UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT
October 25, 1985
EAVENSON, AUCHMUTY & GREENWALD, A PENNSYLVANIA PROFESSIONAL CORPORATION,
MICHAEL HOLTZMAN, ET AL. INDIVIDUALLY AND AS TRUSTEE FOR GIBSON, N.V.; GIBSON, N.V.: A NETHERLANDS ANTILLES CORPORATION; JACQUES TREMPONT, INDIVIDUALLY AND AS TRUSTEE FOR GIBSON, N.V.; CLAUDE A. ANTILLE, INDIVIDUALLY AND AS A MANAGING DIRECTOR OF GIBSON, N.V.; JOHN DOE REPRESENTING ALL OF THE PARTIES IN INTEREST OF GIBSON, N.V.; CHRISTOFFER SMEETS, INDIVIDUALLY AND AS DIRECTOR OF CURACAO CORP. CO. N.V.; EUGENE BRUINENDAEL, INDIVIDUALLY AND AS DIRECTOR OF CURACAO CORP. CO. N.V.; HENRICUL DE ROOID, INDIVIDUALLY AND AS DIRECTOR OF CURACAO CORP. CO. N.V.; CORNELIUS LIND, INDIVIDUALLY AND AS DIRECTOR OF CURACAO CORP. CO. N.V. V. EDWARD H. GREENWALD, SR., ET AL., EDWARD H. GREENWALD, JR., WILLIAM SUMNER SCOTT, AND LEBON WALKER, THIRD-PARTY DEFENDANTS WILLIAM SUMNER SCOTT, APPELLANT
On Appeal from the United States District Court for the Western District of Pennsylvania (D.C. Civil No. 84-848).
Present HIGGINBOTHAM and BECKER, Circuit Judges, and LACEY, District Judge*fn*
BECKER, Circuit Judge.
This case presents the question whether we have appellate jurisdiction over an order of a district court imposing a monetary sanction against an attorney pursuant to Fed. R. Civ. P. 11 where the sanctionee has since withdrawn his appearance in favor of substituted counsel and the district court has not yet entered a final judgment in the underlying action. For the reasons that follow, we conclude that the district court's order is appealable as a collateral order under 28 U.S.C. § 1291 (1982). We further conclude that the district court's ruling upon which the sanction order was based was ambiguous; hence, the imposition of sanctions upon counsel for failing to conform to the court's understanding of the order constituted an abuse of discretion. We therefore reverse.
For this court to entertain the present appeal, the jurisdictional requirements of 28 U.S.C. § 1291 must be met.*fn1 Section 1291 provides that courts of appeal may review only "final" decisions of the district courts. The Supreme Court has, however, established a narrow exception to the rule of finality. See Cohen v. Beneficial Industrial Loan Corp., 337 U.S. 541, 69 S. Ct. 1221, 93 L. Ed. 1528 (1949). Under Cohen and its progeny, "a decision of a district court is appealable if it falls within 'that small class [of pre-judgment orders] which finally determine claims of right separable from, and collateral to, rights asserted in the action, too important to be denied review and too independent of the cause itself to require that appellate consideration be deferred until the whole case is adjudicated.'" Mitchell v. Forsyth, 472 U.S. 511, 105 S. Ct. 2806, 86 L. Ed. 2d 411 (1985) (citing Cohen, 337 U.S. at 546, 69 S. Ct. at 1225); Richardson-Merrell, Inc. v. Koller, 472 U.S. 424, 105 S. Ct. 2757, 86 L. Ed. 2d 340 (1985). For an order to be collateral, therefore, it must meet the following three-part test: the challenged order must "conclusively determine the disputed question, resolve an important issue completely separate from the merits of the action, and be effectively unreviewable on appeal from a final judgment." Coopers & Lybrand v. Livesay, 437 U.S. 463, 468, 98 S. Ct. 2454, 2458, 57 L. Ed. 2d 351 (1978). Construing the collateral order doctrine narrowly, we have required that each of the three independent requirements be met before appellate review is permitted. Metex Corp. v. ACS Industries, Inc., 748 F.2d 150, 153 (3d Cir. 1984); Lusardi v. Xerox Corp., 747 F.2d 174, 177 (3d Cir. 1984); Gross v. G.D. Searle & Co., 738 F.2d 600, 602 (3d Cir. 1984); Yakowicz v. Commonwealth of Pennsylvania, 683 F.2d 778, 783 (3d Cir. 1982). This showing is necessary in order to further the important congressional goal of avoiding piecemeal litigation. Gross, 738 F.2d at 604.
