Chapman & Cole v. Itel Container International B.V.

Citations: 116 F.R.D. 550; 1987 U.S. Dist. LEXIS 8182Docket: Civ. A. No. H-83-5945

Court: District Court, S.D. Texas; July 22, 1987; Federal District Court

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Plaintiffs and a third-party defendant have filed Motions for Sanctions against Itel Container International and its attorneys, Urquhart and Hassel, following a seven-day bench trial that began on April 6, 1987. Initially, the Court indicated no sanctions would be imposed; however, after a reconsideration prompted by the plaintiffs, the Court reviewed pretrial conference tapes and relevant Fifth Circuit case law, deciding to hold a show cause hearing on May 5, 1987, to assess the imposition of sanctions.

A key preliminary issue involved Itel's assertion that third-party defendant Norman Ehrentraut's post-trial motion for sanctions breached their settlement agreement. Itel’s attorneys argue that the settlement required Ehrentraut to withdraw his sanctions motion, while Ehrentraut contends the agreement applied only to his motion against Itel, not against its attorneys. Itel's attorneys reference letters from Ehrentraut’s attorney that suggest a broader interpretation of the agreement, suggesting that Ehrentraut's later claim appears misleading. 

The Court maintains its authority to impose Rule 11 sanctions for attorneys who do not conduct a reasonable inquiry into the merits of a claim, emphasizing that the purpose of sanctions is to deter improper legal practices.

The court has the discretion to impose sanctions for violations of Rule 11, which requires attorneys to have a reasonable basis for their pleadings. It retains the authority to tailor sanctions based on the specifics of the case. The Fifth Circuit emphasizes that Rule 11 is straightforward and does not pose a risk to competent lawyers. If an attorney lacks an objectively reasonable basis for filing a pleading, sanctions are mandated. The court previously indicated during pretrial conferences that it would impose sanctions if allegations against Mr. Ehrentraut were proven baseless. Although the court accepts the settlement agreement concerning Mr. Ehrentraut's motion against Itel, it will not extend this protection to Itel's attorneys.

The court views the last-minute settlement with Mr. Ehrentraut as an attempt by Itel’s attorneys to evade sanctions rather than a legitimate resolution. The justifications provided by the attorneys for the settlement, citing concerns about witness availability and litigation costs, are deemed unpersuasive. The court finds no substantial evidence that the attorneys were unaware of Mr. Ehrentraut's financial situation prior to March 1987. Consequently, the court concludes that the true motivation behind the settlement was to avoid potential sanctions.

Additionally, Itel's attorneys argued that sanctions should not be imposed because the court previously recognized the case's plausibility by denying motions to dismiss and for summary judgment. The court rejects this argument, noting that the attorneys were aware that the issue of sanctions would be addressed after the trial, indicating a misunderstanding of the court's position.

Defendants’ attorneys should note that the Fifth Circuit has previously dismissed the argument that a cross-complaint could not be frivolous if the district court allowed a trial instead of granting a summary judgment. In Barrios v. Pelham Marine, Inc., the court asserted that merely proceeding to trial does not validate a weak claim and vacated the district court's $750 sanctions award, suggesting the possibility of imposing stricter penalties upon remand.

The standard for Rule 11 sanctions, as outlined in Robinson v. National Cash Register Co., emphasizes an attorney's heightened duty to conduct a reasonable inquiry into the facts and law before submitting documents to the court. The revised Rule 11 imposes an objective standard of reasonableness rather than relying on the attorney's good faith, indicating that ongoing evaluation of the case's factual and legal basis is mandatory. If new information reveals that a previously valid claim lacks a good faith basis, attorneys must act to prevent the continuation of such claims.

The May 11, 1987 Show Cause Hearing was convened to allow defendants and their counsel to respond to concerns regarding their inquiry into the facts before filing RICO and Texas Deceptive Trade Practices Act claims, their failure to withdraw these claims upon realizing they lacked a reasonable basis, and whether Itel permitted its agent to submit a misleading affidavit.

