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Pantry Queen Foods Inc. v. Lifschultz Fast Freight Inc.

decided: January 15, 1987.

PANTRY QUEEN FOODS, INC., PLAINTIFF,
v.
LIFSCHULTZ FAST FREIGHT, INC., DEFENDANT-APPELLEE, V. D'ALTERIO FOODS CORPORATION, THIRD-PARTY DEFENDANT-APPELLANT



Appeal from the United States District Court for the Northern District of Illinois, Eastern Division, No. 82 C 2941, Frank J. McGarr, Judge.

Author: Easterbrook

Before CUDAHY, EASTERBROOK, and RIPPLE, Circuit Judges.

EASTERBROOK, Circuit Judge.

Pantry Queen Foods loaned some pasta machines to D'Alterio Foods and later asked for their return. Pantry Queen hired Lifschultz Fast Freight to cart the mechanics from New York to Chicago in May 1981. The "shipper's load and count" bill of lading shows that D'Alterio loaded four machines onto Lifschultz's truck. When the machines were unloaded, Pantry Queen complained that one was missing. Lifschultz's driver verified that the shipment was one machine short. Pantry Queen filed this suit under the Carmack Amendment, 49 U.S.C. § 11707, to recover for the missing machine. Lifschultz made D'Alterio a third-party defendant, contending in its complaint that "if PANTRY QUEEN did not receive all of the sections of machinery from D'ALTERIO it claims it was entitled to receive, then the failure to receive said machinery was a direct and proximate result of the failure of D'ALTERIO to properly count and load said machinery onto LIFSCHULTZ' trailer." To this D'Alterio replied, in an answer filed January 21, 1983: "Third Party Defendant denies each and every allegation of [this paragraph of] the third party complaint."

This denial has produced a novelty. The district court awarded attorneys' fees against D'Alterio for not winning the case fast enough. D'Alterio in fact loaded four machines, and Pantry Queen got all four. It withheld a pasta laminating machine, claiming the machine as security for a debt it asserted Pantry Queen owed. The laminating machine sat in D'Alterio's plant throughout the litigation. On the eve of trial in August 1984 counsel for D'Alterio informed the other parties and the court about the laminating machine's whereabouts. Pantry Queen doggedly insisted that it was still entitled to recover, on the ground that the driver had certified "one piece short" on the consignee's copy of the bill of lading. The district court granted summary judgment for Lifschultz, because according to the court uncontradicted evidence now showed that D'Alterio had shipped and Pantry Queen had received "three" machines, and that a "shipper's load and count" bill -- the only basis on which Pantry Queen continued the case -- is not a sufficient basis for recovery against a carrier when the evidence shows that the shipping count is wrong.

The district court invited Lifschultz to move for attorneys' fees and held an evidentiary hearing to determine why it took so long to resolve the case. D'Alterio's New York counsel, asked why he had withheld the information, testified that "no one ever asked"; had anyone done so, counsel stated, he would have answered straightway. (The judge called this "the most unusual testimony in the history of the court.") D'Alterios' Illinois counsel, who also knew about the laminating machine, states that he did not reveal the information because he did not know that the laminating machine was the one Pantry Queen wanted.

Counsel's assertion that he was confused has some support, because everyone has been confused throughout this litigation. The complaint describes the machines as the " four " sections of a single larger machine, states that Lifschultz delivered only three, and does not say which one is missing. Thus D'Alterio might have supposed that the problem was the loss in transit of one of the four segments listed on the bill of lading, rather than the failure to ship a fifth. Although the endorsement on the bill of lading states "Dough Machine DDLDH 4-1 missing", the bill did not show that a machine by that number had been shipped. The driver's endorsement does not say how many machines reached Pantry Queen. Subsequent statements by Pantry Queen aver that a "DPIT-3 machine" or "indexer" was missing. Pantry Queen's president, in a deposition, variously described the missing section as a "dough" or "laminating" machine and asserted that "DPIT-3" is the wrong number, but he did not supply the right number. The machine in D'Alterio's hands was a "DDLDH-4 Laminating Machine". It is understandable that attorneys, unskilled in the pasta business, would not know what Pantry Queen was missing and whether a DDLDH-4 machine filled the bill. The district court itself was confused -- and so are the attorneys on appeal -- because almost without exception they follow the complaint and assert that D'Alterio shipped, and Pantry Queen received, only three of the four sections of a machine, despite the initial count. The district court granted summary judgment on the ground that the bill of lading was in error. But a photograph of the load shows four segments being shipped, confirming the bill of lading. There was one "missing" all right, but the missing machine was a fifth rather than a fourth segment. Everyone has been confused from the beginning of this case.

