# FILED July 25, 1997 Cecil Crowson, Jr . App ellate C ou rt Clerk IN THE COURT OF APPEALS OF TENNESS EE

EAST ERN S ECTI ON

ALSIDE SUPPLY CENTER O F ) C/A NO. 03A01-9702-CH-00069 KNOXVILLE, ) ) KNOX CHANCERY Plaintif f-A ppella nt, ) ) HON. SHARON BELL, v. ) CH ANCELL OR ) SMIT H HERI TAGE S IDI NG ) COM PANY, INC., a nd DENNIS ) CLEMMER, ) ) Defendan ts, ) ) and ) ) METROPOLIT AN LIFE INSURANCE ) COMPANY, ) VACATED ) AND Appellee. ) REMANDED

JACK B . DRAPE R, ARN ETT, DRA PER & HAG OOD , Knoxvill e, for Pl ainti ffAp pellan t. JOHN A. LUCA S and MA RTIN B. BA ILEY, HUN TON & W ILLIAMS , Knoxvill e, for Appelle e.

O P I N I O N

Franks. J.

In this action, the Chancellor, pursuant to T.R.C.P. Rule 11, sanctioned Alside Supply Center of Knoxville (Alside) $10,000.00, and Alside has a ppealed. This disput

e arose out of ga rnishmen t procee dings initiated by Alside ag ainst Metropolitan Life I

nsurance Company

(Metlife). Alside had previously been awarded a2

judgment against a Mr. Clemmer, who owned annuity contracts with Metlife. Protrac ted litig ation occ

urred a s a resul

t of the ini

tiation of this actio n, due in part to Metlife’s initially failing to answer the garnishment in a timely fashion and Clemmer’s filing for bankruptcy . However, Metlife incurred approximately one hundred thousand dollars ($100,000.00) in attorney fees and expenses in Chancery and Bankruptcy

courts, and the actio ns of Alsid

e’s attor ney , David L

ufkin, we re found to be a ca

use of muc

h of the tim

e and money expended. Sanctions were entered against L ufkin in the Bankruptcy

Court in the amount of $20,000.00 by Judge Richar d Stair. This action deals with Metlife’s efforts to have further sanc tions assessed against Alside in Chancery Court. The basis of the Chancellor’s award of sanctions wa s made largely

on the submission of inaccurate pleadings, such as the re presentation to the Chancery Court that the Bankruptcy Court had ruled that the garnishment action in Chancery Court did not violate the automatic bankruptcy sta y. L ufkin also represented to the Chancery Court that Metlife had not forwarded Clemmer’s funds to it, when the money s had been submitted four months earlier.

Rule 11 sanctions are reviewed by examining whether the Trial Court abused its discretion. Krug v. Krug , 838 S.W.2d 197 (Tenn.App. 1992), citing Cooter & Gell v. Hartmarx Corp. , 496 U.S. 384, 400, 110 S.Ct. 2447, 2458, 110 L.Ed.2d 359 (1990). An abuse of discretion occurs if the trial court’s ruling is based on an erroneous view of the law or on a clearly

erroneous assessment of the evidence. Cooter at 405. Alside essentially conceded the existence of Rule 11 violations, but argues that it should not be responsible for its local counsel’s misconduct because it was not aware of his violations. An affidavit submitted by its in-house counsel, Mr. Cespede s, states that he was not aware of L

ufkin’s false statements “at the time.” The Chancellor acknowledged in her memorandum opinion that the corporation did not appear to be instigator or “c atalyst” of ba d faith or malice. She characterized the corporate c ounsel’s role as involving a “lack of attention or over reliance on local counsel.”3 However, she found that in-house counsel for Alside had be en kept “meticulously apprised of every ste p taken” by virtue

of memos, letters, and facsimile which were “provided at each and e very stag e of the proceedings.” She went on to state tha t Alside had “complete knowledge of the natur e of the proceedings” and that the ina ccuracy of the pleadings “should have been appare nt,” had Alside “exercised a minimal degree of care,” since it was “constantly a pprised of every

