Opinion ID: 1707832
Heading Depth: 1
Heading Rank: 4

Heading: The District Court Order Denying Sanctions Against Polking.

Text: Elmer and SSFI argue for the first time on appeal that Polking's conduct in signing various documents subsequent to the original petition subjects him to Rule 80(a) sanctions. The district court was presented withand ruled uponthe sanctions issue as it related to Polking's signature on the original petition. Our inquiry is likewise circumscribed because our review is limited to those issues passed upon by the district court. Our review is for abuse of discretion. Mathias v. Glandon, 448 N.W.2d 443, 445 (Iowa 1989). We find such an abuse when the district court exercises its discretion on grounds or for reasons clearly untenable or to an extent clearly unreasonable. State ex rel. Miller v. National Dietary Research, Inc., 454 N.W.2d 820, 822 (Iowa 1990). Unreasonable in this context means not based on substantial evidence. Citizens' Aide/Ombudsman v. Rolfes, 454 N.W.2d 815, 819 (Iowa 1990). With these constraints in mind, we turn to the question of whether the district court abused its discretion in denying Rule 80(a) sanctions against Polking in connection with his signing of the original petition in the fraud action.
[c]ounsel's signature to every motion, pleading, or other paper shall be deemed a certificate that: Counsel has read the motion, pleading, or other paper; that to the best of Counsel's 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 cause an unnecessary delay or needless increase in the cost of litigation.... If a motion, pleading, or other paper is signed in violation of this rule, the court, upon motion or upon its own initiative, shall impose upon the person who signed it ... an appropriate sanction, which may include an order to pay the other party or parties the amount of the reasonable expenses incurred because of the filing of the motion, pleading, or other paper, including a reasonable attorney fee. (Emphasis added.) See also Iowa Code § 619.19 (adopts similar certification requirements for parties as well as for attorney). The italicized language makes it clear that Rule 80(a) requires the signer to certify that (1) the signer has read the petition, (2) the signer has concluded after reasonable inquiry into the facts and law that there is adequate support for the filing, and (3) the signer is acting without any improper motive. Iowa R.Civ.P. 80(a); Weigel, 467 N.W.2d at 280. As to the inquiry element the signer must certify that to the best of his knowledge, information, and belief, formed after a reasonable inquiry, the pleading, motion, or other paper is (1) well grounded on the facts and (2) warranted either by existing law or by a good faith argument for the extension, modification, or reversal of existing law. Weigel, 467 N.W.2d at 280 (citations omitted). The reasonableness of the signer's inquiry into the facts and law may depend on such factors as the time available to the signer for investigation; whether the signer had to rely on a client for information as to the facts underlying the pleading, motion, or other paper; whether the pleading, motion, or other paper was based on a plausible view of the law; or whether the signer depended on forwarding counsel or another member of the bar. Id. (citations omitted). As the district court noted, Weigel actually speaks to the signer's obligation when talking about the inquiry element and to the attorney's obligation when talking about the reasonableness of the inquiry. Because of this shift from signer to attorney, the district court raised the question of whether we were broadening the application of Rule 80(a) beyond the signer to include Polking in his role as referring attorney. The district court, however, stopped short of so interpreting Weigel and properly relied on what we said in Mathias. We reject any notion that we intended in Weigel to broaden Rule 80(a) obligations beyond the signer. We reaffirm what we said in Mathias: Rule 80(a) sanctions are imposed on the person signing, the represented party, or both. Mathias, 448 N.W.2d at 447. Contrary to Elmer's and SSFI's suggestion, Mathias specifically rejected any notion that Rule 80(a) imposes a continuing duty on the signer to dismiss the action if the signer later learns the client has no case. There is no such duty. Id. However, Rule 80(a) does apply to each paper signed, and would require that each filing reflect a reasonable inquiry. Other sanctions are available to address abusive tactics not related to the signing of pleadings, motions, and other papers. Id. (citations omitted). The district court must view the reasonableness of the signer-attorney's judgment as of the time the paper in question was filed, not with hindsight gained through hearing the evidence at trial. Weigel, 467 N.W.2d at 280 (citations omitted). An objectiverather than a subjectivestandard is used to measure the conduct of the signer-attorney. The test is `reasonableness under the circumstances' and the standard to be used is that of a reasonably competent attorney admitted to practice before the district court. Id. at 281 (citations omitted).
