INVST Financial Group, Inc. v. Chem-Nuclear Systems, Inc.
| Decision Date | 10 June 1987 |
| Docket Number | 85-1888,Nos. 85-1731,CHEM-NUCLEAR,s. 85-1731 |
| Citation | 815 F.2d 391 |
| Parties | , 7 Fed.R.Serv.3d 529 INVST FINANCIAL GROUP, INC., a Michigan Corporation, Plaintiff-Appellee, v.SYSTEMS, INC., a Washington Corporation, Defendant-Appellant. In re C. William GARRATT, and Garratt & Morris, P.C., Petitioners-Appellants. |
| Court | U.S. Court of Appeals — Sixth Circuit |
Jonathan T. Walton, Jr. (argued) Clark, Klein & Beaumont, Detroit, Mich., Fred W. Batten, for Chem-Nuclear Systems, Inc.
Mark E. Reizen, Bushnell, Gage, Doctoroff & Reizen, Southfield, Mich., John K. Parker (argued), for INVST Financial Group, Inc.
C. William Garratt, Garratt & Morris, P.C., Bloomfield Hills, Mich., pro se.
Ramsey Clark, New York City, for C. William Garratt and Garratt & Morris, P.C.
Before KEITH and WELLFORD, Circuit Judges, and TODD, District Judge. *
This is a consolidation of two cases which arose out of a common set of facts. In INVST Financial Group, Inc. v. Chem-Nuclear Systems, Inc., defendant Chem-Nuclear appeals the district court's entry of a default judgment due to the failure of Chem-Nuclear's former attorney to file an answer in a timely manner. In re C. William Garratt and Garratt and Morris, P.C. is an appeal of the imposition of sanctions upon Garratt pursuant to Fed.R.Civ.P. 11. For the reasons hereinafter stated, we REVERSE the default judgment in INVST Financial Group, Inc. v. Chem-Nuclear Systems, Inc. We AFFIRM in part and REVERSE in part the imposition of sanctions in In re C. William Garratt and Garratt and Morris, P.C.
INVST Financial Group, Inc. (INVST) was a Michigan corporation engaged in the business of identifying corporate acquisition candidates. In 1981, INVST contracted with defendant Chem-Nuclear Systems, Inc. (Chem-Nuclear), agreeing to attempt to locate possible candidates for acquisition by Chem-Nuclear. A written agreement between the parties defined their relationship and described the circumstances under which INVST would be entitled to a fee.
INVST located a company named Hanchar as a potential acquisition prospect for Chem-Nuclear. A Chem-Nuclear subsidiary entered a two-year option and operating agreement to purchase all the stock of two subsidiaries of Hanchar. Chem-Nuclear's subsidiary operated Hanchar's subsidiaries for four months before deciding, for various reasons, not to exercise the option to purchase the Hanchar stock. After the option and operating agreement were terminated, INVST demanded compensation for its role in the Hanchar transaction. Chem-Nuclear refused to pay, claiming that no acquisition had taken place to trigger the agreement to pay a finder's fee.
INVST filed a diversity jurisdiction breach of contract suit against Chem-Nuclear on June 7, 1983. On August 10, 1983, plaintiff's counsel, Mark Reizen (Reizen), granted attorney William Garratt (Garratt) an indefinite extension of time for Chem-Nuclear to answer the complaint.
On September 7, 1983, Reizen sent Garratt a letter seeking a status report. Garratt did not respond. Discovery began in September 1983, even though no answer had been filed on behalf of defendant. District Judge Gilmore held a status conference in November 1983, at which he set certain deadlines, including a motion cutoff date of December 1, 1984, and an anticipated trial date of January 1985. At the status conference, neither the lawyers nor Judge Gilmore referred to Chem-Nuclear's failure to file an answer. During the conference Garratt advised that defendant Chem-Nuclear was a Washington corporation, and Judge Gilmore instructed INVST to amend its complaint to insure complete diversity. On November 17, 1983, INVST filed an amended complaint, reflecting that Chem-Nuclear was a Washington corporation.
As the suit progressed, discovery problems arose. On June 25, 1984, Reizen sent a letter to Garratt which contained the following:
[p]laintiff's First Set of Interrogatories were forwarded to you on February 29, 1984, and I still have not received Answers to the same. Those Answers are now long overdue, and a Motion to Compel Answers to these Interrogatories will be filed with the Court on July 2, 1984.
Discovery in this matter on behalf of your client has been dilatory at best, and it appears that I will no longer be able to accommodate you with requests for extensions of time with regard to any matter on this file. From this point onward, I expect timely responses to all pleadings filed in this matter and I will not hesitate to seek the Court's protection from this point onward.
