## Facts

- Erwin Sussman and Ira Guilden were founders, directors, and major investors in an Israeli bank that collapsed after alleged fraud and mismanagement by senior managers.
- Israel’s central bank and other authorities made deposit-insurance payments, arranged an official receiver, and litigation in Israel followed, including claims against Sussman and Guilden for negligence and breach of duty.
- In 1991, Sussman and Guilden sued in the Southern District of New York against Israel’s central bank, Israel’s Ministry of Finance, an Israeli bank with a New York branch, and individual Israeli officials, alleging fraud, conspiracy, and related wrongdoing connected to the collapse and ensuing proceedings.
- Plaintiffs’ counsel sent pre-suit letters warning that New York litigation could generate adverse publicity and economic consequences unless the dispute was resolved.
- The district court dismissed the action on forum non conveniens grounds, conditioned on (1) written assurances that Sussman would not be detained if he returned to Israel to litigate and (2) defendants’ waiver of Israeli statute-of-limitations defenses.
- After dismissal, defendants sought sanctions against plaintiffs’ counsel under Rule 11, 28 U.S.C. § 1927, and the court’s inherent power.
- The district court imposed a $50,000 sanction under Rule 11 and inherent authority, stating it was based solely on filing the suit for an improper purpose (to exert pressure through publicity), not on frivolousness of claims.
- Counsel appealed the sanctions; defendants cross-appealed seeking greater sanctions.

## Issues

1. Whether Rule 11 sanctions may be imposed for filing a nonfrivolous complaint based solely on a finding that the suit was filed in part for an improper purpose.
2. Whether inherent-power sanctions were permissible absent a finding of bad faith or abuse of the judicial process where the complaint was nonfrivolous.
3. Whether the district court abused its discretion in imposing the $50,000 sanction and, if reversed, what became of the cross-appeal for increased sanctions.

## Decision

- The Second Circuit reversed the sanctions order against counsel.
- The court held that, when sanctions are predicated on filing the complaint, an “improper purpose” finding cannot sustain Rule 11 sanctions without a finding that the complaint (or the forum choice) was frivolous.
- The court concluded the district court abused its discretion by sanctioning counsel despite the nonfrivolous nature of the claims and the plaintiffs’ obtaining procedural protections through the litigation.
- The court also held that imposing sanctions under inherent power was an abuse of discretion because the requisite bad faith or comparable abuse was not shown.
- The defendants’ cross-appeal seeking greater sanctions was dismissed after reversal.

## Legal Principles

- Rule 11 applies an objective reasonableness standard; sanctions are generally tied to frivolous factual or legal contentions or pleadings filed for an improper purpose.
- When the challenged conduct is the filing of a complaint, a determination of “improper purpose” must be supported by a determination of frivolousness; a nonfrivolous complaint cannot be sanctioned solely for mixed or strategic motivations.
- Pre-suit efforts to obtain settlement and warning of reputational consequences, without more, are not sanctionable where the ensuing pleading is nonfrivolous.
- Inherent-power sanctions require a high showing (typically bad faith or comparable abuse of the judicial process) and must be exercised with restraint.
- Appellate review of sanctions is for abuse of discretion, including misapplication of the governing legal standard.

## Conclusion

The Second Circuit vacated sanctions imposed on counsel because the complaint was not frivolous and the district court relied only on perceived litigation pressure as an “improper purpose”; without frivolousness or bad-faith abuse, neither Rule 11 nor inherent power supported the sanction.


Sussman v. Bank of Israel, 56 F.3d 450 (2d Cir. 1995)