Marble Bridge Funding Group, Inc v. Liquid Capital Exchange, Inc. et al

Filing 93

ORDER denying without prejudice 62 Motion for Sanctions. Signed by Judge Edward J. Davila on 6/8/2016. (ejdlc1S, COURT STAFF) (Filed on 6/8/2016)

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UNITED STATES DISTRICT COURT

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NORTHERN DISTRICT OF CALIFORNIA

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SAN JOSE DIVISION

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MARBLE BRIDGE FUNDING GROUP,
INC,
Plaintiff,

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v.

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United States District Court
Northern District of California

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LIQUID CAPITAL EXCHANGE, INC., et
al.,

Case No. 5:15-cv-00177-EJD
ORDER DENYING WITHOUT
PREJUDICE DEFENDANTS’ MOTION
FOR SANCTIONS
Re: Dkt. No. 62

Defendants.
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In this action asserting claims for various forms of negligence and fraud, Plaintiff Marble

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Bridge Funding Group, Inc. (“Marble Bridge”) alleges that Defendants Liquid Capital Exchange,

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Inc. and its executive, Sol Roter (collectively, the “Exchange Defendants”), helped orchestrate a

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transaction that resulted in Marble Bridge purchasing the accounts receivable of a sham company.

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After the court dismissed all claims against Liquid Capital Exchange, Inc., Marble Bridge filed a

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First Amended Complaint (“FAC”) reasserting those claims. The Exchange Defendants now

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move for sanctions against Marble Bridge and its counsel under Federal Rule of Civil Procedure

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11 because, according to them, the allegations in the FAC are without evidentiary support. Dkt.

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No. 62. Marble Bridge opposes the motion.

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The court found this matter suitable for decision without oral argument pursuant to Civil

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Local Rule 7-1(b). Having carefully considered the pleadings filed by the parties, the court finds,

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concludes and orders as follows:

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1.

“Rule 11 authorizes a court to impose a sanction on any attorney, law firm, or party

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that brings a claim for an improper purpose or without support in law or evidence.” Sneller v.

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Case No.: 5:15-cv-00177-EJD
ORDER DENYING WITHOUT PREJUDICE DEFENDANTS’ MOTION FOR SANCTIONS

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City of Bainbridge Island, 606 F.3d 636, 638-39 (9th Cir. 2010). “When, as here, a ‘complaint is

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the primary focus of Rule 11 proceedings, a district court must conduct a two-prong inquiry to

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determine (1) whether the complaint is legally or factually baseless from an objective perspective,

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and (2) if the attorney has conducted a reasonable and competent inquiry before signing and filing

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it.” Holgate v. Baldwin, 425 F.3d 671, 676 (9th Cir. 2005) (quoting Christian v. Mattel, Inc., 286

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F.3d 1118, 1127 (9th Cir. 2002)).

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2.

In the FAC, Marble Bridge alleges that Roter prepared the fraudulent Nature’s Own

Aging Report dated July 12, 2011 (the “Aging Report”), and that Marble Bridge relied upon the

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Aging Report to reach an agreement with Liquid Capital Exchange, Inc. to purchase its share of

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the Nature’s Own accounts receivable. In moving for sanctions, the Exchange Defendants argue

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United States District Court
Northern District of California

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these allegations are “demonstrably without evidentiary support” because the information

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available prior to the initiation of this action is insufficient to establish either that Roter created the

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Aging Report or that Marble Bridge relied on the Aging Report in deciding to do business with the

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Exchange Defendants. To that end, the Exchange Defendants cite to certain evidence it argues

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was available to Marble Bridge and disproves its theory of the case. This includes emails between

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Roter and representatives of Marble Bridge and Nature’s Own, which the Exchange Defendants

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believe show they did not provide Marble Bridge with the Aging Report. It also includes

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testimony from depositions conducted in connection with related cases, which has been submitted

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to support the argument that Marble Bridge could not have relied on the Aging Report when it

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decided to take on Nature’s Own as a client.

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3.

