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FERRERI v. FOX

UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA


July 7, 1988

ALFRED FERRERI
v.
FOX, ROTHSCHILD, O'BRIEN & FRANKEL and PRICE WATERHOUSE

Marvin Katz, United States District Judge.

The opinion of the court was delivered by: KATZ

MEMORANDUM AND ORDER

MARVIN KATZ, UNITED STATES DISTRICT JUDGE.

 Before the court are the motions to dismiss of defendants Fox, Rothschild, O'Brien & Frankel ("Fox, Rothschild") and Price Waterhouse. Both defendants seek dismissal of plaintiff's complaint for failure to state a claim upon which relief can be granted and for lack of subject matter jurisdiction. In addition, Fox, Rothschild asks that the court hold an evidentiary hearing and thereafter impose sanctions on plaintiff Alfred Ferreri, pursuant to Rule 11 of the Federal Rules of Civil Procedure. For the reasons below, plaintiff's complaint will be dismissed and no hearing will be held and no sanctions imposed on plaintiff Ferreri, who has filed this suit pro se.

 BACKGROUND

 The complaint at issue here is only the latest salvo in Mr. Ferreri's crusade against those individuals and entities which he believes to be responsible for serious financial losses he suffered while trading stock options on the Philadelphia Stock Exchange in July and August of 1983. *fn1" In an effort to recoup some of these losses, in February 1984, Mr. Ferreri retained Abraham C. Reich, and Mr. Reich's law firm, defendant Fox, Rothschild, as his attorneys. (Plaintiff's Complaint para. 8). In April of that year Mr. Reich and defendant Fox, Rothschild filed suit on Mr. Ferreri's behalf in the Philadelphia Court of Common Pleas. Named as defendant in that suit was First Options of Chicago ("First Options"), the clearing house through which Mr. Ferreri had cleared his options transactions. (Plaintiff's Complaint paras. 7, 8, 19). That suit was removed to this court by First Options pursuant to 28 U.S.C. § 1441, (Plaintiff's Complaint para. 20) and a jury trial was held in order to determine whether plaintiff was required to arbitrate the dispute under the agreement in effect between the parties. See Ferreri v. First Options of Chicago, Inc., 661 F. Supp. 1186 (E.D. Pa. 1987). A jury found plaintiff's claim to be arbitrable, and Mr. Ferreri then filed for arbitration under the authority of the New York Stock Exchange. (Plaintiff's Complaint paras. 20-22). It is this arbitration proceeding that forms the gravamen of plaintiff's complaint in this case.

 Mr. Ferreri was represented at the arbitration proceeding by Mr. Reich and defendant Fox, Rothschild, and defendant Price Waterhouse was employed by Mr. Ferreri to provide expert accounting testimony at the arbitration. (Plaintiff's Complaint paras. 10, 24, 30, 31). Despite the fact that arbitration of plaintiff's claim against First Options resulted in a monetary award in his favor, see Ferreri, 661 F. Supp. at 1186, Mr. Ferreri remains dissatisfied with the result and now raises various claims against defendants Fox, Rothschild and Price Waterhouse.

 DISCUSSION

 Because Mr. Ferreri is proceeding pro se his complaint is to be held to a less stringent standard than would a formal pleading drafted by an attorney. Likewise, the allegations contained in plaintiff's complaint are to be liberally construed. Becker v. Commission of Internal Revenue, 751 F.2d 146, 149 (3d Cir. 1984) (citing Haines v. Kerner, 404 U.S. 519, 30 L. Ed. 2d 652, 92 S. Ct. 594 (1972)); see also Carr v. Sharp, 454 F.2d 271, 272 (3d Cir. 1971). Regardless of the identity of the plaintiff, however, on a motion to dismiss, all material allegations of the complaint must be treated as true and construed in the light most favorable to the party opposing the motion. The complaint may be dismissed only if it appears that the plaintiff cannot establish any set of facts in support of his claim which would entitle him to relief. Scheuer v. Rhodes, 416 U.S. 232, 236, 40 L. Ed. 2d 90, 94 S. Ct. 1683 (1974); Conley v. Gibson, 355 U.S. 41, 45-46, 2 L. Ed. 2d 80, 78 S. Ct. 99 (1957); Helstoski v. Goldstein, 552 F.2d 564, 565 (3d Cir. 1977); Truhe v. Rupell, 641 F. Supp. 57, 58 (M.D. Pa. 1985). Despite a liberal construction of plaintiff's complaint and taking as true all of Mr. Ferreri's allegations, plaintiff cannot prove any set of facts which would entitle him to any legal relief in this court.

