Mars Steel Corp. v. Continental Bank N.A.

• Decision Date: 20 July 1989
• Docket Number: No. 88-1554,88-1554
• Citation: 880 F.2d 928
• Parties: , 14 Fed.R.Serv.3d 385 MARS STEEL CORPORATION, Plaintiff-Appellee, v. CONTINENTAL BANK N.A., Defendant-Appellee. Appeal of William J. TUNNEY, Edward T. Joyce, Peter B. Carey, and Steven J. Rotunno, Objectors-Appellants.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 928

880 F.2d 928

58 USLW 2076, 14 Fed.R.Serv.3d 385

MARS STEEL CORPORATION, Plaintiff-Appellee, v. CONTINENTAL BANK N.A., Defendant-Appellee.

Appeal of William J. TUNNEY, Edward T. Joyce, Peter B.

Carey, and Steven J. Rotunno, Objectors-Appellants.

No. 88-1554.

United States Court of Appeals, Seventh Circuit.

Argued Sept. 22, 1988.

Reargued En Banc June 15, 1989.

Decided July 20, 1989.

Peter B. Carey (argued), Edward T. Joyce, Steven J. Rotunno, Joyce & Kubasiak, Chicago, Ill., pro se and for objectors-appellants.

Jerome H. Torshen (argued), Mark K. Schoenfield, James K. Genden, Torshen, Schoenfield & Spreyer, Chicago, Ill., for appellee Mars Steel Corp.

Howard J. Roin (argued), Lee N. Abrams, Tyrone C. Fahner, James J. Neath, Mayer, Brown & Platt, Chicago, Ill., for appellee Continental Bank.

C. Steven Tomashefsky (argued), Jenner & Block; Thomas R. Meites, Meites, Frackman & Mulder; Arthur J. Howe, Schopf & Weiss, Chicago, Ill., for amicus curiae Chicago Council of Lawyers.

William A. Montgomery (argued), William M. Hannay, Deborah A. Golden, Denise L Jarrard, Scott C. Bentivenga, The Seventh Circuit Bar Association, Chicago, Ill.; Dennis A. Rendleman, Illinois State Bar Association, Springfield, Ill.; John R. Burns, Indiana State Bar Association, Fort Wayne, Ind.; Jennifer Duncan-Brice, The Chicago Chapter of the Federal Bar Association, Chicago, Ill.; Roy E. Hofer, Rene A. Torrado, Jr., Chicago Bar Association, Chicago, Ill., for amicus curiae.

Before BAUER, Chief Judge, and CUMMINGS, WOOD, Jr., CUDAHY, POSNER, COFFEY, FLAUM, EASTERBROOK, RIPPLE, and KANNE, Circuit Judges. ^*

EASTERBROOK, Circuit Judge.

For several years panels of this court have used divergent standards to review decisions about sanctions under Fed.R.Civ.P. 11. Compare R.K. Harp Investment Corp. v. McQuade, 825 F.2d 1101, 1103 (7th Cir.1987), In re Central Ice Cream Co., 836 F.2d 1068, 1072 (7th Cir.1987), and Borowski v. DePuy, Inc., 850 F.2d 297, 304 (7th Cir.1988), using a deferential standard of review, with Brown v. Federation of State Medical Boards, 830 F.2d 1429, 1434 (7th Cir.1987), S.A. Auto Lube, Inc. v. Jiffy Lube International, Inc., 842 F.2d 946, 948 (7th Cir.1988), and Beeman v. Fiester, 852 F.2d 206, 209 (7th Cir.1988), using a "de novo" standard on some issues. See also Lebovitz v. Miller, 856 F.2d 902, 904 (7th Cir.1988), and FDIC v. Tefken Construction & Installation Co., 847 F.2d 440, 442-43 (7th Cir.1988), tracing developments within the circuit. We heard this case en banc to achieve harmony. From now on, this court will use a deferential standard consistently--whether sanctions were imposed or not, whether the question be frivolousness on the objective side of Rule 11 or bad faith on the subjective side.

I

Parallel class action suits against Continental Bank N.A. (formerly Continental Illinois National Bank and Trust Co. of Chicago) led to an award of sanctions under Rule 11. William J. Tunney filed the first suit (Tunney ) in state court; Mars Steel Corp. filed the second a year later in federal court. Each complaint alleged that Continental Bank had broken its contracts with, and defrauded, customers to whom it had agreed to lend money at a rate linked to the "prime rate". The state suit alleged fraud and breach of contract, the federal suit a violation of the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. Secs. 1961-1968.

Continental's contracts defined the prime rate as the rate it charges "for 90-day unsecured commercial loans to large corporate customers of the highest credit standing". According to the complaints, Continental loaned money to some customers at less than the rate it had announced as its prime. Since the contractual definition of prime is the rate for customers of the "highest" credit standing, the plaintiffs contended that rates below prime are logically impossible, and that Continental had developed the concept of below-prime loans in order to avoid reducing its prime rate--for had Continental reduced that rate, it would have received less from the plaintiffs. Continental, for its part, denied that the loans at rates less than prime were "90-day unsecured commercial loans". (Some had compensating-balance requirements, others were for terms shorter than 90 days, and so forth.)

