An Ohio appellate court has affirmed an order of sanctions against counsel for borrowers who filed a frivolous lawsuit against the lender alleging fraud, breach of contract and estoppel in connection with failed attempts to resolve a separate foreclosure action.

In Bergman v. Genoa Banking Company, the court found that the borrowers’ counsel violated Rule 11 because there was no factual or legal basis for filing the complaint and an inquiry into the factual and legal contentions asserted would have rendered this obvious.

In Bergman, the lender filed a judicial foreclosure action against the borrowers for defaulting on a mortgage loan. Over the next several months the parties engaged in dialogue, exchanged proposals and engaged in an unsuccessful mediation. During those discussions, the trial court entered a judgment for foreclosure. The borrowers appealed the judgment and the appellate court affirmed the judgment.

While the foreclosure action was pending, the borrowers filed a second action against the lender alleging that the lender misrepresented its intention to settle the foreclosure action and breached a settlement agreement by refusing to accept funds to reinstate the loan. The borrowers then moved for a preliminary injunction to stop the foreclosure from proceeding.

At the hearing on the borrower’s motion, the evidence showed that that no settlement agreement was ever reached. The trial court denied the borrowers’ motion for preliminary injunction and the borrowers voluntarily dismissed the case. Shortly after the voluntary dismissal, the lender moved for sanctions under the state’s Rule 11. The trial court found that the claims asserted by the borrowers and their counsel in the subsequent action were legally and factually groundless and awarded the lender its attorneys’ fees to defend the action.

The appellate court affirmed the trial court, finding that the borrowers brought claims that were not warranted under existing law, and made factual contentions that lacked evidentiary support and were not warranted by the evidence. The appellate court stated that it was clear from the documents and testimony at the preliminary injunction hearing that all parties were aware that the discussions never moved past settlement negotiations. The appellate court determined that to plead and represent to the contrary was a willful violation of Rule 11.

The Bergman decision serves as a reminder to parties and their attorneys to ensure a factual and legal basis for each claim and defense asserted, and that, under appropriate circumstances, a court will enforce Rule 11 when necessary.