Peoples Bank filed a collection action against American Coal Company. The bank was a secured creditor holding certain certain invoices for services rendered by P&K Business Corporation to American Coal.
Peoples prevailed at trial. The case was a routine account state case in which the plaintiff claims that certain bills were not disputed by the defendant and became an account stated. What motivated the sanctions motion was American Coal’s concession at trial that certain of the invoices were valid and that it owed the money.
The effect of this late concession was that the Bank was required to spend $340,000 in attorney fees to get ready for trial. Peoples sought sanctions under Rule 11, Rule 37 and 28 USC 1927 for what it claimed was a frivolous defense.
The district court denied all sanctions. First, it noted that Peoples had not complied with the Rule 11 safe harbor by giving the defendant 21 days to correct or withdraw the offending pleading. Second, the court found the defense of the case was in good faith and therefore that sanctions under Section 1927 were not available.
The court describes the standard for 1927 sanctions as follows:
“The United States Court of Appeals for the Seventh Circuit has established standards for the imposition of Section 1927 sanctions:
[A] court has discretion to impose § 1927 sanctions when an attorney has acted in an objectively unreasonable manner by engaging in serious and studied disregard for the orderly process of justice; pursued a claim that is without plausible legal or factual basis and lacking in justification; or pursue[d] a path that a reasonably careful attorney would have known, after appropriate inquiry, to be unsound.
Jolly Group, Ltd. v. Medline Indus., Inc., 435 F.3d 717, 720 (7th Cir. 2006) (quotations and internal citations omitted). Counsel must act unreasonably and vexatiously to warrant sanctions. See Kotsilieris v. Chalmers, 966 F.2d 1181, 1184 (7th Cir. 1992). Vexatious conduct requires either subjective or objective bad faith. See Walter v. Fiorenzo, 840 F.2d 427, 433 (7th Cir. 1988) (“A court may impose sanctions under 28 U.S.C. § 1927, against an attorney where that attorney has acted in an objectively unreasonable manner by engaging in a serious and studied disregard for the orderly process of justice[.]”) (quotation omitted); Ordower v. Feldman, 826 F.2d 1569, 1574 (7th Cir. 1987) (intentional ill will or reckless conduct constitutes vexatious conduct); In re TCI, Ltd., 769 F.2d 441, 445 (7th Cir. 1985) (bad faith can be demonstrated by subjective evidence of malice, objective evidence of reckless conduct, or indifference to the law). The moving party must show subjective bad faith “if the conduct under consideration had an objectively colorable basis.” Dal Pozzo v. Basic Mach. Co., 463 F.3d 609, 614 (7th Cir. 2006). Objective bad faith requires only reckless indifference to the law, not malice or ill will. See Riddle & Assocs. P.C., v. Kelly, 414 F.3d 832, 835 (7th Cir. 2005) (quoting Kapco Mfg. Co. v. C & O Enters., Inc., 886 F.2d 1485, 1491 (7th Cir. 1989)) (“If a lawyer pursues a path that a reasonably careful attorney would have known, after appropriate inquiry, to be unsound, the conduct is objectively unreasonable and vexatious.”).”
Comment: this is an unusual sanctions motion. Most sanctions motions are filed by defendants against plaintiffs who have filed frivolous pleadings. It is tough to prove that the defense of a case was frivolous.
Edward X. Clinton, Jr.