Opinion
Civil Action No. 02-2298-KHV
December 17, 2002
MEMORANDUM AND ORDER
This matter comes before the Court on defendant Robert L. Dodson, Jr.'s Motion For Sanctions (Doc. #25) filed October 23, 2002. The motion seeks sanctions against plaintiff and plaintiff's counsel, Timothy Harris and the law firms of Quarles Brady, LLC and Husch Eppenberger, LLC. For reasons set forth below, defendant's motion is overruled.
Background
On June 28, 2002, General Electric Capital Corporation ("GE Capital") filed suit against defendants, asserting nine state law claims arising out of a security agreement between GE Capital as lender and Dodson Aviation, Inc. as borrower. Under the security agreement GE Capital loaned $2,750,000 for Dodson Aviation to purchase a used aircraft, two engines and other equipment. Robert L. Dodson, Jr. (Dodson), an owner and vice president of Dodson Aviation, personally guaranteed the obligations of Dodson Aviation under the security agreement. According to GE Capital, Dodson knew when he applied for the loan that the aircraft had structural defects, but represented to GE Capital that the aircraft was free of defects. The complaint against Dodson alleges fraud and breach of guaranty and seeks prejudgment attachment.
On June 28, 2002, GE Capital filed a motion for prejudgment attachment of Dodson's real property. See Plaintiff's Motion For Prejudgment Attachment Without Notice (Doc. #3). Because the undersigned judge was unavailable, the Honorable John W. Lungstrum graciously agreed to hear that motion. John Power of Husch Eppenberger in Kansas City and Timothy Harris of Quarles Brady in Chicago represented GE Capital at the hearing, which occurred on July 3, 2002. The corporate defendants appeared through Donald Scott of McDowell, Rice, Smith Gaar in Kansas City. Dodson appeared pro se.
That same day, GE Capital also filed a motion for a temporary restraining order seeking possession of the aircraft, engines and ancillary equipment from Dodson Aviation. On the morning of July 3, 2002, the three corporate defendants (Dodson Aviation, Dodson International and Dodson Investments) filed a bankruptcy petition under Chapter 11 of the United States Bankruptcy Code, 11 U.S.C. § 1101 et seq. The bankruptcy petition stayed the action against the corporate defendants, including the motion for temporary restraining order.
At the beginning of the hearing, Judge Lungstrum queried the lawyers as follows:
Let me ask a preliminary question because I will confess to you I was a first-year law student 35 years ago, which has been a while. I learned at that time that attachment was a remedy utilized with personal property, and I recognize that in over 35 years of practice as a lawyer and as a judge that conventionally at least when a creditor seeks to impose a lien or otherwise impede the ability to sell or to otherwise dispose of real property, that lis penden[s] by virtue of filing a copy of the lawsuit if it's not filed in the same county in which the action was originally brought is the way in which usually that sort of action is accomplished. And I have never in 35 years seen an attachment against real property. My research, although on a rather superficial level, convinces me that there is no literal prohibition against an attachment of real estate. In fact, the Kansas statute includes in the form order the potential for real estate to be attached. I've simply never seen that in 35 years.
My question to you is, as we start the threshold of this, why is an attachment something that you seek on this basis as an extraordinary remedy, extraordinary prejudgment relief, where lis penden[s] is very simply obtained and very easily obtained by virtue of simply recording this complaint that's been filed in federal court with the proper authorities in Franklin County and Johnson County, apparently the places where the real estate is located? * * *
If you sue Mr. Dodson for money damages, then that claim against him is under the laws of Kansas a lis penden[s] following the Kansas procedures. The only complication is that the case is filed in federal court; therefore, you have to go through a couple other hoops of registering what you've done, but you need no further interest other than the potential judgment creditor under the Kansas lis penden[s] statute. That's certainly for 35 years what I have understood the law to be. That doesn't mean I'm right, but I believe that to be absolutely correct, so I don't see where you're going with an attachment here.
