Ronco, Inc., In re
| Decision Date | 23 March 1988 |
| Docket Number | No. 86-2969,86-2969 |
| Parties | , Bankr. L. Rep. P 72,185 In re RONCO, INC., Debtor, Appeal of LEVIT & MASON, LTD. |
| Court | U.S. Court of Appeals — Seventh Circuit |
Louis W. Levit, Levit & Mason, Ltd., Chicago, Ill., for debtor.
Joseph G. Gavin, Chicago, Ill., for appellee.
Before RIPPLE and MANION, Circuit Judges, and REYNOLDS, Senior District Judge. *
Following its disposition of an appeal arising out of Chapter 11 reorganization proceedings, the district court, sua sponte, imposed sanctions under Fed.R.Civ.P. 11 against Levit & Mason, Ltd. ("L & M"), the attorneys for the Creditors' Committee of Ronco Teleproducts, Inc. ("Creditors' Committee" or "Committee"), who brought the appeal from the underlying bankruptcy proceeding. L & M now appeals the imposition of Rule 11 sanctions, 1 arguing that the district court abused its discretion. For the reasons set forth in the following opinion, we vacate the judgment of the district court imposing sanctions against L & M and remand the case for further proceedings.
The district court proceeding in which sanctions were imposed was an appeal taken by L & M, as attorneys for the Creditors' Committee, from a bankruptcy court ruling that established the validity, priority and amount of liens held by First National Bank of Chicago and Wells Fargo Bank (jointly referred to as "the Banks") in the accounts receivable and inventory of Ronco, Inc. ("Ronco") and other affiliated corporations (collectively referred to as "Debtors"). 2
The bankruptcy court's ruling was entered after a hearing on February 24, 1984, that had been set for the purpose of determining the validity of the perfection of the Banks' security interest in certain property of the Debtors. At that hearing, L & M--after having been retained as counsel for the Creditors' Committee that day 3--requested the court to reschedule the lien perfection hearing because it had not had adequate time to prepare for it. The motion was denied and the hearing proceeded. "[T]he issue before the Bankruptcy Court was whether goods shipped to out-of-state retailers (but not yet sold by them) represented sales by Ronco (thus creating accounts receivable with perfected liens) or merely out-of-state Ronco inventory on consignment (and hence property subject only to unperfected liens, which in the present context means no liens at all)." In re Ronco, Inc., 46 B.R. 444, 449 (N.D.Ill.1985) (emphasis in original) (footnotes omitted). After hearing the evidence, the bankruptcy court ruled that the Banks' liens had been validly perfected against the Debtors' estate.
In its appeal to the district court, L & M argued on behalf of the Committee that: 1) the bankruptcy judge erred by not granting a continuance of the February 24, 1984, hearing on the issue of the validity of liens asserted against the Debtors' estate because the Creditors' Committee had no adequate opportunity to prepare; and 2) the bankruptcy court's finding that Ronco's transactions with its out-of-state customers were based on "sale or return" contracts rather than consignments was erroneous. The district court stated, in reference to these arguments, that "not even surface merit attaches to any of Committee's challenges." Id. at 447-48. "In 42 pages of memoranda ... Committee neither asserts the Decision's substantive result was incorrect nor suggests any real basis for a different result." Id. at 447 (emphasis in original).
The district court first addressed the Committee's contention that the bankruptcy court erred by refusing to allow a continuance of the hearing scheduled for February 24, 1984. The Committee had argued that, because the court had only approved its retention of L & M as its counsel on the day of the hearing, L & M was unprepared to represent the interests of the entire group of Ronco Teleproducts, Inc. creditors on the lien perfection issue. The district court classified that argument in L & M's brief to that court as "disingenuous, because Committee inexcusably makes no mention of Levit & Mason's significant involvement in the case before the Hearing." Id. at 448 (emphasis in original). "That statement of 'facts' and accompanying argument were unquestionably designed to convey the impression Committee's counsel were new to the case, caught off guard and forced into a shotgun hearing without an opportunity to prepare." Id. The court then proceeded to point out that, in its view, L & M had adequate opportunity to prepare for the hearing on the narrow issue of the Banks' lien perfection. "Levit & Mason's failure to exercise their full opportunity to prepare was scarcely grounds for a continuance." Id. The district court concluded that "[t]aken all in all, Committee has failed to show the slightest harm from the denial of a continuance, and has unwittingly demonstrated the wisdom of that denial, id. at 449, "by failing to suggest, in the time between the February 24 hearing and the district court's opinion, any "shred of relevant evidence or a single argument that was not presented on its behalf at the original Hearing," id. at 448.
