Dalkon Shield Trust v. Lutz ( 1998 )

UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
In Re: A. H. ROBINS COMPANY,
INCORPORATED,
Debtor.
SHARON LUTZ,
Respondent-Appellant,
and No. 97-1618
PATRICIA L. SHEAR; FREDERICK H.
SHEAR,
Respondents,
v.
DALKON SHIELD CLAIMANTS TRUST,
Movant-Appellee.
Appeal from the United States District Court
for the Eastern District of Virginia, at Richmond.
Robert R. Merhige, Jr., Senior District Judge.
(CA-85-1307-R)
Argued: December 3, 1997
Decided: January 13, 1998
Before WIDENER and HAMILTON, Circuit Judges, and
MICHAEL, Senior United States District Judge for the
Western District of Virginia, sitting by designation.
_________________________________________________________________
Affirmed in part and vacated in part by unpublished per curiam opin-
ion.
COUNSEL
ARGUED: David Richard Parker, CHARFOOS & CHRISTENSEN,
Detroit, Michigan, for Appellant. Orran Lee Brown, Sr., Richmond,
Virginia, for Appellee.
_________________________________________________________________
Unpublished opinions are not binding precedent in this circuit. See
Local Rule 36(c).
_________________________________________________________________
OPINION
PER CURIAM:
This is an appeal from the sanctioning of a Michigan attorney by
the United States District Court for the Eastern District of Virginia for
misconduct in her representation of two claimants against the Dalkon
Shield Claimants Trust (the Trust). The sanction consisted of ordering
the Michigan attorney to pay $2,646 to the Trust (the Monetary Sanc-
tion) and requiring the Trust to send any remaining claims payments
due the Michigan attorney's 236 other Dalkon Shield clients directly
to the clients, thus bypassing her (the Bypass Sanction). The attorney
does not challenge the Monetary Sanction, but challenges the Bypass
Sanction as an abuse of discretion primarily on the grounds that her
misconduct did not involve her other Dalkon Shield clients and did
not call into question her ability to handle client funds. For reasons
that follow, we vacate the Bypass Sanction and affirm the unchal-
lenged Monetary Sanction.
I.
A.H. Robins Company, Inc. entered Chapter 11 bankruptcy
because of claims relating to the Dalkon Shield intrauterine device,
a product it manufactured. On July 26, 1988, the district court
approved A.H. Robins' Sixth Amended and Restated Plan of Reorga-
nization (the Plan). We affirmed the Plan's confirmation in In re A.H.
Robins Co., Inc., 880 F.2d 769 (4th Cir. 1989).
2
The Plan established the Trust, funded by A.H. Robins, to compen-
sate parties injured by the use of the Dalkon Shield intrauterine
device. Section 8.04 of the Plan directs all persons seeking compensa-
tion to follow the claim procedures set forth in the document entitled
"Dalkon Shield Trust Claims Resolution Facility" (the CRF). Pursu-
ant to § 8.05 of the Plan, the United States District Court for the East-
ern District of Virginia retained exclusive jurisdiction to resolve
disputes regarding interpretation and implementation of the Plan, the
Trust, and the CRF. The district court confirmed its exclusive juris-
diction over these issues in an administrative order entered on June
26, 1991 (the June 1991 Administrative Order). In an order entered
on November 2, 1993 in Dalkon Shield Claimants Trust v. Porter-
Cooper, C.A. 85-01307R (the Porter-Cooper Order), the district court
warned that any person who attempted to have other courts rule on
such issues was in contempt of its exclusive jurisdiction and risked
being held in civil contempt.
