MacDraw, Inc. v. CIT Group Equipment Financing, Inc.

• Decision Date: 03 January 1996
• Docket Number: D,No. 305,305
• Citation: 73 F.3d 1253
• Parties: MacDRAW, INC., Plaintiff-Appellant, Klayman & Associates, P.C. and Larry Klayman, Esq., Appellants, v. The CIT GROUP EQUIPMENT FINANCING, INC. and Richard Johnston, Defendants-Appellees. ocket 95-7021.
• Court: U.S. Court of Appeals — Second Circuit

Page 1253

73 F.3d 1253

MacDRAW, INC., Plaintiff-Appellant Klayman & Associates, P.C. and Larry Klayman, Esq., Appellants, v. The CIT GROUP EQUIPMENT FINANCING, INC. and Richard Johnston, Defendants-Appellees.

No. 305, Docket 95-7021.

United States Court of Appeals Second Circuit.

Argued Oct. 12, 1995.

Decided Jan. 3, 1996.

Larry Klayman, Klayman & Associates, Washington, D.C., for plaintiff-appellant and appellants.

Jeffrey H. Weinberger, New York City (Susan G. Rosenthal, Frederick M. Klein, Winick & Rich, on the brief), for defendants-appellees.

Before: NEWMAN, Chief Judge, CARDAMONE and CABRANES, Circuit Judges.

JOSE A. CABRANES, Circuit Judge:

MacDraw, Inc. and its counsel appeal from four orders of the United States District Court for the Southern District of New York (Shirley Wohl Kram, Judge ), imposing sanctions of $25,186.67 pursuant to FED.R.CIV.P. 11 and 28 U.S.C. Sec. 1927 (1988). The court held that plaintiff had no cognizable basis to move for partial summary judgment with respect to three counts of its complaint, that plaintiff's claim to more than $270,000 in damages was not well-grounded in fact or law, and that plaintiff's claim to recovery for work performed during a certain time period was without merit. We conclude that the award of sanctions was not proper on the bases proffered by the district court. We therefore vacate the award.

I. BACKGROUND

A. Facts

For purposes of this appeal, the following facts are not in dispute. Plaintiff MacDraw is an importer and distributor of wire-drawing equipment. In July 1989, nonparty Laribee Wire Manufacturing Company, Inc. ("Laribee") ordered certain industrial equipment from MacDraw for a total purchase price of $7,118,628, to be paid in installments. Laribee approached defendant The CIT Group Equipment Financing, Inc. ("CIT") to finance the purchase. Under a Loan and Security Agreement between Laribee and CIT, dated as of July 2, 1990, CIT agreed to provide a series of interim loans upon which Laribee could draw to meet its payment schedule. CIT received and perfected a security interest in the equipment. The financing agreement required that, prior to each disbursement, Laribee attest to its solvency and creditworthiness and continue to make payments on previous disbursements. In addition, CIT required that Laribee and MacDraw execute a Vendor's Consent and Agreement ("Vendor's Consent"), under which Laribee permitted CIT to disburse funds directly to MacDraw. The Vendor's Consent Agreement contained the following clause:

[Laribee] shall in all events remain obligated to [MacDraw] under the Purchase Agreement, and CIT assumes no obligations thereunder, it being a successor to [Laribee's] rights but not [its] obligations.

Vendor's Consent at 2 (emphasis supplied).

MacDraw had shipped the equipment to Laribee by July 30, 1990. Installation of the equipment and payment to MacDraw proceeded as expected over the course of several months. By September 1990, as required by the terms of Laribee's purchase orders, MacDraw had received payment for ninety percent of the cost of the equipment. On November 16, 1990, a Laribee officer notified CIT that Laribee had accepted the machinery delivered and installed by MacDraw and authorized CIT to transfer the final ten percent balance to MacDraw. Before releasing the final balance, however, CIT discovered that Laribee had failed to keep current on a revolving line of credit with one of its banks and had failed to make certain debt-service payments to CIT. Each event constituted a separate event of default under Laribee's financing agreement with CIT; as a result, CIT refused to release the final payment to MacDraw. On November 28, 1990, MacDraw vice president Massimo Colella notified Laribee in writing that he had learned from CIT that Laribee had not complied with the terms of its financing agreement. On December 12, 1990, Laribee acknowledged that it had not and could not comply with the financing agreement. On January 22, 1991, CIT informed MacDraw that it would not pay the final ten percent installment. Laribee filed for bankruptcy on February 7, 1991. CIT foreclosed on its perfected security interest in the machinery and sold it to a third party in November 1991.

