Opinion
In an appeal arising out of Chapter 11 reorganization proceedings, creditor's committee challenged ruling by the Bankruptcy Court, Richard L. Merrick, J., establishing validity, priority and amount of liens held by two banks in accounts receivable and inventory of debtor and certain other affiliated corporations. The District Court, Shadur, J., first disposed of the substantive merits, 46 B.R. 444. Upon timely motion to alter or amend, the Court held that attorneys who failed utterly to meet requirement that their appeal on creditor's committee's behalf be well grounded in fact and warranted by existing law or good-faith argument for extension, modification, or reversal of existing law, and who could not, in objective terms, have believed same, after reasonable inquiry, violated rule governing signing of pleadings and were liable for attorney fees attributable to that violation.
Motion denied.
Louis W. Levit, Richard J. Mason, Ira Goldberg, Levit & Mason, Ltd., Chicago, for petitioner.
Joseph G. Gavin, Joseph M. Russell, First National Bank of Chicago, Chicago, for respondent.
MEMORANDUM OPINION AND ORDER
SHADUR, District Judge.
On December 11, 1984 this Court issued its memorandum opinion and order, 46 B.R. 444 (the " Opinion" ), affirming the ruling (the " Decision" ) by then Bankruptcy Judge Richard Merrick establishing the validity, priority and amount of liens held by First National Bank of Chicago and Wells Fargo Bank, N.A. (collectively " Banks" ) in the accounts receivable and inventory of Ronco, Inc. (" Ronco" ) and certain other affiliated corporations. In the course of the Opinion this Court directed Levit & Mason, attorneys for the appellant Creditors' Committee (" Committee" ) of Ronco Teleproducts, Inc. (not of Ronco itself), to address the potential applicability of Fed.R.Civ.P. (" Rule" ) 11 to their handling of the appeal.
In response Levit & Mason have not addressed the Opinion's disposition of the substantive merits, a disposition that has now become final. They have filed a timely motion (see Rule 59(e)) that the Opinion be altered or amended " by deleting or modifying the adverse comments contained therein" as to their professional conduct. For the reasons stated in this memorandum opinion and order, Levit & Mason's motion is denied.
Rule 11 's Standards
Levit & Mason essentially assert the important 1983 change in Rule 11's language was not intended to work any change in the Rule's standards. Their Mem. 1 quotes the Advisory Committee's reference to the former version of the rule that had been construed to require bad faith (emphasis added):
The amended rule attempts to deal with the problem [of abuses in the signing of pleading and motions, and the reluctance of courts to impose sanctions] by building upon and expanding the equitable doctrine permitting the court to award expenses, including attorney's fees, to a litigant whose opponent acts in bad faith in instituting or conducting litigation.
Yet they appear unconscious of the fact the Advisory Committee used the terms " building upon" and " expanding" -a clear hallmark (amplified in the rest of the Advisory Committee's comments) the old regime had to be changed. Levit & Mason then indulge a non sequitur (Mem. 2):
Although the intent of the 1983 Amendments is clearly to establish a " more stringent" standard, a finding of subjective bad faith, or at the very least of gross negligence, is still essential before sanctions may be imposed.
But as the following discussion reflects, it is exceedingly plain a new objective test of reasonableness has taken the place of Rule 11's former subjective test of good faith.
As with all questions of statutory (in this case, Rule) construction, the proper place of beginning is the statute (here the Rule) itself (emphasis added):
The signature of an attorney or party constitutes a certificate by him that he has read the pleading, motion, or other paper; that to the best of his knowledge, information, and belief formed after reasonable inquiry it is well grounded in fact and is warranted by existing law or a good faith argument for the extension, modification, or reversal of existing law, and that it is not interposed for any improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation.
