Perelman, J. v. Perelman, R.

J-A20039-15
2015 PA Super 224JEFFREY E. PERELMAN, AND JEP IN THE SUPERIOR COURT OF
MANAGEMENT, INC., AS EQUITABLE PENNSYLVANIA
SUBROGEE OF JEFFREY E. PERELMAN
v.
RAYMOND G. PERELMAN; DILWORTH
PAXSON, LLP: JOSEPH JACOVINI;
LAWRENCE MCMICHAEL MARJORIE
OBOD; RONALD PERELMAN; HAINES &
ASSOCIATES; CLIFFORD E. HAINES;
BUCKLEY, BRION, MCGUIRE, MORRIS &
SOMMER LLP; ANDREW C. ECKERT;
SIGMUND FLECK; GUNSTER, YOAKLEY &
STEWART, P.A.; AND GEORGE S.
LEMIEUX
APPEAL OF: DILWORTH PAXSON LLP,
JOSEPH JACOVINI, LAWRENCE No. 61 EDA 2015
MCMICHAEL AND MARJORIE OBOD
Appeal from the Order Entered on October 30, 2014
In the Court of Common Pleas of Montgomery County
Civil Division at No.: 2013-27085
BEFORE: DONOHUE, J., SHOGAN, J., and WECHT, J.
OPINION BY WECHT, J.: FILED OCTOBER 27, 2015
The law firm of Dilworth Paxson, LLP, and Dilworth attorneys Joseph
Jacovini, Lawrence McMichael, and Marjorie Obod (collectively, “Dilworth”)
appeal the trial court’s order denying their preliminary objections to the
complaint of Jeffrey E. Perelman and JEP Management, Inc. (collectively,
“Jeffrey”). Jeffrey has sued numerous parties, including Dilworth, for
wrongful prosecution under the Dragonetti Act, 42 Pa.C.S. §§ 8351-55,
alleging Dragonetti violations associated with claims brought in several other
J-A20039-15
matters in state and federal court concerning certain business dealings
between Jeffrey and his father, Raymond G. Perelman (“Raymond”). In a
federal action, Jeffrey filed an unsuccessful motion for sanctions under
Fed.R.Civ.P. 11, based upon the same alleged litigation misconduct that
underlies the instant Dragonetti claim. The federal court denied Jeffrey’s
motion. Dilworth now maintains that the trial court erred in overruling
Dilworth’s preliminary objections to the instant Dragonetti complaint, which
objections were based upon principles of res judicata and/or collateral
estoppel arising from the federal court’s denial of Rule 11 sanctions. The
trial court in this matter ruled that the federal court’s Rule 11 order did not
preclude the instant claims. We affirm.
We begin by summarizing the lawsuit that Raymond initiated in the
Philadelphia Court of Common Pleas (hereinafter, “the State Action”) and its
outcome, because it underlies the Dragonetti claims directly at issue in this
matter. In so doing, we distill from a tremendously complex history of
dealings and litigations between Jeffrey and Raymond the following account
from our 2011 memorandum, in which we affirmed the trial court’s dismissal
of Raymond’s complaint in the State Action:
[Raymond] brought [suit] against [Jeffrey] in October 2009
alleging breach of an oral contract, fraud, conversion, express
trust, resulting trust, and unjust enrichment requiring a
constructive trust. The lawsuit is premised upon the following
allegations by [Raymond]. The parties began to discuss
transferring a portion of [Raymond’s] business interests to
[Jeffrey] in 1989 . . . . At the time, [Raymond] agreed to
convey his interest in several businesses to [Jeffrey] with,
according to [Raymond], certain conditions. Those conditions
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included that [Raymond] would transfer the businesses for the
assumption of certain debt; the transfer would not incur any tax
liability; [Jeffrey] would control and operate the businesses
during his lifetime; ownership of the businesses would be divided
evenly between [Jeffrey] and a trust created for the sole benefit
of [Jeffrey’s] children, and [Jeffrey’s] wife would renounce all of
her marital interest in the transferred businesses.
Corporations controlled by [Raymond] transferred their business
interests to corporations formed by [Jeffrey]. In addition, in at
least one instance, a corporation operated by [Raymond] sold
stock to a trust of which [Jeffrey] was the named beneficiary.
The trust was created for the benefit of [Jeffrey], with [Jeffrey’s]
children as contingent beneficiaries. The trust document was
executed on January 24, 1990. On that same date, [Jeffrey’s]
wife also executed a renunciation agreement whereby she
renounced some, but not all, of her interest in the relevant
businesses. [Raymond] alleges that he only recently learned
that the trust and renunciation documents did not conform to his
instructions . . . .
