Art Form Interiors, Inc. v. Columbia Homes, Inc.

• Decision Date: 01 September 1991
• Docket Number: No. 1806,1806
• Citation: 92 Md.App. 587,609 A.2d 370
• Parties: ART FORM INTERIORS, INC., et al. v. COLUMBIA HOMES, INC., et al. ,
• Court: Court of Special Appeals of Maryland

Page 587

92 Md.App. 587

609 A.2d 370

ART FORM INTERIORS, INC., et al. v. COLUMBIA HOMES, INC., et al.

No. 1806, Sept. Term, 1991.

Court of Special Appeals of Maryland.

July 13, 1992.

John H. Doud, III, Baltimore (John M. Robinson, Frederick, on the brief), for appellants.

Bradford I. Webb (Arvin E. Rosen, Siskind, Burch, Grady & Rosen, Baltimore, and Alan L. Winik, Frederick, on the brief), for appellees.

Argued before MOYLAN, ROSALYN B. BELL and DAVIS, JJ.

DAVIS, Judge.

This appeal represents the outgrowth of a construction contract dispute between Columbia Homes Inc. (CHI), a general contractor in Frederick County, Maryland, and Art Form Interiors Inc. (Art Form), a carpentry subcontractor. As a consequence of litigation in that dispute, the lower court ultimately granted a Motion for Sanctions against John Robinson (Robinson), the attorney representing Art Form, and awarded attorney's fees to the opposing side. It is from the award of attorney's fees that the appellants now bring their appeal.

FACTS

On October 10, 1989, Art Form, a West Virginia corporation, filed a complaint in the Circuit Court for Frederick County, alleging that CHI breached its contract by "failing to make payment of amounts earned under the Contract for materials provided and services rendered." Art Form, which claimed that it performed carpentry services for CHI in the summer of 1988 during construction of a town house development, averred in its complaint that the total amount of its undertaking under the contract was $18,398.65, of which $8,786.15 remained unpaid.

CHI filed an answer to the complaint on December 1, 1989, in which it stated that Art Form did not perform the work it claimed it had done and that the total value of the work done by Art Form was only $10,747, of which Art Form was paid $9,612.50. CHI also alleged that it discovered "numerous defects in the work as done by [Art Form]" and that it hired someone else to "correct those defects."

In order to prepare for trial, Art Form sought to conduct discovery but was unsuccessful. On March 30, 1990, Art Form filed a Motion for Sanctions Upon Failure to Provide Discovery. Its motion was granted on May 8, 1990, and the court gave CHI twenty days to provide the requested discovery. When CHI still did not respond to the discovery request, Art Form filed a Motion for Entry of Default Judgment on June 6, 1990. Art Form's motion was granted, and an order for default was entered against CHI on June 7, 1990. The order was filed June 8, 1990. On November 26, 1990, a hearing was held, at which both parties were present and represented by counsel, and the lower court entered judgment in favor of Art Form in the amount of $5,576.15.

On January 7, 1991, Art Form filed a Request for Production of Documents in Aid of Execution and Interrogatories in Aid of Execution. When the corporation received no response from CHI, it filed a Motion for Order Compelling Discovery on February 15, 1991, which the court granted on March 18, 1991. ¹ The court gave CHI until April 15, 1991 to comply with the order, but compliance was not forthcoming.

Finally, on April 17, 1991, Art Form filed a Petition for Contempt against CHI; Arvin Rosen (Rosen), as CHI's resident agent; Bradford Webb (Webb), as CHI's attorney; and David Mathias (Mathias), as director and president of CHI. On April 19, 1991, the lower court (Dwyer, J.) entered a Show Cause Order against CHI, Rosen, Webb, and Mathias and set a hearing for June 20, 1991. The record reflects that the appellants requested service of the Show Cause Order on April 23, 1991 and that it was served by private process on May 7, 1991. On April 22, 1991, Rosen sent a letter to Mathias resigning as CHI's resident agent.

On May 21, 1991, CHI filed a motion seeking sanctions against Art Form and/or Robinson on the ground that Art Form's Petition for Contempt was filed in bad faith and without substantial justification. The motion averred that neither Rosen, as CHI's resident agent, nor Webb, as CHI's attorney, ² could be held in contempt for any failure by CHI to respond to the court's order compelling compliance with discovery and that Robinson/Art Form was attempting to use Rosen and Webb to gain advantage in the legal battle with CHI. Neither Rosen nor Webb had been named as defendants in Art Form's suit against CHI.

