The opinion of the court was delivered by: WEINSTEIN
This matter was remanded for the awarding of attorney's fees under Rule 11 of the Federal Rules of Civil Procedure and 42 U.S.C. § 1988. Eastway Construction Corp. v. City of New York, 762 F.2d 243 (2d Cir. 1985) (Eastway I). For the reasons indicated below, a modest portion of defendant's attorney's fees is assessed against the plaintiffs, while no fees are assessed against plaintiffs' counsel.
I .FACTS AND PROCEDURAL HISTORY
Plaintiff Eastway Construction Corporation is a general contractor that during the 1960s and 1970s engaged exclusively in construction work on publicly financed housing rehabilitation projects in New York City. Plaintiff Jaffee, Kanarek and Jacobs are officers of Eastway Construction Corporation. Collectively, plaintiffs are referred to in this opinion as "Eastway." (A more extensive statement of the facts than is needed for this phase of the litigation is set forth in Eastway I.)
Between 1966 and 1974, defendant City of New York ("City"), loaned nearly twelve million dollars through a now defunct program to limited partnerships controlled by principals of Eastway Construction Corporation. The purpose of the loans was to enable the partnerships to rehabilitate thirty-four multiple dwelling buildings in depressed neighborhoods. The loans were generally non-recourse, secured only by mortgages on the buildings. The partnerships fell behind in their loan payments, so that by March 1983 all but three buildings had reverted to City ownership through default, and the remaining three buildings secured mortgage arrearages totaling about three million dollars.
In the early 1970s, the City's housing rehabilitation loan program was enveloped in corruption, with one City official being convicted of extortion and accepting bribes, and several developers being charged with fraud. George Jaffee admitted making payments to a city official in an attempt to expedite the processing of pending loan applications. No criminal charges were brought against him or Eastway Construction Corporation. In response to this scandal, New York State revised its public housing finance laws. One part of the new statutory scheme gave the City the power to regulate the creation and operation of certain housing redevelopment companies and to control the identities of firms with which these redevelopment companies did business.
In the exercise of its new powers, the City decided that it would no longer enter into rehabilitation contracts with firms whose principals controlled entities that were in arrears or had defaulted on loans from the City. This policy prevented Eastway Construction Corporation from doing rehabilitation work directly for the City. In 1980 the City exercised its supervisory power over redevelopment companies and forbade them from entering into contracts with firms that the City refused to contract with. As a result Eastway was barred from doing any rehabilitation work for the City even indirectly.
Threatened with being forced out of business, Eastway went to the state court to challenge the City's policy, initiating an Article 78 proceeding that sought to have the policy declared "arbitrary and capricious." The State court challenge initially met with success, with the State Supreme Court granting summary judgment in Eastway's favor. On appeal, the Appellate Division reversed, Eastway Construction Corp. v. Gliedman, 86 A.D.2d 575, 446 N.Y.S. 2d 306 (1st Dep. 1982). No appeal was perfected to the Court of Appeals because, according to Eastway, it was then in the midst of attempting to negotiate a "work out" agreement to settle its differences with the City. The negotiations did at one point produce a tentative agreement. The City, however, ultimately refused to execute the agreement, and it never became effective.
Another major actor in the New York City housing rehabilitation arena is the Community Preservation Corporation ("CPC"), a private consortium of thirty-nine banks that do business in the City. CPC extends low interest loans to private developers to facilitate the rehabilitation of multiple dwelling buildings in depressed neighborhoods. In June of 1978 and again in July of 1981, Everett Jennings, on behalf of Orange Realty Co., applied to CPC for a loan to be used to rehabilitate a building in Brooklyn. Although Orange Realty was affiliated with Eastway, the loan applications did not list Eastway as general contractor. Both loan applications were rejected.
Unable to secure work on either publicly or privately financed housing rehabilitation projects, Eastway commenced the present action in this court. The complaint stated two causes of action under federal law. The first was an antitrust claim, which alleged that the City and CPC had conspired to prevent Eastway from carrying on its business. The second was, in essence, a due process claim, which alleged that the City's policy had deprived Eastway of its rights without due process of law.