13. Throughout the entire modification proceedings attorney Tom Polking vehemently argued [that] Elmer Schettler had experienced unanticipated substantial growth and some of that should be shared with his ex-wife and children in the form of increased support. The trial court, the Court of Appeals, and the Iowa Supreme Court agreed there was substantial change in Elmer's circumstances, though not in Jane's, and ordered increased child support. 14. In the instant case, Attorney Tom Polking adopted a diametrically opposed viewpoint alleging defendants had conspired to defraud Jane before the time of dissolution by undervaluing the same corporation. The accuracy of book value, however, remained undisputed throughout both actions. 15. Attorney Tom Polking thus within a six month period intentionally filed two separate actions asserting inconsistent theories of recovery.... 16. Further, attorney Tom Polking filed fraud, conspiracy and breach of fiduciary duty claims against this defendant without factual support. .... 19. Under the provisions of I.R.C.P. 80(a), the effect of ... Tom Polking's signature to the petition is a certificate that counsel had read the petition, and to the best of counsel's knowledge, information and belief, formed after reasonable inquiry, said petition was well grounded in fact and warranted by existing law.... .... Wherefore, defendants ... pray this court ... enter judgment against ... Polking for ... damages ... resulting from the filing of the groundless and inappropriate claims.... In short, the motion alleges that Polking's conduct in filing the underlying fraud action was, in terms of Rule 80(a), not well grounded in fact and was not warranted by existing law. Our task is to determine whether the district court abused its discretion in concluding otherwise. 1. Warranted by existing law. Polking's theory was based on a shareholder fraud action. Our case law is clear that a fiduciary relationship exists between a managing officer of a corporation and a stockholder regarding the stockholder's shares of stock. Dawson v. National Life Ins. Co., 176 Iowa 362, 157 N.W. 929 (1916). Any contract between such an officer and a shareholder that allows the officer to profit from the sale of the stockholder's shares to the stockholder's detriment is presumptively fraudulent and voidable. Id. at 390, 157 N.W. at 937. The burden is on the officer to rebut such presumption by affirmatively showing the contract was fairly procured for value. Id. at 390, 157 N.W. at 937-38. If the stock was procured for less than value, the burden is on the officer to rebut the presumption by making a full disclosure of all facts bearing on the value of the stock that were known to the officer and unknown to the stockholder. Id. at 390, 157 N.W. at 938. The measure of damages in such an action is the value of the stock without reference to the price agreed upon at the time of sale. Id. at 390, 157 N.W. at 938. Elmer and SSFI think the fraud action was not warranted by existing law because Polking allegedly (1) asserted inconsistent theories and (2) impermissibly collaterally attacked the property settlement in the original dissolution of marriage decree. a. Inconsistent theoriesjudicial estoppel. Elmer and SSFI argue that in the modification action Polking was urging a substantial change in Elmer's postdissolution net worth. Jane won on that issue and she received additional child support. At the same time, Elmer and SSFI point out, Polking brought the fraud action involving the same facts knowing full well to support his claim he would have to argue a position diametrically opposed to [Jane's] posture in the modification case: ... Elmer['s] wealth was there but hidden at the time of the dissolution. Elmer and SSFI cite two cases that they claim would have made Polking realize, had he read them, that he could not assert an inconsistent position in a subsequent proceeding. Those cases are Graber v. Iowa Dist. Court, 410 N.W.2d 224 (Iowa 1987) and Vennerberg Farms, Inc. v. IGF Ins. Co., 405 N.W.2d 810 (Iowa 1987). We agree with the district court and Polking that these two cases do not support Elmer's and SSFI's contention that the fraud action was not warranted by existing law. It is true that when a theory has been presented successfully in one court, the doctrine of preclusion by inconsistent positions judicially estops that party from subsequently asserting an inconsistent position. Graber, 410 N.W.2d at 227. Vennerberg Farms, Inc., 405 N.W.2d at 814. But the judicial estoppel doctrine does not apply unless there has been a judicial acceptance of the inconsistent position. Graber, 410 N.W.2d at 227. Vennerberg Farms, Inc., 405 N.W.2d at 814. Here, at the time the fraud action was filed, there had been no decision by any court in the modification action. Because we must view Polking's conduct at the time the fraud action was filed, we cannot say that such action was barred by judicial estoppel at that time. Parties may allege inconsistent theories and rely on them until there has been a judicial acceptance of one of them. Viewing Polking's conduct as of the time he signed and filed the fraud petitionas we mustwe cannot say that objectively the action was not warranted by existing law. b. Collateral attack. Elmer and SSFI also contend that the fraud action