Eastman Kodak v . Knight CV-91-359-B 02/23/94 UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW HAMPSHIRE
Eastman Kodak Company and Eastman Credit Corporation v. Civil Action N o . 91-359-B
Karen E . Knight and Ken Knight d/b/a/ ALL IN ONE HOUR PHOTO and Daniel T . Murphy
O R D E R
On August 3 0 , 1993, defendant Daniel T . Murphy (Murphy)
filed a motion requesting this court to impose sanctions pursuant
to Fed. R. Civ. P. 11 (Rule 11) against the plaintiffs, Eastman
Kodak Company and Eastman Credit Corporation (hereafter
collectively referred to as "Kodak") and Kodak's counsel from the
firm of Smith, Debnam, Hibbert & Pahl of Raleigh, North Carolina and local counsel for Kodak from the firm of Welts & White, P.C.,
of Nashua, New Hampshire (hereafter counsel for Kodak
collectively referred to as "Welts & White"). Murphy contends
that after Welts & White became aware that the claim against him
was not well grounded in fact, they nevertheless continued to
pursue the claim in violation of Rule 1 1 . Murphy also asserts
that Welts & White filed pleadings for the improper purpose of
prolonging the litigation and forcing Murphy to settle the claim
against him. Murphy asks that Kodak and Welts & White be ordered, both jointly and severally, to pay him $30,000 as
sanctions under Rule 11 for reasonable attorneys fees, costs and
expenses incurred by him in the defense of the underlying action.
Murphy also requests this court to order Kodak and Welts & White,
both jointly and severally, to pay to the court $10,000 as
additional sanctions pursuant to Rule 11 for their abuse of the
judicial process. For the following reasons Murphy's request for
Rule 11 sanctions is denied.
I . BACKGROUND
In early 1989, defendants Karen and Ken Knight (the
"Knights") sought to lease equipment and purchase supplies from
Kodak for use in their new business "All In One Hour Photo."
Kodak determined that the Knights were a credit risk and as a condition to extending them credit, Kodak required additional
security. In an effort to obtain this additional security the
Knights approached Murphy, Karen Knight's father. Subsequently,
Kodak mailed Murphy a guaranty agreement and a personal financial
statement form for him to complete and return to Kodak. On or
about June 1 , 1989 Kodak received Murphy's personal financial
statement listing his assets, liabilities, sources of income and
net worth. At the top of the financial statement was printed
2 "Daniel T . Murphy (Limited Partner)" and the final page of the
financial statement bore Murphy's signature. During this period,
Kodak agreed to extend the Knights credit provided that Murphy
sign the agreement guaranteeing the Knights' debt. Shortly
thereafter, Kodak received in its offices a guaranty agreement
purportedly bearing Murphy's signature. The signature was
neither witnessed nor notarized.
As a result, in October of 1989, Kodak and the Knights
entered into a five year lease agreement under which the Knights
would receive a Kodak "Create-A-Print" film developer and Kodak
would receive monthly payments with a total payout of
approximately $65,500. Kodak also supplied the Knights with
approximately $9,500 worth of goods and services on open account.
The Knights were not able to meet their payment obligations to
Kodak and their accounts became seriously past due. In November 1990, with the Knights in default, Kodak accelerated the debt
owed under the lease agreement and called in the amount owed on
the open account, demanding payment in full of the $75,000.
Neither the Knights, nor Murphy responded to the demand and no
payment was made on the outstanding debt. As a result, on July
1 0 , 1991 Kodak instituted the underlying action against the
Knights and Murphy.
3 The first and second counts of the complaint filed by Welts
& White sought recovery from the Knights based on their breach of
the lease agreement and failure to pay for goods and services
rendered. The Knights failed to answer the complaint, and on
November 1 2 , 1991, on plaintiff's motion, the clerk of court made
an entry of default against the Knights pursuant to Fed. R. Civ.
P. 55(a). The third count of the complaint sought recovery from
Murphy as the guarantor of the Knights' debt and was based on his
signature on the guaranty agreement. Kodak's and Welts & White's
alleged Rule 11 violations stem from this third count.
