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Dura Systems Inc. v. Rothbury Investments

filed as amended october 16 1989.: September 19, 1989.


On Appeal from the United States District Court for the Western District of Pennsylvania, D.C. Civil Action No. 86-2621.

Stapleton, Scirica and Rosenn, Circuit Judges.

Author: Scirica


SCIRICA, Circuit Judge.

Plaintiff Dura Systems, Inc., the law firm of Eddy & Osterman and its members Thomas R. Eddy, John D. Eddy and Thomas G. Eddy, individually, appeal the district court's imposition of Rule 11 sanctions. We will reverse the order of the district court.


This is an appeal from an order of the United States district court awarding $12,275.00 in attorneys fees and expenses to the defendant Rothbury Investments, Ltd. under Rule 11 of the Federal Rules of Civil Procedure.

The underlying lawsuit from which these Rule 11 proceedings developed arose from a written franchising agreement between Dura Systems and Rothbury Investments dated January 29, 1984. The franchising agreement granted Dura Systems the right to act as exclusive agent for Rothbury to sell franchises in the United States for the manufacture and distribution of certain patented concrete products developed by Rothbury, and established performance standards to be met by Dura Systems. On April 23, 1986, Rothbury attempted to terminate the franchising agreement on the grounds that Dura Systems had failed to meet the performance standards. In response, Dura Systems sued for a declaratory judgment establishing its right to act as exclusive franchising agent and to enjoin Rothbury from granting to any third party the right to manufacture, distribute, or sell the products. The district court granted summary judgment for Rothbury and this court affirmed. Dura Systems, Inc. v. Rothbury Investments Ltd., 866 F.2d 1409 (3d Cir. 1988).

Rothbury Investments, Ltd. is a Canadian corporation which owns certain United States patents and trademarks on a concrete retaining wall system invented by Angelo and Anthony Risi, Canadian citizens. These patents and trademarks were originally applied for and transferred to Rothbury by another Canadian corporation, Risi Stone, Ltd. Both Rothbury and Risi Stone are owned and managed by the Risis. Seeking to market and distribute the Risi retaining wall system in the United States, Rothbury entered into the franchising agreement described above with Thomas R. Eddy, an attorney, Kenneth Dehus, a former client of the Eddy's law firm, Eddy & Osterman, and the Risis. Pursuant to the franchising agreement, the individuals agreed to form another corporation (Dura Systems) to act as Rothbury's exclusive agent for franchising the right to manufacture and sell Risi products in the United States.

Dura Systems was thereafter incorporated on October 22, 1984 in Pennsylvania by Thomas R. Eddy. The shares of Dura Systems were to be owned one-third by the Risis, one-third by Dehus, and one-third by Thomas R. Eddy. On June 10, 1985, Thomas R. Eddy, as permitted by Pennsylvania business corporation law "elected" a board of directors for Dura Systems, which included himself and his two sons, John D. Eddy, and Thomas G. Eddy, all members of the law firm of Eddy & Osterman. The board then met and elected officers: Thomas R. Eddy, President; Kenneth Dehus, Vice-President; Angelo Risi, Vice-President; and John D. Eddy, Secretary.

In the meantime, differences arose between the franchisee and Rothbury Investments concerning the performance of the terms of the franchising agreement, ultimately resulting in the litigation referred to above. As a consequence, on May 13, 1987, the shareholders of Dura Systems met at the request of the Risis and Dehus. At the meeting, the shareholders voted, in this sequence, to (1) amend the by-laws; (2) dismiss the law firm of Eddy & Osterman as legal counsel to the corporation and hire Randal E. McCamey, Esq. as counsel to the corporation; (3) withdraw the lawsuit against Rothbury concerning the franchising agreement; (4) elect a new Board of Directors; (5) elect new officers; and (6) dissolve the corporation. As a result, McCamey filed his appearance as counsel for Dura Systems and moved to dismiss the lawsuit against Rothbury with prejudice. Thomas R. Eddy, as minority shareholder, objected to the May 13 shareholder resolutions on the grounds that they were ultra vires and unlawful. Despite the May 13 resolutions, Eddy & Osterman continued to prosecute the law suit against Rothbury by filing pleadings in the name of the corporation. Consequently, Rothbury has been obliged to retain and compensate counsel to defend the suit.

Rothbury filed its motion for Rule 11 sanctions the day after the May 13 shareholders' meeting, alleging that:

(1) neither Dura Systems nor the law firm of Eddy & Osterman has "legal authority to institute and prosecute suit in the above matter;" and (2) Eddy & Osterman "knew or should have known that no valid basis existed for instituting a lawsuit, but nevertheless persisted in maintaining the above action without a well-grounded basis in law or fact."

After considering both parties memoranda, the district court granted Rothbury's motion for Rule 11 sanctions on October 11, 1988, pending Rothbury's submission of an accounting of attorney's fees and expenses. On January 3, 1989, the court amended its earlier order to include Plaintiff Dura Systems, the law firm of Eddy & Osterman, and attorneys Thomas R. Eddy, John D. Eddy, and Thomas G. Eddy as the parties subject to the order, and granted Rothbury $12,250.00 in attorney's fees and expenses. Dura Systems appeals the award of counsel fees and ...

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