Court Opinion

ID: 29357
Source: CourtListenerOpinion
Date Created: 2010-04-25 09:37:52+00
Date Added: 2024-06-11T14:55:51.504747
License: Public Domain

IN THE UNITED STATES COURT OF APPEALS

                         FOR THE FIFTH CIRCUIT

                            ______________

                              No. 01-11295
                             _____________

TRINITY GAS CORPORATION,

                                 Plaintiff

J. VAN OLIVER,

                                 Appellant

     v.

CITY BANK & TRUST COMPANY OF NATCHITOCHES; ET AL,

                                 Defendants

CITY BANK & TRUST COMPANY OF NATCHITOCHES,

                                 Defendant - Appellee

_________________________________________________________________

           Appeal from the United States District Court
                for the Northern District of Texas
                        No. 4:99-CV-1007-A
_________________________________________________________________
                         November 19, 2002

Before KING*, Chief Judge, and JOLLY and HIGGINBOTHAM, Circuit
Judges.

PER CURIAM:**

     *
          Chief Judge King concurs in the judgment only.
     **
        Pursuant to 5TH CIR. R. 47.5, the court has determined
that this opinion should not be published and is not precedent
except under the limited circumstances set forth in 5TH CIR. R.
47.5.4.
       On December 7, 1999, Trinity Gas Corporation (“Trinity”)
brought suit against City Bank & Trust Company of Natchitoches
(“City Bank”), Sidney W. Sers (“Sers”), Patricia Sers, and Scriven
Taylor asserting fraud, conspiracy, and conversion claims arising
from    an   alleged   relationship        between        Sers,   Trinity’s     former
chairman, and Joe Pierson, Jr., City Bank’s president.
       In July 2000, City Bank moved for summary judgment on all
claims   asserted      against   it   by       Trinity.        The   district   court
ultimately granted that motion for summary judgment in September
2000.
       In August 2000, while City Bank’s summary judgment motion was
pending, City Bank moved for sanctions against Trinity and its
attorneys under Rule 11 of the Federal Rules of Civil Procedure and
under 28 U.S.C. § 1927 based on allegations in Trinity’s complaint
which City Bank claimed were unreasonable and vexatious and without
adequate legal and evidentiary support.                   Trinity and its attorneys
responded to the motion later that same month.
       On July 19, 2001, more than ten months after the district
court granted summary judgment in favor of City Bank on all claims
and almost one year after City Bank filed its motion for sanctions,
the district court granted City Bank’s motion for sanctions in
part: it     imposed    sanctions     on       one   of    City   Bank’s   attorneys,
Appellant J. Van Oliver, individually, based on a finding that
Oliver had violated Rule 11(b)(2) and (3) and 28 U.S.C. § 1927.
The court sanctioned Oliver under Rule 11 in the amount of $5,000
and called for further briefing on the appropriate sanction for his
§ 1927 violation.       In late August 2001, the Court entered an order

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sanctioning Oliver for the § 1927 violation in the amount of
$ 59,688.97. The sanctions imposed under § 1927 shifted to Oliver,
personally, City Bank’s entire defense costs from the date that
Trinity first filed a document bearing Oliver’s signature.    Oliver
appeals both sanctions.
                              ANALYSIS
     We review a district court order imposing sanctions for abuse
of discretion, and we will find an abuse of discretion if the
district court based its order on either an erroneous view of the
law or a clearly erroneous view of the evidentiary record.1    Under
Rule 11 of the Federal Rules of Civil Procedure, an attorney may be
sanctioned for presenting any paper to a court without first
conducting a reasonable inquiry into legal and evidentiary support
for allegations, claims, and contentions contained therein.2    In a
similar vein, a court may shift attorneys fees and impose other
sanctions under 28 U.S.C. § 1927, if the court finds “evidence of
bad faith, improper motive, or reckless disregard of the duty owed
to the court.”3   Further, to support a shift of all defense costs,
as is the case here, it must be “shown with ‘convincing clarity’
that every facet of th[e] litigation was patently meritless.”4

     1
          Mercury Air Group, Inc. v. Mansour, 237 F.3d 542, 548
(5th Cir. 2001).
     2
          See Fed. R. Civ. P. 11.
     3
          Edwards v. General Motors Corp., 153 F.3d 242, 246 (5th
Cir. 1998).
     4
          Browning v. Kramer, 931 F.2d 340, 345 (5th Cir. 1991)
(emphasis in original and citation omitted); see also Proctor &
Gamble Co. v. Amway Corp., 280 F.3d 519, 526 (5th Cir. 2002)
(same).

