Pacific Dunlop Holdings, Inc. v. Barosh

• Decision Date: 04 March 1994
• Docket Number: Nos. 93-2200,93-2551,s. 93-2200
• Citation: 22 F.3d 113
• Parties: Fed. Sec. L. Rep. P 98,183, 28 Fed.R.Serv.3d 1050 PACIFIC DUNLOP HOLDINGS, INCORPORATED, a Delaware corporation, Plaintiff, v. Robert F. BAROSH, Francis X. Beaudette, Stanley N. Gaines, et al., Defendants-Third Party Plaintiffs-Counterdefendants-Appellees, v. PACIFIC DUNLOP GNB CORPORATION, a Delaware corporation, and GNB Incorporated, a Delaware corporation, Third Party Defendants-Counterplaintiffs, Appeal of GARDNER, CARTON & DOUGLAS, attorneys for Plaintiff Pacific Dunlop Holdings, Incorporated.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 113

22 F.3d 113

Fed. Sec. L. Rep. P 98,183, 28 Fed.R.Serv.3d 1050

PACIFIC DUNLOP HOLDINGS, INCORPORATED, a Delaware

corporation, Plaintiff, v.Robert F. BAROSH, Francis X. Beaudette, Stanley N. Gaines, et al., Defendants-Third PartyPlaintiffs-Counterdefendants-Appellees, v.PACIFIC DUNLOP GNB CORPORATION, a Delaware corporation, andGNB Incorporated, a Delaware corporation, Third

Party Defendants-Counterplaintiffs,

Appeal of GARDNER, CARTON & DOUGLAS, attorneys for Plaintiff

Pacific Dunlop Holdings, Incorporated.

Nos. 93-2200, 93-2551.

United States Court of Appeals Seventh Circuit.

Argued Jan. 3, 1994.

Decided March 4, 1994. ^*

Opinion April 25, 1994.

Opinion April 25, 1994.

Peter J. Meyer, Gordon B. Nash, Jr.(argued), Michael J. Koenigsknecht, Daniel J. Sheridan, Deena S. Newlander, Gardner, Carton & Douglas, Chicago, IL, for Pacific Dunlop Holdings, Inc., Pacific Dunlop GNB Corp., GNB, Inc. in No. 93-2200.

Peter J. Meyer, Gordon B. Nash, Jr.(argued), Michael J. Koenigsknecht, Daniel J. Sheridan, Deena S. Newlander, David J. Gilmartin, Thomas More Schippers, Gardner, Carton & Douglas, Chicago, IL, for Pacific Dunlop Holdings, Inc., Pacific Dunlop GNB Corp., GNB, Inc. in No. 93-2551.

Laurence H. Lenz, Jr., Donald E. Egan(argued), Andrew M. Varga, Paul A. Haskins, Katten, Muchin & Zavis, Chicago, IL, for defendants-appellees.

Before POSNER, Chief Judge, ROVNER, Circuit Judge, and MIHM, District Judge^**.

MIHM, District Judge.

This is an appeal from the district court's award of $138,015.11 in legal fees and costs to Appellees under Federal Rule of Civil Procedure 11and28 U.S.C. Sec. 1927.For the reasons stated below, we reverse.

I.FACTUAL BACKGROUND

In May 1984, the General Services Administration ("GSA") awarded GNB Batteries ("GNB") a three-year contract to supply batteries and related parts to GSA.In early 1987, GSA conducted an audit of the 1984 contract and found that GNB had failed to fully disclose to GSA the discounts GNB had offered to its commercial customers and had failed to grant GSA the equivalent discounts as required by their contract.The audit stated that GSA would conduct a further review of the 1984 contract.GNB received a copy of the GSA audit in July 1987.

In October 1987, AppellantPacific Dunlop Holdings Inc.("PDHI"), the Appellees(the "Management Shareholders"), and the other stockholders of GNB entered into a Stock Purchase Agreement and related documents in which PDHI bought stock in GNB.At the time of the transaction the Management Shareholders were the principal operating personnel of GNB Holdings, Inc., which owned GNB.In this stock transaction, PDHI was represented by the law firm of Gardner, Carton & Douglas ("Gardner, Carton").

Until September 1988, DefendantArthur Richards("Richards") was the chief operating officer of GNB's Industrial Battery Division.In January 1990, Richards learned through contacts at GNB that a federal grand jury was investigating the GSA audit.At that time, Richards no longer worked for GNB.Richards then contacted GNB's general counsel, Augustus Hipp, who confirmed the federal investigation.Hipp told Richards that Gardner, Carton was representing GNB in the investigation.Thereafter, Richards had some telephone conversations with Gardner, Carton attorneys about the status of the grand jury proceedings.

On January 2, 1991, PDHI, represented by Gardner, Carton, filed a lawsuit against the Management Shareholders alleging that the Management Shareholders had violated Section 10(b) of the Securities Exchange Act of 1934andSEC Rule 10b-5, had committed fraud, and had breached representations and warranties in connection with the sale of their stock in GNB Holdings, Inc. PDHI claimed that the Management Shareholders had failed to disclose material facts, including the GSA audit of a battery supply contract and various environmental problems at GNB's facilities.