Perelman v. Perelman, 953 EDA 2010, slip op. at 1-2 (Pa. Super. Sept. 1,
2011).
Jeffrey filed preliminary objections to Raymond’s complaint in the
State Action, which the trial court sustained without explanation by order
entered on March 25, 2010. On or about April 1, 2010, Raymond appealed
the trial court’s ruling. In its opinion pursuant to Pa.R.A.P. 1925(a), the
court explained that it had determined that Raymond’s claims were barred
by the parol evidence rule because the documents governing the twelve
transactions at issue, which contained merger clauses, did not indicate that
any of Raymond’s claimed entitlements were part of the consideration for
the transactions in question. Thus, the merger clauses in the contracts
governing the transactions precluded resort to parol evidence to establish
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the existence of any overarching agreement consistent with Raymond’s
claims. On appeal, this Court affirmed on the same basis. Id. at 7-16.
Mere hours after Raymond commenced the State Action, Jeffrey had
started his own parallel action by filing a complaint concerning the same
subject matter in federal court (hereinafter, “the Federal Action”). In his
answer to Jeffrey’s complaint in the Federal Action, Raymond included
compulsory counterclaims that were substantively identical to the claims he
had raised as plaintiff in the State Action.
While Raymond’s appeal in the State Action was pending, Jeffrey filed
a motion to dismiss Raymond’s counterclaims in the Federal Action, arguing
that the trial court’s ruling in the State Action had preclusive effect over the
parallel counterclaims in the Federal Action. The trial court in the instant
matter has provided a useful summary of the events that followed:
On May 18, 2010, Jeffrey petitioned the [district court] to
impose sanctions against Raymond and [Dilworth] pursuant to
[Rule 11]. [Dilworth] responded to the motion for sanctions on
June 8, 2010. On June 25, 2010, the [district court] denied the
motion for sanctions after reviewing “the Plaintiffs’ and
Counterclaim Defendants’ Motion for Sanctions Pursuant to Rule
11 of the Federal Rules of Civil Procedure, the defendants’
opposition, and the plaintiffs’ reply thereto.” This order was not
appealed. Nevertheless, on May 2, 2013, the [district court]
granted Jeffrey’s motion to dismiss the counterclaims.
On August 30, 2013, after the resolution of all underlying cases
filed by Jeffrey and Raymond, [Jeffrey] filed a Praecipe for
Summons against Raymond, [Dilworth], and numerous other
defendants. On October 7, 2013, [Jeffrey] filed a Complaint.
Subsequently, on December 6, 2013, [Jeffrey] filed an Amended
Complaint. This Amended Complaint sought relief under the
Dragonetti Act with respect to all defendants. In regard to
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[Dilworth] specifically, the Amended Complaint alleged that the
Dilworth Defendants were liable under the Dragonetti Act for
their involvement with Raymond’s [State Action], the Superior
Court appeal of that action’s dismissal, and the pursuit of the
original counterclaims and proposed amended counterclaims in
the Federal Action.
On December 26, 2013, [Dilworth] filed Preliminary Objections.
[The trial court] overruled the Preliminary Objections by its
Order dated September 10, 2014. On September 24, 2014,
[Dilworth] filed an application to amend [the trial court’s]
September 10, 2014 Order to permit an immediate appeal
pursuant to 42 Pa.C.S. § 702(b). [The trial court] denied the
application to amend [its] Order to permit an immediate appeal
by its Order dated October 30, 2014. Subsequently, on
November 8, 2014, [Dilworth] filed a Petition for Review with the
Superior Court at Docket Number 134 EDM 2014. The Superior
Court entered an Order dated January 8, 2015, granting the
Petition for Review and directing that the matter proceed before
the Superior Court as an appeal from the September 10, 2014
Order of [the trial court] overruling [Dilworth’s] Preliminary
Objections.
Trial Court Opinion (“T.C.O.”), 2/19/2015, at 3-4 (citations omitted).1
Before this Court, Dilworth raises the following issue:
Whether, in this case of first impression, the trial court
committed an error of law in denying Dilworth’s preliminary
objections to Jeffrey’s duplicative and retaliatory claim for
wrongful use of civil proceedings, after he already fully
litigated—and lost—his factual allegations and this issue in the
United States District Court, [which] found that the compulsory
counterclaims filed by Dilworth were colorable.
Brief for Dilworth at 4.
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1
The trial court did not direct Dilworth to file a concise statement of the
error complained of on appeal pursuant to Pa.R.A.P. 1925(b).
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We begin by noting our standard of review of a trial court order
sustaining or denying preliminary objections:
“Our standard of review of an order of the trial court overruling
or granting preliminary objections is to determine whether the
trial court committed an error of law. When considering the
appropriateness of a ruling on preliminary objections, the
appellate court must apply the same standard as the trial court.”
