PRESENT: Carrico, C.J., Compton, Lacy, Hassell, Keenan, and
Kinser, JJ., and Whiting, Senior Justice
CARDINAL HOLDING COMPANY, ET AL.
OPINION BY
v. Record No. 990014 SENIOR JUSTICE HENRY H. WHITING
November 5, 1999
JOHN F. DEAL, ET AL.
FROM THE CIRCUIT COURT OF THE CITY OF VIRGINIA BEACH
A. Bonwill Shockley, Judge
This is an appeal of a sanctions award against an attorney
and the law firm that employed him. In accord with familiar
appellate principles, we will state the evidence in the light
most favorable to the prevailing party.
Cardinal Holding Company (Cardinal) and others, filed a
legal malpractice action against John F. Deal & Associates, a
law partnership, and two of its lawyers, John F. Deal and Rhonda
Cobler-Wells (collectively, Deal). The plaintiffs sought
damages in excess of 24 million dollars for Deal's acts of
alleged legal malpractice while representing Alvin Q. Jarrett
and, later, his executors, T. Roy Jarrett and Harry W. Jarrett.
The professional law corporation of Ayers & Stolte, P.C., by
Robert H. Smallenberg, one of its members (collectively, Ayers),
prepared and signed the motion for judgment and subsequent
pleadings that eventually gave rise to the award of sanctions
against them.
Charles E. Ayers, Jr., one of the principals in Ayers &
Stolte, P.C., was associated with Alvin Jarrett in a number of
business ventures. He and law firms in which he was a principal
were also Alvin Jarrett's legal counsel in various matters. In
July 1990, Deal replaced Mr. Ayers and his law firm as Alvin
Jarrett's legal counsel in certain of these matters. Deal's
representation continued until Alvin Jarrett's death in March
1991. Thereafter, Deal represented the executors of Jarrett's
estate until some time in 1991 or 1992.
In June 1993, Mr. Ayers and two of his related corporations
executed settlement agreements with the executors of the Jarrett
estate. As a part of the first agreement, Mr. Ayers agreed to
assist in the liquidation of the Jarrett estate including "the
prosecution of the potential malpractice action against John F.
Deal, Esquire, [and] his law firm."
Also in 1993, on a date not disclosed in the record, Mr.
Ayers filed a malicious prosecution action against Mr. Deal in
the Circuit Court of Henrico County. The action was based on
Mr. Deal's cooperation with the Commonwealth's Attorney of
Henrico County in the prosecution of Mr. Ayers for alleged
criminal conduct in his representation of Alvin Jarrett. Mr.
Ayers and his counsel filed pleadings in the malicious
prosecution action in violation of the sanctions statute, and
the court required them to pay Mr. Deal $4,958.04 as sanctions
2
to reimburse him for his costs and attorney's fees in defending
the action.
When the executors decided that they did not want to pursue
the malpractice claim against Deal, a second agreement was
negotiated in February 1997 in which the claim was assigned to
Mr. Ayers and two corporations in which he was a principal.
Paragraph 14 of the second agreement provided that "the rights
of either party herein may not be assigned without the prior
written consent of the other party."
Shortly after the second agreement was signed, Mr.
Smallenberg wrote a letter to Stephen G. Test, counsel for the
executors, asking that paragraph 14 of the amended settlement
agreement be deleted. Mr. Test not only refused to do so, but
he also reminded Mr. Smallenberg that Test's clients would
"object to the Agreement or any rights conveyed under the
Agreement being assigned without our consent."
In spite of this, the claim was assigned by Mr. Ayers and
his corporations to Cardinal. Thereafter, this action was filed
by Ayers not only in Cardinal's name as assignee, but also in
the Jarretts' names without their knowledge or consent or that
of their counsel. 1
1
Ayers named T. Roy Jarrett and Harry W. Jarrett, co-executors
of the estate of Alvin Q. Jarrett, "Estate of Alvin Q. Jarrett,
and Alvin Q. Jarrett, deceased" (collectively, the Jarretts) as
3
Although the motion for judgment was filed on March 21,
1997, Mr. Smallenberg delayed service of process on Deal for
almost a year. Mr. Deal learned that the action had been filed
before he was served with process and began preparations to
defend it.
