Son Ly v. Solin, Inc.

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
________________________________
)
SON LY and VINH TRAN, )
)
Plaintiffs, )
) Case No. 12-CV-1004 (EGS)
v. )
)
SOLIN, INC., et al., )
)
Defendants. )
________________________________)
MEMORANDUM OPINION
This case is before the Court on defendants Kanlaya
Intavong’s and Paul Surachai’s joint motion to dismiss,
defendant Pichet Laosiri’s Motion to Dismiss, and defendant
Piwat Laosiri’s Motion to Dismiss. For the reasons explained
below, the motions will be GRANTED.
I. BACKGROUND
On June 19, 2012, plaintiffs filed a complaint against
seven defendants: Solin, Inc. (“Solin”), LPK, Inc. (“LPK”),
Kanlaya Intavong, Paul Surachai, Piwat Laosiri, Pichet Laosiri,
and Michael Strong. Plaintiffs brought various state law causes
of action against defendants, including breach of fiduciary
duty, breach of contract, embezzlement of corporate funds,
conspiracy to defraud, false misrepresentation, negligence, and
“piercing the corporate veil.” Plaintiffs also sought a
declaratory judgment.
All of the individual plaintiffs and defendants are listed
in the complaint as having addresses in the State of Virginia.
The corporate defendants are incorporated in the District of
Columbia. In the jurisdictional allegations of the complaint,
plaintiffs stated that “This Court has jurisdiction due to the
parties [sic] are D.C. Corporations and all of the individual
parties are from different jurisdictions; Both companies are
registered to do business in D.C.; Mr. Tran has monetary
contributions of $653,649.00 in shares of two companies.”
Though the complaint contained no further allegations of
diversity, plaintiffs’ counsel indicated on the accompanying
Civil Cover Sheet that jurisdiction in this Court was based on
diversity jurisdiction. See ECF No. 1-2.
On July 5, 2012, plaintiffs filed an amended complaint to
include two counts under the Racketeer Influenced and Corrupt
Organizations Act, 18 U.S.C. § 1962(c) (“RICO”). Plaintiffs
allege that the defendant corporations Solin and LPK were
“enterprises” within the meaning of RICO, 18 U.S.C. § 1961(4).
Plaintiffs further allege that all individual defendants, who
were employed by or associated with the corporate “enterprises,”
engaged in a “pattern of racketeering activity” within the
meaning of 18 U.S.C. § 1961(5), in violation of 18 U.S.C. §
1962(c). Plaintiffs allege that the pattern of racketeering
activity included the fraudulent execution of a promissory note
2
for stock in the defendant corporations. Amend. Compl. ¶ 11.
In particular, plaintiffs state that defendant Kanlaya Intavong
“intentionally signed her name in the promissory note of selling
the stock to Vinh Tran as ‘Kanlaya Surachai’ knowing that Vinh
Tran did not know she was not married to Paul Surachai.” The
complaint further alleges that Intavong wrongfully denied that
the signature on the promissory note was not hers. Plaintiffs
allege that defendants “conduct their business in such a manner
constitutes [sic] a ‘pattern of racketeering activity’” within
the meaning of the RICO statute. This claim only alleges that
defendants caused harm to plaintiff Vinh Tran; no facts are
alleged as to plaintiff Son Ly.
In the second RICO count, plaintiffs allege that defendants
engaged in a conspiracy to engage in racketeering activity, in
violation of 18 U.S.C. § 1962(d). Plaintiffs allege that
defendants “engaged in numerous overt and predicate fraudulent
racketeering acts in furtherance of the conspiracy, including
material misrepresentations and omissions designed to defraud
plaintiffs of money.” Amend. Compl. ¶ 25. Specifically,
plaintiffs allege that Kanlaya Intavong and Paul Surachai “have
sought to and have engaged in the commission of and continue to
commit fraud in the sale of securities in violation of 18 U.S.C.
§ 1961(1)(D).” Amend. Compl. ¶ 27. It appears that this
reference is to the alleged stock transaction referred to in the
3
first RICO count. At the conclusion of the conspiracy claim,
plaintiffs add a seemingly unrelated allegation that Michael
Strong, an attorney for Intavong and Surachai, knowingly drafted
an unnamed agreement and induced Son Ly to sign that agreement
in bad faith and in furtherance of the RICO conspiracy. Amend.