In determining whether the bankruptcy court erred in finding that the Banks had perfected liens on the Debtors' property, the district court considered several issues. 4 First, it addressed the Committee's argument that the testimony admitted for the purpose of establishing that Ronco engaged in "guaranteed sales" with some retailers violated the statute of frauds. The district court expressed its view that "[the] Committee totally misstates (or misapprehends) the significance and effect of UCC Sec. 2-236(4) []," and concluded that "the problem is not one of the statute of frauds at all." Id. at 450. Rather, continued the district court, there might have been a "best evidence" problem but, if so, it had been waived by the Committee's failure to raise it in the bankruptcy court. "In short the first of Ronco's contentions--that based on the statute of frauds--has proved empty." Id. Next, the district court turned to the Committee's argument that new evidence had surfaced since the hearing to show that the contracts were not "sale or return" contracts. Addressing that argument, the district court stated:
Committee's assertion of "new evidence" is as disingenuous as its arguments for a continuance. It says Ronco has incurred expenses for shipping returned goods to Illinois, supposedly implying those goods were initially delivered on consignment. But characterizing that information as "new evidence" is a total distortion, for the fact Ronco regularly paid such return expenses was specifically discussed at the February 3 hearing, even by Levit himself.
Id. at 450-51 (citations omitted). The district court concluded that the evidence was available and known to the parties well before the February 24th hearing, and that the "Committee's non-new 'new evidence' would not alter the result in any event." Id. at 451.
With respect to the substantive issue of whether the contracts were "sale or return" or consignment contracts, the district court stated: "[O]nly a brief review of the law is required to demonstrate an equal (or greater) lack of merit in the argument the Contracts were not sales giving rise to accounts receivables (and therefore subject to Banks' liens)." Id. Id. The district court then explained that the evidence--especially the parties' course of dealing--pointed unequivocally to the conclusion that the contracts were "sale or return" contracts giving rise to accounts receivable.
In summary, the district court stated:
This appeal is the sort of case that makes laymen question the law, lawyers and courts. It has dragged on for nearly eight months, generated well over 100 pages of briefs, consumed hours of this Court's time, and undoubtedly cost the parties thousands of dollars in attorney's fees and other expenses. All that expenditure of time and money has occurred despite the ultimate conclusion the appeal is as groundless as one could imagine.
Id. at 452. Accordingly, the district court directed L & M to address the applicability of Fed.R.Civ.P. 11 to their handling of the appeal. "Because Committee's procedural and evidentiary arguments are so groundless, because on the uncontroverted evidence the Contracts are so unquestionably for sale or return, and because the entire conduct of the appeal ... carries the implication of delaying tactics or other impermissible purpose, a substantial inference of improper purpose is warranted." Id. at 452-53.
L & M filed a memorandum addressing the Rule 11 question and filed a motion to alter or amend the initial opinion. The court issued a second memorandum opinion and order on the Rule 11 issue and denied the motion to alter or amend. 5 The court found that L & M had fallen far short of the objective standard of Rule 11:
Examination of the essential objective facts reflects that:
1. Levit & Mason have and had no tenable argument for their 'consignment' position.
2. Whatever arguments they did raise in their memoranda were both groundless and misleading.
3. They never really attempted to comply with the lien hearing schedule, apparently preferring to assume they could ignore that process and then reopen the matter on appeal.
Id. at 457. The district court noted that, in its Rule 11 memorandum, "Levit & Mason ... assert the...
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