Independent Fire Insurance v. Lea

United States Court of Appeals,
Fifth Circuit.
No. 92–3174
Summary Calendar.
INDEPENDENT FIRE INSURANCE CO.,
Plaintiff–Cross–Defendant–Appellee–Cross–Appellant,
v.
Robert W. LEA, Jr., J. Randall Lea, and Elizabeth Lemoine Lea,
Defendants–Cross–Plaintiffs–Appellants–Cross–Appellees,
and
Richard Dennis Guffey, d/b/a Dick Guffey Insurance, Defendant–Cross–Appellee.
Dec. 18, 1992.
Appeals from the United States District Court For the Eastern District of Louisiana.
Before HIGGINBOTHAM, SMITH, and DeMOSS, Circuit Judges.
PER CURIAM:
BACKGROUND
In October, 1990, Independent Fire Insurance Company ("Independent Fire"), appellee, filed
a complaint for declaratory judgment in the United States District Court for the Eastern District of
Louisiana seeking a determination that it did not provide fire and vandalism insurance on certain
apartment complexes owned by Robert W. Lea, Jr., Randall Lea, and Elizabeth Lemoine Lea ("the
Leas"), appellants. It also sought declaratory relief that Richard Dennis Guffy d/b/a Dick Guffy
Insurance ("Guffy"), was not acting as its agent in connection with any attempts to place insurance
on the apartment projects. The Leas counterclaimed for fire losses to the apartments and
cross-claimed for damages against Guffy as agent, in the event the Court found that Guffy had failed
to secure insurance coverage on the apartment units.
In March 1991 the Leas amended their counterclaim to increase their demand and ask for
penalties and interest for failure to pay an insurance claim under Louisiana law. Trial was originally
set for June 17, 1991, but was reset for January 6, 1992. In December 1991 the Trial Judge allowed
Independent Fire to amend its original complaint so as to allege the Leas were guilty of fraud under
Louisiana law which would permit recision of any contract of insurance and allow an award of
attorney's fees and costs. The matter was ult imately tried as a bench trial for four days beginning
January 6, 1992, during which more than 100 exhibits were put into evidence and testimony was
heard from twelve witnesses.
In a 43 page opinion, (782 F.Supp. 1144; E.D.La.1992) the Trial Court, after detailed review
of the testimony and evidence, concluded that no policy had ever been issued by Independent Fire to
the Leas and confirmed its earlier summary judgment that Guffy was the agent of the Leas and not
of Independent Fire. It further found that no case had been made on the cross-claims by the Leas
against Guffy; and that, since there was never any contract of insurance, there could be no recision,
and therefore no fraud in the inducement. Hence the Trial Court granted the declaratory relief sought
by Independent Fire that it had no policy liability, dismissed the Leas counterclaim, dismissed the Leas
cross-claim against Guffy, and dismissed Independent Fire's claim for damages and attorney's fees
against the Leas based on fraud. More or less on its own motion, the Trial Court found that the filing
of the application for insurance and the filing of the amended counterclaim by the Leas, violated Rule
11 of the Federal Rules of Civil Procedure; and awarded attorney's fees and costs of $50,396.89 to
Independent Fire as sanctions against the Leas. In this appeal, the Leas appeal from the levy of the
sanctions against them, the Independent Fire cross-appeals the refusal of the Trial Court to award it
attorney's fees and damages for fraud.
OPINION
Part A. Rule 11 Sanctions
While the Trial Judge has broad discretion in assessing sanctions under Rule 11, we conclude
that he abused such discretion in applying sanctions to Randall Lea and Elizabeth Lemoine Lea.
These two individuals lived in Springfield, Missouri, and were involved in this litigation solely because
of their joint ownership with Robert W. Lea, Jr. the apartment projects purportedly insured by
Independent Fire. Neither of these individuals participated in the day to day management of the
apartment projects; and neither had any contact with Mr. Guffy or any representatives of
Independent Fire regarding the insurance coverage. Neither of these individuals gave any testimony
either by deposition or at the time of trial; and neither attended the 4–day trial. Neither of these
individuals signed any pleading, any affidavits, or any loss claim forms. In its lengthy opinion, the
Trial Court clearly identified the many grounds and circumstances on which it felt that actions taken
by Robert W. Lea, Jr. failed to satisfy the requirements of Rule 11; but no where did the Trial Court
identify any similar actions as having been taken by either Randall Lea or Elizabeth Lemoine Lea.
While Rule 11 of the Federal Rules of Civil Procedure does contemplate that sanctions can
be levied against a "represented party", we are constrained to hold under the facts of this case that
the "represented party" against which sanctions are levied must be a party who had some direct
personal involvement in the management of the litigation and/or the decisions that resulted in the
actions which the court finds improper under Rule 11. This test would clearly include Robert W. Lea,
Jr. but would also clearly exclude Randall Lea and Elizabeth Lemoine Lea. There is nothing in the
express language of Rule 11 that all parties at interest on a particular side of a given law suit shall be
subject to sanctions on a pro rata or joint and several liability or in solido basis; and we do not think
that the basic policies of "deterrence and education" behind Rule 11 require an interpretation of the
Rule which creates such forms of vicarious liability.
We have tested the circumstances and applicability of the sanction judgment against Robert
W. Lea, Jr. under the teachings and standards outlined by the Supreme Court in Cooter & Gell v.
Hartmarx Corporation, 496 U.S. 384, 110 S.Ct. 2447, 110 L.Ed.2d 359 (1990), and Business
Guides v. Chromatic Communications Enterprises, Inc., ––– U.S. ––––, 111 S.Ct. 922, 112 L.Ed.2d
1140 (1991); and hold that the Trial Court's determinations as to the occasions for and the amount
of such sanctions are well within the "objective standard of reasonableness" and the discretion vested
by necessity in the Trial Court. We therefore affirm the Trial Court's judgment as to sanctions
applicable to Robert W. Lea, Jr.
Part B. Independent Fire's Fraud Claim
Independent Fire cross appeals regarding the failure of the Trial Court to award it damages
for fraud either under a contract or tort theory. Louisiana Civil Code Article 1958, under which
Independent Life initially sought recovery, states:
The party against whom recision is granted because of fraud is liable for damages and
attorney's fees.
However, the Trial Court did not grant recision of an insurance policy on account of fraud;
but rather found that the insurance application originally submitted by Guffy contained a variety of
material misrepresentations, that this application was never accepted by Independent Fire, that no
initial premium was ever paid by the Leas to Independent Fire, and that no policy was ever issued by
Independent Fire insuring the apartment project owned by the Leas. Consequently, the court held
that Article 1958 was not applicable to this case. We think the trial court findings were amply
supported by the evidence and his conclusion of law was correct.
In a post trial memorandum and in their appellate brief, Independent Life asserts that it should
not be limited to a contract theory of fraud under art. 1958, but shoul d be entitled to recovered
damages on a tort theory of fraud. Our reading of the record convinces us, however, that the case
was not tried on a tort theory of fraud; and the Trial Court clearly did not address that theory in
rendering its decision. We decline to address that theory of recovery when it has not been considered
by the Trial Court.
CONCLUSION
For all of the foregoing reasons, we hereby order that the final judgment entered in this cause
under date of February 7, 1992, be and it is hereby amended by striking the names of "Randall Lea
and Elizabeth Lemoine Lea" from the subparagraph awarding judgment in favor of Independent Life
of $50,396.89 as sanctions under Rule 11; and as so amended, such final judgment is now
AFFIRMED.