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May 5, 2004.

STAN and JOHNNA KOJIS, Plaintiffs,

The opinion of the court was delivered by: GERALDINE SOAT BROWN, Magistrate Judge


This case comes to be heard on two motions filed by defendant Navy Federal Credit Union: first, a Motion for Sanctions Pursuant to Rule 11 (the "Rule 11 Motion") [dkt 34], and second, a Rule 37 Motion for Terminating Sanctions (the "Rule 37 Motion") [dkt 36]; as well as a motion filed by plaintiffs Stan and Johnna Kojis entitled Motion to Dismiss Without Prejudice Due to Prosecutorial Misconduct Plus Motion for Relief from August 20, 2003 Order and Motion to Suppress Allied Denials and Howe Deposition Also Due to Prosecutorial Misconduct. [dkt 56]*fn1 The District Judge referred the Plaintiffs' Motion and Defendants' Rule 11 Motion to this court for a report and recommendation. [Dkt 38, 60,]*fn2 For the following reasons, this court respectfully recommends that Defendants' Rule 11 Motion and Rule 37 Motion be GRANTED, and Plaintiffs' Motion to Dismiss Without Prejudice Due to Prosecutorial Misconduct Plus Motion for Relief from August 20, 2003 Order And Motion to Suppress Allied Denials and Howe Deposition Also Due to Prosecutorial Misconduct be DENIED.

Factual Background

  Stan and Johnna Kojis ("the Kojises") filed a Complaint against defendants Navy Federal Credit Union ("Navy Federal") and Equifax Credit Information Services ("Equifax") on November 20, 2002, alleging violations of the Fair Credit Reporting Act ("FCRA"), 15 U.S.C. § 1681 et seq., and defamation. [Dkt 1.]*fn3 In their Complaint, the Kojises alleged inter alia that Navy Federal and Equifax reported inaccurate information to credit reporting agencies about the Kojises' payment history on their Navy Federal accounts. (Compl. ¶¶ 7, 8, 34.) The Kojises alleged that the reporting of that inaccurate information caused them the denial of credit by Allied Mortgage Capital Corporation ("Allied") on May 29, 2002, out of pocket expenses associated with disputing that inaccurate information, emotional distress and mental anguish, and a decreased credit score which, they alleged, could result in an inability to obtain credit on future attempts. (Id. ¶¶ 14, 35.) The Kojises requested actual damages, statutory damages, punitive damages, attorneys' fees and costs and other relief permitted by law. (Id. ¶¶ 21, 35.)

  Allied is a mortgage company that originates residential mortgage loans. (Rule 11 Mem., Ex. 5, Dep. Jeanne L. Stell at 22.) [Dkt 34.] Although it was not mentioned in the Complaint, Joanna Kojis was employed by Allied as a loan officer from December 2001 through March 2003, (Id. at 47-48, 50.)

  During discovery, pursuant to Rule 26(a)(1) and Navy Federal's request for documents, the Kojises' counsel produced to Defendants' counsel two documents, both dated May 29, 2002, entitled "Statement of Credit Denial, Termination or Change" (the "Credit Denial forms" or "Credit Denials"). (Rule 11 Mem. at 2; Exs. 2, 3.) Each of the documents stated that it was given on behalf of Allied. The forms were virtually identical, except that the first form referred to a loan amount of $146,600, an interest rate of 6.25% and a term of 180 months, while the second form referred to a loan amount of $35,000, an interest rate of 13.25% and a term of 240 months, (Credit Denials.) Both of the forms stated that the Kojises' application for credit was denied because of "Delinquent Credit Obligations" and "Information From a Consumer Reporting Agency." (Id.) In addition, both of the forms contained the following text, which appears to have been added to provide a more detailed explanation for the decision to deny the Kojises credit:
Recent NFCU Lates `807
Recent NFCU Lates `800
* * *
  Navy Federal Credit Union has reported a number of "recent late payment activity on 3 accounts. Acct. #s are 421611072008-00 & 421611072008-01 & 421611072008-07. Prior payment history is good on these accounts & others, Mr. & Mrs. Kojis stated that they were not late during these months & will contact NFCU in order have [sic] these items removed. If items are removed/borrowers will qualify for refi[nance]. (Rule 11 Mem., Ex. 2, Credit Denial)*fn4 Both forms were signed "Vicki Liposchak," apparently on behalf of Allied, (Credit Denials.) The signature "Vicki Liposchak" appears directly under Allied's name and address at the bottom of the page. (Id.) The Credit Denial forms imply that the Kojises would have qualified for the loans from Allied had it not been for the "late payment activity" reported on the Kojises' Navy Federal accounts. (Id.) The forms do not identify any entity other than Allied as having made the underwriting decision or disclosure with respect to the loans, (Id.)

