Opinion ID: 516947
Heading Depth: 1
Heading Rank: 4

Heading: the imposition of sanctions against itel

Text: 44 The correct standard for reviewing a courts' imposition of sanctions under Fed.R.Civ.P. 11 on both questions of fact and questions of law is abuse of discretion. Thomas v. Capital Secur. Services, Inc., 836 F.2d 866, 872 (5th Cir.1988) (en banc). Rule 11 sanctions were imposed against Itel for asserting its RICO counterclaim. 9 The trial judge found the counterclaim without merit and part of a defensive strategy designed to make the cost of litigation so high that Chapman would be forced to abandon the fight. 10 45 Itel clearly had ample opportunity to present its position. Itel received notice as early as ten months before trial that sanctions might be imposed when Chapman filed a motion to impose sanctions. Itel also was repeatedly warned throughout the trial of the possibility of sanctions. After trial, Itel was again warned when both Chapman and Ehrentraut renewed their motions for imposition of sanctions. Finally, after a show cause hearing where Itel was allowed to put on evidence, the judge decided to award sanctions. 46 This Court en banc recently discussed an attorney's obligations under Rule 11. Thomas, 836 F.2d at 873-76. In Thomas we held that compliance with Rule 11 requires, when signing a pleading, motion, or other document, 47 1) that the attorney has conducted a reasonable inquiry into the facts which support the document; 48 2) that the attorney has conducted a reasonable inquiry into the law such that the document embodies existing legal principles or a good faith argument 'for the extension, modification, or reversal of existing law;' and 49 3) that the motion is not interposed for purposes of delay, harassment, or increasing costs of litigation. 50 Id. at 873-74. Also, an attorney's subjective good faith does not protect him from Rule 11 sanctions. Robinson, 808 F.2d at 1127. 51 The district court found that the RICO action was based at best upon the subjective belief of Itel's attorney without enough concrete evidence to bring the cause of action, and at worst, on the improper purposes of causing delay and increasing expenses to Chapman. The district court thus had as a basis for sanctions either the first or the third affirmative duty set out in Thomas. 52 Itel undertook to support its RICO claim that Ehrentraut received kickbacks to turn his head during the construction of the flexible surface by initially proffering: 1) copies of five cancelled checks from Novotny and Dantex Erectors to Ehrentraut; 2) statements made by John Montgomery during a taped telephone conversation with Hassell; 3) the fact that Ehrentraut occasionally did work for Novotny as an independent contractor and was a partner in a company with Novotny; 4) the fact that Chapman confronted Ehrentraut about his involvement with Novotny; and 5) the fact that if either Novotny or Ehrentraut admitted to this scheme, they would subject themselves to possible criminal charges. 53 The district court found the only possible solid evidence at the time of the initial filing was the taped conversation between Montgomery and Hassell and the five cancelled checks. The court correctly concluded that neither amounted to proper grounds for bringing a RICO cause of action. The court heard the tape in camera after it was brought to the court's attention at the show cause hearing. The court ruled that it contained only rumors. 11 As to the checks, during the trial and the show cause hearing, Urquhart & Hassell was unable to point to any evidence that linked the check payments to Ehrentraut with the work performed by Treat. Rather, the evidence clearly proved that the five checks issued to Ehrentraut were for legitimate business activities that did not relate to this particular project. 12 It follows that Itel's counsel filed the complaint based on unverified hearsay--not a sufficient basis upon which to subject one to the burdens of complex litigation and heavy legal costs. See Miller v. Schweickart, 413 F.Supp. 1059, 1061 (S.D.N.Y.1976). A RICO cause of action by definition involves complex litigation and high legal costs. 54 Itel and its counsel now try to argue that they were precluded at trial from discussing the RICO issue since the suit against Ehrentraut was never tried; thus, they argue they were never given the opportunity to prove their claim. They were given numerous opportunities to do so during cross-examination, however, and they had fair warning that sanctions might be imposed if additional evidence in support of their claim was not forthcoming. At a pretrial conference, the trial court warned Itel of the weakness of the RICO claim. Itel responded that there was plenty of evidence, but when the court asked Itel to produce that evidence within 60 days, none was provided. Itel also failed at the show cause hearing to supply any additional information on the objective reasonableness of its pleading. 55 Finally, it should be noted that an attorney's responsibility to conduct a reasonable prefiling investigation is particularly important in RICO claims: 56 Given the resulting proliferation of civil RICO claims and the potential for frivolous suits in search of treble damages, greater responsibility will be placed on the bar to inquire into the factual and legal bases of potential claims or defenses prior to bringing such suit or risk sanctions for failing to do so. 57 Black & Magenheim, Using the RICO Act in Civil Cases, 22 Hou. Law. 20, 24-25 (Oct.1984). See also Fahrenz v. Meadow Farm Partnership, 850 F.2d 207 (4th Cir.1988).
