Court Opinion

ID: 9495444
Source: CourtListenerOpinion
Date Created: 2023-08-05 16:03:10.296813+00
Date Added: 2024-06-11T17:57:01.618107
License: Public Domain

GILMAN, Circuit Judge,
concurring in part and dissenting in part.
Although I agree with the majority that Hartford’s cross-appeal was properly denied by the district court, I disagree with its conclusion that First Bank’s appeal should also be denied. The record, in my opinion, neither supports a finding that First Bank acted in bad faith nor justifies the district court’s decision to invoke its inherent powers. I would therefore reverse the district court’s award of attorney fees to Hartford.
I. First Bank did not act in bad faith
A district court has the “inherent authority to award fees when a party litigates in bad faith, vexatiously, wantonly, or for oppressive reasons.” Big Yank Corp. v. Liberty Mut. Fire Ins. Co., 125 F.3d 308, 313 (6th Cir.1997) (internal quotation marks omitted). The court in Big Yank Corp. focused on the plaintiffs alleged filing of a meritless complaint. In this context, the court held that “[i]n order to award attorney fees under this bad faith exception, a district court must find that the claims advanced were [1] meritless, [2] that counsel knew or should have known this, and [3] that the motive for filing the suit was for an improper purpose such as harassment.” Id. (internal quotation marks omitted) (emphasis added). Although the district court in the present case arguably made the requisite findings regarding the first two criteria for awarding attorney fees pursuant to the “bad faith exception,” it did not make any findings regarding First Bank’s motive for filing this lawsuit. The district court thus abused its discretion in invoking its inherent powers to grant attorney fees to Hartford.
As the majority points out, the district court concluded that First Bank’s suit against Hartford was “laced with bad faith.” In coming to this conclusion, however, the district court relied upon its finding that “First Bank was aware of the condition precedent in the Bond Agreement, but chose to ignore it” and, as a result, “First Bank had no legal or factual basis for bringing suit against Hartford.” These statements pertain to the first two findings that a district court must make in order to properly award attorney fees pursuant to the bad-faith exception; namely, that the claim was “meritless” and “that counsel knew or should have known this.” Big Yank Corp., 125 F.3d at 313. But the statements say nothing about First Bank’s motive for filing its lawsuit.
The majority nevertheless concludes that First Bank’s motive was improper. According to the majority, the improper motive that was “implicit” in the district court’s analysis was that “First Bank improperly used the court system to try to force a result that it could not obtain under the applicable law.” Maj. Op. at 535. In reaching this conclusion, the majority relies upon the district court’s conclusory *531statement that First Bank’s bad faith was “in the nature of ‘bringing an action or in causing an action to be brought.’ ” The majority thus infers that a claim is filed for an “improper purpose” if the claim is “invalid” and is put forth by a litigant who knows that the claim is invalid. Given that the first two requirements set forth in Big Yank Corp. relate to the merits of the claim and counsel’s knowledge regarding the merits, such an interpretation of the phrase “improper purpose” essentially eliminates the third requirement for invoking the bad-faith exception.
Nothing in Big Yank Corp. or its progeny, however, indicates that this third requirement is surplusage. A plaintiffs desire to obtain a monetary judgment that is in fact unwarranted cannot possibly be the sort of “improper purpose” that the court in Big Yank Corp. had in mind when shaping the requirements for properly invoking the bad-faith exception. Indeed, because the pursuit of unmeritorious claims is unfortunately all too common, this broad interpretation of the “improper purpose” requirement would bring many cases within the bad-faith exception that, as the Supreme Court has stated, is to be invoked only sparingly. Chambers v. NASCO, Inc., 501 U.S. 32, 44, 111 S.Ct. 2123, 115 L.Ed.2d 27 (1991) (“Because of their very potency, inherent powers must be exercised with restraint and discretion.”). The example of an improper purpose set forth in Big Yank Corp. is harassment, and there was no finding by the district court of such motivation or anything close to it on the part of First Bank.
Realizing, perhaps, that “us[ing] the court system to try to force a result that it could not obtain under the applicable law” is insufficient to establish bad faith, the majority speculates about other bases for the district court’s decision: “Implicit in this finding [of bad faith] is the finding that First Bank had the improper purposes of attempting to use the court system to threaten Hartford in an attempt to force settlement or other action where not otherwise obtainable under the relevant legal principles, and delay.” Maj. Op. at 525 n. 19 (emphasis added).