I I . FACTS
In essence, the complaint against Murphy alleged that he
executed a guaranty agreement, whereby he guaranteed payment of the Knights' debt to Kodak. The Complaint further alleged that
Murphy defaulted on the guaranty agreement by failing to make
payment on Kodak's demand.
In response to the complaint Murphy asserted, inter alia,
that he did not sign the guaranty agreement, therefore he was not
liable to Kodak for the Knights' debt.
In its pretrial conference memorandum dated January 8 , 1992
Welts & White raised two alternative theories of Murphy's
4 liability: (1) Murphy's signature on the guaranty agreement was
genuine (genuine signature), or (2) Murphy's authorized agent
signed the guaranty agreement (agency). In his pretrial
conference memorandum Murphy stated, again, that the signature
was a forgery.
Subsequently, Murphy provided Welts & White with
approximately 20 handwriting exemplars of Murphy's signature in
order for Welts & White to have an expert analyze them and render
an opinion as to whether or not the signature on the guaranty
agreement was Murphy's. Shortly thereafter Welts & White
informed Murphy and this court that they would not rely on expert
testimony to show the genuineness of the signature, but rather
would rely on other circumstantial evidence to prove the same.
As a result, on June 2 2 , 1992 Murphy filed a Motion for
Summary Judgment based on the fact that Welts & White would not present any expert testimony regarding the genuineness of
Murphy's signature. Murphy contended that Welts & White could
not rebut Murphy's testimony that the signature was a forgery and
therefore could not meet its burden of proof. Welts & White
responded to this motion on July 2 2 , 1992 by again asserting its
two alternative theories of liability, (1) genuine signature, or
(2) agency. On October 2 7 , 1992 Judge DiClerico, then presiding
5 over this case, denied Murphy's Motion for Summary Judgment based
on the finding that there was a genuine issue of material fact
concerning whether or not the signature on the guaranty agreement
was Murphy's.
On October 1 3 , 1992, while Murphy's Motion for Summary
Judgment was still pending, Welts & White took the depositions of
Ken and Karen Knight.1 During the course of Ken Knight's
deposition he stated that he had signed Murphy's name to the
guaranty agreement. Karen Knight's deposition testimony
corroborated this. Both Ken and Karen Knight also indicated in
their depositions that Murphy knew he was financially backing
"All In One Hour Photo" when he supplied Kodak with his personal
financial statement. Moreover, the Knights' depositions indicate
that Murphy told his daughter Karen to "do whatever it takes,"
using his credit, to get the "All In One Hour Photo" business set up. The Knights' depositions also indicate that Murphy was
subsequently informed that Ken Knight signed Murphy's name to the
guaranty agreement. Further, the Knights' depositions indicate
that Murphy did not object to Ken Knight signing his name to the
1 On June 1 , 1992 the Knights filed for relief under Chapter 7 of the Bankruptcy Code. Welts & White filed for relief from the automatic stay in order to depose the Knights and to continue with discovery in the litigation pending in this court.
6 guaranty agreement when he was subsequently informed of the action. On November 1 8 , 1992, as a result of the Knight's deposition testimony and Murphy's contention that he had not signed the guaranty agreement, Welts & White filed an adversarial complaint in the Knight's pending Chapter 7 Bankruptcy proceeding seeking to have the Knight's debt to Kodak excepted from discharge. The basis of Kodak's Bankruptcy Complaint was that the Knights had obtained credit from Kodak through false pretenses, a false representation, or actual fraud. Welts & White further alleged that Murphy did not sign the guaranty agreement and that Ken Knight admitted in his deposition that he had forged Murphy's name on said guaranty agreement.2
On January 2 6 , 1993 Murphy received the transcripts of the Knights' depositions and discovered that Ken Knight claimed that
he had signed Murphy's name on the guaranty agreement. On May
1 1 , 1993, approximately four months later, Murphy filed a second
2 Subsequently, on March 5 , 1993, Welts & White filed a motion for withdrawal of reference and consolidation of actions in this court, seeking to consolidate the Knights' bankruptcy proceeding with the action still pending against Murphy in this court. This court granted the consolidation noting the common questions of law and fact and the risk of contradictory decisions based on the same factual and legal issues.
