Del. Motel Assocs. v. Capital Crossing Servicing Co.

DELAWARE MOTEL ASSOCIATES, INC.,INDEPENDENCE MANAGEMENT ASSOCIATES, INC.,TURKEY FOOT LAKE ROAD LAND HOLDINGS, LLC,C. PATEL CO. LLC, CHAMPAKBHAI N. PATEL,and JASHVANTI C. PATEL, Plaintiffs, v. CAPITAL CROSSING SERVICING COMPANY LLC,CAPITAL CROSSING HOLDINGS LLC, ADVANCED APPRAISAL GROUP, INC.,ADVANCED APPRAISAL CONSULTANTS, INC.,ADVANCED APPRAISAL CONSULTANTS, LLC, WILLIAM DADDONO,WOLIN & ROSEN, LTD., SMITHAMUNDSEN LLC, THE STATE BANK OF TEXAS,CHANDRAKANT PATEL, HIREN PATEL, EDWARD FITZGERALD,PHOENIX NPL, LLC, PHOENIX REO, LLC, TARRANT CAPITAL ADVISORS, INC.,TPG GLOBAL, LLC, TPG CAPITAL L.P., TPG GROUP HOLDINGS (SBS) ADVISORS, INC.,TPG SPECIALITY LENDING, INC., TPG OPPORTUNITIES PARTNERS, L.P.,NICHOLAS LAZARES,RICHARD WAYNE, DAVID BONDERMAN,and JAMES G. COULTER, Defendants.

Case No. 17 C 1715

UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS EASTERN DIVISION

May 1, 2019

MEMORANDUM OPINION AND ORDER

MATTHEW F. KENNELLY, District Judge:

The plaintiffs in this suit alleged that the defendants were involved in a racketeering scheme involving commercial real estate loans that were issued based on false and inflated appraisals. After finding that multiple iterations of the plaintiffs' complaint failed to state a claim for relief, the Court ultimately denied their motion to file a fourth amended complaint and entered judgment in favor of the defendants. Two of those defendants—the law firms SmithAmundsen LLC and Wolin & Rosen, Ltd.—have moved for sanctions against the plaintiffs' attorney, Paul Caghan. For the reasons set forth below, the Court denies the motion.

Background

The Court assumes familiarity with its prior written opinions in this case. See Delaware Motel Assocs., Inc. v. Capital Crossing Servicing Co. (Ruling on Motions to Dismiss), No. 17 C 1715, 2017 WL 4224618 (N.D. Ill. Sept. 22, 2017); Delaware Motel Assocs., Inc. v. Capital Crossing Servicing Co. (Summary Judgment Ruling), No. 17 C 1715, 2017 WL 4512709 (N.D. Ill. Oct. 10, 2017); Delaware Motel Assocs., Inc. v. Capital Crossing Servicing Co. (Order Denying Leave to File Second Amended Compl.), No. 17 C 1715, 2018 WL 509956 (N.D. Ill. Jan. 23, 2018); Delaware Motel Assocs., Inc. v. Capital Crossing Servicing Co. (Order Denying Leave to File Fourth Amended Compl.), No. 17 C 1715, 2018 WL 4829598 (N.D. Ill. Oct. 4, 2018). What follows is an abbreviated summary of the relevant procedural history.

The plaintiffs filed suit in Illinois state court in early 2017, alleging a far-reaching scheme of appraisal fraud. They named seventeen defendants in their complaint, including SmithAmundsen and Wolin & Rosen. They alleged that the defendants engaged in a multi-part scheme to generate fraudulent appraisals for the plaintiffs' real estate properties and issue loans based on those appraisals. The plaintiffs contended that SmithAmundsen and Wolin & Rosen participated in the scheme by fraudulentlywithholding the false appraisal information, preparing fraudulent closing documents, and securing the foreclosure of the plaintiffs' properties based on their prior fraud.

The defendants removed the case to federal court, and it was assigned to the undersigned judge. Certain defendants moved to dismiss the complaint for failure to state a claim, while others filed a motion for summary judgment. The Court granted the motion for summary judgment filed by certain defendants but granted the plaintiffs leave to file an amended complaint, in which they named ten additional defendants. See dkt. no. 45.

The defendants again filed several motions to dismiss the amended complaint. The Court granted those motions on September 22, 2017. See Ruling on Motions to Dismiss, 2017 WL 4224618, at *1. It held that the plaintiffs had not adequately alleged the existence of a RICO enterprise and had not alleged their fraud claims with the required particularity. Id. at *8-15. The Court also dismissed the plaintiffs' state-law claims for fraud, tortious interference, and unjust enrichment for failure to state a claim. Id. at *16-18. Finally, the Court held that it lacked personal jurisdiction over two individual defendants. Id. at *18-19.

In a separate opinion issued shortly thereafter, the Court granted summary judgment in favor of two individual defendants. See Summary Judgment Ruling, 2017 WL 4512709, at *1. The Court found that the plaintiffs had introduced no evidence to substantiate their allegations that those defendants had participated in the alleged fraud scheme. Id. at *5-7.