Compl. ¶ 32. As a result of these alleged acts, plaintiffs
state that Vinh Tran lost “all of the money . . . he paid for .
. . 25% of the stocks in Solin, Inc. and LPK, Inc.” Amend.
Compl. ¶ 29.
Defendants filed several motions to dismiss, each alleging
that neither of the RICO counts stated a claim, that diversity
jurisdiction did not exist as to the remaining state law claims,
and that the Court should decline to exercise supplemental
jurisdiction over those remaining claims. See Def. Michael
Strong’s Mot. to Dismiss, ECF No. 20; Joint Mot. to Dismiss of
Kanlaya Intavong and Paul Surachai, ECF No. 22; Def. LPK, Inc.’s
Mot. to Dismiss, ECF No. 23; Def. Pichet Laosiri’s Mot. to
Dismiss, ECF No. 27; and Def. Piwat Laosiri’s Mot. to Dismiss,
ECF No. 28.
Pursuant to the request of the plaintiffs, the Court agreed
to a stay of 60 days to permit the parties to discuss
settlement. A settlement was not reached and plaintiffs were
directed to respond to the motions to dismiss by November 13,
2012. On that date, plaintiffs moved to voluntarily dismiss
4
without prejudice defendants LPK and Solin pursuant to Rule
41(a). Also on that date, plaintiffs responded to the motions
to dismiss filed by Surachai, Intavong, Piwat Laosiri, and
Pichet Laosiri. On November 20, 2012, the parties filed a
stipulation of dismissal with prejudice as to defendant Michael
Strong.
As a result of the voluntary dismissal of several
plaintiffs, only several motions remain before the Court:
defendants Kanlaya Intavong’s and Paul Surachai’s joint motion
to dismiss, defendant Pichet Laosiri’s Motion to Dismiss, and
defendant Piwat Laosiri’s Motion to Dismiss. Also before the
Court is former defendant LPK, Inc.’s opposition to plaintiffs’
voluntary dismissal of their claims against it, in which LPK,
Inc. requests the imposition of Rule 11 sanctions against
plaintiffs. LPK argues that plaintiffs’ complaint was brought
in bad faith and in violation of Rule 11 by alleging diversity
jurisdiction where none existed and by raising frivolous RICO
claims to establish federal subject matter jurisdiction.
II. STANDARD OF REVIEW
Federal district courts are courts of limited jurisdiction
and “possess only that power conferred by [the] Constitution and
[by] statute.” Logan v. Dep't of Veterans Affairs, 357 F. Supp.
2d 149, 152 (D.D.C. 2004) (quoting Kokkonen v. Guardian Life
Ins. Co. of Am., 511 U.S. 375, 377 (1994)). “There is a
5
presumption against federal court jurisdiction and the burden is
on the party asserting the jurisdiction, the plaintiff in this
case, to establish that the Court has subject matter
jurisdiction over the action.” Id. at 153 (citing McNutt v.
Gen. Motors Acceptance Corp. of Ind., 298 U.S. 178, 182-83
(1936)). When it perceives that subject matter jurisdiction is
in question, the Court should address the issue sua sponte. See
Prunte v. Univ. Music Group, 484 F. Supp. 2d 32, 38 (D.D.C.
2007) (citing Doe by Fein v. District of Columbia, 93 F.3d 861,
871 (D.C. Cir. 1996) (noting that, because subject matter
jurisdiction “goes to the foundation of the court’s power to
resolve a case, [] the court is obliged to address it sua
sponte”)).
In a suit between private litigants, a plaintiff generally
demonstrates the existence of subject matter jurisdiction by
establishing federal question jurisdiction pursuant to 28 U.S.C.
§ 1331 or diversity jurisdiction pursuant to 28 U.S.C. § 1332.
“A plaintiff properly invokes § 1331 jurisdiction when [he]
pleads a colorable claim ‘arising under’ the Constitution or
laws of the United States.” Arbaugh v. Y&H Corp., 546 U.S. 500,
513 (2006) (citing Bell v. Hood, 327 U.S. 678, 681-85 (1946)).