It is critical to an understanding of Rule 11 to observe that the emphasized provision has been placed in the conjunctive with the " improper purpose" doctrine. What an attorney is deemed to certify is both (1) his or her " knowledge, information, and belief formed after reasonable inquiry" -an objective test-and (2) the absence of " any improper purpose" -a subjective test that supported the old " bad faith" requirement. And that natural reading of the revised Rule is reconfirmed by its deliberate deletion of the provision that courts (e.g., Badillo v. Central Steel and Wire Co., 717 F.2d 1160, 1166 (7th Cir.1983)) had relied on as establishing the " subjective bad faith" standard-the requirement of wilfulness in the old Rule:
Before the 1983 amendment Rule 11 defined the attorney's filing of a document as a representation:
Badillo was an affirmance of this Court's refusal to tax the losing plaintiff's lawyer with the defendant's attorneys' fees, No. 79 C 2122, slip op. (N.D.Ill. July 21, 1982).
For a wilful violation of this rule an attorney may be subjected to appropriate disciplinary action.
Levit & Mason would essentially have it the extensive and sometimes tortuous procedure of amending the Rules was gone through to create no real substantive change in Rule 11. But the 1983 Advisory Committee Notes, which it is profitable to quote extensively, teach exactly the opposite (citations omitted): Since its original promulgation, Rule 11 has provided for the striking of pleadings and the imposition of disciplinary sanctions to check abuses in the signing of pleadings. Its provisions have always applied to motions and other papers....
Harvard Law School Professor Arthur Miller, one of the principal architects of the 1983 amendments to the Rules, has lectured to a substantial number of judicial conferences and other audiences on the intended effect of the Rule 11 amendment, delivering the same message as conveyed by this opinion. To this Court's knowledge, the peripatetic Professor Miller has not reduced those lectures to published law review form.
Experience shows that in practice Rule 11 has not been effective in deterring abuses.... There has been considerable confusion as to (1) the circumstances that should trigger striking a pleading or motion or taking disciplinary action, (2) the standard of conduct expected of attorneys who sign pleadings and motions, and (3) the range of available and appropriate sanctions.... The new language is intended to reduce the reluctance of courts to impose sanctions ... by emphasizing the responsibilities of the attorney and reenforcing those obligations by the imposition of sanctions.
The amended rule attempts to deal with the problem by building upon and expanding the equitable doctrine permitting the court to award expenses, including attorney's fees, to a litigant whose opponent acts in bad faith in instituting or conducting litigation.... Greater attention by the district courts to pleading and motion abuses and the imposition of sanctions when appropriate, should discourage dilatory or abusive tactics and help to streamline the litigation process by lessening frivolous claims or defenses....
The words " good ground to support" the pleading in the original rule were interpreted to have both factual and legal elements.... They have been replaced by a standard of conduct that is more focused.
The new language stresses the need for some prefiling inquiry into both the facts and the law to satisfy the affirmative duty imposed by the rule. The standard is one of reasonableness under the circumstances.... This standard is more stringent than the original good-faith formula and thus it is expected that a greater range of circumstances will trigger its violation....
The text of the amended rule seeks to dispel apprehensions that efforts to obtain enforcement will be fruitless by insuring that the rule will be applied when properly invoked. The word " sanctions" in the caption, for example, stresses a deterrent orientation in dealing with improper pleadings, motions or other papers. This corresponds to the approach in imposing sanctions for discovery abuses.... And the words " shall impose" in the last sentence focus the court's attention on the need to impose sanctions for pleading and motion abuses. The court, however, retains the necessary flexibility to deal appropriately with violations of the rule. It has discretion to tailor sanctions to the particular facts of the case, with which it should be well acquainted.
The reference in the former text to wilfulness as a prerequisite to disciplinary action has been deleted. However, in considering the nature and severity of the sanctions to be imposed, the court should take account of the state of the attorney's or party's actual or presumed knowledge when the pleading or other paper was signed....
Rule 11's changed meaning of course deprives pre-amendment cases such as Badillo, and the stringent standard established in those cases, of precedential force. Indeed the thrust of those pre-amendment cases is now exactly the opposite of what Levit & Mason contend, for they are illustrative of what motivated the Rule 11 amendment: what the Advisory Committee called the " reluctance of courts" to impose sanctions against the " empty head, pure heart" lawyer. What those earlier cases should thus dictate is a corroboration of the change in standards that underpins this Court's original Opinion.
This catchphrase is of course an oversimplified description of the potentially assessable lawyer. It has however been used to describe the lawyer whose subjective good faith has, under the old version of Rule 11, insulated him or her from sanctions despite the advancement of clearly groundless claims or arguments.