                                 3
     District    courts       are   given   broad   discretion    in   imposing
sanctions against attorneys under Rule 11 and § 1927,5 but even
broad discretion must be exercised within clear and reasonable
limits.    As we have explained before, Rule 11 is not intended to
unreasonably    chill    an    attorney's    enthusiasm   or     creativity   in
pursuing factual or legal theories.6            To this end, courts should
not impose sanctions simply because one party ultimately lost on
the merits in litigation; nor should courts use the wisdom of
hindsight in ruling on a motion for sanctions under Rule 11 or §
1927.    Instead, the task for the district court under Rule 11 and
§ 1927 is only to decide whether an attorney has failed to conduct
a reasonable inquiry into the law and the facts and comply with “an
objective standard of reasonableness under the circumstances.”7
     Upon review of the record, the totality of the circumstances,
and the obligation of Oliver to his clients, we must find that the
district court abused its discretion in imposing drastic sanctions
in this case.
     First, we think that the district court erred as a matter of
law when it held that Trinity’s “claims are legally improper” based
solely on the court’s finding that the claims are “[w]ithout
factual support.”8       In past cases, we have expressly noted the

     5
          See, e.g., Cooter & Gell v. Hartmax Corp., 496 U.S.
384, 403-05 (1990).
     6
          See Thomas v. Capital Sec. Services, Inc., 836 F.2d
866, 988 (5th Cir. 1988)(en banc).
     7
          Federal Deposit Insurance Corp. v. Calhoun, 34 F.3d
1291, 1296 (5th Cir. 1994).
     8
            R.2466-67.

                                        4
difference    between   the     requirements    of   subdivisions   (b)(2)
and(b)(3) of Rule 11, and we have reversed district courts that
blurred the two parts of the Rule.9             In this case, too, the
district conflated subdivision (b)(2) & (b)(3) of Rule 11 and
erroneously concluded that a factually unsupported claim was also
necessarily one that is       unwarranted by existing law or by a non-
frivolous    legal   argument    for   the   extension,   modification   or
reversal of existing law or the establishment of new law.
     Second, we think that the district court clearly erred in
holding that Oliver violated Rule 11 by presenting a complaint to
the court without conducting a reasonable inquiry into basis of the
allegations and other factual contentions contained therein.10 Rule
11 makes clear that the exact nature of the inquiry required will
always depend on the individual circumstances in each case. This
inquiry usually will include specific factors such as how much the
attorney had to rely upon his client for the factual support for
the document; whether pre-filing investigation was feasible; the
complexity of the factual and legal issues in question; and the
need for discovery to develop the factual circumstances underlying

     9
            See FDIC v. Calhoun, 34 F.3d at 1298-99.
     10
          Oliver states in his brief that he did not personally
draft or sign Trinity’s original complaint; however, his name is
clearly listed on the complaint before that of the signatory and
he continuously appeared as a responsible attorney on all papers
filed on Trinity’s behalf. Furthermore, he was designated lead
counsel for Trinity on June 12, 2000. Based on all of this
uncontroverted evidence, Oliver clearly participated in
“presenting” the complaint to the district court. Accordingly,
Oliver can be held liable for the complaint under Fed. R. Civ. P.
11.