The CRF gives claimants against the Trust three options. The first
option "is intended to resolve small claims with prompt payment to
claimants and a minimum of transaction costs for the Trust." In re
A.H. Robins Co., Inc., 109 F.3d 965, 966 (4th Cir. 1997). Under the
second option, a claimant "may be eligible to receive more compensa-
tion based on fixed amounts for specified injuries categorized and
listed in Exhibit A of the CRF." Id. Under the third option, a claimant
"may be eligible upon proper proof to receive a greater amount of
compensatory damages than allowed under" the first and second
options. Id. With respect to the third option, a claimant:
must complete a detailed claim form and provide medical
records or evidence of use of the Dalkon Shield and all med-
ical records of any injuries and damages alleged to have
resulted from use of the Dalkon Shield. The Trust then fully
evaluates the claim and makes a settlement offer. If the
claimant rejects the settlement offer, the claimant may
choose to proceed through In-Depth Review/Voluntary Set-
tlement Conference or other voluntary alternative dispute
resolution (ADR) process under § E.4 of the CRF. . . . If
claimants continue to reject a settlement offer following this
initial form of alternative dispute resolution, they may then
choose either binding arbitration or traditional litigation.
3
Id.
In order to facilitate the voluntary settlement of claims, § G.4 of the
CRF provides that all communications between the Trust and claim-
ants are in the nature of settlement negotiations and are to be kept
confidential. In the Porter-Cooper Order, the district court specified
that § G.4 of the CRF prohibited any disclosure of the amounts of
offers by the Trust under the third option, especially in an attempt to
use such offer amounts against the Trust in litigation.
In addition to representing 236 other clients in their claims against
the Trust, the attorney involved in this case, Sharon Lutz (Lutz), rep-
resented Patricia and Frederick Shear (the Shears) in their pursuit of
claims against the Trust. The Shears chose to proceed under the third
option of the CRF. After evaluating the claim form and medical
records submitted by the Shears, the Trust made offers of settlement
to the Shears. The Shears rejected the offers. The Shears then chose
to proceed to the In-Depth Review/Voluntary Settlement Conference.
This resulted in the Trust making the Shears final offers on May 13,
1992, which by their terms expired on August 3, 1992. Under the
terms of the offers, acceptance could only be effected by the Trust's
receipt of properly executed releases by 4:00 p.m. on August 3, 1992.
The Shears refused to accept the Trust's final offers, and instead,
through Lutz, filed suit against the Trust in the United States District
Court for the Western District of Michigan. With the Michigan suit
pending, on August 16, 1993, Lutz informed the Trust by letter that
the Shears had changed their minds and now intended to accept the
Trust's final offers under the third option.
The Trust responded by letter dated September 3, 1993 that per the
express terms of the offers, the offers were no longer open. Ignoring
the Trust's response, on September 20, 1993, Lutz forwarded the
Trust release forms executed by the Shears and directed that the Trust
send her the settlement funds for distribution to the Shears. The Trust
refused.
Not content with the Trust's response, Lutz filed a"Motion to
Compel Rule 68 Offer of Judgment" (Rule 68 Motion) in the Michi-
gan case. See Fed. R. Civ. P. 68. In that motion, Lutz disclosed the
4
amounts of the Trust's final offers to the Shears under the third option
in violation of § G.4 of the CRF and the Porter-Cooper Order. She
also asked the Michigan court to interpret the Plan and the CRF as
requiring the Trust to allow the Shears to settle their claims against
the Trust in violation of the district court's exclusive jurisdiction over
Plan interpretation issues as provided in § 8.05 of the Plan and the
June 1991 Administrative Order.
The Trust faxed a letter to Lutz on November 17, 1993 warning
that the issue raised in her Rule 68 Motion before the United States
District Court for the Western District of Michigan violated the exclu-
sive jurisdiction of the United States District Court for the Eastern
District of Virginia. The letter advised Lutz to withdraw the Rule 68
Motion and stated that if the Trust did not receive notice of such with-
drawal by the close of business on Friday, November 19, 1993, the
Trust would assume that she would not voluntarily do so. The letter
was accompanied by a copy of the Porter-Cooper Order.