The municipal and private defendants each moved for summary judgment, and each requested an award of attorney's fees. In August 1984 this court granted both summary judgment motions and dismissed the action but denied the motions for attorney's fees, stating on the record that it found plaintiffs' claims were not frivolous. Eastway appealed the dismissal of its action, and the municipal defendants cross-appealed the denial of attorney's fees.
The Court of Appeals affirmed the dismissal, but characterized the claims as "groundless" for purposes of determining entitlement to attorney's fees. Eastway I. It remanded for an award of attorney's fees to the municipal defendants. Costs incurred in defending the civil rights claim were to be assessed against plaintiffs alone under 42 U.S.C. § 1988, while costs incurred in defending the antitrust claim were to be assessed against plaintiffs or plaintiffs' counsel or both under Rule 11 of the Federal Rules of Civil Procedure. The case is therefore now before this court for a determination of 1) the proper amount of attorney's fees to be awarded to the municipal defendants, and 2) the person or persons who should pay the fees.
A. Purpose and Relationship of Rule 11 and 42 U.S.C. § 1988
The traditional American rule is that each party to litigation bears its own costs, including attorney's fees. See Alyeska Pipeline Service Co. v. Wilderness Society, 421 U.S. 240, 44 L. Ed. 2d 141, 95 S. Ct. 1612 (1975). This furthers our policy, demonstrated also by fee absorption and other devices such as contingency fees, of keeping the courts as open as possible. Congress has over the years enacted numerous statutory exceptions to the general rule against fee-shifting. The courts, through rules and interpretation, have gradually expanded these exceptions.
Courts have quite properly distinguished between two different purposes of the fee-shifting statutes and rules. One purpose is to compensate plaintiffs for the actual cost of vindicating legal rights, by partial analogy to the English system, in order to encourage private-attorney general suits in enforcement of important public policies. The second is to deter unfounded claims and defenses by assessing fees as a punitive measure. The second purpose is usually applied in favor of defendants, with the secondary effect of compensating the aggrieved litigant for legal fees that he should never have been forced to incur these exceptions.
Prominent among statutes providing an incentive for private enforcement of federal law is the Civil Rights Attorney's Fees Act of 1976, 42 U.S.C. § 1988 (1982), which provides for grants of attorney's fees to successful parties in actions brought under 42 U.S.C. §§ 1981-1983 & 1985-1986 and other civil rights provisions. Similarly, the Civil Rights Act of 1964 contains a provision awarding attorney's fees to successful parties in actions brought under Title VII of the Act. See § 706(k) of the Civil Rights Act of 1964, 42 U.S.C. § 2000a-3(b) (1982); Eastway I at 252-54; Erie Conduit Corp. v. Metropolitan Asphalt Paving Association, 106 F.R.D. 451, 455-56 (E.D.N.Y. 1985) (Maletz, J.) (discussion of statutory and judicial exceptions to the American Rule).
In applying these statutes to determine when to make awards of attorney's fees to plaintiffs, courts have been quite liberal, concluding that attorney's fees are routinely available to all prevailing plaintiffs. There are two reasons for such openness. "First, . . . the plaintiff is the chosen instrument of Congress to vindicate 'a policy that Congress considered of the highest priority.' Second, when a district court awards counsel fees to a prevailing plaintiff, it is awarding them against a violator of federal law." Christiansburg Garment Co. v. EEOC, 434 U.S. 412, 418, 54 L. Ed. 2d 648, 98 S. Ct. 694 (1978), quoting Newman v. Piggie Park Enterprises, 390 U.S. 400, 402, 19 L. Ed. 2d 1263, 88 S. Ct. 964 (1968) (citation omitted). The plaintiff, in short, is acting as a private attorney general and such behavior is to be encouraged by liberal compensation. See Copeland v. Marshall, 205 U.S. App. D.C. 390, 641 F.2d 880, 899 (D.C. Cir. 1980) ("The purpose of Title VII's fee award provision . . . is to encourage the private enforcement of the civil rights law.").
In addition to fee-shifting provisions that are intended to encourage the bringing of some lawsuits, there are provisions intended to deter the bringing of others. It is these provisions that are of primary interest in this case. Among them are the two provisions just discussed, 42 U.S.C. § 1988 and 42 U.S.C. § 2000a-3(b), as applied in determining whether to award fees to prevailing defendants, as well as Rule 11 of the Federal Rules of Civil Procedure. The purpose of these provisions is to discourage litigants from bringing frivolous cases or making frivolous motions.