                                       5
the claim.11 In drafting pleadings, an attorney is entitled to rely
on his own personal knowledge as well as the objectively reasonable
representations of his clients.            In this case, the reasonableness
of Oliver’s inquiry to support his pleadings is manifested by his
prior dealings with the parties in this case.              Before filing this
case, Oliver represented the plaintiffs in a shareholder-derivative
action brought on behalf of Trinity against Trinity’s former
President, Sydney W. Sers, and he represented Trinity itself in an
SEC enforcement action against Sers (in which the SEC obtained the
temporary restraining order freezing assets belonging to Sers and
his    family   at   issue    in    this    case).    In    addition,   Oliver
successfully intervened on behalf of Trinity in a lawsuit brought
by City Bank in Louisiana state court against various parties.              He
also represented Trinity in various bankruptcy proceedings, as
counsel to the Shareholders Committee. Thus, Oliver was intimately
familiar with Sers, Trinity, City Bank, and alleged relationships
among the three at the time this complaint was filed such that the
reasonable inquiry component of Rule 11 is satisfied.              Even if we
set aside Oliver’s affidavit (offering apparently true but untimely
testimony   about    his     own   knowledge   and   beliefs   regarding   the
parties, their alleged relationships with one another, and the
factual background surrounding this case), the record still shows
that Oliver reasonably relied on the statements and knowledge of
his own clients in presenting Trinity’s complaint to the court.12

       11
            See Thomas v. Capital Sec. Services, Inc., 836 F.2d at
988.
       12
            See, e.g., R.2438-41 (Aff. of William Ruth).

                                        6
       In fact, each of the “false” allegations cited by City Bank
appear to have some reasonable evidentiary basis sufficient to
withstand attack under Rule 11(b)(3).                      For example, Trinity’s
allegation that Sers had “a close relationship” with City Bank’s
President,       Joe   Pierson    is    clearly         supported      by   information
uncovered during the course of other litigation indicating that
Sers and his family were prominent City Bank customers, that
Pierson acted as the sole loan officer to Sers and the corporations
that he controlled, and that the Bank often extended loans to Sers
and his corporations under unusual conditions.                    Likewise, based on
the Affidavit of William Ruth filed in this case and based on
deposition testimony taken in other litigation, Trinity appears to
have   had   a    reasonable     factual        basis    for     alleging    that   Sers
conspired with Pierson and City Bank fraudulently to transfer
$800,000 in       proceeds   from      an   illegal       sale    of   Trinity   stock.
Specifically, on December 8, 1997, Pierson did in fact arrange for
City Bank to transfer $800,000 out of a City Bank account opened in
the name of Sers’s young daughter to an offshore bank account in
the Cayman Islands belonging to Columbia Trinity, one of Sers’s
wholly owned companies.          This action was taken only on Sers’s oral
and written request and apparently in contravention of general bank
policies.    Moreover, on the same day that this suspicious transfer
occurred a district court entered a temporary restraining order
freezing that account.            Still further, Trinity and Oliver had
evidence supporting Trinty’s belief that City Bank and Pierson were

                                            7
aware of Sers’s problems with the SEC at the time of the supicious
transfer.13
      Finally, with respect to the § 1927 violation, we do not think
that the record supports a determination that Oliver unreasonably
and vexatiously multiplied the proceedings in this case simply by
filing the original complaint and refusing to withdraw it prior to
the disposition of City Bank’s summary judgment motion. Certainly,
the   evidence   will   not   support       “with   ‘convincing   clarity’”   a
determination “that every facet of th[e] litigation was patently
meritless.”14

      13
          The district court stated that “there is no evidence
that City Bank knew of the TRO” in its order granting City Bank’s
sanctions motion. However, a close reading of the original
complaint reveals that Trinity only alleged “[u]pon information
and belief” that “City Bank received notice from Mr. Sers and/or
others that the SEC had filed a lawsuit commencing the SEC
Enforcement Action.” Thus, Trinity did not, as the district
court said, ever make an allegation that City Bank knew about the
granting of the TRO before it wired the $800,000. Because
Trinity never made such an allegation, evidence of the bank’s
knowledge of the TRO is immaterial for the purposes of Rule 11.
      14
          Browning v. Kramer, 931 F.2d 340, 345 (5th Cir. 1991)
(emphasis in original and citation omitted); see also Proctor &
Gamble Co. v. Amway Corp., 280 F.3d 519, 526 (5th Cir. 2002)
(same).

                                        8
     We thus conclude that, for reasons we have briefly set forth,
the district court abused its discretion in awarding sanctions.15
Accordingly, the judgment of the district court is REVERSED, and
judgment is RENDERED in favor or Oliver.
                                           REVERSED and RENDERED.

     15
          As we said in Thomas v. Capital Security Service, Inc.,
836 F.2d at 878, we review more rigorously severe sanctions such
as those imposed against Oliver.

                                9