Title: McNally v. Rey

State: virginia

Issuer: Virginia Supreme Court

Document:

Present:  All the Justices 
 
JOHN J. MCNALLY 
 
 
      OPINION BY CHIEF JUSTICE LEROY R. HASSELL, SR. 
v.  Record No. 070522 
 April 18, 2008 
 
ROBERT REY, ET AL. 
 
FROM THE CIRCUIT COURT OF THE CITY OF NORFOLK 
Charles D. Griffith, Jr., Judge 
 
 
In this appeal, we consider whether the Circuit Court of 
the City of Norfolk abused its discretion by imposing 
sanctions upon an attorney who filed a petition in bankruptcy 
on behalf of his client who was a party in a proceeding 
pending in the circuit court.  The relevant facts necessary 
for our resolution of this appeal are undisputed.  Robert Rey 
and Ellen Rey, the plaintiffs, filed a motion for judgment 
against Simonz, Inc., and its representative, Gerald T. Simon.  
Plaintiffs alleged that Simonz and Simon breached certain 
contractual and statutory duties owed to them arising out of 
an agreement to remove lead-based paint from the plaintiffs' 
home. 
 
Simonz and Simon filed responsive pleadings, and Simonz 
also filed a counterclaim.  Subsequently, the circuit court 
dismissed Simon as a defendant, and the plaintiffs proceeded 
with their action against Simonz. 
 
The circuit court scheduled a trial date of November 15, 
2006.  Before the scheduled trial date, John J. McNally, 
counsel of record for Simonz, discussed with his client the 
option of filing a voluntary bankruptcy petition in the United 
States Bankruptcy Court for the Eastern District of Virginia.  
On the evening of November 14, 2006, McNally filed a petition 
in bankruptcy in the United States Bankruptcy Court for 
Simonz.  McNally sent a facsimile of the petition and the 
bankruptcy court's electronic confirmation of the filing to 
plaintiffs' counsel within one hour of the time of the filing 
of the bankruptcy petition. 
 
The next day, McNally and plaintiffs' counsel appeared in 
the circuit court for the scheduled trial.  McNally informed 
the circuit court that his client had filed a petition in 
bankruptcy.  Plaintiffs' counsel immediately asked the circuit 
court to assess costs and attorney's fees against McNally, 
dismiss Simonz' counterclaim with prejudice, and issue a bench 
warrant against Simon for unspecified criminal charges. 
 
The circuit court questioned McNally about the 
circumstances related to his client's decision to file the 
petition in bankruptcy.  McNally informed the court that his 
client indicated "early on that it did not want to incur the 
expense of defending the plaintiffs' suit."  Additionally, 
"[s]everal months before trial, McNally explained [Simonz'] 
options, including bankruptcy, to Simon, but Simon did not 
then decide to file a bankruptcy petition." 
 
2
McNally, asserting the attorney-client privilege, 
declined to answer certain questions that the circuit court 
asked about his client's decision to file the petition.  
McNally told the circuit court that he was not prepared to 
proceed with the plaintiffs' oral motion for sanctions.  
McNally also informed the court that his client had a legal 
right to file a petition in bankruptcy at any time, including 
pretrial, during the trial, or upon the conclusion of trial.  
The circuit court did not rule on the plaintiffs' oral motion 
for sanctions against McNally, but entered an order that 
dismissed the plaintiffs' action without prejudice because 
Simonz was entitled to an automatic stay of legal proceedings 
by operation of law pursuant to 11 U.S.C. § 362. 
McNally filed a letter with the circuit court on November 
20, 2006, responding to the circuit court's consideration of 
sanctions against him for the bankruptcy filing.  He stated 
"it would have been an ethical violation for me to disclose my 
client's intention to file a bankruptcy (which was clearly a 
client confidence) unless the client specifically authorized 
me to do so."  McNally also asked that he be subject to a 
"properly file[d]" motion and be given an opportunity to 
respond:  "I respectfully believe that I am entitled to due 
process on this issue."  Plaintiffs' counsel responded by 
requesting sanctions for legal fees, costs, and expenses 
 