De Lage Landen Fin’l Servs., Inc., v. Urban P'ship, LLC,
903 A.2d 586, 589 (Pa. Super. 2006).
“Preliminary objections in the nature of a demurrer test
the legal sufficiency of the complaint.” When considering
preliminary objections, all material facts set forth in the
challenged pleadings are admitted as true, as well as all
inferences reasonably deducible therefrom. Preliminary
objections which seek the dismissal of a cause of action
should be sustained only in cases in which it is clear and
free from doubt that the pleader will be unable to prove
facts legally sufficient to establish the right to relief. If any
doubt exists as to whether a demurrer should be
sustained, it should be resolved in favor of overruling the
preliminary objections.
Hykes v. Hughes, 835 A.2d 382, 383 (Pa. Super. 2003)
(citations omitted).
Haun v. Comm. Health Sys., Inc., 14 A.3d 120, 123 (Pa. Super. 2011)
(citations modified).
There are several additional legal standards that must be related to
frame the analysis to follow. First, to prevail on a claim under the
Dragonetti Act, a plaintiff must establish the following statutory elements:
(a) Elements of action.—A person who takes part in the
procurement, initiation or continuation of civil proceedings
against another is subject to liability to the other for wrongful
use of civil proceedings [if]:
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(1) he acts in a grossly negligent manner or without
probable cause and primarily for a purpose other than that
of securing the proper discovery, joinder of parties or
adjudication of the claim in which the proceedings are
based; and
(2) the proceedings have terminated in favor of the
person against whom they are brought.
42 Pa.C.S. § 8351.
In an action brought pursuant to this subchapter the plaintiff has
the burden of proving . . . that:
(1) The defendant has procured, initiated, or
continued the civil proceedings against him.
(2) The proceedings were terminated in his favor.
(3) The defendant did not have probable cause for his
action.
(4) The primary purpose for which the proceedings
were brought was not that of securing the proper
discovery, joinder of parties or adjudication of the claim on
which the proceedings were based.
(5) The plaintiff has suffered damages as set forth in
section 8353[2] . . . .
42 Pa.C.S. § 8354.
A person who takes part in the procurement, initiation or
continuation of civil proceedings against another has probable
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2
Among the categories of damages that may be awarded for a violation
are “[t]he harm to [the plaintiff’s] reputation by any defamatory matter
alleged as the basis of the proceedings,” “the expense, including any
reasonable attorney fees, that he has reasonably incurred in defending
himself against the proceedings,” [a]ny emotional distress that is caused by
the proceedings,” and “[p]unitive damages according to law in appropriate
cases.” 42 Pa.C.S. § 8353.
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cause for doing so if he reasonably believes in the existence of
the facts upon which the claim is based, and either:
(1) reasonably believes that under those facts the
claim may be valid under the existing or developing law;
(2) believes to this effect in reliance upon the advice
of counsel, sought in good faith and given after full
disclosure of all relevant facts within his knowledge and
information; or
(3) believes as an attorney of record, in good faith
that his procurement, initiation or continuation of a civil
cause is not intended to merely harass or maliciously
injure the opposite party.
42 Pa.C.S. § 8352.
“[A]n action for wrongful use of civil proceedings pursuant to the
Dragonetti Act does not require a prima facie showing of actual malice, but
such action requires proof that the defendant acted in a grossly negligent
manner.” Hart v. O’Malley, 781 A.2d 1211, 1218 (Pa. Super. 2001). The
application of section 8352 to attorneys of record is somewhat more
circumscribed than as to the parties that they represent:
Insofar as attorney liability is concerned, “as long as an attorney
believes that there is a slight chance that his client’s claims will
be successful, it is not the attorney’s duty to prejudge the case.”
Morris v. DiPaolo, 930 A.2d 500, 505 (Pa. Super. 2007).
“Lawyers can safely act upon the facts stated by their clients.”
Meiksin v. Howard Hanna Co., Inc., 590 A.2d 1303, 1307
(Pa. Super. 1991).
Keystone Freight Corp. v. Stricker, 31 A.3d 967, 973 (Pa. Super. 2011)
(citations modified). That being said, “the plaintiff in a wrongful use of civil
proceedings action need not obtain the defendant’s outright ‘confession’ of
improper purpose; an improper purpose may be inferred where the action is
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filed without justification.” Gentzler v. Atlee, 660 A.2d 1378, 1385
(Pa. Super. 1995). Thus, a claim for wrongful use of civil proceedings will lie
“if the trier of fact could reasonably conclude that the defendant initiated the
underlying lawsuit without probable cause.” Id.At issue in this matter is the preclusive effect under the instant
circumstances, if any, of a federal court’s ruling denying sanctions under
Rule 11. That rule provides, in relevant part, as follows:
(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 . . .
