Terrebonne, Ltd. of California v. Murray

Decision Date23 January 1998
Docket NumberNo. CIV-F-95-5296 OWW DLB.,CIV-F-95-5296 OWW DLB.
Citation1 F.Supp.2d 1050
CourtU.S. District Court — Eastern District of California
PartiesTERREBONNE, LTD. OF CALIFORNIA, Plaintiff, v. Ronald W. MURRAY, et al., Defendants.
MEMORANDUM OPINION RE: ORDER TO SHOW CAUSE WHY SANCTIONS SHOULD NOT BE IMPOSED AGAINST FORMER ATTORNEYS OF RECORD AND LAW FIRMS FOLLOWING DISQUALIFICATION FROM FURTHER REPRESENTATION OF PLAINTIFF; AND ORDER

WANGER, District Judge.

I. INTRODUCTION

This matter is before the court on an order to show cause why sanctions should not be imposed against attorneys Kenneth S. Bayer, Timothy D. McCollum and the law firms of McCollum, Bayer & Bunch, and Bayer, Cutsinger & Lopez,1 following disqualification of these lawyers and their law firms as attorneys of record for plaintiff Terrebonne Ltd. of California.

II. BACKGROUND

The court's order disqualifying the attorneys and law firms (collectively referred to herein as the "disqualified attorneys") was entered on August 6, 1997, following the court's memorandum decision detailing the facts upon which the motion to disqualify was granted.2 The grounds justifying the disqualification order were the following:

1. Undertaking representation of a new client (the New Hogan investors) whose interests presented an actual conflict of interest with a current client (Terrebonne), arising because of their competing interests in the subject real property, without first obtaining the affected parties' informed consent.

2. Failing to provide evidence that the disqualified attorneys adequately explained the conflict of interest resulting from the dual representation and received the informed consent of all affected parties to proceed with the dual representation.

3. Directly contacting a represented party in the litigation, Charles Boggs or New Hogan investors who are noteholder-limited partners rather than noteholder-creditors.

4. Acquiring confidential information regarding New Hogan's litigation strategy and settlement position through a misleading communication with New Hogan's attorney, and subsequently conveying that information and using it to advance Terrebonne's position in the litigation.

After issuance of an order to show cause, two separate evidentiary hearings were held at which the disqualified attorneys were provided the opportunity to present evidence as to why they should not be sanctioned for conduct found by the court to be in violation of recognized rules of professional conduct and the relevant court rules and statutes applicable to the conduct of attorneys practicing in federal court.

III. LEGAL STANDARD

The district court has the duty and responsibility to supervise the conduct of attorneys who appear before it. Erickson v. Newmar Corp., 87 F.3d 298, 301 (9th Cir. 1996); Lockary v. Kayfetz, 974 F.2d 1166, 1170 (9th Cir.), cert. denied, sub nom., Pacific Legal Foundation v. Kayfetz, 508 U.S. 931 113 S.Ct. 2397, 124 L.Ed.2d 298 (1993); Trust Corp. v. Piper Aircraft Corp., 701 F.2d 85, 87 (9th Cir.1983). The power of federal judges to impose sanctions for abuses of process is quite broad. In Gas-A-Tron of Ariz. v. Union Oil Co., 534 F.2d 1322 (9th Cir.), cert. denied sub nom. Shell Oil Co. v. Gas a Tron of Ariz., 429 U.S. 861, 97 S.Ct. 164, 50 L.Ed.2d 139 (1976), the court stated:

Whenever an allegation is made that an attorney has violated his moral and ethical responsibility, an important question of professional ethics is raised. It is the duty of the district court to examine the charge, since it is that court which is authorized to supervise the conduct of the members of its bar. The courts, as well as the bar, have a responsibility to maintain public confidence in the legal profession. This means that a court may disqualify an attorney for not only acting improperly but also for failing to avoid the appearance of impropriety.

534 F.2d at 1324-25.

The district court's power to sanction derives from several sources: federal statute, Local Rules of Court, and its inherent power. "For a sanction to be validly imposed, the conduct in question must be sanctionable under the authority relied on." Cunningham v. County of Los Angeles, 879 F.2d 481, 490 (9th Cir.1988) (internal quotations omitted), cert. denied, 493 U.S. 1035, 110 S.Ct. 757, 107 L.Ed.2d 773 (1990).

A. POWER TO SANCTION FOR ATTORNEY MISCONDUCT UNDER LOCAL RULES OF THE EASTERN DISTRICT

The Local Rules of the Eastern District, L.R. 83-184 provides:

In the event any attorney subject to these Rules engages in conduct which may warrant discipline or other sanctions, any Judge ... may initiate proceedings for contempt under 18 U.S.C. § 401 or Fed. R.Crim.P. 42, or may, after reasonable notice and opportunity to show cause to the contrary, take any other appropriate disciplinary action against the attorney. In addition to or in lieu of the foregoing, the Judge ... may refer the matter to the disciplinary body of any Court before which the attorney has been admitted to practice.

L.R. 83-184(a) (1997).