The next day, on November 18, 1993, Lutz faxed the Trust the fol-
lowing message: "Don't assume anything by November 19--I'm in
depositions all day and won't even have a chance to look at this until
next week. You'll hear from me [by] Nov. 29." (J.A. 392). The Trust
responded the same day by faxing Lutz a letter emphasizing the dis-
trict court's exclusive jurisdiction over interpretive matters involving
the Plan, the Trust, and the CRF. The letter also stated that if Lutz did
not agree to withdraw the Rule 68 motion by November 22, 1993, it
would be left no choice but to file a motion with the district court in
Virginia on November 23, 1993 to enforce the Plan and the district
court's exclusive jurisdiction.
After Lutz failed to respond to the Trust's November 18, 1993 let-
ter by November 22, 1993, the Trust filed a motion on November 23,
1993 to enforce the terms of the Plan against Lutz and the Shears,
bringing to the attention of the district court Lutz's violations of the
terms of the Plan, the CRF and the district court's orders (Motion to
Enforce the Plan). The motion specifically sought an order requiring
Lutz and her clients to cure the violations and directing such other
relief as it saw appropriate.
The district court set a hearing on the Trust's Motion to Enforce
the Plan at 1:00 p.m. on Friday, December 10, 1993, and Lutz was
5
properly notified. On November 30, 1993, Lutz withdrew the Rule 68
motion. The Shears ultimately abandoned their civil suit against the
Trust in favor of proceeding through the ADR program.
Lutz failed to file a response to the Trust's Motion to Enforce the
Plan and failed to appear for the hearing on December 10, 1993. At
the hearing, the Trust presented evidence in support of its motion.
Subsequently, the district court entered a brief order finding that Lutz,
"through ignorance or deliberate misconduct," had violated its exclu-
sive jurisdiction over interpretation of the Plan and the confidentiality
provisions of § G.4 of the CRF. (J.A. 405). The order noted that Lutz
and her clients had not responded to the Trust's Motion to Enforce the
Plan and had not availed themselves of the opportunity to be heard,
though a time for such hearing was set, ample notice of hearing was
given, and the hearing was actually held. The order also indicated that
Lutz's misconduct had resulted in additional expense to the Trust to
the detriment of all claimants and that a subsequent order would be
entered assessing costs against her. The district court further opined
that Lutz's clients were innocent parties in the matter, and thus, would
not be sanctioned.
On January 11, 1994, as directed by the district court, the Trust
filed a statement showing that it had incurred $2,646 in legal fees as
a result of Lutz's misconduct. Lutz did not file a response.
The issue of appropriate sanctions against Lutz remained dormant
on the district court's docket until March 20, 1997. Then, as part of
an effort to wind up pending Dalkon Shield matters, the district court
ordered the Monetary Sanction and the Bypass Sanction against Lutz
in a single order. In aid of the Bypass Sanction, the district court
ordered Lutz to furnish the Trust with a list of addresses for her cli-
ents who were claimants against the Trust.1 Lutz made a motion for
reconsideration of the Bypass Sanction, which the district court
denied.
_________________________________________________________________
1 Because all of Lutz's other Dalkon Shield clients have concluded
their initial claims against the Trust and have been paid on those claims,
the only remaining monetary obligation of the Trust to those claimants
will arise once all the claims against the Trust have concluded. At that
point, the remaining funds in the Trust are to be disbursed to all eligible
claimants on a pro rata basis.
6
Lutz noted a timely appeal. On appeal, Lutz does not dispute that
she violated the district court's exclusive jurisdiction over issues
requiring interpretation of the Plan as set forth in§ 8.05 of the Plan
and the June 1991 Order, and the requirement of confidentiality under
the CRF and the Porter-Cooper Order. Accordingly, Lutz does not
dispute that the district court acted properly in holding her in civil
contempt for this misconduct. Furthermore, she does not challenge
the Monetary Sanction. Lutz's only purpose in pursuing this appeal
is to challenge the Bypass Sanction, and she does so on two bases:
(1) the district court abused its discretion in imposing the Bypass
Sanction and (2) the district court's failure to give her notice that it
was contemplating the Bypass Sanction violated her rights to due pro-
cess.
