Objective
bad faith suffices for sanctions
By
David Ziemer
Wisconsin Law Journal
Sept.
13, 2006
|
What
the court held
Case:
Dal Pozzo v. Basic Machinery Co., Inc., No. 04-4277.
Issue:
Must a court find that an attorney's conduct shows both
objective and subjective bad faith to award sanctions pursuant
to 28 U.S.C. 1927?
Holding:
No. Either subjective or objective bad faith is sufficient.
|
An
attorney who reneged on a settlement agreement was properly sanctioned
pursuant to 28 U.S.C. 1927, the Seventh Circuit held on
Sept. 6.
Kevin
Dal Pozzo, an employee of Richards Brick Company, was injured
on the job when something went wrong with an automated brick conveyor
system he was working on. He sought workers’ compensation
from Richards Brick and, in Illinois federal court, sued Basic
Machinery Co., Inc., which built the conveyor system, and Fanuc
Robotics America, Inc., which provided the parts that malfunctioned.
Richards
Brick was represented by two attorneys from different firms: Gregory
C. Vacala; and Farrah Anderson. Vacala took the position that
Richards Brick was an insured under the policies of Basic and
Fanuc, and sent letters purporting to tender its defense to their
respective insurance companies. Basic’s insurer declined
the tender, and Fanuc’s insurer never responded.
Eventually
the parties reached an oral settlement and notified the district
court that the case was settled. The court entered an order dismissing
the action with prejudice, but reserving the right to reopen if
the settlement was not consummated.
The
first draft of the settlement agreement provided for the settlement
of all claims any person may have against any party “and/or
their insurers.”
Nevertheless,
Vacala continued to pursue Fanuc’s insurer. In response,
the names of Fanuc’s and Basic’s insurers were expressly
incorporated into a second draft of the agreement. Vacala then
refused to sign it, claiming that the amendment was a material
change in the terms.
Dal
Pozzo’s counsel then warned Vacala that, if he persisted
in blocking the settlement, he would move the court for enforcement,
and seek costs and fees. Vacala continued to obstruct the settlement,
and Dal Pozzo, Basic, and Fanuc all sought enforcement.
The
court held a hearing on the motions, but Vacala did not attend.
At the hearing, the other attorneys agreed that the only obstacle
to settlement was Vacala’s insistence on pursuing “baseless
coverage claims” against the insurers.
The
court ordered the settlement enforced, and granted the motions
for costs and fees associated with the motion and hearing. The
sanctions were against Vacala, not Richards Brick.
Vacala
filed a Rule 59 motion to alter the judgment, arguing that Rule
11 did not justify the sanctions, and that the amendment to the
settlement to include the insurers was a material change. The
court held another hearing, and denied the motion.
Vacala
appealed, but in a decision by Judge Diane S. Sykes, the court
of appeals affirmed, tacking on more costs and attorneys fees
for filing a frivolous appeal.
The
court agreed with Vacala that Rule 11 does not authorize the sanctions
imposed, but found this irrelevant, because Vacala was not sanctioned
pursuant to Rule 11, which only applies to pleadings, motions,
and other papers filed with the court.
The
court acknowledged that none of the parties specified the rule
or statute pursuant to which they were pursuing sanctions, and
the district court failed to cite the basis for its order.
Despite
the oversight, however, the court found the order was clearly
authorized by either sec. 1927 or the court’s inherent power.
Section
1927 provides for sanctions against any attorney “who so
multiplies the proceedings in any case unreasonably and vexatiously.”
The
court noted that some precedent suggests that either subjective
or objective bad faith is a prerequisite for sanctions under sec.
1927, while other cases suggest otherwise.
Reconciling
the precedents, the court wrote, “We read the cases as drawing
a distinction between subjective and objective bad faith. Subjective
bad faith, the more difficult type of bad faith to prove, is not
always necessary. Subjective bad faith must be shown only if the
conduct under consideration had an objectively colorable basis.
The standard for objective bad faith does not require a finding
of malice or ill will; reckless indifference to the law will qualify.
‘If a lawyer pursues a path that a reasonably careful attorney
would have known, after appropriate inquiry, to be unsound, the
conduct is objectively unreasonable and vexatious’ (cites
omitted).”
Applying
the standard, the court found that Vacala’s conduct satisfies
the standard for objective bad faith.
Reciting
the original draft of the settlement agreement, the court found,
“Richards Brick and every other party to the litigation released
all disputes, claims, and causes of action by any
firm or corporation against Basic or Fanuc and their insurers
(emphasis in original).”
In
addition, when Vacala was given the opportunity to explain why
the settlement language did not abandon Richards Brick’s
insurance coverage claims, Vacala skipped the hearing.
The
court reasoned, “Any reasonably careful attorney would know
not to pursue this obviously unsound path. The district court’s
conclusion that Vacala’s conduct was sanctionable was not
an abuse of discretion.”
Befote
concluding, the court imposed additional sanctions pursuant to
FRAP 38, for filing a frivolous appeal.
The
court noted that, initially, Vacala appealed both the imposition
of sanctions, and the order enforcing the settlement. In his reply
brief, however, he abandoned the latter issue.
The
court found this problematic, because opposing counsel stated
at oral argument that they would not have pressed the case if
the only issue was the sanctions, finding, “Vacala’s
opposing counsel spent time on this appeal because the settlement
— not the sanctions — was valuable to their clients.
Vacala continues to needlessly and frivolously multiply the proceedings
in this case.”
Accordingly,
the court affirmed the sanctions awarded in the district court,
and ordered Vacala to pay his opponents attorney fees and double
costs on the appeal.
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Case Analysis.
David
Ziemer can be reached by email.