Because such provisions 1) are in derogation of the general American policy of encouraging resort to the courts for peaceful resolution of disputes, 2) tend to breed time-consuming and expensive satellite litigation, and 3) increase tensions among the litigating bar and between bench and bar, the standard for imposition of sanctions is high. The provisions do not entitle all prevailing defendants to an award of fees; instead, fees are to be awarded only if the claim or motion was entirely unjustified, i.e., frivolous. Although they do contain a compensation element, the primary purpose of this group of provisions is deterrence. See, e.g., Advisory Committee Notes to Rule 11 ("The word 'sanctions' in the caption . . . stresses a deterrent orientation in dealing with improper pleadings, motions or other papers."); S.M. Kassin, An Empirical Study of Rule 11 Sanctions at 29 (Federal Judicial Center 1985) ("[T]he majority of judges . . . expressed a belief that deterrence is the most important purpose of sanctions."); Carrion v. Yeshiva University, 535 F.2d 722, 727 (2d Cir. 1976) (in passing § 706(k) and allowing for awards of attorney's fees to defendants, "Congressional intention was to . . . discourage baseless or frivolous actions"; power to be "sparingly exercised"); Rapisardi v. Democratic Party of Cook County, 583 F. Supp. 539, 543-44 (N.D. Ill. 1984) (court granted defendants attorney's fees of a modest amount under 42 U.S.C. § 1988, stating that an award of that size "accomplishes the deterrent purpose of the statute, [and] affords the defendant some compensation"); Kostiuk v. Town of Riverhead, 570 F. Supp. 603, 612-13 (E.D.N.Y. 1983) (court granted defendants nominal fees under § 1988, stating that the amount was "not intended to . . . fully compensate defendants," but that it would hopefully be "sufficient to serve as a caution to potential litigants with similar claim"). Cf. Taylor v. Prudential Bache-Securities, Inc., 594 F. Supp. 226 (N.D.N.Y.), aff'd mem., 751 F.2d 371 (2d Cir. 1984) (purposes of Rule 11 are deterrence and compensation); Index Fund Inc. v. Hagopian, 107 F.R.D. 95 (S.D.N.Y. 1985) (though Rule 11 is intended both to deter and to compensate, court awarded only nominal fees of $100).
While none of the deterrence-oriented provisions actually uses the word "frivolous," courts nonetheless consistently employ a "frivolousness" standard in determining whether an award of fees is appropriate. To properly inform the bar, simplify administration, and maximize substantive impact, it is advisable that the degree of frivolousness needed to trigger sanctions under each of these provisions be the same.
"Frivolous" is of the same order of magnitude as "less than a scintilla." It is defined in Webster's Third New International Dictionary (1967) as "of little weight or importance: having no basis in law or fact: light, slight, sham, irrelevant, superficial." The Oxford English Dictionary (1971) defines it as "[o]f little or no weight, value or importance; paltry; trumpery; not worthy of serious attention; having no reasonable ground or purpose . . . In pleading: Manifestly insufficient or futile."
If a claim is deemed frivolous for the purpose of imposing sanctions under Rule 11, it should also be considered frivolous for the purpose of imposing sanctions under section 1988. At least one court of appeals has expressly endorsed the application of a uniform standard for determining frivolousness. See Zaldivar v. City of Los ANgeles, 780 F.2d 823, 831 & n.8 (9th Cir. 1986) ("[T]he district court correctly adopted and applied for purposes of Rule 11 sanctions the standard applicable for the award of fees to prevailing defendants under the civil rights acts . . . The same standard is applied to the award of fees under the Securities Exchange Act of 1939, 15 U.S.C. § 78i(e) (1982) and the Securities Act of 1933, 15 U.S.C. ) 77k(e) (1982)."); see also Nemeroff v. Abelson, 620 F.2d 339, 350 (2d Cir. 1980) (applying Christiansburg standard to requests in securities actions for attorney's fees under 15 U.S.C. § 78i(e)).