step in the proceedings and whose advice was sought at each state of the proceedings.” The record before the Chancellor comprised affidavits, submitted by both parties’ a ttorneys, and the opinion of Judge Stair, who a ssessed sanction s again st Alside’ s attorne y, L ufkin, in t he bankr uptcy court, a nd other d

ocuments . Alside insists that a client cannot be liable when it did not sign the defective pleading. We note pr eliminar ily t hat fede ral auth ority

may be used f or guida nce in interpreting Rule 11. Andrews v . Bible , 812 S.W.2d 284 (Tenn. 1991).

Rule 11 sta

tes in par t that: Represe ntations to

Court.- B y pr

esenting to the cou

rt (whet her by sign ing, fili ng, sub mitt ing, o r late r advo catin g) a pleading, written motion, or other paper, an attorney

or unrepresented party

is certifying

that to the best of the person’s knowledge, information, and belief, f ormed after an inquiry reasonable under the circumstances, - (1) it is no t being p

resente d for any

improper purpose, such as to

harass o r to cause unnecessary

delay or needless increase in the cost of litigation . . . (3) the allegations and other factual contentions have evidentiary support a

fter a reasonable opportunity

for further investigation or discovery

. . . . Tenn.R.Civ.Pro.11.02 (emphasis added). This Court has held that the above emphasized portion permits assessment of Rule 11 sanctions against any one who “advocates” a pleading , including the non-signing client. Al-Haddad v. Ritter , 1997 WL 44389 (Tenn.App. 1997) (homeowner could be

assesse d sanctio ns for requiring $8,000.00

in damag es when p lumbing p roblem ha

d argu ably been repa ired at $3 5.00 c ost). Lia

bilit y f or a n on-s igni ng c lient

also c an be

foun d in the next section, which sta

tes: If, after notice

and a reasonable opportunity to respond, the court determines that subdivision 11.02 has been violated, the court may , subject to the conditions stated below, impose an appropriate sanction upon the attorne ys,4 law firms, or parties that have violated subdivisio n 11.02 or

are re sponsible for the violation of

Tenness ee Rules o f Civil Proc edure, 1 1.03. (Em phasis added). Federal Rule 11 contains parallel provisions which have similarly been relied on when sanctioning non-signing parties. See, e.g., Bergeron v. Northwest Publications Inc. , 165 F.R.D. 518, 521 (D.Minn. 1996). Contrary to Alside’s contentions, a non-signing party may be subject to sanctions.

Attorneys are

held to an “objective” standard of reasona bleness when determining whether they have complied with Rule 11. Business Guides v. C hromatic Communications , 498 U.S. 5 33, 549, 11 1 S.Ct. 922, 9 32 (U.S. 19 91); Andrews, at 288; Krug, at 205 . Accor dingl y, sancti ons ar e appro priat e when a n atto rney subm its a p leadi ng, motion, or other paper on grounds which he knew or should have known were meritless. Vekris v. Peoples Express Airline , 707 F.Supp. 679, 682 (S.D.N.Y. 1988). A subjective showing of bad faith is no longer nece ssary. U.S. v. I nt’l Broth erhood of T

eamsters , 948 F.2d 1338, 1344 n. 3 (2d Cir. 1991).

Signing parties are held to a standard tha t varies with the client’s sophistication and experience. Business Guides, at 550. Business Guides, was an experienced litig ant with in -house c ounsel to make the necessa ry “reaso nable inq

uiry ” on its behalf, but was he

ld to an obj ective s tandard and asse ssed sanctions without a showing that it acted in bad faith. Id. Business Guides declined to reach the issue of the standard to be applied to non-signing parties. Id. at 554. At least one court has declined to impose an objective standard of reasonable inquiry on such a client. Taylor v. U.S. , 151 F.R.D. 389, 397 (D.Kan. 1993). Ho wever, that cas e dealt with a lay litigant who relied on her a

ttorney with regard to the merits of her ca se. Id.

