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Keywords

contractplaintiffdefendantlitigationattorneystatutemotionstatute of limitations
contractbreach of contractplaintiffdefendantlitigationattorneypleamotionfiduciaryfiduciary dutybreach of fiduciary dutyspecific performancecivil procedure

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Smith v. Smith, 184 F.R.D. 420, 42 Fed.R.Serv.3d 1274, RICO Bus.Disp.Guide 9674

Facts

Walter Smith filed a complaint against Viragen, Inc. alleging that the company owed him shares of stock in return for services rendered under a contract. He claimed that the defendants had engaged in fraudulent misrepresentations that deprived him of the ability to sell his shares at a favorable time. Smith's complaint included multiple claims, including violations of federal and state securities laws, but was voluntarily dismissed before the defendants could file their motion for Rule 11 sanctions. The defendants subsequently sought sanctions, arguing that Smith's complaint was baseless and failed to comply with the requirements of Rule 11.

In his complaint filed October 2, 1997, Plaintiff Walter Smith (“Smith”) alleged Viragen, Inc. (“Viragen”) owed him 100,000 shares of stock he says he purchased in return for providing services pursuant to a contract between the parties. … Smith's eleven-count complaint included claims for violations of federal and state securities laws, violations of federal and state RICO, breach of contract, fraud, breach of fiduciary duty and specific performance.

Issue

Whether the court could impose sanctions under Rule 11 and the Private Securities Litigation Reform Act after the plaintiff voluntarily dismissed his complaint.

Whether the court could impose sanctions under Rule 11 and the Private Securities Litigation Reform Act after the plaintiff voluntarily dismissed his complaint.

Rule

The court held that the 'safe harbor' provision of Rule 11 does not apply to federal securities actions brought under the Reform Act, and that a voluntary dismissal does not bar the court from imposing sanctions.

The central purpose of Rule 11 of the Federal Rules of Civil Procedure is to “deter baseless filings in district court.” … A violation of Rule 11 may subject the pleading party and his attorney to sanctions.

Analysis

The court analyzed the allegations in Smith's complaint and found that many of the federal claims were time-barred and lacked a legal basis. Specifically, the court noted that Smith's claims under federal securities laws were filed well beyond the statute of limitations, and that there was no private right of action under certain sections of the law he cited. The court concluded that Smith and his attorney should have recognized the deficiencies in their claims, which warranted sanctions.

The Court believes, based on the substance of Smith's allegations, that his federal claims were included in the complaint simply to bring this case into federal court. It appears there was no basis for the federal claims in this action.

Conclusion

The court granted the defendants' motion for sanctions, finding a basis for sanctions against Smith and his attorney, but allowed them the opportunity to respond and explain why sanctions should not be imposed.

Based on the foregoing, Defendant's motion is GRANTED to the extent the Court finds a basis for sanctions to be imposed on Smith and his counsel.

Who won?

Defendants prevailed in the case as the court granted their motion for sanctions, citing the deficiencies in Smith's claims.

Defendants subsequently filed this motion for sanctions arguing the complaint failed to comply with the requirements of Rule 11 and, pursuant to the Private Securities Litigation Reform Act (the “Reform Act”), the Court is required to impose sanctions upon Smith and his counsel.

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