The sanctions order under appeal in this case was entered on October 5, 1984, when the district court granted the defendant's motion for attorneys fees and costs under Rule 11*fn2 and imposed sanctions against appellant William Sumner Scott, Esquire, personally in the amount of $1,642.50.*fn3 Appellant promptly withdrew as counsel for plaintiff Eavenson Auchmuty & Greenwald, Inc., on whose behalf he had filed and litigated to that point a suit for defamation and tortious interference with business against a number of foreign defendants. Scott then filed a motion for new trial or for alternative relief and stay pursuant to Fed.R.Civ.P. 62(b) and (d), which was denied by the district court on October 16, 1984. On October 30, 1984, he filed a notice of appeal. Eavenson Auchmuty & Greenwald then obtained new counsel and the underlying action continued to be litigated in the district court. Appellant is no longer associated with the case in any capacity.*fn4
Given these facts, this present appeal presents a jurisdictional question of first impression in this court. In a similar case, Eastern Maico Distributors v. Maico-Fahrzeugfabrik, 658 F.2d 944 (3d Cir. 1981), we declined to exercise jurisdiction over an appeal from a non-final order of the district court pursuant to Fed.R.Civ.P. 37*fn5 which imposed a monetary sanction against the defendant's attorney personally for filing repeated and dilatory requests for the production of documents. However, the order appealed in Eastern Maico clearly failed to satisfy two of the three Cohen criteria. First, the sanctioned activity was not completely collateral to the underlying action; in order to address the question of whether the documents requested were truly relevant, we would have had to examine the claims underlying the litigation and reach some conclusions as to the relative importance of the material repeatedly requested by the appellant. Second, the sanction order could have been effectively reviewed on appeal from final judgment, since the parties to the order would still have been before the court and would still have retained the same interest in challenging the order. 658 F.2d at 947.
In contrast, there can be no dispute that the first two prongs of the Cohen test are met in this appeal. The sanctions order challenged by Scott finally and conclusively determines the sanctions issue, and the resolution thereof is completely separate from the merits of the case as our discussion of the sanctions order, see discussion infra at part II.B., will make clear.*fn6 What is at issue therefore is the effective reviewability of the issue on appeal from final judgment, and, on that score, the circumstances which compelled our decision in Eastern Maico are absent in the case at bar.
We must determine, therefore, whether the appeal brought by Scott meets the third requirement for collateral orders -- that the sanctions order would be effectively unreviewable on appeal from a final order in the litigation period. We note first that the circumstances that compelled our conclusion in Eastern Maico, that effective appellate review of the Rule 37 order would be possible following final judgment, are absent in this appeal. Unlike Eastern Maico, where the appeal was taken by both the sanctioned attorney and the party, the instant appeal is taken only by the sanctioned attorney, who has since withdrawn as counsel in the underlying action. Because appellant Scott is no longer connected with the merits of the case, he has an immediate interest in challenging the sanction which is not shared by the parties to the suit or by counsel to a party. First, the possibility exists that appellant's former client may ultimately prevail on the merits, or settle the case; in either of those situations, it is not clear that appellant would be able to appeal from final judgment. Second, it is quite possible, even likely, that appellant, as a non-party, may be unaware that the suit has been terminated so as to be able to filed a timely appeal. Thus, appellant might never be able to receive any appellate review of the sanctions order if he is denied that opportunity now.