Where the district court's jurisdiction is dependent solely on
the diversity of citizenship between the parties, there must be
“complete diversity,” meaning that no plaintiff may have the
6
same citizenship as any defendant. E.g., Owen Equip. & Erection
Co. v. Kroger, 437 U.S. 365, 373–74 (1978).
In assessing whether a complaint sufficiently alleges
subject matter jurisdiction, the Court accepts as true the
allegations of the complaint, see Ashcroft v. Iqbal, 556 U.S.
662, 678 (2009), and liberally construes the pleadings such that
the plaintiff benefits from all inferences derived from the
facts alleged, Barr v. Clinton, 370 F.3d 1196, 1199 (D.C. Cir.
2004). However, “[a] pleading that offers labels and
conclusions or a formulaic recitation of the elements of a cause
of action will not do. Nor does a complaint suffice if it
tenders naked assertions devoid of further factual enhancement.”
Iqbal, 556 U.S. at 678 (internal citations, quotation marks and
brackets omitted). When the inquiry focuses on the Court's
power to hear the claim, “the Court may give the plaintiff's
factual allegations closer scrutiny and may consider materials
outside the pleadings.” Logan, 357 F. Supp. 2d at 153 (citing
Fed. R. Civ. P. 12(b)(1); Herbert v. Nat'l Academy of Scis., 974
F.2d 192, 197 (D.C. Cir. 1992); Grand Lodge of Fraternal Order
of Police v. Ashcroft, 185 F. Supp. 2d 9, 13 (D.D.C. 2001)).
“A claim invoking federal-question jurisdiction under 28
U.S.C. § 1331 . . . may be dismissed for want of subject matter
jurisdiction if it is not colorable, i.e., if it is immaterial
and made solely for the purpose of obtaining jurisdiction or it
7
is wholly insubstantial and frivolous.” Arbaugh, 546 U.S. 500,
513 n. 10 (2006) (citations omitted); accord Tooley v.
Napolitano, 586 F.3d 1006, 1009 (D.C. Cir. 2009) (quoting Best
v. Kelly, 39 F.3d 328, 330 (D.C. Cir. 1994) (a complaint is
subject to dismissal on jurisdictional grounds when it is
“patently insubstantial,” presenting no federal question
suitable for decision); see Lyndonville Sav. Bank & Trust Co. v.
Lussier, 211 F.3d 697, 701 (2d Cir. 2000) (quoting Bell v. Hood,
327 U.S. 678, 682-83 (1946)).
III. DISCUSSION
The threshold issue before this Court is whether it has
subject matter jurisdiction over the plaintiffs’ claims. For
the reasons explained below, the Court concludes that it does
not, and will dismiss plaintiffs’ complaint.
A. Diversity Jurisdiction
As discussed above, plaintiffs initially indicated on the
civil cover sheet filed with their complaint that the Court has
diversity jurisdiction over this action, although plaintiffs did
not invoke 28 U.S.C. § 1332. In the complaint, plaintiffs
stated only that “[t]his Court has jurisdiction due to the
parties [sic] are D.C. Corporations and all of the individual
parties are from different jurisdictions; Both companies are
registered to do business in D.C.; Mr. Tran has monetary
contributions of $653,649.00 in shares of two companies.” This
8
jurisdictional allegation does not properly invoke diversity
jurisdiction.
Moreover, it appears from the face of the complaint that
diversity jurisdiction did not exist at the time the complaint
was filed, nor does it currently exist. Indeed, there is no
diversity whatsoever between any of the individual plaintiffs
and defendants, all of whom are described in the complaint as
having addresses in the State of Virginia. The corporate
defendants, who have since been voluntarily dismissed, are
incorporated in the District of Columbia. Their presence or
absence in the litigation has no effect on diversity
jurisdiction, however, since 28 U.S.C. § 1332 requires “complete
diversity” between the plaintiffs and defendants. See Owen
Equipment & Erection Co. v. Kroger, 437 U.S. 365, 373 (1978).
Because there are plaintiffs and defendants from the State of
Virginia, diversity jurisdiction does not exist in this action.