But the majority’s speculation as to the behavior of First Bank that the district court found objectionable is belied by the explicit reasoning of the district court. As described above, the district court based its finding of bad faith on the fact that “First Bank was aware of the condition precedent in the Bond Agreement, but chose to ignore it” and, as a result, First Bank “had no legal or factual basis for bringing suit against Hartford.” The district court did not, however, make any findings whatsoever regarding First Bank’s motivation for filing its complaint.
At another point, the majority claims that “the district court’s finding here that the Plaintiffs conduct of this litigation is ‘laced with bad faith’ is an explicit finding of bad faith.” Maj. Op. at 520. The majority offers no authority to support this holding, however, beyond citing the unpublished decisions of Mann and Johnson. Id. Moreover, the district court’s statement that First Bank’s suit is “laced with bad faith” is not a finding at all, but only a bare legal conclusion. And it is a conclusion that I find unpersuasive because it is not supported by any specific findings of fact by the district court. Big Yank Corp., 125 F.3d at 314 (“[T]he bad faith exception requires that the district court make actual findings of fact that demonstrate that the claims were meritless, that counsel knew or should have known that the claims were meritless, and that the claims were pursued for an improper purpose.”) (emphasis in original).
The majority also attempts to cure this deficiency in the district court’s analysis by *532proclaiming that, “[a]s a matter of law, to file a meritless lawsuit and to withhold material evidence in support of a claim is an improper use of the courts.” Maj. Op. at 522 n. 18 (emphasis in original). I disagree with this pronouncement because it converts a finding that a lawsuit is “mer-itless” into an “improper use of the courts,” whereas the binding precedent of Big Yank Corp. requires that these elements be considered as separate concepts. Big Yank Corp., 125 F.3d at 313. Furthermore, the only authority that the majority cites to support its new rule is dicta from the case of Mansmann v. Tuman, 970 F.Supp. 389 (E.D.Pa.1997), concerning the tortious use of the courts under Pennsylvania law. I am unpersuaded by the applicability of the cited authority.
One could also argue that the district court did not even make the first two findings that Big Yank Corp. requires in order to properly invoke the bad-faith exception, because the district court did not expressly find that “First Bank filed suit in an attempt to obtain payment on what it knew was an invalid claim under the terms of the Bond Agreement.” Instead, the district court simply stated that it “could easily conclude” that such was the case. (Emphasis added.) But the district court decided that it “need not reach that conclusion to find that First Bank’s suit was in bad faith.”
I believe that the district court’s analysis is difficult to reconcile with the clear requirements for properly invoking the bad-faith exception as set forth in Big Yank Corp. In order to satisfy the first two requirements, the district court had to find that First Bank’s claim was invalid and that counsel knew it was invalid. Because the district court apparently thought that it did not have to reach such a conclusion, it appears that the court invoked its inherent power under a misapprehension of the law.
In sum, this case appears to be nothing more than a typical clash between a bank and an insurance company over the application of a fidelity insurance policy. The bank’s claim relating to the unauthorized increase in the Mascrete line of credit might have lacked merit, but it hardly seems frivolous. Furthermore, I find no proof that First Bank intended to harass or intimidate Hartford with the claim. Hartford, in fact, is a much larger entity than the bank, so such motives are extremely unlikely. I therefore believe that the district court erred in finding that First Bank acted in bad faith.
II. The district court erred in invoking its inherent powers
Even if First Bank had acted in bad faith, the Supreme Court has instructed the lower courts that they should invoke their inherent powers only where the rules of civil procedure are not “up to the task” of addressing the conduct at issue:
[W]hen there is bad-faith conduct in the course of litigation that could be adequately sanctioned under the Rules, the court ordinarily should rely on the Rules rather than the inherent power. But if in the informed discretion of the trial court, neither the statute nor the Rules are up to the task, the court may safely rely on its inherent power.
Chambers v. NASCO, Inc., 501 U.S. 32, 50, 111 S.Ct. 2123, 115 L.Ed.2d 27 (1991). This is a strong admonition. It means that, absent extraordinary circumstances, a court abuses its discretion when it resorts to its inherent powers to sanction conduct that could be covered by the rules of civil procedure.