II.
In this appeal, we must determine whether the district court abused
its discretion in imposing the Bypass Sanction on Lutz. Cf. Cooter &
Gell v. Hartmarx Corp., 496 U.S. 384, 405 (1990) (reviewing sanc-
tions imposed under Federal Rule of Civil Procedure 11 for abuse of
discretion). A district court necessarily abuses its discretion in impos-
ing a sanction if it based its ruling on an erroneous view of the law
or on a clearly erroneous assessment of the evidence. Cf. id.
Presumably, the district court sanctioned Lutz pursuant to its
authority under Bankruptcy Code § 105(a), which provides:
The court may issue any order, process, or judgment that is
necessary or appropriate to carry out the provisions of this
title. No provision of this title providing for the raising of
an issue by a party in interest shall be construed to preclude
the court from, sua sponte, taking any action or making any
determination necessary or appropriate to enforce or imple-
ment court orders or rules, or to prevent an abuse of process.
11 U.S.C. § 105(a) (emphasis added); see also Matter of Volpert, 110
F.3d 494, 500 (7th Cir. 1997) (recognizing that bankruptcy court may
impose sanctions in exercise of its authority to enter any necessary or
appropriate orders under Bankruptcy Code § 105(a)); In re Walters,
868 F.2d 665, 669 (4th Cir. 1989) (recognizing Bankruptcy Code
§ 105(a) as empowering bankruptcy courts to hold parties or attorneys
in civil contempt). The determination of what constitutes a "necessary
or appropriate" sanction of an attorney under Bankruptcy Code
7
§ 105(a) must be considered in relation to the universal goals of sanc-
tioning attorneys--compensation to the injured party, punishment and
deterrence. Cf. Fahrenz v. Meadow Farm Partnership, 850 F.2d 207,
211 (4th Cir. 1988) (stating that what constitutes reasonable amount
of sanction imposed under Rule 11, which speaks in terms of an "ap-
propriate sanction," must be considered in relation to sanctioning
goals of compensation, punishment, and deterrence).
We hold that the district court abused its discretion in imposing the
Bypass Sanction against Lutz. We are at a loss to conceive of how,
under this record, the Bypass Sanction could be considered necessary
or appropriate to carry out the provisions of the Bankruptcy Code,
including the goals of compensation to the injured party, punishment,
or deterrence. First, the Trust was fully compensated by way of the
Monetary Sanction. Second, there is no evidence to justify the highly
unusual sanction of interfering with an attorney's relationships with
her clients as necessary or appropriate to punish the attorney or deter
her behavior in the future. This is especially so here, where the clients
were not involved in the matters giving rise to the sanctions. Indeed,
the record contains no evidence to support a finding of contemptuous
conduct on Lutz's part with respect to her representation of her other
Dalkon Shield clients and no evidence to support a finding that she
is untrustworthy when it comes to handling her clients' funds. Third,
the district court did not make any findings in support of, nor give any
explanation for, the Bypass Sanction. Fourth, such findings and expla-
nation are not self evident. Fifth and finally, we have been unable to
find any case to support a sanction that interferes with an attorney's
relationship with clients when the clients were not involved in the
matters before the court giving rise to the sanctions. For these rea-
sons, we vacate the portion of the district court's order imposing the
Bypass Sanction and affirm the portion imposing the Monetary
Sanction.2
AFFIRMED IN PART AND VACATED IN PART
_________________________________________________________________
2 In light of our disposition, Lutz's argument that her due process rights
were violated by the Bypass Sanction is moot. We note, however, that
any violations of Lutz's due process rights were remedied by the district
court's consideration of Lutz's motion for reconsideration.
8