Banus v. Citigroup Global Markets, Inc. et al

Filing 48

MEMORANDUM OPINION: Mr. Thierman filed this action for the improper purpose of delaying pending arbitration proceedings. There is no evidence to support a finding that the plaintiffs, as lay persons, were primarily responsible for the strategy and re sulting arguments. Mr. Thierman pursued claims that either should have been decided in arbitration, as the plaintiffs contracts specified, or were completely without merit. The arguments were so baseless that the Court can conclude only that they wer e made in bad faith. For all of the foregoing reasons, defendants motion seeking attorneys fees is granted to the extent that Mr. Thierman shall pay appropriate defense costs in an amount that will be fixed on motion made by the defendants within 21 days of this order. (Signed by Judge Lewis A. Kaplan on 12/20/2010) (jfe)

Banus v. Citigroup Global Markets, Inc. et al

Doc. 48

UNITED STATES DISTRICT COURT S O U T H E R N DISTRICT OF NEW YORK ------------------------------------------x T H O M A S A. BANUS, et al., P l a i n t i ffs ,

-a ga in s t-

0 9 Civ. 7128 (LAK)

C IT IG R O U P GLOBAL MARKETS, INC., et al., D e fe n d a n t s . ------------------------------------------x

M E M O R A N D U M OPINION

A p p e a ra n c e s :

M a rk R. Thierman T H IER M A N LAW FIRM Le o n Greenberg A tto r n e y s for Plaintiffs

S a m S. Shaulson M e lis s a R. Kelly M O R G A N , LEWIS & BOCKIUS LLP A tto r n e y s for Defendant Citigroup Global Markets, Inc.

LEW IS A. KAPLAN, District Judge. P la in tiffs all were financial consultants for defendant Citigroup Global Markets, Inc. (" C G M I" ), which did business under the Smith Barney name. In connection with their hiring by C G M I, each received what plaintiffs call a "signing bonus" ­ actually, as plaintiffs acknowledge,

Dockets.Justia.com

2
" a forgivable loan . . . to be forgiven in equal yearly amounts over a term of seven years." 1 If, h o w e v e r, a plaintiff left CGMI before the note had been fully forgiven, "the unforgiven prorated s h a re of the remaining principle with interest [would be] due and payable immediately." 2 Plaintiffs b ro u gh t a purported class action seeking principally a declaration that the promissory notes executed b y plaintiffs and other similarly situated, or at least the acceleration clauses they contain, are void o r voidable. Plaintiff Banus sought also to set aside an arbitration award against him on CGMI's c la im for breach of the promissory note that he signed upon going to work for CGMI. The Court granted CGMI's motion to dismiss the second amended complaint.3 N o w before the Court is CGMI's motion seeking attorneys' fees. The court assumes fa m ilia rity with its previous opinion.

F a c ts A. T h e Note and the Special Compensation Agreement P la in tiffs are six securities brokers hired by CGMI at various offices during the six-

1

S e c o n d amended complaint ("Cpt.") ¶ 10. T h e paragraphs of the second amended complaint are numbered consecutively from 1 th ro u g h 39 following which the next paragraph, rather than being numbered 40, instead is n u m b e re d 7. The paragraphs following the second paragraph 7 then are numbered c o n s e c u tiv e ly from 7 through 24. Thus, there are two paragraphs numbered with each n u m e ra l from 7 through 24. Unless otherwise indicated, all references to paragraphs 7 t h ro u g h 24 are to the first of those to appear. References to the second paragraph 7 and fo llo w in g are cited "7(2d)" and so on.
2

Id .
3

B a n u s v. Citigroup Global Mkts., Inc., No. 09 Civ. 7128 (LAK), 2010 WL 1643780 (S .D .N .Y . Apr 23, 2010) (hereinafter Banus I).