B. District Court Proceedings

MacDraw commenced this action against CIT in August 1991, seeking, inter alia, the $711,862.80 final installment payment owed to it. MacDraw's various theories of liability shared a common factual predicate: that a CIT employee, defendant Richard Johnston, had assured Colella orally on October 11, 1990, and in writing the following day that CIT would proceed with payment of the final ten percent as soon as it received assurances from Laribee that the equipment had been fully installed and accepted. MacDraw alleged that (1) Johnston and CIT engaged in common-law fraud by misrepresenting CIT's intent to make the final payment, thereby inducing MacDraw to rely upon that misrepresentation by expending additional sums to "fine-tune" the equipment (Count 1); (2) MacDraw was an intended third-party beneficiary of an agreement between Laribee and CIT (Count 2); (3) the doctrines of promissory estoppel and unjust enrichment precluded CIT from withholding payment to MacDraw (Count 3); (4) CIT had breached a unilateral contract with MacDraw by virtue of its failure to remit the final payment upon MacDraw's completion of the installation (Count 4); and (5) CIT had breached a contract implied-in-fact between MacDraw and CIT based on their course of dealing (Count 5). Under each count, MacDraw also sought more than $270,000 in damages for so-called "enhancement" costs--additional labor and equipment costs incurred as MacDraw continued to fine-tune the equipment, allegedly in reliance upon CIT's promise to remit the final payment.

On November 13, 1991, claiming that CIT's security interest in the equipment should be deemed subordinate to MacDraw's "equitable interest," MacDraw filed an emergency motion seeking to compel CIT to deposit into the court registry the proceeds of its sale of the equipment to a third party. ¹ At an evidentiary hearing on this motion the following day, plaintiff's counsel announced his intention to move for summary judgment. The district court advised him not to, indicating that "I think it is a waste of time." In December 1991, plaintiff's counsel filed a notice of intent to seek summary judgment and submitted a "courtesy copy" of its summary judgment motion to the district court and opposing counsel. At a pre-motion conference held pursuant to the district court's individual rules on February 21, 1992, the district court stated:

I would try to ... discourage you from making the [summary judgment] motion because I think you leave yourself open to a Rule 11 sanction, but if I can't dissuade you, fine, we will go ahead with it....

....

You have the right to make your motion if you want to. I have advised you that I think there are these problems with the motion. I think you leave yourself open to a Rule 11 sanction. If you want to make it, okay. ²

Plaintiff proceeded to move for partial summary judgment on Counts 2 through 5 of its complaint a week later. The defendants cross-moved for summary judgment, dismissal of the complaint, and sanctions for MacDraw's "frivolous" motion practice.

Nearly two years later, by a Memorandum Opinion and Order of January 17, 1994, the district court denied plaintiff's motion for partial summary judgment in its entirety and granted defendants' cross-motion on three of the five counts, leaving MacDraw's fraud and promissory estoppel claims for trial. The district court also granted defendants' motion for sanctions, proffering three bases for doing so. First, the court concluded that MacDraw had no cognizable basis for moving for summary judgment on three of its five counts. The court explained that MacDraw could not possibly have obtained summary judgment on any theory involving Johnston's alleged oral representation, inasmuch as the defendants had denied in their answer that any oral representation had taken place, thereby setting up a material issue of fact in dispute precluding summary judgment. Second, the court found that MacDraw's claim for damages arising from certain "enhancements" to the equipment lacked any factual and legal basis. Third, the court concluded that MacDraw's claim for work performed prior to the October 11, 1990, oral promise and after MacDraw's November 28, 1990, discovery that Laribee had failed to comply with the terms of its financing agreement with CIT was meritless.

The court withheld judgment on the amount of the sanctions, pending receipt of an affidavit from defendants setting forth their legal fees and costs in defending MacDraw's motion for partial summary judgment. On November 2, 1994, the court ordered that MacDraw pay the defendants $25,186.67 in attorney's fees. In response to a motion for reconsideration, the court reaffirmed its November 2 order on December 9, 1994. After a letter from defendants' counsel, the court issued an order on December 27, 1994, clarifying the award of sanctions as follows: "It is hereby ordered that plaintiff's counsel comply with this Court's ... orders by paying a sanction in the amount of $25,186.67 to [CIT] on or before January 4, 1995." This appeal followed.

II. DISCUSSION

The district court awarded sanctions pursuant to FED.R.CIV.P. 11 and 28 U.S.C. Sec. 1927. We review all aspects of a district court's award of sanctions under either provision for abuse of discretion. See, e.g., Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 405, 110 S.Ct. 2447, 2460, 110 L.Ed.2d 359 (1990) (Rule 11); Sussman v. Bank of Israel, 56 F.3d 450, 456 (2d Cir.) (Rule 11), cert. denied sub nom. Bank of Israel v. Lewin, --- U.S. ----, 116 S.Ct. 305, 133 L.Ed.2d 210 (1995); Knipe v. Skinner, 19 F.3d 72, 75 (2d Cir.1994) (Rule 11); McMahon v. Shearson/American Express, Inc., 896 F.2d 17, 23 (2d Cir.1990) (...