SEDGWICK ARTICLE AUGUST 2016
How to Win a Motion for Sanctions
Practitioners may be hesitant to pursue a motion for sanctions based on suspicions of fraud given the seriousness of the allegations--and the perceived difficulties in obtaining sufficient evidence to support them. Over the last year and a half, federal courts nationwide have considered motions for sanctions in the context of parties engaging in fraud on the court. What those cases teach us is that when a party commits fraud, the interest in giving a party the chance to be heard in court is diminished by the interest in maintaining integrity in the judicial system. The trend is to show zero tolerance for fraud, which means that courts are willing to dish out the most severe sanctions for parties caught falsifying evidence. For practitioners, this also means that, under the appropriate circumstances, a motion for sanctions concerning a party's willful misconduct may be a worthwhile pursuit.
The First Case The first example comes from the Middle District of Pennsylvania. In Stafford v. Derose, an inmate initiated a lawsuit against correctional officers, alleging that they violated his civil rights. The defendants filed a summary judgment motion and, in response, the plaintiff submitted various exhibits in opposition to it. One such exhibit was a handwritten statement, signed by a "Steve Stevens," which detailed a confrontation between the plaintiff and correctional officers. At the time of the alleged assault, there was no Steve "Stevens" at the facility, though there was a Steve "Stephens." Stephens testified at deposition that he did not prepare the handwritten statement, but that its contents were mostly true and that he had witnessed the officers doing "damage" to the plaintiff. Thereafter, the plaintiff admitted that he had authored the "Stevens" statement. The defendant filed a motion to dismiss the case as a sanction for the plaintiff's fraud on the court. In considering the defendant's motion to dismiss, the court balanced the factors set forth in Poulis v. State Farm Fire and Casualty. It recognized that the plaintiff's claims may have had some merit, and that
there was no evidence that the defendants were prejudiced because of the plaintiff's failure to meet scheduling orders and respond to discovery, two of the Poulis factors. Nonetheless, it found that the plaintiff's actions prejudiced the judicial system; that the plaintiff was solely responsible for the forged statement; and that he willfully perpetrated a fraud in submitting it as evidence. Moreover, the court explained that, where there is fraud on a court, "any sanction short of dismissal `may be inherently inadequate.'" As a result, the court dismissed the case with prejudice. Case 2 The Central District of California similarly sanctioned a party for falsified evidence in Consumer Financial Protection Bureau v. Morgan Drexen, a 2015 case involving alleged violations of the Telemarketing Sales Rule (TSR) and the Consumer Financial Protection Act (CFPA). The defendants in this case had historically charged up-front fees for debt settlement services; however, the TSR later banned these types of advance fees. In response to the ban, the defendants created a fee arrangement whereby they stopped charging up-front fees for debt services
but began offering bankruptcy services, for which they charged up-front fees. The CFPB learned about this fee arrangement and brought a lawsuit against the defendants, essentially alleging that the bankruptcy services were just a front to hide the fact that they continued to charge up-front fees for debt services. The CFPB contended that this scheme violated the TSR and CFPA. The case proceeded with discovery, and, after several delays, the defendants ultimately produced bankruptcy petitions to the CFPB. The CFPB argued that the defendants manufactured the bankruptcy petitions to support their defense and consequently filed a motion for sanctions. In support of its motion, it submitted a declaration from an e-law litigation support specialist, who attested that the metadata from the bankruptcy petitions showed that most of them were created by the defendants after they received the CFPB's document request. The CFPB also had evidence that the defendants ordered its employees: (1) to complete bankruptcy petitions to make it seem as though they were performing bankruptcy-related work; and (2) to use older versions of the petitions to make it look
Reprinted with permission from the "August 5, 2016" edition of the "Corporate Counsel" 2016 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited. ALMReprints.com 877-257-3382 - firstname.lastname@example.org.