was in reality an impermissible collateral attack on the property settlement in the dissolution of marriage action in order to enhance that settlement. They correctly point out that a property settlement is not subject to modification in the absence of fraud, duress, or other grounds as would justify setting aside or changing a decree in any other case. In re Marriage of Knott, 331 N.W.2d 135, 136 (Iowa 1983). They also correctly point out that the time for asserting grounds to set aside the decree for fraud in procuring the property settlement under Iowa Rules of Civil Procedure 252 and 253 had passed. The only fraud that is not subject to these time constraints is extrinsic fraud which is some act or conduct of the prevailing party which has prevented a fair submission of the controversy. Stearns v. Stearns, 187 N.W.2d 733, 735 (Iowa 1971). And, as Elmer and SSFI note, there is no allegation of extrinsic fraud here. However, viewing the petition objectively, we agree with the district court that the petition's allegations support Polking's claim that the suit was a shareholder fraud action. Earlier we discussed the Iowa law on such an action which is consistent with Polking's claim that the lawsuit was based on fraud against Jane as a shareholder in SSFI. We therefore find no abuse of discretion in the district court's conclusion that the instant action asserting predecree fraud did not when filed offend Rule 80(a). 2. Well grounded in fact. The record discloses that Polking conducted formal discovery in the modification action before he filed the fraud action. He reviewed a number of documents he obtained from Elmer and his accountant. Elmer vigorously resisted such discovery and only after being threatened with sanctions did he relent and turn over the documents requested. Besides deposing Elmer and his accountant, Polking sought the advice of experts about the valuation of SSFI. He also secured Jane's dissolution file from her dissolution of marriage attorney. This file contained virtually nothing about Elmer's financial condition, much less anything about the value of SSFI. The dissolution of marriage attorney relied entirely on Elmer, Elmer's accountant, and Elmer's attorney regarding Elmer's financial worth and the value of SSFI. During the course of this discovery, Polking learned that Elmer obtained Jane's 20% ownership interest in SSFI in two separate transactions, one before the dissolution of marriage and one as part of the dissolution of marriage property settlement. The corporation's book value at the time of the dissolution of marriage was $708,000, yet Elmer obtained Jane's 20% ownership interest on a book value basis of $580,000. Before the fraud action was filed, Polking discovered a financial statement showing Elmer's financial condition on September 30, 1983six months before the dissolution of marriage decree was entered. The statement shows a market value of Elmer's 80% ownership interest in SSFI to be $1,268,900 more than twice the book value basis upon which Elmer obtained Jane's stock. Similar statements dated September 30, 1982, and April 16, 1984, show Elmer's 80% interest in SSFI to be $1,283,444 and $1,586,238, respectively. All three statements contained signature lines for Elmer but none for Jane. Jane told Polking that she had not seen these documents, that she would not know what they meant had she seen them, and that she relied on Elmer and his accountant as to the value of the SSFI stock she gave up. Along with these financial statements, Polking found a publication on how to value a closely held seed company. With the publication was a note from Elmer to his accountant in which Elmer asked, What do you think about this, Ron? Polking testified this convinced him that Elmer knew how to value a corporation. The expert Polking sought out confirmed that book value was not a proper way to value SSFI and the outstanding stock in the corporation. The expert placed a value on SSFI even higher than what Elmer had valued it. In 1988 SSFI was sold for nearly $2,500,000. Contrary to Elmer's and SSFI's contention, we think from an objective standpoint the record amply supports the district court's conclusion that the shareholder fraud action was well grounded in fact. The district court was therefore well within its discretion in coming to this conclusion. Sometime after the fraud action was filed, Elmer produced a financial statement he obtained from his bank. The statement bore not only his signature but Jane's signature as well. Elmer and SSFI rely heavily on this piece of evidence. They contend that this is conclusive evidence that Jane, too, knew what SSFI was worth. We reject this contention. The timing of the financial statement's discovery and Jane's insistence that she did not remember the document, or even understand it, all militate against Elmer's and SSFI's contention. In summary, Polking was a signer to the original petition in the fraud action. Measured by the yardstick of a reasonable signer in Polking's position, we see no abuse of discretion in the district court's determination that sanctions against Polking were unwarranted. Any facts developed after the petition was filed are simply irrelevant to the propriety of the filing. The perfect acuity of hindsight has no place in a Rule 80(a) motion for sanctions.