McNally v. Rey

Present: All the Justices

JOHN J. MCNALLY
OPINION BY CHIEF JUSTICE LEROY R. HASSELL, SR.
v. Record No. 070522 April 18, 2008

ROBERT REY, ET AL.

FROM THE CIRCUIT COURT OF THE CITY OF NORFOLK
Charles D. Griffith, Jr., Judge

In this appeal, we consider whether the Circuit Court of

the City of Norfolk abused its discretion by imposing

sanctions upon an attorney who filed a petition in bankruptcy

on behalf of his client who was a party in a proceeding

pending in the circuit court. The relevant facts necessary

for our resolution of this appeal are undisputed. Robert Rey

and Ellen Rey, the plaintiffs, filed a motion for judgment

against Simonz, Inc., and its representative, Gerald T. Simon.

Plaintiffs alleged that Simonz and Simon breached certain

contractual and statutory duties owed to them arising out of

an agreement to remove lead-based paint from the plaintiffs'

home.

Simonz and Simon filed responsive pleadings, and Simonz

also filed a counterclaim. Subsequently, the circuit court

dismissed Simon as a defendant, and the plaintiffs proceeded

with their action against Simonz.

The circuit court scheduled a trial date of November 15,

2006. Before the scheduled trial date, John J. McNally,
counsel of record for Simonz, discussed with his client the

option of filing a voluntary bankruptcy petition in the United

States Bankruptcy Court for the Eastern District of Virginia.

On the evening of November 14, 2006, McNally filed a petition

in bankruptcy in the United States Bankruptcy Court for

Simonz. McNally sent a facsimile of the petition and the

bankruptcy court's electronic confirmation of the filing to

plaintiffs' counsel within one hour of the time of the filing

of the bankruptcy petition.

The next day, McNally and plaintiffs' counsel appeared in

the circuit court for the scheduled trial. McNally informed

the circuit court that his client had filed a petition in

bankruptcy. Plaintiffs' counsel immediately asked the circuit

court to assess costs and attorney's fees against McNally,

dismiss Simonz' counterclaim with prejudice, and issue a bench

warrant against Simon for unspecified criminal charges.

The circuit court questioned McNally about the

circumstances related to his client's decision to file the

petition in bankruptcy. McNally informed the court that his

client indicated "early on that it did not want to incur the

expense of defending the plaintiffs' suit." Additionally,

"[s]everal months before trial, McNally explained [Simonz']

options, including bankruptcy, to Simon, but Simon did not

then decide to file a bankruptcy petition."

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 McNally, asserting the attorney-client privilege,

declined to answer certain questions that the circuit court

asked about his client's decision to file the petition.

McNally told the circuit court that he was not prepared to

proceed with the plaintiffs' oral motion for sanctions.

McNally also informed the court that his client had a legal

right to file a petition in bankruptcy at any time, including

pretrial, during the trial, or upon the conclusion of trial.

The circuit court did not rule on the plaintiffs' oral motion

for sanctions against McNally, but entered an order that

dismissed the plaintiffs' action without prejudice because

Simonz was entitled to an automatic stay of legal proceedings

by operation of law pursuant to 11 U.S.C. § 362.

McNally filed a letter with the circuit court on November

20, 2006, responding to the circuit court's consideration of

sanctions against him for the bankruptcy filing. He stated

"it would have been an ethical violation for me to disclose my

client's intention to file a bankruptcy (which was clearly a

client confidence) unless the client specifically authorized

me to do so." McNally also asked that he be subject to a

"properly file[d]" motion and be given an opportunity to

respond: "I respectfully believe that I am entitled to due

process on this issue." Plaintiffs' counsel responded by

requesting sanctions for legal fees, costs, and expenses

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plaintiffs incurred that totaled $14,090.45. Without a

hearing, the circuit court entered an order on December 15,

2006, holding, among other things, that

"the conduct of Mr. McNally in filing pleadings
indicating an intent to try the case while in fact
knowing that bankruptcy was to be filed was not in
good faith and was for an improper purpose including
to needlessly increase the cost of litigation to the
Plaintiffs. As a result, Plaintiffs incurred
unnecessary legal and expert fees and costs in
preparing the case for trial. The Court on its own
initiative as permitted by law believes the
appropriate sanction is that Counsel for Defendant,
John [J.] McNally personally pay the legal fees,
expert charges, and costs incurred by Plaintiffs
from November 8, 2006 until notified of the
bankruptcy on the evening of November 14 as well as
the cost of the jury.
"Counsel for Plaintiffs have submitted a
statement of legal fees with affidavits, costs and
expert fees. The Court finds all charges fair and
reasonable. The legal fees total $12,170.00, the
costs, including airfare for the mother of Mrs. Rey
to come and watch their children during the trial
are $555.45, the expert costs are $1,365.00. The
Court hereby assesses these fees, costs and charges
against John [J.] McNally personally under the power
of the Court to sanction conduct of lawyers where
appropriate and ORDERS that John [J.] McNally pay
the total amount of $14,090.45 . . . .
"The Court further ORDERS that Mr. McNally pay
to the Clerk of the Court the cost of the jury which
was ordered to be present for this trial."

McNally objected to the entry of this order, asserting

numerous reasons, including his contention that he had not

violated Code § 8.01-271.1. McNally also filed a motion to

reconsider, and he reasserted, among other things, that he had

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not violated Code § 8.01-271.1. The circuit court denied the

motion, and McNally appeals.