In Continental Insurance Co. v. Construction Industries Services Corp., an experienced, non-signing corpora te entity with an in-house counse l was held to a standard of “reasonableness under the circumstanc es.” 149 F.R.D. 451, 455 (E.D. N.Y. 1993). The court did not elaborate as to what “reasonableness unde r the circumstances” required, althoug h the end result was to sanction the corporation whose in-house counsel ha d not conducted a5

“reasonable inquiry ” into the facts and law and had misinformed local counsel of the company’s princ ipal place of business. The Court obviously a pplied an objective standard that does not require a showing of bad faith.

We believe the use of an objective standard for a sophisticated, non-signing party is appropr

iate. SeeCoburn v. Cilco , 610 F.Supp. 656 (M.D.N.C. 1985) ; also see Terminix Int’l Co. v. Kay , 150 F.R. D. 532, 53 9 n. 7 (E.D . Penn. 199 3); also see g enerally Painewebber, Inc. v. Can Am Financial Group, Ltd. , 121 F.R. D. 324 (N .D.I ll. 1988); Independent Fire Insurance Co. v. Lea , 979 F.2d 377, 378- 379 (5th Cir . 1992); Chevron U.S.A. v. Hand , 763 F.2d 1184, 1187 (10th Cir. 1985).

We hold that sanctions are appropriate against a c orporate client when there has been meaningful participation by an in-house counsel, and the in-house counsel does not meet the criteria of the objective standard, mea ning that he or she knew or should have known tha

t the acti ons of loc al counse l were in violation of Rule 11 a

nd took no s teps to ameliora te. As to w

hether A lside play ed an ac tive role

in the re present ations, the affid avits submitted d

o little to sh

ed light on the lev el of in-house cou nsel’s pa rticipat ion. The a

ffidavit of in-hou se counse

l Cespede s indicate s that he w as unawa re of impr

oper ac tions by

Lufk in and had not directed those actions. I t is unclear what the basis was for the Chancellor’s finding that in-house was kept meticulously informed of the proceedings. Regarding whether Alside, throug h its in-house counsel, failed to meet an objectiv e standa

rd of conduct, we

recog nize that th

e purpose of hiring local counsel is to g ain familiarity and expertise with local va riances in the law. This ty pe of reliance is common and

reasona ble and seems to hav e play ed a role here, a s Alside’ s in-house counsel s tates in hi s affidavit that Ohio law does not use the writ of scire facias that was necessary in Tennessee. The conflicting evidence in this record c annot be properly evaluated on appeal. An evide

ntiary hearing is neces sary

in sanctio n cases w

here the re are disputed f

acts or issues of credibility. Chemiakin v. Yefimov , 932 F.2d 124, 130 (2d Cir. 1991); also see Didie v. Howes , 988 F.2d 1097, 1105 n. 8 (11th C ir. 1993) (“While notice, ‘f rom the pa

rty seeking sanctions, or from the court, or from both,’ a nd an opportunity to respond to a motion6

for Rule 11 sanctions comports under Donaldson with the du e proce ss requir ements of Rule 11, we consider it prudent for a district judge to hold a hea ring before imposing sanctions. Donaldson , 819 F.2d at 1560").

We believ e under t

he circumstance s of this ca se that it i s appropr iate to va cate the Trial Court’s judgment and remand for an evide ntiary hear

ing, where the Trial Judge can hear evidence and assess the cr edibility of the witnesses. Acc ordingly, we vacate the Trial Court’s judgment and remand with the cost of the appeal asse ssed to the appellee.

_______________________ Herschel P. Franks, J.

CONCUR:

___________________________ Houston M . Goddard, P.J.

___________________________ Cha rle s D. Susa

no, Jr., J.