Johnson v. Baker

ALPERT, Judge. In this case, Edward A. Johnson (appellant) appeals from an award, made pursuant to Rule 1-341, to Wallace H. Baker (appellee) and the law firm of Blumenthal, Wayson, Downs and Offut (appellee). The lower court awarded both ⁵²⁴ parties unreimbursed expenses, including attorneys’ fees, that they incurred to defend against Johnson’s prior, failed appeal in a breach of contract and fraud action; it also awarded to Baker the costs he expended to compel Johnson to release a deed of trust. We shall affirm.

Facts Property owner John Chaney wanted to sell his land in Anne Arundel County; however, four separate mortgage liens encumbered the property. Johnson, Chaney’s former attorney, was one of the lienholders. Because the interest on these liens had accumulated, a buyer would have had to pay an amount in excess of the property’s market value to satisfy the debt. To rectify the problem, Baker proposed that he develop Chaney’s land into residential lots which could be sold.

On July 17, 1984, Johnson agreed in writing to reduce the balance due on his lien from $80,000 to $60,000. As “inducement,” Baker agreed to give Johnson either: (1) the lot of his choice from a group of five lots selected by Baker or (2) $25,000. The contract gave Baker the right to decide whether he would give Johnson the land or the money. It further provided that Baker could execute the provision at any time, but not later than “the time there remain five (5) lots unsold.” No lienholder was to receive more than' “its agreed upon amount.” A “Fourth Amendment to the Agreement of Sale,” effective January 9, 1986, left these provisions substantially the same. 1 For whatever reason, Baker chose a lot rather than allowing Johnson to do so, and recorded a deed of trust on it in Johnson’s favor.

Baker’s attorney, a partner at Blumenthal, Wayson, Downs and Offut, notified Johnson of the error and stated that, “[m]y feeling is you are well-secured ⁵²⁵ and have received the substantial equivalent since the lots are all being sold at the same price, and they have approximately the same value.” He requested that Johnson contact him if Johnson still was dissatisfied so that they could agree on “a course which is satisfactory.” On July 15, 1987, Johnson responded to Baker’s attorney by letter. In that letter, Johnson made a number of demands, including the demands (1) that Baker reinstate the original $80,000 mortgage and pay Johnson the outstanding principal plus interest, less the $60,000 Baker already had paid him and (2) that Baker not sell any more lots until Johnson’s contract action was resolved and Baker had paid him the balance on the original mortgage. On July 21, 1987, Johnson, acting pro se, filed the following complaint: LAW ACTION FOR BREACH OF CONTRACT AND FRAUD Edward Johnson sues defendants for breach of contract and fraud in the transaction of the contract of sale of and settlement of the Contract of Sale dated July 17,1984 and the Deed of Trust dated June 19, 1987. WHEREFORE YOUR PLAINTIFF SUES DEFENDANTS FOR ONE MILLION DOLLARS.

The clerk of court mailed the summons to Johnson for service by private process, but no return of service was filed within the prescribed time period. Baker and Blumenthal eventually learned of the suit and filed motions to dismiss the complaint in November 1987. Johnson’s response was to file an amended complaint and to assert that the pending motions had been rendered moot. This cycle of pleading went on through Johnson’s third amended complaint.

Throughout this period, Johnson sent letters to both Blumenthal and Baker in which he proposed to settle the case for sums that ranged as high as $300,000 plus attorney’s fees and costs. ⁵²⁶ On June 28, 1988, Baker paid to Johnson’s trustee the $25,000 due to Johnson under the contract. On July 7, 1988, the trial court ultimately granted Baker and Blumenthal’s motions to dismiss on Johnson’s second amended complaint. 2 The court ordered Johnson to pay Blumenthal $500 in attorney’s fees “because I think [the suit against Blumenthal] has been frivolous and I do not think it has any basis in law or in fact based on your allegations.” When Johnson appealed to us, we affirmed the lower court’s ruling in an unreported per curiam opinion, Johnson v. Baker, No. 1160, slip op. at 9 (Md.App. Mar. 23, 1989). In May 1989, Johnson petitioned the Court of Appeals for certiorari; the court denied the petition because it “was filed without substantial justification in violation of Maryland Rule 1-341.” In the meantime, Blumenthal and Baker, in separate motions to the circuit court, moved for unreimbursed expenses — including attorney’s fees — incurred in resisting Johnson’s failed appeal. Baker also moved for costs associated with compelling Johnson to release the deed of trust. 3 On October 13, 1989, the Circuit Court for Anne Arundel County held a hearing on Blumenthal and Baker’s motions for costs and attorney’s fees.

