Insurance Ben. Administrators, Inc. v. Martin

Decision Date18 April 1989
Docket NumberNo. 87-2671,87-2671
Citation871 F.2d 1354
Parties, RICO Bus.Disp.Guide 7190 INSURANCE BENEFIT ADMINISTRATORS, INC., an Illinois corporation, Plaintiff-Appellee, v. Jon MARTIN, individually and d/b/a the Communicators, BiJo, Inc., an Illinois corporation; William Mueller, individually and d/b/a Wilkare Typographers, Defendants, Appeal of John W. GAVIN, one of the attorneys for Jon Martin, et al.
CourtU.S. Court of Appeals — Seventh Circuit

James J. Gavin, Gavin & Gavin, Westchester, Ill., for appellant.

Matthew F. Kennelly, Cotsirilos Crowley Stephenson Tighe & Streicker, Ltd., Chicago, Ill., for plaintiff-appellee.

Before CUMMINGS, COFFEY, and KANNE, Circuit Judges.

KANNE, Circuit Judge.

Based on two separate requests, the district court imposed sanctions against Attorney John W. Gavin. The first sanction against Gavin was a $3,000 assessment for frivolously contesting his client's employment status. The second sanction was an assessment of more than $31,000 for various actions, relating to pretrial and trial matters, taken by Gavin. This appeal solely contests the imposition of sanctions, not the underlying RICO decision in favor of the plaintiff. Gavin appeals, claiming that both determinations that his conduct was sanctionable were erroneous. He alternatively argues that the monetary amounts of both sanctions were excessive. We affirm the grant of IBA's initial motion for sanctions and the $3,000 penalty imposed. We reverse and remand the second imposition of sanctions so that the district court may review the matter to determine whether Gavin's conduct was in fact sanctionable, and if so, under what authority sanctions should be imposed and what type of sanctions they should be.

I. Background

Insurance Benefit Administrators, Inc. ("IBA") hired Jon Martin in January, 1982 as its Advertising/Public Relations Director. Thereafter, without the knowledge of IBA, Martin formed a corporation called BiJo, Inc. Joining with Martin to set up BiJo, Inc., was William Mueller, the owner of a typography firm used by IBA at Martin's direction. Martin then used his authority as advertising director of IBA to "hire" BiJo to act as IBA's advertising agency and to contract with printers that had agreed to pay BiJo "commissions" to do work for IBA. Over a 16-month period, BiJo received over $18,000 in these "commissions."

BiJo also did business with IBA under the name "The Communicators," placing IBA's advertising in publications. The evidence at trial established that some publications charge ad agencies less than they charge businesses which place ads directly, with the difference (about 15%) being paid to the agency as a commission. IBA also paid The Communicators for the design of promotional material. These fees through April, 1984 amounted to over $128,000.

Once it discovered this caper, IBA brought suit, charging Martin, Mueller and BiJo with several RICO violations, breach of fiduciary duty, and fraud. The defendants counterclaimed on several grounds. The jury found in favor of IBA on both the RICO and pendent state law claims and awarded damages in excess of $156,000 (after trebling) plus attorneys' fees in the sum of $63,805.

Martin initially retained another lawyer to represent him. He replaced that lawyer, however, with appellant, John W. Gavin. Mr. Gavin, it appears, was not familiar with the ways of the federal courts in general--and with the proscriptions of Rule 11 in particular.

Although Gavin's predecessor had made admissions that Martin was an employee of IBA, the answers to the First and Second Amended Complaints, signed by Gavin, claimed that Martin was an independent contractor who owed no fiduciary duty to IBA. When Martin testified during the trial, however, he conceded that he was employed by IBA. Following Martin's admission of employment, IBA made an oral motion under Rule 11 of the Federal Rules of Civil Procedure requesting that sanctions be imposed against Gavin for his prior pleading denying Martin's employee status.

In addition, after the conclusion of the trial, IBA made a supplemental written motion for sanctions pursuant to Rules 11, 26(g) and 37 of the Federal Rules of Civil Procedure, 28 U.S.C. Sec. 1927 and common law "bad faith." 1 It based the second request for sanctions upon several instances of allegedly improper conduct by Gavin, including:

(a) Gavin's denial of 17 allegations in the second amended complaint that were either admitted or not contested at trial, and three defenses relied upon by defendants, citing Rule 11 and 28 U.S.C. Sec. 1927;

(b) Gavin's accusation during trial that IBA fabricated an exhibit, citing 28 U.S.C. Sec. 1927 and common law "bad faith;"

(c) The denial of 36 out of 45 transactions which were the subject of requests for admission that Gavin later conceded were true by stipulation, citing Rules 11 and 26(g);

(d) The tendering of a psychologist and a psychiatrist as experts to show emotional distress claimed to have been caused by the alleged libel and slander of Martin, citing Rules 11, 26(g) and 28 U.S.C. Sec. 1927; and

(e) Various other improprieties connected with allegations in the defendant's counterclaim, including an accusation that IBA and Mr. & Mrs. Gaik (the owners of IBA) had hired someone to burglarize Mueller's home, and an allegation that the defendants were watched, followed or harassed.