B. Role of the District Court
Once a trial court determines that a claim or motion fails to meet the standard for nonfrivolousness, the court of necessity has a great deal of discretion in deciding on the nature of the sanction, and if it be an award of attorney's fees, how much to award. This is because the trial court's role is to provide the "appropriate" deterrent. Rule 11 of the Federal Rules of Civil Procedure for the United States District Courts is directed to the trial judge. It requires that the trial court "impose . . . an appropriate sanction."
Punishment should never exceed the amount required to achieve the result desired. A deterrent is therefore appropriate when it is the minimum that will serve to adequately deter the undesirable behavior. See U.S. v. Brennan, 629 F. Supp. 283, 307 (E.D.N.Y. 1986); Nemerson, Coercive Sentencing, 64 Minn. L. Rev. 669 (1980); see also Schwarzer, Sanctions Under the New Federal Rule 11, 104 F.R.D. 181, 201 (1985) ("The basic principle governing the choice of sanctions is that the least severe sanctions adequate to serve the purpose should be imposed."); Advisory Committee Notes to Rule 11 ("The court . . . retains the necessary flexibility to deal appropriately with violations of the rule. It has discretion to tailor sanctions to the particular facts of the case . . ."); Faraci v. Hickey - Freeman Company, Inc., 607 F.2d 1025, 1028 ("Recent legislation extending the power of the federal courts to award attorneys' fees by no means requires abandonment of the equitable principles that have traditionally governed a court's discretion in such matters. On the contrary, the express grant of authority to award fees presumes continued application of equitable considerations in appropriate cases, both to effectuate the broader legislative purpose and to do justice in the particular case."); Colucci v. New York Times Co., 533 F. Supp. 1011, 1013 (S.D.N.Y. 1982) ("the equities of the situation are to be considered to ensure that although the deterrent purpose of the statute [) 706(k)] is enforced, a losing party is not subjected to financial ruin"); Rapisardi v. Democratic Party of Cook County, 583 F. Supp. 539, 543 (N.D. Ill. 1984) ("In the court's discretion [under § 1988] to determine the amount of the fee to be awarded [to the defendants], small as well as large fees are permissible.").
Rule 11 on its face grants the trial judge the discretion not only to decide how much attorney's fees to award, but also whether or not to grant attorney's fees at all. The Rule states that when a filing is determined to be frivolous, the court "shall" impose sanctions, which sanctions "may" -- not must -- include an order to pay the other party's expenses. Other sanctions such as a reprimand or an order that the attorney take certain remedial courses or consult with skilled attorneys or attend court sessions are all available in place of a monetary award.
Recognizing that trial courts must have great discretion in fashioning proper sanctions under deterrence-oriented fee-shifting provisions, appellate courts have enunciated an "abuse of discretion" standard for reviewing specifics of fee awards. See, e.g., Eastway I at 254 n.7 ("In reviewing the specifics of an award [under Rule 11] of attorneys' fees, . . . we shall continue to adhere to the 'abuse of discretion' standard.'); Zaldivar v. City of Los Angeles, 780 F.2d 823, 828 (9th Cir. 1985) ("[I]f the appropriateness of the [Rule 11] sanction imposed is challenged, we review the sanction under an abuse of discretion standard."). This practice and standard placing primary reliance on trial court discretion has been applied to a wide range of deterrence-oriented provisions. See Zaldivar, 780 F.2d 823, 828 n.4, and cases cited therein. Necessarily, the district court will have a better grasp of what is acceptable trial-level practice among litigating members of the bar than will appellate judges. Cf. Gargiul v. Tompkins, 790 F.2d 265, 272 (2d Cir. 1986) ("District Judge, whose experience with New York law deserves deference"); Anderson v. City of Bessemer City, 470 U.S. 564, 105 S. Ct. 1504, 84 L. Ed. 2d 518 (1985).
In addition, where the decision whether to impose any sanctions rests on resolution of factual issues, i.e., whether an attorney conducted the "reasonable inquiry" required by Rule 11, the trial court's findings are reviewed under the "clearly erroneous" standard. See Zaldivar, 780 F.2d 823, 828; see also Westmoreland v. CBS, Inc., 248 U.S. App. D.C. 255, 770 F.2d 1168, 1174-75 (D.C. Cir. 1985); see generally Anderson v. City of Bessemer City, 470 U.S. 564, 105 S. Ct. 1504, 84 L. Ed. 2d 518 (1985) (requiring deference to trial court's findings of fact).