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
****
(c) Sanctions.
(1) In general. 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. . . .
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(2) Motion for Sanctions. A motion for sanctions
must . . . describe the specific conduct that allegedly
violates Rule 11(b). The motion must be served under
Rule 5, 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 after service or within another time the court sets.
If warranted, the court may award to the prevailing party
the reasonable expenses, including attorney’s fees,
incurred for the motion.
Fed.R.Civ.P. 11.
Finally, because this case presents the question whether collateral
estoppel/issue preclusion bars a claim under the Dragonetti Act when it is
based upon the same allegations asserted in a Rule 11 motion that a federal
court has denied, we must review the standard for collateral estoppel:
Collateral estoppel applies if (1) the issue decided in the
prior case is identical to the one presented in the later
case; (2) there was a final judgment on the merits; (3) the
party against whom the plea is asserted was a party or in
privity with a party in the prior case; (4) the party or
person privy to the party against whom the doctrine is
asserted had a full and fair opportunity to litigate the issue
in the prior proceeding and (5) the determination in the
prior proceeding was essential to the judgment.
Collateral estoppel is also referred to as issue preclusion. It is a
broader concept than res judicata and operates to prevent a
question of law or issue of fact which has once been litigated and
fully determined in a court of competent jurisdiction from being
relitigated in a subsequent suit.
Catroppa v. Carlton, 998 A.2d 643, 646 (Pa. Super. 2010) (quoting
Inbollingo v. Maurer, 575 A.2d 939, 940 (Pa. Super. 1990)) (citations
omitted).
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As set forth, supra, in the Federal Action, the district court denied
Jeffrey’s motion for sanctions. In the ruling at issue in the instant appeal,
however, the trial court denied Dilworth’s preliminary objections in the
nature of a demurrer alleging that the district court’s ruling estopped Jeffrey
from bringing a Dragonetti Act claim based upon the same allegations raised
in his unsuccessful Rule 11 motion.3
The trial court explained its reasoning for denying Dilworth’s
preliminary objections as follows:
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3
Jeffrey urges this Court to affirm without addressing the substantive
merits of Dilworth’s preliminary objections upon the basis that Dilworth
should have presented its collateral estoppel defense in a pleading as new
matter under Pa.R.C.P. 1030 rather than as a preliminary objection under
Pa.R.C.P. 1028. Jeffrey argues that Rule 1028 precludes consideration of
documents outside the pleadings, and contends that the trial court therefore
acted improperly when it considered documents pertaining to the prior law
suits underlying Jeffrey’s Dragonetti claims. See Brief for Jeffrey at 18-19
(citing, inter alia, 220 P’ship v. Phila. Elec. Co., 650 A.2d 1094, 1097
(Pa. Super. 1994)). Dilworth responds that the documents in question were
matters of public record, and, inasmuch as those cases were discussed at
length in Jeffrey’s complaint, they could properly be considered by the trial
court in the context of a demurrer. Reply Brief for Dilworth at 6-8 (citing,
inter alia, Del Turco v. Peoples Home Sav. Ass’n., 478 A.2d 456, 461
(Pa. Super. 1984)). We agree with Dilworth. References to the earlier
cases, being necessary to the assertion of a Dragonetti claim in the first
instance, are made repeatedly throughout Jeffrey’s operative complaint.
Consequently, as per Del Turco, Dilworth had the prerogative to raise
collateral estoppel by reference to those cases in its preliminary objections.
See Del Turco, 478 A.2d at 461 (“It is settled . . . that[,] unless the
complaint sets forth in detail, either directly or by reference, the
essential facts and issues pleaded by the prior suit, the affirmative
defense of res judicata must be raised in a responsive pleading under the
heading of new matter and not by preliminary objection.” (emphasis
added)).
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[F]ederal sanctions are not in derogation of state common[-]law
remedies; indeed both may be sought based upon identical
factual and procedural events. Werner v. Plater-Zyberk, 799
A.2d 776, 785 (Pa. Super. 2002). Moreover, “the denial of
sanctions under federal Rule 11 does not foreclose the assertion
of a subsequent suit for malicious prosecution.” Id. (citing
Lightning Lube, Inc., v. Witco Corp., 4 F.3d 1153, 1196
(3d Cir. 1993)). In addition, “the scope of a Rule 11 hearing is
much narrower than a full civil proceeding in state court.”
Amwest Mortg. Corp. v. Grady, 925 F.2d 1162, 1165 (7th Cir.