3
m o n th period antedating the commencement of the dismissed class action. Among the considerations in hiring them were their respective "books of business" and the hope the clients would follow them to their new employer.4 E a c h of the plaintiffs, at or about the time of his employment, was paid what plaintiffs re fe r to as a "signing bonus."5 At or about the same time, each entered into a special compensation a gre e m e n t (the "SCA") with and signed a promissory note (the "Note") payable to CGMI.6 The Note, w h ic h was in the amount of the so-called signing bonus, provided that the employee would repay the p rin c ip a l sum to CGMI in seven equal annual installments commencing on the first anniversary of th e execution of the Note, but it contained an acceleration clause that made the entire principal sum d u e upon the termination of employment "for any reason or no reason." 7 The SCA provided that the e m p lo ye e would be paid special compensation in the principal sum in seven equal annual installments c o m m e n c in g on the first anniversary of the execution of the SCA.8 In practical effect, then, the soc a lle d signing bonuses were not bonuses at all. They were compensation advances ­ loans. Plaintiffs a lle ge d that one of the purposes of structuring the initial payment to them in this manner was "to

4

C p t. ¶ 7.
5

Id . ¶ 10.
6

Id . ¶ 11.
7

Id . Ex. A, ¶¶ 1, 4.
8

Id . Ex. B, ¶ 1.

4
e n s u re that the[y . . . did] not resign during the term of the agreement." 9 B o th the Note and the SCA contained broad arbitration clauses obliging the parties to a rb itra te "any controversy arising out of or relating to [the relevant instrument] . . . pursuant to the c o n s titu tio n , by-laws, rules and regulations then in effect of the New York Stock Exchange, Inc. or th e National Association of Securities Dealers, Inc." 10 T h e second amended complaint alleged that plaintiff Banus was employed by CGMI in October 2004, received an initial payment of $45,675.36, and terminated his employment in 2006, a t which point CGMI demanded payment of the unforgiven portion of his Note with interest in the a m o u n t of $39,150.31. The status of the other five plaintiffs, however, was less clear from the second a m e n d e d complaint. It was silent as to whether CGMI had accelerated any of their Notes or d e m a n d e d repayment.11

B.

T h e Banus Arbitration Award O n February 18, 2008, CGMI filed a statement of claim against Banus for breach of

th e Note in which it sought recovery of the unpaid balance of $39,150.31.12 Banus was represented

9

Id . ¶ 12.
10

Id . Ex. A, ¶ 9, Ex. B, ¶ 4.
11

C G M I stated that all of the other named plaintiffs resigned from their employment with C G M I at various times between 2006 and 2009 and that it sought repayment from each of th e m . Simon Decl. [DI 17] ¶ 6.
12

Id . ¶ 1.

5
b y attorney Douglas Kutsko for almost 18 months during which he responded to the statement of c la im , engaged in discovery and the exchange of documents, prepared for the hearing, and attended pre-hearing conferences.13 During this period, Banus never claimed that the matter was not arbitrable o r that the arbitration could not proceed because Banus was involved in a class action. O n or about August 10, 2009, the day prior to the hearing, Banus changed counsel. Attorney Thierman was substituted on Banus's behalf. According to the second amended complaint, M r. Thierman appeared at the hearing on August 11, 2009, informed the arbitrators that he had sent th e original complaint in this action (which was brought only on behalf of Banus) to this Court for filin g, and asked that the arbitration be stayed at least long enough for him to provide the panel with a file-stamped copy.14 The complaint had not yet been filed. Mr. Thierman sought an adjournment to allow the lawsuit to be filed, in the hope that such a filing would trigger a stay pursuant to FINRA R u le 13204.15 T h e panel denied the requests. The hearing proceeded. Banus argued,16 among other th in gs , that his contract was one of adhesion and that it lacked consideration.17 The hearing concluded

13

Id . ¶¶ 2-3, Ex. B.
14

C p t. ¶ 39; see also id. ¶¶ 7(2d)-9(2d).
15

" F IN R A " is the acronym for the Financial Industry Regulatory Authority, which was created i n 2007 by the consolidation of the National Association of Securities Dealers, Inc., and c e rta in functions of the New York Stock Exchange.
16

In all cases, references to claims or arguments made by Banus and the other plaintiffs refer to claims pursued or arguments advanced by Mr. Thierman.
17

C p t. Ex. C, at 2.

6
o n August 11, 2009, and the arbitrators signed the award in favor of CGMI in the amount of $ 5 1 ,8 9 7 .6 0 , on August 12, 2009,18 the day on which this action was commenced.19

C.