B. Federal Question Jurisdiction
Because diversity jurisdiction is not present in this case,
plaintiffs must establish that federal question jurisdiction
exists under 28 U.S.C. § 1331. See Arbaugh, 546 U.S. at 513 n.
10 (2006). “A plaintiff properly invokes § 1331 jurisdiction
when [he] pleads a colorable claim ‘arising under’ the
Constitution or laws of the United States.” Id. (citing Bell,
327 U.S. at 681-85). In this case, plaintiffs’ supplemental
9
RICO claims are the only claims brought under federal law and
are therefore the only basis under which federal question
jurisdiction could be properly invoked.
1. Count IX: Violation of RICO, 18 U.S.C. § 1962(c)
In order to state a claim for a violation of the RICO
statute, a plaintiff must allege the following elements: “(1)
conduct (2) of an enterprise (3) through a pattern (4) of
racketeering activity.” Sedima, S.P.R.L. v. Imrex Co., 473 U.S.
479, 496 (1985). To show such a pattern, RICO requires at least
two predicate criminal racketeering acts over a ten-year period.
See 18 U.S.C. § 1961(5). The predicate acts must be among the
criminal acts listed in Section 1961(1). The Supreme Court has
further ruled that these predicate acts must show elements of
relatedness and continuity. See H.J. Inc. v. Northwestern Bell
Telephone Co., 492 U.S. 229, 239 (1989). In other words, a
plaintiff must show “that the racketeering predicates are
related, and that they amount to or pose a threat of continued
criminal activity.” Id. In determining whether this continuous
pattern is established, there are a number of factors to be
considered: “the number of unlawful acts, the length of time
over which the acts were committed, the similarity of the acts,
the number of victims, the number of perpetrators, and the
character of the unlawful activity . . . as they bear on the
separate questions of continuity and relatedness.” Edmondson &
10
Gallagher v. Alban Towers Tenants Ass’n, 48 F.3d 1260, 1265
(D.C. Cir. 1995).
Count IX of plaintiffs’ complaint wholly fails to set forth
a RICO claim under Section 1962(c). Plaintiffs have alleged
only one predicate act, though the statute requires at least
two. 1 See 18 U.S.C. § 1961(5). Having alleged only one act, it
is impossible for plaintiffs to establish the other required
elements of relatedness and continuity, nor did plaintiffs make
any attempt to do so. See H.J. Inc., 492 U.S. at 239; Edmondson
& Gallagher, 48 F.2d at 1265 (allegation of single scheme,
single injury, and few victims makes it virtually impossible for
plaintiffs to state a RICO claim). Plaintiffs have also failed
to allege a threat of continued criminal activity, since the
complaint refers only to one alleged past act. See H.J. Inc.,
492 U.S. at 239.
1
The Court notes without deciding that plaintiffs may have also
failed to allege a predicate act that falls within the purview
of RICO because plaintiffs allege that defendants committed
securities fraud. As argued in the motion to dismiss of
Surachai and Intavong, the Private Securities Litigation Reform
Act, 18 U.S.C. § 1964(c) exempted securities fraud from the list
of qualifying RICO predicate acts. Plaintiffs respond to this
argument by stating that the shares in LPK, Inc. and Solin, Inc.
are “not regulated by the 1933 Security [sic] Act and the 1934
Security [sic] Exchange Act.” Pls.’ Combined Opp. to Mots. to
Dismiss at 10. Because there is insufficient information in the
record for the Court to decide this issue and because
plaintiffs’ RICO claims fail for other reasons discussed herein,
the Court does not reach the issue of whether plaintiffs have
sufficiently alleged a predicate act under RICO.
11
2. Count X: Conspiracy to Violate RICO, in violation of 18
U.S.C. § 1962(d)
Plaintiffs’ second RICO count fares no better than their
first. Count X alleges a conspiracy to violate Section 1962(c),
in violation of Section 1962(d). Section 1962(d) provides that
it is “unlawful for any person to conspire” to violate a
substantive RICO provision. To state a Section 1962(d)
conspiracy, the complaint must allege that (1) two or more
people agreed to commit a subsection (c) offense, and (2) a
defendant agreed to further that endeavor. RSM Construction
Corp. v. Freshfields Bruckhaus Deringer U.S. LLP, 682 F.3d 1043,
1047-48 (D.C. Cir. 2012).