In this case, however, Rule 11 would have fully covered the district court’s focus *533on First Bank’s alleged misconduct if Hartford had complied with the Rule’s safe-harbor filing requirements. Hartford’s failure to comply with those requirements does not mean that the Rule 11 was not “up to the task” of addressing First Bank’s behavior. The majority, however, avoids this conclusion by first claiming that Rule 11 would not have covered all of First Bank’s misconduct, and then by reinterpreting Chambers so as to eviscerate the requirement that the district court’s inherent powers should be properly invoked only when the civil rules are not “up to the task” of addressing the conduct at issue.
In Chambers, the alleged sanctionable conduct was that Chambers had “(1) attempted to deprive this Court of jurisdiction by acts of fraud, nearly all of which were performed outside the confines of this Court, (2) filed false and frivolous pleadings, and (3) attempted, by other tactics of delay, oppression, harassment and massive expense to reduce plaintiff to exhausted compliance.” 501 U.S. at 41, 111 S.Ct. 2123 (internal quotation marks omitted). The district court granted attorney fees pursuant to its inherent powers after concluding that “the first and third categories could not be reached by Rule 11, which governs only papers filed with a court,” and that “the falsity of the pleadings at issue did not become apparent until after the trial on the merits, so that it would have been impossible to assess sanctions at the time the papers were filed.” Id. at 41, 111 S.Ct. 2123. Although the Supreme Court affirmed the district court’s decision, it did so only after noting that “[m]uch of the bad-faith conduct by Chambers [ ] was' beyond the reach of the Rules....” Id. at 50-51, 111 S.Ct. 2123.
At several points in its opinion, the majority attempts to analogize the case before us to the facts in Chambers. One such point is found in the following passage:
Here, as in Chambers, some of First Bank’s conduct would be sanctionable under Rule 11, ie., filing of a clearly meritless claim, while First Bank’s other conduct falls outside Rule 11, i.e., noncompliance with discovery orders, delays in providing discovery and withholding material evidence. First Bank’s Rule 11 conduct is intertwined with its other misconduct that needed to be addressed by the district court’s inherent powers. Thus, even if Hartford had complied with the Rule 11 safe harbor provisions, Rule 11 would not cover First Bank’s other misconduct and discovery delays, nor would it apply to First Bank’s conduct in intentionally withholding the Tonti affidavit.
Maj. Op. at 517-18. The problem with the majority’s analysis, in my opinion, is that the district court did not base its finding of bad faith on First Bank’s discovery delays or on the fact that First Bank did not disclose the Tonti affidavit until Hartford had filed its motion for summary judgment. In determining whether conduct is “beyond the reach of the Rules,” Chambers makes it clear that we can rely only on behavior that the district court has found to be “bad-faith conduct.” Chambers, 501 U.S. at 50-51, 111 S.Ct. 2123.
This case presents circumstances that are considerably different than those found in Chambers, because, the offending conduct that was cited by the district court here was clearly within the purview of Rule ll’s sanctions against litigants who file meritless claims. The only “bad-faith conduct” that the district court found was that “First Bank was aware of the condition precedent in the Bond Agreement, but chose to ignore it” and, as a result, First Bank “had no legal or factual basis for bringing suit- against Hartford.” Because *534Rule 11 would have been fully “up to the task” of sanctioning First Bank’s alleged misconduct if Hartford had complied with the Rule’s safe-harbor filing requirements, I believe that the district court abused its discretion in invoking its inherent powers to sanction First Bank.
Realizing, perhaps, the flaw in its contention that First Bank’s conduct was “beyond the reach” of Rule 11, the majority reinterprets Chambers so as to eviscerate the requirement that inherent powers should properly be invoked only when the civil rules are not “up to the task” of addressing the conduct at issue. After acknowledging that Chambers does not define what “up to the task” means, and that various federal courts of appeals have interpreted the phrase in different ways, the majority declares: “In our view, Chambers should be read broadly to permit the district court to resort to its inherent authority to sanction bad-faith conduct, even if the court has not expressly considered whether such conduct could be sanctioned under all potentially applicable rules or statutes.” Maj. Op. at 514. I strongly disagree with the majority’s adoption of this broad new rule.