Based upon similar considerations, the Seventh Circuit recently accepted the proposition that an order assessing attorney's fees against a party's former counsel was effectively unreviewable on appeal from final judgment, and that, provided the other two requirements of Cohen were satisfied, such a sanction could be immediately appealed by counsel as a collateral order. See Knorr Brake Corp. v. Harbil, Inc., 738 F.2d 223 (7th Cir. 1984). We find the reasoning of the Seventh Circuit, which is limited to a sanction order against a party's former counsel who has withdrawn from representation at the time of appeal, to be persuasive.
A conclusion that the Rule 11 sanction order against Scott is an appealable collateral order is also supported by prior decisions of this court, establishing the principle that contempt sanctions against non-parties may be appealed immediately. In Eastern Maico, we stated that
in civil contempt proceedings or Rule 37(b) sanctions against a non-party, even against an attorney to or an officer of a party, an appeal generally need not wait until final judgment in the case as a whole. See In re Fish & Neave, 519 F.2d 116 (8th Cir. 1975) (attorney may appeal civil contempt sanction); David v. Hooker, Ltd., 560 F.2d 412, 416-17 (9th Cir. 1977) (officer of party may appeal Rule 37(b) sanction for violation of discovery order).
658 F.2d at 949. Other decisions, relying upon Alexander v. United States, 201 U.S. 117, 26 S. Ct. 356, 50 L. Ed. 686 (1906), have held that a non-party witness adjudicated in contempt of a district court order has an immediate right of appellate review. See Gross v. G.D. Searle & Co., 738 F.2d 600, 603-04 (3d Cir. 1984); DeMasi v. Weiss, 669 F.2d 114, 122 (3d Cir. 1982). Finally, a non-party, unlike a party, may immediately appeal a contempt sanction under § 1291 because the progress of the underlying litigation is not impeded and because the non-party may not be notified of a final judgment in the case or may lack standing to appeal that judgment. See, e.g., Liew v. Breen, 640 F.2d 1046, 1048 (9th Cir. 1981); ITT Community Dev. Corp. v. Barton, 569 F.2d 1351, 1352 n.1 (5th Cir. 1978). See also Eastern Maico, 658 F.2d at 949-50. We conclude that appellant's position as a non-party to the underlying action has placed him in a predicament similar to that of the non-party witness who has been sanctioned for civil contempt, i.e., the challenged order is effectively unreviewable on appeal from a final judgment.
Accordingly, based on the jurisprudence of the Seventh Circuit and cases in this circuit holding that sanctions against non-parties may be appealed immediately, we hold that where, as here, counsel has withdrawn from a case in which he has been sanctioned, and the sanction order is itself final and sets forth issues separable from the merits, the requirements of Cohen have been met, and the Rule 11 sanction order is appealable as a collateral order. We do not now adopt a rule that would allow immediate appellate review of any sanction order imposed upon counsel, whether counsel has withdrawn from the case or not;*fn7 rather, our holding today is narrow and limited to the facts of the case presented.
In considering the imposition of a penalty upon attorneys, we have cautioned that "like 'other sanctions, attorney's fees should not be assessed lightly or without fair notice and an opportunity for a hearing on the record.'" Eash v. Riggins Trucking Inc., 757 F.2d 557, 570 (3d Cir. 1985) (citing Roadway Express, Inc. v. Piper, 447 U.S. 752, 767, 100 S. Ct. 2455, 2464, 65 L. Ed. 2d 488 (1979)). The district court must exercise discretion and sound judgment in dealing with the myriad methods with which lawyers may abuse the judicial process. 757 F.2d at 568. On review, the question is not whether the reviewing court would have applied the sanction, but whether the district court abused its discretion in so doing. See National Hockey League v. Metropolitan Hockey Club, 427 U.S. 639, 642, 96 S. Ct. 2778, 2780, 49 L. Ed. 2d 747 (1976).
