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Baker Industries Inc. v. Cerberus Limited Cravath

June 14, 1985

BAKER INDUSTRIES, INC. APPELLEE
v.
CERBERUS LIMITED CRAVATH, SWAINE & MOORE, APPELLANT



On Appeal from the United States District Court for the District of New Jersey (D.C. No. 82-0526).

Garth and Higginbotham, Circuit Judges and McGlynn, District Judge.*fn*

Author: Garth

Opinion OF THE COURT$GARTH, Circuit Judge:

Cravath, Swaine, and Moore (Cravath) here appeals an order of the district court taxing a portion of Baker Industries' attorney's fee against them. Concluding that the record amply supports the district court's finding that Cravath's conduct in the course of representing Cerberus, Ltd. in this case constituted bad faith, we affirm the award of attorneys' fees under 28 U.S.C. § 1927.

I.

The district court ordered Cravath, Swaine, and Moore to pay Baker Industries, Inc. the legal fees which Baker incurred by reason of certain aspects of Cravath's conduct in representing Cerberus Limited in a patent licensing suit. The specific conduct of which Baker complained was Cravath's filing of objections to the legal conclusions of a special master*fn1 who was appointed at the district court's suggestion, pursuant to a stipulation of the parties. The stipulation into which Baker and Cerberus entered was arrived at after an extended colloquy between both parties and the court. The terms of the parties' stipulation are spread on the transcript record of the hearing held October 14, 1982.

In sum, the Baker-Cerberus stipulation provided as follows: (1) that the issues pending before the district court relating to an injunction against Baker's sale of smoke detectors were to be referred to a referee; (2) that the issues pending in arbitration, relating to breach and termination of the underlying contract, were to be referred to the same referee; and (3) that litigation between the parties then pending in Boston and New York was to be stayed pending the referee's determination. In particular, and because of the nature of the contested issues this stipulation barred review by any court of the referee's conclusions of law as well as of fact. Despite this non-appealable feature of the stipulation, Cravath filed with the district court numerous objections to the referee's decision. The district court found that Cravath's action in seeking such review was taken in bad faith, given its stipulation that it would not appeal from the referee's determination.

Cravath in disputing the non-reviewability of the referee's findings and conclusions, relied on precedents which Cravath cited as holding that parties cannot effectively stipulate to shield from review the legal conclusions of a Rule 53 master. Baker Industries disputed Cravath's characterization of the reference to the referee as a Rule 53 proceeding, and the district court agreed with Baker Industries, reading the Rule 53 cases on which Cravath relied, to be inapposite.

A.

The underlying action was brought by Baker Industries, the licensee, to enjoin Cerberus' attempt to terminate a long term patent license for the manufacture of smoke detectors. The merits of the termination were to be settled by arbitration, pursuant to a contractual arbitration clause. Baker's suit was originally brought in New Jersey state court, and then removed to federal court by Cerberus.

The injunctive relief sought by Baker was denied by the district court as being covered by the arbitration clause and thus precluded by that clause. The district court's order was affirmed by this court on appeal. Baker Ind., Inc. v. Cerberus Ltd., 692 F.2d 747 (3d Cir. 1982) (table). Cerberus then counterclaimed to enjoin Baker from selling its smoke detectors, claiming that these issues were not subject to the arbitration clause. Meanwhile, related suits were pending in both New York and Massachusetts.

At the urging of the district court, the parties agreed to refer all the issues before the district court, as well as the portion of the dispute pending before the arbitrators, to a hearing before a neutral party -- a referee -- to be selected by the court. The advantage to be gained by such a reference was the possibility of judicial control over the all of the issues,*fn2 thus concluding all disputes between the parties in one proceeding. The referee was to have power to order discovery. As a condition to 2acceding to the appointment of a referee, the district court required an express agreement of the parties that the referee's decision would be final and not reviewable. Both parties thereupon stipulated "that the findings of fact will be final" and that "the conclusions of law will be final." According to the court:

[Question by Mr. Rosenbaum, counsel for Baker Industries: T]he Master's decision is not reviewable by you[?]

