Powrzanas v. Jones Utility and Contracting Co Inc

Filing 129

MEMORANDUM OPINION AND ORDER - Based on the foregoing facts and considerations, the court finds that the plaintiffs motion for Rule 11 sanctions against the defendant and its counsel is due to be and hereby is DENIED. Signed by Magistrate Judge T Michael Putnam on 12/19/2018. (KEK)

FILED
2018 Dec-19 PM 03:55
U.S. DISTRICT COURT
N.D. OF ALABAMA

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ALABAMA
SOUTHERN DIVISION

MANDY POWRZANAS,
Plaintiff,
vs.
JONES UTILITY AND
CONTRACTING CO., INC.
Defendant.

)
)
)
)
)
)
)
)
)
)

Case No. 2:17-cv-975-TMP

MEMORANDUM OPINION and ORDER
On October 17, 2018, the plaintiff, Mandy Powrzanas, filed a motion for
sanctions against the defendant and defendant’s counsel, pursuant to Rule 11 of the
Federal Rules of Civil Procedure. (Doc. 95). She contends that the counterclaims
filed against her by the defendant and counsel violate Rule 11 as being both
frivolous and offered for an improper purpose. Having carefully considered the
evidence and arguments advanced by all counsel (docs. 97, 111, and 114), the
court concludes that the motion is due to be denied.
I. Factual Background
This action commenced on June 9, 2017, when the plaintiff filed her
complaint alleging that she had been constructively discharged from her
employment with the defendant in violation of the Americans with Disabilities Act

(“ADA”). The defendant, Jones Utility and Contracting Co., Inc., is a family
business, owned and operated by the plaintiff’s father, Richard “Ricky” Jones.
Plaintiff and her sister, Shawna Stewart, worked in the office of the business and
were authorized to write and sign checks in the ordinary course of the business.
Although the plaintiff had worked in her father’s business since 2006, the office
atmosphere changed dramatically in late 2015, when Mr. Jones’s wife and the
plaintiff’s mother, Donna Jones, passed away and Mr. Jones soon began a
relationship with his current wife, Patricia Jones.
To describe the office atmosphere from November 2015 until the plaintiff
left in March 2016 as chaotic is an understatement.

There were frequent

arguments, descending into cursing and shouting, between the plaintiff, her sister,
and Mr. Jones. On more than one occasion, Mr. Jones threatened suicide or to
“whip Mandy’s ass,” although there is no evidence of any actual physical violence.
In February 2016, the plaintiff quit her job, but was soon persuaded to return to
work a few days later when Mr. Jones threatened suicide. When she returned in
mid-February, she asked Mr. Jones to reduce the level of tension and discord, to
avoid shouting and cursing, because it was making her sick.

She left again

permanently in early March 2016, after she, her sister, and Mr. Jones got into an a
shouting argument during lunch at a restaurant, ultimately leading to Mr. Jones
angrily throwing his leftover food on cars in the restaurant parking lot.
2

On August 24, 2016, the plaintiff filed a charge of discrimination with the
EEOC, contending that she was constructively discharged due to her disability
from fibromyalgia and the defendant companies fail to reasonably accommodate
her condition. On March 14, 2017, the EEOC closed the matter and gave the
plaintiff a Notice of Right to Sue letter, and the instant action was filed on June 9,
2017.
After service of process on the defendant (“Jones Utility”), a three-count
counterclaim was filed on August 11, 2017. Count I alleged a claim for breach of
contract against the plaintiff based on her failure to pay a promissory note dated
April 20, 2011, in the face amount of $66,000.00, which fully matured on April 20,
2016. Count II alleged conversion, based on a check written by the plaintiff to
herself without authorization for $4,000.00.1 Count III alleged breach of fiduciary
duty based on the conversion of the same check alleged in Count II.

On

August 31, 2017, the plaintiff filed her answer to the counterclaim, asserting that
the promissory note was a fraudulent document, meant to cover up a scheme by
Mr. Jones to transfer money between his businesses, and not evidence of a true
loan to the plaintiff.

1

The counterclaim erroneously refers to the check as “Number 1960,” which, in fact, was a
check written and signed by the plaintiff to her sister, Shawna Stewart, in the amount of
$4,000.00. Instead, check number 1961 was the check in the amount of $4,000.00 written and
signed by the plaintiff to herself.
3

Litigation proceeded, contentiously, for several months. On July 2, 2018,
counsel for the plaintiff wrote a letter to defense counsel pursuant to Rule 11(c)(2),
demanding that the counterclaims be dismissed within twenty-one (21) days, or the
plaintiff would seek Rule 11 sanctions.