After the state court certified Tunney as a class action, it lay dormant. Discovery proceeded in the federal case. When the evidence appeared to bear out Continental's position, implying that the case lacked merit, Mars Steel agreed to settle the litigation on terms that were worth at most $11.5 million to the 23,000 class members. Joyce and Kubasiak, P.C., the law firm representing the Tunney class, tried to derail the agreement. Settlement negotiations between Continental and the Tunney class had collapsed over Joyce & Kubasiak's demand for $1.25 million in legal fees--this despite having conducted no discovery, while Jerome Torshen, after aggressively pursuing discovery on behalf of Mars Steel, accepted $300,000 for all work in the federal suit. Although quiescent in the state case, Joyce & Kubasiak (through Edward T. Joyce, Peter B. Carey, and Steven J. Rotunno) commenced a campaign of guerilla warfare in the federal case. It failed: the district court approved the settlement, and we affirmed. 834 F.2d 677 (7th Cir.1987). The district court "denied every motion filed by J & K except for two motions to file a brief in excess of 15 pages, a motion to conduct limited discovery before the fairness hearings and a motion to submit a corrected page." 120 F.R.D. 53, 54 (N.D. Ill.1988). The details are unimportant, except for the two motions that led to sanctions against Tunney, Joyce, Carey, and Rotunno (the appellants).

On July 22, 1986, the district court issued an order preliminarily approving the settlement and certifying the Mars Steel class for purposes of settlement only. It ordered the parties to mail a notice of settlement under Fed.R.Civ.P. 23(e) to all class members on or before August 1. On July 25 Joyce & Kubasiak filed a motion to reconsider, and on July 29 the court set a briefing schedule on this motion. Joyce & Kubasiak did not, however, seek a stay of the order directing the parties to mail notices by August 1, and the court did not issue one. The notices went out on schedule. On August 8 Joyce & Kubasiak filed a motion for a rule to show cause, arguing that counsel for Mars Steel and Continental were in contempt of court for mailing the notices, because the mailing "violated" the order setting a briefing schedule. The district court summarily denied this motion and later held that it was frivolous within the meaning of Rule 11. 120 F.R.D. at 55 n. 1.

Because Tunney, a member of the Mars Steel class, objected to the settlement in response to the notice, the district court held a hearing on the fairness of the disposition. Mars Steel and Continental offered seven affidavits. Joyce & Kubasiak objected to these on the ground that affidavits denied them the opportunity to cross-examine the affiants. Concluding that hearsay is admissible during a fairness hearing, the district court overruled the objection and admitted the affidavits. After the hearing Joyce & Kubasiak moved to strike the affidavits on a different ground: because some of the affiants had been available to testify, the affidavits were inadmissible. The new ground fared no better than the old, and the district court held that this motion too violated Rule 11. 120 F.R.D. 55-56 n. 2. The court pointed out that if it may admit hearsay in a fairness hearing the presence of the affiant changes nothing.

These two transgressions led to an award of $1,648 to cover the parties' reasonable costs of responding. Although the district judge was tempted to hold that Joyce & Kubasiak's entire course of conduct was objectively frivolous and conducted in bad faith to boot, he held back because he believed that this court, by discussing Joyce & Kubasiak's arguments in affirming his approval of the settlement, had implicitly determined that the arguments were neither frivolous nor pressed in bad faith. 120 F.R.D. at 55-57. Mars Steel and Continental have not appealed from the order to the extent it denied their request for additional sanctions, so we shall not have to determine whether the judge's inference from our opinion was appropriate.

II

Rule 11 provides that a lawyer's or party's signature on any paper filed in district court

constitutes a certificate by the signer that the signer has read the pleading, motion, or other paper; 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 for any improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation.

This has both a subjective and an objective component. A paper "interposed for any improper purpose" is sanctionable whether or not it is supported by the facts and the law, and no matter how careful the pre-filing investigation. The objective component is that a paper filed in the best of faith, by a lawyer convinced of the justice of his client's cause, is sanctionable if counsel neglected to make "reasonable inquiry" beforehand. This objective component is the big change in the 1983 amendment to Rule 11. "An empty head but a pure heart is no defense. The Rule requires counsel to read and consider before litigating." Thornton v. Wahl, 787 F.2d 1151, 1154 (7th Cir.1986). Counsel may not drop papers into the hopper and insist that the court or opposing counsel undertake bothersome factual and legal investigation.

Rule 11 is not a fee-shifting statute in the sense that the loser pays. It is a law imposing sanctions if counsel files with improper motives or inadequate investigation. Under the...