THE COURT: That is right. And if (sic) not reviewable by the United States Court of Appeals for the Third Circuit and not reviewabling (sic) by the Supreme Court of the United States, and not reviewable by the World Court --

It is evident from a reading of the transcript that absent full and complete agreement by the parties to the terms of the stipulation the district court would not have appointed a referee and would not have endorsed the reference procedure agreed to by the parties.

The precise nature of the court's reference is both disputed and the subject of some confusion. Nevertheless, despite the confusion in terminology by both the parties and the court, it is evident that what emerged was a hybrid form of reference -- not a classic Rule 53 master, nor a conventional arbitrator. Rather, the court appointed an impartial referee granting him the powers agreed to by the parties.

To illustrate the confusion that led up to the appointment, we note that the district court repeatedly referred to the referee as a "Master" during the conference, which led to the parties' stipulation. It was in this connection that the district court discussed the Fed. R. Civ. P. 53 provisions relating to Masters.*fn3

From the outset, the parties realized, however, that a true Rule 53 reference was inappropriate, as the district court lacked subject matter jurisdiction over the portion of the dispute covered by the arbitration clause. Indeed, at a hearing on the appointment of the referee, the district court, although referring to the appointee as an arbitrator-master, denied that the reference was to arbitration. "He's not an Arbitrator. The proceeding you are about to go through is not an arbitration." At the same hearing, the court referred to the referee as the "Arbitrator-Master" and to the reference as an "Arbitration-Mastership."

The hybrid character of the reference was recognized by the parties as well. When Baker moved to enforce the referee's favorable report, it moved alternatively to enter judgment on a Master's report and to confirm an arbitration award. The court reacted: "I don't know what you are talking about. There was no arbitration. There was no award." Despite this disclaimer, at the October 14, 1982 stipulation conference, the district court did at one time refer to the reference in terms of arbitration: "The arbitration will, in effect, be shifted to a different forum, one which we can control in terms of the timetable and speed, et cetera and so forth."

B.

After receiving the referee's report, which was unfavorable to Cerberus, despite its earlier stipulation that findings of fact and conclusions of law were to be final and were not to be appealed, Cravath nevertheless filed thirty pages of objections to the report. Cerberus claimed that the objections which it filed with the district court and which appear to be objections raised to findings of fact were not barred by provisions of the stipulation prohibiting appeal because, according to Cerberus, they were based on the referee having exceeded the scope of his reference. Cerberus also contented that "manifest errors of law" are always reviewable. On April 15, 1983, the district court judge held a hearing, at which he indicated that he would not consider objections other than those based on a claim that the scope of the reference had been exceeded.

Cravath then filed a 101 page brief in support of its various objections, insisting that the district court was obliged to exercise review of the referee's findings and conclusions despite its stipulation to forego appeal. Baker filed a 36 page response to Cerberus' objections, and a 43 page response to Cerberus' legal memorandum.

On April 11, 1983, Baker moved to enforce the referee's report and on April 25, 1983, Baker moved for an award of counsel fees pursuant to 28 U.S.C. § 1927. The district court granted both motions. In the district court's opinion, which denied Cerberus any review of the legal issues decided by the referee, the district court implicitly held that the referee was not a Special Master under Rule 53. Rather, according to the district court's opinion. "This court at no time could have delegated to the master the power to decide the controversy between the parties since this court has never had any such power to delegate," Baker Industries, Inc. v. Cerberus, Limited, 570 F. Supp. 1237, 1250 (D.N.J. 1983), and "the only statute which arguably governs judicial review of Mr. Moser's [the referee's] decision is the United States Arbitration Act." Id. at 1251.

The district court judge thus found to be frivolous Cravath's contentions on Cerberus' behalf that the referee's legal conclusions were reviewable, and found that Cravath's conduct in asserting this position was sufficiently vexatious to justify the award of attorneys' fees directly against it under 28 U.S.C. § 1927.*fn4

II.