1991); see Fed.R.Civ.P. 11, Notes of 1983 Advisory Committee
on Rules (“[T]he court must to the extent possible limit the
scope of sanction proceedings to the record. Thus, discovery
should be conducted only by leave of court, and then only in
extraordinary circumstances.”).
T.C.O. at 5 (citations modified).
In the instant case, [Dilworth] argue[s] that the federal court’s
June 25, 2010 Order dispositively addressed the same
arguments in a Rule 11 context that Jeffrey now advances in the
context of his Dragonetti action. After reciting the standard for
Rule 11, the Order outlined Jeffrey’s arguments. After outlining
Jeffrey’s arguments, the [district court], without commenting
specifically on any of Jeffrey’s arguments, stated: “Sanctions,
however, are not warranted in this case. Regardless of [his]
arguments’ ultimate merit, Raymond . . . presents a colorable
argument in support of his counterclaims. Furthermore,
Raymond . . . appealed the state trial court’s order [in the State
Action], and that order could be reversed by the Superior Court
of Pennsylvania.”[4]
The June 25, 2010 Order does not elaborate on its single
statement that [Raymond’s] counterclaims presented a
“colorable argument.” Consequently, the Order does not
address the particular merits of any of Jeffrey’s arguments.
Raymond argues in his Preliminary Objections that because the
federal court identifies the counterclaims as being supported by
colorable arguments, . . . the Order dispositively rejected all of
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4
As noted supra, this Court ultimately affirmed the trial court’s ruling in
the State Action.
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Jeffrey’s arguments in favor of sanctions. Because Jeffrey
advances the same arguments in his instant Dragonetti claims
against [Dilworth], and the federal court declined to impose
sanctions under Rule 11 [in the Federal Action], [Dilworth]
argues that the doctrine of collateral estoppel prohibits Jeffrey
from raising the same arguments in a Dragonetti context. It
bears repeating that “the denial of sanctions under federal Rule
11 does not foreclose the assertion of a subsequent suit for
malicious prosecution.” Werner, 799 A.2d at 785. Both Rule 11
sanctions and state suits for abuse of process may be sought
predicated upon the same underlying factual and procedural
events. Id.The June 25, 2010 Order [in the Federal Action] merely stated
that Raymond had advanced colorable arguments in support of
his counterclaims; the federal court declined to analyze each
argument individually. Thus, given the facts of this case, and
the legal standard which dictates that all doubts as to whether a
demurrer should be sustained are resolved in favor of overruling
preliminary objections, [the trial court] properly overruled
[Dilworth’s p]reliminary [o]bjections. Cf. Kegerise v.
Susquehanna Twp. Sch. Dist., No. 1:CV-14-0747, 2015 WL
106528, at *15 (M.D. Pa. Jan. 7, 2015).
T.C.O. at 7-8 (record citations omitted).
Against this backdrop, we now turn to Dilworth’s argument. Dilworth
contends that “Jeffrey cannot, as a matter of law, prove these necessary
elements [of a Dragonetti complaint], because the federal court has already
found that the claims at issue are ‘colorable.’” Brief for Dilworth at 14
(emphasis omitted). In a lengthy argument in support of the application of
collateral estoppel, which appears to conflate questions that would arise only
if this case went to trial and the narrower question whether this case should
go to trial in the first instance, Dilworth addresses each of the five elements
necessary to establish collateral estoppel. However, only Dilworth’s
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arguments as to elements one, four, and five are at issue because Jeffrey
does not dispute that the second and third elements, respectively a final
judgment on the merits and a commonality of parties between the federal
and state proceedings, are satisfied in this case. See Brief for Jeffrey at 20.
Furthermore, because the failure to establish any one element precludes the
application of collateral estoppel, and because we find that Dilworth cannot
satisfy at least one element of the test, we focus solely upon that one
element. Specifically, like the trial court, we agree with Jeffrey that he did
not have “a full and fair opportunity to litigate” the substance of his
Dragonetti claims in the Federal Action under Rule 11. See Catroppa, 998
A.2d at 646.5
Dilworth argues that Jeffrey chose the Federal Action as the venue to
challenge Dilworth’s good faith in commencing the State Action, and the
existence of probable cause for doing so. Dilworth correctly notes that
Jeffrey filed “a substantial memorandum of law that articulated the facts to
support his request,” which facts are materially the same as those upon
which Jeffrey bases the instant Dragonetti action. Brief for Dilworth at 22.
Dilworth also would have this Court reject Jeffrey’s claim that the absence of
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5
For purposes of discussion, we assume, but need not decide, that the
substance of the respective claims was materially the same. However,
unless Jeffrey had a full and fair opportunity to litigate those claims in
federal court, the identity of claims is of no moment to the question of issue
preclusion.