The circuit court, having reviewed the record and Baker and Blumenthal’s affidavits of expenses, heard each party’s oral argument. The court found that “Mr. Johnson ignored precedent, was unable to give Judge Heise any support for his proposition, and even as was indicated after the payment, the twenty-five thousand was made sometime into the proceedings, pursued the appeal and failed to release the deed of trust so that it did, in fact, tie up the property while this litigation was in progress.” The court concluded that Johnson “was ... ⁵²⁷ purely and simply filing this claim in bad faith and without ... legal justification, and any substantial justification.” The court awarded Blumenthal $15,000 plus the cost of the suit and awarded Baker attorney’s fees of $5,695.78 plus the $287.50 that it cost him to obtain the deed of trust. It is from the lower court’s awards to Blumenthal and Baker that Johnson appeals to us again. Johnson raises the following issues on appeal: I. Whether the circuit court erred when it awarded Blumenthal and Baker attorney’s fees and costs incurred in defending against Johnson’s prior, failed appeal.

II

Whether the circuit court erred in making the awards in the manner and/or the amounts in which it did. I. Johnson contends that the lower court erred when it imposed sanctions in the form of awards to Blumenthal and Baker for attorney’s fees and costs. He argues that his claim was at least colorable and that he had one appeal as of right after the trial judge dismissed his case. He urges us to establish a “higher threshold” for the imposition of sanctions at the appellate level than exists at the trial level.

Under the American Rule, litigants pay their own attorney’s fees regardless of the lawsuit’s outcome. Sierra Club v. U.S. Army Corps of Engineers, 776 F.2d 383 , 390 (2d Cir.1985). Maryland Rule 1-341 4 is a limited exception to that rule which is intended to prevent parties and/or their attorneys from abusing the judicial process by initiat ⁵²⁸ ing or maintaining meritless actions. Legal Aid Bureau, Inc. v. Farmer, 74 Md.App. 707, 722 , 539 A.2d 1173 (1988).

Rule 1-341 outlines the circumstances in which the court may require a party and/or that party’s attorney to pay the adverse party’s costs of litigation, including attorney’s fees: In any civil action, if the court finds that the conduct of any party in maintaining or defending any proceeding was in bad faith or without substantial justification the court may require the offending party or the attorney advising the conduct or both of them to pay the adverse party the costs of the proceeding and the reasonable expenses, including reasonable attorney’s fees, incurred by the adverse party in opposing it. (Emphasis added). Thus, the award of costs and reasonable expenses is predicated by one of two circumstances: (1) conduct that amounts to bad faith or (2) conduct that lacks substantial justification. Blanton v. Equitable Bank, Nat’l Ass’n, 61 Md.App. 158, 162 , 485 A.2d 694 (1985); see also Yamaner v. Orkin, 313 Md. 508, 509 , 545 A.2d 1345 (1988).

Although the rule’s purpose is to prohibit pleading that is labeled for one purpose but in fact is filed for delay, P. Niemeyer & L. Richards, supra, at 40, the rule is not intended to penalize a party and/or counsel for averring colorable claims or defenses. Yamaner, 313 Md. at 516 , 545 A.2d 1345 ; see also Dent v. Simmons, 61 Md.App. 122, 124 , 485 A.2d 270 (1985). A court must make an evidentiary finding of “bad faith” or “lack of substantial justification” before it imposes Rule 1-341 sanctions. Legal Aid Bureau, Inc. v. Bishop’s Garth Associates Ltd. Partnership, 75 Md.App. 214, 220 , 540 A.2d 1175 (1988).

The existence of bad faith or lack of substantial justification is a question of fact subject to a “clearly erroneous” standard of review. Legal Aid, 75 Md.App. at 220-21 , 540 A.2d 1175 ; see also Century 1 Condominium Association, Inc. v. Plaza Condominium Joint Venture, 64 Md.App. 107, 117 , 494 A.2d 713 (1985); But see Shanks v. Williams, 53 Md.App. 670, 672-73 , 455 ⁵²⁹ A.2d 450 (1983) (applying abuse of discretion standard). Upon a finding of bad faith or lack of substantial justification, the court must decide whether to award attorney’s fees and costs. Legal Aid, 75 Md.App. at 221 , 540 A.2d 1175 .

On appeal, the appellate court reviews the propriety of the sanction imposed under an abuse of discretion standard and will not disturb the sanction unless the lower court abused its discretion. Id. A. Lack of Substantial Justification As a matter of law, an action is substantially justified when the party reasonably believes that the case will generate a factual issue for the fact finder at trial. Legal Aid, 75 Md.App. at 223 , 540 A.2d 1175 .