The court's criminal contempt power arising under § 401 of Title 18 authorizes the court "to punish by fine or imprisonment, at its discretion, such contempt of its authority, and none other as — (1) [m]isbehavior of any person in its presence or so near thereto as to obstruct the administration of justice...." Under Rule 42, contempt is criminally punishable "if the judge certifies that the judge saw or heard the conduct constituting the contempt or that it was committed in the actual presence of the court." Fed. R.Crim.P. 42(a).

Neither the Local Rules nor the Federal Rules provide as clear a definition of "other appropriate disciplinary action," for instances when attorney digressions do not constitute or warrant criminal contempt. However, district judges do have an "arsenal of sanctions" they can impose for unethical behavior. Erickson v. Newmar Corp., 87 F.3d at 303. These sanctions include monetary sanctions, contempt and the disqualification of counsel. Id. In addition, the court may look for appropriate sanctions under the Rules of Professional Conduct and State Bar Rules of California.3 See L.R. 83-180(e) (adopting California Rules of Professional Conduct and decisions of any Court applicable thereto as standards of professional conduct in Eastern District courts); see also, e.g., Frazier v. Heebe, 482 U.S. 641, 645, 107 S.Ct. 2607, 96 L.Ed.2d 557 (1987) (district courts have clear statutory authority to promulgate rules governing the admission and conduct of attorneys who appear before them).

B. POWER TO SANCTION DERIVED UNDER FEDERAL STATUTE

The statutory basis for awarding sanctions is found at 28 U.S.C. § 1927. Section 1927 provides in pertinent part:

Any attorney ... who so multiplies the proceedings in any case unreasonably and vexatiously may be required by the court to satisfy personally the excess costs, expenses, and attorneys' fees reasonably incurred because of such conduct.

28 U.S.C.S. § 1927 (1989).

The Ninth Circuit has stated that "[b]ecause [ ] section [1927] authorizes sanctions only for the "multipli[cation of] proceedings," it applies only to unnecessary filings and tactics once a lawsuit has begun." In re Keegan Management Co. Sec. Litig. (Keegan Management Company v. Moore), 78 F.3d 431, 435 (9th Cir.1996). Indeed, the term "vexatious" has been defined as "lacking justification and intended to harass." Overnite Transp. Co. v. Chicago Ind. Tire Co., 697 F.2d 789, 795 (7th Cir.1983) (citing Webster's Int'l Dictionary (1971) and United States v. Ross, 535 F.2d 346 (6th Cir.1976)). Sanctions awarded pursuant to § 1927 must be based upon a finding that the sanctioned attorney acted in subjective bad faith. United States v. Blodgett, 709 F.2d 608, 610 (9th Cir.1983); New Alaska Development Corp. v. Guetschow, 869 F.2d 1298, 1306 (9th Cir. 1989). Subjective bad faith requires the court to find that the attorney knowingly or recklessly advanced a frivolous position, or a meritorious position for the purpose of harassing an adversary. See In re Keegan, 78 F.3d at 436; Salstrom v. Citicorp Credit Serv., Inc., 74 F.3d 183 (9th Cir.1996), cert. denied, sub nom, Webb v. Citicorp Credit Serv. Inc., ___ U.S. ___, 117 S.Ct. 60, 136 L.Ed.2d 23 (1996); MGIC Indemnity v. Moore, 952 F.2d 1120 (9th Cir.1991); Toombs v. Leone, 777 F.2d 465 (9th Cir.1985) (court not required to make express findings as to counsel's state of mind because record contained sufficient evidence to support decision). As the court in Keegan states:

For sanctions to apply, if a filing is submitted recklessly, it must be frivolous, while if it is not frivolous, it must be intended to harass. Thus, while it is true that reckless filings may be sanctioned, and nonfrivolous filings may also be sanctioned, reckless nonfrivolous filings, without more may not be sanctioned.

78 F.3d at 436.

Section 1927 requires some element of wrongful purpose. See Blodgett, 709 F.2d at 610. "Bad faith is present when an attorney knowingly or recklessly raises a frivolous argument, or argues a meritorious claim for the purpose of harassing an opponent." West Coast Theater Corp. v. City of Portland, 897 F.2d 1519, 1528 (9th Cir.1990) (citing Cunningham v. County of Los Angeles, 879 F.2d 481, 490 (9th Cir.1988)); New Alaska, 869 F.2d at 1306. Sanctions are warranted only if actions are so completely without merit as to require the conclusion that they must have been undertaken for an improper purpose such as delay. See Shafii v. British Airways, PLC, 83 F.3d 566, 569 (2d Cir. 1996).

Under § 1927, the decision to award sanctions is a matter within the court's sound discretion. Wages v. Internal Revenue Service, 915 F.2d 1230, 1235 (9th Cir.), cert denied, 498 U.S. 1096, 111 S.Ct. 986, 112 L.Ed.2d 1071 (1991).

C. POWER TO SANCTION DERIVED UNDER DISTRICT COURT'S INHERENT AUTHORITY TO PUNISH ATTORNEY MISCONDUCT

While the district court should issue sanctions under...

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