Kristin L. ROWEDDER, as Conservator of Gary Kral, Appellee, v. Michael ANDERSON, Richard F. Rosener, Mark Helkenn, Raymond Helkenn, McCord Insurance & Real Estate Corp., Roger Preul, and Berneil Preul, Appellants, and Comstock Brothers, Merritt Daniel Comstock, Geary Steven Comstock, Douglas E. Comstock, and D.R. Franck, Defendants.
No. 10-1172
Supreme Court of Iowa
June 15, 2012
816 N.W.2d 585
Earl G. Greene, III, of Woodke & Gibbons, P.C., L.L.O., Omaha, Nebraska, for appellants Helkenns.
Brandon R. Tomjack of Baird Holm, LLP, Omaha, Nebraska, for appellant Anderson.
Sean A. Minahan, Patrick G. Vipon, and Gage R. Cobb of Lamson, Dugan & Murray, LLP, of Omaha, Nebraska, for appellants McCord Insurance and Preuls.
Mark McCormick of Belin McCormick, P.C., Des Moines, Robert L. Laubenthal and Marvin O. Kieckhafer of Smith Peterson Law Firm, LLP, Council Bluffs, for appellee Rowedder.
Parties seek further review of a court of appeals decision affirming a district court order awarding $1000 in sanctions against plaintiff‘s counsel and making the sanctions payable to the Crawford County Jury and Witness Fund. We conclude the trial court did not abuse its discretion in fixing the amount of the sanction. We also conclude, however, the court abused its discretion in making the sanction payable to the jury and witness fund. Given the preference in our rule toward compensating victims, on remand the district court should enter an order requiring the sanction be paid in equal parts to the parties seeking the sanctions.
I. Background Facts and Proceedings.
Between February 2004 and February 2005, Gary Kral, as the executor and sole heir of his father‘s estate, sold four forty-acre parcels of farmland located in Craw
Michael Anderson purchased the first parcel in February 2004. Comstock Brothers, a partnership consisting of Merritt Daniel Comstock, Geary Steven Comstock, and Douglas Comstock, bought the second parcel in March. In May, Richard Rosener bought the third parcel. Finally, Raymond Helkenn purchased the fourth parcel in February 2005. All of the buyers paid $2000 per acre.
In August 2005, Kral met with attorney Bradley Nelson about evicting Helkenn‘s brother, Mark, who was living in one of Kral‘s rental properties. Nelson became concerned Kral lacked the mental ability to take care of his own financial matters. After examining Kral‘s bank records, Nelson discovered what he deemed to be suspicious checks totaling over $200,000 to certain individuals. Nelson became convinced these individuals were taking advantage of Kral. Nelson then petitioned the district court to establish a conservatorship for Kral, which Kral accepted voluntarily. The court appointed Kristin Rowedder, Nelson‘s office manager, as conservator for Kral in September 2005.
In May 2006, Rowedder, as conservator for Kral, filed suit against Anderson, the Comstocks, the Helkenn brothers, the Preuls, and McCord Insurance. Robert Laubenthal served as the attorney on behalf of Rowedder and Kral. In that capacity, he signed and filed the petition as well as subsequent pleadings, motions, and resistances.
The petition alleged the buyers, the Preuls, and their real estate company defrauded Kral by purchasing or facilitating the purchase of his land at “extremely low” prices, despite the fact that they knew or should have known that he was incompetent to conduct these transactions. The petition also alleged “certain of the defendants”1 conspired to divest Kral of his assets through real estate purchases. Finally, it alleged the Preuls and their real estate company were professionally negligent and breached a fiduciary duty to Kral in facilitating the sales. The petition sought to rescind the sales and requested that the court establish a constructive trust on each property.
After discovery commenced, Rosener, the Comstocks, the Preuls, and McCord Insurance filed motions to compel discovery. These motions centered on Rowedder‘s answers to interrogatories relating to evidence of the alleged fraud and conspiracy. Rowedder‘s answers repeatedly indicated she could not provide the specifics of her allegations until after the completion of discovery. In December, the district court ordered Rowedder to answer all of the discovery requests by January 20, 2007, or be subject to sanctions. On January 23, Rowedder filed a motion seeking an extension of this deadline.