Conversely, conduct lacks substantial justification when there is no basis in law and/or in fact to support the plaintiff’s claim against the defendants who seek fees and costs. Brady v. Hartford Fire Insurance Co., 610 F.Supp. 735, 738 (D.Md.1985); see also Singer v. Stevens Kokes, Inc., 39 Md.App. 180, 186 , 384 A.2d 463 (1978). This does not mean, however, that the prevailing party is entitled to attorney’s fees because the opposing party “misconceived the legal basis upon which he sought to prevail,” Hess v. Chalmers, 33 Md.App. 541, 545 , 365 A.2d 294 (1976), or that a litigant is to “be penalized for innovation or exploration beyond existing legal horizons unless such exploration is frivolous.” Dent, 61 Md. at 128, 485 A.2d 270 . Public policy encourages innovation and advances in the law, id. at 128 , 485 A.2d 270 , but that policy may not be stretched to permit a litigant to prosecute an appeal against another when the proponent’s claim is frivolous.

In Legal Aid , we noted that [an] action is frivolous ... if the lawyer is unable either to make a good faith argument on the merits of the action or to support the action taken by a good faith argument for an extension, modification or reversal of existing law. ⁵³⁰ Id. 75 Md.App. at 221-22 , 540 A.2d 1175 (quoting Comment, Maryland Lawyers’ Rules of Professional Conduct Rule 3.1). At the trial level, Johnson’s theory of his case was that a third party may sue an attorney for advice which the attorney has given a client on a matter in which the attorney has no personal interest. When pressed by the judge, Johnson could offer no Maryland case law, nor case law from any other jurisdiction, to support that theory. 5 The judge considered Johnson’s proposition a “fundamentally erratical change in the law” which would radically change the nature of attorney-client relationships and create a litigation explosion. The judge concluded that Johnson’s claim was “frivolous ... [and without] any basis in law or in fact based on [Johnson’s] allegations.” Our prior opinion on this case was part of the record before the circuit court judge at the sanctions hearing.

In it, we explained why Johnson had no cause of action and affirmed the circuit court’s dismissal of Johnson’s complaint and award of attorney’s fees to Blumenthal. In this appeal, Johnson still has not provided us with a viable legal theory or precedent that would justify his pursuit of his prior appeal to us. He begins by claiming that he has a “color-able claim,” which clearly has no basis in fact or in law, and then contends that he was entitled to continue the action because he had one appeal as of right. He appears to assume — erroneously—that an appeal of right can legitimize and give substance to an action that is otherwise without merit.

Johnson had the opportunity to present his “colorable claim” to the trial court and to engage in “innovation or exploration beyond existing legal horizons ...,” Dent, 61 ⁵³¹ Md.App. at 128, 485 A.2d 270 . The circuit court judge did not impose sanctions because Johnson initiated that action. Rather, the circuit court judge imposed the sanctions only after Johnson pursued his appeal — when it had become patently apparent that he had no colorable claim or novel legal theory to support his actions. As the judge noted at the sanctions hearing: “[Y]ou [pursue a novel course of action] at your own risk when its [sic] blatantly against the outstanding statutes and case law in the case in question.” Based on the facts before us, we cannot conclude that the circuit court judge was clearly erroneous in finding that Johnson brought his action without substantial justification.

B. Bad Faith In Needle v. White, 81 Md.App. 463, 474 , 568 A.2d 856 (1990), we noted that the Maryland appellate courts [have] not yet defined “bad faith” under Rule 1-341. Although we held in Needle that sanctions were improper if “the underlying action presented a colorable claim,” we conceded that “a trial court has inherent power to impose sanctions for continuing an action vexatiously, wantonly, or for oppressive reasons.” Id.; see also Roadway Express, Inc. v. Piper, 447 U.S. 752, 766 , 100 S.Ct. 2455, 2464 , 65 L.Ed.2d 488 (1980). We went on to say that “[s]uch an action, however, requires clear evidence that the action is entirely without color and taken for other improper purposes amounting to bad faith.” Needle, 81 Md.App. at 474 , 568 A.2d 856 . Previously, we had said that “[u]nder Rule 1-341, ‘bad faith,’ in some circumstances, may include an action taken for the purpose of causing unjustifiable delay.” Blanton, 61 Md.App. at 163 , 485 A.2d 694 .

Thus, “[t]he bad-faith exception for the award of attorney’s fees is not restricted to cases where the action is filed in bad faith ... but may be found ... in the conduct of the litigation.” Roadway Express, 447 U.S. at 766 , 100 S.Ct. at 2464 . Generally, the “[m]isuse of a pleading ... amounts to bad faith.” P. Niemeyer & L. Richards, supra, at 40. ⁵³² Johnson’s tactics during the course of this litigation strongly suggest that his underlying motives were (1) to force Baker to share his land sale profits with Johnson through the lis pendens effect of his action and subsequent appeals, (2) to hold’ hostage the deed of trust until Baker paid him additional money to which Johnson was not entitled, and (3) to pressure Blumenthal into settling for a large sum of money by extending the period of legal action indefinitely. The chronology of facts that follows provides ample evidence of those motives. July 15, 1987 Just before he filed his initial complaint, Johnson demanded that “[no] further mortgages upon lot sales” in Baker’s subdivision be made, “until my breach of contract action is resolved.” He further stated that “I intend to have an outstanding unreleased mortgage on all future lot sales including an outstanding lien on all those lots----” Johnson made his demands despite the fact that Baker already had paid him pursuant to the contract to release the lien that Johnson then purported to cancel.