T h e Alipour and Bishop Arbitrations C G M I commenced arbitrations against plaintiffs Alipour and Bishop, evidently to

c o lle c t on the Notes executed by them.20 On October 22, 2009, Alipour and Bishop moved in their re s p e c tiv e arbitrations to stay those proceedings pursuant to FINRA Rule 13204 based upon the p e n d e n c y of this action.21 The panel in the Alipour arbitration denied the motion.22 The record does n o t reveal the outcome of the stay motion in the Bishop arbitration.

18

T h is consisted of the principal sum of $39,150.31, interest of $6,872.29, and fees of $5,875. Id. Ex. C, at 3-5.
19

T h e complaint was received by the Court and filed on August 12, 2009. Thus, this action w a s not pending at the time the arbitration hearing was held. It is unclear whether the action h a d been commenced by the time the award was signed.
20

P la in tiffs submitted a purported affidavit (it was acknowledged rather than sworn before a n o ta ry and therefore not an affidavit) of Bishop that contains the statement that "[n]o one has d e m a n d e d arbitration of me." Bishop Aff. [DI 24] ¶ 21. CGMI, however, submitted a copy o f a letter from plaintiffs' counsel to an arbitration panel seeking a stay of the Bishop a rb itra tio n . MacEvoy Decl. [DI 16] ¶ 2, Ex. B. As plaintiffs' counsel did not deny the a u th e n tic ity of that letter and plaintiffs' memorandum did not dispute the existence of an a rb itra tio n by CGMI against Bishop (see generally Thierman Decl. [DI 21], Att. 1), the C o u rt concluded that Bishop's purported affidavit is mistaken, although the point ultimately w a s immaterial.
21

M a c E v o y Decl. [DI 16] ¶ 2 & Exs. A, B.
22

Id . ¶¶ 8-9.

7
D. P la in tiffs ' Claims T h e dismissed class action was commenced on August 12, 2009, the day after the B a n u s arbitration hearing and the same day on which the award was entered against him.23 The five p la in tiffs in addition to Banus were added later. They asserted four claims for relief: (1) declaration th a t the Note and the SCA are "an illusory contract, with lack of mutuality and lacking . . . c o n s id e ra tio n . . . ," and that they are unenforceable, (2) set aside of the arbitration award against B a n u s , (3) declaration that each Note is subject to the Truth in Lending Act ("TILA") as a consumer c re d it transaction and that CGMI did not make the disclosures required by TILA, and (4) rescission o n the theory that CGMI failed to remain solvent and penalized the plaintiffs with reduced c o m p e n s a tio n as a result. O n April 23, 2010, the Court granted CGMI's motion to dismiss the second amended c o m p la in t because the claims were subject to arbitration and plaintiffs all failed to state a claim upon w h ic h relief may be granted. None of the plaintiffs' claims regarding the enforceability of the Note w a s related to the validity of the agreement to arbitrate, the only type of claim that the Court properly c o u ld have addressed.24 The Court found also that there was no basis for overturning the arbitration a w a rd rendered against Banus.25 Finally, the Court denied plaintiffs' Rule 56(f) motion in all respects.

23

T h e re is no evidence as to whether the complaint was filed before or after the arbitrators s ig n e d the Banus award.
24

B a n u s I, 2010 WL 1643780 at *8.
25

Id . at *6.

8
D is c u s s io n C G M I now seeks to recover costs and attorneys' fees that CGMI incurred in defending th e action before this Court. It contends that the plaintiffs needlessly multiplied the proceedings, b ro u gh t a frivolous class action lawsuit, and took these actions with the purpose of delaying their loan re p a ym e n t.26 Plaintiffs essentially reargue the merits of their previously dismissed claims and assert th a t arbitration is the appropriate forum for the fee application if CGMI is correct that arbitration is th e exclusive forum for resolving disputes related to the Note and SCA.27

A.

D is tr ic t Court's Authority to Award Attorneys' Fees A court has discretion to award attorneys' fees pursuant to statutory authority and its

in h e re n t powers. Although the Court previously concluded that arbitration, as specified in the c o n tra c ts , is the most appropriate forum to settle disputes related to the agreements, that conclusion d o e s not prevent the Court from deciding this motion.