58 The district court found that in connection with the RICO claim, Itel's attorneys also abused the discovery process. The district court stated its awareness of the superior resources of Itel. It then found evidence of an attempt to innundate Chapman with unnecessary discovery requests to raise the cost of the litigation to a point that Chapman would be forced to give up without a fight because of the expense. 665 F.Supp. at 1284. In particular, the court found that the discovery conducted by Itel's attorneys was unreasonable, unnecessary, and unduly burdensome in violation of Rule 26(g). 13 The court also found that, in violation of Rule 37(a)(3), Itel improperly failed to disclose the existence of the taped telephone conversation between Hassell and Montgomery in Itel's response to an interrogatory. 14 59 Under 26(g), Urquhart & Hassell was under a duty similar to the duty under Rule 11 to make a reasonable inquiry into the basis of the action:The duty to make a 'reasonable inquiry' is satisfied if the investigation undertaken by the attorney and the conclusions drawn therefrom are reasonable under the circumstances. It is an objective standard similar to the one imposed by Rule 11 ... Ultimately what is reasonable is a matter for the court to decide on the totality of the circumstances. 60 Fed.R.Civ.P. 26(g) Advisory Committee is note (1983). The record clearly reflects extensive discovery by Itel. Urquhart & Hassell deposed Lestor Schalit, Ehrentraut, Brent Warren, J.E. Lewis, and John Montgomery. In addition, it deposed Treat on three different occasions and Chapman twice. The court found the discovery burdensome in light of the continued lack of any additional evidence. This finding did not abuse the judge's discretion. 61 The failure to inform opposing counsel of the tape also warranted sanction. The failure amounted to an incomplete response to an interrogatory question. 15 An incomplete response is sanctionable and is considered to be evasive under Rule 37. 16 See Dollar v. Long Mfg., N.C., Inc., 561 F.2d 613, 616-17 (5th Cir.1977), cert. denied, 435 U.S. 996, 98 S.Ct. 1648, 56 L.Ed.2d 85 (1978). 62 Itel and its counsel claim that they were not under a duty to reveal the tape since it constitutes work product. For two reasons this contention cannot prevail. First, the clandestine taping of a telephone conversation implicitly waives the protection of the work product doctrine because it violates the American Bar Associations's Model Rules of Professional Conduct. See Parrott v. Wilson, 707 F.2d 1262, 1270-72 (11th Cir.), cert. denied, 464 U.S. 936, 104 S.Ct. 344, 78 L.Ed.2d 311 (1983). Second, Itel should have filed a work product objection within 30 days of receipt of the interrogatory to preserve the objection. Fed.R.Civ.P. 33. Its failure to do so amounted to a waiver. Thus, the trial court also correctly sanctioned Itel and its counsel under Rule 37.
63 The district court imposed sanctions in the amount of $20,000 on Itel and its attorneys under Rules 11, 26, and 37 without specifying the sum actually awarded under each rule. Itel and Urquhart & Hassell each were ordered to pay $10,000 of the $20,000. Ehrentraut was to receive $5,000 and Chapman was to receive the remaining $15,000. We find no abuse by the district court in the amount assessed. 64 First, the district court correctly determined an appropriate sanction under Rule 11. Once a violation was found, the judge was mandated to impose sanctions. The choice of sanction was, however, within the trial court's broad discretion. Thomas, 836 F.2d at 876. In Thomas, we listed possible types of sanctions, noting the purpose of sanctioning: 65 [w]hether sanctions are viewed as a form of cost-shifting, compensating opposing parties injured by the vexatious or frivolous litigation forbidden by Rule 11, or as a form of punishment imposed on those who violate the rule, the imposition of sanctions pursuant to Rule 11 is meant to deter attorneys from violating the rule. 66 Id. at 877 (quoting Donaldson v. Clark, 819 F.2d 1551, 1556 (11th Cir.1987) (en banc) (emphasis added). Here the trial judge chose a monetary sanction as appropriate. 17 67 Itel and its counsel argue that even if monetary sanctions are appropriate under Rule 11, the amount should be reduced by the amount awarded under Rule 37. Under that Rule they can only be held responsible for the reasonable expenses caused by their failure to comply with discovery. See Batson v. Neal Spelce Associates, Inc., 765 F.2d 511 (5th Cir.1985). They assert that assessment of fees is limited only to those flowing from the specific abuses of the discovery process. See Stillman v. Edmund Scientific Co., 522 F.2d 798 (4th Cir.1975). This claim is fruitless, however, because we find the total amount awarded appropriate under Rule 11 without a finding under any other rule. 68 Even if Rule 11 did not cover the full amount awarded, it is clear the total amount of sanctions was also appropriate under the discovery rules. The district court clearly found Itel and its counsel to have continued unreasonably for several years the massive discovery requests after finding no additional evidence to support Itel's claim. Not one witness was produced with personal knowledge of any kickbacks. The district court cannot be said to have abused its discretion in the award of sanctions or the amount awarded.