Precisely that analysis of Badillo and its inapplicability to the new version of Rule 11 was made in Zaldivar v. City of Los Angeles, 590 F.Supp. 852, 856 (C.D.Cal.1984).
No post-amendment Court of Appeals cases dealing with lawyers' post-amendment conduct appear to have been reported anywhere as yet. Unfortunately the waters have been muddied somewhat in our own Circuit by a case dealing with pre -amendment conduct (to which of course the old standard must apply as a matter of fundamental fairness-of due process, if you will). In Suslick v. Rothschild Securities Corp., 741 F.2d 1000, 1007 (7th Cir.1984) our Court of Appeals was called upon to consider less-than-bad-faith 1982 conduct by a lawyer. Of course the Court followed its own Badillo precedent, and Badillo 's reading of Rule 11, thus rejecting fee-shifting under those circumstances. But Suslick created a potential for confusion by the fact that, when Rule 11 was first referred to several pages earlier in that opinion, the opinion quoted the 1983 revised version (rather than the proper earlier version) in a footnote, 741 F.2d at 1003 n. 3.
Earlier in 1984 the Court of Appeals had done exactly the same thing (except that it simply cited Rule 11 without quoting it) in Gieringer v. Silverman, 731 F.2d 1272, 1281 (7th Cir.1984).
That error however should not be permitted to obscure the issue. Suslick had no occasion to focus on the new language or on the reason for the substantial change in the Rule (and of course the litigants had no occasion to argue the matter, for it was not and could not be in issue there).
This Court does not view itself as bound by the Suslick mistaken footnote citation. It was not an expression of opinion (let alone a holding) at all, and even if it had been it would have been not only the archetype of pure dictum but (unintentionally of course) misguided dictum as well. Instead this Court adheres to its own decisions and to those of the other District Courts that have also looked at the revised Rule (and its background) and have found it dictates an objective test, rather than the old subjective bad faith standard. See, e.g., Rodgers v. Lincoln Towing Service, Inc., 596 F.Supp. 13, 22, 26-27 (N.D.Ill.1984) (Judge Kocoras); Zaldivar (see n. 5); Goldman v. Belden, 580 F.Supp. 1373, 1381 (W.D.N.Y.1984); Wells v. Oppenheimer & Co., 101 F.R.D. 358, 359 & n. 3 (S.D.N.Y.1984).
See, e.g., SFM Corp. v. Sundstrand Corp., 102 F.R.D. 555, 556-57 (N.D.Ill.1984) (imposing attorneys' fee sanctions) and Pudlo v. Director of IRS, 587 F.Supp. 1010, 1011 (N.D.Ill.1984) (denying such sanctions).
Levit & Mason's Conduct
It remains then to measure what Levit & Mason have done against the objective yardstick created by Rule 11. Nothing in their current submission alters the Opinion's original sense of their having fallen far short of that standard.
First, Levit & Mason stress their fiduciary obligations to their clients, the Committee (Mem. 4 ff.). But it is not a coincidence that the newly-inserted language in Rule 11 (the part emphasized in this Opinion's quotation from the Rule) mirrors the standards in ABA Code of Professional Responsibility DR 7-102(A)(2) and in ABA Model Rule of Professional Conduct Rule 3.1 and its accompanying comment. All of them-Rule 11, the DR and the Model Rule-teach that a lawyer's duty to his or her client cannot be permitted to override his or her duty to the justice system, defined by all three of those rules.
As part of their argument, Levit & Mason contend they and Committee were not given the chance contemplated by the Bankruptcy Code to conduct appropriate examinations of " all matters which might be relevant to the issue of lien perfection." That is really nothing more than a rehash of the arguments rejected by the Opinion, and it is flatly wrong for the reasons articulated in the Opinion. Levit & Mason are effectively renewing the notion they were deprived of the opportunity to go fishing for an undefined catch, but again they give no explanation at all of their delay in propounding discovery before the Bankruptcy Court hearing whose scheduling Mason had concurred in, or of their failure to tailor their document request to the issues rather than launch a blunderbuss request, or of their general lack of preparation during the two and one-half weeks before the hearing. And once more they have not identified a single matter that would or might have been discovered had a continuance been granted.
