Sterling Energy, Ltd. v. Friendly Nat. Bank, 83-1424

• Citation: 744 F.2d 1433
• Decision Date: 03 October 1984
• Docket Number: No. 83-1424,83-1424
• Parties: STERLING ENERGY, LTD., d/b/a Senco, a Texas Corporation, Plaintiff-Appellant, v. FRIENDLY NATIONAL BANK, an Oklahoma banking corporation; and George W. Higgins, Jr., Defendants-Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (10th Circuit)

Page 1433

744 F.2d 1433

STERLING ENERGY, LTD., d/b/a Senco, a Texas Corporation, Plaintiff-Appellant, v. FRIENDLY NATIONAL BANK, an Oklahoma banking corporation; and George W. Higgins, Jr., Defendants-Appellees.

No. 83-1424.

United States Court of Appeals, Tenth Circuit.

Oct. 3, 1984.

John H. Scaggs, Walters, Okl., for plaintiff-appellant.

Edward B. Carrier, Jr., Oklahoma City, Okl., for defendants-appellees.

Before SETH, BREITENSTEIN and SEYMOUR, Circuit Judges

SEYMOUR, Circuit Judge.

After examining the briefs and the appellate record, this three-judge panel has determined unanimously that oral argument would not be of material assistance in the determination of this appeal. See Fed.R.App.P. 34(a); Tenth Cir.R. 10(e). The cause is therefore ordered submitted without oral argument.

Sterling Energy appeals from the district court's order awarding attorneys fees to Friendly National Bank. Sterling claims the trial court erred in finding that Sterling prosecuted its case against the bank in bad faith. We have concluded that the district court's order below reveals an insufficient basis for finding bad faith, and accordingly we remand for more specific findings.

I.

Sterling Energy is a petroleum products marketing company based in Irving, Texas. Its president, Sterling Russell, has been in the business since 1958, buying and selling petroleum and its various by-products. In 1979, Lee Sullivan, a petroleum broker with whom Russell had done business since the early 1970's, contacted Russell about some diesel fuel available in Oklahoma from George Higgins. Although Russell did not know Higgins, he agreed to buy 760,000 gallons of the fuel. He wired a prepayment of $102,700 to Higgins' account at the Friendly National Bank in Oklahoma City, Oklahoma on November 6, 1979, anticipating delivery by Higgins on November 15. Higgins never delivered the fuel, and to date has returned only $23,700 of the original $102,700 prepayment.

Russell brought a diversity action against Higgins and Friendly National Bank to recover the $79,000 of unreturned prepayment and other damages. He alleged a breach of contract claim against Higgins. He also alleged that Higgins and the bank, acting in concert, maliciously and fraudulently induced Russell to enter into a contract with Higgins for the purchase of diesel by falsely representing that Higgins had a contract to purchase the diesel from a third party, and that Higgins was financially sound and able to deliver the diesel to Russell. Russell alleged further that he relied on the misrepresentations and transferred $102,700 through the bank to Higgins, and that Higgins failed to deliver the diesel and misappropriated the money. Russell sought punitive as well as compensatory damages against both parties.

Higgins confessed judgment on the breach of contract claim prior to trial. Thereafter his attorney was granted leave to withdraw because Higgins disappeared and his attorney was unable to contact him. Higgins did not appear at trial to contest the fraud claims.

After a jury trial, the judge directed a verdict against Higgins for the full amount of Russell's claim, and dismissed Russell's fraud claim against the bank. Upon subsequent motion, the judge awarded the bank $17,500 in attorneys fees on the ground that Russell had prosecuted the fraud claim against the bank in bad faith. The sole issue on appeal is whether the judge properly awarded attorneys fees to Friendly National. ¹

II.

Under the traditional American rule, the prevailing party ordinarily cannot obtain attorneys fees from a losing party. See Hall v. Cole, 412 U.S. 1, 4-5, 93 S.Ct. 1943, 1945-1946, 36 L.Ed.2d 702 (1973). An exception exists which allows an award of attorneys fees when a party's opponent acts " 'in bad faith, vexatiously, wantonly, or for oppressive reasons.' " Id. at 5, 93 S.Ct. at 1946 (quoting 6 J. Moore, Federal Practice p 54.77 at 1709 (2d ed. 1972)). See also Alyeska Pipeline Service Co. v. Wilderness Society, 421 U.S. 240, 258-59, 95 S.Ct. 1612, 1622, 44 L.Ed.2d 141 (1975); accord, United States v. 2,116 Boxes of Boned Beef, 726 F.2d 1481, 1488 (10th Cir.1984); Rutledge v. Sunderland, 671 F.2d 377, 382 (10th Cir.1982); Cornwall v. Robinson, 654 F.2d 685, 686-87 (10th Cir.1981). ²

