Opinion
Kenneth Schneider, Detroit, Mich., for plaintiff.
Joseph Walker, Detroit, Mich., for plaintiff's counsel Kenneth Schneider.
William Garratt, Bloomfield Hills, Mich., for defendants.
Stanley Bernstein, Detroit, Mich., for Creditors' Committee.
ORDER DENYING MOTION FOR SANCTIONS
STEVEN W. RHODES, Bankruptcy Judge:
The defendant, Riverview Finance Company, seeks sanctions against the trustee, Shelia Solomon, and her attorney, Kenneth Schneider, for alleged violations of Rule 11 of the Federal Rules of Civil Procedure. Specifically, Riverview contends that three pleadings were filed in this adversary proceeding in violation of Rule 11--the complaint, the first amended complaint, and the trial brief, in that Solomon and Schneider did not conduct an adequate pre-filing investigation and the pleadings were not well grounded in fact. Solomon and Schneider deny any violation of Rule 11.
While the evidentiary hearing on this motion was under way, Riverview filed a petition in bankruptcy under Chapter 7. Later, Riverview's trustee abandoned the claim, and Riverview continued to prosecute it through its counsel.
The complaint was filed on February 26, 1985, alleging that Riverview had accepted conveyances of the property of Kitchen Fare, the debtor, from co-defendant Kate Kovacevic, the debtor's principal. On July 29, 1985, the first amended complaint was filed, alleging that over a substantial period of time, Riverview had failed to pay Kitchen Fare in full pursuant to their agreement under which Riverview purchased retail installment sales contracts from Kitchen Fare. It was further alleged that Riverview had commingled and failed
to account for Kitchen Fare's funds, had exercised such control over Kitchen Fare that its distinct corporate identity was disregarded, and that Riverview fraudulently used Kitchen Fare's money to pay off the debts of Kovacevic and her previous business, Suburban Food Service, Inc., without consideration.
The trial brief filed on January 16, 1986, at the start of trial indicated more specifically that Riverview owed approximately $1,000,000 for "dealer reserve" funds and approximately $55,000 for a "second half" account, and that Riverview had borrowed from Henry Rabier but used the Kitchen Fare's money to repay the loans.
The non-jury trial ended after three weeks when the Court granted Riverview's Rule 41(b) motion to dismiss at the close of the plaintiff's case. The primary basis for this decision was the Court's conclusion that Kate Kovacevic, upon whom Solomon and Schneider relied to establish the allegations as to nature of the arrangement between Riverview and Kitchen Fare, lacked credibility.
The present motion followed.
II.
A.
Riverview contends that several witnesses available to Solomon and Schneider were not contacted prior to making the allegations that were eventually dismissed. These include Jack Boland, Kitchen Fare's accountant, Robert Piraino, Kitchen Fare's attorney, Diane Janes, Kitchen Fare's bookkeeper, Louis Demas, Kovacevic's attorney when she operated Suburban Food Services, and other unbiased witnesses. Thus, Riverview contends that Solomon and Schneider relied too heavily on the evidence provided by Kovacevic and two biased creditors, George Zaratzian and Henry Raiber. Riverview further contends that Solomon and Schneider failed to adequately investigate the evidence available through its own employees, who would have established Kovacevic's lack of credibility. Finally, Riverview attacks Solomon's failure to do any of her own investigation, or even to read the complaint, before it was filed.
B.
Schneider testified that he examined Kate Kovacevic pursuant to Rule 2004 of the Bankruptcy Rules, and the information he obtained in that examination formed the basis of his claims at trial. He further testified that he had previously represented George Zaratzian, and was familiar with the relationship between Riverview and Kitchen Fare. During the period before the complaint was filed, he contacted Murdock Herzog, who was then Riverview's attorney, and they had several conversations about the claim. However, he was unable to resolve the matter or get a satisfactory explanation. He also talked with Dale Riggar, who was Kate Kovacevic's son and who was involved in Kitchen Fare.
Schneider testified that he was persuaded of Kate Kovacevic's credibility by the lack of any accounting from Riverview or segregation of funds by it, and because Riverview had written checks to itself on Kitchen Fare's accounts. Moreover, two creditors (Zaratzian and Fuller) had confirmed the control over Kitchen Fare exercised by Robert Fisher, Riverview's president. Prior to filing the amended complaint, Schneider was able to recover and review Kitchen Fare's records, and hired a bookkeeper to help establish the various claims.
Finally he testified that after he filed the first amended complaint, Riverview's new counsel severely hampered his effort to obtain discovery from Riverview to prepare for trial. Just prior to trial, the bookkeeper he hired reported to him that Riverview owed Kitchen Fare over $1,000,000. In his view, the loan office accounting reports, when they were finally obtained from Riverview, conclusively established that the 10% discount charged to Kitchen Fare by Riverview was actually a dealer reserve, not a discount, and therefore the trustee was entitled to recover it.
III.