Meanwhile, the Helkenns offered to sell their parcel back to Kral for the purchase price. After Rowedder refused, the Helkenns filed a motion for sanctions alleging Rowedder brought the action to harass,
The Comstocks, Rosener, and Anderson filed separate motions for summary judgment. Rowedder resisted each. Following a hearing, the district court entered summary judgments finding Rowedder had failed to show any facts supporting her allegations despite the court having given her several opportunities to do so. Rowedder later resisted separate motions for summary judgment filed by the Preuls, McCord Insurance, and the Helkenns. Nonetheless, the district court entered summary judgments.
In January 2008, the Helkenns filed a request for a hearing on their previously filed motion for sanctions. Anderson, Rosener, and the Comstocks also filed motions for sanctions. Rowedder filed a notice of appeal. In February, the court stayed all of the motions before it pending the disposition of Rowedder‘s appeal.
All of the defendants, except the Helkenns, moved to dismiss the appeal as to them, arguing Rowedder had not timely or properly perfected an appeal. We dismissed Rowedder‘s appeal without comment with respect to Anderson, the Comstocks, and Rosener, thereby upholding the summary judgments in their favor.
We transferred the balance of the appeal, which involved the claims against the Helkenns, the Preuls, and McCord Insurance, to the court of appeals. The court of appeals affirmed summary judgment in favor of the Helkenns, but reversed and remanded with respect to the claim of professional negligence against the Preuls and McCord Insurance.
On remand, the district court held a trial on the professional negligence claims against the Preuls and McCord Insurance. A jury found they did not breach any fiduciary duty but were negligent in the sales to Rosener and Helkenn. The jury awarded damages of $15,400. Rowedder filed a motion for a new trial. The Preuls and McCord Insurance moved for a directed verdict and later for judgment notwithstanding the verdict or, alternatively, a new trial. The district court denied these motions.
Meanwhile, following the dismissal of the appeal as to them, Rosener, Anderson, and the Helkenns renewed their motions for sanctions. These renewed motions asked the district court to sanction Rowedder and her attorneys. Rowedder resisted each motion.
The district court ordered sanctions against Rowedder‘s attorney, Laubenthal. In doing so, the court found that although Laubenthal‘s actions were not willful, vindictive, or taken in bad faith, the evidence demonstrated “the only actionable claims that ever existed were those against ... McCord Insurance and Real Estate and the Preuls.” The court noted Laubenthal did not have a prior history of sanctions. Further, the court stated it was presented with itemizations of attorney fees incurred by the various parties seeking sanctions, but not with evidence of Laubenthal‘s ability to pay any sanctions imposed by the court. It also stated its belief that each party personally paid its own legal fees because it was not presented with any indication the parties had insurance coverage for their legal fees. The court assessed a sanction of $1000 and directed payment to the Crawford County Jury and Witness Fund. The court did not order sanctions against Rowedder.
The Helkenns, Anderson, and Rosener filed notices of appeal. The Preuls and McCord Insurance appealed the negligence verdict. We transferred the case to the court of appeals. The court of appeals found sufficient evidence to support the jury verdict in favor of Rowedder and
Rosener and the Helkenns filed applications for further review, which we granted.
II. Issues.
The court of appeals determined the district court did not abuse its discretion by awarding sanctions for $1000. The court of appeals also determined the order requiring the sanctions be paid to the Crawford County Jury and Witness Fund was proper under
III. Standard of Review.
We review a district court‘s order imposing sanctions under our rules of civil procedure for an abuse of discretion. Everly v. Knoxville Cmty. Sch. Dist., 774 N.W.2d 488, 492 (Iowa 2009). An abuse of discretion occurs “when the district court exercises its discretion on grounds or for reasons clearly untenable or to an extent clearly unreasonable.” Schettler v. Iowa Dist. Ct., 509 N.W.2d 459, 464 (Iowa 1993). An erroneous application of the law is clearly untenable. Waits v. United Fire & Cas. Co., 572 N.W.2d 565, 569 (Iowa 1997). When we review for an abuse of discretion, we will correct an erroneous application of the law. Weigel v. Weigel, 467 N.W.2d 277, 280 (Iowa 1991).
IV. The Amount of the Sanction.
The
If a motion, pleading, or other paper is signed 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 an order to pay the other party or parties the amount of the reasonable expenses incurred because of the filing of the motion, pleading, or other paper, including a reasonable attorney fee.
The primary purpose of sanctions under
In making its ruling, the district court attempted to make the specific findings of fact as required by Everly.
The court noted that the parties presented it with itemizations of attorney fees incurred by the parties seeking sanctions, that the parties did not present it with any indication of the parties’ insurance coverage for their legal fees, and that it “was left with the impression that each party who sought sanctions personally paid their legal fees.”3 The court, however, failed to make a specific finding as to the reasonableness of the fees.