Judge Getzendanner granted IBA's initial request for sanctions and assessed Gavin $3,000 for contesting whether or not Martin was an employee of IBA. Additionally, the court ruled in favor of IBA on its supplemental motion for sanctions, and ordered an additional assessment against Gavin in the amount of $31,902, half of the attorneys' fees awarded to IBA.

II. IBA's Initial Request for Sanctions

Whether or not Martin was an employee of IBA was a crucial issue in the case. Gavin argues that he reasonably disputed whether or not Martin was employed by IBA because the record did not clearly indicate an employer-employee relationship. Gavin claims that his only source of information on whether Martin was an employee of IBA was Martin himself. Martin represented to him, Gavin argues, numerous facts to which he also testified at trial supporting his claim of independent contractor status. 2 Gavin further contends that he could not rely upon IBA's owners or upon documents supporting this arrangement because there was no agreement reduced to writing.

IBA argues in response that evidence adduced during discovery and offered by IBA at trial established that although Martin initially was retained on a free-lance basis in late 1981, he became a salaried employee in January 1982, was placed on IBA's payroll and began to have income and Social Security taxes withheld from his pay. He was given a title and an office, and a staff was hired to work under him. Martin himself conceded at trial that he was an employee of IBA.

Quite aside from the trial testimony itself, however, IBA points out that it established Martin's employee status at trial mainly through documentary evidence that had been available to Gavin before he signed the pleadings in question. W-2 forms provided to Martin by IBA listed Martin as "employee" and IBA as his "employer." In October, 1985, Martin filed a wage claim application with the Illinois Department of Labor seeking recovery of wages, payment for "two weeks notice" (presumably this is severance pay) and for unpaid vacation and sick leave. He listed his "employer" as IBA, stated that he was its "Advertising Director," and "salaried," and that he worked an eight-hour day. These documents were noted by Judge Getzendanner in her opinion.

In addition, a new W-4 form filled out by Martin in July, 1983, listed IBA as "employer" and was signed by Martin in the space marked "employee." Beginning in 1982, moreover, Martin was paid with IBA payroll checks, and IBA withheld Social Security and income taxes therefrom. Martin's performance was appraised by IBA in 1982 and 1983 on forms identifying him as "employee," which forms were signed by him in a space marked "employee's signature."

Gavin does not deny that these documents existed, nor does he claim that they were not available to him before he signed any of the pleadings in question. Rather, he claims that these were "factors" to be weighed against other "incidents of the [employee-employer] relationship" in order to determine employee status, citing NLRB v. United Ins. Co. of Am., 390 U.S. 254, 258, 88 S.Ct. 988, 999, 19 L.Ed.2d 1083 (1968). We disagree.

Gavin, as discussed above, relied on Martin's statements for the facts he claims support Martin's claim of independent contractor status. 3 Yet these documents, which clearly belie this claim, existed and were available to Gavin at that time. Cf. Brown v. Federation of State Medical Bds., 830 F.2d 1429, 1436 (7th Cir.1987) (where record was developed by the time third lawyer was substituted in the case, it was not necessary for him to rely on his client for the factual foundation).

Under Rule 11, attorneys are required to make a reasonable inquiry to determine whether pleadings or other documents they sign are well-grounded in fact and warranted by existing law. If the district court concludes that the motion, pleading, or other document was not well-grounded in fact or warranted by the existing law, or was meant to harass, then the court must impose a sanction. Fed.R.Civ.P. 11; Brown, 830 F.2d at 1433.

There are two grounds for sanctions in Rule 11: the "frivolousness clause" and the "improper purpose clause." As set forth in Brown, the frivolousness clause of Rule 11 has two subparts: whether the party or attorney made a reasonable inquiry into the facts, and whether the party or attorney made a reasonable inquiry into the law. Brown, 830 F.2d at 1435-36. Similar to the district judge in Brown, the trial court's ruling here seems to be based on Gavin's failure...

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