26

C G M I Mem. at 2.
27

B a n u s Mem. at 2. A d d itio n a lly, plaintiffs attempt to justify their prior arguments based on Supreme Court o p in io n s that had not been issued at the time the motion to dismiss in this action was d e c id e d . Even if those opinions supported the plaintiffs' position (and it is not entirely clear to this Court that they do), merely citing those opinions does not support a conclusion that p la in tiffs ' arguments were well-founded or in good faith at the time that they were made.

9
1. S ta tu to r y Authority

S e c tio n 1927 of the Judicial Code authorizes a district court to require that an attorney " s a tis fy personally the excess costs, expenses, and attorneys' fees reasonably incurred" as a result of th e attorney's unreasonable and vexatious multiplication of proceedings.28 Such sanctions, however, m a y be imposed "only when there is a finding of conduct constituting or akin to bad faith." 29 An a w a rd under Section 1927 may be appropriate when actions by the attorney are "so completely w ith o u t merit as to require the conclusion that they must have been undertaken for some improper p u rp o s e such as delay."30 Moreover, a court may infer bad faith "from the clear lack of merit" of the a tto rn e y's claims.31

2.

In h e r e n t Power

T h e Supreme Court has recognized the district courts' discretion to impose costs and fe e s against attorneys or parties pursuant to their inherent equitable powers.32 Before awarding costs o r fees pursuant to its inherent powers, a district court in the Second Circuit must make factual fin d in gs as if it were imposing sanctions under Section 1927. A district court " must make an explicit

28

2 8 U.S.C. § 1927.
29

6 0 East 80th Street Equities, Inc., 218 F.3d 109, 115 (2d Cir. 2000) (citing Sakon v. Andreo, 1 1 9 F.3d 109, 114 (2d Cir. 1997)) (internal quotation marks omitted).
30

Id . (internal quotation marks omitted).
31

Id . at 117.
32

C h a m b e r s v. NASCO, Inc., 501 U.S. 32, 48-49 (1991).

10
fin d in g of bad faith" before imposing a fee award for "actions taken on behalf of a client." 33

3.

P r o c e d u r a l Requirements

In addition to the substantive requirement of "bad faith" under both Section 1927 and th e court's inherent powers, there are procedural requirements related to an award of fees or costs. The subject of the sanctions must receive both notice and an opportunity to be heard. The notice re q u ire m e n t imposes an obligation to inform the subject of the sanctions of "(1) the source of a u th o rity for the sanctions being considered; and (2) the specific conduct or omission for which the s a n c tio n s are being considered so that the subject of the sanctions motion can prepare a defense." 34 T h e opportunity to be heard does not require a full evidentiary hearing, and being afforded the o p p o rtu n ity to respond by brief or oral argument may be sufficient.35

B.

P la in tiffs ' Rule 11 Argument P la in tiffs assert that CGMI's motion is improper because CGMI did not file a motion

u n d e r Rule 11.36 Plaintiffs provide no authority for this proposition. Rule 11(b) and Section 1927

33

U n ite d States v. Seltzer, 227 F.3d 36, 41-42 (2d Cir. 2000).
34

6 0 East 80 th Street Equities, 218 F.3d at 117.
35

Id .
36

B a n u s Mem. at 5.

11
a llo w a court to impose sanctions on different grounds.37 An attorney violates Rule 11(b) by filing a pleading for an improper purpose or presenting a frivolous legal claim or facts that lack evidentiary s u p p o rt.38 An attorney violates Section 1927 by "unreasonably" and "vexatiously" multiplying legal p ro c e e d in gs .39 It is possible that a party may allege a violation of both Rule 11(b) and Section 1927 i n the same proceeding, but bringing a motion only under Section 1927 does not make the motion p ro c e d u ra lly deficient. C G M I' s motion satisfies the procedural requirements for sanctions. Through the p re s e n t motion, plaintiffs and their counsel received notice of the authority for the imposition of costs a n d fees and of the specific conduct at issue. Plaintiffs have been afforded a meaningful opportunity to respond to the motion through briefing.

C.

L a c k of Merit and Bad Faith T h is lawsuit was completely without merit. In addition, as the Court previously found,

th e lawsuit "amounted to an attempt to use the judicial process for the quite improper purpose of s im p ly stalling CGMI's effort to collect the money it is owed." 40 T h e plaintiffs all received the equivalent of interest-free advances that they all

37

S e e Ball v. A.O. Smith Corp., 451 F.3d 66, 70 n.1 (2d Cir. 2006).
38

F e d .R .C iv .P . 11(b).
39

2 8 U.S.C. § 1927.
40

B a n u s I, 2010 WL 1643780 at *12.

