James, Cooke & Hobson, Inc. v. Lake Havasu Plumbing & Fire Protection

• Decision Date: 29 April 1993
• Docket Number: CA-CV,No. 1,1
• Citation: 177 Ariz. 316,868 P.2d 329
• Parties: JAMES, COOKE & HOBSON, INC., a Texas corporation, Plaintiff-Appellee, v. LAKE HAVASU PLUMBING & FIRE PROTECTION, an Arizona general partnership, David N. Danboise, Scott Cunningham, Allen Jedrey, Defendants-Appellants, and Ted BOWEN, Defendant, Real Party in Interest-Appellant. 91-0069.
• Court: Arizona Court of Appeals

Page 329

868 P.2d 329

177 Ariz. 316

JAMES, COOKE & HOBSON, INC., a Texas corporation, Plaintiff-Appellee, v. LAKE HAVASU PLUMBING & FIRE PROTECTION, an Arizona general partnership, David N. Danboise, Scott Cunningham, Allen Jedrey, Defendants-Appellants and Ted BOWEN, Defendant, Real Party in Interest-Appellant.

No. 1 CA-CV 91-0069.

Court of Appeals of Arizona Division 1, Department C.

April 29, 1993.

Reconsideration Denied Aug. 20, 1993.

Review Denied March 1, 1994.

[177 Ariz. 317] Murphy & Posner by Daryl M. Williams and Najia M. Kerrin, Phoenix, for plaintiff-appellee.

Lewis and Roca by John P. Frank, Janet Napolitano and Barbara Anstey, Phoenix, for defendant real party in interest-appellant.

OPINION

McGREGOR, Judge.

In this appeal, we consider the standard of review applicable to trial court orders imposing sanctions pursuant to Rule 11, Arizona Rules of Civil Procedure, and the trial court's imposition of Rule 11 sanctions against Ted Bowen (Bowen). We hold that we will review all aspects of orders imposing such sanctions for abuse of discretion. We affirm the judgment of the trial court.

I.

Lake Havasu Plumbing & Fire Protection (Lake Havasu) purchased goods from James, Cooke & Hobson, Inc. (James). Lake Havasu, acting as a subcontractor, used the majority of the goods on a construction project in Yuma County. In June 1987, James filed a complaint on open account against Lake Havasu and one of its partners, David N. Danboise (Danboise), alleging that Lake Havasu owed James $31,342 plus interest to the date of the filing of the complaint, a total of $31,731. The complaint also named the Yuma project's general contractor as a defendant and alleged, in a second count, that the general contractor had guaranteed payment of $30,322 of the amount Lake Havasu owed to James.

To its complaint, James attached five invoices sent to Lake Havasu totaling $31,342. James also attached a letter in which Danboise informed the general contractor "of a commitment to pay James, Cooke & Hobson" and discussed the method by which Lake Havasu would pay $31,731.59.

Bowen, an attorney, filed an answer on behalf of Lake Havasu and Danboise. The relevant portion of the answer admitted "that a contract or contracts do exist involving plaintiff and these answering defendants," but denied "that defendants are indebted to plaintiff for the amount set forth in the complaint, or any other amount, and demand strict proof." The answer also made a demand for items of account. ¹

In December 1987, James moved for summary judgment. The trial court delayed hearing the motion due to the automatic stay that resulted from a bankruptcy filing by Lake Havasu. Bowen never filed a response to the motion for summary judgment. In March 1988, the trial court entered judgment against the partners for $31,342 plus prejudgment interest, costs and attorneys' fees. In January 1990, the trial court entered judgment against Lake Havasu for $31,342 plus prejudgment interest, costs and attorneys' fees.

In April 1990, James requested that the court impose sanctions against Bowen under Rule 11 and Ariz.Rev.Stat.Ann. ("A.R.S.") §§ 12-349 and 12-341.01.C. James asserted that Bowen was responsible for numerous improper actions in the case, including filing an answer denying the debt although he knew and later admitted that the debt had always been valid.

In response, Bowen argued that he should not be penalized for zealously advocating for his clients. Bowen questioned the tactics of James's attorneys, stating that James had refused to accept a $40,000 settlement offer. ² Bowen also asserted that the amount of fees sought by multiple attorneys for James was unreasonable.

The trial court imposed sanctions, ordering Bowen, Lake Havasu and its partners to reimburse James $38,966.25 plus interest for attorneys' fees and costs. In explaining its reasons for awarding sanctions, the court stated: "The court finds that there was no valid reason for the partnership to deny plaintiff's complaint, and that a general denial was filed to cause unnecessary delay. This resulted in a needless increase in the cost of litigation to plaintiff."

After the trial court denied a motion for new trial, the original defendants and Bowen, the latter as an additional defendant and real party in interest, appealed from the order imposing sanctions. Only Bowen filed an appellant's brief, challenging only the grounds upon which the trial court awarded sanctions. ³ Bowen does not contest the amount of the sanctions. We have jurisdiction pursuant to A.R.S. §§ 12-2101.B, -2101.C, and -2101.F.

