R.K. Harp Inv. Corp. v. McQuade, 86-2150
| Decision Date | 15 July 1987 |
| Docket Number | No. 86-2150,86-2150 |
| Citation | 825 F.2d 1101 |
| Parties | R.K. HARP INVESTMENT CORP., Plaintiff-Appellant, v. James McQUADE and Donald Cobb, M.D., Defendants-Appellees. |
| Court | U.S. Court of Appeals — Seventh Circuit |
R. Kymn, Harp, Regas, Fredzados & Harp, Chicago, Ill., for plaintiff-appellant.
Stephen R. Swofford, Hinsahw, Culbertson, Moelmann, Hoban & Fuller, Chicago, Ill., for defendants-appellees.
Before BAUER, Chief Judge, COFFEY and EASTERBROOK, Circuit Judges.
The plaintiff-appellant, R.K. Harp Investment Corp. ("Harp"), appeals the district court's denial of a Rule 11 motion, Fed.R.Civ.Pro 11, seeking attorneys' fees in excess of $37,000 from the defendants-appellees, James McQuade and Donald Cobb. Harp's Rule 11 motion was filed following the district court's denial of the appellees' motion and subsequent amended motion to set aside a prior default judgment entered in the case. For the reasons which follow we affirm the district court's denial of Rule 11 sanctions.
This controversy began with an art collection known as the James Paul Delaney Collection of Art. The Delaney Collection was the subject of a perfected security interest governed by a document referred to as the "Amended Intercreditor and Security Agreement." This agreement purported to grant a security interest in the art collection to numerous creditors, entitling each to receive a portion of the proceeds upon its sale. Harp was an owner, by assignment, of such an interest entitled to receive $200,000 upon the sale of the art collection.
The underlying case initially brought before the district court centered upon whether the defendants had purchased the art collection pursuant to a Memorandum of Understanding executed on March 30, 1983. If a sale actually took place, it would have activated Harp's right to payment under the Amended Intercreditor and Security Agreement, thus obligating the defendants to pay Harp according to its interest. The defendants maintained that the Memorandum of Understanding merely reflected preliminary negotiations and was not a binding contract.
Contrary to the defendants' assertions, however, shortly after the Memorandum of Understanding was executed, the defendants received bills of sale conveying to them the individual works of art comprising the collection. Moreover, they executed a formal "Notice" directed to the custodian in possession of the art work, explicitly stating that they were the new owners of the Delaney Collection.
Subsequently, Carl Stacey, a large creditor with a security interest in the collection, objected to the sale claiming that it was a breach of the Amended Intercreditor and Security Agreement. At a meeting involving Stacey's attorneys and the defendants, a document entitled the "Cash Out Intercreditor Security Agreement" was executed in which the defendants purportedly bought only the security interest of certain secured creditors who held a lien against the collection. Thus, because the defendants did not actually purchase the collection itself, Harp's right to payment was not activated pursuant to the Amended Intercreditor and Security Agreement. Harp claimed that the "Cash Out" agreement was a sham designed to avoid paying Harp the funds it was entitled to receive.
On May 2, 1983, Harp filed suit in the United States District Court. Though defendant Cobb was personally served with a summons and complaint, he failed to respond and a default judgment was entered against him on September 6, 1983. Thereafter, sixteen garnishment summonses were directed against the assets of Cobb. Defendant McQuade was served with an alias summons and complaint on January 27, 1984. A default judgment was entered against him for failure to appear or plead on March 6, 1984.
Initially, Cobb contacted Truman Gibson, an attorney who had been involved in the purported sale of the Delaney Collection. Though it is unclear whether the defendants actually retained Gibson to represent them, he did render his advice about Harp's action on several occasions. On July 16, 1984, the defendants, through their new attorney Stanley L. Hill, filed a motion to set aside default judgments. Following 16 months of discovery, Judge Getzendanner denied the motion. An amended motion to set aside default judgments was filed by the defendants and subsequently denied by the court.
On March 12, 1986, Harp filed its motion for Rule 11 sanctions. On July 2, 1986, the court denied Harp's motion finding: (1) that the existence of the "Cash Out" agreement and the defendant's stated belief as to the effect of that agreement provided some factual support for their assertion of a good faith defense to Harp's claim, particularly when under the time pressures of filing a prompt motion to set aside default judgments; and (2) that there was a sufficient factual basis to support the assertion that the defendants did not unduly delay in seeking to set aside the default judgments where the defendants offered a "vague" explanation that they were relying on Truman Gibson to defend the action.
Pursuant to Fed.R.Civ.P. 11, every pleading or other document submitted to the court must be signed and is deemed to certify that the person so signing "has read the ... paper; that to the best of his 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." Fed.R.Civ.P. 11; see also Thornton v. Wahl, 787 F.2d 1151, 1154 (7th Cir.1986); In Re TCI, Ltd., 769 F.2d 441, 445 (7th Cir.1985). If a document is submitted in violation of this rule, "the court, upon motion or upon its own initiative, shall impose upon the person who signed it, a represented party or both, an appropriate sanction, which may include" attorneys' fees. Fed.R.Civ.P. 11; see also American Security Vanlines, Inc. v. Gallagher, 782 F.2d 1056 (D.C.Cir.1986); Zaldivar v. City of Los Angeles, 780 F.2d 823 (9th Cir.1986).
However, the imposition of sanctions must be divorced from the ultimate disposition of the underlying action. Frazier v. Cast, 771 F.2d 259 (7th Cir.1985); White v. New Hampshire Dept. of Employment Security, 455 U.S. 445, 451 n. 13, 102 S.Ct. 1162, 1166 n. 13, 71 L.Ed.2d 325 (1982). Moreover, because the trial court alone has an intimate...
To continue reading
Request your trial
-
Borzych v. Frank
... ... Inter-Continental Hotel Chicago Operating Corp., 314 F.3d 278, 282 ... Page 971 ... (7th ... ...
-
Mars Steel Corp. v. Continental Bank N.A.
...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, ......
-
Ordower v. Feldman
...under the factual background of the case, however, is subject to review for abuse of discretion. R.K. Harp Investment Corp. v. McQuade, 825 F.2d 1101, 1103, (7th Cir.1987) (Rule 11); Frazier v. Cast, 771 F.2d 259, 262-63 (7th Cir.1985) (Rule 11); Indianapolis Colts, 775 F.2d at 182 (Sec. 19......
-
Brown v. Federation of State Medical Boards of U.S.
...F.2d at 1082 (mandatory) and Shrock v. Altru Nursing Registry, 810 F.2d 658, 661 (7th Cir.1987) (same) with R.K. Harp Inv. Corp. v. McQuade, 825 F.2d 1101, 1103 (7th Cir.1987) (decision to award sanctions is subject to an abuse of discretion). We believe that the better view is that of Szab......