  Despite the allegation that Allied had denied their loan application, the Kojises did not identify anyone employed by Allied or any other loan originator or credit grantor as having "knowledge of any of the claims or defenses" alleged in the lawsuit. (Rule 11 Mem., Ex. 4, Pls.' Resp. Interrogs. and Req. Produc. Docs, at Interrog, No. 1.) On June 27, 2003, Navy Federal took the Rule 30(b)(6) deposition of Allied employee Jeanne Stell. Ms. Stell testified that Allied had a loan application file for the Kojises, but it contained an automated notice that the file was incomplete. (Stell Dep, at 53-54.) Based on Ms. Stell's testimony, it also appears that if a credit denial had been made, it would have been issued directly from InterFirst, a division of ABN AMRO Mortgage Group, Inc. and the entity that made the underwriting decision with respect to the Kojises' loan application. (Stell Dep, at 51, 53-54, 66-68.) Ms. Stell testified that Allied had no record of having issued the Credit Denial forms, of having employed anyone by the name of Vicki Liposchak, of having received an application for a $35,000 consolidation loan from the Kojises, or of having made any underwriting decision whatsoever regarding a loan for the Kojises. (Stell Dep. at 28-31, 37-38, 52, 54, 56-57, 66-67.) Ms. Stell also testified that she believed the signature of Vicki Liposchak on the Credit Denial forms resembled the handwriting of Johnna Kojis. (Stell Dep. at 55-56.)*fn5

  Upon being notified of Ms. Slell's testimony by Navy Federal's counsel, the Kojises' counsel, Larry Smith, produced a document that confirmed Ms. Stell's testimony that TnterFirst, not Allied, was indeed the entity that had made the underwriting decision. (Rule 11 Mem., Ex. 6, Aff. Richard B. Polony ¶¶ 2, 6; Ex. 7, July 3, 2003 E-mail from L. Smith to R. Polony attaching InterFirst Underwriting Report.) This newly-produced document, dated May 28, 2002, stated: "Loan declined due to credit history," and, significantly, did not identify information from Navy Federal as the basis for the denial of a $150,220 loan to the Kojises. (InterFirst Underwriting Report at 2.) According to Navy Federal, the document identifying InterFirst as the underwriter was never produced in response to discovery, (Rule 11 Mem. at 5.)

  Despite Ms. Stell's testimony casting serious doubt on the authenticity of the Credit Denial forms, the Kojises continued to assert that Vicki Liposchak had been employed by Allied (thereby implying that she did sign the documents), and explained her failure to appear in Allied's corporate employment records by saying that her state-issued license remained in the name of her former employer. (Polony Aff. ¶ 7.) On July 28, 2003, Navy Federal took Ms. Liposchak's deposition. Ms. Liposchak testified that she had never worked for Allied and had never authored or signed the Credit Denial forms, (Rule 11 Mem., Ex. 8, Dep. Vicki Liposchak-Howe at 33.) Ms. Liposchak further testified that Johnna Kojis had asked her to sign the Credit Denial forms because Johnna Kojis had a lawsuit with Navy Federal and "really needed" Ms. Liposchak to sign the papers for her. (Id. at 34-35.) Ms. Liposchak testified that she had told Johnna Kojis that she did not feel comfortable doing that. (Id.) Ms. Liposchak testified that she realized later that Johnna Kojis must have forged her signature on the Credit Denial forms when she received a call from one of Navy Federal's attorneys asking her if she worked at Allied, (Id. at 37.) Ms. Liposchak testified that when she later questioned Johnna Kojis about the matter, Johnna admitted to signing Ms. Liposchak's name and apologized for doing so, but then asked Ms. Liposchak to agree to represent that she did in fact sign the forms. (Id. at 37-40.) According to Ms. Liposchak, Johnna Kojis indicated that lying about the authenticity of the signature and forms was not "that big of a deal" because the matter would probably never proceed to trial. (Id. at 40-42.) Ms. Liposchak testified that she continued to refuse to go along with Johnna Kojis' lie, and, within the next day, drafted a letter to Johnna Kojis dated June 30, 2003 wherein she reiterated her position that she would not participate in the He, (Id. at 41, 50; Rule 11 Mem., Ex, 12, June 30, 2003 Ltr from V. Liposchak to J. Kojis.) When Johnna Kojis received the letter, she called Ms. Liposchak in one more attempt to convince Ms. Liposchak to lie about having signed the Credit Denial forms but Ms. Liposchak again refused. (Liposchuk Dep. at 51-52.)

