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Rey v. Vertrue Inc.

United States District Court, Seventh Circuit

September 3, 2013

CHARLES REY AND JEFFREY C. DAN, Plaintiffs-Appellants,
VERTRUE INCORPORATED, f/k/a MEMBER WORKS, INCORPORATED, Defendants-Appellees-Cross-Appellants.


MARVIN E. ASPEN, District Judge.

Presently before us are cross-appeals stemming from the bankruptcy court's imposition of sanctions in this matter. Charles Rey and Jeffrey C. Dan's (collectively, "Appellants") challenge the bankruptcy court's determination that they violated 28 U.S.C. § 1927 and Rule 9011, while Vertrue Incorporated ("Vertrue" or "Appellee") challenges the amount of sanctions awarded in its favor. For the reasons set forth below, we affirm the decision of the bankruptcy court in all respects and deny Vertrue's cross-appeal for additional attorneys' fees.


The underlying facts and procedural context are detailed in the bankruptcy court's Order of December 2, 2011. (12/2/11 Order at 1-2, Adv. Dkt. No. 124.) For purposes of this ruling, we summarize the pertinent facts.

Charles Rey ("Rey") was president of marketing company Heartland Direct, Inc. ("Heartland") and in 1993 entered into a commission contract with Vertrue. ( Id. at 1.) Under the agreement, Heartland served as a broker for Vertrue by marketing programs to Heartland clients, primarily oil companies. Id.

Several of the oil companies began to market Vertrue's programs to their credit card customers. ( Id. at 1.) The oil companies and Vertrue entered into contracts under which the oil companies purchased Vertrue's programs and then paid Vertrue fees. ( Id. at 2.) Vertrue then paid Heartland a commission. ( Id. ) The only exception to this model was Vertrue's relationship with Chevron, which had a contract directly with Heartland. ( Id. ) There, Heartland sold Vertrue's programs to Chevron, deducted its own commission, and sent the remaining funds to Vertrue. As the bankruptcy court succinctly notes, "payments in the Heartland-Vertrue relationship moved in two directions. On Chevron sales, Heartland paid Vertrue; on other oil company sales, Vertrue paid Heartland." ( Id. )

The relationship between Vertrue and Heartland was uneventful until 1999 when Heartland failed to pay Vertrue $148, 000.00 due in Chevron sales. ( Id. at 2.) In response, Vertrue stopped paying commissions due Heartland in January 2000. ( Id. ) Instead, Vertrue offset those commissions due Heartland against the unpaid Chevron funds. ( Id. ) For the next two years, the amount due to Vertrue steadily increased. In an exchange of letters spanning several years, the parties bickered about the amount due to Vertrue. ( Id. ) Finally in September 2003, after no resolution was reached, Vertrue declared a breach of the agreement. ( Id. ) Vertrue then filed suit against Heartland and Rey in Connecticut state court. ( Id. )

The action in Connecticut hastened bankruptcy filings by Heartland and later Rey. In 2008, Rey filed an adversary proceeding claiming he was due $14 million from Vertrue. ( Id. ) Prior to a trial held in January 2011 Vertrue filed two unsuccessful motions: a motion for partial summary judgment and a Rule 16© motion, attempting to limit potential damages. ( Id. ) In a letter sent July 21, 2010, six months prior to trial, Vertrue alerted Rey's attorney, Jeffrey Dan ("Dan") to its intent to seek sanctions should the claim continue. ( Id. ) In a post-trial oral ruling on June 1, 2011, the court found in favor of Vertrue. The court concluded that Heartland was the first to breach the contract and, thus, that Vertrue was entitled to cease performance. ( Id. )

Seven weeks after judgment, Vertrue filed a motion for sanctions against Rey and Dan under Bankruptcy Rule 9011 and 28 U.S.C. § 1927. (Adv. Dkt. No. 118.) In its December 2, 2011 Order, the bankruptcy court imposed sanctions against Dan since "evidence showed unequivocally that some time in 1999 or early 2000, Heartland breached its agreement with Vertrue by failing to pay $148, 000 due Vertrue." (12/2/11 Order at 6.) The bankruptcy court held that the breach of contract claim had no factual basis whatsoever. The court emphasized that "in an extensive series of letters from June 2002 through September 2003, the parties squabbled continually about monies owed" but that "[n]ot once in any of those letters, however, did Heartland deny that it owed Vertrue money." ( Id. ) Thus there was "no factual basis at all " for Heartland to assert a breach of contract claim against Vertrue. ( Id. )

The court concluded that Rey should be sanctioned because he demonstrated "obvious intelligence." Rey admitted at trial that Heartland owed and failed to pay Vertrue $148, 000 on Chevron sales and that Heartland's failure to pay took place prior to Vertrue's cessation of commissions owed on other oil company sales. ( Id. at 10.) Further, Rey "never asserted that Vertrue owed Heartland anything." ( Id. ) The court held that Rey had no reason to believe that his claim would be successful.

In the December 2011 order, the court requested that both parties brief the court on what sanctions should be awarded. ( Id. at 11.) Vertrue submitted a memorandum seeking $276, 634.95 in attorneys' fees and $3, 496.46 in costs. (Adv. Dkt. No. 127.) In support of its request, Vertrue submitted time entries and an affidavit stating that Vertrue had paid all attorneys' fees in full. (11/13/12 Order at 6, Adv. Dkt. No. 154.)

Using the lodestar method for its calculations, the bankruptcy court awarded Vertrue $193, 130.85 in attorneys' fees and costs against Dan pursuant to § 1927. ( See 11/13/12 Order at 16.) The court also awarded Vertrue $25, 000.00 as Rule 9011 sanctions against Rey. ( Id. at 22.) The imposition of sanctions and the amounts awarded prompted the present appeal and cross-appeal.


Pursuant to 28 U.S.C. § 158(a), we have jurisdiction to review bankruptcy court decisions. In re Brittwood Creek, LLC, 450 B.R. 769, 773 (N.D. Ill. 2011). We will review the bankruptcy court's findings of fact for clear error and will review de novo its conclusion of law. Stamat v. Neary, 635 F.3d 974, 979 (7th Cir. 2011); In re Supreme Plastics, Inc., 8 B.R. 730, 734 (N.D. Ill. 1980). "[W]here the Bankruptcy Code commits a decision to the discretion of the bankruptcy court, " however, "that decision is only reviewed for an abuse of that discretion." Belson v. Olson Rug Co., 483 B.R. 660, 664 (N.D. Ill. 2012); see Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 399-405, 110 S.Ct. 2447, 2457-60 (1990) (holding that appellate review is deferential with regards to sanctions). We thus review the bankruptcy court's award of fees under § 1927 and imposition of Rule 9011 sanctions for an abuse of its discretion. See Walter v. Fiorenzo, 840 F.2d 427, 433 (7th Cir. 1988); see also Matter of Excello Press, Inc., 967 F.2d 1109, 1112 (7th Cir. 1992).

Under the abuse of discretion standard, the bankruptcy court's determination will not be disturbed on appeal so long as it has a "basis in reason." Marcus v. Shalala, 17 F.3d 1033, 1037 (7th Cir. 1994); see In re Volpert, 186 B.R. 240, 245 (N.D. Ill. 1995). An abuse of discretion has occurred only when no reasonable person could "take the view adopted by the lower court." Nanetti v. Univ. of Ill. at Chi., 867 F.2d 990, 995 (7th Cir. 1989); see Fiorenzo, 840 F.2d at 433 (stating that "the relevant inquiry is not how the reviewing judges ...

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