Recent amendments to Fed.R.Civ.P. 11 now authorize sanctions to be imposed upon an attorney who violates his or her pleading and that the pleading is not interposed for delay. See Walsh v. Schering-Plough Corp., 758 F.2d 889, 895 (3d Cir. 1985). The standard for testing conduct under amended Rule 11 is reasonableness under the circumstances, a more stringent standard than the original good-faith formula. Notes of Advisory Committee on Rules, 1983 Amendment, Fed.R.Civ.P. 11. Thus, subjective bad faith is no longer a predicate to a Rule 11 violation; the test is now an objective one of reasonableness. Westmoreland v. CBS, Inc., No. (D.C. Cir. August 20, 1985); In re TCI Limited, No. (7th Cir. August 1, 1985); Davis v. Veslan Enterprises, 765 F.2d 494 (5th Cir. 1985); Eastway Construction Corp. v. City of New York, 762 F.2d 243 (2d Cir. 1985); Elliott v. Perez, 751 F.2d 1472 (5th Cir. 1983). See also Schwarzer, Sanctions Under the New Federal Rule 11 -- A Closer Look, 104 F.R.D. 181 (1985). However, in exercising its discretion, the district court "is expected to avoid using the wisdom of hindsight and should test the signer's conduct by inquiring what was reasonable to believe at the time the pleading, motion, or other paper was submitted." Notes of Advisory Committee on Rules, supra (emphasis added). Finally, "if either party's bad faith is determinative of whether attorney's fees should be awarded [under Rule 11], then the parties should be given an opportunity to present appropriate submissions on that issue." Rubin v. Buckman, 727 F.2d 71, 73 (3d Cir. 1984).
In this litigation, the factual and procedural scenario out of which the district court's sanction order emerged is quite complicated. We turn therefore to a detailed recitation of the factual and procedural history of the case as it bears on the sanctions issue.
On April 5, 1984, appellant Scott filed a complaint on behalf of the plaintiff in the United States District Court for the Western District of Pennsylvania. The gravamen of the original complaint was that defendant Michael Holtzman, acting as an agent for two foreign defendant corporations located in the Netherlands Antilles, Gibson, N.V., and Curacao Corp. Co., N.V., deposited money in a Pennsylvania bank, engaged the services of plaintiff, and then committed intentional acts of defamation and tortious interference with business upon plaintiff. Based upon information obtained from a private investigator, appellant also named as defendants one trustee for Gibson, N.V., Jacques Trempont, and four directors of Curacao Corp. Co., N.V., Christopher Smeets, Eugene Bruinendael, Henricul De Rooid and Cornelius Lind.
On June 1, 1984, Curacao Corp. Co., N.V.; and Smeets, Bruinendael, De Rooid and Lind (the "Curacao defendants") moved to dismiss plaintiff's complaint against them for lack of personal jurisdiction. The Curacao defendants alleged, inter alia, that "any activities [the Curacao] defendants performed in connection with defendant Gibson N.V. were done solely in their capacity as managing directors of Curacao Corporation Company N.V. and [could] not be used as a basis for the exercise of in personam jurisdiction over them." Appellant, on behalf of his client, filed a timely reply to the Curacao defendants' motion to dismiss, averring that, as managing directors of Gibson, N.V., the Curacao defendants were responsible for the intentional tortious activity of Gibson, N.V., as perpetrated through its agent or employee, Holtzman, and that Gibson, N.V., was "a shell corporation established for the principle purpose of concealing the identity of the real parties in interest."
On July 2, 1984, the Curacao defendants requested leave to file a response to appellant's Reply to the Motion to Dismiss. The district court granted the leave and on July 13, 1984, the Curacao defendants submitted a reply memorandum of law in further support of their motion to dismiss. In their memorandum of law, the Curacao defendants explained the corporate structures of Curacao Corp. Co., N.V., and Gibson, N.V., under Netherlands Antilles Law; stated that Curacao merely provided "local management services" to businesses incorporated under the laws of the Netherlands Antilles, such as Gibson, N.V.; and averred that, under Netherlands Antilles law, Gibson, N.V., could be bound only by any of its managing directors acting individually. The Curacao defendants disavowed any knowledge of the activities of Michael Holtzman and Gibson, N.V., in the United States, and alleged that "it was Claude A. Antille [a managing director for Gibson, N.V.] acting alone who ratified the appointment of Michael Holtzman as an agent for Gibson, N.V."
