Burda v. M. Ecker Co.

• Decision Date: 25 August 1993
• Docket Number: No. 92-2225,92-2225
• Citation: 2 F.3d 769
• Parties: Matthew BURDA, Plaintiff-Appellant, v. M. ECKER COMPANY, Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 769

2 F.3d 769

26 Fed.R.Serv.3d 1071

Matthew BURDA, Plaintiff-Appellant, v. M. ECKER COMPANY, Defendant-Appellee.

No. 92-2225.

United States Court of Appeals Seventh Circuit.

Argued Jan. 7, 1993.

Decided Aug. 25, 1993.

Robert J. Slobig (argued), McDermott, Will & Emery, Chicago, IL, for defendant-appellee.

Kenneth N. Flaxman (argued), Ruth Stelzman, Cantena & Stelzman, Chicago, IL, for appellants.

Before CUDAHY, COFFEY, and ROVNER, Circuit Judges.

COFFEY, Circuit Judge.

This is the second appeal from the district court's decision awarding fees and costs incurred by defendant M. Ecker Company in defending against a frivolous claim advanced by the plaintiff and his two attorneys, Ruth Stelzman and Kenneth N. Flaxman. In our first decision, we affirmed the district court's order dismissing plaintiff's action pursuant to Fed.R.Civ.P. 12(b)(6) for failure to state a claim upon which relief could be granted. We remanded the case to allow the district court to reconsider the imposition of sanctions, which had initially been imposed exclusively on the "nominal" plaintiff, Burda. Burda v. M. Ecker Co., 954 F.2d 434 (7th Cir.1992). On remand, the district court imposed sanctions against Stelzman and Flaxman under Fed.R.Civ.P. 11 and Illinois Supreme Court Rule 137. This appeal followed. We affirm in part and modify in part. ¹

I. FACTUAL BACKGROUND

The underlying facts are recited fully in Burda, 954 F.2d at 436-437. Plaintiff Matthew Burda, an employee of M. Ecker Company, filed a claim for benefits under the Illinois Worker's Compensation Act, Ill.Rev.Stat. ch. 48, p 138.1 et seq. Ruth Stelzman represented Burda before the Illinois Industrial Commission. The parties settled the claim and executed a Lump Sum Settlement Contract and Order ("Settlement Order") in the amount of $8525.78 that was approved by the Illinois Industrial Commission. From the total amount, $1705.16 was deducted for Stelzman's attorney's fee and $230.00 was deducted for a doctor's report and X-rays. Burda was to receive the remaining $6590.62.

Before disbursing the settlement checks, Liberty Mutual Insurance Company ("Liberty Mutual"), M. Ecker's insurance carrier, requested that Stelzman provide her taxpayer identification number. Stelzman inexplicably refused to cooperate. Nevertheless, Liberty Mutual then provided Stelzman with two checks. The first check was payable to Burda and his attorneys and was in the amount of $6590.62, which represented Burda's recovery. The second check was for $1548.12 and was payable only to Stelzman. This amount represented the $230.00 medical reimbursement and Stelzman's $1705.16 fee, less a 20% deduction for federal withholding tax.

Liberty Mutual issued payment in this manner in accordance with an Internal Revenue Service 1988 Private Letter Ruling. The letter ruling directed that payments of attorneys' fees, when "fixed and determinable" and exceeding $600.00 in a single year, are reportable payments under Sec. 6041 of the Internal Revenue Code. 26 U.S.C. Sec. 6041. Stelzman's $1705.16 fee was a reportable payment under Sec. 6041. Section 3406 of the Code further provided that reportable income under Sec. 6041 was subject to a backup withholding of 20% if the payee fails to furnish a valid taxpayer identification number. 26 U.S.C. Sec. 3406. Stelzman's refusal to provide a taxpayer identification number required Liberty Mutual to deduct 20% of her fee as withholding tax.

Stelzman returned both checks to Liberty Mutual and requested a single check for full payment issued to Burda alone. Liberty Mutual wrote back to Stelzman and explained that it was obliged to comply with federal tax law. Stelzman still refused to provide her taxpayer identification number. Liberty Mutual thereafter issued three checks to replace the two that had been returned. A second check payable to Burda was issued in the amount of $6590.62. This check was accepted. Burda also accepted a check in the amount of $230.00 for the doctor's report and X-rays. Liberty Mutual also tendered another check to Stelzman for her $1364.13 attorney's fee, and offered to provide her with a check for the $341.03 withheld as backup withholding taxes upon receipt of Stelzman's taxpayer identification number. Stelzman refused to accept the fee payment or provide her identification number.