Robert L. Dodson Jr.'s Memorandum In Support Of Motion For Preliminary Injunction (Doc. #13) filed September 17, 2002, Ex. E., Transcript of Motion Proceedings Before the Honorable John W. Lungstrum on July 3, 2002, at 7-10.
In response to Judge Lungstrum's query, Mr. Harris stated that GE Capital sought to prevent any transfer of Dodson's real property between the time of the hearing and the entry of judgment, and stated that he knew of no other procedure for prejudgment attachment. Judge Lungstrum responded that in lis pendens one does not get an attachment but creates a prospective lien, which is a cloud on title that would prevent any sale with a warranty of good title by a prospective judgment debtor. Mr. Harris stated that "that's news to me because I don't know how you can attach somebody's property simply by suing them on a guarantee." Id. at 10. Judge Lungstrum then asked Mr. Harris (who is a Chicago lawyer) if he had consulted with Kansas counsel on the issue. Mr. Power (who is admitted to practice in this court) responded that Mr. Harris had consulted with him and that "while I don't necessarily take issue with your depiction of lis penden[s], my concern about a lis penden[s] is while it may impede an arm's length transaction, it does nothing with nonarm's length transactions and there's multiple entities and parties involved here in which there could be transfers going on which we could not block; whereas, with a preattachment — prejudgment attachment then we can block that." Judge Lungstrum responded that "[y]ou have said the magic words as to what might be a potential concern about lis penden[s] as the only way to protect you here. That's definitely a potential issue." After further colloquy with plaintiff's attorneys and with Dodson personally, the Court overruled GE Capital's motion for prejudgment attachment, citing the following reasons:
First of all, with regard to the Kansas statute and permitting the prejudgment attachment to be obtained without notice, I believe the purpose for that is in the event that you have property that is very easily moved and . . . [someone can] obtain an attachment to prevent that from happening. That doesn't apply here. We're talking about real estate, which is certainly not subject to the kind of ability to secret, hide, or dispose of without anybody knowing it.
Second, the prong of the prejudgment attachment statute under which the plaintiff seeks relief is the fraud prong. It doesn't say allegations of fraud; it doesn't say if the plaintiff comes in and says there was fraud, then attachment prejudgment is appropriate. It says if there was fraud in contracting the debt. I think that does require a finding by the court, although not the final finding in the case, that does potentially implicate those parties who have filed their bankruptcy action as to whom the conduct of Mr. Dodson Jr. probably is attributable. And therefore I believe that it would be imprudent to conduct a hearing today without Mr. Dodson Jr. being represented, with the bankruptcy petition having been filed, and the court to make findings one way or another about the question of fraud. . . . I'm satisfied that there's a dispute here and it's not appropriate for the court to resolve it today, especially because I see no prejudice to the plaintiff. I think Kansas law is well established that lis penden[s] is available. Plaintiff simply needs to take the steps that are available . . . and this lawsuit will be, in fact, a lien on the property of Mr. Dodson Jr., which will cloud his title and ability to sell that property if you take those steps.
[Third, although] it is possible that there would be some kind of transaction entered into which would somehow not [be] an arms length transaction, . . . I think at this stage with the light shining brightly on Mr. Dodson Jr. he would be well advised not to engage in some sort of fraudulent transfer . . . I think the glare of the spotlight on Mr. Dodson and again his personal appearance here today are indicative of the fact that the likelihood of the plaintiff suffering prejudice is very low.
Id. at p. 22-24.
On August 13, 2002, six weeks after Judge Lungstrum denied its motion for prejudgment attachment, GE Capital filed a notice of this action in the office of the Register of Deeds of Franklin County, Kansas. The notice stated that GE Capital seeks to recover $2,750,000 from Dodson and that "[d]efendants' real property is charged with the payment of such sum, and there shall be a lien declared on it, for which the property may be sold." Robert L. Dodson Jr.'s Memorandum In Support Of Motion For Sanctions (Doc. #26) filed October 23, 2002, Ex. A at 1. The notice listed legal descriptions of four parcels of real property which Dodson owned in Franklin County, Kansas. Id. at 2-3.