Sylvia Hassell, a partner at Urquhart and Hassell, provided testimony during the Show Cause Hearing regarding the rationale for filing a RICO claim against Mr. Ehrentraut and claims under the Texas Deceptive Trade Practices Act against the plaintiffs. Key allegations against Mr. Ehrentraut included accepting kickbacks from E.J. Novotny, owner of DanTex Erectors, resulting in improper supervision of construction at the Itel facility. Supporting facts included five cancelled checks from Novotny to Ehrentraut, statements from a recorded conversation, expert testimony on substandard construction, and conflicts of interest due to Ehrentraut's association with Novotny.

The analysis of Hassell's compliance with Rule 11 involves two inquiries: the adequacy of her initial fact investigation before filing the RICO claims and whether she reassessed the claim's reasonableness after discovering more facts. The Court noted the challenge in evaluating an attorney's inquiry retrospectively, emphasizing an objective standard based on the circumstances at the time of filing. Hassell did not contest the circumstances of the filing, thus the evaluation focused on two primary facts she had: her conversation with Montgomery and the checks from DanTex Erectors. The Court must determine if her investigation was sufficient to justify the RICO claims based on these facts.

The court evaluated whether Ms. Hassell's initial inquiry into the facts related to alleged RICO claims met the standard of a reasonably prudent attorney. It concluded that her inquiry was not objectively reasonable given the circumstances. An in camera review of a conversation between Ms. Hassell and Mr. Montgomery revealed that Mr. Montgomery's claims were based solely on speculation, lacking any first-hand knowledge of kickbacks and explicitly stating that none of the information he received pertained to the Itel project. Consequently, Ms. Hassell should have recognized the limited value of his statements.

The only credible evidence of illegal payments consisted of five checks to Mr. Ehrentraut, which were found to be legitimate payments for work done on unrelated projects. The evidence indicated that Mr. Novotny had no involvement with the Itel project, as Mr. Treat was solely responsible for the work on the flexible surface. Ms. Hassell failed to connect the payments to Mr. Treat's work and did not present any evidence supporting the existence of kickbacks or illegal payments related to Itel.

The court determined that Ms. Hassell's initial inquiry was either insufficient or she was aware of the lack of evidence but chose to disregard it, leading to a violation of Rule 11. Moreover, despite this initial inadequacy, her decision to pursue the RICO claims after further discovery was even less justifiable. Both Ms. Hassell and Mr. Urquhart conducted extensive depositions of key witnesses, all of whom denied any wrongdoing. They allegedly attempted to intimidate a witness, Mr. Schalit, with threats of lawsuits and accusations of kickbacks but chose not to cross-examine him in court when given the chance. Additionally, Ms. Hassell sent Mr. Montgomery an affidavit for his signature after their conversation, further questioning the reasonableness of her reliance on his statements.

Mr. Montgomery discarded an affidavit from Ms. Hassell, stating that only his name, address, and profession were accurate, as the affidavit's claims regarding his knowledge of the Itel construction site were unfounded based on prior telephone conversations. The Court determined it was unreasonable for Ms. Hassell to pursue RICO claims after conducting extensive discovery, particularly since the four new facts she identified did not support these claims. Ms. Hassell's continued pursuit was based on her subjective belief in Mr. Ehrentraut's wrongdoing, which violated the objective standard mandated by the Fifth Circuit. Her failure to dismiss the counterclaim against Mr. Ehrentraut imposed undue financial and emotional burdens on him and complicated matters for Chapman and Cole, resulting in unnecessary litigation costs. The Court concluded that Ms. Hassell's conduct constituted a violation of Rule 11, necessitating sanctions. Additionally, the Court found that both Urquhart and Hassell abused the discovery process, contravening Rule 26(g), which requires attorneys to certify that discovery requests are made in good faith and not for improper purposes.

