigation:
In any private action arising under this chapter, upon final adjudication of the action, the court shall include in the record specific findings regarding compliance by each party and each attorney representing any party with each requirement of Rule 11(b)... as to any complaint, responsive pleading, or dispositive motion.
If the court makes a finding under paragraph (1) that a party or attorney violated any requirement of Rule 11(b)... as to any complaint, responsive pleading, or dispositive motion, the court shall impose sanctions on such party or attorney in accordance with Rule 11.... 15 U.S.C. § 78u-4(c)(1) & (2). The statute presumes that the court should award attorney fees as a sanction when there is a violation of Rule 11(b). Id. § 78u-4(c)(3). If a responsive pleading or dispositive motion fails to comply with Rule 11(b) "an award to the opposing party of the reasonable attorneys' fees and other expenses incurred as a direct result of the violation" should be granted. Id. § 78u-4(c)(3)(A)(1). Two circumstances can overcome the presumption in favor of an award of attorney fees: awarding fees would "impose an unreasonable burden on that party or attorney and would be unjust," while failure to award fees would not impose a greater burden on the party in whose favor sanctions would be ordered; or "the violation of Rule 11(b)... was de minimis." Id. § 78u-4(c)(3)(B)(i) & (ii).
"[W]hen the Rule 11 proceeding is commenced by motion filed by one of the parties, the courts have, without exception, held counsel [and, under the PSLRA, the parties themselves] to an objective standard of reasonableness." Lucas v. Spellings, 408 F. Supp. 2d 8, 10 (D.D.C. 2006) (citations omitted); Independence Federal Savings Bank v. Bender, 230 F.R.D. 11, 17 (D.D.C. 2005) (citing Gurary v. Winehouse, 235 F.3d 792, 797 (2d Cir. 2000)) (noting that the "PSLRA does not alter substantive standards but circumscribes judicial discretion to conduct the Rule 11 analysis and in imposing sanctions"). The Benders contend that these Defendants flagrantly violated Subsections (3) and (4) of rule 11(b) in that their defenses or other factual contentions in their Answers did not have evidentiary support and their denials of the Complaint's factual contentions were not warranted. See Pls.' Mem. at 3.
Rule 11(c)(1) provides that if the court determines that Rule 11(b) has been violated, it should impose sanctions on "any attorney, law firm, or party that violated the rule or is responsible for the violation." Fed. R. Civ. P. 11(c)(1). "The sanction should be imposed on the persons -- whether attorneys... or parties -- who have violated the rule or may be determined to be responsible for the violation." Id. Advisory Committee Note (1993) (subdivisions (b) and (c)); see Reynolds v. The U.S. Capitol Police Board, 357 F. Supp. 2d 19, 23-24 (D.D.C. 2004) ("Parties and their counsel may be sanctioned by the Court for violations of Rule 11."); see also Rafferty v. NYNEX Corp., 60 F.3d 844, 852 (D.C. Cir. 1995) (holding that "once the district court finds that a pleading is not well grounded in fact..., Rule 11 requires that sanctions of some sort be imposed" (emphasis in original; internal quotation marks and citations omitted)); Carswell v. Airline Pilots Ass'n In'l, 248 F.R.D. 325, 327 (D.D.C. 2008) (sanctioning both party and counsel for a pleading that lacked reasonable factual support).
The Benders are clear that they do not move for sanctions against counsel for the Defendants or dismissed co-Defendants but only against the remaining Defendants themselves. See Pls.' Mem. at 2 n.2. As to Ms. Jordan and Messrs. Wilmot and Batties, the Benders allege that they made false representations "both on paper and in testimony during the preliminary injunction hearing." Pls.' Mem. at 2. "On paper" is explained to mean paragraphs 14, 19, 20, 23, 26-28, 30, and 32-33 of the Defendants' Answers. See Pls.' Mem. at 3, 4, 6, & 7; Defendant Batties' Answer [Dkt. # 9]; Defendant Jordan's Answer [Dkt. # 12]; Defendant Wilmot's Answer [Dkt. # 13] (collectively, "Defs.' Answers").*fn3
The Defendants argue that they had a right to present a defense and that their Answers were objectively reasonable. They note that "Rule 11 was not intended to penalize a party whose interpretation of the evidence is eventually proved wrong; the question is whether there was a reasonable basis for the interpretation initially...." Crawford v. Deutsche Bank AG, 271 F. Supp. 2d 829, 834 (E.D. Va. 2003).
Below are the answers the Benders relied upon in their motion for attorneys' fees along with the Court's findings of fact with respect to each allegation at issue.
A few days prior to the May 11th meeting, a letter dated May 4, 2005 was sent to shareholders allegedly on behalf of "the Committee to Save Independence Federal Savings Bank." Upon information and belief, this letter was drafted by, or with the assistance of, Defendant Batties (and/or one or more of the Director Defendants), as the level of detail set forth in the letter leads to the inescapable conclusion that it was written by, or in consultation with, Bank management. Some of the information contained in the letter could only have come from confidential OTS examination reports, which are maintained in the Bank's file. The letter is full of faulty and misleading statements, coupled with undisguised character assassination ("Morton Bender's Background").