C. Issues in Imposing Rule 11 Sanctions
(1) Objective and Subjective Standards.
Rule 11 read literally contains both subjective and objective components. In pertinent part, it states:
Every pleading, motion, and other paper of a party represented by an attorney shall be signed by at least one attorney of record . . . The signature of an attorney . . . constitutes a certificate by him that he has read the pleading, motion, or other paper; that 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 . . . If a pleading, motion, or other paper is signed in violation of this rule, the court . . . shall impose upon the person who signed it, 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, including a reasonable attorney's fee.
(emphasis added). The text suggests that the obligation imposed by the Rule is partly objective, and partly subjective. The requirement that the attorney base his certification on a "reasonable inquiry" is objective, because what is "reasonable" is judged by objective norms of reasonable attorneys. But the certification itself need only state that the motion is well grounded "to the best of [the attorney's] knowledge, information, and belief." Since the certification relates to the attorney's own beliefs, it appears that it should be judged by a subjective standard. Even the subjective component has objective aspects since, as a matter of evidence, the judge will rely on what reasonable lawyers would have known or believed under the circumstances in deciding what this lawyer believed.
The objective "reasonable inquiry" element of Rule 11 serves to protect attorneys who reach reasonable, but erroneous, conclusions about the validity of their cases. Before a suit is filed, often only a limited investigation in the law and facts is possible. If an attorney makes a reasonable investigation under the circumstances and concludes based on that investigation that the pleading is well grounded in law and fact, he cannot be sanctioned for filing the pleading when time and discovery prove that the plaintiff does not in fact have a viable claim. See Advisory Committee Notes to Rule 11 ("[W]hat constitutes a reasonable inquiry may depend on such factors as how much time for investigation was available to the signer . . . [and] whether he had to rely on a client for information as to the facts underlying the pleading . . .").
A more difficult question is whether the apparently subjective element of Rule 11 can protect attorneys who honestly reach unreasonable conclusions about the factual or legal strength of their cases. What if an attorney conducts a reasonable inquiry into the facts and the law and concludes, honestly but mistakenly, that the law supports his pleading, even though the pleading would be recognized as plainly frivolous by a minimally competent member of the bar? A literal reading of the Rule would indicate that such conduct is not sanctionable because the attorney has clearly complied with the letter of the Rule: he has certified that to the best of his knowledge, information and belief, formed after a reasonable inquiry into the facts and the law, that the pleading is well grounded. This reading is also supported by the rationale behind the Rule, namely deterrence. While sanctioning an attorney's failure to make a reasonable inquiry might make him more diligent in the future, sanctioning honest errors is unlikely to prevent their recurrence. Cf. The American Law Institute, Model Penal Code Tentative Draft No. 4, at 140 (1955) ("In the absence of minimal culpability, the [criminal] law has neither a deterrent nor corrective nor an incapacitative function to perform.").
Eastway I holds that the policy requires that Rule 11 not be read according to its literal terms. In a telling paraphrase of the language of Rule 11, the Second Circuit restated the requirement of the Rule as follows: "[S]anctions shall be imposed [if], after reasonable inquiry, a competent attorney could not form a reasonable belief that the pleading is well grounded in fact and is warranted by existing law . . ." Eastway I at 254 (emphasis added). While the Rule requires certification only by the actual attorney of his actual beliefs, Eastway I requires the reasonable beliefs of a hypothetical competent attorney. The Second Circuit's restatement of the rule effectively eliminates the subjective element incorporated by the drafters of the Rule. As a result, an attorney's erroneous conclusion that a pleading is well grounded may lead to sanctions. Eastway I, in other words, holds attorneys strictly liable for mistakes in judgment that lead to the filing of papers later deemed frivolous. Accord, Wells v. Oppenheimer & Co., Inc,, 101 F.R.D. 358, 359 & n.3 (S.D.N.Y. 1984), vacated on other grounds, 106 F.R.D. 258 (S.D.N.Y. 1985); but cf. Baranski v. Serhant, 106 F.R.D. 247 (N.D. Ill. 1985) (mistake can be a defense to Rule 11 motion). While application to lawyers of a penal rule from which mens rea has been eliminated is inconsistent with American penal and professional traditions, the courts of this circuit are bound by Eastway I.
