Needle v. White, Mindel, Clarke and Hill

JAMES S. GETTY, Judge Specially Assigned. This case involves two appeals in one record from the imposition of sanctions, pursuant to Md.Rule 1-341, by the Circuit Court for Baltimore County. The appellants herein are Carolyn Gerst, the plaintiff in the underlying lawsuit, ⁴⁶⁵ and her attorneys, Howard J. Needle and Sarah C. King. The court ordered that Gerst pay the sum of $121,369.14 and that Needle and King pay the sum of $21,748.00 to the law firm of White, Mindel, Clarke and Hill, Samuel D. Hill, and John F. Foley, the defendants in the trial court and appellees herein.

The record establishes that Gerst began working for the appellees in 1970 as a bookkeeper. In March, 1983, she was discharged, according to appellees, because a replacement bookkeeper could do a better job. That her termination was amicable is evidenced by the fact that she received four weeks severance pay, a farewell luncheon, and several letters of recommendation from members of the law firm. Following Gerst’s departure, the appellees discovered that withdrawals in 1982 and the first quarter of 1983 from their escrow savings account totaling approximately $208,-000.00 had not been deposited into the escrow checking account.

During the same period $170,000.00 in fees received was deposited in the escrow savings account rather than in the appellees’ operating account. The appellees maintained an employee fidelity policy with the Insurance Company of North America in the amount of $100,000.00. Appellees directed John Foley, a member of the firm, to file a claim for reimbursement. The proof of loss contained an affidavit that the loss resulted from dishonest or fraudulent acts by Gerst.

A condition of recovery under the policy required the appellees to file a complaint with the local police. Appellees filed proof of loss with the insurer and a report to the police on the same day. The full $100,000.00 was eventually remitted to appellees. Detective Henry Wysham testified that he was assigned to investigate the alleged theft, but he could not determine what happened to the money, because he was instructed by an Assistant State’s Attorney not to interview Gerst.

Gerst, meanwhile, was charged with embezzlement and she was represented at trial by an assigned public defender. ⁴⁶⁶ The principal witnesses testifying on behalf of the State were John Foley and Samuel Hill, both of whom were partners in the law firm. Hill testified that he set up the escrow savings account so that withdrawals were to be by internal paper transfer but never by cash. He denied authorizing cash withdrawals or receiving cash from Gerst, who alleged she withdrew cash from the escrow account at Hill’s direction and turned the money over to him. At the conclusion of the three-day jury trial, Gerst was acquitted.

Thereafter, Gerst retained Needle and King, who reviewed the transcript of the criminal trial, interviewed several of the jurors who heard the case, and interviewed Detective Wysham as well as employees of First American Bank where the escrow account was maintained. Gerst paid an initial counsel fee of $9,500.00 with additional fees being contingent upon the outcome of the case. The court trial focused on Gerst’s claims for malicious prosecution and intentional infliction of emotional distress. The trial was preceded by an extensive hearing on appellees’ motion for summary judgment which included memoranda by both litigants, numerous exhibits and excerpts of testimony from the criminal trial.

Appellees contended that probable cause existed for accusing Gerst of the crime of embezzlement and that appellees’ conduct was not so outrageous as to justify an action for intentional infliction of emotional distress. In appellees’ view, Gerst’s civil action was nothing short of retaliation for the criminal charges. Gerst, conversely, advanced the argument that the criminal charges were motivated solely by appellees’ efforts to collect on its employee fidelity insurance policy. The trial court denied the pre-trial motion as to malicious prosecution and intentional infliction of emotional distress and granted it as to four other allegations.

The trial proceeded with Gerst reiterating her previous testimony that all transfers of funds were by written authorization of a partner in the law firm and that all cash withdrawals were returned to Hill. A former employee of ⁴⁶⁷ First American Bank testified that withdrawals could be by check or cash during the period in question. Hill and Foley contradicted Gerst’s testimony regarding cash withdrawals and receipt of cash from her. At the close of Gerst’s case, appellees again moved for judgment which the court denied.

The court pointed out that the appellees could be liable “if there was evidence, considered in the light most favorable to appellants, that some member of the law firm made a report to the Baltimore County Police knowing that the report was recklessly made with a high probability that emotional distress would result” and, the court added, “in fact, emotional distress has resulted, given the testimony of Dr. Bills, who said, you know, how terrible it’s been on Miss Gerst, if that’s believed.” Appellees’ case included further attacks on Gerst’s credibility by presenting evidence that she cashed checks that were to be used to maintain the appellees’ postage meter and kept the cash; that she sought to purchase a house that required a $30,000.00 down payment; that she spent large sums of money purchasing lottery tickets; that her lifestyle was inconsistent with her earned income of $265.00 weekly; and that she had fraudulently received unemployment compensation benefits. The issues in this case were whether the appellees instituted a criminal proceeding against Gerst without probable cause for a purpose other than bringing an offender to justice, and whether the appellant suffered emotional distress therefrom. The appellees’ defense was twofold: that it did not act maliciously or recklessly in reporting the theft, and that the evidence amassed through pre-trial discovery clearly established that Gerst stole the money. Appellees’ introduction of evidence discovered after Gerst’s acquittal in the criminal case was objected to by Gerst’s counsel, who maintained that probable cause in making the accusation of theft should be restricted to the known facts as of the time the accusation was made.