7 motion for summary judgment based on Ken Knight's statement and
Kodak's complaint in the bankruptcy proceeding alleging Ken
Knight's forgery. On May 2 4 , 1993 Welts & White responded by
again alleging 1 ) genuine signature, or 2 ) agency. In addition,
Welts & White alternatively claimed that Murphy ratified the
guaranty agreement. When this case settled on July 2 9 , 1993,
Murphy's motion was still pending.
At the final pre-trial conference hearing on May 2 1 , 1993
Murphy again claimed that Kodak could not successfully maintain a
claim against him. Murphy based his contention on the assumption
that the genuineness of his signature was no longer a disputed
issue of fact and the fact that Kodak had never formally amended
its complaint to include counts alleging agency and ratification.
Kodak responded by claiming that it did intend to pursue the
agency and ratification theories at trial. As a result, I advised Welts & White to file a motion to amend its complaint,
which it did on May 2 8 , 1993. The motion to amend the complaint
contained five alternative theories of Murphy's liability: 1 )
genuine signature, 2 ) agency, 3 ) ratification, 4 ) estoppel, or 5 )
partnership.
On June 9, 1993 Murphy objected to Kodak's motion to amend
asserting, inter alia, that his case would be prejudiced by such
8 a late amendment. On June 1 6 , 1993, in its response to Murphy's
objection, Kodak again asserted all five of its theories of
Murphy's liability based on the guaranty agreement.
On July 2 9 , 1993 at the second final pretrial conference,
the case settled, with Kodak agreeing accept a dismissal of the
case with prejudice. Murphy's Rule 11 motion focuses on Welts &
White's and Kodak's continued assertion that Murphy's signature
on the guaranty agreement was genuine. Murphy does not contend
that Welts & White's alternative theories of liability violated
Rule 1 1 . As such, I focus my analysis on Kodak's claim that
Murphy's signature is genuine.
III. DISCUSSION
A. Standard "The purpose of Rule 11 is to deter dilatory and abusive
tactics in litigation and to streamline the litigation process by
lessening frivolous claims or defenses."3 Cruz v . Savage, 896
F.2d 626, 630 (1st Cir. 1990); see also Fed. R. Civ. P. 1 1 ,
3 I have analyzed Murphy's claims under the version of Rule 11 that was in place prior to December 1 , 1993. Significant changes were made in Rule 11 by the December 1 , 1993 amendments and I have determined that it would be inappropriate to apply these changes retrospectively in this case. See Fed. R. Civ. P. 8 6 , advisory committee notes and notes of decisions.
9 advisory committee notes. "Rule 11 imposes a duty on attorneys
to certify that they have conducted a reasonable inquiry and have
determined that any papers filed with the court are well grounded
in fact, legally tenable and 'not interposed for any improper
purpose.'" Cooter & Gell v . Hartmarx Corp., 496 U.S. 3 8 4 , 393
(1990); see also Mariani v Doctors Assoc., Inc,, 983 F.2d 5 , 7
(1st Cir. 1993); Cruz, 896 F.2d at 630. In this regard,
attorneys are held to the standards of due diligence and
objective reasonableness. Mariani, 983 F.2d at 7 ; Cruz, 896 F.2d
at 631; Lancellotti v . Fay, 909 F.2d 1 5 , 20 (1st Cir. 1990).
Under this standard, pleadings filed by an attorney are evaluated
and judged based upon what was objectively reasonable under the
circumstances that existed when the pleading was filed. Cruz,
896 F.2d at 631; Kale v . Combined Ins. Co., 861 F.2d 746, 758
(1st Cir. 1988); Navarro-Ayala v . Nunez, 968 F.2d 1421, 1425 (1st Cir. 1992); see also Fed. R. Civ. P. 1 1 , advisory committee
notes.
