Agency of Natural Resources v. Lyndonville Savings Bank & Trust Co.

Agency of Natural Resources v. Lyndonville Savings Bank & Trust Co. (2001-190);
174 Vt. 498; 811 A.2d 1232

[Filed 19-Aug-2002]

                                 ENTRY ORDER

                      SUPREME COURT DOCKET NO. 2001-190

                               MAY TERM, 2002


  Agency of Natural Resources	       }	APPEALED FROM:
                                       }
                                       }
       v.	                       }	Environmental Court
                                       }	
  Lyndonville Savings Bank & Trust     }
  Company	                       }
                                       }	DOCKET NO. 40-3-99 Vtec

                                                Trial Judge: Merideth Wright 

             In the above-entitled cause, the Clerk will enter:

       The Lyndonville Savings Bank & Trust Company appeals from the
  environmental court's order declining to award the Bank attorney's fees
  incurred in an enforcement action voluntarily dismissed by the Agency of
  Natural Resources following the first day of hearing.  We affirm.

       For the most part, the relevant facts are not in dispute.  On February
  5, 1999, the Agency issued an administrative order pursuant to 10 V.S.A. §
  8008 alleging that the Bank's logging activities at Bolton Valley during
  the summer of 1997 violated Vermont's "heavy cutting" law, 10 V.S.A. §
  2625, which had been enacted earlier that summer.  The law requires a
  permit to log forty or more acres of woodland below a certain density.  Ken
  Davis, an outspoken opponent of the law, had conducted the Bolton Valley
  logging operation for the Bank and was obligated by an indemnification
  agreement with the Bank to pay any fines imposed as the result of the
  operation.  The Agency alleged that the Bank had cut plus or minus
  sixty-four acres, and imposed a civil penalty of $22,000.

       The Bank challenged the administrative order in the environmental
  court.  After the Agency filed a pre-trial memorandum on May 26, 1999, both
  parties filed various motions to compel additional discovery. 
  Approximately one week before the scheduled September 22, 1999 hearing, the
  court granted the Agency's motion to amend its administrative order to
  allege that the heavy cut had taken place on forty or more acres.  The day
  before the hearing, the Bank served the Agency with a motion for sanctions
  under V.R.C.P. 11, asserting that the Agency's decision to proceed with the
  enforcement action against the Bank was patently frivolous because the
  Agency had made so many mistakes in conducting its survey of the operation
  that it would be unable to prove that the Bank had heavily logged forty or
  more acres, in violation of the law.

 
        
       The following day, the hearing proceeded with the State calling its
  first witness, the state forester who had investigated the Bank's logging
  operation.  Midway through direct examination, the court permitted counsel
  for the Bank to conduct a voir dire examination of the witness concerning a
  computer-generated map of the cut area that the Agency sought to put into
  evidence.  The examination revealed several discrepancies between the scale
  of the underlying map and the scale of the inspected areas.  The hearing
  concluded with the court directing the Agency to arrange for the computer
  file of the base map of the cut area to be retrieved and printed, for a
  one-inch scale line to be physically drawn on the new printout, and for the
  inspection lines to be replotted on the new computer-generated base map. 
  New hearing dates were set for October 12, 19, and 25.  On October 7, 1999,
  the Agency moved to dismiss the proceeding under V.R.C.P. 41(a)(2).  In
  response, the Bank requested reimbursement for its costs, expenses, and
  attorney's fees.  On November 17, 1999, the court ordered that the
  dismissal be with prejudice and scheduled an evidentiary hearing on the
  Bank's motion for Rule 11 sanctions.  The Agency moved for reconsideration,
  and on January 26, 2001, the court denied the Bank's motion for attorney's
  fees and costs, except for the Bank's expert witness fees from the
  September 22 hearing.  The court also gave the Agency the option of
  dismissing the case with prejudice or dismissing the case without prejudice
  but being obligated to reimburse the Bank for additional fees.  The Agency
  elected to dismiss the case with prejudice.

