Appeal from the United States District Coat for the Northern District of Illinois, Western Division, No. 86 C 20018--Stanley J. Roszkowski, Joe.
Bauer, Chief Judge, Cummings and Kanne, Circuit Judges.
Once again this Court examines a district court's conclusion that a party's conduct in a particular case did not violate either Rule 11 of the Federal Rules of Civil Procedure or 28 U.S.C. § 1927. Because a de novo review of the district court's order denying sanctions in this case reveals the actual propriety of such an award, we reverse and remand.
Our examination of the protracted history of this case chronicles both the vexatious litigation tactics and the frivolous nature of the suits pursued by the plaintiff, Fred A. Smith Lumber Company (FASCO), against defendants Sam Pancotto, Norman Edidin and Gary Edidin. FASCO's claims concern the February 6, 1980 execution of a note by Transcontinental Development Corporation (TDC) payable by TDC to FASCO for work it was performing on a construction project for TDC. FASCO contends that violations of both the Racketeer Influenced and Corrupt Organizations Act (RICO) and federal securities laws arose from the defendants' allegedly fraudulent misrepresentation that TDC could pay the note.
After FASCO obtained a judgment against TDC in the Circuit Court of DuPage County in March 1984, it initiated further state court litigation against Pancotto to hold him personally liable for the corporate debts. The state trial court dismissed FASCO's attempts to collect individually from Pancotto on November 19, 1984, and on appeal, on June 21, 1985, the Illinois Appellate Court concluded that to permit any further efforts by FASCO would "in effect, sanction a fishing expedition by the plaintiff and further harassment of the parties involved." (Pl. App. at p. 16).
FASCO filed its complaint in federal court on January 21, 1986, nearly six years after its various causes of action allegedly arose. After receiving FASCO's complaint, which basically phrased its previous state law claims in RICO terms, Pancotto's counsel alerted FASCO to the potential statute of limitations and res judicata bars to its lawsuit. When Pancotto moved to dismiss, FASCO withdrew its original complaint and filed an amended version which deleted reference to the suit's untimeliness, added the Edidins as defendants, and asserted an additional allegation of a federal security violation. This complaint was dismissed by the district court on October 28, 1986, which held that all counts were barred on statute of limitations grounds. A second amended complaint filed by FASCO was also dismissed in its entirety by that same court on June 16, 1987.
Both defendants then filed motions for attorneys' fees and costs of approximately $19,000 against FASCO pursuant to Rule 11, 28 U.S.C. § 1927, and the district court's "inherent" power to award sanctions. These motions were denied on October 26, 1987, with the sole justification from the court following: "In light of the split within the Seventh Circuit prior to the Appellate Court's recent pronouncements, the plaintiff's RICO counts constituted colorable claims at the time they were filed."
The legal conclusion that counsel's conduct in this case did not constitute a Rule 11 violation is reviewed de novo by this Court. S.A. Auto Lube, Inc. v. Jiffy Lube International, Inc., 842 F.2d 946, 948 (7th Cir. 1988). We also note that "the decision whether there has been a violation is a judgment call." Flip Side Productions, Inc. v. Jam Productions, Ltd., 843 F.2d 1024, 1036 (7th Cir. 1988) (quoting In the Matter of Central Ice Cream Co., 836 F.2d 1068, 1072 (7th Cir. 1987)). While this Court applies a deferential standard of review on the question whether FASCO's assorted filings violated Rule 11, we disagree with the district court's erroneous conclusions regarding counsel's conduct in this case. The record here is replete with numerous violations of Rule 11 and Section 1927, and the fact that the district court failed to consider the validity of each of appellants' claims separately, Szabo Food Service, Inc. v. Canteen Corp., 823 F.2d 1073, 1077 (7th Cir. 1987), only reinforces our holding reversing and remanding for sanctions.
Initially, we describe the standards for the three grounds for sanctions requested by defendants. Rule 11 imposes an affirmative duty of reasonable investigation on an attorney signing any court paper. Whether the pre-filing investigation was reasonable depends on the circumstances of each case, S.A. Auto Lube, 842 F.2d 946, slip op. at 5, and the signer's investigation need not be carried to the point of certainty. Nemmers v. United States, 795 F.2d 628, 632 (7th Cir. 1986). "The amount of investigation required by Rule 11 depends on both the time available to investigate and on the probability that more investigation will turn up important evidence; the rule does not require steps that are not cost-justified." Szabo Food Service, 823 F.2d at 1083. In Brown v. Federation of State Medical Boards of the United States, 830 F.2d 1429, 1433 (7th Cir. 1987), we noted several factors bearing on whether a signer's inquiry into the facts was reasonable:
whether the signer of the documents had sufficient time for investigation; the extent to which the attorney had to rely on his or her client for the factual foundation underlying the pleading, motion or other paper; whether the case was accepted from another attorney; the complexity of the facts and the attorney's ability to do a sufficient pre-filing investigation; and whether discovery would have been beneficial to the development of the underlying facts.
Rule 11 provides two grounds for sanctions, namely, the "frivolousness clause" and the "improper purpose" clause. Id. at 1435. The frivolousness clause requires that the party or the attorney conduct a reasonable inquiry into the facts and the law relevant to the case. Id. The improper purpose clause ensures "that a motion, pleading, or other document may not be interposed for purposes of delay, harassment, or increasing the costs of litigation." Id. at 1436. The standard for imposing sanctions under either prong of Rule 11 is an "objective determination of whether the sanctioned party's conduct was reasonable under the circumstances." Id. at 1435. We must determine only whether the arguments actually advanced by counsel were reasonable, and not whether reasonable arguments could have been advanced in support of counsel's position. In re Ronco, Inc., 838 F.2d 212 (7th Cir. 1988).
Also, as we pointed out in Brown, the most important purpose of Rule 11 sanctions is to deter frivolous litigation and the abusive practices of attorneys. Id. at 1438; see also Flip Side Productions, 843 F.2d 1024, slip op. at 23. This same policy also leads to the implementation of 28 U.S.C. § 1927, the second basis for sanctions proffered by defendants. Section 1927 provides for the award of attorneys' fees and costs against any attorney who "so multiplies the proceedings in any case unreasonably and vexatiously." This provision "permits a court to insist that the attorney bear the cost of his own lack of care." In Re TCI, Ltd., 769 F.2d 441, 445 (7th Cir. 1985); see also Ordower v. Feldman, 826 F.2d 1569, 1573 (7th Cir. 1987). Also, as noted by this Court ...