Rule 11 provides two grounds for sanctions: the "reasonable
inquiry" clause and the "improper purpose" clause. Lancellotti,
909 F.2d at 1 9 . Rule 11 states, in pertinent part: Every pleading, motion, and other paper of a party represented by an attorney shall be signed by at least one attorney of record in
10 the attorney's individual name, whose address shall be stated ... The signature of an attorney or party constitutes a certificate by the signer that the signer has read the pleading, motion, or other paper; that to the best of the signer's knowledge, information, and belief formed after reasonable inquiry it is well grounded in fact and warranted by existing law ... and that it is not interposed for any improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation ... Fed. R. Civ. P. 1 1 . In the present case, Murphy contends that
Welts & White and Kodak violated both the "reasonable inquiry"
clause and the "improper purpose" clause of Rule 1 1 . I will
address each contention in turn.
B. Reasonably Inquiry; Sanctions Against Welts & White
The Rule 11 "reasonable inquiry" clause is itself composed of two subdivisions. "A party or lawyer can run afoul of the
'reasonable inquiry' clause by failing either (1) to make a
reasonable inquiry into the facts, or (2) to make a reasonable
inquiry into (and informed assessment of) the law." Lancellotti,
909 F.2d at 1 9 , n.4 (citing Ryan v . Clemente, 901 F.2d 1 7 7 , 179-
81 (1st Cir. 1990) (applying both subdivisions of the "reasonable
inquiry" clause)). I now turn to the pleadings and motions which
Murphy claims were filed in violation of Rule 1 1 .
11 1. The Complaint and Pretrial Conference Memorandum
The complaint and pretrial conference memorandum filed by
Welts & White violated neither subdivision of the "reasonable
inquiry" clause. Murphy contends that counsel for Kodak was
aware at the pretrial hearing on January 9, 1992, that its
complaint against him was not well grounded in fact and that
there was no objectively reasonable evidentiary basis for the
claim against him. I disagree.
I judge the complaint and the pretrial conference memorandum
on the basis of what was objectively reasonable when the
pleadings were filed. Cruz, 896 F.2d at 631; Kale, 861 F.2d at
758; Navarro-Ayala, 968 F.2d at 1425. When the complaint was
filed on July 1 0 , 1991 and when the pretrial conference
memorandum was filed on January 9, 1992, Welts & White was in
possession of several pieces of evidence suggesting that Murphy had signed the guaranty agreement. First, counsel had the
guaranty agreement itself, which purportedly bore Murphy's
signature. The fact that Murphy denies having signed the
guaranty agreement does not make his version of what occurred the
"true facts" of the case, but rather it makes it a disputed issue
of fact. Second, Welts & White had Murphy's signed personal
financial statement. This statement indicated that Murphy
12 considered himself a "Limited Partner" in "All In One Hour
Photo." Moreover, the purpose of providing Kodak with the
financial statement was to secure a credit line and financing for
the Knights. Third, Welts & White had Kodak's business records
which allegedly memorialize conversations between Murphy and
Kodak employees concerning "All In One Hour Photo" and indicate
Murphy's involvement in the business. Fourth, Welts & White had
all of the unpaid invoices underlying the Knights' debt. Based
on this evidence, I conclude that Kodak's complaint and pretrial
conference memorandum were well grounded in fact and that Welts &
White made a reasonable inquiry into the facts underlying and
supporting its claim.
Welts & White also made a reasonable inquiry into and
informed assessment of the applicable law. Generally, under
guaranty law the guarantor agrees to be secondarily liable for another's debt and agrees to satisfy that debt if and when the
debtor fails to repay. It is not disputed that the Knights
defaulted on both their lease agreement and open account with
Kodak. Kodak was merely attempting to collect on the guaranty of
an undisputed debt. Thus, I conclude that Welts & White made a
reasonable inquiry and an informed assessment of the applicable
law when it filed the complaint and at the January 9th pretrial
13 hearing.