12
p ro m is e d to repay over terms of years out of their compensation and to repay any unpaid balance if th e y left the firm "for any reason or no reason." The plaintiffs left the firm without fulfilling the p ro m is e to repay everything that they owed. In such circumstances, the agreements that the plaintiffs fre e ly signed gave CGMI the right to pursue arbitration proceedings against the plaintiffs, as it did.

1.

B a n u s 's Individual Case

In Banus's individual case, the arbitration claim had been pending for well over a year d u rin g which CGMI had been unable to collect the money it claimed that Banus owed it pursuant to th e plain terms of the Note and the SCA. Once the case was ready for an arbitration hearing, Banus b r o u g h t this baseless lawsuit. The lawsuit quite plainly was a studied effort to oust FINRA of its a u th o r i t y to proceed, frustrate CGMI's right to a determination of its claim, and prevent collection th ro u gh the arbitration process of the debt that Banus owed. By filing and pursuing this class action, B a n u s needlessly multiplied the proceedings for improper ends.

2.

E n fo r c e a b ility Claims

P la in tiffs made baseless claims in this action. First, they argued that the arbitration c la u s e s in each agreement contained allegedly unenforceable class action waivers. Neither the SCA n o r the Note contained any such language.41 Even if they had, the Supreme Court and the Second

41

B a n u s I, 2010 WL 1643780 at *8.

13
C irc u it had not established a per se rule that class action waivers were unenforceable.42 In any case, the plaintiffs' claims for relief in this action were at war with the most b a s ic principles of the law of contracts. They asserted that the Note and the SCA lacked mutuality a n d consideration and, as a result, were unenforceable.43 Plaintiffs argued also that the acceleration a n d imputed interest clauses were unconscionable and violated public policy.44 These arguments, h o w e v e r, failed on the basis of undisputed facts. Plaintiffs signed the Notes, received substantial loan p ro c e e d s (interest free it should be noted), and had the ability to use those proceeds for any purpose th e y chose, not least of them being the investment of the loan proceeds to generate interest income o r capital gains. There was no lack of consideration or mutuality. Nor was there any basis for their c h a lle n ge s to the acceleration and imputed interest clauses. Acceleration clauses are routine and have b e e n upheld repeatedly against arguments that they are unconscionable penalties.45 In this case, the

42

S e e In re Am. Express Merchants' Litig., 554 F.3d 300, 302 (2d Cir. 2009), vacated, A m e r ic a n Exp. Co. v. Italian Colors Restaurant, 130 S.Ct. 2401 (2010). T h e Second Circuit expressly indicated that it was not establishing a rule regarding class a c tio n waivers stating: " [W ]e do not decide whether class action waiver provisions are either void or enforceable p e r se. Rather, we are concerned solely with the class action waiver contained in the c o n tra c t between the parties before us on this appeal. We conclude that, on the record before u s , the plaintiffs have adequately demonstrated that the class action waiver provisions at is s u e should not be enforced because enforcement of the clause would effectively preclude a n y action seeking to vindicate the statutory rights asserted by the plaintiffs." Id. at 304.
43

C p t. ¶¶ 14, 27.
44

Id . ¶¶ 14, 27, 30.
45

S e e , e.g., Walter E. Heller & Co. v. Video Innovations, Inc., 730 F.2d 50, 54 (2d Cir. 1984) (a c c e le ra tio n clause in equipment rental agreement not unlawful penalty); Fifty States Mgmt.

14
lo a n proceeds were paid to the plaintiffs at the start of their employment with CGMI and were to be re p a id out of their annual compensation during the continuation of that employment. There was n o th in g inequitable about accelerating any unpaid balance where a broker ended his term of e m p lo ym e n t before full repaying the loan.

3.

