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The First Department Sanctions a Hefty Sanction and Holds that Voluntary Discontinuance of Action Does Not Divest the Court of Jurisdiction to Award Sanctions Against Plaintiff for Refusing to Execute a Stipulation Granting All Relief Sought By Its Order to Show Cause

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  • Posted on: Dec 15 2023

By Jonathan H. Freiberger

A court can award sanctions to any party or attorney in any civil action or proceeding before the court, except where prohibited by law, costs in the form of reimbursement for actual expenses reasonably incurred and reasonable attorney’s fees, resulting from frivolous conduct as defined in this Part.  22 NYCRR 130-1.1; see also Conregation Ahavas Moische, Inc. v. Katzoff, 134 A.D.3d 934 (2nd Dep’t 2015).  “In addition to or in lieu of awarding costs, the court, in its discretion may impose financial sanctions upon any party or attorney in a civil action or proceeding who engages in frivolous conduct as defined in this Part, which shall be payable as provided in section 130-1.3 of this Part.”  22 NYCRR 130-1.1.  “Conduct is frivolous if (1) it is completely without merit in law or fact and cannot be supported by a reasonable argument for the extension, modification, or reversal of existing law; (2) it is undertaken primarily to delay or prolong the resolution of the litigation, or to harass or maliciously injure another; or (3) it asserts material factual statements that are false.”  Id.; see also Congregation Ahavas, 134 A.D.3d at 934.  “The decision whether to impose costs or sanctions against a party for frivolous conduct, and the amount of any such costs or sanctions, is generally entrusted to the court’s sound discretion.”  Strunk v. New York State Bd. of Elections, 126 A.D.3d 779, 781 (2nd Dep’t 2015) (citation omitted).

On December 12, 2023, the First Department, in 13 East 124 LLC v. J&M Realty Services Corp., upheld a sanctions award against the plaintiff of in excess of $22,000.00 for frivolous conduct pursuant to 22 NYCRR 130-1.1.  The plaintiff in 13 East was a building owner that entered into a contract with the defendant to “manage, maintain, and lease vacant units in plaintiff’s building.”  The plaintiff terminated the contract and alleged that, post termination, the defendant “withheld books, records, security deposits, and keys, and were generally uncooperative with the new property management company.”  The plaintiff commenced an action against the defendant for declaratory and injunctive relief, breach of contract, breach of fiduciary duty, professional malpractice and negligence, and accounting against defendants in connection with the parties’ property management contract.”

The plaintiff “moved by order to show cause for a preliminary injunction directing defendants to cooperate with the change in property management.”  The defendant cross-moved for sanctions; alleging that it agreed to the relief sought in the plaintiff’s motion but the plaintiff refused to so stipulate.  Thus, the defendants’ cross-motion:

was supported by the affidavit of Jerry Edelman, an individual defendant, and president of defendant J&M Realty Services Corp. Mr. Edelman explained that he agreed to turn over the books and records and comply with the property management transition, but he requested plaintiffs execute a formal termination letter as required by the terms of the contract as well as by the New York City Department of Housing Preservation and Development. Mr. Edelman transferred the books and records to his former attorney to be held in escrow pending plaintiffs’ execution of the formal termination letter. Upon receiving plaintiffs’ order to show cause, Mr. Edelman directed his attorney to resolve the dispute with plaintiffs’ counsel directly rather than in court by offering plaintiffs the entirety of their requested relief. In response to Mr. Edelman’s overture, plaintiffs’ counsel stated that the “motion’s goal was not the possession of the documents, . . . ‘but to make Jerry cry, pay $500,000 in legal fees, and then only agree to discontinue the action when Jerry agrees to reimburse [p]laintiffs’ legal fees.'”

Subsequently, the plaintiff refused to sign a stipulation drafted by the defendants’ counsel pursuant to which “plaintiffs would receive all books and records, the parties would acknowledge that the management contract was terminated, and plaintiffs would discontinue the action.”

The motion court denied the plaintiff’s motion for injunctive relief and granted the defendants’ cross-motion for sanctions, finding that “plaintiffs acted in bad faith when they refused to withdraw their motion despite defendants consenting to all relief requested.”  The defendants’ counsel submitted an affirmation supporting a claim for $22,133.45 in legal fees.  On the same day plaintiff filed a notice of discontinuance of the action and opposed the application for legal fees on the ground that the action was discontinued and, therefore, the supreme court was without jurisdiction to “issue further orders in connection with the matter pursuant to CPLR 3217.”  Rejecting the plaintiff’s arguments, the motion court issued an order directing the plaintiff to pay the full amount demanded by the defendant.  The plaintiff appealed, arguing that the discontinuance “divested the Supreme Court of jurisdiction to impose sanctions based on their pre-discontinuance conduct.”

The First Department affirmed the motion court’s order.  In describing the purpose of sanctions, the Court stated that “Rule 130 sanctions are retributive, in that they punish past conduct. They are also goal oriented, in that they are useful in deterring future frivolous conduct not only by the particular parties, but also by the Bar at large. The goals include preventing the waste of judicial resources, and deterring vexatious litigation and dilatory or malicious litigation tactics.”  (Citation, internal quotation marks and brackets omitted.)  The Court reiterated that the plaintiff acted in bad faith by refusing “to consent to a stipulation which would have granted them all the relief they were seeking.”

In rejecting the plaintiff’s jurisdictional argument, the Court stated:

Voluntary discontinuance did not divest the court of jurisdiction to impose sanctions for pre-discontinuance conduct. The Second Circuit has held that the District Court “clearly [has] jurisdiction to impose sanctions irrespective of the status of the underlying case because the imposition of sanctions is an issue collateral to and independent from the underlying case” (Schlaifer Nance & Co. v Estate of Warhol, 194 F.3d 323, 333 [2d Cir 1999] [affirming District Court’s imposition sanctions pursuant to Fed Rules Civ Pro rule 11 after dismissing underlying case], citing Cooter & Gell v Hartmarx Corp., 496 US 384, 395-396 [1990]). Similarly, this Court has held that the trial court’s jurisdiction over the underlying case is not necessary to impose sanctions pursuant to 22 NYCRR 130-1.1 (see e.g. World Sports Group v Motion Picture Academy of Arts & Sciences, 273 AD2d 53, 54 [1st Dept 2000] [affirming trial court’s imposition of sanctions pursuant to 22 NYCRR 130-1.1 after dismissing the action for lack of personal jurisdiction over the defendants]). Accordingly, plaintiffs’ voluntary discontinuance did not divest the court of jurisdiction to determine the amount of the attorneys’ fees award to defendants (see Schlaifer Nance & Co. , 194 F3d at 333; World Sports Group , 273 AD2d at 54).  [Hyperlinks supplied.]

Jonathan H. Freiberger is a partner and co-founder of Freiberger Haber LLP.

This article is for informational purposes and is not intended to be and should not be taken as legal advice.

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