2. Duty to Update Pleadings
Next, Murphy asserts that after Welts & White took the
Knights' depositions and discovered that Ken Knight claimed to
have signed Murphy's name to the guaranty agreement, it should
have withdrawn Kodak's objection to Murphy's Motion for Summary
Judgment. Murphy claims that Welts & White's failure to do so
violated Rule 1 1 . I disagree.
Rule 11 is applicable to the "initial" signing of a
pleading, motion, or other paper and the signer's conduct should
be judged when the pleading, motion, or other paper is signed.
Cruz, 896 F.2d at 631; Kale, 861 F.2d at 758; Navarro-Ayala, 968
F.2d at 1425; see also Fed. R. Civ. P. 11 advisory committee
notes. Moreover, Rule 11 does not require counsel to update and
revise pleadings, motions, or other papers that were not subject to sanctions when filed. Oliveri v . Thompson, 803 F.2d 1265,
1274-1275 (2nd Cir. 1986); Samuels v . Wilder, 906 F.2d 2 7 2 , 275
(7th Cir. 1990); Pantry Queen Foods, Inc. v . Lifschultz Fast
Freight, Inc., 809 F.2d 4 5 1 , 454 (7th Cir. 1987); Corp. of the
Presiding Bishop v . Assoc. Contractors, 877 F.2d 9 3 8 , 943 (11th
Cir. 1989).
In the present case neither the initial objection, nor the
14 amended objection filed by Kodak's counsel was subject to Rule 11
sanctions at the time they were filed. The initial objection, as
stated above, claimed that Murphy's signature on the guaranty
agreement was either (a) genuine or (b) signed by Murphy's
authorized agent.
In support of these two theories Welts & White set forth
several pieces of evidence. First, there was evidence that Kodak
mailed the personal financial statement form and the personal
guaranty contract to Murphy simultaneously. Second, there was
evidence that the Personal Financial Statement and the Guaranty
Agreement were received back by Kodak at approximately the same
time and that both documents bore Murphy's signature. Third,
Murphy admitted that the information in the personal financial
statement was accurate and he did not deny signing the statement.
Fourth, Welts and White had Kodak's business records regarding Murphy's involvement in "All In One Hour Photo." Although
Kodak's theories of genuine signature and agency were weak, they
were not so patently baseless or frivolous as to amount to a
violation of Rule 1 1 .
Moreover, Kodak's Amended Objection set forth additional
evidence, obtained through discovery, that supported its theories
of Murphy's liability. The evidence was as follows: (a) the
15 subpoenaed business records of Nynex Information Resources, which
showed that Murphy was the responsible billing party for "All In
One Hour Photo" until November 7 , 1991; (b) a lease agreement
between Murphy and Copal Systems, Inc., apparently entered into
by Murphy on behalf of "All In One Hour Photo"; and (c) a
Schedule from the Knights' Chapter 7 Bankruptcy file which listed
Murphy as a co-debtor. This new evidence provided additional
support to Kodak's claim against Murphy. Moreover, it
demonstrates Welts & White's continuing inquiry into and
reassessment of the factual and legal basis for Kodak's claims.
The objection and amended objection filed by Welts & White
were well grounded in fact and law at the time they were filed.
The mere fact that Kodak's claim that Murphy had signed the
guarantee may have been weak does not subject Welts & White to
sanctions. 3. Pleadings Filed Subsequent To The Knights' Depositions
Next, Murphy contends that, in light of Ken Knight's claim
that he signed Murphy's name to the guaranty agreement, Welts &
White did not have an objectively reasonable basis in fact to
support its continued assertion that Murphy's signature was
genuine. As such, Murphy asserts that the pleadings filed by
Welts & White subsequent to the Knights' depositions, which
16 included the claim that Murphy's signature on the guaranty
agreement was genuine, were filed in violation of Rule 1 1 .
The pleadings filed by Welts & White at issue here are as
follows: (a) Pretrial Conference Memorandum, filed January 2 9 ,
1993; (b) Kodak's Response to Murphy's Motion for Summary
Judgment, filed May 2 4 , 1993; (c) Kodak's Motion to Amend the
Complaint, filed May 2 8 , 1993; and (d) Kodak's Response to
Murphy's Objection to Amending the Complaint, filed June 6, 1993.
