Crowe v. Smith

• Decision Date: 12 August 1998
• Docket Number: No. 96-30851,96-30851
• Citation: 151 F.3d 217
• Parties: Larry D. CROWE, et al., Plaintiffs, v. James W. SMITH, et al., Defendants, Michael P. Tone; Anne Fiedler; Robert B. Bieck, Jr.; James W. Berry; William E. Wright; Judy L. Burnthorn; W. Glenn Burns; American Casualty Company of Reading, Pennsylvania, Appellants.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 217

151 F.3d 217

Larry D. CROWE, et al., Plaintiffs, v. James W. SMITH, et al., Defendants, Michael P. Tone; Anne Fiedler; Robert B. Bieck, Jr.;

James W. Berry; William E. Wright; Judy L.

Burnthorn; W. Glenn Burns; American

Casualty Company of Reading,

Pennsylvania, Appellants.

No. 96-30851.

United States Court of Appeals, Fifth Circuit.

Aug. 12, 1998.

John Mason McCollam, Gordon, Arata, McCollam & Duplantis, New Orleans, LA, William A. Von Hoene, Thomas P. Sullivan, Jenner & Block, Chicago, IL, for Tone and Fiedler.

Daniel Lund, Albert Carter Mills, IV, Montgomery, Barnett, Browen, Read, Hammond & Mintz, New Orleans, LA, for Bieck.

Thomas M. Hayes, III, Donald C. Douglas, Jr., Hayes, Harkey, Smith & Cascio, Monroe, LA, for Berry.

Walter C. Thompson, Jr., Miguel Schor, Jan Krzysztof Frankowski, Barkley & Thompson, New Orleans, LA, for Wright and Burnthorn.

J. Michael Percy, Percy, Smith, Foote & Gadel, Alexandria, LA, for Burns.

Harry M. Reasoner, Marie Roach Yeates, Anne M. Pike, Vinson & Elkins, Houston, TX, Emmet C. Sole, Stockwell, Sievert, Viccellio, Clements & Shaddock, Lake Charles, LA, Gary Vincent Dixon, Leslie S. Ahari, Ross, Dixon & Masback, Washington, DC, for American Cas. Co. of Reading, PA.

Appeals from the United States District Court for the Western District of Louisiana.

Before JOHN R. GIBSON, ^* JOLLY and EMILIO M. GARZA, Circuit Judges.

E. GRADY JOLLY, Circuit Judge:

American Casualty Company of Reading, Pennsylvania ("CNA" ¹), Michael P. Tone, Anne Fiedler, W. Glenn Burns, Robert B. Bieck, Jr., William E. Wright, Judy L. Burnthorn, and James W. Berry (collectively, the "sanctions defendants") appeal the imposition of sanctions against them by Judge Nauman S. Scott of the Federal District Court for the Western District of Louisiana.

All of the defendants are attorneys except for CNA. After the settlement of an underlying civil action in which these attorneys were involved as either defense counsel or insurer's counsel, the district court was advised by the plaintiffs that an applicable insurance policy issued by CNA (the "D&O Policy") had not been disclosed to them, although its existence had long been known to the sanctions defendants. The district court appointed the attorney for the plaintiffs in the underlying case to investigate and present evidence to the court of the offense. After the conclusion of a civil bench trial, the district court entered an extensive opinion, which included numerous findings of fact and conclusions of law. Briefly stated, the district court held that the sanctions defendants willfully conspired to defraud the plaintiffs by concealing the D&O Policy despite having discovery-related, ethical, and other duties to disclose it. Acting under its inherent power, the court then imposed sanctions consisting of fines, reprimands, and suspensions from the practice of law. In particular, it imposed fines of $5 million on CNA and $75,000 on Tone. All fines were made payable to the district court.

We hold that the district court abused its discretion by imposing serious criminal sanctions on CNA and Tone via a manifestly civil process. The sanctions against those defendants are therefore reversed. Furthermore, and although we find the procedure to have been adequate as to the suspended and reprimanded defendants, we also hold that the district court abused its discretion as to all of the sanctions defendants, save the defendant Berry, in finding that they engaged in bad faith conduct by failing to disclose the D & O Policy. Because a finding of bad faith is a prerequisite to the exercise of a court's inherent power, we therefore reverse the district court's judgment as to defendants Burns, Bieck, Wright, Fiedler, and Burnthorn as well. In addition, as to defendants CNA, Tone, Fiedler, and Burnthorn, we also hold that the record is completely insufficient to support a finding of bad faith conduct. As to those defendants, the sanctions proceeding is dismissed. With respect to defendants Burns, Bieck, and Wright, we find the record potentially sufficient to support a finding of bad faith conduct, and remand the case to the district court for further consideration in the light of our opinion. We affirm the sanctions imposed against Berry.

