Resolution Trust Corp. v. Bright

• Court: Court of Appeals for the Fifth Circuit
• Decided: November 9, 1993
• Docket: 92-1978
• Status: Published

Opinion

United States Court of Appeals,

Fifth Circuit.

No. 92-1978.

RESOLUTION TRUST CORPORATION, In its Corporate Capacity, Plaintiff,

v.

H.R. "BUM" BRIGHT, et al., Defendants-Appellees,

Hopkins & Sutter, Peter F. Lovato III and Thomas D. Graber, Appellants.

Nov. 9, 1993.

Appeal from the United States District Court for the Northern District of Texas.

Before JONES and DeMOSS, Circuit Judges, and KAZEN, District Judge.1

KAZEN, District Judge:

This appeal arises out of a lawsuit filed in May 1992 by the Resolution Trust Corporation

("RTC") against H.R. "Bum" Bright and James B. "Boots" Reeder, based on their alleged misconduct

in connection with activities at Bright Banc Savings Association, Dallas ("Bright Banc").

Approximately two months after the suit was filed, appellees moved for a protective order and

sanctions against the RTC for the manner in which its attorneys, Peter F. Lovato III and Thomas D.

Graber, interviewed a former Bright Banc employee. After four days of hearings on the motion for

sanctions, the district court issued an oral order on October 19, 1992, finding that the attorneys,

appellants herein, impermissibly attempted to persuade the witness to sign an affidavit containing

statements which the witness had not previously told appellants. The order disbarred the attorneys

from practicing before the district judge and disqualified the attorneys' law firm, Hopkins & Sutter,

from further representing RTC in the underlying case. In a December 28, 1992 written order, the

court assessed attorneys' fees against the law firm for costs incurred by appellees in prosecuting the

sanctions motion.2 Appellants timely appealed the district court's decision. We reverse.

1 District Judge of the Southern District of Texas, sitting by designation. 2 Because appellants' Notice of Appeal had already been filed when the district court issued its opinion, the court stayed the operation of the award of attorneys fees pending disposition of the appeal. A. Factual Background

On May 14, 1992, the RTC filed suit in federal district court charging appellees Bright and

Reeder, as shareholders, directors and officers of Bright Banc, with fraud, negligence, and breach of

fiduciary and other duties owed to the bank's shareholders. As part of their pre-filing investigation

of the case, attorneys Lovato and Graber conducted several interviews—all voluntary—with Barbara

Erhart, formerly the Senior Vice President of Finance Support at Bright Banc. Erhart had worked

closely with defendant Reeder and had contact with defendant Bright on "critical matters."

The primary focus of the Erhart interviews was the method Bright Banc used to calculate the

amount of non-cash assets it had converted to cash for a December 1986 report on the bank's

financial health to the Federal Home Loan Bank Board ("FHLBB"). The RTC attorneys, including

Lovato and Graber, questioned Erhart extensively about who made and authorized the computations

used in the report. At the conclusion of the third interview, Lovato and Graber asked Erhart to return

to their office the next day—April 9, 1992—to review and sign an affidavit summarizing what she

had told them in the course of the prior interviews.

When Erhart arrived at the office of Hopkins & Sutter on April 9th, she was not immediately

given the affidavit. Instead, the attorneys quest ioned her again about the cash conversion

calculations. As Lovato and Graber spoke to Erhart, they made some last-minute changes to the

draft. The changes were incorporated into a revised draft which Graber then presented to Erhart.

He warned her that it "contained a couple of things [they hadn't] discussed with [her]," but which the

attorneys nevertheless believed to be true. Erhart was instructed to read the affidavit "very carefully."

Erhart made several changes to the draft affidavit. Some related only to semantical

differences, while others reflected Erhart's disagreement with substantive claims in the affidavit.

Lovato and Graber questioned Erhart extensively about the changes she made. During this

questioning, the attorneys asked Erhart whether she could reword some of her changes to emphasize

that Bright and Reeder were more directly involved in the decision to use the controversial cash

conversion computations. Erhart declined because she did not have personal knowledge of the

statements the attorneys wanted her to include in her affidavit. With respect to som e of the statements in the affidavit, the attorneys were not content to accept Erhart's initial refusal to revise

her changes. In an effort to have Erhart see things their way, Lovato and Graber described their

understanding of how certain events transpired at Bright Banc, presented Erhart with independent

evidence to support this interpretation of events, and aggressively challenged some of Erhart's

assumptions about Bright and Reeder. After making their case for further revisions, Lovato and

Graber asked Erhart whether she believed them and whether she was now convinced that their

version of certain events was correct. Erhart, unconvinced, declined to alter the initial changes she

had made to the draft affidavit.

