China AI Capital Limited v. DLA Piper LLP

Background

The court had previously adopted Magistrate Judge Valerie Figueredo’s recommendation to impose sanctions under Federal Rule of Civil Procedure 11 on China AI and its counsel, Michael Maloney and Rosanne Felicello of Felicello Law P.C. The earlier ruling ordered China AI to pay DLA Piper’s reasonable attorneys’ fees and costs incurred in defending the action.

DLA Piper initially sought $1,225,115.50 in attorneys’ fees and $2,531.50 in costs. In a May 22, 2025 Report and Recommendation, Judge Figueredo recommended an award of $634,525.39 in attorneys’ fees and $2,331.50 in costs. She concluded that the award was reasonable and would deter conduct that violated Rule 11(b)(2) and Rule 11(b)(3).

China AI’s Objections

China AI objected to five principal aspects of the recommendation: the conclusion that shareholder notice could not be waived; the recommendation to award fees for work on the Rule 11 motion; reliance on events outside the Rule 11 notice; the hourly rates and time calculations; and the total award. China AI also argued that its financial condition should have resulted in a reduced award.

The court reviewed the specific objections under the standard required by federal law, generally conducting a new review of the challenged portions. It rejected China AI’s arguments concerning shareholder notice because the court had previously directed China AI to provide notice to other shareholders before voluntarily dismissing the derivative action. The court also relied on its earlier conclusion that the litigation after China AI’s proposed dismissal was not unnecessary under the circumstances.

The court upheld the award of fees for work on the Rule 11 motion. It reasoned that Rule 11 permits an award of reasonable expenses and attorneys’ fees and that the court had already found China AI’s continued pursuit of the legal-malpractice claim objectively unreasonable and sufficient to require the sanctions motion.

The court also concluded that Judge Figueredo had used later events only to support the size of the deterrent award, not to identify additional sanctionable conduct. Those events included China AI’s filing of a related malpractice suit and its continued efforts to stay the proceedings, withdraw its proposed voluntary dismissal, and amend the complaint.

Fees and Costs

The court found the hourly rates and time calculations reasonable. It approved the rates used for the attorneys who worked on the case and noted that Judge Figueredo had already applied an across-the-board 30-percent reduction in hours. The court also rejected China AI’s challenge to using the rate a paying client would be willing to pay as a measure of a reasonable hourly rate in the Rule 11 context.

The court found immaterial the parties’ disagreement about whether the underlying complaint sought $180 million or more than $580 million in damages. It stated that the magnitude of the damages was only one factor supporting the rates and that the matter still required attorneys with the necessary skill and experience.

Finally, the court rejected China AI’s argument that the award was excessive because the case had not progressed beyond the pleading stage. It also rejected the inability-to-pay argument because the financial information submitted did not adequately document the claimed financial hardship. The court noted that ability to pay is a discretionary consideration and that China AI’s counsel did not assert that China AI could not pay the award.

Disposition

Judge Marrero overruled China AI’s objections with prejudice, adopted Judge Figueredo’s Report and Recommendation in its entirety, and ordered the Clerk to enter judgment awarding DLA Piper $634,525.39 in attorneys’ fees and $2,331.50 in costs. The opinion states that China AI and its counsel are jointly and severally liable for the reasonable costs and attorneys’ fees awarded as sanctions.