I

The sanctions proceeding in this case concerned the actions of several attorneys during a period of time leading up to the signature of a settlement agreement in a civil RICO ² suit. To understand the significance of those actions, it is necessary briefly to review the circumstances of that case.

In December 1992, as the latest installment of a long and tangled saga of partnership litigation, Larry D. Crowe and the Succession of Reba Coody Crowe (the "Crowes") brought suit against James W. "Sonny" Smith in the Federal District Court for the Western District of Louisiana. The Crowes alleged, among other things, that Smith, who was a former business partner of Larry Crowe, conspired with Peoples Homestead Savings and Loan Association of Monroe, Louisiana, ("Peoples") to defraud the Crowes of their interest in certain commercial agricultural property in violation of RICO. Also made defendants in this suit were Russell Hart, the former president of Peoples, and several of Peoples's former directors and outside attorneys. Eventually, the case was set for trial on July 12, 1994, in Monroe, Louisiana.

Most of the sanctions defendants served as defense counsel in the 1992-94 litigation. Berry represented four former directors of Peoples. Bieck, Wright, Burnthorn, and Burns represented various of the outside attorneys. The remaining individual sanctions defendants, Tone and Fiedler, represented CNA as coverage counsel and were not directly involved in the case. The following chronology traces the activities of these attorneys in the months leading up to the trial. It is based on the factual findings of the district court, which in all relevant respects are undisputed.

Late into the litigation--in March 1994--as part of his research for the upcoming trial, Bieck made a fateful discovery among the files of one of the attorney defendants. He learned that in 1983, CNA had issued a directors' and officers' errors and omissions policy--the D & O Policy--to Peoples. This policy was a "claims made" policy, and carried a general liability limit of $5 million. It expired in 1986, but not before Larry Crowe had brought suit against Peoples under a conversion theory in February of that year. ³ Shortly thereafter, the directors of Peoples began corresponding with CNA regarding Crowe's claims. ⁴ It was this correspondence that Bieck discovered in March 1994. He conveyed his findings almost immediately to Burnthorn.

Three weeks later, the Crowes issued certain discovery requests to counsel for each of the director defendants and one of the attorney defendants, Johnny Dollar. ⁵ Dollar was represented, significantly, by Wright and Burnthorn. The discovery requests in question were for the production of certain described documents. Two are relevant to this case:

5. All claims or notices of claim that were transmitted to any of your insurance carriers in relation to any of the claims of Larry Crowe and/or the Succession of Reba Crowe.

8. All indemnity agreements related to service as bank officer, director, attorney, or representative.

It is important to note that these discovery requests were very significant ones in the Western District in 1994. Although Fed.R.Civ.P. 26(a)(1)(D) generally provides for the automatic disclosure of relevant insurance policies, the Western District had opted out of that provision in its local rules. See ULLR 6.06W (1994). At the time, the only way for a party to find out about insurance policies in the Western District was by way of a properly propounded discovery request.

On April 27, Berry responded to the discovery requests on behalf of three of his four director clients. He answered Requests 5 and 8 with the words "none" or "none known." On that same day, Burnthorn faxed Berry a copy of the CNA correspondence first discovered by Bieck. At this point, Burnthorn also began preparing a letter to CNA requesting defense and indemnification for her client, Dollar, under the D & O Policy. On April 28, she faxed Berry a copy of this letter as well, so that he could use it as a model for letters written on behalf of his clients. On April 29, one of Berry's director clients sent such a letter to CNA. Letters from two of the other directors followed soon thereafter.

On May 1, Burnthorn responded to the discovery requests on behalf of Dollar. Her response to Request 5 read as follows:

Response to request # 5: New England Insurance Company and the Home Insurance Company have been notified of plaintiff's lawsuit. Dollar objects to the request on grounds of attorney-client privilege and work product immunity.

On May 5, Berry responded to the discovery requests on behalf of his fourth and final director client. His answers to Requests 5 and 8 for this client were identical to the ones he had sent the week before on behalf of the other directors--in the negative.

On May 12, Fiedler wrote to Burnthorn advising that CNA was proceeding under a reservation of rights with respect to the D&O Policy, and requesting certain additional information. On June 7, Burnthorn provided this information.

As the trial drew nearer, settlement negotiations intensified. On June 23, Berry made a written offer to settle on behalf of the directors for $10,000. He emphasized in this letter that his clients were not insured, and did not have access to substantial funds for settlement purposes. The Crowes counter-offered for $25,000.

On June 30, CNA made a formal response to the notice of lawsuit letters sent by Berry's and Burnthorn's clients. CNA advised that the D&O Policy was a $5 million indemnity policy that might not provide coverage for several reasons, and that CNA would be proceeding under a reservation of rights to deny...