Further, the court made a finding as to the minimum amount to deter. It found that
the mere imposition of sanctions has in and of itself an impact of significance deterrence upon the person upon which
the sanctions are imposed.... [T]he court is satisfied that a court-ordered sanction of $1,000 along with the stigma attached to the mere imposition of sanctions is [a] sufficient sanction [to deter future conduct].
As to the ability to pay, the court stated it could not make a finding as to the ability of Laubenthal to pay a sanction because the court did not have any evidence as to Laubenthal‘s financial situation. We agree with the district court that the record is devoid of any evidence that would allow the court to make a finding as to Laubenthal‘s ability to pay.
Finally, the court made specific findings as to the severity of the violation. In this regard, the court found Laubenthal did not take his actions in bad faith. The court also found his actions were not vindictive or willful insofar as to suggest he acted with evil intent. The court further found Laubenthal did not have a prior history of court-imposed sanctions.
We realize the district court erred by not making a specific finding as to the reasonableness of the opposing parties’ attorneys’ fees. Additionally, the record did not contain any evidence as to Laubenthal‘s ability to pay. It was Laubenthal‘s obligation to set forth evidence of his ability to pay. Kunstler, 914 F.2d at 524. By not producing evidence of his ability to pay, Laubenthal took the risk that he would not have the ability to pay. However, even with these deficiencies, the district court did not abuse its discretion in fixing the amount of the sanction. Deterrence is the primary goal of sanctions, not compensation of the opposing party. The district court went to great length to make a detailed finding that a $1000 sanction is sufficient to deter any future conduct regardless of the opposing parties’ attorneys’ fees. Therefore, under the record made, we find the district court did not abuse its discretion in awarding a $1000 sanction. Consequently, we affirm the district court‘s award of $1000 as the proper sanction.
V. Who Should Receive the Sanction Payment?
The district court directed Laubenthal to pay the sanction to the Crawford County Jury and Witness Fund rather than to the parties seeking sanctions. It is true that
the court ... shall impose ... an appropriate sanction, which may include an order to pay the other party or parties the amount of the reasonable expenses incurred because of the filing of the motion, pleading, or other paper, including a reasonable attorney fee.
However,
There are strong reasons for first directing sanctions to the injured parties. First, as we have noted, the reasonable expectation that parties will be the beneficiaries of sanctions should they prevail provides some of the incentive needed to motivate those parties to invest the time and money necessary to pursue legitimate sanction claims. If injured parties do not expect even to recoup the cost of their additional sanction filings, some may not be willing or financially able to file motions for sanctions. This would not only compound the personal injustice that they have already suffered, but it could undermine the integrity of our judicial system by diminishing the deterrent effect of sanctions. Accordingly, because the primary goal of
Second, under Iowa law, although deterrence is clearly the primary goal of
We do not now define the precise standards for choosing between parties and the judicial system, but given the strong arguments in favor of victim compensation, we would expect courts to provide special reasons with specific findings as to why they exercised their discretion not to benefit those who have been most directly harmed by the sanctionable conduct. One valid reason for allocating sanctions to the judicial system would be the fact that the minimum sanction necessary for deterrence actually exceeded the costs to the harmed litigants. In such a case, the excess should be paid to the judicial system so that parties do not receive a windfall and so that the system can be partially reimbursed for the unnecessary costs it incurred.
Therefore, we find the district court‘s order requiring Laubenthal to pay the sanction to the Crawford County Jury and Witness Fund without a specific finding as to why it should be paid to the jury and witness fund unreasonable in light of the preference in
VI. Disposition.
Although we find, under the record made, the district court did not abuse its discretion in fixing the amount of the sanction at $1000, the court abused its discretion by ordering Laubenthal to pay the sanction to the Crawford County Jury and Witness Fund. Given
COURT OF APPEALS DECISION AFFIRMED IN PART AND VACATED IN PART; DISTRICT COURT JUDGMENT AFFIRMED IN PART AND REVERSED IN PART; AND CASE REMANDED WITH INSTRUCTIONS.
All justices concur except WATERMAN, J., who concurs in part and dissents in part, and MANSFIELD, J., who takes no part.