When it was clear to the attorneys that Erhart would not sign a statement agreeing with the

attorneys' version of some of the disputed events at Bright Banc, they incorporated Erhart's

handwritten changes into a new draft affidavit. Erhart read this draft and made a few changes which

were then included in a third draft. Erhart read and approved this version of the affidavit, signed it

and left the offices of Hopkins & Sutter.

Approximately one month later, Erhart told appellees' attorneys that she had given a statement

to appellant-attorneys regarding some of the transactions at issue in the underlying law suit.

Appellees' counsel then arranged for Erhart to give them an ex parte statement on June 12, 1992

about her meetings with Lovato and Graber. This statement was transcribed by the court reporter

but never signed by Erhart. However, she later adopted portions of it during testimony before Judge

Kendall on August 9, 1992.

In that testimony, Erhart stated, among other things, that she did not think Lovato and Graber

were asking her to say something she did not believe but rather were trying to determine if she could

see the case the way they did. She denied being harassed or intimidated and expressed the view that

"they were doing their job, just like everybody else." The district court essentially disregarded this

testimony, finding it contrary to Erhart's earlier ex parte statement given to appellees' attorneys, and

concluding that the change must have been the result of "obvious job pressure." Erhart's earlier

statement clearly has a different tone from her subsequent court testimony. For example, she earlier

described Lovato as having been particularly aggressive in attempts to persuade her to agree with appellants' version of certain events, "almost like browbeating me." Nevertheless even in her ex parte

statement, Erhart indicated that Lovato and Graber were not trying to have her change facts but

rather to agree with a different "interpretation" or "slant" from the facts.

B. The Motion For Sanctions

On July 15, 1992, Bright and Reeder moved for sanctions and a protective order against the

RTC based on Lovato and Graber's conduct during the Erhart interviews. The motion alleged that

the manner in which the RTC's attorneys interviewed Erhart violated Texas Disciplinary Rules of

Professional Conduct 3.04, 4.01(a) and 4.04(a) and probably violated 18 U.S.C. §§ 1503, 1512.

Appellees also called upon the court to exercise its "inherent powers" to sanction the RTC for

intimidating Erhart. The motion asked the court to prevent the RTC from using any notes or

statements obtained through the Erhart interviews, to order the RTC not to make any further contact

with Erhart, and to award attorneys fees to Bright and Reeder for their efforts in bringing and

prosecuting the motion for sanctions.

On July 20, 1992, the district court ordered that both sides refrain from contacting Erhart

while the sanctions motion was pending. Hearings on the sanctions motion were held over the course

of several days from August to October 1992.

C. The District Court's Decision

The district court issued an oral ruling on the motion for sanctions on October 19, 1992. This

ruling was further clarified in separate written orders issued on October 23 and December 28, 1992.

The court found that Lovato and Graber "knowingly attempted to get a key witness ... to

commit to a sworn statement that they knew contained assertions of fact she had not made or told

them previously in matters highly relevant to the plaintiff's civil claim." It found that the attorneys

were "going to try to talk her into" those statements. The Court was particularly troubled because

the draft affidavit given to Erhart added matters only in areas "that established or buttressed the

[RTC's] claims." The court characterized the attorneys' actions concerning the draft affidavit as

"tampering with" or attempting to "manufacture" evidence to "cause, or aid in, Defendants' downfall."

Based on its inherent power to regulate the conduct of attorneys, Judge Kendall disbarred Lovato and Graber from practicing before him. He assessed $110,000 in attorneys fees against

Hopkins & Sutter for expenses incurred by Bright and Reeder in the prosecution of the sanctions

motion.3 Pursuant to its authority under Local Rule 13.2 (N.D.Tex.),4 the court removed Hopkins

& Sutter from further representing the RTC in the underlying action. Finally, it ordered the firm not

to charge the RTC for defending against the sanction motion. No sanctions were assessed against

the RTC. Lovato, Graber and Hopkins & Sutter timely appealed.5

D. Disbarment of Lovato and Graber

The district court disbarred attorneys Lovato and Graber from practicing before it pursuant

to the court's inherent powers to discipline attorneys. It is beyond dispute that a federal court may

suspend or dismiss an attorney as an exercise of the court's inherent powers. In re Snyder, 472 U.S.