On October 3, 2018, an Amended

Counterclaim was filed, dropping Counts II and III, but retaining Count I for
breach of contract on the promissory note. The instant motion was filed two weeks
later, on October 17, 2018.
II. Discussion
Rule 11(b) of the Federal Rules of Civil Procedure states the following:

(b) 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;
(2) the claims, defenses, and other legal contentions are warranted
by existing law or by a nonfrivolous argument for extending,
modifying, or reversing existing law or for establishing new law;
(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.
4

Subsection (c) authorizes the imposition of sanctions for violation of the
representations required by subsection (b). The sanctions may be imposed on the
lawyer, law firm, and party who “is responsible for the violation.”
The court of appeals has explained that, “Rule 11 sanctions are properly
assessed ‘(1) when a party files a pleading that has no reasonable factual basis;
(2) when the party files a pleading that is based on a legal theory that has no
reasonable chance of success and that cannot be advanced as a reasonable
argument to change existing law; or (3) when the party files a pleading in bad faith
for an improper purpose.’” Massengale v. Ray, 267 F.3d 1298, 1301 (11th Cir.
2001) (quoting Worldwide Primates, Inc. v. McGreal, 87 F.3d 1252, 1254 (11th
Cir.1996)). In making that assessment, the court engages in a two-prong inquiry.
First, the court weighs “whether the party’s claims are objectively frivolous,” and
second, “whether the person who signed the pleadings should have been aware that
they were frivolous.” Benavides v. Miami Atlanta Airfreight, Inc., 612 F. Supp. 2d
1236, 1238 (S.D. Fla. 2008) (quoting Byrne v. Nezhat, 261 F.3d 1075, 1105 (11th
Cir. 2001)); see also Homecare CRM, LLC v. Adam Grp., Inc. of Middle
Tennessee, 952 F. Supp. 2d 1373, 1380 (N.D. Ga. 2013); Rueter v. Merrill Lynch,
Pierce, Fenner & Smith, Inc., 440 F.Supp.2d 1256, 1266 (N.D. Ala. 2006).
“Although sanctions are warranted when the claimant exhibits a ‘deliberate
indifference to obvious facts,’ they are not warranted when the claimant’s evidence
5

is merely weak but appears sufficient, after a reasonable inquiry, to support a claim
under existing law.” Baker v. Alderman, 158 F.3d 516, 524 (11th Cir. 1998). “The
‘objective standard for testing conduct under Rule 11 is “reasonableness under the
circumstances” and “what was reasonable to believe at the time” the pleading was
submitted.’” Homecare CRM, LLC v. Adam Grp., Inc. of Middle Tennessee, 952
F. Supp. 2d 1373, 1380 (N.D. Ga. 2013) (quoting Baker v. Alderman, 158 F.3d
516, 524 (11th Cir. 1998)); accord Riccard v. Prudential Ins. Co., 307 F.3d 1277,
1294 (11th Cir. 2002); Donaldson v. Clark, 819 F.2d 1551, 1556 (11th Cir. 1987);
Kaplan v. DaimlerChrysler, A.G., 331 F.3d 1251, 1255 (11th Cir. 2003) (holding
courts use an objective standard to determine whether a reasonable attorney would
have known the filing was legally and factually justified). Attorneys have a duty to
make “reasonable” pre-filing inquiries to avoid filing papers not supported by any
factual basis. “The reasonableness of the inquiry ‘may depend on such factors as
how much time for investigation was available to the signer; whether he had to rely
on a client for information as to the facts underlying the [violative document]; ... or
whether he depended on forwarding counsel or another member of the bar.’”
Worldwide Primates, Inc. v. McGreal, 87 F.3d 1252, 1254 (11th Cir. 1996)
(quoting Mike Ousley Productions, Inc. v. WJBF–TV, 952 F.2d 380, 382 (11th
Cir.1992)). Thus the standard applicable to counsel’s pre-filing investigation also
is “reasonableness under the circumstances.” Anderson v. Smithfield Foods, Inc.,
6