I respectfully concur in part and dissent in part. I agree with the majority‘s affirmance of the district court‘s findings that attorney Laubenthal violated
Citing Barnhill v. Iowa Dist. Ct., 765 N.W.2d 267, 276 (Iowa 2009), the majority correctly recognizes “the primary purpose of sanctions under
At the time they were served, interrogatories and requests for production of documents many months ago, Plaintiffs apparently had no evidence to support the allegations in the petition against these defendants. Despite a motion to compel, the plaintiffs still were not able to produce any such evidence. After the court‘s order of December 21, 2006, the plaintiffs were unable to produce any such evidence. When asked directly at both the January 29 hearing and the February 23 hearing, “Where is your evidence?” Neither of plaintiffs’ attorneys were able to provide any whatsoever.
. . . .
Plaintiffs have not only been challenged to produce evidence of such a tort by the court‘s rulings, but have been challenged to do so in open court, in the court‘s chambers, at least three times. The court cannot help but believe if this evidence existed, the court would have seen it by now.
Laubenthal did not stop there. He appealed despite the lack of evidence to support these claims. The court of appeals, in affirming summary judgment, noted “plaintiff points us to no case law identifying similar conduct as actionable.” Rowedder v. Helkenn, No. 08-0117, 2009 WL 1492558, at *7 (Iowa Ct. App. May 29, 2009).
The district court, with the apparent approval of today‘s majority, justified the low amount by noting the accompanying “stigma” of court-ordered sanctions. Stigma will accompany every judicial finding sanctioning an attorney, and any court-ordered sanction would be an anathema to most Iowa lawyers. Yet no authority is cited for the proposition that a low-dollar sanction can be justified by the accompanying stigma. “Stigma” is not one of the sixteen factors in the American Bar Association guidelines or the four Kunstler factors we encouraged courts to apply in Barnhill. Barnhill, 765 N.W.2d at 276-77 (citing Kunstler, 914 F.2d at 523; ABA Section of Litigation, Standards and Guidelines for Practice Under Rule 11 of the Federal Rules of Civil Procedure (1988), reprinted in 121 F.R.D. 101, 125-26 (1988)). Nor is the stigma of a sanction mentioned as a factor to consider in setting the dollar amount in any of the numerous cases applying the Federal Rule of
More importantly, the $1000 sanction is a small downside to the large upside Laubenthal apparently saw in this case when he agreed to a one-third contingent fee for all recoveries in a written agreement acknowledging “[i]n excess of $200,000 has been fraudulently obtained.” The tension between fear and greed regulates much human behavior, including tax compliance and hardball litigation. What is the deterrent effect of a $1000 sanction when the lawyer anticipates a potential fee over sixty times that amount? See Barnhill, 765 N.W.2d at 278 (noting a larger sanction needed for deterrence in cases “where there is a potential for a hefty settlement“). Notably, Laubenthal offered no evidence of an inability to pay a larger sanction. Cf. id. at 277 (affirming $25,000 sanction despite Barnhill‘s statement “a large sanction will put [my firm] out of business“).
In Barnhill, we approvingly quoted federal appellate precedent concluding “‘de minimis sanctions are simply inadequate to deter Rule 11 violations.‘” Id. at 276 (quoting Rentz v. Dynasty Apparel Indus., Inc., 556 F.3d 389, 400-02 (6th Cir. 2009) (reversing $2500 sanction as so low as to be an abuse of discretion)). We specifically concluded a sanction of less than $25,000 against Barnhill would be insufficient “to deter repetition of such conduct or comparable conduct by others similarly situated.” Id. at 278 (quoting
Today‘s majority pays lip service to the primary goal of our rule—deterrence—while approving a de minimis sanction. In Barnhill, we noted “the twin purposes of compensation and deterrence set forth in our case law” were served by the sanction of $25,000 when that victim‘s fees were $148,596. Id. at 277. Applying the same one-to-six ratio here warrants a sanction of $10,500. The Eighth Circuit affirmed a $25,000 sanction imposed sua sponte by Chief Judge Pratt, noting it was approximately three-fourths the victim‘s fees and expenses. MHC Inv. Co. v. Racom Corp., 323 F.3d 620, 621, 627-28 (8th Cir. 2003). That case involved similar misconduct, sanctioning counsel who “persisted in asserting claims and defenses which were not justifiable either in law or in fact.” Id. at 626. As here, the sanctioned attorneys had previously unblemished records and impressive credentials. As here, the district court found the counsel in Racom Corp. violated the rule by continuing to litigate claims and defenses discovery revealed to be meritless. Id. But, unlike here, the sanction upheld in Racom was calibrated to send the right message.
I would reverse the $1000 amount of the sanction and remand for the district court to enter a sanction of at least $10,000 payable to the victims in equal parts.