In Count X, plaintiffs merely incorporate by reference
their allegations of a single-event RICO violation based on
alleged securities fraud committed by Intavong and Surachai. 2
For the reasons explained above, plaintiffs have failed to set
2
In this claim, plaintiffs also add an allegation of wrongdoing
as to Michael Strong, attorney for Intavong and Surachai.
Plaintiffs allege that Strong “knowingly drafted an agreement
and induced Mr. Ly to sign on [sic] the agreement. [Strong]
should not and could not in good faith to ask [sic] Mr. Ly to
sign the agreement of January 20, 2012. [Strong] also advised
Mr. Tran on two other occasions. [Strong’s] acts for the sake
of Solin and LPK, Intavong and Surachai constituted a RICO
violation.” Amend. Compl. ¶ 32. These allegations do not state
a claim for RICO for several reasons, including that they do not
set forth a predicate act, nor do they establish the elements of
relatedness and continuity. Accordingly, this allegation also
cannot set forth the basis for a RICO conspiracy. In any event,
all claims against Strong have been dismissed with prejudice and
are not properly before this Court. See ECF No. 35.
12
forth any claim for a RICO violation. Accordingly, they are
unable to establish that “two or more people agreed to commit a
[RICO violation],” which is necessary to state a claim for a
RICO conspiracy. Furthermore, other than plaintiffs’ conclusory
allegations, plaintiffs have not set forth any allegations that
any defendants agreed to further any such RICO conspiracy.
Accordingly, plaintiffs have failed to state a claim for a RICO
conspiracy against any of the defendants. See Edmondson &
Gallagher, 48 F.3d at 1265 (“Further, as the allegations provide
no basis for inferring any conspiracy broader than the alleged
scheme itself, the § 1962(d) claim fails as well; there is no
conspiracy to violate any of the provisions of subsection (c).”)
(internal quotation marks omitted).
3. Plaintiffs’ RICO Claims Fail to Invoke this Court’s Subject
matter Jurisdiction
The Court finds that plaintiffs’ RICO claims are subject to
dismissal for lack of subject matter jurisdiction. This is
plainly not a RICO case; rather, plaintiffs’ claims appear to
set forth, at most, a state-law business dispute falling
squarely within the jurisdiction of the District of Columbia
courts. Plaintiffs’ conclusory allegations of “racketeering”
are simply not colorable and do not present a federal question
for this Court’s decision. See Arbaugh, 546 U.S. at 513 n. 10
(2006) (“A claim invoking federal-question jurisdiction under 28
13
U.S.C. § 1331 . . . may be dismissed for want of subject matter
jurisdiction if it is not colorable, i.e., if it is immaterial
and made solely for the purpose of obtaining jurisdiction . . .
.”); accord Tooley, 586 F.3d at 1009 (quoting Best, 39 F.3d at
330 (a complaint is subject to dismissal on jurisdictional
grounds when it is “patently insubstantial,” presenting no
federal question suitable for decision)); Williams v. Aztar
Indiana Gaming Corp., 351 F.3d 294, 300 (7th Cir. 2003) (finding
that plaintiff’s RICO theory was “so feeble, so transparent an
attempt to move a state-law dispute to federal court . . . that
it [did] not arise under federal law at all”). Accordingly,
Counts IX and X of plaintiffs’ complaint are DISMISSED with
prejudice for lack of subject matter jurisdiction.
C. Supplemental Jurisdiction
In view of the Court’s dismissal of the federal claims, and
the lack of diversity jurisdiction in this matter, the Court
must determine whether to dismiss the remaining state law
claims. District courts are given supplemental jurisdiction
over state claims that “form part of the same case or
controversy” as federal claims over which they have original
jurisdiction. 28 U.S.C. § 1367(a). By the same token, they
“may decline to exercise supplemental jurisdiction over [such]
claim[s] . . . if . . . the district court has dismissed all
claims over which it has original jurisdiction.” § 1367(c)(3).