353 F.3d 912, 915 (11th Cir. 2003); United States v. Milam, 855 F.2d 739, 743
(11th Cir. 1988) (quoting Donaldson v. Clark, 819 F.2d 1551, 1556 (11th Cir.
1987) (en banc)). Further, under the bad faith standard of Rule 11(b)(3), an
attorney and party may be sanctioned only if they acted in bad faith to file a
pleading for the intentional purpose of harassing and vexing the opposing party or
to needlessly increase the costs of the action. See Thomas v. Evans, 880 F.2d
1235, 1243 (11th Cir. 1989). Bad faith implies a deliberate purpose, not a mere
error or misjudgment about the facts or law of the claim. The party seeking the
Rule 11 sanction must show that the improper purpose for the filing “constituted
the sole reason for bringing the lawsuit.” Benavides v. Miami Atlanta Airfreight,
Inc., 612 F. Supp. 2d 1236, 1239 (S.D. Fla. 2008).
In the instant case, the plaintiff asserts that the counterclaim filed by the
defendant, with assistance of and signed by counsel, violates Rule 11(b)(1),
because the factual contentions underlying the counterclaim lack evidentiary
support, and Rule 11(b)(3), because it was filed for an improper purpose. The
court will address these in order.
A. Lack of Factual Support
The counterclaim filed by the defendant rests on two factual bases. The first
was the 2011 execution of a promissory note by the plaintiff, evidencing a
$66,000.00 debt payable to the defendant when the note matured in April 2016.
7

The second was the existence of a check in the amount of $4,000.00, written by the
plaintiff to herself on the defendant company’s corporate bank account.2 Based on
these factual foundations, the defendant asserted a counterclaim against the
plaintiff for breach and nonpayment of the promissory note and two other claims
for conversion and breach of fiduciary duties in relation to the check written by the
plaintiff to herself.

The plaintiff contends that these claims against her are

meritless—and known by Ricky Jones and the company’s attorneys to be
meritless—because the promissory note was not a real debt but part of a scheme by
Mr. Jones to set a minority-owned company to bid for business set aside for such
companies. Likewise, the plaintiff asserts that the two checks she wrote to herself
and her sister were authorized by Mr. Jones, as were many other such checks she
wrote to herself, her sister, her mother, and several other people at the direction of
Mr. Jones.
Turning first to the promissory note, Mr. Jones testified in his deposition and
by affidavit that the promissory note evidences a loan Jones Utility made to the
plaintiff to enable her to buy her share of stock in a new company, Karma
Construction, being set up in 2011 by the plaintiff, Shawna Stewart, Donna Jones,
and Geniece Dancy. He testified that the business was set up by the four women
2

The counterclaim mistakenly refers to this as check number 1960. In fact, it was check
number 1961. As shown by a subsequent audit of the defendant company’s checking records,
the plaintiff wrote two checks in the amount of $4,000.00 each, one to herself and one to her
sister, Shawna Stewart. Both checks were signed by the plaintiff. The check to the plaintiff was
check number 1961, and check number 1960 was the one written to her sister.
8

for their own benefit and that he had no control over it or its business. In support
of this assertion, the defendant has offered a copy of the April 20, 2011,
Shareholders Agreement among the four women setting up the company. This
Agreement reflects that the plaintiff was a 22% owner of Karma Construction,
which is consistent with the $66,000.00 amount of the promissory note as the
plaintiff’s share of ownership, based on plaintiff’s and Mr. Jones’s testimony that
Karma was initially capitalized with $300,000.00. Further, in filing her federal
income tax return for tax year 2011, the plaintiff acknowledged to an account
preparing her personal tax return that, as a percentage owner of Karma, a
Subchapter S corporation, she personally was entitled to claim her share of the
losses suffered by the company that year. See Docs. 90-5, 90-6. In that tax year,
she claimed a loss from Karma totaling $65,972.00, that was used to offset
otherwise taxable income, reducing her federal income tax.
Although the plaintiff has testified that Karma was a sham, set up by Mr.
Jones as a way to bid on minority-set aside contracts, the fact that the plaintiff
claimed a tax loss in the same year the company was established tends to support
the assertion that it was not a sham, but one in which she was a part owner. This is
probative to confirm the legitimacy of the note as evidencing a loan made by Mr.
Jones to the plaintiff to enable her to buy her shares of stock in Karma. While
there may be factual disputes about the note, it clearly constituted a reasonable
9

factual basis on which the defendant and counsel sought collection of the debt
when it matured. There is nothing “objectively frivolous” about the promissory
note or the counterclaim to collect it. Thus, the counterclaim for breach of the note
did not lack a reasonable factual basis for purposes of a Rule 11 analysis.
The same is true of the conversion and breach of fiduciary duty claims
alleged in Counts II and III of the counterclaim, both of which have now been
dropped from the counterclaim. 3 It is undisputed as a fact that the plaintiff wrote
check number 1961 to herself.

