Objective bad faith suffices for sanctions

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An attorney who reneged on a settlement agreement was properly sanctioned pursuant to 28 U.S.C. 1927, the Seventh Circuit held on Sept. 6.

Kevin Dal Pozzo, an employee of Richards Brick Company, was injured on the job when something went wrong with an automated brick conveyor system he was working on. He sought workers’ compensation from Richards Brick and, in Illinois federal court, sued Basic Machinery Co., Inc., which built the conveyor system, and Fanuc Robotics America, Inc., which provided the parts that malfunctioned.

Richards Brick was represented by two attorneys from different firms: Gregory C. Vacala; and Farrah Anderson. Vacala took the position that Richards Brick was an insured under the policies of Basic and Fanuc, and sent letters purporting to tender its defense to their respective insurance companies. Basic’s insurer declined the tender, and Fanuc’s insurer never responded.

Eventually the parties reached an oral settlement and notified the district court that the case was settled. The court entered an order dismissing the action with prejudice, but reserving the right to reopen if the settlement was not consummated.

The first draft of the settlement agreement provided for the settlement of all claims any person may have against any party “and/or their insurers.”

Nevertheless, Vacala continued to pursue Fanuc’s insurer. In response, the names of Fanuc’s and Basic’s insurers were expressly incorporated into a second draft of the agreement. Vacala then refused to sign it, claiming that the amendment was a material change in the terms.

Dal Pozzo’s counsel then warned Vacala that, if he persisted in blocking the settlement, he would move the court for enforcement, and seek costs and fees. Vacala continued to obstruct the settlement, and Dal Pozzo, Basic, and Fanuc all sought enforcement.

The court held a hearing on the motions, but Vacala did not attend. At the hearing, the other attorneys agreed that the only obstacle to settlement was Vacala’s insistence on pursuing “baseless coverage claims” against the insurers.

The court ordered the settlement enforced, and granted the motions for costs and fees associated with the motion and hearing. The sanctions were against Vacala, not Richards Brick.

Vacala filed a Rule 59 motion to alter the judgment, arguing that Rule 11 did not justify the sanctions, and that the amendment to the settlement to include the insurers was a material change. The court held another hearing, and denied the motion.

Vacala appealed, but in a decision by Judge Diane S. Sykes, the court of appeals affirmed, tacking on more costs and attorneys fees for filing a frivolous appeal.

The court agreed with Vacala that Rule 11 does not authorize the sanctions imposed, but found this irrelevant, because Vacala was not sanctioned pursuant to Rule 11, which only applies to pleadings, motions, and other papers filed with the court.

The court acknowledged that none of the parties specified the rule or statute pursuant to which they were pursuing sanctions, and the district court failed to cite the basis for its order.

Despite the oversight, however, the court found the order was clearly authorized by either sec. 1927 or the court’s inherent power.

Section 1927 provides for sanctions against any attorney “who so multiplies the proceedings in any case unreasonably and vexatiously.”

The court noted that some precedent suggests that either subjective or objective bad faith is a prerequisite for sanctions under sec. 1927, while other cases suggest otherwise.

Reconciling the precedents, the court wrote, “We read the cases as drawing a distinction between subjective and objective bad faith. Subjective bad faith, the more difficult type of bad faith to prove, is not always necessary. Subjective bad faith must be shown only if the conduct under consideration had an objectivel
y colorable basis. The standard for objective bad faith does not require a finding of malice or ill will; reckless indifference to the law will qualify. ‘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’ (cites omitted).”

Applying the standard, the court found that Vacala’s conduct satisfies the standard for objective bad faith.

Reciting the original draft of the settlement agreement, the court found, “Richards Brick and every other party to the litigation released all disputes, claims, and causes of action by any firm or corporation against Basic or Fanuc and their insurers (emphasis in original).”

In addition, when Vacala was given the opportunity to explain why the settlement language did not abandon Richards Brick’s insurance coverage claims, Vacala skipped the hearing.

The court reasoned, “Any reasonably careful attorney would know not to pursue this obviously unsound path. The district court’s conclusion that Vacala’s conduct was sanctionable was not an abuse of discretion.”

Befote concluding, the court imposed additional sanctions pursuant to FRAP 38, for filing a frivolous appeal.

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The court noted that, initially, Vacala appealed both the imposition of sanctions, and the order enforcing the settlement. In his reply brief, however, he abandoned the latter issue.

The court found this problematic, because opposing counsel stated at oral argument that they would not have pressed the case if the only issue was the sanctions, finding, “Vacala’s opposing counsel spent time on this appeal because the settlement — not the sanctions — was valuable to their clients. Vacala continues to needlessly and frivolously multiply the proceedings in this case.”

Accordingly, the court affirmed the sanctions awarded in the district court, and ordered Vacala to pay his opponents attorney fees and double costs on the appeal.

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David Ziemer can be reached by email.