634, 643-644, 105 S.Ct. 2874, 2880, 86 L.Ed.2d 504 (1985); Matter of Thalheim, 853 F.2d 383,

389 (5th Cir.1988). However, before sanctioning any attorney under its inherent powers, the court

must make a specific finding that the attorney acted in "bad faith." Thalheim, 853 F.2d at 389. The

United States Supreme Court has held that a court's imposition of sanctions under its inherent powers

is reviewable under the abuse-of-discretion standard. Chambers v. NASCO, Inc., --- U.S. ----, ----,

3 The court explained that the award of attorneys fees was not intended as a sanction, but that it "flows from equity in light of the Court's inherent power or the purpose of reimbursement rather than sanction." December 28, 1992 Order at 3 n. 1. 4 Local Rule 13.2 of the U.S. District Court For the Northern District of Texas states, in pertinent part,

Any member of the bar of this Court ... who proves to be incompetent to practice before this Court because of unethical behavior ... is subject to revocation of admission to practice in this District and to other appropriate discipline, after such hearing as the Court may direct in each particular instance. 5 The notice of appeal purports to appeal all sanctions imposed in the Order of December 28, 1992. However, an order disqualifying counsel in a civil case is not a final judgment on the merits of the litigation and does not fall under the "collateral order" exception. Richardson-Merrell, Inc., v. Koller, 472 U.S. 424, 430, 105 S.Ct. 2757, 2761, 86 L.Ed.2d 340 (1985). Appellants' brief generally attacks the "sanctions" imposed by the trial court but does not specifically mention the disqualification order. Their Statement of Jurisdiction refers to counsel "who have perforce withdrawn from the case." Appellees' Statement of Jurisdiction asserts that appellants "have not attempted to appeal from that portion of the order disqualifying them as counsel to the RTC." Appellants have not challenged that assertion. We conclude that the disqualification sanction is not before us on this appeal. The remaining three sanctions are ripe for appeal. Markwell v. County of Bexar, 878 F.2d 899 (5th Cir.1989). 111 S.Ct. 2123, 2138, 115 L.Ed.2d 27 (1991). A court abuses its discretion when its ruling is based

on an erroneous view of the law or on a clearly erroneous assessment of the evidence. Cooter & Gell

v. Hartmarx Corp., 496 U.S. 384, 405, 110 S.Ct. 2447, 2461, 110 L.Ed.2d 359 (1990). In the

specific context of a disqualification motion, this circuit reviews fact findings for "clear error" while

"carefully examining" the district court's application of relevant ethical standards. In re American

Airlines, Inc., 972 F.2d 605, 609 (5th Cir.1992), cert. denied --- U.S. ----, 113 S.Ct. 1262, 122

L.Ed.2d 659 (1993).

Because disbarment is a quasi-criminal proceeding, any disciplinary rules used to impose this

sanction on attorneys must be strictly construed, resolving ambiguities in favor of the person charged.

Thalheim, 853 F.2d at 388. The Texas Disciplinary Rules of Professional Conduct do not expressly

apply to sanctions in federal courts, but a federal court may nevertheless hold attorneys accountable

to the state code of professional conduct. See In re Snyder, 472 U.S. at 645 n. 6, 105 S.Ct. at 2881

n. 6; In re Finkelstein, 901 F.2d 1560, 1564 (11th Cir.1990).

The district court failed to make specific findings of how appellants violated the Disciplinary

Rules. In its oral findings, the court concluded that Lovato and Graber engaged in "inappropriate

conduct, conduct that probably violates the DRs, unethical conduct, as well as a probable violation

of the obstruction of justice statutes." We shall assume that the district court's comments referred

to the Disciplinary Rules invoked by Appellees in their motion for sanctions.

The sanctionable conduct found by the district court was the attorneys' inclusion of

statements in draft affidavits that had not been previously discussed with Erhart, combined with the

attorneys' attempts to persuade Erhart to agree with their understanding of how certain events

transpired at the bank. Placing statements in a draft affidavit that have not been previously discussed

with a witness does not automatically constitute bad-faith conduct. See U.S. v. Brand, 775 F.2d

1460, 1469 (11th Cir.1985) (giving witness affidavit with statements not previously discussed not

obstruction of justice). It is one thing to ask a witness to swear to facts which are knowingly false.

It is another thing, in an arms-length interview with a witness, for an attorney to attempt to persuade

her, even aggressively, that her initial version of a certain fact situation is not complete or accurate. Disciplinary Rules 3.04(b) and 4.01(a) concern the former circumstance, not the latter. The district

court never found that appellants asked Erhart to make statements which they knew to be false.

Indeed, the district court pretermitted any consideration of the truth of the draft affidavits. Appellees

nevertheless argue that because appellant attorneys attempted to persuade Erhart to adopt certain

statements which she had not expressly made and which she refused to adopt, the attorneys thereby

were either making or urging t he making of "false" statements in violation of DRs 3.04(b) and

4.01(a). We disagree. The district court characterized the attorneys' behavior as "manufacturing"

evidence, but there is no indication that the attorneys did not have a factual basis for the additional

statements included in the draft affidavit. See Koller v. Richardson-Merrell, 737 F.2d 1038, 1058-59

(D.C.Cir.1984), vacated on other grounds 472 U.S. 424, 105 S.Ct. 2757, 86 L.Ed.2d 340 (1985).