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discovery in connection with his Rule 11 motion by itself precludes any
finding that he had a full and fair opportunity to litigate the assertions at
issue in his Dragonetti complaint. Dilworth challenges the proposition that
such discovery is required to establish a full and fair opportunity to litigate,
not least because “the determination of probable cause and gross negligence
can be made as a matter of law on preliminary objection.” Id. at 23.
In response, Jeffrey notes that discovery is available in Rule 11
proceedings only by leave of court upon a showing of extraordinary
circumstances. Brief for Jeffrey at 21 (citing Fed.R.Civ.P. 11 (1983 advisory
committee notes)). Jeffrey submits that it is precisely upon this basis that
federal courts have concluded that Rule 11 proceedings do not preclude a
later malicious prosecution claim. Id. at 22 (citing Lightning Lube, 4 F.3d
at 1196)).
In further support of his alleged inability even to seek leave of court to
conduct relevant discovery, Jeffrey submits the following account of the
condensed procedural chronology pertaining to his Rule 11 motion. First, on
March 25, 2010, ten days after the commencement of discovery in the
Federal Action, the court of common pleas in the State Action sustained
Jeffrey’s preliminary objections and dismissed Raymond’s complaint with
prejudice. However, under Rule 11’s notice requirement, Jeffrey could not
file a motion for sanctions based upon that occurrence until he had furnished
notice to Raymond of his intent to seek sanctions and waited at least
twenty-one days thereafter to file the Rule 11 motion with the district court.
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Furthermore, he could not seek discovery in the interim because the whole
point of the twenty-one-day safe harbor is to allow the non-moving party to
cure whatever action or omission comprises the basis for the Rule 11
motion. See Fed.R.Civ.P. 11(c)(2) (allowing the non-moving party twenty-
one days to withdraw or correct “the challenged paper, claim, defense,
contention, or denial”).
On April 9, 2010, Jeffrey served his motion upon Dilworth. On April
21, 2010, Jeffrey filed a motion to stay discovery in the Federal Action
pending resolution of his motion to dismiss Raymond’s counterclaims in that
action. On May 18, 2010, the Rule 11 safe harbor period having passed
without any curative action being taken by Raymond, Jeffrey filed his Rule
11 motion with the district court. While Raymond had the opportunity to file
his opposition to Jeffrey’s motion, the district court stayed discovery, in part
because an appeal had been filed challenging the common pleas court’s
dismissal with prejudice of Raymond’s complaint in the State Action. Then,
on June 25, 2010, with the discovery stay still in effect and the State Action
appeal still pending, the district court denied Jeffrey’s Rule 11 motion. See
Brief for Jeffrey at 22-23. In light of this sequence of events, Jeffrey asks
“[w]here . . . was there any opportunity for Jeffrey to take discovery?” Id.
at 24.
Dilworth alternatively argues that Jeffrey required no discovery,
because all information necessary to determine whether Dilworth had a
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colorable claim could be gleaned from the face of the 1990 transaction
documents. Jeffrey responds as follows:
That argument . . . conflates the bases for Jeffrey’s Dragonetti
claims with the bases for his defense of Raymond’s original
[c]ounterclaims: Even if the face of the decades-old transaction
documents decisively determined the impact of the parol
evidence rule on Raymond’s claims, the merits of Jeffrey’s
Dragonetti claims go far beyond that. The question here is not
whether Raymond and [Dilworth] presented the [district court]
with a “colorable” justification for concluding that Raymond’s
[Federal Action] pleading, on its face, presented viable claims.
Rather, the question is whether the true factual record—which
was never explored in discovery in any of the underlying suits—
would have supported that facially “colorable” argument
(whatever it was)—and whether [Dilworth] properly investigated
that background.
Brief for Jeffrey at 24 (footnote omitted; emphasis in original). Jeffrey
further notes that one of his stated bases for seeking sanctions under Rule
11 was “the lack of factual support for Raymond’s [c]ounterclaims,” which
the district court did not address in its order denying sanctions. Id. at 24
n.21. Jeffrey adds that the district court could not have evaluated that
argument, given the lack of discovery. Id. Jeffrey also highlights relevant
questions as to which discovery is necessary to fully measure his Dragonetti
claims. For instance, he notes that he has never had the opportunity to
explore whether Dilworth acted with gross negligence, without probable
cause, or with an improper purpose—and specifically whether it had a
reasonable belief in any relevant facts—when it asserted that Raymond had
a factual basis to establish an exception to the parol evidence rule or the
application of the discovery rule. Id. at 25.