 Assuming for the purposes of this motion that the allegations made by Mr. Ferreri in his complaint are indeed accurate, during the arbitration proceedings initiated by Mr. Ferreri to recover his lost savings, Fox, Rothschild, (as represented by one of the firm's partners, Abraham C. Reich), intentionally failed to assert various federal securities laws violations against First Options, as well as failed to pursue other securities law claims in a separate forum against First Options, Andrew Mainardi, III (plaintiff's trading partner in the ill-fated options transactions) and the Philadelphia Stock Exchange. (Plaintiff's Complaint paras. 30, 31). In addition, defendant Fox, Rothschild manifested a conflict of interest, exemplified by their "passive conduct and [the] preferential loyalty extended to large corporate entities by major law firms." (Plaintiff's Complaint para. 33). Plaintiff points specifically to Fox, Rothschild's: (1) unwillingness to file suit against the Philadelphia Stock Exchange on plaintiff's behalf; (2) instructions from Fox, Rothschild to Mr. Paul DaLomba, a certified public accountant employed by defendant Price Waterhouse, and plaintiff's expert witness at the arbitration proceeding, which limited the scope of Mr. DaLomba's testimony; (3) failure to request "Mr. DaLomba to present pertinent evidence at hand"; (4) failure to properly question witnesses; and to Fox, Rothschild's (5) "failure to seek expert advice at early stage of litigation for proper orientation of cause of action." (Plaintiff's Complaint para. 33).

 In addition, Mr. Ferreri is dissatisfied with the performance of defendant Price Waterhouse, which provided plaintiff with expert accounting testimony at the arbitration hearing. Mr. Ferreri asserts that Price Waterhouse likewise exhibited an unacceptable "conflict of interest" by (1) Mr. DaLomba's association "with a multiplicity of corporate entities engaged in the securities industry"; (2) Mr. DaLomba's acquaintance with the President of the Philadelphia Stock Exchange; and (3) Price Waterhouse's provision of "accounting, auditing and ancillary services to the Philadelphia Stock Exchange." (Plaintiff's Complaint para. 35). Likewise, Mr. Ferreri asserts that Price Waterhouse's expert testimony "was a complete failure and detrimental" to his case by (1) "failing to make the relative mathematical representation"; (2) "introducing ambiguous statements"; (3) "refusing to clearly distinguish the subject matters in question"; (4) "addressing irrelevant questions in favor of [First Options]"; (5) "fraudulently concealing documentary evidence provided by defendant prior to arbitration"; and (6) "making concluding statements which completely refuted whatever scant support was shown in his [Mr. DaLomba's] presentation." (Plaintiff's Complaint para. 36). According to plaintiff's complaint these facts amount to a violation of the federal securities laws, specifically sections 6, 7, 8, 10, 15 and 20 of the Securities Exchange Act of 1934. (Plaintiff's Complaint para. 1). *fn2" Likewise, plaintiff's complaint asserts that Price Waterhouse's and Fox, Rothschild's conduct amounts to professional malpractice and negligence due to defendants' conflicts of interest, their breach of their fiduciary and ethical obligations to Mr. Ferreri; and their needless exposure of plaintiff to unnecessary delay, risk, and expense. (Plaintiff's Complaint para. 39).

 Defendants contend that Mr. Ferreri has failed to state a claim under the federal securities laws. As Mr. Ferreri agrees that he has no such claim, (Plaintiff's Answer to Motion to Dismiss [of Price Waterhouse] para. 1), and as my review of the securities laws reveals the absence of any conceivable claim under these statutes by Mr. Ferreri, *fn3" plaintiff's complaint must be dismissed unless there is some other basis for the exercise of federal jurisdiction in this case. As there are no viable federal claims contained on the face of plaintiff's complaint, the only possible remaining basis for plaintiff's suit against these two private entities is the exercise of diversity jurisdiction by this court over plaintiff's claims of professional malpractice and negligence.