At the outset, we must determine whether 28 U.S.C. § 1927 requires a finding of bad faith before attorneys' fees may be assessed directly against counsel. The statute itself does not speak explicitly in terms of bad faith. Nevertheless, we conclude that a bad faith finding is required as precondition to the imposition of attorneys' fees under section 1927.

Section 1927 provides for the assessment of sanctions directly against counsel:

§ 1927. Counsel's liability for excessive costs$Any attorney or other person admitted to conduct cases in any court of the United States or any Territory thereof who so multiples the proceedings in any case unreasonably and vexatiously may be required by the court to satisfy personally the excess costs, expenses, and attorneys' fees reasonably incurred because of such conduct.

Courts in other circuits have been uniform in holding that an attorney's bad faith is a necessary predicate to liability under section 1927. E.g., United States v. Blodgett, 709 F.2d 608 (9th Cir. 1983); United States v. Ross, 535 F.2d 346 (6th Cir. 1976). This bad faith requirement is seen necessary to avoid chilling an attorney's legitimate ethical obligation to represent his client zealously:

The power to assess the fees against an attorney should be exercised with restraint lest the prospect thereof chill the ardor or proper and forceful advocacy on behalf of his client. To justify the imposition of excess costs of litigation upon an attorney his conduct must be of an egregious nature, stamped by bad faith that is violative of recognized standards in the conduct of litigation. The section is directed against attorneys who willfully abuse judicial processes.

Colucci v. New York Times Company, 533 F. Supp. 1011, 1014 (S.D.N.Y. 1982) (Weinfeld, J.).

We too read section 1927 to require a showing of actual bad faith before attorneys' fees may be imposed. If it were otherwise, an attorney who might be guilty of no more than a mistake in professional judgment in pursuing a client's goals might be made liable for excess attorneys' fees under section 1927. We do not read the language of section 1927, which explicitly requires "unreasonable" conduct before attorneys' fees may be taxed, to impose such a burden absent actions taken which are tantamount to willful bad faith. But we conclude that before attorneys' fees and costs may be taxed under section 1927, there must be a finding of willful bad faith on the part of the offending attorney.

III.

Having established that attorneys' fees may be imposed only upon a finding of willful bad faith, we now turn to whether such a finding must be explicitly made by the district court, and if not, whether the record will support such an implicit finding. While the court here did not make an explicit bad faith finding in so many words, in light of the entire record and the expressions of the district court judge, who employed the very words of the statute, we are satisfied that the "bad faith" standard that we hold is required under section 1927, is met.

The district court here acknowledged Baker's contention that "Cerberus' objections in the face of the agreement made in open court . . . were filed by Cravath in bad faith," then went on to

find that the objections filed by Cravath on behalf of Cerberus -- have unreasonably and vexatiously multiplied the proceedings. . .

Most of the contentions advanced by Cravath on Cerberus's behalf do not relate to matters which are allegedly outside the scope of the reference. Instead, as our discussion has shown, they involve either challenges to the merits of the master's determinations, which cannot be made given the stipulation, or frivolous contentions that Cerberus did not receive a fair hearing. Cravath contends that it has an ethical duty both to this Court and to its client to urge this Court to review the master's findings. There is no ethical duty, however, to violate a stipulation entered into in open court, and the authority which Cravath contends compelled it do so is apposite only if its attempt to completely distort the nature of the stipulation reached is accepted.

Baker Industries, Inc. v. Cerberus, Limited, 570 F. Supp. at 1259.

Though the district court did not thus make an express finding of "bad faith" in so many words, it did find that the objections filed by Cravath "unreasonably and vexatiously multiplied the proceedings," tracking the language of the statute. The district court also implicitly held that the critical element of willfulness was present. The district court found that Cravath's challenges were directed not to the scope but rather to the merits of the merits of the referee's determination, in blatant violation of its stipulation. It also found that Cravath's position was an "attempt to completely distort the nature of the stipulation reached."