Compl. [Dkt. # 1] ¶ 14.*fn4
Answers: Defendants admitted that a letter was sent to shareholders dated May 4, 2005. Defendants denied all remaining allegations set forth in paragraph 14. Defs.' Answers ¶ 14.
Court Findings: Upon the specific direction of Mr. Batties, Christopher Chambers, an attorney and part-time Bank employee, worked with Judy Smith of Impact Strategies, a public relations firm retained by the Bank, to provide information for the Committee Letter and to set its tone and arrange its mailing. The three alleged signatories, all prominent African American clergy in Washington, D.C., testified that they had nothing to do with preparing the letter. Not only did Mr. Batties instruct Mr. Chambers to work with Ms. Smith, but Mr. Chambers sent copies of all e-mails between himself and Ms. Smith to Mr. Batties. Mr. Chambers also talked with Mr. Batties directly about his efforts.
[T]he Court conclude[d] that Mr. Batties authorized and was aware of Mr. Chambers' participation in the creation and mailing of the Committee Letter.... Further, the Court [found] that Mr. Batties authorized and was aware that the Committee was being portrayed falsely to shareholders and the public as an independent group.... Further, the Court [found] that it is more likely than not that certain Directors of the Bank were, at a minimum, informed of the Committee Letter before its mailing.
Bender v. Jordan, 439 F. Supp. 2d 139, 150 (D.D.C. 2006) (internal citations omitted). Mr. Batties admitted that some of the information in the Committee Letter and its attachments could only have come from confidential OTS examination reports, which are maintained in the Bank's files. Id. at 149.
Therefore, contrary to Defendants' explicit denial in their Answers, the Letter from the Committee to Save IFSB was drafted with the assistance of Mr. Batties and in consultation with some Bank directors. It appears from the emails that Ms. Jordan was fully involved and Mr. Wilmot may have been. In addition, some of the information in the Letter admittedly came from OTS reports in the Bank's files. The blatant denial of facts known to two or all Defendants violated Rule 11(b) as there was no reasonable factual basis for them. See Crawford, 271 F. Supp. 2d at 834.
Allegation: On or about October 3, 2005, Bender sent a letter to the IFSB Shareholders, which inter alia identified the Bender Nominees, and explained that the only way to vote for the Bender Nominees was to attend the meeting in person, or to send someone with a legal proxy. The letter also specifically instructed that Bender was not soliciting proxies, and was not able to vote any shares other than his own.
Answers: Defendants admitted that Bender sent a letter to shareholders on or about October 3, 2005. Defendants denied the remaining allegations set forth in paragraph 19. Defs.'
On October 3, 2005, Mr. Bender sent a letter to IFSB shareholders which identified his nominees for directors as Osborne George and John Silvaneous Wilson Jr. ('Bender Nominees'). The letter explained that Mr. Bender was not soliciting proxies and that the only way to vote for the Bender nominees was to attend the meeting in person or to send someone with a legal proxy.
Bender, 439 F. Supp. at 151 (internal citation omitted).
Defendants state now that their denial of the allegations concerning the text of the October 3, 2005, letter from Mr. Bender was because the document speaks for itself. Of course, their Answers said no such thing. The proof, however, was easy to present and the Court finds that any violation of Rule 11 was de minimis.
Allegation: On October 4, 2005, the Director Defendants and Defendant Batties submitted the Bank's proxy Materials to the Shareholders ("Proxy Materials"). These Proxy Materials included the Bank's Proxy Statement ("Proxy Statement") with ten appendices, a "Notice of Postponement and Rescheduling of Special Meeting of Shareholders," as well as a letter signed by Defendants Jordan and Batties entitled "Update to our Shareholders" ("Update"). Both the Update and the Proxy Statement contained inaccurate and misleading information about the Bender Nominees, Bender's regulatory filings, and his intentions to obtain majority ownership and control of the Bank, as set forth in detail below. As such, they violate Section 14(a) of the Exchange Act, 15 U.S.C. § 78n(a), 12 C.F.R. § 569, and 17 C.F.R. § 240.14a-9.
Answers: "Defendant[s] admit[ted] that an October 4, 2005 letter was sent to the shareholders containing the Bank's proxy materials with appendices and a letter titled 'Update to our Shareholders.' Defendant[s] den[y] the remaining allegations set forth in paragraph 20." Defs.' Answers ¶ 20.
Court Findings: "The Bank distributed its proxy materials to shareholders on October 4, 2005. The Bank's nominees for directors were Marion O. Greene Jr. and Defendants Fitzgerald and Wilmot ('Management Nominees')." Bender, 439 F. Supp. 2d at 151. The Proxy Materials incorrectly informed shareholders that "[i]f you fail to vote for the election of directors, the votes of those supporting Bender's nominees will have a greater impact in helping Bender gain operating control of the Bank" and "[y]our broker will not vote your shares without your instructions." Id. at 158 (citation omitted). "Both of these [statements] were incorrect and ...