 In his complaint Mr. Ferreri alleges that he "is an adult individual residing [in] . . . Philadelphia, Pennsylvania." (Plaintiff's Complaint para. 2). I take this allegation of residence to be a statement of plaintiff's citizenship. In addition, both Price Waterhouse and Fox, Rothschild are partnerships. (Affidavit of James Clancy, Exhibit A to defendant Price Waterhouse's Motion to Dismiss; Affidavit of Jeffrey Albert, Exhibit B to defendant Fox, Rothschild's Motion to Dismiss). It is well established that in order for a federal court to exercise jurisdiction in diversity, complete diversity between all parties opposed in interest is required. Carlsberg Resources Corp. v. Cambria Savings and Loan, 554 F.2d 1254, 1257-58 (3d Cir. 1977) (citing Strawbridge v. Curtiss, 7 U.S. (3 Cranch) 267, 2 L. Ed. 435 (1806)). Likewise, when partnerships are involved "the courts should look to the citizenship of the persons comprising such organizations in order to determine whether there is compliance with the diversity standard." Carlsberg, 554 F.2d at 1258. Indeed, "the citizenship of the partnership for diversity purposes is that of each partner." Lucido v. Cravath, Swaine & Moore, 425 F. Supp. 123, 125 n.2 (S.D.N.Y. 1977) (citing Great Southern Fire Proof Hotel Co. v. Jones, 177 U.S. 449, 456, 44 L. Ed. 842, 20 S. Ct. 690 (1900); Woodward v. D. H. Overmyer Co., Inc., 428 F.2d 880, 883 (2d Cir. 1970), cert. denied, 400 U.S. 993, 27 L. Ed. 2d 441, 91 S. Ct. 460 (1971); Molasky v. Garfinkle, 380 F. Supp. 549, 553 (S.D.N.Y. 1974)). Both Price Waterhouse and Fox, Rothschild have a number of partners who are Pennsylvania citizens. (Affidavit of James Clancy, Exhibit A to defendant Price Waterhouse's Motion to Dismiss; Affidavit of Jeffrey B. Albert, Exhibit B to defendant Fox, Rothschild's Motion to Dismiss). Accordingly, the assertion of federal jurisdiction is inappropriate here due to the absence of complete diversity between the parties. Plaintiff asserts that this court should nevertheless exercise jurisdiction because "plaintiff feels that in order to facilitate an equitable and expedient conclusion in these matters this complaint must remain in this court." (Plaintiff's Answer to [Fox, Rothschild's] Motion to Dismiss and for Imposition of Sanctions under Rule 11 of the Federal Rules of Civil Procedure para. 1). Without subject matter jurisdiction, a federal court has no power to hear and decide a case. Daley v. Town of New Durham, 733 F.2d 4, 7 (1st Cir. 1984) (citing American Fire & Casualty Co. v. Finn, 341 U.S. 6, 17-18, 95 L. Ed. 702, 71 S. Ct. 534 (1951)). Considerations of judicial economy and convenience can never override a failure of jurisdiction. Accordingly, plaintiff's complaint must be dismissed for lack of jurisdiction.

 Defendant Fox, Rothschild also urges this court to hold an evidentiary hearing and thereafter to impose sanctions on Mr. Ferreri under Rule 11 of the Federal Rules of Civil Procedure. *fn4" Fox, Rothschild contends that Mr. Ferreri improperly filed this complaint to harass the law firm for refusing to continue to represent him in his quest to recover his lost savings and that Fox, Rothschild is therefore entitled to recover its attorneys fees, and costs, as well as other sanctions from Mr. Ferreri.

 A hearing on a motion for the imposition of sanctions under Rule 11 is not required by the language of the Rule or by case law. See Fed. R. Civ. P. 11 advisory committee's note; Donaldson v. Clark, 819 F.2d 1551 (11th Cir. 1987). Moreover, the Supreme Court has warned against starting a second lawsuit in response to a request for attorney's fees. See Hensley v. Eckerhart, 461 U.S. 424, 437, 76 L. Ed. 2d 40, 103 S. Ct. 1933 (1983). To determine whether a hearing on sanctions under Rule 11 is appropriate the Advisory Committee Note observes:

 

The particular format to be followed should depend on the circumstances of the situation and the severity of the sanction under consideration. In many situations the judge's participation in the proceedings provides him with full knowledge of the relevant facts and little further inquiry will be necessary.

 Fed. R. Civ. P. 11 advisory committee's note; see Oliveri v. Thompson, 803 F.2d 1265, 1280 (2d Cir. 1986), cert. denied, 480 U.S. 918, 107 S. Ct. 1373, 94 L. Ed. 2d 689 (1987).

 As I was involved in the previous proceedings in which Mr. Ferreri was represented by Fox, Rothschild and have received briefs from both sides on the issue of sanctions under Rule 11, I am fully aware of the facts relevant to this litigation. A hearing on this issue, therefore, would only serve to increase the costs of litigation and to waste judicial resources. Accordingly, a hearing will not be held, and the propriety of the imposition of sanctions will be determined based upon the motion papers of Fox, Rothschild and the response of Mr. Ferreri.

