Bodenhamer Bldg. Corp. v. Architectural Research Corp.

• Decision Date: 10 March 1993
• Docket Number: 90-2310,Nos. 90-2135,s. 90-2135
• Citation: 989 F.2d 213
• Parties: BODENHAMER BUILDING CORPORATION, Plaintiff-Appellee, v. ARCHITECTURAL RESEARCH CORPORATION; Ar-Lite Panelcraft, Inc.; and American Standards Testing Bureau, Inc., Defendants-Appellants.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 213

989 F.2d 213

25 Fed.R.Serv.3d 272

BODENHAMER BUILDING CORPORATION, Plaintiff-Appellee, v. ARCHITECTURAL RESEARCH CORPORATION; Ar-Lite Panelcraft Inc.; and American Standards Testing Bureau Inc., Defendants-Appellants.

Nos. 90-2135, 90-2310.

United States Court of Appeals Sixth Circuit.

Argued Sept. 28, 1992.

Decided March 10, 1993.

David M. Hayes, Clark, Klein & Beaumont, Detroit, MI, Charles D. Bavol (argued and briefed), Bavol & Associates, Tampa, FL, for plaintiff-appellee.

Robert L. Blamer, Cummings, McClorey, Davis & Acho, Livonia, MI, W. Breck Weigel (argued and briefed), Vorys, Sater, Seymour & Pease, Cincinnati, OH, for defendants-appellants.

Before: RYAN and SUHRHEINRICH, Circuit Judges; and ENGEL, Senior Circuit Judge.

ENGEL, Senior Circuit Judge.

This case is before us a second time. In our earlier opinion, we affirmed a damage award but vacated an award of attorneys' fees on the ground that the district court had failed to make the findings necessary to support such an award under Federal Rule of Civil Procedure 11. Bodenhamer Building Corp. v. Architectural Research Corp. (Bodenhamer I), 873 F.2d 109 (6th Cir.1989). On remand, the district court steadfastly refused once again to make the necessary findings. Accordingly, we are compelled once more to vacate the award and to remand the case for further proceedings.

I

The relevant facts are set forth in Bodenhamer I. Briefly, however, they are as follows. Appellee Bodenhamer Building Corporation ("Bodenhamer") contracted to purchase building materials from appellant Architectural Research Corporation ("ARC"). ARC was a subsidiary of appellant American Standards Testing Bureau ("ASTB"). Subsequently, ASTB and ARC entered into a revolving loan agreement that left ARC woefully undercapitalized and indebted to ASTB. When ARC defaulted on the building materials contract, Bodenhamer sued and won a judgment of $49,633.66. Before judgment could be collected, however, ASTB foreclosed on its loan to ARC. ARC's assets were sold at an auction attended only by representatives of ASTB, who purchased them for inadequate consideration.

Its assets sold, ARC ceased doing business, leaving unpaid its debts to Bodenhamer and others. ASTB then created another wholly-owned subsidiary, appellant Ar-Lite Panelcraft, Inc. ("API"), to assume the operations abandoned by ARC. API took over ARC's facility and commenced operations the day after the auction, assuming the bulk of the unfulfilled contracts entered into by its predecessor.

Frustrated in its efforts to collect the judgment, Bodenhamer brought a diversity action seeking, under various theories, to pierce ARC's corporate veil and hold ASTB and API responsible for the judgment against ARC. In support of its theory that ASTB and the related businesses had disregarded the corporate form, Bodenhamer's complaint alleged, among other things, that ASTB had paid insufficient consideration for ARC's assets, leaving ARC insolvent, and that API was nothing more than a successor to ARC. The defendants were represented at the time by in-house counsel, who had played a large role in arranging the asset-shuffling that had given rise to the suit. Through counsel, the defendants filed an answer in which they denied most of the allegations and raised a counterclaim against Bodenhamer. ¹

The matter proceeded to a jury trial on some claims and to a bench trial on others. Both judge and jury found in favor of Bodenhamer, and the court entered judgment in the amount of $51,069.75. The court also held that Bodenhamer was entitled to attorneys' fees under Rule 11, and it ordered the company to document its fees and costs. Bodenhamer complied by submitting affidavits totalling fifty pages that documented expenses in the amount of $84,209.80. This amount included $73,550 in attorneys' fees, representing 921.8 hours of work, and $10,659.80 in costs. The affidavit did not indicate any of the attorneys' hourly rates, although it did identify each attorney separately and indicate that attorney's position within the firm (i.e., associate, partner) ² as of the conclusion of litigation on the merits. For reasons that will later become clear, the court deducted $6,414.05 from this amount and awarded the difference--$77,795.75--to Bodenhamer. The court based this award on its finding that the counterclaim was baseless, that the conduct of the defense was "well below professional standards," and that "the entire defense of this case was offered merely to require the plaintiff to expend enough money so as to prevent further prosecution of plaintiff's claims." Bodenhamer Building Corp. v. Architectural Research Corp., No. 83-CV-71887-DT, slip op. at 13 (E.D.Mich. Oct. 3, 1986).