3
plaintiffs incurred that totaled $14,090.45.  Without a 
hearing, the circuit court entered an order on December 15, 
2006, holding, among other things, that  
"the conduct of Mr. McNally in filing pleadings 
indicating an intent to try the case while in fact 
knowing that bankruptcy was to be filed was not in 
good faith and was for an improper purpose including 
to needlessly increase the cost of litigation to the 
Plaintiffs.  As a result, Plaintiffs incurred 
unnecessary legal and expert fees and costs in 
preparing the case for trial.  The Court on its own 
initiative as permitted by law believes the 
appropriate sanction is that Counsel for Defendant, 
John [J.] McNally personally pay the legal fees, 
expert charges, and costs incurred by Plaintiffs 
from November 8, 2006 until notified of the 
bankruptcy on the evening of November 14 as well as 
the cost of the jury. 
 
"Counsel for Plaintiffs have submitted a 
statement of legal fees with affidavits, costs and 
expert fees.  The Court finds all charges fair and 
reasonable.  The legal fees total $12,170.00, the 
costs, including airfare for the mother of Mrs. Rey 
to come and watch their children during the trial 
are $555.45, the expert costs are $1,365.00.  The 
Court hereby assesses these fees, costs and charges 
against John [J.] McNally personally under the power 
of the Court to sanction conduct of lawyers where 
appropriate and ORDERS that John [J.] McNally pay 
the total amount of $14,090.45 . . . . 
"The Court further ORDERS that Mr. McNally pay 
to the Clerk of the Court the cost of the jury which 
was ordered to be present for this trial." 
 
 
McNally objected to the entry of this order, asserting 
numerous reasons, including his contention that he had not 
violated Code § 8.01-271.1.  McNally also filed a motion to 
reconsider, and he reasserted, among other things, that he had 
 
4
not violated Code § 8.01-271.1.  The circuit court denied the 
motion, and McNally appeals. 
 
McNally contends that the circuit court erred by awarding 
sanctions and costs against him.  McNally states that the 
circuit court's order that awards sanctions against him only 
cites one pleading that he signed, the witness and exhibit 
list that he was required to file in accordance with the 
court's scheduling order.  McNally contends that there is no 
evidence that his act of filing this pleading violated Code 
§ 8.01-271.1.  Additionally, McNally asserts that Code § 8.01-
271.1 does not authorize a court to impose sanctions upon an 
attorney when that attorney fails to disclose to opposing 
counsel or to the court that the attorney's client is 
contemplating filing a petition in bankruptcy. 
Responding, the plaintiffs contend that McNally did not 
make the proper objections in the circuit court to the order 
awarding sanctions against him and, therefore, his arguments 
are procedurally barred.  The plaintiffs argue, consistent 
with the circuit court's rulings, that McNally intended to 
file a petition in bankruptcy on behalf of his client sometime 
before the scheduled trial date and that McNally's act of 
filing the witness and exhibit list was "not in good faith" 
and constituted an "improper purpose" within the intendment of 
Code § 8.01-271.1.  We disagree with plaintiffs' contentions. 
 
5
The plaintiffs' argument that McNally failed to object to 
the circuit court's order imposing sanctions is without merit.  
McNally repeatedly objected to the circuit court's decision to 
impose sanctions against him. 
Initially, we observe that we are unable to discern from 
the circuit court's order whether the court imposed sanctions 
authorized by Code § 8.01-271.1 or some other source of 
authority.  We note, however, that this Court has previously 
held that a circuit court does not have inherent authority to 
impose as a sanction an award of attorney's fees and costs: 
 
"In the absence of authority granted by a 
statute, such as Code § 8.01-271.1, or a rule of 
court, such as Rule 4:12, . . . a trial court's 
inherent power to supervise the conduct of attorneys 
practicing before it and to discipline an attorney 
who engages in misconduct does not include the power 
to impose as a sanction an award of attorneys' fees 
and costs to the opposing parties." 
 
Nusbaum v. Berlin, 273 Va. 385, 400-01, 641 S.E.2d 494, 502 
(2007). 
 