Based upon this information, on July 20, 1984, appellant filed a Motion to Amend Complaint which sought to delete the Curacao defendants named in paragraphs 6-10, and insert one new defendant, Claude A. Antille. Exhibit "A" to appellant's Motion proposed new paragraphs 6-10 as follows:
6. Defendant, Claude A. Antille, is a citizen of Switzerland, whose principal residence is Avenue Champel 26-1206, Geneva, Switzerland.
7. Gibson, N.V. has engaged in the commission of intentional tortious action within the Western District of Pennsylvania at the direction and for the benefit of Claude A. Antille, Jacques Trempont, Michael Holtzman and other unidentified persons.
8. Through discovery, Plaintiff plans and intends to identify such presently unidentified persons and add them as parties to this action and preserves such right by the inclusion of John Doe as Defendant.
Paragraphs 9 and 10 are intentionally left blank.
Appellant also attached a draft order which requested that amendment be granted "without prejudice to a claim for attorneys fees and costs to Plaintiff from [the Curacao] Defendants."
On July 26, 1984, the district court entered the following Order:
IT IS HEREBY ORDERED that said Motion is GRANTED in that plaintiff is hereby granted leave to amend the complaint in accordance with Exhibit A attached to the Motion, except that no amendment of paragraphs 8, 9, 10 of the complaint is permitted. (emphasis in original).
In apparent compliance with this Order, an Amended Complaint was filed on July 31, 1984, which conformed to Exhibit A of appellant's motion, except that paragraphs 8, 9 and 10 of the original complaint, and the Curacao defendants named therein were retained. On the same date, July 31, 1984, appellant filed a Motion for Attorneys Fees and Costs from the Curacao defendants, alleging that "the filing of the Motion to Dismiss by the [Curacao defendants on June 1, 1984] was designed to intentionally mislead and defraud the Plaintiff from its opportunity to bring this cause of action against C.A. Antille and any other [real] party in interest."*fn8 The district court denied appellant's motion for attorney's fees and costs by order dated August 2, 1984.
Subsequently, on August 14, 1984, the Curacao defendants named in paragraphs 8, 9 and 10 of the original complaint filed a motion to strike and for attorneys fees pursuant to Fed.R.Civ.P. 11*fn9 and 28 U.S.C. § 1927,*fn10 alleging that their retention in the amended complaint violated the district court's July 26, 1984 Order. The district court agreed, and on August 16, 1984, granted defendant's motion to strike and ordered plaintiff to file a second amendment to the complaint in conformance with the July 26, 1984, Order. Appellant immediately filed a second amendment to complaint, which deleted paragraphs 8-10, and the defendants named therein, in their entirety.
On September 19, 1984, a hearing was held concerning defendants' motion for attorney's fees and costs. The central controversy involved interpretation of the district court's July 26, 1984, Order. The district court stated that language in the Order which provided for "no amendment of paragraphs 8, 9 and 10 of the complaint" clearly referred to the court's rejection of paragraphs 8, 9 and 10 of the proposed amended complaint, attached as Exhibit A to the motion to amend, and was not a direction to retain paragraphs 8, 9 and 10 of the original complaint, and that the clear intent of his Order was that the defendants named in paragraphs 6-10 of the original complaint be deleted, as proposed by appellant in his Motion to Amend.*fn11 Appellant argued that he misunderstood the Order in this regard, believing instead that the order had referred to paragraphs 8-10 of the original complaint. Appellant further explained that he believed that the intent of the order was to retain jurisdiction over the defendants named in those paragraphs to permit a later claim for attorney's fees and costs against them, as proposed by appellant in his draft order.*fn12
The district court rejected this interpretation as "irrelevant," concluding that there was "no reasonable basis for that mistake" and that appellant was guilty of "harassment." The district court stated further that he could not "look at [the] situation in isolation," referred to "a lot of problems . . ., a lot of motions and a lot of harassment" which the district judge had encountered with appellant in another case, docketed at Civil Action 82-2366,*fn13 and imposed sanctions against appellant.