(2) Due Process Right to a Hearing.
Rule 11 does not address the issue of the procedural rights of attorneys and clients who are being sanctioned. The Advisory Committee Notes to Rule 11 contains a mixed message about procedural rights. While the Notes comment that "[t]he procedure obviously must comport with due process requirements," they go on to suggest that procedural safeguards should be kept to a minimum:
To assure that efficiencies achieved through more effective operation of the pleading regimen will not be offset by the cost of satellite litigation over the imposition of sanctions, the court must to the extent possible limit the scope of sanction proceedings to the record.
Id. In the absence of specific instructions from the Rule, our discussion of the due process issue must be based on general principles.
Due process requires, at a minimum, notice and an opportunity to be heard "appropriate to the nature of the case." Goss v. Lopez, 419 U.S. 565, 579, 42 L. Ed. 2d 725, 95 S. Ct. 729 (1975), quoting Mullane v. Central Hanover Trust Co., 339 U.S. 306, 313, 94 L. Ed. 865, 70 S. Ct. 652 (1950). In the case of sanctions this would seem always to require that the attorney be given notice of the motion for fees and have an opportunity to address the court before sanctions are imposed. The Supreme Court has endorsed this notion. In Roadway Express, Inc. v. Piper, 447 U.S. 752, 767, 65 L. Ed. 2d 488, 100 S. Ct. 2455 (1980), it noted that like other sanctions, "attorney's fees certainly should not be assessed lightly or without fair notice and an opportunity for a hearing on the record". See also, e.g., The Committee on Federal Courts, Procedural Rights of Attorneys Facing Sanctions, 40 The Record 313, 323 (1985); cf. Adamsons v. Wharton, 771 F.2d 41, 43 n.4 (2d Cir. 1985).
The constitutional mandate that the due process rights be appropriate to the nature of the case also requires that an evidentiary hearing be held if necessary. An evidentiary hearing will be necessary "when the imposition of the sanction is dependant upon facts genuinely in dispute." The Committee on Federal Courts at 323-24. See also Schwarzer, Sanctions Under the New Federal Rule 11, 104 F.R.D. 181, 198 (1985) (evidentiary hearing "should be avoided, unless the court must find disputed facts or resolve issues of credibility.") An analysis of the Rule shows that in many Rule 11 cases the potential exists for factual disputes that would entitle an attorney to request an evidentiary hearing.
As pointed out earlier in this opinion, there are two basic ways in which Rule 11 might be violated. First, an attorney might violate the Rule by failing to make a reasonable inquiry into the facts and law. Second, according to Eastway I, an attorney might also violate the Rule by failing to draw the "reasonable" conclusions that a "competent" attorney would have reached.
In the first type of Rule 11 violation, it is obvious why there may be genuine factual disputes: the nature of the inquiry actually conducted is an issue of fact. In other words, whether sanctions ought be imposed may depend on disputed facts about what kind of inquiry was made.
In the second type of Rule 11 violation, the decision whether or not to impose sanctions does not depend on any facts relating to the attorney's investigation or reasoning. Presumably a judge can take judicial notice of what a reasonable attorney should know. See Rodgers v. Lincoln Towing Service, Inc., 771 F.2d 194, 205-206 (7th Cir. 1985) (no hearing needed when complaint was legally deficient and "overblown"); cf. Federal Rules of Evidence, Rule 201. Appropriate modesty would, even here, in many cases suggest that generalist federal judges might not be fully aware of what reasonable and competent members of the bar consider a reasonable conclusion. A hearing would thus be required in many instances even under the objective test.
Hindsight rationalizations for finding frivolousness must constantly be guarded against. See Advisory Committee Notes to Rule 11 ("the court is expected to avoid using the wisdom of hindsight"); Erie Conduit Corp. v. Metropolitan Asphalt Paving Association, 106 F.R.D. 451, 459 (E.D.N.Y. 1985) (Maletz, J.). Judicial opinion-writing style is well-known; after the judge equivocates in chambers and cogitates, with the decision wavering in the balance, the opinion is written in an adversarial fashion as if the court never had been dubitante and the outcome was always inevitable. This is deemed ...