After Mr. Smallenberg finally had process served on March
20, 1998, Deal responded on April 10, 1998 with a grounds of
defense, a special plea in bar, and a counterclaim against
Cardinal for malicious prosecution. Paragraph 3 of Deal's
counterclaim alleged that "[Cardinal] filed the Suit with
notice, actual or constructive, that legal malpractice claims
are non-assignable in the Commonwealth of Virginia. [Cardinal],
as purported assignee, has no basis in law to bring the Suit."
Hence, Deal sought sanctions.
At a hearing on June 10, 1998, more than 55 days after
service of the counterclaim on counsel for Cardinal, the court
permitted Cardinal to file a late response to the counterclaim.
Cardinal denied the allegations of paragraph 3 of the
counterclaim in its grounds of defense.
plaintiffs. When the Jarretts' counsel learned of this and
objected thereto, the court advised the parties that it would
sustain the Jarretts' motions to dismiss them as parties
plaintiff and for sanctions against Ayers. Since there is no
order in this record reflecting those rulings, we do not
consider either assignment of error raising issues as to the
award of sanctions to the Jarretts.
4
On the same day, the court heard argument on Cardinal's
motion to nonsuit its malpractice action against Deal and Deal's
opposition thereto because of the pendency of its counterclaim.
The court took this issue under advisement. By letter dated
July 15, 1998, the court advised the parties that it would
sustain Cardinal's motion for a nonsuit, but would hear argument
on the motion for sanctions on a date to be agreed upon by
counsel and the court.
Thereafter, counsel for Cardinal prepared, and counsel for
Deal signed, an order of nonsuit which did not reflect the
court's decision to hear argument on the motion for sanctions at
a later date. Another circuit court judge entered that order on
August 10, 1998.
At a hearing on September 4, 1998, the court overruled
Ayers' oral motion to dismiss Deal's motion for sanctions
against Ayers based on the ground that the court had lost
jurisdiction to impose sanctions, more than 21 days having
elapsed since entry of the nonsuit order. 2 After hearing
evidence and argument, the court awarded sanctions in favor of
Deal against Ayers in the sum of $22,181.17 to reimburse Deal
2
The court sustained the motion to dismiss the sanctions claim
against Cardinal and no cross-error was assigned to that ruling.
5
for attorney's fees, costs, and time expended in defense of this
proceeding and "the sum of $10,000 to punish" Ayers.
The sanctions award was based on the following pertinent
provisions of Code § 8.01-271.1 (the sanctions statute):
Every pleading, written motion, and other paper
of a party represented by an attorney shall be signed
by at least one attorney of record in his individual
name. . . .
The signature of an attorney or party constitutes
a certificate by him that (i) he has read the
pleading, motion, or other paper, (ii) to the best of
his knowledge, information and belief, formed after
reasonable inquiry, it is well grounded in fact and is
warranted by existing law or a good faith argument for
the extension, modification, or reversal of existing
law, and (iii) it is not interposed for any improper
purpose, such as to harass or to cause unnecessary
delay or needless increase in the cost of litigation.
. . . .
An oral motion made by an attorney or party in
any court of the Commonwealth constitutes a
representation by him that (i) to the best of his
knowledge, information and belief formed after
reasonable inquiry it is well grounded in fact and is
warranted by existing law or a good faith argument for
the extension, modification or reversal of existing
law, and (ii) it is not interposed for any improper
purpose, such as to harass or to cause unnecessary
delay or needless increase in the cost of litigation.
If a pleading, motion, or other paper is signed
or made in violation of this rule, the court, upon
motion or upon its own initiative, shall impose upon
the person who signed the paper or made the motion, a
represented party, or both, an appropriate sanction,
which may include an order to pay to the other party
or parties the amount of the reasonable expenses
incurred because of the filing of the pleading,
motion, or other paper or making of the motion,
including a reasonable attorney's fee.
6
I
Ayers' jurisdictional argument is based on the following
assignment of error asserted by Ayers:
The trial court erred in awarding any sanctions to the
Jarretts when more than 21 days elapsed after entry of
the final order. (Emphasis added.)
Deal responds that (1) neither this nor any other
assignment of error relates the alleged jurisdictional defect to
the sanctions awarded to Deal, and that (2) in any event,
Cardinal remained in the case because it was the defendant in
Deal's counterclaim which was still pending when the court
awarded sanctions. We need to consider only the first response.
During oral argument, Ayers maintained that the
reference in the assignment of error to the Jarretts
instead of to Deal was a typographic error which becomes
manifest upon reading the text of Ayers' argument on brief.