Levit & Mason also assert they have a colorable argument that the transactions by the debtors (as sellers) ought to be treated-as to the sellers' creditors, not the buyers' creditors-as consignments rather than sale-or-return transactions. Two answers refute that bogus position. First, nothing in the UCC or the case law supports their position, and a review of Opinion 10-17 discloses every meaningful indicator points to sale-or-return. Second, the assertion they now advance was never even hinted at in their briefs before this Court (indeed, it was Opinion 16-17 rather than the parties' presentations that first commented UCC §§ 2-326(2) and (3) speak to the rights of the buyer's creditors, not the seller's). Golden Eagle Distributing Corp. v. Burroughs Corp., 103 F.R.D. 124, 127-28 (N.D.Cal.1984) has properly pointed out that such post-hoc sleight of hand does not justify, for Rule 11 purposes, an empty or misleading presentation in the first instance.
District Judge William Schwarzer, the author of Golden Eagle, has been (like Professor Miller) one of the most prolific commentators on the federal courts' awarding of attorneys' fees. He too reads revised Rule 11 in exactly the same way as does this opinion. See his article, Sanctions Under the New Federal Rule 11-A Closer Look, 104 F.R.D. 181, 185, 191.
Finally Levit & Mason urge they did not interpose the appeal for delay, nor did they deliberately mislead this Court. It is of course precisely the difficulty of divining someone's intentions that led to the change in Rule 11-as Wells, 101 F.R.D. at 359 put it:
If subjective bad faith ... were the criteria [sic] the Rule might as well be repealed.
Wells went on to observe ( id. at 359 n. 3):
That inquiry need not be made. Though it may be assumed Levit & Mason's motives may not have been evil (the absence of " subjective bad faith" ), the effects of their conduct were as described in the Opinion. And the matter has come full circle to the meaning of Rule 11, for though " improper purpose" could well be an aggravating factor under the revised Rule, its absence does not insulate from sanctions the lawyer who fails the alternative objective standard.
In sum, Levit & Mason's position throughout their current submission is essentially that their fiduciary position (1) justified them in demanding the right to conduct a massive fishing expedition before the Bankruptcy Court engaged in any proceeding of substance and (2) required them to appeal an adverse lien decision because they believed the lien question to be a difficult one. They are wrong on both counts. Examination of the essential objective facts reflects that:
1. Levit & Mason have and had no tenable argument for their " consignment" position.
2. Whatever arguments they did raise in their memoranda were both groundless and misleading.
3. They never really attempted to comply with the lien hearing schedule, apparently preferring to assume they could ignore that process and then reopen the matter on appeal.
Sanctions
It follows then that Levit & Mason have indeed violated Rule 11 and should be subjected to appropriate sanctions. As Opinion 18-20 suggested, reimbursement of Banks' attorneys' fees represents the most appropriate sanction under the circumstances. Levit & Mason's supplemental statement, filed January 10, has asked the opportunity to determine by negotiation with Banks' counsel the proper measure of the fees attributable to the issues decided by the Opinion. This Court will accordingly await a motion from either party on that score.
Conclusion
Levit & Mason have failed utterly to meet the requirement that their appeal on Committee's behalf was well grounded in fact and warranted by existing law or a good faith argument for the extension, modification, or reversal of existing law. Nor could they, in objective terms, have believed that after reasonable inquiry. Accordingly they have violated Rule 11 and are liable for Banks' attorneys' fees attributable to that violation. Their motion to alter or amend the Opinion is denied. This Court will await a motion from either party to enable this Court to establish the amount of the liability for fees.
that he has read the pleading; that to the best of his knowledge, information, and belief there is good ground to support it; and that it is not interposed for delay.
Comparison of the Rule's old language with the amendment not only reflects the insertion into the Rule of the " formed after reasonable inquiry" language, creating a previously unprescribed duty, but also shows the deletion of a sentence later in the Rule that had limited disciplinary action to " a wilful violation of this rule." Later discussion in the text of this opinion provides further particulars.
Having been many years at the Bar before being on the Bench, we know from our own experience that there is no position-no matter how absurd-of which an advocate cannot convince himself.