We now consider the litigants' arguments that relate to 
Code § 8.01-271.1.  This statute states in relevant part: 
"The signature of an attorney or party 
constitutes a certificate by him that (i) he has 
read the pleading, motion, or other paper, (ii) 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 (iii) it is not 
interposed for any improper purpose, such as to 
harass or to cause unnecessary delay or needless 
 
6
increase in the cost of litigation.  If a pleading, 
written motion, or other paper is not signed, it 
shall be stricken unless it is signed promptly after 
the omission is called to the attention of the 
pleader or movant. 
 
. . . . 
 
"If a pleading, motion, or other paper is 
signed or made in violation of this rule, the court, 
upon motion or upon its own initiative, shall impose 
upon the person who signed the paper or made the 
motion, a represented party, or both, an appropriate 
sanction, which may include an order to pay to the 
other party or parties the amount of the reasonable 
expenses incurred because of the filing of the 
pleading, motion, or other paper or making of the 
motion, including a reasonable attorney's fee." 
 
Code § 8.01-271.1. 
We must apply an abuse of discretion standard when 
reviewing a circuit court's determination to impose sanctions 
pursuant to Code § 8.01-271.1.  Williams & Connolly, LLP v. 
People for the Ethical Treatment of Animals, 273 Va. 498, 509, 
643 S.E.2d 136, 140 (2007); Ford Motor Co. v. Benitez, 273 Va. 
242, 249, 639 S.E.2d 203, 206 (2007); Flora v. Shulmister, 262 
Va. 215, 220, 546 S.E.2d 427, 429 (2001); Gilmore v. Finn, 259 
Va. 448, 466, 527 S.E.2d 426, 435 (2000) (quoting Oxenham v. 
Johnson, 241 Va. 281, 287, 402 S.E.2d 1, 4 (1991)). 
 
Code § 8.01-271.1 imposes several obligations upon an 
attorney who files a written pleading or other document with 
the court.  The signature of an attorney constitutes a 
certificate that the attorney has read the pleading, motion, 
 
7
or the paper, and to the best of the attorney's knowledge, 
information, and belief formed after reasonable inquiry, the 
pleading or document filed 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.  The 
attorney may not interpose the pleading or other paper for any 
improper purpose.  
 
The circuit court's order that imposed the sanctions 
against McNally was based upon the circuit court's conclusion 
that McNally filed a witness and exhibit list when he did not 
intend to try the case.  There is simply nothing in the record 
before this Court that supports this finding.  There is no 
evidence in the record that McNally's act of filing the 
witness and exhibit list was not well grounded in fact.  There 
is nothing in the record before this Court that supports a 
finding that the witness and exhibit list was interposed for 
an improper purpose, such as to harass or cause unnecessary 
delay, or needless increase in the cost of litigation.  See 
Taboada v. Daly Seven, Inc., 272 Va. 211, 214-16, 636 S.E.2d 
889, 890-91 (2006).  Simply stated, the record before this 
Court is devoid of any evidence that supports the circuit 
court's award of sanctions.  McNally's act of filing the 
witness and exhibit list, as required by the circuit court's 
own pretrial order, did not violate Code § 8.01-271.1. 
 
8
 
9
Additionally, counsel of record in a state court 
proceeding, who represents a litigant contemplating filing a 
petition in bankruptcy in a federal bankruptcy court, does not 
have an obligation to inform opposing counsel or the circuit 
court that the attorney's client is considering filing a 
petition in bankruptcy.  A litigant's decision to file a 
petition in bankruptcy while litigation is pending does not 
constitute a violation of Code § 8.01-271.1 provided such 
filing is in compliance with the federal Bankruptcy Code, 11 
U.S.C. § 101, et seq.  To hold otherwise would have a chilling 
effect upon the rights of litigants and their attorneys when 
such litigants seek to avail themselves of their statutory 
rights set forth in the federal Bankruptcy Code.  Therefore, 
we hold that the circuit court abused its discretion by 
imposing sanctions upon McNally. 
 
Accordingly, we will reverse the judgment of the circuit 
court, and we will enter a final judgment in favor of McNally. 
Reversed and final judgment.