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We agree. First, the limited case law that we have found addressing
this matter, none of it binding under the circumstances of this case,6
counsels strongly against finding that Jeffrey has had a full and fair
opportunity to litigate his Dragonetti claim in the context of Rule 11
proceedings, which are abbreviated by design. In Cohen v. Lupo, 927 F.3d
363 (8th Cir. 1991), for example, the United States Court of Appeals for the
Eighth Circuit distinguished Rule 11 sanctions and malicious prosecution
claims as follows:
Federal Rule of Civil Procedure 11 grants a court discretion to
discipline parties and counsel for conducting litigation in bad
faith or in a frivolous or abusive fashion. Rule 11 is a procedural
tool that under the Rules Enabling Act cannot “abridge, enlarge
or modify any substantive right.” 28 U.S.C. § 2072. Rule 11
sanctions must be sought by motion in a pending case; there
can be no independent cause of action instituted for Rule 11
sanctions. Port Drum Co. v. Umphrey, 852 F.2d 148, 151
(5th Cir. 1988).
On the other hand, the common[-]law tort of malicious
prosecution is a claim in its own right under applicable state
law. . . . Rule 11 [cannot] abridge the substantive state law of
malicious prosecution, nor was it adopted to serve as a
surrogate for an action based upon a claim of malicious
prosecution resulting from frivolous, harassing, or vexatious
litigation.
Cohen, 927 F.2d at 365 (citations modified).
____________________________________________
6
Although the decisions of the federal district courts and courts of
appeal do not bind this Court, their interpretations nonetheless may have
persuasive authority on the question presented. See Martin v. Hale
Prods., Inc., 699 A.2d 1283, 1287 (Pa. Super. 1977).
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In Cohen, a district court awarded $100,000 in Rule 11 sanctions for
costs associated with litigation that it found to be conducted “in a manner
that escalated costs unnecessarily and vexatiously.” Id. at 364. Thereafter,
the complaining party filed a separate suit in federal district court for state
common-law malicious prosecution, seeking recoupment of the remaining
costs of defending the earlier suit, which approached $1 million. The district
court dismissed that suit upon the basis that the earlier Rule 11 proceeding
barred by res judicata a subsequent malicious prosecution suit based upon
the same underlying facts. The court of appeals reversed, finding as follows:
[The] malicious prosecution cause of action [did] not raise the
same claim that [the Rule 11 proceeding] resolved. [The
plaintiff’s] malicious prosecution claim was not actually litigated
and could not properly [have] been raised and determined in
[the Rule 11 proceeding]. . . .
The district court did not decide whether the [underlying]
complaint was filed without probable cause, whether [the
malicious prosecution defendant] acted with malice, or the
amount of damages [the plaintiff] suffered as a result of [the
sanctioned] misconduct. Those inquiries are irrelevant under
Rule 11, but are the sum and substance of the tort of malicious
prosecution.
Id. at 365; see Faigin v. Kelly, 184 F.3d 67, 79 (1st Cir. 1999) (“The
scope of a Rule 11 hearing is generally much more circumscribed than that
of a trial or comparable proceeding. Thus, there are legitimate questions as
to whether a Rule 11 sanctions order can provide a satisfactory basis for
issue preclusion under any circumstances in respect to the merits of a
complaint. . . . By their very nature, Rule 11 inquiries are severely
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restricted . . ., and it seems odd to extrapolate from them to the subsequent
litigation of issues on the merits.”); cf. Klayman v. Barmak, 602 F.
Supp.2d 110, 117-18 (D.D.C. 2009) (“It would be unfair to preclude an issue
based on the resolution of a motion for sanctions because sanctions hearings
are procedurally dissimilar to trials. A motion for sanctions does not provide
parties an opportunity to litigate fully—conduct discovery, present and cross-
examine witnesses—as required for application of collateral estoppel.”
(citations and internal quotation marks omitted)).
To similar effect, in Amwest Mortgage, supra, the United States
Court of Appeals for the Ninth Circuit identified the absence of discovery
under Rule 11, as well as other aspects of that abbreviated process, as
determinative against enjoining state malicious prosecution proceedings
based upon a Rule 11 order:
Here, the district court in its denial of Amwest’s [Rule 11] motion
emphasized the limited nature of the Rule 11 proceeding: “It
was a motion, it was done without discovery, without any other
aspects, and it is improper under those limited circumstances for
a federal court to enjoin a state court from [malicious
prosecution] proceedings that are pending there.”
****
[T]he district court stated “[m]otions for sanctions come in here
a dime a dozen, and very often they’re denied for a number of
reasons other than the actual merits. Unless it is a clear-cut
case of egregious behavior, I generally do not impose sanctions.”
Injunctive relief is particular inappropriate if the district court’s
decision may possibly be based on grounds other than
those asserted in the state court action.