The Exchange Defendants also appear to rely on the deposition testimony of

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Marsha Holloway a/k/a Annette Zimmerman, which Marble Bridge cited in its original complaint

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and which the court considered when ruling on a prior motion to dismiss. In connection with a

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determination that Marble Bridge had not properly identified each defendant’s role in the Nature’s

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Own scheme, the court observed the allegation that all of the defendants had participated in

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preparing the Aging Report appeared to be inconsistent with Holloway’s testimony that a

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defendant other than the Exchange Defendants prepared the report.

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Case No.: 5:15-cv-00177-EJD
ORDER DENYING WITHOUT PREJUDICE DEFENDANTS’ MOTION FOR SANCTIONS

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4.

Given the record presented, the Exchange Defendants’ Rule 11 argument is a

plausible one. Nevertheless, this motion for sanctions is premature at this stage of this case.

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“Courts should, and often do, defer consideration of certain kinds of sanctions motions until the

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end of trial to gain a full sense of the case and to avoid unnecessary delay of disposition of the

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case on the merits.” Lichtenstein v. Consol. Servs. Grp., Inc., 173 F.3d 17, 23 (1st Cir. 1999);

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accord Fed. R. Civ. P. 11 advisory committee’s note (1983) (“The time when sanctions are to be

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imposed rests in the discretion of the trial judge. However, it is anticipated that in the case of

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pleadings the sanctions issue under Rule 11 normally will be determined at the end of the

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litigation . . . .”); Fed. R. Civ. P. 11 advisory committee’s note (1993) (“As under the prior rule,

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the court may defer its ruling (or its decision as to the identity of the persons to be sanctioned)

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United States District Court
Northern District of California

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until final resolution of the case in order to avoid immediate conflicts of interest and to reduce the

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disruption created if a disclosure of attorney-client communications is needed to determine

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whether a violation occurred or to identify the person responsible for the violation.”). “This is a

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sensible practice where the thrust of the sanctions motion is that institution of the case itself was

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improper.” Lichtenstein, 173 F.3d at 23. “Although dismissal of baseless claims is theoretically

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available under Rule 11, it is better to deal with those arguments on the merits under a rule like

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Rule 56.” In re New Motor Vehicles Canadian Exp. Antitrust Litig., 244 F.R.D. 70, 74 (D. Me.

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Aug. 22, 2007).

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5.

Here, the instant motion in effect asks for a finding, based on the Exchange

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Defendants’ selection of evidence and their interpretation of it, that Marble Bridge’s claims are

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frivolous and factually baseless. But the parties have not yet had the benefit of a full

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investigation; in fact, the Exchange Defendants had only answered the FAC one month before this

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motion was filed. Thus, the factual record presented is undeniably incomplete and, therefore, an

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improper basis for the imposition of Rule 11 sanctions.

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6.

Moreover, assessing whether or not sanctions should be imposed now would

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collapse this motion with one for summary judgment, whereas it is the latter, rather than the

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former, that is the mechanism best suited to addressing the factual viability of Marble Bridge’s

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Case No.: 5:15-cv-00177-EJD
ORDER DENYING WITHOUT PREJUDICE DEFENDANTS’ MOTION FOR SANCTIONS

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claims. In addition, taking up an early Rule 11 motion may encourage the use this device as a way

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to derail the normal litigation process, which it should not be.

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For these reasons, the Exchange Defendants’ motion for sanctions (Dkt. No. 62) is

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DENIED WITHOUT PREJUDICE to renewal at a later stage in these proceedings. Marble

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Bridge’s request for an award of expenses pursuant to Rule 11(c)(2) is DENIED because such

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expenses are not warranted. Although this motion was premature, the court cannot find that it was

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meritless or “a paradigmatic example of the type frowned upon by the courts.”

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United States District Court
Northern District of California

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IT IS SO ORDERED.
Dated: June 8, 2016
______________________________________
EDWARD J. DAVILA
United States District Judge

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Case No.: 5:15-cv-00177-EJD
ORDER DENYING WITHOUT PREJUDICE DEFENDANTS’ MOTION FOR SANCTIONS