Rule 26(g) imposes a duty on attorneys to conduct pretrial discovery responsibly and aims to prevent discovery abuse by promoting sanctions. The standard for evaluating whether an attorney made a "reasonable inquiry" is objective, similar to Rule 11, and is determined by the court based on the totality of the circumstances. In this case, the Court found that the discovery efforts by attorneys Urquhart and Hassell regarding alleged RICO claims were unreasonable and burdensome, especially given the evidence indicating that payments to Mr. Ehrentraut were legitimate. Despite multiple depositions yielding no evidence of illegal activity, Urquhart and Hassell persisted in extensive discovery, including a third deposition of Mr. Treat that violated court orders and revisited previously asked questions. They also demanded unnecessary documents from non-party witnesses, such as Mr. Warren, without producing any evidence of wrongdoing. Furthermore, they allegedly intimidated a witness, Mr. Schalit, with threats of lawsuits and accusations of kickbacks, yet failed to substantiate these claims during the trial. The Court concluded that Urquhart and Hassell's conduct resulted in delays, burdened witnesses, and increased litigation costs, warranting sanctions under Rule 26(g).

The Court addressed the issue of Plaintiffs’ Fifth Set of Interrogatories and the defendant, Itel Container Corp.'s, compliance with discovery obligations. The Court initially considered imposing sanctions on Itel for allowing Mr. Allen P. Goldade, its agent, to sign interrogatory answers without personal knowledge of their truth. However, it concluded that Mr. Goldade’s signing was lawful under Federal Rule of Civil Procedure 33(a), which allows a corporation to designate an agent to respond using all information accessible to its officers, employees, and attorneys. Consequently, Goldade's lack of personal knowledge did not warrant sanctions.

However, the Court found that Itel’s response to Interrogatory No. 4 was incomplete, constituting a failure to respond adequately under Fed. R. Civ. P. 37(a)(3). The interrogatory requested detailed evidence regarding allegations against Mr. Norman Ehrentraut related to benefits received from subcontractors. Itel's response referenced cancelled checks but omitted critical information known to its in-house and trial counsel, specifically a tape-recorded conversation relevant to the inquiry. This omission warranted sanctions for non-compliance with discovery requirements.

Itel contends that its response to Interrogatory No. 4 was sufficient due to two reasons. Firstly, Itel interprets the interrogatory's language, particularly the phrase 'and/or any other evidence,' as limiting the scope to only those items Itel intended to present at trial, thereby excluding the tape and transcript, which Itel argues are not considered evidence. However, the court finds this interpretation unreasonable, asserting that the phrase intended to broaden the request, indicating that Itel should have included the telephone conversation with Mr. Montgomery in its response.

Secondly, Itel's argument for not disclosing the tape and transcript is based on the assertion that these materials are protected under the work product doctrine, as they supposedly reflect Ms. Hassell's mental impressions. The court disagrees with this assessment, having reviewed the materials in camera and determining that only a minor portion contains privileged content. The court emphasizes that it should have been the court's responsibility, not Itel's attorneys', to determine the privilege status of the materials. Consequently, the court concludes that Itel's response was incomplete per Rule 33, which requires full answers to interrogatories or a clear statement of objections.

Discovery through interrogatories mandates full and honest responses. A party must clearly state any objections to an interrogatory; providing a partial answer while withholding undisclosed objections is deemed evasive. In this case, Itel's incomplete response to Interrogatory No. 4, lacking a disclosure of its work-product objection, qualifies as evasive and incomplete under Rule 37(a)(3), which treats such responses as failures to answer. Consequently, the court has the authority to impose sanctions on the defendants and their counsel for this evasiveness. Additional sanctions can be imposed under Rule 26(g) for not disclosing a relevant telephone conversation. The court determined that these evasive answers unnecessarily extended litigation regarding a baseless RICO claim, justifying sanctions. The court ordered sanctions totaling $20,000 against the defendants and their attorneys, Urquhart and Hassell, to be paid as follows: $10,000 by the defendants and $10,000 by their attorneys. Specific allocations include $5,000 to third-party defendant Norman Ehrentraut for attorney fees and $15,000 to the plaintiffs, Chapman and Cole, for associated costs. Payment is required by September 1, 1987, with proof of payment to be provided to the court. However, the court found no grounds for sanctions against Ms. Hassell regarding her claims under the Texas Deceptive Trade Practices Act, citing the statute's broad scope.