CHI filed its Motion for Sanctions pursuant to Maryland Rule 1-341, which states:

In any civil action, if the court finds that the conduct of any party in maintaining or defending any proceeding was in bad faith or without substantial justification the court may require the offending party or the attorney advising the conduct or both of them to pay to the adverse party the costs of the proceeding and the reasonable expenses, including reasonable attorney's fees, incurred by the adverse party in opposing it. [Emphasis added.]

On June 5, 1991, Art Form filed a response to the appellees' motion and withdrew its Petition for Contempt "in light of the Answers to Interrogatories and Response to Request for Production of Documents in Aid of Execution filed by Defendant on or about April 30, 1991 and the Amended Answers to Interrogatories filed on or about May 13, 1991."

A hearing on the appellees' Motion for Sanctions was held June 20, 1991. The circuit court (Dwyer, J.), ruling that the issue of the Petition for Contempt was moot, granted the motion on the ground that Robinson lacked substantial justification, not for filing the Petition for Contempt but for proceeding with service of the Show Cause Order against Rosen and Webb. ³ The court thereupon rendered its findings of fact.

Upon rendering its findings, the lower court allowed attorney's fees of $2,645 for services ⁴ rendered after April 18, 1991 when Rosen and Webb, both of whom are Baltimore attorneys, sent the circuit court a letter, a copy of which was forwarded to Robinson, stating that they were "not aware of any statutory or case law which subjects a resident agent or an attorney to liability for contempt upon failure of a corporate defendant to comply with an order compelling discovery." At the hearing, the court said: "[I]t's the letter of April 18th itself which triggers the finding of lack of substantial justification. That letter, in and of itself, and the research for that, would not be part of it [the computation of attorney's fees]."

In his appeal, Robinson advances two claims of error:

I. Whether the trial court was clearly erroneous when it found that there was no substantial justification for continuing to process the Petition for Contempt by sending the Show Cause Order to Baltimore on April 23, 1991 for the service of that Order which occurred on May 7, 1991.

II. Whether the trial court abused its discretion when it awarded any damages in this case.

Because we find the lower court was clearly erroneous in imposing sanctions and accordingly reverse its judgment, we do not reach the second issue presented in this appeal.

DISCUSSION

The Court of Appeals set forth in Inlet Assocs. v. Harrison Inn Inlet, Inc., 324 Md. 254, 596 A.2d 1049 (1991), the standard of appellate review that should be applied when a lower court has imposed sanctions under Maryland Rule 1-341. A court "may" impose sanctions upon a party or the attorney advising the conduct or both "if the court finds that the conduct of any party in maintaining ... any proceeding was in bad faith or without substantial justification." Rule 1-341 (emphasis added). As the Court explained, the awarding of attorney's fees as sanctions can occur only upon the satisfaction of a two-prong test:

If the judge makes the requisite finding that a litigant acted in bad faith or without substantial justification, the judge should not automatically impose sanctions. After finding bad faith or lack of substantial justification, the judge should then exercise discretion in deciding, in light of those findings, whether costs and/or attorney's fees should be awarded.

Inlet, 324 Md. at 266, 596 A.2d 1049.

In contrast to Rule 1-341's predecessor, Rule 604 b, which "made sanctions mandatory after a finding of bad faith or lack of substantial justification," Inlet, 324 Md. at 267, 596 A.2d 1049, the award of attorney's fees as sanctions under Rule 1-341 is not mandatory despite the fact that the judge may have found that the attorney or the offending party acted in bad faith or without substantial justification. Before sanctions can be imposed "in the form of costs and/or attorney's fees under Rule 1-341, the judge must make two separate findings that are subject to scrutiny under two related standards of appellate review." Inlet, 324 Md. at 267, 596 A.2d 1049 (emphasis added).

First, the judge must find that the proceeding was maintained or defended in bad faith and/or without substantial justification. This finding will be affirmed unless it is clearly erroneous or involves an erroneous application of law. Second, the judge must find that the bad faith and/or lack of substantial justification merits the assessment of costs and/or attorney's fees. This finding will be affirmed unless it was an abuse of discretion.

Id. at 267-68, 596 A.2d 1049.

The test for determining lack of substantial justification is "whether [the offending attorney or party] had a reasonable basis for believing that the claims would generate an issue of fact for the fact finder." Id. at 268, 596 A.2d 1049 (emphasis added). We stated similar sentiments in Needle v. White, 81 Md.App. 463, 476, 568 A.2d 856 cert. denied, 319 Md. 582, 573 A.2d 1338 (1990) (emphasis added): "[A] reasonable basis for believing that a case will generate a factual issue for the fact-finder at trial provides substantial justification for initiating or defending an action."

The "bad faith" referred to in Rule 1-341 is defined as acting "vexatiously, for the purpose of harassment or unreasonable delay, or for other improper reasons." Inlet, 324 Md. at 268, 596 A.2d...