As the majority points out in footnote 12 above, a number of our sister circuits have rejected its broad interpretation of Chambers. Maj. Op. at 514-15 n. 12. These federal courts of appeals instead require district courts to consider whether the sanctions can be applied pursuant to any applicable rule or statute before invoking the court’s inherent powers. The majority acknowledges that even the Third Circuit, which at one time endorsed an open-ended reading of Chambers, has now “squarely held that before utilizing its inherent powers, a district court should consider whether any Rule — or statute-based sanctions are up to the task.” Montrose Med. Group Participating Sav. Plan v. Bulger, 243 F.3d 773, 785 (3d Cir.2001) (reversing a district court’s grant of sanctions pursuant to its inherent powers because the district court did not consider whether any civil rule or statute covered the conduct in question).
Moreover, the only authorities cited by the majority for its interpretation of Chambers do not in fact eliminate the “up to the task” requirement. The majority first cites this court’s decision in Mann v. University of Cincinnati, Nos. 95-3195, 95-3292, 1997 WL 280188, at *5-*6 (6th Cir. May 27, 1997) (unpublished table decision), as a case where “[t]his Court has affirmed the imposition of sanctions under the district court’s inherent authority where the district court did not expressly consider particular rules of civil procedure.” Maj. Op. at 513. Besides being an unpublished case with no precedential value, Mann does not stand for the proposition relied upon by the majority. Instead, the dispute in Mann centered on whether the district court had made a finding of bad faith, and this court explicitly reaffirmed the principle that “the inherent authority to sanction exists for situations where a party or attorney’s conduct is not covered by one of the other sanctioning provisions.” Mann, 1997 WL 280188, at *5 (emphasis added). The numerous Sixth Circuit cases listed by the majority in footnote 11 also fail to support the wholesale elimination of the “up to the task” requirement set forth by the Supreme Court in Chambers, as can be readily ascertained by the conduct mentioned in the parenthetical describing each case.
The next two cases relied upon by the majority to bypass the “up to the task” requirement are Amsted Industries, Inc. v. Buckeye Steel Castings Co., 23 F.3d 374 (Fed.Cir.1994), and Gillette Foods, Inc. v. Bayerwald-Fruchteverwertung, 977 F.2d 809 (3d Cir.1992). But neither case supports the majority’s position. In Amsted, the court reversed the district court’s *535award of expert witness fees under its inherent powers. The Amsted court recognized that “Chambers admonishes trial courts to first employ statutory and rules sanctions. Thus, courts should only resort to further sanctions when misconduct remains unremedied by those initial tools.” Amsted, 23 F.3d at 379. The Federal Circuit therefore concluded that, because “the litigation misconduct falls within the remedies of’ a statute, the district court abused its discretion in relying on its inherent powers. Id. Similarly, the Gillette court reversed a district court’s imposition of sanctions under its inherent powers, because the district court’s finding of bad faith was clearly erroneous. Gillette, 977 F.2d at 814-15.
The final case cited by the majority in support of its elimination of the “up to the task” requirement is an unpublished Seventh Circuit decision stating that “[c]ourts need not consider lesser sanctions, however, in situations where the misconduct is so egregious, inexcusable, and destructive that no lesser sanction than dismissal could be adequate.” Graham v. Schomaker, No. 99-1564, 2000 WL 717093, at *3 (7th Cir. May 31, 2000) (internal quotation marks omitted). But the majority fails to quote the prior sentence in Graham: “Importantly, the court should first consider the adequacy of a less severe sanction.” Graham, 2000 WL 717093, at *3. It is only in cases where the conduct in question is “egregious, inexcusable, and destructive” that the Seventh Circuit allows a district court to bypass the “up to the task” requirement set forth in Chambers. In fact, the Seventh Circuit vacated and reversed the grant of sanctions in Graham because it found that, unlike cases where litigants engaged in misconduct that was “criminal in character” or that caused the “very temple of justice [to be] defiled,” the alleged misconduct in that case did not “rise to the level of egregiousness required for the court to avoid undertaking the lesser-sanctions analysis.” Id. at *4 (alteration in original) (internal quotation marks and citations omitted). Like Graham, the case before us is also devoid of such egregious conduct.
I therefore cannot accept the majority’s elimination of the “up to the task” requirement as set forth by the Supreme Court in Chambers. Thus, even if First Bank’s conduct in purportedly “us[ing] the court system to try to force a result that it could not obtain under the applicable law” were (mis)construed to constitute bad faith, I would still conclude that the district court erred in imposing sanctions on First Bank pursuant to the court’s inherent powers.
III. Conclusion
For all of the reasons set forth above, I respectfully dissent from those portions of the majority opinion that affirm the district court’s decision to rely upon its inherent powers to justify the award of attorney fees to Hartford.