The evidence Welts & White had at this time supporting its
claim that Murphy's signature was genuine was as follows: (a)
Kodak mailed the personal financial statement form and guaranty
agreement to Murphy simultaneously and received them back,
completed, at approximately the same time; (b) both the guaranty
agreement and Murphy's personal financial statement bore his
signature; (c) Murphy admitted that the information in the personal financial statement was accurate and did not deny
signing the statement; (d) the personal financial statement
indicated that Murphy was a "Limited Partner" in "All In One Hour
Photo"; (e) Kodak's business records indicating Murphy's
involvement in "All In One Hour Photo"; (f) the business records
of Nynex Information Resources which show that Murphy was the
responsible billing party for "All In One Hour Photo" until
17 November 7 , 1991; (g) the lease agreement between Murphy and
Copal Systems, Inc., entered into by Murphy on behalf of "All In
One Hour Photo"; (h) a schedule from the Knights' Chapter 7
bankruptcy file listing Murphy as a co-debtor; (i) an
authorization signed by Murphy on July 1 7 , 1989, authorizing his
bank to release his financial information to third parties.
The evidence in derogation of Kodak's claim that Murphy's
signature was genuine was as follows: (a) Murphy's assertion that
the signature was a forgery; (b) the Knights' depositions that
indicate Ken Knight signed Murphy's name to the guaranty
agreement; (c) the fact that the signature on the guaranty
agreement was neither witnessed nor notarized. Although this
evidence seriously weakens Kodak's claim that Murphy's signature
was genuine, it does not preclude such a finding. In considering the evidence in support of and in opposition
to Kodak's claim, I find that Welts & White had an objectively
reasonable basis in fact on which to maintain its assertion that
Murphy's signature on the guaranty agreement was genuine. The
evidence set out above could have been presented to a trier of
fact in support of the claim that Murphy signed the guaranty
agreement. "Sanctions should not be imposed where a 'plausible
good faith argument can be made ...'". Kale, 861 F.2d at 759
18 (quoting Zaldivar v . City of Los Angeles, 780 F.2d 823, 833 (9th
Cir. 1986)).
As a result, I find that Welts & White made a reasonable
inquiry into the facts and the law before filing the pleadings in
question. Moreover, even in the face of evidence to the
contrary, Welts & White had an objectively reasonable basis in
fact and law on which to maintain its claim that Murphy signed
the guaranty agreement. As such, Welts & White did not violate
Rule 11's reasonably inquiry standard.
C. Improper Purpose
Rule 11 provides that sanctions may be imposed where a
pleading is interposed for an improper purpose, such as to
harass, delay, or needlessly increase the cost of litigation.
See Bay State Towing C o . v . Barge American 2 1 , 899 F.2d 129, 132-
133 (1st Cir. 1990) (upholding district courts finding that
defendant interposed pleadings in hope that delay and added costs
of litigation would bring about compromise); Lancellotti, 909
F.2d at 18-19 (Rule 11 sanctions reach pleadings that, while not
devoid of all merit, were filed for some malign purpose); Cruz,
896 F.2d at 630 (Rule 11 imposes an obligation on attorneys to
19 ensure that a proceeding does not continue without a reasonable
basis in law and fact, thus attorneys must conduct themselves in
a manner bespeaking reasonable professionalism and consistent
with the orderly functioning of the judicial system)(citing
Figueroa-Rodriguez v . Lopez-Rivera, 878 F.2d 1488, 1491 (1st Cir.
1988)(quoting In re D.C. Sullivan Co., 843 F.2d 596, 598 (1st
Cir. 1988)). I now turn to a discussion of Murphy's allegations
of improper purpose.