On August 20, 2002, Dodson's counsel faxed a letter to Mr. Power of Husch Eppenberger, asking GE Capital to withdraw the notice or provide authority for not doing so. The letter stated in part as follows:
The referenced property is not the subject matter of the litigation. By the express terms of Kan. Stat. Ann. § 60-701, the pre-judgment attachment which GE Capital sought and was denied was simply "incidental" to, and not the subject matter of, the litigation. The subject matter of the litigation is an airplane. For that reason, Kan. Stat. Ann. § 60-2201 is inapplicable. Kan. Stat. Ann. § 60-2203a (assuming it is even applicable) provides for filing notice with the clerk of the district court, not the register of deeds. Please withdraw the Notice, or provide me with the authority for taking such action. If Mr. Dodson has to seek judicial relief, he will ask for his fees and costs in doing so.
Robert L. Dodson Jr.'s Memorandum In Support Of Motion For Sanctions (Doc. #26) filed October 23, 2002, Ex. B. On August 22, 2002, Mr. Harris, GE Capital counsel in Chicago, faxed Dodson's counsel a response that stated in relevant part:
GE Capital disagrees with the conclusions reached in your letter, and will not withdraw the Notice. Moreover, if you seek support for the right of GE Capital to record the Notice, please refer to the ruling made by Judge Lungstrum on July 3, 2002 in open Court.
Id., Ex. C.
When GE Capital refused to withdraw its Notice in Franklin County, Dodson asserted a counterclaim for abuse of process and slander of title, filed a motion for a preliminary injunction to compel GE Capital to withdraw the Notice, and requested and prepared for a hearing on that motion. In the memorandum in support of his motion for a preliminary injunction, Dodson again asserted that K.S.A. § 60-2201 did not apply and that K.S.A. § 60-2203a provided the only authority for filing.
The Kansas lis pendens statute, K.S.A. § 60-2201(a), provides:
When a petition has been filed in the district court pursuant to chapter 60 of the Kansas Statutes Annotated, the action is pending so as to charge third persons with notice of its pendency, and while pending no interest can be acquired by third persons in the subject matter thereof as against the plaintiff's claims; but such notice shall be of no avail unless the summons be served or the first publication made within ninety (90) days after the filing of the petition.
K.S.A. § 60-2201(a). The Kansas Supreme Court has set out the requirements for a valid lis pendens under K.S.A. § 60-2201(a): "(1) property must be of a character to be subject to the rule of lis pendens; (2) the court must acquire jurisdiction both of the person and the property; and (3) the property must be sufficiently described in the pleadings." Field v. Freedman, 1986 WL 379754, at *4 (D.Kan. 1986) (citing Travis v. Supply Co., 42 Kan. 625, 22 P. 991 (Kan. 1889)). In addition, the litigation must be about the property that will be affected by the notice. Id. (citing Herman v. Goetz, 204 Kan. 91, 460 P.2d 554 (Kan. 1969)); see Gatewood v. Bosch, 2 Kan. App. 2d 474, 581 P.2d 1198, 1203 (Kan. 1978) ("the Pendente lite lien only applies to property which is the subject of the pending action").
By contrast, K.S.A. § 60-2203a "is concerned with notices of lis pendens for actions not involving title to real property and pending either in federal or state court." Griffin v. Fed. Land Bank of Wichita, 1989 WL 60303, at 1 (D. Kan (1989). Section 60-2203a provides in pertinent part:
Notice of pendency of certain actions; liens; release; fees.