It is inconsequential that the counterclaim

mistakenly identified the check as number 1960, when the audit requested by the
plaintiff clearly demonstrated that the actual check was 1961.

A mere

typographical error cannot be the basis of a Rule 11 sanction. What is disputed is
whether she had the authority to write and sign the check on behalf of the
defendant company—she says she did and Mr. Jones says it was not authorized.4
Once again, while there may be a factual or legal dispute over the merits of the

3

Mr. Jones testified in his deposition that Counts II and III of the counterclaim were dropped
because his lawyers advised him to do so. It was not economically viable to pursue them. The
check involved was for $4,000.00, but the costs incurred attempting to recoup the lost money had
exceeded that amount.
4

The plaintiff points to the hundreds of checks written by her, reflected in the audit trail of the
defendant company, as conclusive proof that she was authorized to write these two particular
checks. It is true that the plaintiff was authorized to write checks for legitimate business
expenses and activities. The fact that she performed this task, however, does not prove that
every check she wrote was authorized. If that were the case, no bookkeeper would ever be
charged with embezzlement.
10

counterclaims related to the check, there is no question that there was a reasonable
factual basis for them at the time they were pleaded.
All three counts of the counterclaim as originally filed were grounded on
reasonable factual bases, even if the parties dispute the significance of them. It is
not disputed that a promissory note was executed by the plaintiff and that
$66,000.00 was transferred as capital funds to Karma on her behalf. There is no
dispute that the plaintiff wrote and signed the check to herself. These basic facts,
however otherwise controverted by the parties, means that there was a reasonable
factual basis for the counterclaim within the requirements of Rule 11(b)(1).
B. Improper Purpose
The plaintiff also contends that, even if there was a factual and legal basis
for each counterclaim, they were filed by counsel and the defendant for the
improper purposes of harassing her and further aggravating her fibromyalgia. The
plaintiff questioned Mr. Jones about this during his deposition, and he steadfastly
denied any malicious or bad faith purpose. (See Richard Jones Depo, Doc. 95-20,
pp. 73-74, 88-90, 91-92, 93-94, 137-138). He maintained that counterclaim was
filed because he believed it to have merit. Circumstantial evidence also suggests
the counterclaim was not for an improper purpose. Although it is true that the
defendant took no steps to collect either the promissory note or the check until
after the plaintiff filed suit against it in 2017, the counterclaims are compulsory in
11

nature. The defendant had to decide whether to pursue the claims or forfeit them
under Rule 13 of the Federal Rules of Civil Procedure. A reasonably prudent
attorney would be inclined to pursue them, rather than risk their loss. It is not
improper or retaliatory for a defendant to pursue a fact-based counterclaim when
the decision whether to do so is forced on the defendant by the compulsory nature
of the counterclaim.
Moreover, the defendant has not singled out the plaintiff for collection of the
debt. Of the four original investors in Karma Construction, Dancy’s investment
was in the form of vehicles and equipment, later surrendered to the defendant when
Karma collapsed. The defendant has pursued its promissory note claims against
the plaintiff in this action and against Shawna Stewart in a state-court action. The
remaining promissory note debt was owed by Richard Jones’s former wife, who is
now deceased and against whose estate collection efforts would be difficult and
expensive. The fact that Jones Utility has pursued its remedies on loans made to
other investors in Karma undercuts the assertion that it acted with an improper or
malicious intent toward the plaintiff.
The circumstances simply do not demonstrate that the counterclaims pleaded
by Jones Utility in this action were motivated by bad faith, any more so that the
claims pleaded by the plaintiff against the defendant.

The counterclaims are

objectively reasonable and grounded on a factual basis supported by evidence.
12

Other than the bitter family conflict underlying this action—which goes both
ways—there is no evidence of bad faith or an improper purpose in the filing of the
counterclaims by counsel for Jones Utility or by the defendant itself.
III. Conclusion
Based on the foregoing facts and considerations, the court finds that the
plaintiff’s motion for Rule 11 sanctions against the defendant and its counsel is due
to be and hereby is DENIED.
DONE this 19th day of December, 2018.

_______________________________
T. MICHAEL PUTNAM
UNITED STATES MAGISTRATE JUDGE

13