In effect, Ayers seeks an amendment of the assignment of
error to correct this alleged typographic error.
In Hamilton Development Co., v. Broad Rock Club, 248
Va. 40, 445 S.E.2d 140 (1994), we said: "Appeals are
awarded based on assignments of error. Rule 5:17(c). The
language of an assignment of error may not be changed
. . . ." Id. at 44, 445 S.E.2d at 143. Accordingly, Ayers
is held to the assignment of error as written and, because
it fails to relate the jurisdictional question to the
7
sanctions awarded to Deal, we will not consider the
question.
II
Ayers concedes that legal malpractice actions were not
assignable at common law in Virginia. Ayers claims,
however, that it was objectively reasonable for lawyers to
believe that the common law in Virginia had been modified
in 1977 by the enactment of the following pertinent
provisions of Code § 8.01-26:
Only those causes of action for damage to real or
personal property, whether such damage be direct or
indirect, and causes of action ex contractu are
assignable.
Even if we were to decide that it was objectively
reasonable to believe that the statute had modified the
common law in 1977, no such belief could have been held
after our decision in MNC Credit Corp. v. Sickels, 255 Va.
314, 497 S.E.2d 331 (1998). In MNC Credit, we held that
Code § 8.01-26 "does not abrogate the common law rule which
prohibits the assignment of legal malpractice claims in
this Commonwealth because the General Assembly did not
plainly manifest an intent to do so." 255 Va. at 318, 497
S.E.2d at 333.
We think that had Ayers made the "reasonable inquiry"
required of lawyers by Code § 8.01-271.1, the holding in
8
MNC Credit would have been discovered by the time Ayers
caused process to be served on March 20, 1998. This was
almost a month after the decision in MNC Credit was issued
and made public on February 27, 1998. Moreover, Mr.
Smallenberg told the trial court that he acquired actual
knowledge of MNC Credit when served with Deal's responsive
pleadings on April 13, 1998, "at the latest." Those
pleadings referred to MNC Credit.
Yet, 58 days later, on June 10, 1998, Ayers prepared
and Mr. Smallenberg, acting for the law firm, signed and
filed Cardinal's grounds of defense to Deal's counterclaim.
In the grounds of defense, Cardinal effectively asserted
that it, as the assignee of a legal malpractice action, had
the right to maintain the action.
Hence, the trial court did not err in basing its
sanctions award on the proposition that Ayers should have
known that legal malpractice claims cannot be assigned in
Virginia. Therefore, we need not consider the alleged
errors in basing the sanctions award on other grounds.
III
Next, we consider Ayers' argument that since Mr.
Smallenberg was the only person who signed the offending
pleadings, the court erroneously imposed sanctions on Ayers
& Stolte, P.C., Mr. Smallenberg's employer. Ayers thus
9
seeks to limit the scope of the sanctions statute solely to
the individual person who actually signed the pleadings.
Code § 1-13 requires that we construe certain
statutory language "as set forth in . . . following
sections unless this construction would be inconsistent
with the manifest intention of the General Assembly." Code
§ 1-13.19 directs that the word "'person' shall include any
individual, corporation, . . . or other legal entity." We
find no manifest intention in the sanctions statute to
limit the application of the word "person" to individuals,
thereby excluding corporations like Ayers & Stolte, P.C.
See Landmark Communications Inc. v. Commonwealth, 217 Va.
699, 702, 233 S.E.2d 120, 123 (1977) (applying Code § 1-
13.19, corporation held a "person" within scope of judicial
inquiry and review statute, Code § 2.1-37.13), rev'd on
other grounds, 435 U.S. 829 (1978).
Nor does the sanctions statute manifest an intention
to abrogate the general rule that a principal is liable for
its agent's acts that are performed within the scope of the
agency. E.g., Miller v. Quarles, 242 Va. 343, 347, 410
S.E.2d 639, 642 (1991); United Brotherhood v. Humphreys,
203 Va. 781, 786-87, 127 S.E.2d 98, 101-02 (1962). Here,
as Deal notes, the corporate employer was shown as counsel
of record for Cardinal. Indeed, the offending pleadings
10
bear a printed notation that the pleading was "Prepared By:
Law Offices Ayers & Stolte, P.C."
The record also indicates that, in signing and filing
these pleadings, Mr. Smallenberg was acting for his
employer, Ayers & Stolte, P.C, and within the scope of that
employment. Mr. Smallenberg's act was therefore the act of
the law firm since "{t}he act of the agent is the act of
the principal." Harris v. McKay, 138 Va. 448, 457, 122
S.E. 137, 140 (1924).