  On July 17, 2003, Navy Federal served the Kojises with a deposition notice scheduling Johnna Kojis' deposition for August 7, 2003 and Stan Kojis' deposition for August 8, 2003, (Rule 37 Mot, ¶ 1.) At the Kojises' request, the depositions were rescheduled to August 20, 2003 at 10:30 a.m. and August 21, 2003 at 9:00 a.m., both at the offices of Navy Federal's attorneys. (Id.; Rule 37 Mot., Ex, A, Aug 13, 2003 Ltr from L. Smith to R, Polony, reflecting a copy to "Mr. and Mrs. Kojis.") On August 20, 2003, at 9:45 a.m., a hearing was held before this court on Navy Federal's Motion to Compel Production of Documents and Inspection of Original Documents [dkt 25], which was granted. The Kojises were ordered to pay Navy Federal a monetary sanction of $450 after this court found that the Kojises' non-production of documents was not substantially justified. [Dkt 28.] That same morning, however, and on the subsequent day, the Kojises failed to appear for either of their depositions, even though they had assured their counsel, Amy Schwab, that they would be present. (Rule 37 Mot., Aff. Barry MacEntee ¶¶ 3-4; Ex, B, Tr. Aug. 20, 2003 at 5; Ex. C, Tr. Aug. 21, 2003 at 4.) Navy Federal's attorneys Barry MacEntee and Richard Polony were present, as was Equifax's counsel Brad Miller, who had flown to Chicago from Atlanta. (MacEntee Aff, ¶¶ 3-4.) AmySchwab, the Kojises' counsel, was present by telephone. (Id.) The attorneys waited until 10:55 a.m. on both August 20 and 21, 2003 (25 minutes past the scheduled start time on August 20 and almost 2 hours past the scheduled start time on August 21) before convening the depositions and creating a record that the Kojises had failed to appear. (Id.; Tr. Aug. 20, 2003 at 4; Tr. Aug. 21, 2003 at 3.) On August 20, 2003, the Kojises' attorneys filed a Motion to Withdraw as counsel, which was granted by the District Judge on September 2, 2003. [Dkt 30, 31,]

  On September 8, 2003, Navy Federal filed two of the three motions at issue here, namely, the Rule 11 Motion and the Rule 37 Motion. On January 16, 2004, after numerous extensions had been granted by the court, the Kojises finally responded to Defendants' Motions (although their response was not properly served until February 2, 2004). See dkt 50, 53, 54. Also on January 16, 2004, the Kojises filed their Motion for Relief from August 20, 2003 Order and Motion to Suppress Allied Denials and Howe*fn6 Deposition, and Motion to Dismiss Without Prejudice Due to Prosecutorial Misconduct or in the Alternative Motion to Change Venue, [Dkt 49.] The Kojises' filing was stricken that same day for failure to be properly noticed and served. (Dkt 51.) The Kojises re-filed their motion on January 28 and February 5, 2004 under the caption Motion to Dismiss Without Prejudice Due to Prosecutorial Misconduct Plus Motion for Relief from August 20, 2003 Order And Motion to Suppress Allied Denials and Howe Deposition Also Due to Prosecutorial Misconduct. [Dkt 56, 59.]


 A. Defendants* Rule 11 Motion

  In support of their Rule 11 Motion, Defendants argue that the Kojises not only created forged and fraudulent documents and submitted those documents in this lawsuit as evidence to support their claims, but then tried to "cover their tracks" with even more fraud after their misconduct was discovered, by "aggressively recruiting Ms. Liposchak to commit perjury on their behalf." (Rule 11 Mem. at 11, 15.) Defendants argue that "[c]reating fraudulent evidence to support one's claims undermines the very integrity of the judicial process and seeks to perpetrate a fraud not only on the defendants, but on this Court which is being asked to rely on the fraudulent evidence as a basis for establishing liability and assessing damages." (Id, at 14-15.) They further argue that any future proceedings based on evidence or testimony provided by the Kojises in this case would be "seriously taint[ed]." (Id. at 15.) Defendants argue that they have had to spend "tens of thousands of dollars defending plaintiffs' concocted claim and ferreting out the fraud on which it was based" and request that the court enter an order dismissing the lawsuit with prejudice and holding the Kojises liable for Defendants' costs and attorneys' fees in defending the lawsuit. (Id. at 13-14; Rule 11 Mot. at 2.) The K.OJISES proffer a number of arguments in response, yet none attempts to refute the fact that the Kojises manufactured evidence including forged signatures. Indeed, Johnna Kojis admits ...

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