The district judge concluded that the suit by Pantry Queen was "specious" because it knew or should have known that D'Alterio was withholding the DDLDH-4 machine under a claim of right. It therefore knew that it could not rely on a shipper's load and count bill of lading to recover from Lifschultz. (It also knew, so far as we can tell, that it received all four of the segments listed on the bill of lading.) The judge ordered Pantry Queen to contribute $31,000 toward the attorneys' fees of Lifschultz and its insurance carrier; Pantry Queen did not appeal.

The judge ordered D'Alterio to pay another $31,000 in attorneys' fees, finding "a combination of mistakes, indifference to the litigation, and negligent failure to inquire into facts which becoming involved in the lawsuit should have prompted." The court did not conclude that D'Alterio or its lawyers acted in subjective bad faith but thought them "negligent in their failure to ascertain the underlying facts". The negligence injured Lifschultz, which the court portrayed as a bystander to a dispute between Pantry Queen and D'Alterio about who was entitled to possess the DDLDH-4 machine. Because Lifschultz was caught in the middle, the court reasoned, it was entitled to recompense. The court did not refer to any statute or rule as authority to award attorneys' fees, and the opinion does not cite any case. Lifschultz has abjured reliance on 28 U.S.C. § 1927, which might have supported the award, see In re TCI, Ltd., 769 F.2d 441, 445-50 (7th Cir. 1985). We must decide whether there is any other source of authority.

One might be Fed. R. Civ. P. 11. The version of Rule 11 in force when D'Alterio filed its answer to the complaint stated that an attorney's signature on a pleading certifies that "there is good ground to support [the pleading]; and that it is not interposed for delay." It allowed a court to take "disciplinary action" for "a wilful violation of this rule". Courts were reluctant to impose sanctions for the filing of unsupported documents under this language and did so only on a showing of subjective bad faith. Badillo v. Central Steel & Wire Co., 717 F.2d 1160, 1166 (7th Cir. 1983); Nemeroff v. Abelson, 620 F.2d 339, 350 (2d Cir. 1980). The district court did not find subjective bad faith; it found only negligence. A new version of Rule 11, effective August 1, 1983, changed the standard to one of objective reasonableness. Thornton v. Wahl, 787 F.2d 1151, 1154 (7th Cir. 1986). The new Rule 11 also requires that the attorney's belief in the propriety of the filing be "formed after reasonable inquiry [and] well grounded in fact". There is no evidence that D'Alterio's lawyers undertook any inquiry, let alone a "reasonable" one, before filing an answer asserting (by denying the opposite assertion) that D'Alterio had shipped a missing segment. The new Rule 11 therefore might support the imposition of sanctions, if it applied. See Brown v. Federation of State Medical Boards, 800 F.2d 168 (7th Cir. 1986).