(a) After the commencement of any action in any district court of this state, or the courts of the United States in the state of Kansas or in any action now pending heretofore commenced in said courts, which does not involve title to real estate, any party to said action may give notice in any other county of the state of the pendency of the action by filing for record with the clerk of the district court of such other county a verified statement setting forth the parties to the action, the nature of the action, the court in which it is pending, and the relief sought, which shall impart notice of the pendency of the action and shall result in the same lien rights as if the action were pending in that county.
On October 3, 2002, the Court convened a hearing on Dodson's motion for preliminary injunction. GE Capital appeared through Scott A. Klundt of Quarles Brady Streich Lang, LLP, in Phoenix and Tammy N. Etem of Husch Eppenberger. Dodson appeared through Kirk May of Rouse Hendricks German May, PC.
At the outset of the hearing, the Court noted that Kansas case law is clear: in order to attach a valid lis pendens under K.S.A. § 60-2201, the property itself must be the subject of the litigation. The Court asked Mr. Klundt whether he disputed the Court's understanding of the law and whether he claimed that Dodson's property was the subject of the litigation. Mr. Klundt agreed that under K.S.A. § 60-2201 the property must be the subject of the action. He asserted, however, that because the complaint requested prejudgment attachment, the property is the subject of the action. Mr. Klundt could cite no case law to the effect that a simple request for prejudgment attachment is sufficient for purposes of K.S.A. § 60-2201. Cf. Davison v. McKown, 157 Kan. 217, 139 P.2d 421 (Kan. 1943) (prospective judgment lien is not sufficient basis for lis pendens under K.S.A. § 60-2201). At the end of this colloquy Mr. Klundt noted that unlike Section 60-2201, K.S.A. § 60-2203a does not require that the action affect the real property, and the Court agreed that under Section 2203a, plaintiff in a Kansas state or federal court can obtain a potential lien on defendant's property in another county by filing a verified statement in the county in which defendant owns that property. Under K.S.A. 60-§ 2203a, the notice must be filed with the state district court, and it must be a verified statement setting forth the parties, the nature of the action, the court in which it is pending and the relief sought.
At that point in the hearing, Mr. Klundt backtracked, stating that GE Capital did not claim title to Dodson's property and that GE Capital had filed its notice under K.S.A. § 60-2203a because this action "does not involve title to real property." October 3, 2002 Transcript at 14. He asserted that GE Capital had followed K.S.A. § 60-2203a by filing a notice in Johnson County district court, and had also followed K.S.A. § 60-2201(b) by filing its Notice with the Franklin County Register of Deeds. The Court asked whether GE Capital's filing in Franklin County was just an extension of what it had filed in Johnson County and was therefore not subject to the case law and requirement of K.S.A. § 60-2201. In yet another contradiction of his earlier position, Mr. Klundt responded that GE Capital had filed in Franklin County pursuant to K.S.A. § 60-2201 because Dodson's real property was the subject of the action.
Dodson's position was that at most plaintiff had a potential judgment lien under K.S.A. § 60-2203a, and it must file in Franklin County District Court in compliance with that statute.
The Court noted that Judge Lungstrum had denied GE Capital's request for prejudgment attachment, as pleaded in the complaint, and that it saw no other basis to claim that Dodson's real estate was the subject matter of the litigation. The Court therefore found that the purported lis pendens under K.S.A. § 60-2201, which GE Capital had filed in Franklin County, was invalid on its face. The Court questioned whether to enter a mandatory preliminary injunction requiring plaintiff to withdraw its Notice under K.S.A. § 60-2201, or to enjoin plaintiff from further pursuing its remedies in the Franklin County Register of Deeds Office. At that point, GE Capital offered to "voluntarily" remove the filing from the Register of Deeds Office in Franklin County and to file notice with the Franklin County District Court Clerk under K.S.A. § 60-2203a. The Court allowed GE Capital 24 hours to do so, and overruled as moot Dodson's motion for preliminary injunction.
Mr. May noted that he had suggested to GE Capital precisely such action in his letter of August 20, 2002 and that GE Capital had flatly rejected it.