T r u th in Lending Act

P la in tiffs asserted that the Notes were consumer credit transactions subject to TILA a n d that CGMI failed to make the necessary disclosures. That assertion was without merit based on th e plain language of the statute. TILA applies only to extensions of consumer credit,46 not the type o f loans at issue here. Moreover, these loans were exempt in any case because they all exceeded $ 2 5 , 0 0 0 ,47 the statutory maximum under TILA, and even if TILA had applied to these loans, any c la im s would have been barred by the statute of limitations.48

C o r p . v. Pioneer Auto Parks, Inc., 46 N.Y.2d 573, 576-78 (1979) (acceleration clause in le a s e upheld); Headquarters Rest Corp. v. Reliance Vending Co., 133 A.D.2d 444, 446, 519 N .Y .S .2 d 662, 664 (2d Dept. 1987) (acceleration clause in personal loan agreement not u n c o n s c io n a b le ).
46

1 5 U.S.C. § 1603 (exempting "[c]redit transactions involving extensions of credit primarily fo r business . . ." purposes from TILA).
47

1 5 U.S.C. § 1603 (exempting "[c]redit transactions . . . in which the total financed exceeds $ 2 5 ,0 0 0 "); see also Koons Buick Pontiac GMC, Inc. v. Nigh, 543 U.S. 50, 62 n.10 (2004) (" T IL A does not in general apply to credit transactions in which the total amount financed e x c e e d s $25,000. ").
48

1 5 U.S.C. § 1640(e) ("Any action under this section may be brought . . . within one year fro m the date of the occurrence of the violation."). The only allegations about when the a lle g e d violation occurred show that Banus signed the Note on October 21, 2004, well over o n e year before the initial complaint in this action was filed on August 11, 2008.

15
4. C o m m o n Law Contract Arguments

P la in tiffs ' common law arguments ­ impossibility of performance,49 breach of duty o f good faith and fair dealing,50 unspecified price term,51 and contract of adhesion 52 ­ were even more fa r-fe tc h e d . Plaintiffs arguments were nothing more than conclusory legal assertions unsupported by a n y facts.53 Such allegations were not entitled to the assumption of truth and failed to state a plausible c la im for relief.54

49

C p t. ¶¶ 15, 31, 33, 35.
50

Id . ¶¶ 23, 25.
51

Id . ¶ 34.
52

Id . ¶ 13.
53

E v e n if the complaint did contain some factual amplification, the arguments would fail as a matter of law. None of the doctrines plaintiffs cited would invalidate the Note here. Impossibility excuses contract performance only when the unanticipated destruction of the s u b je c t matter of the contract makes performance objectively impossible. Kel Kim Corp v. C e n tr a l Markets, Inc., 70 N.Y.2d 900, 902 (1987). It is insufficient that plaintiffs' re p a ym e n t obligation became more burdensome because of CGMI's alleged m is m a n a g e m e n t. Id. The covenant of good faith and fair dealing is an "implied obligation . . . in aid and furtherance of other terms of the agreement." Murphy v. Am. Home Prods. C o r p ., 58 N.Y.2d 293, 304 (1983). But CGMI already has performed its obligation under th e Note ­ it provided plaintiffs the loan. Plaintiffs' price term argument is completely friv o lo u s ­ the only alleged indefiniteness is the plaintiffs' total compensation, a subject c o l l a t e ra l to both the Note and the SCA. Cpt. ¶ 34. Finally, an adhesion contract may be in v a lid a te d only if the drafting party used "high pressure tactics," or "deceptive language," o r if the contract is unconscionable, none of which are, or likely could be, alleged here. Klos v. Polskie Linie Lotnicze, 133 F.3d 164, 168-69 (1997).
54

S e e Ashcroft v. Iqbal, 129 S.Ct. 1937, 1949 (2009).

16
C o n c lu s io n M r. Thierman filed this action for the improper purpose of delaying pending arbitration p ro c e e d in gs . There is no evidence to support a finding that the plaintiffs, as lay persons, were p rim a rily responsible for the strategy and resulting arguments. Mr. Thierman pursued claims that e ith e r should have been decided in arbitration, as the plaintiffs' contracts specified, or were c o m p le te ly without merit. The arguments were so baseless that the Court can conclude only that they w e re made in bad faith. For all of the foregoing reasons, defendants' motion seeking attorneys' fees is granted to the extent that Mr. Thierman shall pay appropriate defense costs in an amount that will b e fixed on motion made by the defendants within 21 days of this order. S O ORDERED. D a te d : D e c e m b e r 20, 2010