Stelzman then filed suit under Burda's name in the Circuit Court of Cook County, Illinois, with the filing of an Application for Judgment under Section 19(g) of the Illinois Worker's Compensation Act. The complaint asserted that M. Ecker had failed to tender full payment under the Settlement Order. M. Ecker answered the state court complaint and removed the case to federal district court pursuant to 28 U.S.C. Secs. 1441(b) and 1446(a), alleging that Burda's purported state claim was actually an artfully pleaded challenge to federal withholding tax statutes and regulations. M. Ecker moved to dismiss the action on the ground that it failed to state a claim upon which relief could be granted under the Internal Revenue Code. Burda, ostensibly represented in federal court by Flaxman and Stelzman, opposed dismissal and moved to remand the action to state court. The district court denied Burda's remand motion, and granted M. Ecker's motion to dismiss.

M. Ecker then moved for sanctions against Burda and Stelzman pursuant to Fed.R.Civ.P. 11 or, in the alternative, Illinois Supreme Court Rule 137, which is the state-law version of federal Rule 11. The district court awarded M. Ecker $9478.75 in attorney's fees and $505.75 in costs under Rule 11. Burda and Stelzman appealed the orders dismissing the complaint and imposing sanctions.

We affirmed the district court's judgment of dismissal, holding that because Burda's artfully-pleaded claim was essentially a challenge to federal tax withholding regulations, Burda's exclusive remedy was an action against the United States. Burda v. M. Ecker Co., 954 F.2d 434 (7th Cir.1992) ("Burda I "). This court remanded for reconsideration of the judgment imposing sanctions because the district court's order resulted in imposition of sanctions only against Burda, who was merely a nominal party to the action. Id. at 440. While recognizing that the district court could not impose Rule 11 sanctions on Stelzman because only Flaxman had signed pleadings filed in federal court, we noted that there was "little doubt that the target of the sanctions was Stelzman--whose personal interest in the litigation appeared to precipitate the actions for which sanctions were imposed." Id. We concluded that because the district court relied only on Rule 11 to impose sanctions, we would forego discussion of the propriety of sanctioning Stelzman under 28 U.S.C. Sec. 1927. Id. at 441 (citing Walter v. Fiorenzo, 840 F.2d 427 (7th Cir.1988)).

After we remanded this case to the district court for reconsideration of the propriety of sanctions, M. Ecker renewed its motion for sanctions against Burda and Stelzman under Rule 11, 28 U.S.C. Sec. 1927, and Illinois Supreme Court Rule 137. M. Ecker sought to recover the $9984.50 in fees and costs that it incurred in removing the state action and in obtaining a dismissal. While M. Ecker did not seek sanctions against Flaxman, the district court acted on its own initiative, as Rule 11 expressly allows, and imposed sanctions against Flaxman as the attorney who signed the federal court pleadings. The district court acknowledged that one of the bases upon which M. Ecker sought sanctions was 28 U.S.C. Sec. 1927. Nonetheless, the district court did not specifically invoke Sec. 1927, but instead relied exclusively on the alternative grounds of Rule 11 and Illinois Supreme Court Rule 137 as the bases for its decision.

Because Stelzman had signed all of the state court pleadings but none of the pleadings filed in federal court, the district court was not authorized under Rule 11 to impose sanctions against Stelzman for pleadings she had filed prior to removal of the case to federal court. See Schoenberger v. Oselka, 909 F.2d 1086, 1087 (7th Cir.1990); Dahnke Kelly & Haus v. Teamsters Local 695, 906 F.2d 1192, 1201 (7th Cir.1990). The district court held, however, that although it could not sanction Stelzman under Rule 11 as a signing attorney, Rule 11 nevertheless gave the court discretion to sanction her as a "represented party."

Stelzman and Flaxman assert on appeal that sanctions were inappropriate against Stelzman under Rule 11 because she had not signed any pleadings in federal court. Flaxman challenges the imposition of sanctions against him on two grounds. First, Flaxman alleges that the district court's sua sponte imposition of sanctions against him violated the timeliness requirement set forth in Kaplan v. Zenner, 956 F.2d 149 (7th Cir.1992). Second, Flaxman asserts that the district court could not impose sanctions against him for his pleading's unresponsiveness to M. Ecker's jurisdictional arguments when the district court did not adopt those precise arguments as the basis for its decision. Both attorneys also challenge the propriety of the district court's alternative resort to Illinois Supreme Court Rule 137 as a basis for sanctioning attorneys in a removed case. Furthermore, Stelzman and Flaxman raise a cursory challenge to several of defense counsel's time and cost entries included as part of the fees and costs awarded.

II. ANALYSIS

We hold that under the circumstances of this case, that the district court's imposition of sanctions under Rule 11 against Stelzman and Flaxman was warranted. Although the district court did not directly address the availability of sanctions under 28 U.S.C. Sec. 1927, we may affirm the district court's ruling on any basis finding support in the record. Klein v. Rush-Presbyterian-St. Luke's Medical Ctr., 990 F.2d 279, 282-83 (7th Cir.1993); Reed v. Amax Coal Co., 971 F.2d 1295, 1298 (7th Cir.1992). The district court's findings that the lawsuit was insupportable and pursued...