Because the amended Rule 11 did not go into force until August 1, however, it does not apply. The Supreme Court's order promulgating the 1983 amendments states that they "shall govern all civil proceedings thereafter commenced and, insofar as just and practicable, in proceedings then pending." This is sufficient ground to apply the new Rule 11 to any filing after August 1 in a pending case. It does not, however, support the application of the Rule to prior filings. Hashemi v. Campaigner Publications, Inc., 784 F.2d 1581 (11th Cir. 1986). The new language was designed to deter improper filings and to induce lawyers to do better research. As the Advisory Committee's notes state: "The word 'sanctions' in the caption . . . stresses a deterrent orientation in dealing with improper pleadings, motions or other papers." A rule cannot deter conduct that is completed before the rule's adoption; people cannot comply with rules that do not exist. And a deterrence argument for sanctions in a case such as this is weak. D'Alterio had no reason to prolong the litigation. Its own interest was to get the case over with as cheaply as possible. It had to pay its own lawyers. We have not found any case in which Rule 11 was used to penalize a party for not winning quickly or cheaply enough. Section 1927 has this function, as the Supreme Court emphasized in Roadway Express, Inc. v. Piper, 447 U.S. 752, 759-61 & n.6, 65 L. Ed. 2d 488, 100 S. Ct. 2455 (1980), but § 1927 is not in issue here.

Perhaps, however, D'Alterio had an obligation to update its pleadings after August 1 in conformity with the new Rule 11. Yet the new Rule 11 does not require revisions of pleadings to conform with newly discovered information. The Advisory Committee's notes discourage resort to hindsight to assess the adequacy of filings: "The court is expected to avoid using the wisdom of hindsight and should test the signer's conduct by inquiring what was reasonable to believe at the time the pleading, motion, or other paper was submitted. Thus, what constitutes a reasonable inquiry may depend on such factors as how much time for investigation was available to the signer; whether he had to rely on a client for information", and so on. Cf. Golden Eagle Distributing Corp. v. Burroughs Corp., 801 F.2d 1531, 1536 (9th Cir. 1986) (court must "look at the situation which existed when the paper was filed"). The Advisory Committee did not hint that the Rule requires a lawyer to continue his investigation after filing the paper and to update his pleadings in light of any new findings. Oliveri v. Thompson, 803 F.2d 1265, 1274-75 (2d Cir. 1986), holds, and we agree, that Rule 11 does not require the updating of papers that were not subject to sanctions when filed.

There is an implicit obligation to update because Rule 11 applies to all papers filed in the litigation. Each filing must reflect the results of reasonable inquiry. Rare is the case that goes from complaint and answer to trial without an intervening filing. Updating occurs in the course of these filings. Papers in discovery also are covered by Rule 26(g), and affidavits used in moving for summary judgment are covered by Rule 56(g). A court has ample support for sanctions when new filings do not reflect the full picture. See also Jeffrey A. Parness, Groundless Pleadings and Certifying Attorneys in the Federal Courts, 1985 Utah L. Rev. 325, 341-42. D'Alterio's lawyers were not entitled to continue to assert that D'Alterio shipped the machine after discovering that it had not. Counsel also must update disclosures in discovery, on learning that the initial disclosure was not fully responsive -- a duty that has never been applied to pleadings.

D'Alterio's lawyers did not continue to assert that D'Alterio shipped the fourth segment. In February 1984 Lifschultz filed a motion for summary judgment, attaching an affidavit of D'Alterio's president dated May 1983. The affidavit stated that D'Alterio had shipped to Pantry Queen the four segments listed on the bill of lading: a DCDC-4 Cooker Blancher, a DCCB-4 Immersion Conveyor, a DDPQ-3 Quencher, and a DPIT-3 Indexer. Responding to Pantry Queen's position that the missing piece may have been a ravioli machine, the affidavit stated: "No machine similar in size and shape to the machine depicted in [Pantry Queen's photograph] was delivered to LIFSCHULTZ". The affidavit continues: "No one delivered a DDLDH-4 Laminating Machine . . . to LIFSCHULTZ . . . . No DDLDH4-1C Dough Machine was delivered to LIFSCHULTZ". The affidavit narrated the meaning of an attached photograph showing the four segments being loaded. With this affidavit D'Alterio correctly denied giving Lifschultz the machine Pantry Queen said Lifschultz had ...


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