1. Adversarial Complaint Filed in Bankruptcy Court
Murphy contends that the adversarial complaint filed by
Welts & White in bankruptcy court was done in bad faith. Murphy
claims that Welts & White should be sanctioned for alleging in
bankruptcy court that Ken Knight forged Murphy's name on the
guaranty agreement, while at the same time maintaining in this
court that Murphy's signature was genuine. I disagree. Inconsistent, alternative theories of recovery can be
pursued in the same lawsuit. Fed. R. Civ. P. 8(e)(2) provides
that: A party may also state as many separate claims or defenses [in its pleadings] as the party has regardless of consistency and whether based on legal, equitable, or maritime grounds. All statements shall be made subject to the obligations set forth in Rule 1 1 .
20 The situation is potentially quite different where
inconsistent pleadings are alleged against different defendants
in different courts. Such conduct runs the risk of a plaintiff
obtaining a double recovery and of inconsistent judgments based
on the same factual and legal issues. Nevertheless, for the
following reasons I find that Welts & White did not violate Rule
11 in this case by filing an inconsistent adversarial complaint
in bankruptcy court.
First, Welts & White did not initiate the action in
bankruptcy court. The Knights initiated the bankruptcy proceeding
when they filed a voluntary petition under Chapter 7 of the
Bankruptcy Code. Welts & White was merely intervening in the
bankruptcy proceeding in an effort to preserve Kodak's claim and
potential recovery.
Second, Welts & White had sufficient factual support for the forgery claim to petition the bankruptcy court to except that
portion of the Knights' debt from discharge. Put simply, the
factual support for the adversarial complaint was Murphy's
assertion that his signature on the guaranty agreement was
forged, without his authorization or consent, coupled with Ken
Knight's statement that he signed Murphy's name on the guaranty
agreement.
21 Third, Welts & White was not seeking separate judgments in
different courts based on the same factual and legal issues.
Quite the contrary is true. On March 5 , 1993, Welts & White
filed a motion to consolidate the Knights' bankruptcy action with
the action still pending in this court against Murphy. I granted
the consolidation, noting the common questions of law and fact
and the risk of contradictory decisions based on the same factual
and legal issues.
Fourth, the circumstances demanded that Welts & White take
prompt action to protect its client. As stated above, at the
time Ken Knight claimed that he signed Murphy's name to the
guaranty agreement, both he and his wife were in the midst of a
Chapter 7 bankruptcy proceeding. The debt the Knights owed to
Kodak was likely to be discharged by the appointed trustee. That
would have left Murphy as the only person from whom Kodak could seek recovery. Once Welts & White learned of Ken Knight's claim,
it was were faced with the inconsistent assertions of Murphy and
the Knights. On the one hand, Murphy claimed that the signature
on the guaranty agreement was a forgery, signed without his
knowledge or consent. On the other hand, the Knights asserted
that the guaranty agreement was signed with the belief that they
had the authority to do s o , that Murphy knew he was financially
22 backing "All In One Hour Photo," and that Murphy was later told
that Ken Knight signed his name to the guaranty agreement and
Murphy did not object to that action. The disparity between
Murphy's and the Knights' claims is obvious.
As a result of the inconsistent statements made by Murphy
and the Knights, Welts & White was correspondingly forced into
the position of asserting inconsistent pleadings in order to
preserve Kodak's claim against Murphy and the Knights, either
individually or jointly. By seeking to have the Knights' debt
excepted from discharge in bankruptcy court, Welts & White was
merely acting as an effective advocate for its client by seeking
to maintain a viable cause of action and a viable means of
recovery against the appropriate defendants.
Fifth, the adversarial complaint demonstrates Welts &
White's reasonable inquiry into and informed assessment of the law. Generally, under bankruptcy law a debt otherwise
dischargeable under Chapter 7 of the Bankruptcy Code will be
excepted from discharge if the debt was obtained by false
pretenses, a false representation, or actual fraud. See
Bankruptcy Reform Act, 11 U.S.C. § 523(a)(2)(A) (1978). Clearly,
the relief sought by Welts & White in bankruptcy court was based
on an informed assessment of the applicable law and was supported
23 by the available facts.