14
The decision of whether to exercise supplemental jurisdiction
where a court has dismissed all federal claims is left to the
court's discretion. United Mine Workers v. Gibbs, 383 U.S. 715,
726 (1966). When deciding whether to exercise supplemental
jurisdiction over state claims, federal courts should consider
“judicial economy, convenience and fairness to litigants.” Id.Nonetheless, “in the usual case in which all federal-law claims
are eliminated before trial, the balance of factors to be
considered under the pendent jurisdiction doctrine—judicial
economy, convenience, fairness, and comity—will point toward
declining to exercise jurisdiction over the remaining state-law
claims.” Carnegie–Mellon Univ. v. Cohill, 484 U.S. 343, 350 n.
7 (1988); see Edmondson & Gallagher, 48 F.3d at 1267.
Here the factors clearly weigh against retention of this
case. This Court has handled little in the case beyond the
current Motions to Dismiss and has not dealt at all with the
supplemental state claims. Compare Schuler v.
PricewaterhouseCoopers, LLP, 595 F.3d 370, 378 (D.C. Cir. 2010)
(finding that district court appropriately retained supplemental
jurisdiction over state claims where it had “invested time and
resources” in the case). Finally, Plaintiff will not be
prejudiced because 28 U.S.C. 1367(d) provides for a tolling of
the statute of limitations during the period the case was here
and for at least 30 days thereafter. See Shekoyan v. Sibley
15
Int’l, 409 F.3d 414, 419 (D.C. Cir. 2005) (finding that because
of this tolling, dismissal of the pendent state claims “will not
adversely impact plaintiff's ability to pursue his District of
Columbia claims in the local court system.”) (internal citation
omitted).
Accordingly, the remaining claims in this case will be
DISMISSED without prejudice.
D. Leave to Amend
In the concluding paragraph of their consolidated
opposition to defendants’ motions to dismiss, plaintiffs state
that “[i]f there is [sic] any RICO pleading deficiencies,
Plaintiffs should be given a chance to correct the deficiencies
by amendment.” Pls.’ Opp. to Defs.’ Mots. to Dismiss at 18, ECF
No. 34. Plaintiffs did not separately move for leave to amend,
nor did plaintiffs include a proposed amended complaint.
Under the Federal Rules of Civil Procedure, a party may
amend its pleadings once as a matter of course within a
prescribed time period. See Fed. R. Civ. P. 15(a)(1). When a
party seeks to amend its pleadings outside that time period or
for a second time, it may do so only with the opposing party's
written consent or the district court's leave. See Fed. R. Civ.
P. 15(a)(2). The decision whether to grant leave to amend a
complaint is entrusted to the sound discretion of the district
court, but leave “should be freely given unless there is a good
16
reason, such as futility, to the contrary.” Willoughby v.
Potomac Elec. Power Co., 100 F.3d 999, 1003 (D.C. Cir. 1996).
Because plaintiffs have already amended their pleadings once,
they may only do so with the consent of the plaintiffs or by
leave of the Court.
Under the Local Rules of this Court, a “motion for leave to
file an amended pleading shall be accompanied by an original of
the proposed pleading as amended.” Local Civ. R. 15.1.
Critically, a party seeking leave to amend must file a motion to
amend before a court can consider the issue. Confederate Mem.
Ass’n, Inc. v. Hines, 995 F.2d 295, 299 (D.C. Cir. 1993) (“[A]
bare request in opposition to a motion to dismiss[,] without any
indication of the particular grounds on which amendment is
sought . . . does not constitute a motion within the
contemplation of Rule 15(a).”).
Plaintiffs’ request to amend their RICO claims, made in
passing at the end of their opposition to defendants’ motions to
dismiss, will be denied. Plaintiffs failed to properly file a
motion for leave to amend and have made no indication to the
Court of the grounds for any such amendment. Rather, plaintiffs
are hedging their bets: they state that if the Court were to
find that there are deficiencies in plaintiffs’ RICO claims,
then plaintiffs will submit an amended complaint. This approach
not only violates the Local Rules but deprives the Court of the
17
ability to determine whether leave should be denied on grounds
of futility or otherwise. See Confederate Mem. Ass’n, Inc., 995
F.2d at 299. Accordingly, because plaintiffs have failed to
properly move for leave to amend and have failed to provide the
Court with their proposed amended claims, plaintiffs’ request
for leave to amend is DENIED.