Pursuant to 28 U.S.C. § 1927 and the Court's inherent power, Dodson now seeks to recover costs and fees which he incurred as a result of plaintiff's erroneous filing in the Franklin County Register Of Deeds Office under K.S.A. § 60-2201. Dodson contends that plaintiff's conduct, and that of his counsel in filing and refusing to remove the lien, was unreasonable and vexatious. He asserts that the Court should award him $16,753 in attorney fees and paralegal time and $336.65 in expenses for prosecuting the motion for preliminary injunction and preparing the motion for sanctions.
Analysis
Pursuant to 28 U.S.C. § 1927, a district court may assess costs and fees against an attorney who vexatiously and unreasonably multiplies the proceedings. Dreiling v. Peugeot Motors of Am., Inc., 768 F.2d 1159, 1165 (10th Cir. 1985). This power to award sanctions must be strictly construed and utilized only in instances evidencing a "serious and [studied] disregard for the orderly process of justice." Id. (citing Kiefel v. Las Vegas Hacienda, Inc., 404 F.2d 1163, 1167 (7th Cir. 1968)).
28 U.S.C. § 1927 states in full:
Any attorney or other person admitted to conduct cases in any court of the United States or any Territory thereof who so multiplies the proceedings in any case unreasonably and vexatiously may be required by the court to satisfy personally the excess costs, expenses, and attorneys' fees reasonably incurred because of such conduct.
A court may award Section 1927 sanctions "for conduct that, viewed objectively, manifests either intentional or reckless disregard of the attorney's duties to the court." Bowles Fin. Group, Inc. v. Stifel, Nicolaus Co., 33 F.3d 62, 1994 WL 459647, at *3 (10th Cir. 1994). "An attorney becomes subject to Section 1927 sanctions `by acting recklessly or with indifference to the law, as well as by acting in the teeth of what he knows to be the law. . . . A lawyer's reckless indifference to the law may impose substantial costs on the adverse party. Section 1927 permits a court to insist that the attorney bear the costs of his own lack of care.'" Braley v. Campbell, 832 F.2d 1504, 1511 (10th Cir. 1987) (quoting In re TCI Ltd., 769 F.2d 441, 445 (7th Cir. 1985)); see also Herzfeld Stern v. Blair, 769 F.2d 645, 647 (10th Cir. 1985) (upholding sanctions under § 1927 for attorney conduct "either cavalier . . . or bent on misleading the court").
GE Capital's decision to file a Notice of lis pendens with the Franklin County Register of Deeds under K.S.A. § 60-2201 was ill advised — but perhaps understandable given the tenor of the hearing on July 3, 2002. More serious issues arise from plaintiff's refusal to retract that Notice in the face of Dodson's letter of August 20 — a refusal which reflects shoddy legal work, poor judgment and questionable professional ethics. On the other hand, the improper notice under K.S.A. § 60-2201 served a function which was similar to (though more harsh than) a properly filled notice under K.S.A. § 60-2203a. And the end result — after great to-do on both sides — was the same: a cloud on Dodson's property in Franklin County. The Court cannot condone the conduct of GE Capital in this regard but by the same token, it cannot condemn its apparently good faith effort to prevent Dodson from dissipating his assets prior to trial in fraud of a potential creditor. In other words, on balance, the Court cannot agree that Section 1927 sanctions are appropriate.
Dodson also asks the Court to use its inherent power to "assess attorney's fees when a party has acted in bad faith, vexatiously, wantonly, or for oppressive reasons." Chambers v. NASCO, Inc., 501 U.S. 32, 55 (1991). This power extends only to bad faith conduct in litigation. Id. Here again, GE Capital's insistence on procedures under K.S.A. § 60-2201, rather than under K.S.A. § 60-2203a, does not justify the impositions of sanctions.
IT IS THEREFORE ORDERED that Robert L. Dodson, Jr.'s Motion For Sanctions (Doc. #25) filed October 23, 2002 be and hereby is OVERRULED.