925 F.2d at 1165 (emphasis added).
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Recently, in Kegerise, 2015 WL 106528, the district court declined to
find that collateral estoppel precluded a Dragonetti Act claim when the trial
court in the underlying action denied Rule 11 sanctions. The district court
first acknowledged that the “improper purpose” language found in Rule 11 is
the same as the language used to define an element of a Dragonetti claim,
i.e., “that the defendant had an improper purpose in pursuing the underlying
action.” Id. at *15. In the underlying matter, in denying Rule 11 sanctions,
the trial court had found that the lawsuit in question was not filed for an
improper purpose. Nonetheless, relying upon Cohen, Amwest Mortgage,
and Lightning Lube, the district court determined that collateral estoppel
did not apply. Reviewing the above three cases and noting the absence of
contrary authority cited by the Dragonetti defendant, the court deemed the
defendant’s argument “too sketchy to accept, especially since they have the
burden as the moving party to show that [the Dragonetti plaintiff’s] claim
must fail.” Id. at 15.
While none of the above-cited cases is perfectly on point, they
nonetheless point in only one direction. Moreover, Dilworth, like the
defendant in Kegerise, offers no on-point authority to counter the above-
cited cases, which appear to reflect a consensus, or at least a majority view,
among the courts that have addressed questions similar to those presented
in this matter.
Although none of the above-cited cases binds us, it is worth
emphasizing that this Court in Werner not only favorably cited Lightning
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Lube, Cohen, and Amwest Mortgage, but also issued a decision with
which our analysis in the instant matter harmonizes. At issue in Werner
was a plaintiff’s prerogative to seek damages under the Dragonetti Act for
litigation conduct that occurred in federal court. The Dragonetti defendant
argued that Rule 11 sanctions in federal court were the appropriate remedy
and that the entwinement of the tortious conduct asserted involved
questions best suited to resolution in federal court.
This Court disagreed:
[The Dragonetti defendant] argue[s] that [the plaintiff’s]
interests would be vindicated adequately via sanctions imposed
by the federal district court. However, the damages [the
plaintiff] seeks are distinct from the various types of penalties
that may be imposed by a court as sanctions against a
tortfeasor. Sanctions, including monetary sanctions paid to an
adversary in the form of fees or costs, address the interests of
the court and not those of the individual. A litigant cannot rely
on a sanction motion to seek compensation for every injury that
the sanctionable conduct produces. Rather, an injured party
must request tort damages to protect his personal interest in
being free from unreasonable interference with his person and
property.
****
The main objective of Rule 11 is not to reward parties who are
victimized by litigation; it is to deter baseless filings and curb
abuses. While imposing monetary sanctions under Rule 11 may
confer a financial benefit on a victimized litigant, this is merely
an incidental effect on the substantive rights thereby implicated.
Simply put, Rule 11 sanctions cannot include consequential
damages and thus are not a substitute for tort damages. In light
of the foregoing, we conclude that [the plaintiff’s] right to seek
tort damages for his alleged injuries exists independently of,
and in addition to, any rights he might possess to petition
for sanctions from the federal district court . . . .
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799 A.2d at 784-85 (emphasis added; citations and internal quotation marks
omitted). Reinforcing the obvious import of the above language, we added
that “[f]ederal sanctions are not in derogation of state common[-]law
remedies, and both may be sought predicated on the same underlying
factual and procedural events,” citing Lightning Lube, Cohen, and
Amwest Mortgage favorably for the proposition that “the denial of
sanctions under federal Rule 11 does not foreclose the assertion of a
subsequent suit for malicious prosecution.” Id. at 785. The sum of our
reasoning in Werner, like the cases upon which we relied, supports our
reliance upon those same cases in the instant matter, especially given the
lack of contrary Pennsylvania authority.
Our conclusion is buttressed by the constraints of our standard of
review. Like the trial court, in reviewing preliminary objections, we are
obligated to give the non-moving party the benefit of his own averments of
fact and all reasonable inferences that may be derived therefrom. Given the
procedural and evidentiary differences between a Rule 11 proceeding and a
Dragonetti act trial, including the absence of discovery in the former case,
the right to trial by jury that applies in the latter case, and the prospect that
dispositive findings of fact that the district court never had the opportunity
to make might dictate the outcome of a Dragonetti claim, we find no abuse
of discretion or error of law in the trial court’s denial of Dilworth’s
preliminary objections. While we express no opinion whatsoever as to the
relative merit of Jeffrey’s claims, it is neither for us nor the trial court to do
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so now. At this juncture, Jeffrey is entitled to move forward with his case
against Dilworth.
Order affirmed.
Judgment Entered.
Joseph D. Seletyn, Esq.
Prothonotary
Date: 10/27/2015
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