Under these circumstances, little would be gained by remanding this proceeding to the district court for an explicit finding of bad faith when it is clearly evident from the district court's expressions and from the record as a whole, that the district court found, albeit implicitly, Cravath's conduct to be in bad faith. While it is far preferable for the district court to make express findings, rather than remit us to a review of the record, we are convinced from our independent review of the record that the district court's expressions are sufficient to constitute findings satisfying the willfulness and bad faith requirements for an assessment of costs and fees under section 1927.

IV.

The district court's findings are nonetheless subject to our review and must find support in the record. The district court's finding of willfulness on Cravath's part, as a finding of willfulness on Cravath's part, as a finding of fact, is subject to reversal only if erroneous. See Fed. R. Civ. P. 52(a). This standard requires us to pay deference to the district court's interpretation of the factual record before it. Anderson v. City of Bessemer City, North Carolina, 470 U.S. 564, 105 S. Ct. 1504, 84 L. Ed. 2d 518 (1985). Once such a finding is made, the appropriateness of assessing attorneys' fees against counsel under section 1927 is a matter for the district court's discretion. See Mobil Oil Corporation v. Independent Oil Workers Union, 679 F.2d 299 (3d Cir. 1982).

Cravath's position on appeal is quite simple. According to Cravath, (1) the district court appointed the referee pursuant to Fed. R. Civ. P. 53; (2) Cravath's objections to the referee's report were based on the referee's erroneous legal rulings; and (3) a line of cases of other circuits renders invalid any stipulation to shield a Rule 53 master's report from review for erroneous conclusions of law. Cravath contends that its reliance on those cases was reasonable, thus barring a finding of willfulness and bad faith as a matter of law.

We are not persuaded by Cravath's argument: the reference was not made pursuant to Rule 53; Cravath's objections were not soley aimed at the referee's legal conclusions (even if such conclusions could be reviewed under the stipulation); and the cases cited by Cravath do not establish the principle of absolute reviewability upon which Cravath relies.

A.

As we have earlier observed, the precise nature of the reference in this case is the subject of some confusion. The district court finally characterized it as an "arbitration-mastership." While Rule 53 was discussed during the conference that culminated in the stipulation of reference, it is clear that no Rule 53 reference could have been made, since, due to the arbitration clause, the district court lacked subject matter jurisdiction over the entire controversy to be referred.

All parties to the stipulation were aware of this fatal defect in any attempt Rule 53 reference, yet they forged ahead to create their own hybrid reference the Rules. Having knowingly and voluntarily gone outside the Rules to create the reference, Cravath may not in good faith seek to rely on a rule (Rule 53(e)(4)*fn5 to challenge the results of the reference to which it had consented. Cravath agreed to an unorthodox protocol under which legal conclusions of the referee were not to be challenged. It cannot thereafter change the protocol to which it had agreed.

B.

Cravath characterizes its lengthy objections as: (1) challenging findings outside the scope of the referee's authority; and (2) challenging erroneous conclusions of law which it claims cannot be insulated from review under Rule 53. Neither of these characterizations can be supported.

By their own terms, Cravath's objections to the referee's report were directed to "separate clearly erroneous and unsupportable assertions of fact" in the Report. Objections of Cerberus, Ltd. to the Report of Special Master Richard G. Moser (Objections) at p. 4. The district court found, and we agree, that many, if not the vast majority, of the objections were not relevant to the scope of the reference or the scope of the referee's authority. The objections, for the most part, challenged findings as being contrary to evidence or discussed findings relevant to the merits. E.g. Objections at p. 11 (Finding 7 challenged as contrary to Baker's answers to interrogatories); Objections at 21 (statement in chronology that Baker attempted to terminate contract despite "fact [that] there is no evidence . . . that Cerberus sought to terminate the agreement."). Some objections dealt with the improper admission of evidence and challenged findings which were predicated upon that evidence. E.g. Objections at 30 (admission of testimony that no smoke detectors had failed safety tests, leading to inference that they passed).

We cannot accept Cravath's characterization of its objections as permissible objections which would not offend Cravath's stipulation that it would not appeal the referee's decision. Moreover, even were we to accept Cravath's contention that conclusions of law may not be insulated from review in this hybrid situation (an argument which we do not accept) we nevertheless are not ...


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