The ⁴⁶⁸ court overruled the objection and admitted the later discovered evidence. The appellees renewed their motion for judgment at the conclusion of all of the evidence; the court reserved ruling and submitted the case to the jury on issues. The jury decided that appellees had a reasonable belief that Gerst took the money, and that appellees did not report the matter to the police with ill will or with a reckless disregard for the truth. Interestingly, issue 3, submitted over objection by Gerst, asked whether Gerst stole money from appellees.

The- jury decided that she did not. The jury found that Gerst suffered from emotional distress, that it was not severe, and that a causal connection existed between the filing of the police report and Gerst’s emotional distress. Based upon the responses by the jury, judgment was entered for the appellees. The jury verdict was returned on Friday, September 16, 1988.

The court, sua sponte, scheduled a sanctions hearing for the following Thursday, stating: I am scheduling a hearing on Thursday, September 22nd at 3:30 p.m. on the issue of Rule 1-341, bad faith and unjustified proceedings. At that time I would appreciate Mr. White or Mr. Byrnes providing me with lists of all expense, attorney’s fees incurred since the filing of this action. All right. That concludes the case.

As we shall see, rather than concluding the case, the court’s action merely set the stage for phase two of the battle. On December 16, 1988, 1 the court filed a 21-page Memorandum Opinion and Order imposing the monetary sanctions which are the subject of this appeal. The court made post-trial findings of fact which we shall summarize as follows: ⁴⁶⁹ The court found as a fact that when John Foley made the police report on behalf of the law firm it “was not done with ill will or hostility or lack of good faith or reckless disregard for the truth.” Referring to the disputed testimony over Gerst’s spending habits, the trial court found as a fact that “after having had the opportunity to see and hear the witnesses, that the plaintiff spent approximately $1,000 to $1,500 per week in cash during the 1982 through March of 1983 period despite the fact that she had a cash income of only $275.00 per week.” Addressing the issue of emotional distress, the court said: “The facts clearly and convincingly established that the plaintiff never suffered from any disabling emotional distress. Nevertheless, the court finds that the plaintiffs attorney did have good reason to believe that the plaintiff had emotional problems as early as November of 1985.” Concluding its fact finding, the court opined: “After reading the extensive pleadings ... and ... documentation which takes up four file folders, listening to every witness over the eight days that the trial took and again reviewing the 58 exhibits introduced ... the court is clearly convinced that this suit was brought by the plaintiff because of her ill will and hostility toward White, Mindel, Clark & Hill, Samuel Hill and John Foley.

Further, that she felt that she had nothing to lose by bringing this suit but believed that if she were successful she could reap a windfall from the defendants. This court finds as a fact that this suit was brought and continued in bad faith and without substantial justification. The plaintiff knew that this action was frivolous. In addition, this court is clearly convinced that at the very latest, when the case was called for trial on September 6, 1988, the plaintiff’s attorneys knew that there was no evidence to support the plaintiff’s allegations.

Further, they knew or reasonably should have known that there was no justification in continuing this litigation and causing the defendants to incur additional defense costs. ⁴⁷⁰ Aside from “hindsight,” which we address later, some of the court’s findings adopt the version of a particular witness or witnesses over the testimony of others, or its findings are contrary to the responses of the jury on the issues, or it adopts a conclusion where more than one inference is presented by the testimony. 2 The appellants raise a number of issues including denial of due process in scheduling the sanctions hearing; whether the standard of reviews in Rule 1-341 cases ought to include an independent review by the appellate court; and whether the sanctions imposed amount to an abuse of discretion. We shall limit our review to the single issue: Is the trial court’s decision clearly erroneous? Rule 1-341 Bad Faith—Unjustified Proceeding In any civil action, if the court finds that the conduct of a 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 to the adverse party the costs of the proceeding and the reasonable attorney’s fees incurred by the adverse party in opposing it. The objective of the Rule is to fine-tune the judicial process by eliminating the abuses arising from the tendency of a few litigants and their counsel initiating or continuing litigation that is clearly without merit.