On the cont rary, appellants have attempted to demonstrate in a detailed chart that the contested

portions of the affidavit were based either on their notes of interviews with Erhart or on evidence

from other sources (e.g., internal bank memorandum).

We recognize that the Texas Disciplinary Rules are not the sole authority governing a motion

to disqualify in federal court; rather, such a motion must be determined by standards developed under

federal law. In re Dresser Industries, Inc., 972 F.2d 540, 543 (5th Cir.1992). Our source for

professional standards has been the canons of ethics develo ped by the American Bar Association.

Id. The district court opinion, however, makes no reference to any national canons which would add

to the analysis here, nor do appellees. A court obviously would be justified in disbarring an attorney

for attempting to induce a witness to testify falsely under oath, see Thalheim, 853 F.2d at 390 (citing

U.S. v. Friedland, 502 F.Supp. 611, 619 (D.N.J.1980), aff'd. 672 F.2d 905 (3d Cir.1981)), but this

record does not support the conclusion that Lovato and Graber engaged in such behavior. While the

attorneys were persistent and aggressive in presenting their theory of the case to Erhart, they

nevert heless made sure that Erhart signed the affidavit only if she agreed with its contents. The

attorneys never attempted to hide from Erhart the fact that some statements were included in draft

affidavits that had not been discussed with her previously. Instead, they brought the statements to

her attention and warned her to read them carefully. Additionally, Lovato and Graber never claimed to be neutral parties. Erhart knew that these attorneys were advocates for a particular position, and

she was also in communication with attorneys who were advocating the contrary position. Were

Erhart giving testimony at a deposition or at trial, the attorneys for either side would not be required

to accept her initial testimony at face value but would be able to confront her with other information

to challenge her testimony or attempt to persuade her to change it.

Appellees also alleged that RTC attorneys violated Disciplinary Rule 4.04(a), which prohibits

an attorney from burdening a third party without a valid "substantial purpose" or violating a third

party's legal rights. The district court findings do not reveal that Lovato and Graber committed either

wrong. The attorneys' sometimes laborious interviews with Erhart were conducted with the goal of

eliciting an accurate and favorable affidavit from a key witness in the underlying case. Additionally,

the district court made no findings that the interviews violated Erhart's legal rights, nor does the

record contain any evidence to support such a finding.

E. Sanctions Against The Law Firm

The district court ordered the firm of Hopkins & Sutter to pay $100,000 in attorneys' fees

to appellees for their prosecution of the sanction motion and also restrained the firm from charging

the RTC for defending against the motion. The court assessed attorneys' fees under its inherent

power to do so against counsel who have conducted themselves "in bad faith." Chambers, --- U.S.

at ----, 111 S.Ct. at 2133. It found that Lovato and Graber acted in bad faith because they tampered

with or attempted to manufacture evidence and concluded that "a law firm may not escape the

consequences of misconduct committed by one of its attorneys." The Supreme Court in Chambers

described three except ions to the so-called "American Rule," which prohibits fee shifting in most

cases. The exception pertinent to the instant case is that a court may assess attorney's fees when a

party acts "in bad faith, vexatiously, wantonly, or for oppressive reasons." --- U.S. at ----, 111 S.Ct.

at 2133. The Supreme Court compared this exception to the requirement under Rule 11,

Fed.R.Civ.P., providing that the signer of a paper warrants 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.

Id. at n. 10. We understand the district court's finding of "bad faith" to be grounded exclusively on the proposition that attorneys Lovato and Graber wrongfully tried to tamper wi th or manufacture

evidence. Because we have already found that the record does not support that conclusion, t he

assessment of attorney's fees cannot be sustained.

The trial court did not elaborate, either orally or in writing, on its order restraining Hopkins

& Sutter from charging the RTC for time spent defending the motion for sanctions. Neither side has

specifically addressed that sanction on appeal. Nevertheless, in view of the conclusions we have

heretofore announced, there would likewise be no justification for this sanction.

F. Conclusion

We conclude that the district court abused its discretion when it issued its sanctions ruling

against appellants.6 We REVERSE and REMAND for proceedings not inconsistent with this opinion.

6 Appellants advance several additional grounds for the reversal of the district court's decision, including due process violations and an impermissible ex parte contact between the district court judge and an FBI agent. We need not reach these issues.