On October 2, 1984, three months after the letter from Reizen, Garratt filed an answer for Chem-Nuclear, including affirmative defenses and a counterclaim. At that same time, Garratt responded to INVST's first set of interrogatories.
INVST had not sought entry of default between its June 1984 letter purportedly revoking the time extensions and defendant's October 1984 pleading. From June until October, the only contact between the parties was an additional discovery dispute in July.
On October 19, 1984, INVST moved to strike Chem-Nuclear's answer, counterclaim, and affirmative defenses. Chem-Nuclear responded to the motion to strike by contending that INVST's counsel had expressly agreed to grant additional time to respond; that INVST's counsel never requested a response to the pleadings; that INVST had never objected or sought any relief regarding the alleged untimeliness of the response until after it was filed; and that failure to object to the untimeliness of the response constituted a waiver or estoppel.
On November 15, 1984, at a hearing on pending motions, Garratt explained that he had not answered the complaint in a timely fashion because he had relied upon the agreement made with plaintiff's counsel. Garratt indicated that he interpreted the June 25, 1984, letter to be confined to discovery matters, and that he did not consider it to be a revocation of the extension of time granted to file an answer. Garratt also argued that plaintiff had not been prejudiced by any delay in filing an answer because discovery had proceeded and plaintiff had not sought any judicial relief as a result of the untimely answer. INVST argued that it had been prejudiced by the delay because the filing of a counterclaim and affirmative defenses so close to the discovery cutoff made adequate discovery impossible prior to a January trial date. Judge Gilmore granted INVST's motion to strike the answer and counterclaim, although the order to strike was not entered until November 30, 1984, and was not filed by the clerk until December 3, 1984.
Chem-Nuclear filed two motions before the order to strike was entered. On November 20, 1984, Chem-Nuclear filed a motion to dismiss for insufficiency of service of process on the basis that Chem-Nuclear had ceased to exist in 1982 and was therefore not amenable to suit. On November 29, 1984, Chem-Nuclear moved for summary judgment on the basis that defendant had no obligation to plaintiff, because no acquisition which would trigger the finder's fee provision of the agreement had ever occurred.
INVST moved for entry of default and default judgment on December 5, 1984. INVST also responded to Chem-Nuclear's motions to dismiss and for summary judgment, contending that the motions were "frivolous and vexatious" and were filed in bad faith. INVST sought an award of costs and fees pursuant to Fed.R.Civ.P. 11 for the alleged vexatious, harassing, and frivolous motions. On January 17, 1985, before arguments began on pending motions, a representative of Garratt's law firm made an oral motion for Judge Gilmore's recusal. Because no affidavit was presented in support of that motion, the motion for recusal was summarily denied. At the conclusion of arguments on the pending motions, the court granted plaintiff's motion for default judgment. Judge Gilmore denied Chem-Nuclear's motion to dismiss for insufficiency of service of process because it had been waived under Fed.R.Civ.P. 12(a)(1). The court described the defense of insufficiency of service of process as "outrageous" because Garratt had initially filed an answer and counterclaim on behalf of Chem-Nuclear, and only after those pleadings had been stricken did he take the position that Chem-Nuclear did not exist.
The court also denied, without consideration, defendant's motion for summary judgment. The court reasoned that because defendant's answer had been stricken, its motion for summary judgment should not be entertained. Rule 11 sanctions were imposed for both the motion for summary judgment and the motion to dismiss.
A hearing on damages for the default judgment was set for January 24, 1985, and a hearing on the Rule 11 sanctions was set for January 31, 1985. On the date set for a hearing on damages for the default judgment, Chem-Nuclear filed two motions opposing the court's entry of a default judgment. Chem-Nuclear argued that a default judgment was inappropriate because: 1) any attorney neglect was excusable; 2) it had stated meritorious defenses to plaintiff's claims; and 3) the facts had been misrepresented to obtain a default judgment.
Also on January 24, 1985, Garratt presented a lengthy written motion for recusal of Judge Gilmore. In the motion, Garratt questioned Judge Gilmore's impartiality, setting forth a history of Judge Gilmore's alleged "bias" in cases in which a party was represented by Garratt's firm. 1 The recusal motion was assigned to Honorable Robert E. DeMascio for disposition, and on February 21, 1985, Judge DeMascio denied the motion to recuse Judge Gilmore, stating:
[i]nitially, we note that, under [28 U.S.C.] Sec. 144, actions of a judge in pending or previous litigation in which the movant has been involved are not grounds for disqualification. Personal bias based upon extrajudicial actions must be shown. Southerland v. Irons, 628 F.2d 978 (6th Cir.1980).
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