 By its own terms Rule 11 applies to pro se parties as well as to attorneys. Fed. R. Civ. P. 11. Just as courts hold pro se complaints to a less stringent standard with regard to pleading requirements than complaints drafted by attorneys, Haines v. Kerner, 404 U.S. 519, 30 L. Ed. 2d 652, 92 S. Ct. 594 (1972), courts should judge pro se parties more leniently than attorneys when applying Rule 11. See Talley v. SEPTA, No. 87-4754, slip op., 1988 U.S. Dist. LEXIS 292 (E.D. Pa. Jan. 19, 1988) (Shapiro, J.); U.S. v. Tarver, 642 F. Supp. 1109, 1112 (D. Wyo. 1986); Farrell v. United States Tax Court, 647 F. Supp. 944, 946 (D. Kan. 1985); Blume v. Leake, 618 F. Supp. 95, 97 (D. Idaho 1985).

 To test a party's conduct under Rule 11, the court should apply "an objective standard of reasonableness under the circumstances." Mary Ann Pensiero, Inc. v. Lingle, 847 F.2d 90, 94 (3d Cir. 1988) (Weis, J.) (citing Snow Machines Inc. v. Hedco, Inc., 838 F.2d 718, 727 (3d Cir. 1988)); see also Colburn v. Upper Darby Township, 838 F.2d 663, 667 (3d Cir. 1988). The court's inquiry should center on "what was reasonable to believe at the time the pleading, motion, or other paper was submitted." Fed. R. Civ. P. 11 advisory committee's note; Eavenson, Auchmuty & Greenwald v. Holtzman, 775 F.2d 535, 540 (3d Cir. 1985). In assessing what was objectively reasonable behavior, the district court "has sufficient discretion to take account of the special circumstances that often arise in pro se situations." Fed. R. Civ. P. 11 advisory committee's note. "Obviously, it is inappropriate to hold a pro se litigant to the ordinary Rule 11 standard of a 'competent attorney.'" 2A J.W. Moore, J. Lucas & G. Grotheer, Moore's Federal Practice, § 11.02[3] n.8 (1988). Because Mr. Ferreri is proceeding pro se, this court can reasonably expect his complaint to lack the legal precision which would be required of a complaint drafted by an attorney.

 Rule 11 aims to discourage the filing of frivolous complaints and to prevent the misuse of judicial resources for improper purposes. See Lieb v. Topstone Industries, Inc., 788 F.2d 151, 157 (3d Cir. 1986). Indeed, it is intended to be used only in "exceptional" circumstances. Teamsters Local Union No. 430 v. Cement Express, Inc., 841 F.2d 66 (3d Cir. 1988). In Teamsters the Court of Appeals made clear that Rule 11 sanctions should be imposed "only if the filing of the complaint constituted abusive litigation or misuse of the court's process." Teamsters, 841 F.2d at 68. As Mr. Ferreri has failed to establish jurisdiction in this court over his claim against Fox, Rothschild and Price Waterhouse, his complaint has been dismissed. The granting of a motion to dismiss, however, does not obligate a court to impose sanctions. Zaldivar v. City of Los Angeles, 780 F.2d 823, 830 (9th Cir. 1986). The Court of Appeals has emphasized that Rule 11 targets "abuse -- the Rule must not be used as an automatic penalty against an attorney or a party advocating the losing side of a dispute." Gaiardo v. Ethyl Corp., 835 F.2d 479, 482 (3d Cir. 1987).

 Given Mr. Ferreri's lack of legal training it was objectively reasonable for him to believe that this court would be an appropriate forum for the resolution of his claim. To impose Rule 11 sanctions upon him under the circumstances of this case would not further the stated purposes of the Rule and would serve only to punish him for his inability to understand the diversity requirements and for simply advocating the losing side. *fn5" Accordingly, sanctions under Rule 11 are inappropriate and hearing on this issue is unnecessary.

 ORDER - July 7, 1988, Filed

 AND NOW, this 7th day of July, 1988, upon consideration of defendant Price Waterhouse's Motion to Dismiss Plaintiff's Complaint and defendant Fox, Rothschild, O'Brien & Frankel's Motion to Dismiss Plaintiff's Complaint and for Imposition of Sanctions, and plaintiff's responses thereto, and in accordance with the Memorandum filed this date, it is hereby ORDERED that:

 1. Defendant Price Waterhouse's motion is GRANTED and plaintiff's complaint against Price Waterhouse is dismissed.

 2. Defendant Fox, Rothschild's motion is GRANTED in part and DENIED in part. Plaintiff's complaint against Fox, Rothschild is dismissed, but no hearing will be held and no sanctions imposed upon plaintiff Alfred Ferreri.


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