       On appeal, the Bank first argues that the court erred in concluding,
  as a matter of law, that it could not consider an award of attorney's fees
  because the Agency voluntarily dismissed its enforcement action within
  twenty-one days of the Bank's service of its Rule 11 motion.  Before
  addressing this argument, we must examine Rule 11, relevant case law, and
  the environmental court's reasoning in denying the Bank's motion for
  attorney's fees.  Rule 11 imposes upon attorneys and unrepresented parties
  an obligation to present the court with only those pleadings that assert
  claims, defenses or other legal positions "warranted by existing law or by
  a nonfrivolous argument for the extension, modification, or reversal of
  existing law or the establishment of new law."  V.R.C.P. 11(b)(2); see
  Bennington Realty, LLC v. Jard Co., 169 Vt. 538, 538, 726 A.2d 56, 57
  (1999) (mem.).  Parties seeking Rule 11 sanctions must make the request
  separately from other motions or requests, and must serve the motion,
  including a description of the specific conduct complained of, on the party
  alleged to have violated the rule.  V.R.C.P. 11(c)(1)(A).  Under Rule 11's
  "safe-harbor" provision, which was added as part of a 1996 amendment
  adopting the amended federal rule, the motion for sanctions "shall not be
  filed with or presented to the court unless, within 21 days after service
  of the motion (or such other period as the court may prescribe), the
  challenged paper, claim, defense, contention, allegation, or denial is not
  withdrawn or appropriately corrected."  The provision is intended to
  provide protection against sanctions when lawyers or unrepresented
  litigants timely withdraw or correct potential violations brought to their
  attention.  See Reporter's Notes, 1996 Amendment, V.R.C.P. 11.  Thus, under
  the safe-harbor provision, sanctions are generally unavailable, as a matter
  of law, if the moving party fails to abide by the rule's procedural
  requirements.  Bennington Realty, 169 Vt. at 539, 726 A.2d  at 58.
   
       Here, the environmental court ruled that Rule 11 sanctions were not
  available to the Bank because the Agency moved to dismiss its underlying
  administrative order within the twenty-one-day safe-harbor period, and
  further because the alleged misconduct centered around pre-litigation

 

  activities not governed by the rule.  We uphold the trial court's ruling
  for the more fundamental reason that V.R.C.P. 11 is inapplicable in this
  case.  Rule 11 prohibits certain misconduct by "an attorney or
  unrepresented party," V.R.C.P. 11(b), and allows sanctions against those
  persons, id. 11(c).  While the Bank mentioned the lawyer for the Agency of
  Natural Resources in its original motion, its real target was the Agency,
  and it sought sanctions against the Agency.  Moreover, it wanted sanctions
  based on the Agency's filing of the enforcement order even though that
  order was not a paper presented to the court as required by Rule 11(b). 
  Sanctions against a represented party are not covered by Rule 11; nor are
  sanctions based upon out-of-court activity.

       There may be some confusion in this area of the law caused by our
  memorandum decision in Bennington Realty, where we disposed of a Rule 11
  appeal on grounds similar to those invoked here.  In that case, as here,
  the moving party also sought sanctions on other grounds, particularly under
  Cameron v. Burke, 153 Vt. 565, 576, 572 A.2d 1361, 1367 (1999), which
  allows sanctions for bad faith or vexatious actions or conduct which is
  unreasonably obdurate or obstinate.  We responded that Rule 11 is the
  "appropriate vehicle for invoking these principles of equity and justice,"
  and that a party could not evade the safe harbor provision of Rule 11 by
  labeling its motion as proceeding under Cameron.  Bennington Realty, 169
  Vt. at 539, 726 A.2d  at 58.  But our holding in Bennington Realty did not
  alter the fact that Rule 11 is the appropriate vehicle only if one seeks
  sanctions against an unrepresented party or a lawyer for a party.  Neither
  Rule 11 nor its safe harbor provision applies if the moving party is
  seeking sanctions against a represented litigant.

       In any event, even putting aside the fact that the Bank is seeking
  sanctions based on the conduct of a represented party rather an attorney or
  an unrepresented party, we agree that the Agency's voluntary dismissal
  within the safe-harbor period precluded the imposition of sanctions.  In
  its  one-page argument challenging the environmental court's decision in
  this regard, the Bank contends that the Agency should be estopped from
  asserting the application of the safe-harbor provision because the Agency
  delayed in disclosing information that would have revealed earlier the
  total absence of support for the administrative order.  In making this
  argument, the Bank relies upon Divane v. Krull Elec. Co., 200 F.3d 1020
  (7th Cir. 1999).
   
