Stubborn Denial in Face of Losing Case Leads To Sanctions

June 21, 2012 | Erika Eckley

Most of the time, factual issues and legal consequences of the facts in a lawsuit are disputed and sorted out through the course of litigation. Likewise, there is generally evidence supporting legal theories for recovery. If, however, there is no evidence to support a legal claim against a party, the attorney has an obligation to recognize (hopefully before trial) that there is no legal claim and resolve the matter. In this case, the continuation of a lawsuit in the absence of any proof warranted sanctions against the attorney.

The sole heir of farmland worked with an insurance company and a real estate company to sell four forty-acre parcels of farmland for $2,000 an acre between 2004 and 2005. The price per acre was specified as no more than $2,000 because this was the value of the land at the time of the decedent’s death, and the heir wanted to avoid paying capital gains taxes on the sales. All parcels were purchased by different parties for $2,000 an acre. 

Shortly thereafter, the heir met with an attorney to evict a tenant from one of his rental properties. This attorney had some concerns regarding the heir’s mental capacity to conduct his financial matters. The attorney discovered suspicious checks totaling more than $200,000 written to individuals. The attorney petitioned the court to appoint a conservator for the heir. The heir accepted the conservatorship voluntarily, and the attorney’s office manager was appointed conservator.

A short time later, the conservator sued the parties that purchased the $2,000 acre farmland along with the insurance agent and the real estate company involved in the transactions.  The conservator alleged fraud in the purchase of the land due to the low purchase price when the purchasers knew or should have known the heir was not competent to conduct the sales.  The conservator also alleged professional negligence and breach of fiduciary duty against the real estate company and insurance agent, and sought to rescind the sales and establish a constructive trust.

During the course of the litigation, the conservator failed to respond to discovery requests from the defendants seeking evidence of the alleged fraud and conspiracy. After she refused to accept an offer to repurchase one of the 40 acre parcels for the original purchase price of $2000 an acre to resolve the matter, the party brought a motion for sanctions against the conservator. Also motions for summary judgment were brought by all defendants to dismiss the claims due to the conservator’s inability to produce any evidence of fraud. The conservator resisted each of these motions, but the trial court granted them all and dismissed the claims. The conservator appealed. All but one of the defendants moved to dismiss the appeal as untimely. As to these defendants, the appeal was dismissed without opinion regarding the defendant land buyers, so the summary judgment order was upheld as to claims against them.

The remaining claims were heard and argued. The Court of Appeals upheld the summary judgment order as to the remaining purchaser, but remanded for trial on the claims against the insurance agent and real estate company. 

At trial, the jury found the defendants did not breach any fiduciary duties but breached their duty of professional responsibility to them by failing to advise the heir to seek legal advice when the interest of any party to the transaction requires it and awarded damages to the plaintiff.

In the meantime, following the dismissal of the appeal regarding claims against them, the purchasers renewed their motions for sanctions against the conservator and her attorney. The district court ordered sanctions against the conservator’s attorney based on the lack of evidence for the claims alleged. The court held that the attorney’s actions were not willful or taken in bad faith, but the evidence showed there was no actionable claim that ever existed against the purchasers. The court noted as important that the attorney had not received sanctions in the past. The court also took notice of the fees incurred by the various parties in defending the suit, but did not receive evidence regarding the attorney’s ability to pay any sanctions. After considering all of this, the court ordered sanctions in the amount of $1,000 against the attorney to be paid to the county’s jury and witness fund.  The purchasers appealed the award of sanctions, and the insurance agent and real estate company found to be negligent appealed the jury verdict.

On appeal, the Court of Appeals upheld the jury verdict against the insurance agent and real estate company and upheld the award of sanctions and the payment to the county jury and witness fund. Application for further review was granted as to the issue of the amount sanctioned and the propriety of requiring payment to the court’s fund.

In reviewing, the Iowa Supreme Court noted that the primary purpose of awarding sanctions is not compensation for parties but is deterrence of conduct. Because of this, sanctions do not need to reflect actual expenditures by the parties seeking sanctions for costs of litigation. The Court has previously established criteria for determining the amount of sanctions to be awarded when applicable. These include: reasonableness of opposing party’s attorney fees; minimum necessary to deter conduct; ability to pay; and factors relating to the severity of the conduct. Some additional factors can also be considering in establishing an award of sanctions including such factors as bad faith of the parties, willfulness, experiences, and prior history of sanctions., 

The Court noted that the district court order failed to make a specific finding regarding the reasonableness of the opposing parties’ attorney fees and the attorney being sanctioned failed to present evidence regarding his ability to pay the award. Despite the deficiencies, however, the court held that the district court did not abuse its discretion in fixing the amount of sanctions at $1,000. The court noted the district court made detailed findings regarding the deterrence of imposing the $1000 sanction and based on these findings of deterrence, the court upheld the amount as proper based on the principle that deterrence is the primary purpose in awarding sanctions rather than compensation.

Having determined the amount of the sanctions was proper, the court turned to whether the district court erred by requiring sanction to be paid to the jury and witness fund. The Iowa rule on sanctions is different than Federal Rule 11 in that it seeks to compensate the injured party first rather than the court. Iowa’s rule provides incentive for an injured party to invest time and money into pursuing appropriate sanction claims and helps maintain professionalism within the legal community through deterrence actions. The Court also found an important secondary aspect of sanctions can be to provide partial compensation to injured parties. 

In reviewing the issue of who should receive sanctions, the court did not set out any specific test or standards for how a court should choose to use sanctions to compensate the moving party rather than the court system. Instead, the Court signaled its preference through its express directive that judges must provide detailed findings as to why sanctions should be paid to court funds rather than directed to the party seeking the sanctions when awarded to the court. The Court did hint that an appropriate reason for this could be that the amount of sanctions necessary for deterrence of conduct would exceed the costs to the harmed party. The Court stated this might be appropriate to avoid the moving party receiving a windfall and to compensate the court system for unnecessary costs incurred by the actions resulting in the sanctions. 

In this case, the Court looked at the circumstances and found no compelling reason for the court system to receive the award rather than the injured parties. It reversed the district court’s order requiring the $1000 sanction award to be paid to the court’s fund and remanded the matter to the district court to enter an order requiring the sanction to be paid in equal portions to each of the harmed parties and assessed costs of the appeal to the conservator’s attorney.

A dissent was filed in this case regarding the decision to uphold the $1000 award as appropriate to deter the conduct. The dissent found egregious the amount of time and resources required by the defendant purchasers to continue to defend the fraud claims when the conservator had no evidence to support the claim even after discovery was conducted. In addition, the fact that the grant of summary judgment was appealed despite the lack of evidence demonstrated that the conservator’s attorney “crossed the line ‘between zealous advocacy and frivolous claims.’” The dissent disagreed that the mere “stigma” of having sanctions imposed against an attorney created a deterrent and stated that a much higher award not less than $10,000 should have been granted. Rowedder v. Anderson, No. 10-1172, 2012 Iowa Sup. LEXIS 66 (Iowa Sup. Ct. Jun. 15, 2012).