A party acts in bad faith only when the claim brought "is entirely without color and has been asserted wantonly, for purposes of harassment or delay, or for other improper reasons." Browning Debenture Holders' Committee v. DASA Corp., 560 F.2d 1078, 1088 (2d Cir.1977). The standard for bad faith awards is stringent, for "[o]therwise those with colorable, albeit novel, legal claims would be deterred from testing those claims in a federal court." Id. Thus, courts generally require a finding by the trial judge of subjective bad faith. See, e.g., Badillo v. Central Steel & Wire Co., 717 F.2d 1160, 1165 (7th Cir.1983) (citing cases); Cornwall, 654 F.2d at 687. Awarding attorneys fees under the bad faith exception is within the discretion of the trial judge, and an appellate court will reverse only when it finds the lower court has abused its discretion. See Ryan v. Hatfield, 578 F.2d 275, 277 (10th Cir.1978); accord, Cornwall, 654 F.2d at 687.

In the present case, the trial court made a finding of bad faith as follows:

"The evidence produced at trial clearly revealed that the Bank had no business relationship with the plaintiff and had merely rendered an opinion, at the plaintiff's insistence, concerning the existence of a contract. After all the evidence was heard, the Court determined that no basis for a fraud claim existed. However, for the Court to reach this determination, the Bank was required to defend its reputation, integrity and honesty .... A party has an affirmative duty to evaluate its claim in light of all facts known to it. In this case, the facts known to plaintiff did not justify the allegations of fraud directed at the defendant bank. Thus, for the plaintiff to have prosecuted this action against the defendant Bank constituted bad faith."

Rec., vol. I, at 235.

We agree that the facts in this case do not justify the allegations of fraud against Friendly National. The sole basis for the fraud allegations against the bank arose out of a telephone conversation on November 5, 1979 between Russell and Nona Parrott, an assistant cashier at Friendly National. Due to the large amount of the prepayment and because he did not know Higgins, Russell decided to check on Higgins' background before sending him the money. He first inquired of his long time business acquaintance Sullivan, who assured him that "everything was all right with Mr. Higgins." ³ Rec., vol. X, at 196. Russell then called Higgins' bank, Friendly National, but the news there was less assuring. In Russell's first contact with the bank, Parrott told him that Higgins had only two accounts at the bank, one containing between $350 and $650, and the other containing between $1000 and $3000. Russell's response was, "You mean I'm talking sending a $100,000 to a man with two little bitty personal accounts?" Id. at 144.

Concerned because Higgins "had no money in his account to speak of," id. at 186, Russell took steps to ensure that Higgins actually had a contract for the diesel fuel. Russell never asked to see the contract himself, nor did he arrange for an attorney or anyone else to review its authenticity for him. Instead, Russell decided to verify the contract's existence by having Higgins take it to Friendly National, and having someone there describe it to Russell over the phone. Accordingly, on November 5, 1979, Higgins took the contract to Nona Parrott and asked her to take a telephone call from Russell. According to Parrott, she read the contract to Russell at his request, skipping parts of it whenever told to by Russell, and informing him whenever a word or phrase was blacked out or illegible. She testified that after reading the contract in this fashion for a short time, Russell interrupted her and stated "Never mind [reading the contract], just tell me the name of the company." Rec., vol. X, at 136. According to her testimony, Parrott responded that she could not see the company name because Higgins had covered that part of the contract with a sheet of paper. In response to Russell's inquiry about the general nature of the document, Parrott told him that the document had numerous changes and places marked out, that the signature was covered by the sheet of paper, and that she was unable to see the whole document.

Russell's testimony concerning the telephone exchange differs somewhat from Parrott's version. Russell testified that Parrott did not read the contract to him, but rather was willing only to answer any specific questions that he might tender. ⁴ Id. at 173, 200. Russell further asserted that Parrott said the document was signed, and he denied that Parrott told him about the numerous strike-outs on the paper. Finally, Russell claimed that Parrott told him the paper "looked like ... a contract document." ⁵ Id. at 174; see also id. at 173-74.

Conflicting testimony aside, certain key facts are undisputed. Parrott is a high school graduate who never attended college or business school or had any post-high school training other than two classes in English and banking principles given by the American Banking Institute. She has no legal training and no...