       Divane offers no support for the Bank's position.  In Divane, the
  trial court granted the plaintiffs' post-judgment motion for Rule 11
  sanctions, finding that the lack of evidentiary support for the defendant's
  counterclaim could not have been determined until the trial was completed. 
  Id. at 1025.  Rather than accept the trial court's reasoning that the
  safe-harbor period was an unnecessary formality where the plaintiffs had
  filed a post-judgment motion for sanctions, the Seventh Circuit relied on
  the fact that the plaintiffs had previously served a pre-trial motion for
  sanctions on the defendant at the same time that they had asked the trial
  court to strike the counterclaim as frivolous.  Id. at 1026.  Although the
  trial court eventually dismissed the pre-trial motion as premature, the
  defendant had effectively been put on notice that the plaintiffs were
  seeking Rule 11 sanctions against him for filing a frivolous counterclaim;
  therefore, defendant had been given an opportunity to respond by
  withdrawing the counterclaim, and the safe-harbor provision was satisfied. 
  See id. at 1026-27.  A similar situation does not exist here.  Divane does
  not stand for the proposition, as the 

 

  Bank suggests, that the safe-harbor provision may be ignored when a party
  incurs litigation costs before becoming aware of Rule 11 violations that
  resulted in those costs.

       Nevertheless, the Bank insists that there is a basis for its claim of
  estoppel, if not under Rule 11, then under the bad-faith exception to the
  American Rule under which each party assumes its own attorney's fees. 
  Although we have stated that a party may not defeat Rule 11's safe-harbor
  provision "by invoking the same residual powers of equity and justice that
  form the basis of the rule and its requirements," Bennington Realty, 169
  Vt. at 539, 726 A.2d  at 58,  there is no doubt that courts have inherent
  power, independent of Rule 11, to award attorney's fees in exceptional
  cases based on the bad-faith conduct of litigants.  See Chambers v. ASCO,
  Inc., 501 U.S. 32, 45-46 (1991); Cameron v. Burke, 153 Vt. 565, 576, 572 A.2d 1361, 1367 (1990); see also Reporter's Notes, 1996 Amendment, V.R.C.P.
  11 (court may look to its inherent judicial power to award attorney's
  fees).  This power must be exercised with cautious restraint, however -
  only in those exceptional cases where justice demands an award of
  attorney's fees, see Chambers, 501 U.S.  at 44; In re Gadhue, 149 Vt. 322,
  330, 544 A.2d 1151, 1156 (1987), such as where a party is unjustly forced
  to endure a second round of litigation, see Vt. Women's Health Center v.
  Operation Rescue, 159 Vt. 141, 150-51, 617 A.2d 411, 416-17 (1992); In re
  Gadhue, 149 Vt. at 329, 544 A.2d  at 1155.

       Here, the environmental court found that even assuming the Bank could
  avoid the safe-harbor provision by asking the court to invoke its residual
  powers of equity, the Bank had failed to demonstrate that it was forced to
  seek judicial assistance to secure a clearly defined and established right
  that should have been freely enjoyed without judicial intervention.  The
  court explicitly referred to the fact that the Bank had not been forced to
  engage in a second round of litigation, but also concluded in other
  sections of its decision that none of the documents filed by the Agency in
  this case contained frivolous contentions or were filed for an improper
  purpose, and that, until the first day of trial, the Agency had reason to
  believe that its administrative order had evidentiary support.  The record
  supports these findings.  Indeed, the Bank's own proffer of bad-faith
  litigation made to the environmental court and referenced here on appeal
  states that (1) the Agency's voluntary dismissal, standing alone, is
  tantamount to a concession that the administrative order was without merit;
  (2) the Agency recklessly proceeded with a close case even though it was
  aware of problems involving difficult density determinations; (3) the
  Agency's own report indicated problems with the implementation of the new
  law; (4) the Agency had reason to doubt the investigating forester's
  calculations in this close case; and (5) given the uncertainty over the
  methodology employed by the forester, "it would seem prudent" for the
  Agency to have selected an independent expert to review the forester's work
  before the administrative order was issued.  In short, the record,
  including the Bank's own proffer, indicates that implementation of the new
  law was difficult, that the methodologies were uncertain, and that this was
  a close case as to whether forty or more acres were heavily logged, in
  violation of the new law.
   