E. Rule 11
On November 13, 2012, plaintiffs voluntarily dismissed
defendant LPK from this action. ECF No. 32. LPK had moved to
dismiss plaintiffs’ complaint and plaintiffs filed a notice of
voluntarily dismissal on the day that their opposition to LPK’s
motion would have been due. On November 28, 2012, LPK filed an
opposition to plaintiffs’ voluntary dismissal, arguing that
plaintiffs are subject to sanctions under Federal Rule of Civil
Procedure 11 because plaintiffs’ claims were brought in bad
faith.
“Rule 11 imposes a duty on attorneys to certify that they
have conducted a reasonable inquiry and have determined that any
papers filed with the court are well-grounded in fact, legally
tenable, and not interposed for any improper purpose.” Cooter &
Gell v. Hartmarx Corp., 496 U.S. 384, 393 (1990) (internal
quotation marks omitted). The rule's text provides, in relevant
part, that
18
[b]y presenting to the court a pleading, written
motion, or other paper ... 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:
...
(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.
Fed. R. Civ. P. 11(b).
Rule 11 permits courts to award sanctions for violations of
Rule 11(b). See Fed. R. Civ. P. 11(c)(1) (“If, after notice and
a reasonable opportunity to respond, the court determines that
Rule 11(b) has been violated, the court may impose an
appropriate sanction on any attorney, law firm, or party that
violated the rule or is responsible for the violation.”). “‘The
test [for sanctions] under Rule 11 is an objective one: that is,
whether a reasonable inquiry would have revealed that there was
no basis in law or fact for the asserted claim. The Court must
also take into consideration that Rule 11 sanctions are a harsh
punishment, and what effect, if any, the alleged violations may
have had on judicial proceedings.’” Scruggs v. Getinge USA,
Inc., 258 F.R.D. 177, 180–81 (D.D.C. 2009) (quoting Sharp v.
Rosa Mexicano, D.C., LLC, 496 F. Supp. 2d 93, 100 (D.D.C.
2007)).
Rule 11 sets forth specific procedural requirements for a
party moving for sanctions. The motion “must be made separately
19
from any other motion and must describe the specific conduct
that allegedly violates Rule 11(b).” Fed. R. Civ. P. 11(c)(2).
The motion must be served on the nonmovant “but it must not be
filed or be presented to the court if the challenged paper,
claim, defense, contention, or denial is withdrawn or
appropriately corrected within 21 days. . . .” Id. Here, it
appears that LPK did not fully satisfy this requirement. In its
motion, LPK represents that “[l]etters were written and phone
calls were made that the corporations were not proper party
defendants. Indeed, more than 21 days after filing the Motion
to Dismiss, Plaintiffs refused to remove the offending
pleadings.” LPK’s Opp. to Pls.’ Voluntary Dismissal at 4, ECF
No. 38. This representation does not establish that LPK made a
separate motion, served it upon plaintiffs, and having received
no resolution of the Rule 11 issue within 21 days, filed the
motion with the Court.
Even though LPK’s motion fails to meet the requirements of
Rule 11, the Court itself has the authority to impose Rule 11
sanctions sua sponte. Fed. R. Civ. P. 11(c)(1)(B). This
inherent power, as the D.C. Circuit recognized, “guard[s]
against abuses of the judicial process.” Shepherd v. Am. Board.
Co., 62 F.3d 1469, 1472 (D.C. Cir. 1995). In this regard, Rule
11 serves the purpose of protecting the Court from “frivolous
and baseless filings that are not well grounded, legally
20
untenable, or brought with the purpose of vexatiously
multiplying the proceedings.” Cobell v. Norton, 211 F.R.D. 7,
10 (D.D.C. 2002) (quoting Cobell v. Norton, 157 F. Supp. 2d 82,
86 n. 8 (D.D.C. 2001)). If the Court determines that the motive
and intent of the offending party is to harass the other party,
or that a party has otherwise violated Rule 11(b), it has the
inherent power to consider a Rule 11 sanctions motion sua sponte
by issuing an order directing the offending party to show cause
why it has not violated Rule 11(b). Fed. R. Civ. P.