II.

A.

In Wright v. Hills, 161 Ariz. 583, 780 P.2d 416 (App.1989), this court adopted the three-tiered standard of review for orders imposing sanctions under Rule 11 previously defined in Zaldivar v. City of Los Angeles, 780 F.2d 823, 828 (9th Cir.1986). Under this standard, appellate courts review trial courts' factual determinations under a clearly erroneous standard, legal conclusions de novo, and the imposed sanction's appropriateness for abuse of discretion. Wright, 161 Ariz. at 589, 780 P.2d at 422. We followed this federal standard of review because Arizona's Rule 11 is "essentially identical to the federal rule...." Id. at 588, 780 P.2d at 421.

Shortly after we decided Wright, however, the United States Supreme Court rejected the Zaldivar three-tiered standard of review in favor of an abuse of discretion standard for all aspects of orders imposing Rule 11 sanctions. Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 405, 110 S.Ct. 2447, 2461, 110 L.Ed.2d 359 (1990). In Cooter, the Supreme Court noted that appeals challenging the imposition of sanctions pursuant to Rule 11 involve three types of issues: (1) factual issues regarding the attorney's prefiling inquiry and "the factual basis of the pleading or other paper"; (2) legal issues "considering whether a pleading is 'warranted by existing law or a good faith argument' for changing the law and whether the attorney's conduct violated Rule 11"; and (3) whether the trial court appropriately exercised its discretion "to tailor an 'appropriate sanction.' " Id. at 397, 110 S.Ct. at 2457. The Supreme Court, observing that federal appellate courts typically reviewed the trial court's selection of a sanction under an abuse of discretion standard and its findings of fact under a clearly erroneous standard, concluded that, in practice, the abuse of discretion and clearly erroneous standards are indistinguishable in these aspects of Rule 11 proceedings. "A court of appeals would be justified in concluding that a district court had abused its discretion in making a factual finding only if the finding were clearly erroneous." Id. at 399, 110 S.Ct. at 2458.

The Court then considered whether an appellate court must defer to the lower court's legal conclusions in Rule 11 proceedings. Noting that distinguishing between legal and factual issues is "particularly difficult in the Rule 11 context[,]" and that a trial court "is better situated than the court of appeals to marshall the pertinent facts and apply the fact-dependant legal standard mandated by Rule 11[,]" id. at 401, 110 S.Ct. at 2459, the Court held a deferential standard should apply to legal conclusions also. The Court therefore concluded that an appellate court should not apply the three-tiered standard of review set out in Zaldivar and followed in Wright. "Rather, an appellate court should apply an abuse-of-discretion standard in reviewing all aspects of a district court's Rule 11 determination." ⁴ Id. 496 U.S. at 405, 110 S.Ct. at 2461.

By rejecting the Zaldivar standard, the United States Supreme Court removed the underpinnings of the standard of review we adopted in Wright. Because Arizona's Rule 11 is identical to the federal rule and because we agree with the analysis of Cooter, we adopt the Cooter holding and will apply an abuse of discretion standard to all aspects of orders imposing sanctions under Rule 11.

B.

1.

The standards of conduct with which a lawyer must comply to avoid sanctions under Rule 11 are well-defined. A lawyer's signature on a pleading or other document constitutes certification that the lawyer has read the pleading, that "to the best of the signer's knowledge, information, and belief formed after reasonable inquiry it is well grounded in fact and is warranted by existing law or a good faith argument for the extension, modification, or reversal of existing law; and that it is not interposed ... to harass or to cause unnecessary delay or needless increase in the cost of litigation." Rule 11(a). Rule 11 therefore requires that before signing a pleading, a lawyer possess a good faith belief, formed on the basis of a reasonable investigation, that a colorable claim or defense exists. Boone v. Superior Court, 145 Ariz. 235, 241, 700 P.2d 1335, 1341 (1985).

An attorney violates Rule 11 by filing an answer if he knows or should have known, by a reasonable investigation of fact and of law, that an asserted defense is insubstantial, frivolous, groundless or otherwise unjustified. Id. We evaluate the attorney's conduct under an objective standard of reasonableness. Wright, 161 Ariz. at 589, 780 P.2d at 422 (quoting Eavenson, Auchmuty & Greenwald v. Holtzman, 775 F.2d 535, 540 (3d Cir.1985)); Boone, 145 Ariz. at 241, 700 P.2d at 1341.

In this action, the trial court based its award of sanctions on its findings that "there was no valid reason for the partnership to deny plaintiff's complaint, and that a general denial was filed to cause unnecessary delay" thus resulting "in a needless increase in the cost of litigation to plaintiff." ⁵ Our inquiry, then, is whether the trial court abused its discretion, either in making its findings or in concluding that they constituted a violation of Rule 11 sufficient to justify imposing a sanction.

2.

Bowen argues that the trial court abused its discretion in finding he had no valid reason to deny the allegations of the...