       As the trial court noted, essentially, the Bank proffered that the
  Agency had acted recklessly in not acting sooner to determine whether in
  fact the logging operation constituted a violation of the law.  As a matter
  of law, such recklessness, even if true, is not a sufficient showing of bad
  faith for the court to have awarded attorney's fees under the limited
  bad-faith exception to the American Rule.  

 

  See LaPrade v. Kidder Peabody & Co., 146 F.3d 899, 905 (D.C. Cir. 1998)
  (bad-faith standard is more stringent than recklessness standard);
  Chambers, 501 U.S.  at 47 (bad-faith standard under court's inherent power
  to award attorney's fees is more stringent than Rule 11 standard).  The
  Bank has failed to show that this is one of those exceptional cases where
  attorney's fees should be awarded because a litigant acted vexatiously, in
  an unreasonably obdurate or obstinate manner, or in bad faith.

       The Bank argues, however, that the environmental court erred by
  refusing to allow additional discovery and an evidentiary hearing so that
  it could demonstrate that the Agency's decision to issue the underlying
  administrative order and continue to pursue it without evidentiary support
  was based on bad faith motives rather than a legitimate effort to enforce
  the new law.  Apparently, the Bank hoped to uncover evidence to support its
  theory that the Agency's dogged prosecution of the administrative order was
  an attempt to punish Ken Davis for his outspoken objections to the new law.

       We conclude that the environmental court acted well within its
  discretion in refusing to grant the Bank additional discovery and an
  evidentiary hearing to engage in a fishing expedition.  See LaPrade, 146 F.2d  at 904 (appropriate standard for reviewing decision whether to hold
  evidentiary hearing on attorney's fees is abuse of discretion); see 4
  V.S.A. § 1004(b) (in connection with environmental enforcement actions, no
  discovery other than that explicitly provided shall be permitted except
  under extraordinary circumstances).  The court had followed the case
  throughout the litigation and was acutely aware of the difficulties and
  shortcomings of the Agency's case.  Indeed, it was the court that ordered
  the Agency to produce a new base map to determine the cut area.  Thus, the
  court had already observed the factors most relevant to determining whether
  additional discovery and an evidentiary hearing were required to address
  the Bank's motion for sanctions. Cf. LaPrade, 146 F.3d  at 907 (hearing not
  required on request for Rule 11 sanctions when trial court has already
  observed elements of litigation most relevant to criteria for imposing
  sanctions); 5A C. Wright & A. Miller, Federal Practice and Procedure §
  1337, at 123-24 (2d ed. 1990) (hearing on Rule 11 sanctions generally not
  necessary when court has observed conduct of litigation; additional
  discovery should be allowed only in extraordinary circumstances).  Of
  course, the Bank may seek an evidentiary hearing based on an allegation of
  malicious prosecution in a separate action, see Reporter's Notes, 1996
  Amendment, Rule 11 (parties retain ability to bring action for malicious
  prosecution or abuse of process), and in fact has apparently already done
  so.

       Finally, the Bank argues that the court erred by concluding that
  attorney's fees were not warranted as a discovery sanction on the ground
  that no discovery order was violated.  According to the Bank, the court
  ignored the fact that certain discovery is automatic under 4 V.S.A. §
  1004(a) and V.R.C.P. 76(d)(3)(B), and that the Agency's pre-trial
  memorandum was incomplete and thus failed to satisfy the rule and statute. 
  We find no merit to this argument.  The Bank has failed to show that the
  Agency violated a specific discovery order, as required by V.R.C.P.
  37(b)(2).  Even assuming that the Agency filed an incomplete pre-trial
  memorandum, the court acted within its discretion in giving the Agency
  additional time to produce its expert.  See Greene v. Bell, 171 Vt. 280,
  283, 762 A.2d 865, 869 (2000) (trial court has inherent authority to
  enforce discovery requirements by excluding evidence, granting
  continuances, or taking other appropriate action; absent abuse of
  discretion, court's decision regarding imposition of discovery sanctions
  will not be disturbed on review). 

 
        
       Affirmed.


                                       BY THE COURT:

                                       _______________________________________
                                       John A. Dooley, Associate Justice

                                       _______________________________________
                                       James L. Morse, Associate Justice

                                       _______________________________________
                                       Denise R. Johnson, Associate Justice

                                       _______________________________________
                                       Marilyn S. Skoglund, Associate Justice

                                       _______________________________________
                                       Michael S. Kupersmith, District Judge
                                       Specially Assigned