Thus, the firm itself, a person under the provisions
of Code § 1-13.19 and, as such, covered by the provisions
of Code § 8.01-271.1, effectively signed the pleadings.
Hence, we conclude that the court did not err in awarding
sanctions against the law firm of Ayers & Stolte, P.C.
IV
Ayers attacks the computations and amounts of the awards on
several grounds. In reviewing the awards, we apply an abuse of
discretion standard. Oxenham v. Johnson, 241 Va. 281, 287, 402
S.E.2d 1, 4 (1991).
In the first ground, Ayers maintains that the
$22,181.17 compensatory award included time and costs
incurred in asserting Deal's counterclaim. However, Ayers
does not segregate or identify those amounts and our review
11
of the record indicates that the award was $1,840 less than
the fees and costs billed.
Under these circumstances, we are unable to ascertain
that the court included these amounts in its award. Thus,
the record is insufficient for us to decide whether the
court erred in doing so.
Next, Ayers contends that "[i]t is inconceivable how
the defendants racked up in excess of $10,000.00 in
attorneys' fees prior to the nonsuit." Ayers notes that
there were no discovery proceedings during the three months
between the time the motion for judgment was served and
Ayers moved for a nonsuit. Ayers overlooks the evidence of
the time that Deal spent in preparing to defend the
malpractice action in the year that elapsed after the
action was filed and before Deal was finally served with
process. Moreover, Ayers fails to indicate that any
particular charge was excessive. Under these
circumstances, we are unable to say that the trial court
abused its discretion in fixing the amount of the
compensatory award.
Ayers further argues that the award constituted
"improper fee shifting" in that most of the fees claimed
were incurred in seeking sanctions, an activity allegedly
12
unrelated to Cardinal's original unwarranted claim. We
turn to the statute to resolve this contention.
In empowering a court to award an "appropriate
sanction," Code § 8.01-271.1 also authorizes an award of a
reasonable attorney's fee and reasonable expenses "incurred
because of the filing of the pleading." We read the quoted
language as permitting not only a recovery of such fees and
expenses incurred in defending against an unwarranted
claim, but also a recovery of those fees and expenses
incurred in pursuing a sanctions award arising out of such
a claim. Scheiderer & Associates v. City of London, 689
N.E.2d 552, 554 (Ohio 1998). Accordingly, we find no merit
in this contention.
Finally, Ayers asserts that the $10,000 award was
actually an award of punitive damages and that the elements
necessary to support such an award were not established.
We agree with Deal's response that this award was not an
award of punitive damages based on a common-law tort, but a
part of the sanctions award intended to punish Ayers under
Code § 8.01-271.1.
Although punitive damage awards and sanctions awards
share the common purpose of punishment and deterrence, Zedd
v. Jenkins, 194 Va. 704, 707, 74 S.E.2d 791, 793 (1953)
(punitive damages); In re Kunstler, 914 F.2d 505, 522 (4th
13
Cir. 1990), cert. denied, 499 U.S. 969 (1991) (sanctions),
the two awards differ in significant ways. Punitive
damages are awarded "only when there is misconduct or
actual malice, or such recklessness or negligence as to
evince a conscious disregard of the rights of another [or
in certain instances] if the acts are done with malice or
wantonness." Simbeck, Inc. v. Dodd Sisk Whitlock Corp.,
257 Va. 53, 58, 508 S.E.2d 601, 604 (1999)(citations
omitted).
In contrast, sanctions are assessed because of a
violation of Code § 8.01-271.1 which requires that a
lawyer's pleadings, motions, and other papers, as well as
oral motions are
to the best of his knowledge, information and belief,
formed after reasonable inquiry, . . . well grounded
in fact and . . . warranted by existing law or a good
faith argument for the extension, modification, or
reversal of existing law, and . . . [are] not
interposed for any improper purpose, such as to harass
or to cause unnecessary delay or needless increase in
the cost of litigation.
Hence, the absence of evidence of those elements necessary
to support an award of punitive damages does not affect an
award of sanctions if, as in this case, the evidence is
sufficient to support such an award. In sum, we find no
merit in any of Ayers' contentions regarding the amounts
awarded as sanctions.
14
For all the above reasons, we will affirm the judgment
of the trial court in awarding sanctions in favor of Deal.
Affirmed.
15