11(c)(1)(B). 3 Although the Court has found it lacks subject
matter jurisdiction over plaintiffs’ claims, the Court may
retain jurisdiction over the issue of Rule 11 sanctions. See
Willy v. Coastal Corp., 503 U.S. 131, 138-39 (1992). Likewise,
plaintiffs’ voluntary dismissal of certain claims against
certain defendants does not prevent the Court from considering
claims made against those defendants in connection with Rule 11
sanctions. See Cooter & Gell v. Hartmax Corp., 496 U.S. 384(1990) (district court may enforce Rule 11 even after a
3
When exercising its discretion and imposing sanctions sua
sponte, the court is not required to provide a party with the
safe harbor period, as is required in Rule 11(c)(1)(A). Compare
Fed. R. Civ. P. 11(c)(1)(B) (containing no explicit safe harbor
provision) with Fed. R. Civ. P. 11(c)(1)(A) (containing an
explicit safe harbor provision); see, e .g., Elliot v. Tilton,
64 F.3d 213, 216 (5th Cir.1995) (distinguishing between the safe
harbor required when sanctions are requested by motion and the
absence of the safe harbor requirement when the court is acting
sua sponte).
21
plaintiff files a notice of voluntary dismissal under Rule
41(a)(1)).
At this stage of the litigation, it appears to the Court
that plaintiffs failed to conduct the reasonable inquiry
required by Rule 11(b) when they sought to invoke the Court’s
subject matter jurisdiction. Although the common citizenship
between all individual plaintiffs and defendants was plain from
the face of the complaint, plaintiffs nonetheless sought to
invoke diversity of citizenship as the initial basis for the
Court’s subject matter jurisdiction. Counsel was obligated,
however, to make reasonable inquiry into the basis for diversity
jurisdiction. See Weisman v. Rivlin, 598 F. Supp. 724, 724
(D.D.C. 1984) (awarding sanctions and stating that counsel “had
an obligation to make a reasonable inquiry into the basis for
diversity. The Court finds that it was not reasonable to
overlook the citizenship of counsel’s own client . . . .”);
Rowland v. Fayed, 115 F.R.D. 605, 607 (D.D.C. 1987) (awarding
sanctions for filing of complaint invoking diversity
jurisdiction where no such jurisdiction existed and citizenship
of all parties was known to counsel when complaint was filed).
Complete diversity between the parties was so clearly lacking
that even the most cursory of legal inquiries would have
uncovered this error. See, e.g., Diversity of Citizenship, The
Free Legal Dictionary, http://legal-
22
dictionary.thefreelegaldictionary.com/Diversity+Jurisdiction
(last visited December 17, 2012).
Although counsel’s meritless invocation of diversity
jurisdiction would have been enough to risk Rule 11 sanctions,
counsel compounded her initial error by subsequently amending
the complaint to add two wholly insubstantial civil RICO claims
in an effort to invoke federal question jurisdiction. The RICO
claims were not warranted by existing law or a “nonfrivolous
argument for extending, modifying, or reversing existing law or
establishing new law.” See Fed. R. Civ. P. 11(b)(2). It
appears to the Court at this time that the RICO claims were
frivolously filed solely to invoke the jurisdiction of this
Court and sanctions under Rule 11 may be warranted. See
Williams v. Aztar Indiana Gaming Corp., 351 F.3d 294, 300 (7th
Cir. 2003) (directing plaintiff to show cause why he should not
be sanctioned for frivolous RICO claim filed solely to invoke
federal court’s jurisdiction).
Because the issue of Rule 11 is being raised sua sponte by
this Court, sanctions will not be imposed at this time. Rather,
an Order will be issued contemporaneously herewith affording an
opportunity for counsel for plaintiffs to show cause why
sanctions pursuant to Rule 11 should not be issued.
23
IV. CONCLUSION
For the reasons explained above, the Court finds that it
lacks subject matter jurisdiction over this action.
Accordingly, Counts IX and X of the complaint are hereby
DISMISSED with prejudice; Counts I through IIX are DISMISSED
without prejudice; and leave to amend the complaint is hereby
DENIED. The Court will retain jurisdiction over the case solely
to resolve the issue of sanctions under Rule 11. An appropriate
Order accompanies this Memorandum Opinion.
Signed: Emmet G. Sullivan
United States District Judge
December 17, 2012
24