Rule 11, Federal Rules of Civil Procedure, provides in pertinent part:
In construing this rule, the Court in Mohammed v. Union Carbide Corp., 606 F.Supp. 252, 260-61 (E.D.Mich.1985) indicated:
See also : Albright v. Upjohn Co., 788 F.2d 1217 (6th Cir.1986); Olga's Kitchen of Hayward, Inc. v. Papo, 108 F.R.D. 695 (E.D.Mich.1985).
As noted in Advo System, Inc. v. Walters, 110 F.R.D. 426, 429 (E.D.Mich.1986), the Advisory Committee Notes relating to the 1983 amendments cautioned:
See also : Pravic v. U.S. Industries-Clearing, 109 F.R.D. 620, 623 (E.D.Mich.1986).
Moreover, "[s]anctions under Rule 11 should not be freely imposed, and mere lack of success on the merits cannot alone
justify sanctions." Advo Systems, Inc. v. Walters, supra. See also : Reinhardt v. International Union, 636 F.Supp. 864, 868 (E.D.Mich.1986).
IV.
The Court concludes that there was no violation of Rule 11 in the circumstances of this case, and that Schneider, on behalf of Solomon, did perform an adequate investigation.
Attorneys practicing in bankruptcy have a special advantage in their pre-filing investigative work--Bankruptcy Rule 2004. This is a powerful tool, allowing an attorney investigating a claim to perform almost all of the necessary discovery before filing an action, and it is not normally available in contexts outside of bankruptcy. The availability of this discovery device must be considered a circumstance which would justify requiring greater pre-filing investigation in bankruptcy matters than might be required in ordinary civil litigation, where it is not available.
Nevertheless, Rule 11 only requires a reasonable pre-filing investigation in the circumstances, and it does not require that every potential witness be contacted and examined. Here, Schneider had contacted four witnesses whose evidence convinced him of the merit of the claims he was considering. That Schneider rejected the explanations of Riverview's employees does not suggest a Rule 11 violation. Rather, this circumstance only indicates that there was a dispute that Schneider was in fact attempting to investigate.
Moreover, it must be concluded that Schneider himself was genuinely convinced of Kovacevic's credibility. This is significant because if the Court had agreed with Schneider on this issue, it would have found for the trustee; Kovacevic's evidence, if believed, was sufficient to sustain the plaintiff's claims. It was only because the Court disagreed with Schneider's assessment of Kovacevic's credibility that the case was dismissed under Rule 41(b).
Although the Court at the conclusion of the adversary process, which included the capable cross-examination of Kovacevic, concluded that she lacked credibility, nothing suggests that it was unreasonable for Schneider to conclude before trial that Kovacevic was credible. Schneider found that he had no good reason to doubt her and every reason to believe her.
No doubt in these circumstances, Schneider was required to proceed. Ordinarily, an attorney should hesitate to proceed upon such a weighty case upon the uncorroborated testimony of a single witness, if only because a reasonable inquiry in such a case might require more. But here, there was more; Schneider had independently developed from the parties' records and other witnesses certain objective facts corroborating Kovacevic's evidence.
In these circumstances, a refusal to proceed may have resulted in a violation of the trustee's duty under 11 U.S.C. § 704 to "collect and reduce to money the property of the estate," for which the trustee and her attorney might have been accountable to the Court and the creditors. Thus, the Court concludes that Schneider and Solomon acted only to fulfill their obligations to the creditors under the Bankruptcy Code and not in violation of their duties under Rule 11.
One final consideration supports the conclusion that there was no Rule 11 violation. Plainly an allegation of an inadequate investigation must be adjudged in part on the basis of the availability of pertinent information. Thus, a moving party who has been more cooperative in providing information during discovery would have a stronger claim than a party who has not been cooperative.
Here, it is fair to conclude that Riverview was profoundly uncooperative in providing information to Schneider during discovery. In fact, the record reflects that despite Schneider's best efforts to obtain discovery, both informally and formally, Riverview's new counsel successfully thwarted most of those efforts, and Schneider received very little information from Riverview during discovery. Schneider had to go to extreme lengths to get any documents, and his attempts to depose Riverview
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employees were blocked by unnecessary objections. In the end, as the trial date approached, Schneider understandably gave up on discovery and decided to prepare his best case for trial.
The Court does not intend to suggest that Riverview's new counsel violated any of the Federal Rules of Civil Procedure; no such specific issue is before the Court. Nor does the Court intend to suggest that an attorney who has difficulty obtaining information through discovery is thereby relieved of his or her responsibilities under Rule 11. Rather, the significance of these observations is that where, as here, counsel who deliberately suppresses the flow of information by following a standard practice of requiring strict adherence to the legal technicalities of Rules 26-37, Federal Rules of Civil Procedure, and of raising every arguable objection, is somewhat less likely to persuade the Court that the opposing counsel did not perform an adequate investigation under Rule 11.
Accordingly, IT IS HEREBY ORDERED that the motion for sanctions is DENIED.