McNally contends that the circuit court erred by awarding

sanctions and costs against him. McNally states that the

circuit court's order that awards sanctions against him only

cites one pleading that he signed, the witness and exhibit

list that he was required to file in accordance with the

court's scheduling order. McNally contends that there is no

evidence that his act of filing this pleading violated Code

§ 8.01-271.1. Additionally, McNally asserts that Code § 8.01-

271.1 does not authorize a court to impose sanctions upon an

attorney when that attorney fails to disclose to opposing

counsel or to the court that the attorney's client is

contemplating filing a petition in bankruptcy.

Responding, the plaintiffs contend that McNally did not

make the proper objections in the circuit court to the order

awarding sanctions against him and, therefore, his arguments

are procedurally barred. The plaintiffs argue, consistent

with the circuit court's rulings, that McNally intended to

file a petition in bankruptcy on behalf of his client sometime

before the scheduled trial date and that McNally's act of

filing the witness and exhibit list was "not in good faith"

and constituted an "improper purpose" within the intendment of

Code § 8.01-271.1. We disagree with plaintiffs' contentions.

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 The plaintiffs' argument that McNally failed to object to

the circuit court's order imposing sanctions is without merit.

McNally repeatedly objected to the circuit court's decision to

impose sanctions against him.

Initially, we observe that we are unable to discern from

the circuit court's order whether the court imposed sanctions

authorized by Code § 8.01-271.1 or some other source of

authority. We note, however, that this Court has previously

held that a circuit court does not have inherent authority to

impose as a sanction an award of attorney's fees and costs:

"In the absence of authority granted by a
statute, such as Code § 8.01-271.1, or a rule of
court, such as Rule 4:12, . . . a trial court's
inherent power to supervise the conduct of attorneys
practicing before it and to discipline an attorney
who engages in misconduct does not include the power
to impose as a sanction an award of attorneys' fees
and costs to the opposing parties."

Nusbaum v. Berlin, 273 Va. 385, 400-01, 641 S.E.2d 494, 502

(2007).

We now consider the litigants' arguments that relate to

Code § 8.01-271.1. This statute states in relevant part:

"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

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 increase in the cost of litigation. If a pleading,
written motion, or other paper is not signed, it
shall be stricken unless it is signed promptly after
the omission is called to the attention of the
pleader or movant.

. . . .

"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."

Code § 8.01-271.1.

We must apply an abuse of discretion standard when

reviewing a circuit court's determination to impose sanctions

pursuant to Code § 8.01-271.1. Williams & Connolly, LLP v.

People for the Ethical Treatment of Animals, 273 Va. 498, 509,

643 S.E.2d 136, 140 (2007); Ford Motor Co. v. Benitez, 273 Va.

242, 249, 639 S.E.2d 203, 206 (2007); Flora v. Shulmister, 262

Va. 215, 220, 546 S.E.2d 427, 429 (2001); Gilmore v. Finn, 259

Va. 448, 466, 527 S.E.2d 426, 435 (2000) (quoting Oxenham v.

Johnson, 241 Va. 281, 287, 402 S.E.2d 1, 4 (1991)).

Code § 8.01-271.1 imposes several obligations upon an

attorney who files a written pleading or other document with

the court. The signature of an attorney constitutes a

certificate that the attorney has read the pleading, motion,

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or the paper, and to the best of the attorney's knowledge,

information, and belief formed after reasonable inquiry, the

pleading or document filed 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. The

attorney may not interpose the pleading or other paper for any

improper purpose.

The circuit court's order that imposed the sanctions

against McNally was based upon the circuit court's conclusion

that McNally filed a witness and exhibit list when he did not

intend to try the case. There is simply nothing in the record

before this Court that supports this finding. There is no

evidence in the record that McNally's act of filing the

witness and exhibit list was not well grounded in fact. There

is nothing in the record before this Court that supports a

finding that the witness and exhibit list was interposed for

an improper purpose, such as to harass or cause unnecessary

delay, or needless increase in the cost of litigation. See

Taboada v. Daly Seven, Inc., 272 Va. 211, 214-16, 636 S.E.2d

889, 890-91 (2006). Simply stated, the record before this

Court is devoid of any evidence that supports the circuit

court's award of sanctions. McNally's act of filing the

witness and exhibit list, as required by the circuit court's

own pretrial order, did not violate Code § 8.01-271.1.

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 Additionally, counsel of record in a state court

proceeding, who represents a litigant contemplating filing a

petition in bankruptcy in a federal bankruptcy court, does not

have an obligation to inform opposing counsel or the circuit

court that the attorney's client is considering filing a

petition in bankruptcy. A litigant's decision to file a

petition in bankruptcy while litigation is pending does not

constitute a violation of Code § 8.01-271.1 provided such

filing is in compliance with the federal Bankruptcy Code, 11

U.S.C. § 101, et seq. To hold otherwise would have a chilling

effect upon the rights of litigants and their attorneys when

such litigants seek to avail themselves of their statutory

rights set forth in the federal Bankruptcy Code. Therefore,

we hold that the circuit court abused its discretion by

imposing sanctions upon McNally.

Accordingly, we will reverse the judgment of the circuit

court, and we will enter a final judgment in favor of McNally.

Reversed and final judgment.

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