July 21, 1987 Johnson filed his initial complaint. July 24, 1987 Johnson indicated in letter to the parties that “I anticipate your reluctance to resolve this matter equitably and with my experience I quite naturally expect that the ensuing impass [sic] and legal action to extend over a period of two, three or four years____” November 13, 1987 In his letter to Blumenthal, Johnson stated that his “consideration for my dismissing” the case is $200,000. Johnson directed that no one was to “telephone or correspond with me” unless that individual had the authority to settle the case and had “identified designated escrow monies” available for settlement. He further wrote that negotiations other than his proposed course of action would entail “ad ⁵³³ vancing estimated attorneys [sic] fees over and above the settlement amount of $200,000.” November 16, 1987 A motion to dismiss Johnson’s initial complaint was filed.

December 8, 1987 Johnson filed his first amended complaint. March 3, 1988 A motion to dismiss Johnson’s first amended complaint was filed. April 6, 1988 Johnson filed his second amended complaint, praying damages from Blumenthal of $500,000 plus $1,000,000 in exemplary damages. April 19, 1988 A motion to dismiss Johnson’s second amended complaint was filed.

April 22, 1988 Johnson submitted a new demand of $300,000 plus costs and attorney’s fees to Blumenthal “as consideration for dismissing” his case against the firm. He gave Blumenthal the same instructions as before — that no one was to contact him unless that person was authorized to resolve the matter with him. May 20, 1988 Johnson wrote to Baker offering “settlement of all issues as against all parties: $250,000.” Johnson stated that “[because] lot sales in excess of 40 will gross you a figure in excess of TWO MILLION DOLLARS ($2,000,000.00) in addition to the ONE MILLION DOLLARS ($1,000,000.00) that you already have grossed, there is certainly sufficient monies to liquidate the settlement amount of $250,000.00 plus settlement costs.” He added that “a further source of settlement monies is of course you and all of the other defendants.” Johnson reiterated that the amount was nonnegotiable. ⁵³⁴ June 13, 1988 Johnson wrote to Baker after Johnson learned that Baker was “unable to sell [Baker’s] property.” Johnson proposed to purchase the lots at $25,000 per lot. June 18, 1988 Baker paid to Johnson’s trustee “$25,000 being full payment of all that Johnson was owed for a release of the deed of trust.” [E. 21] Johnson responded that he might want more than the $25,000, but hadn’t yet decided on a course of action.

July 1, 1988 Johnson filed his third amended complaint, asking again for $500,000 damages and $1,000,000 in exemplary damages against Blumenthal. July 7, 1988 The trial court dismissed Johnson’s action with prejudice and awarded Blumenthal attorney’s fees under Rule 1-341. July 15, 1988 Johnson wrote to Blumenthal that “[t]his case has continued for at least one year through the Circuit Court level, and through appeals and remand, and [with] the possibility of my filing this case in another jurisdiction this matter could continue on for another year or more. Therefore, ...

I hereby renew my settlement demand [of $300,000 plus costs and attorneys’ fees] as noted in my correspondence of 22 April 1988.” Johnson also refused to execute the release of the lien on Baker’s lot for which Johnson had received full payment on June 18, 1988. He continued to hold the lien through his appeal to us and then to the Court of Appeals. He did not execute a release until shortly before the Rule 1-341 hearing for sanctions from which he now appeals. These are among the facts that the circuit court judge had before him when he concluded that Johnson had acted in bad faith when he pursued his first appeal to us.

Based ⁵³⁵ on the foregoing facts, we cannot say that the judge was clearly erroneous in reaching the conclusion that he did. Johnson urges us to adopt a “higher threshold” for the imposition of sanctions at the appellate level than that which exists at the trial level. He offered no suggestion, however, as to what that higher threshold might be. The present “threshold,” whether at the trial level or the appellate level, is that neither a party nor that party’s counsel can bring an action in bad faith or without substantial justification.

We decline the invitation to alter it.

II

Johnson contends that the circuit court judge violated his constitutional guarantees of due process when he imposed sanctions on Johnson without first affording him a full evidentiary hearing, including the opportunity to present witnesses and the opportunity for cross-examination. Johnson insists that such a hearing is necessary to determine the basis for imposing sanctions