On May 15, 1991, the district court dismissed PDHI's fraud claims concerning the alleged environmental nondisclosures and PDHI's claim for declaratory relief.On June 28, 1991, PDHI filed an amended complaint.While Katten Muchin & Zavis, the Management Shareholders' counsel, was preparing the Management Shareholders' response to the amended complaint, it learned that Richards had spoken with Gardner, Carton during Gardner, Carton's representation of GNB in the grand jury investigation.Richards claimed that he was led to believe that Gardner, Carton was representing him because of his status as a former GNB employee.Richards also claimed that he had disclosed confidential information to Gardner, Carton regarding what he knew about the GSA audit after Gardner, Carton attorneys had assured him that no conflict of interest existed.

Based on Richards's claims regarding conversations with Gardner, Carton attorneys, the Management Shareholders filed a Motion to Disqualify Gardner, Carton on December 17, 1991.In their Motion to Disqualify, the Management Shareholders asserted that Gardner, Carton attorneys would likely be called as witnesses in the trial of the case; that Gardner, Carton had a conflict of interest with PDHI because it had negligently or recklessly failed to uncover the Management Shareholders' alleged fraud prior to the sale; and that Gardner, Carton had previously entered into an implied attorney-client relationship with Richards regarding the GSA contract.In support of these arguments, the Management Shareholders submitted the affidavits of Richards and two other persons involved in the stock transaction.

Upon receiving the Management Shareholders' Motion to Disqualify, PDHI served notices of deposition on Richards and other persons whose affidavits the Management Shareholders had filed with their Motion.Gardner, Carton also filed a motion for expedited discovery.The Motion to Expedite Discovery stated:

[PDHI seeks to] resolve defendants' Motion to Disqualify as soon as possible and ... to proceed with the depositions as soon as possible.Therefore, it requests that the court order discovery to be conducted on an expedited basis.

The district court granted PDHI's Motion to Expedite Discovery.By January 31, 1992, PDHI had completed discovery.

On February 4, 1992 at a status hearing, PDHI informed the district court that, based on the depositions taken of the Management Shareholders' affiants, including Richards PDHI believed that the Management Shareholders' Motion to Disqualify failed as a matter of law.PDHI supposedly believed that Richards' affidavit and deposition testimony demonstrated that Richards had never provided confidential information to Gardner, Carton and had never sought legal advice from Gardner, Carton and therefore, as a matter of law, no attorney-client relationship existed.At this status hearing, PDHI notified the district court that it planned to file a brief arguing that the Motion to Disqualify should be denied "as a matter of law, so hopefully no further discovery will be necessary."

On February 7, 1992, a Katten Muchin & Zavis partner representing the Management Shareholders wrote to the lead Gardner, Carton attorney and stated that the Management Shareholders would oppose any effort by Gardner, Carton to reopen the proceedings after the district court ruled on its Motion to Disqualify.

On February 13, 1992, Gardner, Carton filed its opposition to the Management Shareholders' Motion to Disqualify.PDHI argued that Richards's own testimony established that an implied attorney-client relationship did not exist as a matter of law.Gardner, Carton did not submit any affidavits in opposition to the Motion to Disqualify.In its Memorandum in Opposition, PDHI stated that "[i]n the event the Court determines that it is unable to decide this motion as a matter of law, PDHI would request leave to file affidavits and other materials in opposition to the Motion to Disqualify."

At a status hearing on February 18, 1992, PDHI again informed the district court that PDHI was responding to the Motion to Disqualify as a matter of law.PDHI's counsel stated:

As we indicated last time we were before the Court, we think this could be deposed [sic] of as a matter of law.We have not submitted any factual information to the Court.We have simply taken the affidavits and the testimony of the three affiants and on that basis believe that this motion fails and that there is no discovery that is necessary or even relevant to this issue at this point in time.

On March 13, 1992, the Management Shareholders filed a Reply Memorandum.In a footnote of their Reply Memorandum, the Management Shareholders restated their opposition to PDHI's plan to oppose the Motion to Disqualify initially as a matter of law.

On March 18, 1992, PDHI filed a surreply in opposition to the Motion to Disqualify.PDHI responded to the Management Shareholders' argument that it was improper for Gardner, Carton to ask leave to file affidavits in the event the district court was unable to decide the Motion to Disqualify as a matter of law.PDHI's Surreply Memorandum stated in part:

On two occasions during status hearings before this Court, PDHI's counsel advised the Court that it intended to respond to the Motion to Disqualify on the basis that the evidence submitted by defendants in support of their motion was insufficient as a matter of law to warrant disqualification.On both occasions, defendants' attorneys did not object.PDHI further stated in its Memorandum in Opposition that it would request leave to file its own affidavits and evidence if the Court decides that the Motion cannot be resolved on the basis of defendants' evidence alone.PDHI so advised the Court after taking the depositions of Richards and Beaudette in the good faith belief that further discovery and multiple depositions at GCD, GNB and PDHI could be avoided as defendants had not met the appropriate legal standard.

On March 27, 1992, the Management Shareholders filed a Sur-surreply...