The plaintiffs again moved to amend their complaint. After the parties fully briefed the motion, the Court denied leave on January 23, 2018, reasoning that theamended complaint would be futile because it would not survive a motion to dismiss. Order Denying Leave to File Second Amended Compl., 2018 WL 509956, at *5. With respect to SmithAmundsen and Wolin & Rosen, the Court found that the proposed second amended complaint failed to "adequately allege that the law firms conducted the affairs of an enterprise or agreed to do so" as required to state a RICO claim against them. Id. at *8.

That ruling did not dispose of the case, however, because several defendants had filed motions to dismiss to which the plaintiffs had not yet had the opportunity to respond. The Court ordered the plaintiffs to show cause why the claims in proposed second amended complaint would survive motions to dismiss by those defendants. Id. at *20.

The plaintiffs moved for reconsideration of the ruling denying leave to amend. See dkt. no. 167. They attached a proposed third amended complaint to that motion. Five days later, the plaintiffs filed a statement of cause why the remaining defendants' motions to dismiss should not be granted, see dkt. no. 170, to which they attached a proposed fourth amended complaint.

The Court ruled that the plaintiffs had failed to show cause and dismissed the first amended complaint in its entirety. Dkt. no. 175. It also denied the motion for reconsideration, dkt. no. 177, but set a briefing schedule on the motion for leave to file the proposed fourth amended complaint, dkt. no. 178.

Finally, on October 4, 2018, the Court denied leave to amend the complaint. See Order Denying Leave to File Fourth Amended Compl., 2018 WL 4829598. Noting that the plaintiffs had repeatedly failed to adequately allege facts that stated a claim forrelief, the Court denied the motion with prejudice and without leave to replead. Id. at *15.

SmithAmundsen and Wolin & Rosen have moved for sanctions against the plaintiffs' attorney, Paul Caghan. Caghan filed a cross-motion for sanctions, which the Court denied. Dkt. no. 194. The Court now denies the motion by SmithAmundsen and Wolin & Rosen.

Discussion

Federal Rule of Civil Procedure 11 "imposes a duty on attorneys to ensure that any papers filed with the court are well-grounded in fact, legally tenable, and not interposed for any improper purpose." Brunt v. Serv. Emps. Int'l Union, 284 F.3d 715, 721 (7th Cir. 2002). A court may sanction an attorney for breaching this duty after giving the attorney notice and a reasonable opportunity to respond. Fed. R. Civ. P. 11(c)(1).

A court may also impose sanctions under 28 U.S.C. § 1927, which prohibits attorneys from "multipl[ying] the proceedings in any case unreasonably and vexatiously." Although sanctions under section 1927 are appropriate only if the attorney has acted in bad faith, the Seventh Circuit has held that this requirement is satisfied if the attorney "pursues a path that a reasonably careful attorney would have known, after appropriate inquiry, to be unsound." Bell v. Vacuforce, LLC, 908 F.3d 1075, 1081-82 (7th Cir. 2018).

As a preliminary matter, the Court notes that in their motion for sanctions the movants purport to incorporate "all arguments from their motions to dismiss, opposition to plaintiffs' motions for leave to amend, and briefs in support of same." Mot. forSanctions, dkt. no. 184, at 4. This is inappropriate. Rule 11(c)(2) requires a moving party to make a motion for sanctions "separately from any other motion" and "describe the specific conduct that allegedly violates Rule 11(b)." Motions under section 1927 similarly must articulate bases for relief in a separate filing. Mitchell v. NFL Player Annuity Program, 255 F. Supp. 3d 781, 791 (N.D. Ill. 2017). Defendants' attempt to incorporate their prior arguments by reference is particularly inappropriate given the volume of filings in this case. For these reasons, the Court will consider only the arguments raised properly within the motion.

A. Improper purpose

The movants argue that Caghan brought this suit with the improper purpose of collaterally challenging the judgments in Ohio state court that foreclosed on the plaintiffs' properties. According to Rule 11(b)(1), improper purposes include harassment, unnecessary delay, and needlessly increasing the cost of litigation. More generally, the Seventh Circuit has characterized improper purposes as "abusive litigation practices." Beeman v. Fiester, 852 F.2d 206, 209 (7th Cir. 1988), abrogated on other grounds by Mars Steel Corp v. Cont'l Bank N.A., 880 F.2d 928 (7th Cir. 1989). The movants point to no authority suggesting that a party's attempt to indirectly challenge the outcome of an earlier case constitutes a similarly impermissible motive. Indeed, the movants' reasoning would imply that every case that a court finds to barred by claim preclusion was filed for an improper purpose—a proposition for which the movants offer no authority.

The movants also argue that Caghan improperly attempted to use the plaintiffs' complaint "as a vehicle for obtaining discovery" to which the plaintiffs were not entitled.Mot. for Sanctions, dkt. no. 184, at 10. The movants' sole evidence for this claim is that the plaintiffs unsuccessfully sought discovery from one of SmithAmundsen's former clients in a related case. But the inference that Caghan filed this suit for the purpose of obtaining that discovery indirectly through...