The inherent danger in the process is that over zealous pursuit of the objective may result in what the Court, in Eastway Construction Corp. v. City of New York, 762 F.2d 243, 254 (2nd Cir.1985), described as “stifling the enthusiasm or chilling the creativity that is the very lifeblood of the law.” ⁴⁷¹ Although Rule 1-341 was adopted in 1984, our appellate courts have addressed the rule in at least six cases in 1988 alone. Watson v. Watson, 73 Md.App. 483 , 534 A.2d 1365 ; Legal Aid v. Farmer, 74 Md.App. 707 , 539 A.2d 1173 ; Legal Aid v. Bishop’s Garth, 75 Md.App. 214 , 540 A.2d 1175 ; Allnutt v. Comptroller of the Treasury, 77 Md.App. 424 , 550 A.2d 728 ; Yamaner v. Orkin, 313 Md. 508 , 545 A.2d 1345 ; Newman v. Reilly, 314 Md. 364 , 550 A.2d 959 . Sanctions imposed upon litigants and counsel pursuant to Rule 1-341 were upheld in two of the above cases and reversed in four. In Watson , sanctions were upheld where fraud was clearly established.

Likewise, in Allnutt , sanctions were imposed where the attack on the validity of state personal income tax laws lacked substantial justification in view of a plethora of cases rejecting the same argument. Sanctions imposed were reversed on appeal in: Farmer , where a $900.00 attorney fee was imposed against attorneys for taking a “frivolous appeal” from a District Court order favoring a landlord in a landlord-tenant dispute; Bishop’s Garth , where the trial judge assessed a counsel fee of $9,691.00 after concluding that “it became clear during the trial that the defendant's case (an evicted tenant) was totally without merit”; Yamaner , where the court granted a $300.00 fee against a party filing a second motion for summary judgment; and Newman , where sanctions of $21,-165.05 were approved by the trial court which held that a plaintiff lacked substantial justification to pursue in court a malpractice claim where the plaintiff admittedly had no expert witnesses to testify as to his condition when he was involuntarily committed for treatment of a mental disorder. The cases make clear that the principle we stated in Dent v. Simmons, 61 Md.App. 122, 124 , 485 A.2d 270 (1985) (Alpert, J.), is to be zealously guarded. That principle confirms that: [F]ree access to the courts is an important and valuable aspect of an effective system of jurisprudence, and a party possessing a colorable claim must be allowed to ⁴⁷² assert it without fear of suffering a penalty more severe than that typically imposed on defeated parties.

In Newman, supra, the Court of Appeals (Rodowsky, J.), citing both Yamaner and Farmer, supra, reiterated that Rule 1-341 is not intended to penalize a party and/or counsel for asserting a colorable claim or defense. Ibid. 314 Md. at 380 , 550 A.2d 959 . Needle and King The trial court held that as of the start of the trial Needle and King knew that there was no evidence to support Gerst’s allegations and, therefore, there was no justification in continuing the litigation. At the outset of the case Needle and King knew the following: a.

That a direct conflict existed between Gerst and her accusers as to whether cash withdrawals were permitted and, if so, whether their client or a member of the firm took the money. b. That a representative of the bank would dispute the law firm’s allegation that cash withdrawals were prohibited. c. That Gerst was acquitted of the crime of embezzlement. d. That if Gerst did not take the money, some other person in the law firm must have done so and, under that scenario, the named defendant and the law firm were chargeable with falsely accusing Gerst with the theft. e.

That the law firm filed its police report and claim for reimbursement on its employee dishonesty policy on the same day and that the policy did not cover members of the firm. f. That its research of the law restricted evidence of probable cause in initiating the charges of theft to the facts known by the law firm at the time the accusations were made. g. That Gerst had paid a substantial retainer in order that her case be presented in court. ⁴⁷³ The appellants herein, Needle and King, testified at the sanctions hearing that they believed Gerst’s protestations of innocence to be “sincere” and “consistent.” A subjective belief in one’s client, standing alone, should not be a bar to the imposition of sanctions. Where that belief is supported by articulated facts supporting the subjective opinion, however, the rule is otherwise.

The federal courts, in order to reduce satellite litigation, have adopted an objective standard holding that sanctions shall be imposed when it appears that a competent attorney could not form the requisite reasonable belief as to the validity of what is asserted at trial. See Eastway Construction Corp. v. City of New York, 762 F.2d 243 (2nd Cir.1985). Counsel’s justification for initiating or continuing a suit, moreover, does not and was never intended by Rule 1-341 to require an attorney to pass judgment on the credibility of his client under the threat of a monetary sanction in the event that either a jury or judge arrives at a different conclusion as to credibility. Substantial justification is established where the legal position taken by counsel is “fairly debatable.” Newman v. Reilly, supra.

See also ABA Section of Litigation, Sanctions (2d Ed.1988) stating: monetary sanctions against an attorney should not turn on whether a court or jury later believes that the client lacks credibility; Comment to Rule 3.1 of the Rules of Professional Conduct (action by lawyer does not lack substantial justification even if lawyer “believes that the client’s position ultimately will not prevail”). We hold that by either an articulated subjective belief or by a more rigorous objective standard, Needle