The defendants appealed to this court. In Bodenhamer I, we affirmed the judgment but reversed the award of attorneys' fees. We explained our reasoning as follows:

[B]efore a district court awards an attorney fee, Rule 11 requires a finding that the recoverable fee was induced by the filing of a sanctionable pleading. "[A] district judge faced with a sanction motion must make certain findings determining that an award is appropriate. Careful analysis and discrete findings are required, no matter how exasperating the case." In re Ruben, 825 F.2d 977, 990-91 (6th Cir.1987). Although the court implied that the counterclaim against Douglas Bodenhamer and Bodenhamer Building Corporation was entirely unjustified, neither the data submitted nor the findings of the court indicate how any particular pleading, motion, or paper relates to any particular expense or attorney fee. We therefore must vacate the award of attorney fees.

Bodenhamer I, 873 F.2d at 114. Having thus reminded the district court that expenses compensable under Rule 11 were limited to those incurred as a result of the filing of an offensive pleading, we advised the court, without restricting further inquiry, that the only pleading that appeared sanctionable was the counterclaim.

On remand, the parties submitted briefs and the court heard oral argument. The court did not, however, hold an evidentiary hearing, and the parties submitted no additional proof. Nonetheless, the court issued an order reinstating the original award of $77,795.75. This time, however, the court elected not to attribute Bodenhamer's expenses to the counterclaim. Rather, the court ruled that the defendants' answer was the sanctionable pleading. The court observed that the answer, which was prepared by the attorneys who orchestrated the fraud of which the plaintiff complained, contained many denials of allegations in the complaint that the attorneys knew to be true. The court stated that, "[b]ecause of Defendant's failure to cooperate, Bodenhamer engaged in extensive discovery practice. This enormous expenditure was generally attributable to Defendant's failure to truthfully respond to plaintiff's complaint." Bodenhamer Building Corp. v. Architectural Research Corp., No. 83-CV-71887-DT, slip op. at 15 (E.D.Mich. Sept. 13, 1990). Accordingly, the court concluded that the entire course of litigation had been induced by the offensive nature of the answer.

The defendants appeal the district court's reinstatement of its original award.

II

The imposition of sanctions under Rule 11 is committed to the trial court's discretion. Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 405, 110 S.Ct. 2447, 2460, 110 L.Ed.2d 359 (1990). Accordingly, we may overturn an award of sanctions only upon a finding that the district court abused its discretion. That discretion is not, however, completely unfettered. First, where a court has decided that a pleading has been signed in violation of Rule 11, the court must impose a sanction. Second, and more relevant here, the amount of the sanction must be reasonable. INVST Financial Group, Inc. v. Chem-Nuclear Systems, Inc., 815 F.2d 391, 404 (6th Cir.1987).

As a preliminary matter, we reject defendants' contention that an answer is not a pleading capable of being sanctioned. Rule 11 provides that "[e]very pleading, motion, or other paper" may be the basis for a sanction. "Pleadings" are defined elsewhere in the Federal Rules of Civil Procedure as including answers. See, e.g., Fed.R.Civ.P. 7(a), 8(b), 10(b). Furthermore, even if answers were not "pleadings," they would certainly qualify as "other papers." Thus, both the counterclaim and the answer may legitimately serve as the bases of a Rule 11 sanction.

Nor do we quarrel with the district court's decision to impose some quantum of sanctions. We agree with the district court that the defendants knew many of the allegations in Bodenhamer's complaint to be true, and yet they denied them or, at best, qualified their admissions. Under such circumstances, we cannot deny that a large part of Bodenhamer's expenditures could have been avoided if the defendants had answered the complaint truthfully.

Nonetheless, the district court's refusal to make the findings necessary to support a blanket award of attorneys' fees compels us to overturn the award. As we informed the district court, Rule 11 authorizes the award of "reasonable expenses incurred because of the filing of" offensive pleadings (emphasis added). Bodenhamer I, 873 F.2d at 114. Accordingly, before an award of attorneys' fees may be made under the rule, it must be shown that the fees were incurred because of the filing of an improper pleading. As our court has previously noted, "an award of attorneys' fees should be limited to those expenses reasonably incurred to meet the other party's groundless, bad-faith procedural moves." Rathbun v. Warren City Schools (In re Ruben), 825 F.2d 977, 990 (6th Cir.1987) (quoting Browning Debenture Holders' Committee v. DASA Corp., 560 F.2d 1078, 1089 (2d Cir.1977)). Accordingly, before granting a motion for fees under Rule 11, a trial court must "analyze the impact upon [the moving party] of discrete acts of claimed misconduct." Rathbun, 825 F.2d at 990. See...