SEDGWICK ARTICLE JULY 2016
as though they were created earlier than they were. The defendants denied the allegations of wrongdoing, but ultimately confessed that the bankruptcy petitions were not prepared for their clients at the outset of the engagement, as they had previously alleged. The court considered the evidence and found in favor of the CFPB. It pointed out that throughout the litigation, the defendants had maintained that they prepared bankruptcy petitions for their customers to get better settlement offers from creditors to use as leverage during debt settlement negotiations. It was for this reason, the court explained, that it had denied the CFPB's summary judgment motion earlier in the case. Thus, the fact that the bankruptcy petitions were not generated in the ordinary course of business indicated that the defendants intended to deceive the court, which undermined the earlier summary judgment motion ruling and threatened the integrity of a trial. The court entered a default judgment against the defendants accordingly. The Third Case Last September, the U.S. Court of Appeals for the Seventh Circuit similarly considered a party's submission of falsified evidence in Secrease v. Western & Southern Life Insurance. In this case, the plaintiff sued his former employer and supervisors, alleging unlawful discrimination and retaliation in violation of Title VII of the Civil Rights Act of 1964. The employer moved to dismiss the complaint, arguing that it was untimely. In the plaintiff's response to the motion to dismiss, he sought to enforce an arbitration clause, attaching to it a copy of his purported employment contract, which contained a mandatory arbitration provision. In reply, the employer argued that the plaintiff was trying to defraud the court because there was no mandatory arbitration clause in the employment contract
that the plaintiff signed. Rather, it contended that the plaintiff fashioned two contracts together and that the one he signed did not contain such a provision. After reviewing the briefs, the district court dismissed all of the plaintiff's claims except for the retaliation claim. As to that claim, the district judge held a hearing on whether the plaintiff deliberately submitted a falsified document in an attempt to compel arbitration. During the hearing, the employer's personnel manager testified that the plaintiff's personnel file contained one employment contract and that it did not contain an arbitration clause. The plaintiff then "dug a deeper hole of deception," contending that he accidentally combined the two contracts; that his employer destroyed another contract he signed; and that he called the clerk to correct the filing (his phone record did not corroborate this). On the basis of the evidence, the district court found that the plaintiff had willfully tried to deceive the court and dismissed the suit with prejudice as a sanction for seeking relief based on falsified evidence. The Seventh Circuit affirmed the district court's ruling and found that it acted within its discretion by dismissing the case with prejudice. In doing so, it noted the district court's inherent authority to sanction a party that willfully abused the judicial process, and found that the district court's findings were fully supported by the evidence. The Seventh Circuit explained that "falsifying evidence to secure a court victory undermines the most basic foundations of our judicial system." It also recognized the court's general interest in punishing a party's dishonesty and deterring others from engaging in similar misconduct. Case 4 The next case example is from Florida and involves the alleged misuse of a plaintiff's trademark. In D'Amato v. Echl, the
plaintiff submitted declarations from two witnesses, attesting that they paid royalties to plaintiff for the use of his trademark and attaching tax forms to substantiate the payments. The defendant alleged that plaintiff falsified these documents and brought a motion to dismiss to sanction the egregious conduct. The court held an evidentiary hearing to further investigate defendant's serious allegations. During that investigation, the defendant presented evidence from two witnesses. They confirmed that they did not write the declarations, that the declarations contained false statements, and that the tax forms were similarly fabricated. On the basis of the evidence, the Florida court held that the dismissal with prejudice was warranted. Citing Zocaras v. Castro, it explained that to dismiss the case as a sanction, there must be: (1) a clear record of willful conduct; and (2) a finding that lesser sanctions are inadequate. The court found a clear record of willful conduct as plaintiff knowingly forged and fabricated documents. In addition, a lesser sanction would not be adequate, as the plaintiff had stopped responding to court orders after the motion to dismiss was filed, and committed a flagrant fraud, which could not be tolerated. The court further ruled that the plaintiff had to pay more than $220,000 for defendant's attorney fees and related costs. The Latest Case The most recent case continues the trend of sanctioning parties for fraud on a court to protect judicial integrity. In Ramirez v. T&H Lemont, the plaintiff initiated an employment discrimination and retaliation case against his employer. (Disclosure: the authors of this article represented T&H Lemont in this case.) The plaintiff's counsel sought to withdraw from the case, at which time three witnesses who could not be located earlier in the litigation
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SEDGWICK ARTICLE JULY 2016
suddenly surfaced, right before the close of discovery. The three witnesses offered nearly identical testimony, contending that one of the defendant's employees had called plaintiff a burro or donkey at work on one occasion. After the depositions, the defendant discovered additional evidence that the witnesses were offered, or were seeking, financial compensation in exchange for their testimony. As a result, the defendant sought an evidentiary hearing to further investigate the issue. During a follow-up deposition to the evidentiary hearing, one of the three witnesses admitted that the plaintiff offered him money in exchange for his testimony. The defendant filed a motion to dismiss the case with prejudice as a sanction against the plaintiff. The court agreed with the defense. On Jan. 19, 2016, the court found that there was clear and convincing evidence that witness tampering took place and granted the defendant's motion to dismiss the case with prejudice as a sanction. (This case is currently pending before the Seventh Circuit.)
Conclusion Federal courts have the power to sanction parties that commit fraud on a court. This includes the sanctions of a dismissal with prejudice against a plaintiff and a default judgment against a defendant. While courts recognize that these sanctions are severe, they also realize that they are essential to maintain integrity in the judicial system. As illustrated here, this is especially so when parties are caught manufacturing evidence and lying to the court. For practitioners suspicious of fraud, it may not be easy to obtain evidence in support of a motion for sanctions, especially since the party committing the fraud may be acting pro se or without his or her attorneys' knowledge. An evidentiary hearing may also be necessary, which can be both costly and time-consuming. Even so, as the cases above demonstrate, there is no tolerance for fraud on a court. This means that, notwithstanding the costs, time and effort, your motion for sanctions just may be a worthwhile pursuit.
Cinthia Granados Motley Partner Chicago 312.641.9050 email@example.com
Diana M. Karnes Associate Chicago 312.641.9050 firstname.lastname@example.org
2016 Sedgwick LLP
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