In sum, the district court's decision to sanction appellant was based solely upon the district court's perception that appellant had willfully and deliberately violated the terms of its order granting appellant leave to amend his complaint.*fn14 However, our examination of that order, especially in light of the surrounding facts and procedural history, leads us to conclude that appellant could reasonably have misread it.
At the time appellant filed the pleading at issue, he had been granted "leave to amend [his] complaint in accordance with Exhibit A attached to [his] Motion, except that no amendment of paragraphs 8, 9, 10 of the complaint [was] permitted." In apparent compliance with that directive, appellant submitted an amended complaint which retained paragraphs 8, 9 and 10 of the original complaint. However, at the subsequent Rule 11 hearing, the district court specified that the actual intent of its July 26, 1984, order was to permit amendment of paragraphs 8, 9 and 10, but not as proposed by appellant in Exhibit A of his Motion, an intent which was at least arguably not evident from the face of the order.
During the hearing, appellant explained that he had misunderstood the district court's order, and stated that he believed that the intent of the Order at the time it was issued was to retain jurisdiction over certain of the Curacao defendants to permit a claim for attorney's fees and costs to be brought against them. Appellant pointed out that, based upon his understanding of the order, he filed a motion for attorney's fees and costs against the Curacao defendants on the same day that he filed his amended complaint.*fn15 Moreover, appellant argued that his good faith was exhibited by the immediate filing of a second amended complaint once the district court's true intent became clear.*fn16 Nevertheless, the district court rejected appellant's explanation that he had simply misunderstood the order, finding that no reasonable basis could exist for any such misinterpretation. In the district court's opinion, appellant's conduct amounted to "harassment" sufficient to warrant a Rule 11 sanction. We disagree.
In our view the district court's order was fully susceptible of the interpretation placed upon it by appellant. A reasonable person might as easily have believed that the import of the Order was to require retention of original PP 8, 9, and 10 for the reasons stated by appellant. While the district court's interpretation is, of course, just as plausible, we can only conclude that the Order, which was not accompanied by any further explanation, was ambiguous. Cf. Notes of Advisory Committee on Rules, 1983 Amendment, Fed.R.Civ.P. 11, stating that the district court's determination to impose sanctions may depend on "whether the pleading, motion, or other paper was based on a plausible view of the law." We therefore hold that appellant had reasonable grounds to believe that his amended complaint was in compliance with the district court's order at the time it was submitted, and, accordingly that no violation of Rule 11 could have occurred.*fn17
We also observe the analogy between the district court's finding of a Rule 11 violation and a finding of contempt: like a contempt citation, the sanction penalized appellant for the district court's perception that he had willfully violated a court order. In view of this similarity, we find applicable our "long-standing, salutary rule in contempt cases  that ambiguities and omissions in orders redound to the benefit of the person charged with contempt." United States v. Christie Industries, Inc., 465 F.2d 1002, 1006 (3d Cir. 1972); Ford v. Kammerer, 450 F.2d 279, 280 (3d Cir. 1971); see also International Longshoremen's Ass'n v. Philadelphia Marine Trade Ass'n, 389 U.S. 64, 76, 88 S. Ct. 201, 208, 19 L. Ed. 2d 236 (1967).
In order to cite a person for contempt for violating a court order, two principles, each a corollary of the other, must, among other requirements, be established. The first of these is that it must be proved that the alleged contemnor had knowledge of the order which he is said to have violated. The corollary of this proposition is that the order which is said to have been violated must be specific and definite. These two principles are merged in a general statement which is specifically applicable here: "An order may be so vague or indefinite that, even though the alleged contemnor is chargeable with knowledge of such order, he cannot be punished for doing what he did in view of lack of certainty as to what it prohibited or directed." (citations omitted).
In re Rubin, 378 F.2d 104, 108 (3d Cir. 1967). The district court's order granting leave to amend was ambiguous. Appellant's understanding of the order was reasonable under the circumstances. Hence, the imposition of sanctions was not warranted and constituted an abuse of discretion. Accordingly, the order of the district court will be reversed.