FILED

July 25, 1997

Cecil Crowson, Jr.

Appellate Court Clerk

 IN THE COURT OF APPEALS OF TENNESSEE

EASTERN SECTION

ALSIDE SUPPLY CENTER OF ) C/A NO. 03A01-9702-CH-00069

KNOXVILLE, ) 

) KNOX CHANCERY

Plaintiff-Appellant, )

) HON. SHARON BELL,

v. ) CHANCELLOR

)

SMITH HERITAGE SIDING )

COMPANY, INC., and DENNIS )

CLEMMER, )

)

Defendants, )

)

and )

)

METROPOLITAN LIFE INSURANCE )

COMPANY, ) VACATED

) AND

Appellee. ) REMANDED

JACK B. DRAPER, ARNETT, DRAPER & HAGOOD, Knoxville, for PlaintiffAppellant.

JOHN A. LUCAS and MARTIN B. BAILEY, HUNTON & WILLIAMS, Knoxville,

for Appellee.

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 appealed.

This dispute arose out of garnishment proceedings initiated by Alside against

Metropolitan Life Insurance Company (Metlife). Alside had previously been awarded a
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judgment against a Mr. Clemmer, who owned annuity contracts with Metlife.

Protracted litigation occurred as a result of the initiation of this action, 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 actions of Alside’s attorney, David Lufkin, were found to be a cause of much of the time

and money expended. Sanctions were entered against Lufkin in the Bankruptcy Court in the

amount of $20,000.00 by Judge Richard Stair. 

This action deals with Metlife’s efforts to have further sanctions assessed

against Alside in Chancery Court. The basis of the Chancellor’s award of sanctions was

made largely on the submission of inaccurate pleadings, such as the representation to the

Chancery Court that the Bankruptcy Court had ruled that the garnishment action in Chancery

Court did not violate the automatic bankruptcy stay. Lufkin also represented to the Chancery

Court that Metlife had not forwarded Clemmer’s funds to it, when the moneys 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. Cespedes, states that he

was not aware of Lufkin’s false statements “at the time.” 

The Chancellor acknowledged in her memorandum opinion that the

corporation did not appear to be instigator or “catalyst” of bad faith or malice. She

characterized the corporate counsel’s role as involving a “lack of attention or over reliance on

local counsel.”
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However, she found that in-house counsel for Alside had been kept

“meticulously apprised of every step taken” by virtue of memos, letters, and facsimile which

were “provided at each and every stage of the proceedings.” She went on to state that Alside

had “complete knowledge of the nature of the proceedings” and that the inaccuracy of the

pleadings “should have been apparent,” had Alside “exercised a minimal degree of care,”

since it was “constantly apprised 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’ attorneys, and the opinion of Judge Stair, who assessed

sanctions against Alside’s attorney, Lufkin, in the bankruptcy court, and other documents.

Alside insists that a client cannot be liable when it did not sign the defective

pleading. 

We note preliminarily that federal authority may be used for guidance in

interpreting Rule 11. Andrews v. Bible, 812 S.W.2d 284 (Tenn. 1991).

Rule 11 states in part that: 

Representations to Court.- By presenting to the court (whether by signing,

filing, submitting, or later advocating) 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, formed after an inquiry

reasonable under the circumstances, -

(1) it is not being presented for any improper purpose, such as to harass or to

cause unnecessary delay or needless increase in the cost of litigation . . . (3)

the allegations and other factual contentions have evidentiary support after 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 anyone who “advocates” a pleading, including the non-signing

client. Al-Haddad v. Ritter, 1997 WL 44389 (Tenn.App. 1997) (homeowner could be

assessed sanctions for requiring $8,000.00 in damages when plumbing problem had arguably

been repaired at $35.00 cost). Liability for a non-signing client also can be found in the next

section, which states: 

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 attorneys,
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law firms, or parties that have violated subdivision 11.02 or are responsible

for the violation of Tennessee Rules of Civil Procedure, 11.03. (Emphasis

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 reasonableness when

determining whether they have complied with Rule 11. Business Guides v. Chromatic

Communications, 498 U.S. 533, 549, 111 S.Ct. 922, 932 (U.S. 1991); Andrews, at 288;

Krug, at 205. Accordingly, sanctions are appropriate when an attorney submits a pleading,

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 necessary. U.S. v. Int’l Brotherhood of Teamsters, 948 F.2d

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

Signing parties are held to a standard that varies with the client’s

sophistication and experience. Business Guides, at 550. Business Guides, was an

experienced litigant with in-house counsel to make the necessary “reasonable inquiry” on its

behalf, but was held to an objective standard and assessed 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). However, that case dealt with a lay litigant who relied on her attorney with

regard to the merits of her case. Id.

In Continental Insurance Co. v. Construction Industries Services Corp., an

experienced, non-signing corporate entity with an in-house counsel was held to a standard of

“reasonableness under the circumstances.” 149 F.R.D. 451, 455 (E.D. N.Y. 1993). The court

did not elaborate as to what “reasonableness under the circumstances” required, although the

end result was to sanction the corporation whose in-house counsel had not conducted a
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“reasonable inquiry” into the facts and law and had misinformed local counsel of the

company’s principal place of business. The Court obviously applied 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 appropriate. 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, 539 n. 7 (E.D. Penn. 1993); also see generally

Painewebber, Inc. v. Can Am Financial Group, Ltd., 121 F.R.D. 324 (N.D.Ill. 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 corporate 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, meaning that he or she knew or should have

known that the actions of local counsel were in violation of Rule 11 and took no steps to

ameliorate. As to whether Alside played an active role in the representations, the affidavits

submitted do little to shed light on the level of in-house counsel’s participation. The affidavit

of in-house counsel Cespedes indicates that he was unaware of improper actions by Lufkin

and had not directed those actions. It is unclear what the basis was for the Chancellor’s

finding that in-house was kept meticulously informed of the proceedings. 

Regarding whether Alside, through its in-house counsel, failed to meet an

objective standard of conduct, we recognize that the purpose of hiring local counsel is to gain

familiarity and expertise with local variances in the law. This type of reliance is common and

reasonable and seems to have played a role here, as Alside’s in-house counsel states in his

affidavit that Ohio law does not use the writ of scire facias that was necessary in Tennessee. 

The conflicting evidence in this record cannot be properly evaluated on

appeal. An evidentiary hearing is necessary in sanction cases where there are disputed facts

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 Cir. 1993) (“While notice, ‘from the party

seeking sanctions, or from the court, or from both,’ and an opportunity to respond to a motion
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for Rule 11 sanctions comports under Donaldson with the due process requirements of Rule

11, we consider it prudent for a district judge to hold a hearing before imposing sanctions. 

Donaldson, 819 F.2d at 1560"). 

We believe under the circumstances of this case that it is appropriate to vacate

the Trial Court’s judgment and remand for an evidentiary hearing, where the Trial Judge can

hear evidence and assess the credibility of the witnesses. Accordingly, we vacate the Trial

Court’s judgment and remand with the cost of the appeal assessed to the appellee.

_______________________

Herschel P. Franks, J. 

CONCUR:

___________________________

Houston M. Goddard, P.J.

___________________________

Charles D. Susano, Jr., J.