I find that Welts & White did not violate Rule 11 by filing
an inconsistent pleading in Bankruptcy Court. Welts & White's
filings were well grounded in fact and law and there is no
evidence that said pleading was interposed for an improper
purpose.
2. Continued Pursuit of Claim
In the present action Murphy also asserts that Welts & White
continued to pursue the genuineness of the signature claim when
it knew or should have known that the claim was frivolous.
Murphy contends that this, coupled with the fact that Kodak had
the financial strength to delay and prolong the litigation, is
evidence of Kodak's improper purpose. Moreover, Murphy contends
that Kodak's objections to his motions for summary judgment and
dismissal were interposed for the sole purpose of forestalling an early adjudication of the litigation. In support of this
assertion, Murphy refers to the fact that Kodak terminated the
litigation by accepting a dismissal of the case with prejudice.
As already set forth in this order, I find that the
pleadings filed by Welts & White were not frivolous. Welts &
White initiated the claim against Murphy after it made a
reasonable inquiry into the facts and the law supporting its
24 claim. Moreover, as Kodak's discovery uncovered additional
factual support, it reevaluated its case and plead alternative
theories as to Murphy's liability. Although Kodak's claims
against Murphy were weak, they did not amount to a violation of
Rule 1 1 .
In addition, Kodak's acceptance of a dismissal with
prejudice, although a factor in determining the existence of an
improper purpose, is not itself determinative of the issue. Like the imposition of costs, attorney's fees, and contempt sanctions, the imposition of a Rule 11 sanction is not a judgment on the merits of an action. Rather, it requires the determination of a collateral issue: whether the attorney has abused the judicial process, and, if s o , what sanction would be appropriate.
Cooter & Gell, 496 U.S. at 396. In reviewing the conduct of this case and the pleadings, I find no evidence that indicates that
Kodak initiated or pursued its claims against Murphy for any
improper purpose. Murphy has failed set forth any argument that
persuades this court otherwise.
D. Sanctions Against Kodak
Rule 11 sanctions may be imposed on represented parties.
Business Guides, Inc. v . Chromatic Communications Enters., Inc.,
25 498 U.S. 533, 548 (1990); Navarro-Ayala, 968 F.2d at 1425.
Pursuant to Rule 1 1 , a party who signs a pleading, motion, or
other paper has an affirmative duty to conduct a reasonable
inquiry into the facts and the law before filing. Business
Guides, 498 U.S. at 551; Navarro-Ayala, 968 F.2d at 1425. Like
an attorney, the standard by which a party will be judged is one
of objective reasonableness under the circumstances that existed
at the time the pleading, motion, or other paper was filed.
Business Guides, 498 U.S. at 551; Navarro-Ayala, 968 F.2d at
1425.
In this case, Murphy requests this court to impose sanctions
on Kodak, however, he fails to allege or direct this court to any
conduct on the part of Kodak or its employees which constitutes a
violation of Rule 1 1 . The only document signed by an employee of Kodak and filed in this case, that this court is aware o f , is the
affidavit of Kenneth W . Miller, filed July 7 , 1992 in support of
Kodak's objection to Murphy's motion for summary judgment.
Murphy neither contends, nor do I find, that this affidavit
violated Rule 1 1 .
Based on my review of the record and Murphy's failure to
persuade this court otherwise, I find that Kodak did not engage
in any conduct violative of Rule 11 and as such, is not subject
26 to sanctions.
E. Sanctions For Abuse of Process
As a result of the findings set forth above, Murphy's
request that Welts & White and Kodak be sanctioned for abuse of
the judicial process is denied as moot.
III. CONCLUSION
Based on the foregoing, I find the neither Welts & White,
nor Kodak violated the requirements of Fed. R. Civ. P. 1 1 .
Accordingly, Defendant Daniel T . Murphy's motion for sanctions
(document n o . 64) is denied.
Paul Barbadoro United States District Judge
February 2 3 , 1994
cc: Byron L . Sainsting, Esq. Jack S . White, Esq. Marsha V . Kazarosian, Esq.