Inlet Associates v. Harrison Inn Inlet, Inc.

CHASANOW, Judge. We granted certiorari in the instant case to determine what standard of appellate review should be applied when a trial court has imposed sanctions in the form of costs and attorney’s fees pursuant to Maryland Rule 1-341. The facts giving rise to this controversy cannot be stated as simply and succinctly as the issue before the Court. This appeal arises out of a $22,000,000 lawsuit filed by Inlet Associates (Inlet) against Harrison Inn Inlet, Inc., Harrison Inn Sixty-Six, Inc., Hale Harrison, John Harrison (the Harrisons), and their attorney, K.

King Burnett, for abuse of process and malicious interference with prospective business advantage. Inlet is a Maryland partnership that was formed in 1984 for the purpose of developing a parcel of land, known as Holt’s Landing, in Ocean City, Maryland. Inlet’s managing partner is an architect, Leo D’Aleo (D’Aleo). The Harrisons own property adjacent to Holt’s Landing. In 1984, the Harrisons hired D’Aleo to design a high-rise condominium building to be located on their property adjacent to the Holt’s Landing site.

At about the same time, the Harrisons and Inlet had discussions about jointly developing and constructing a marina in front of their adjacent properties. For reasons that shall become apparent, the joint development of the marina never occurred. As a result of litigation by another neighboring property owner, the Harrisons lost a height variance that was essential to their high-rise project. Shortly thereafter, they approached D’Aleo and asked him to abate a portion of his architectural fees for their high-rise project.

It was suggested to D’Aleo that, unless he did so, the Harrisons would no longer participate in joint development of the marina property. D’Aleo refused to abate any of his architectural fees and informed the Harrisons that Inlet would, without the Harrisons, develop the marina, as well as a hotel and condominium project (the Inlet project). D’Aleo sued the Harrisons and recovered his architectural fees, and the Harrisons began a series of legal actions to block the Inlet project. Initially, the Harrisons sought to prohibit the town of Ocean City from transferring to Inlet, without ordinances, a portion of a public street and the riparian rights at the end of the street, which were to be used for the Inlet project. They successfully obtained an injunction prohibiting the transfer, which was affirmed on appeal. Inlet Associates v.

Assateague House, 313 Md. 413, 545 A.2d 1296 (1988). While the appeal of the injunction was pending, Inlet amended the plans for the project and submitted the amended plans to appropriate agencies of the town of Ocean City. The Harrisons, with Burnett as their attorney, challenged the amended plans. The Ocean City Planning and Zoning Commission and zoning administrator approved Inlet’s amended plans and issued a building permit.

The Harrisons filed three separate appeals with the Board of Zoning Appeals, and when those appeals were unsuccessful, they sought review in the Circuit Court for Worcester County. The Harrisons filed separate appeals of the Board of Zoning Appeals’ oral decisions, as well as its written opinions “in an abundance of caution to insure the preservation of the right to appeal.” They did, however, request that all of the appeals be consolidated, and this was done by the trial judge. The Harrisons also filed suit seeking declaratory and injunctive relief “solely as a protective action due to uncertainty concerning the right to take an administrative appeal from the decision of the Planning and Zoning Commission.” Thus, there were six circuit court actions filed by the Harrisons, all of which were consolidated for trial. Until early 1988, Inlet was represented by Gerard P.

Martin. Martin contacted George A. Nilson to inquire whether Nilson and his law firm, Piper and Marbury, (herein collectively Nilson) would take over the representation of Inlet in its litigation with the Harrisons. On February 17, 1988, Nilson entered into an agreement to represent Inlet.

Under the terms of that agreement, Nilson would receive a bonus of an additional 50% of his hourly rate if he was able to persuade the Harrisons to drop their opposition to Inlet’s project within one month. The bonus provision apparently was extended for an additional month. Martin also provided Nilson with a draft bill of complaint of Inlet against the Harrisons alleging abuse of process and malicious interference with prospective business advantage. This draft complaint named the Harrisons as defendants, but did not name their attorney, Burnett.

The day after Nilson was retained by Inlet, he wrote to Burnett advising him that if the parties did not meet before March 3, 1988, to resolve their differences, suit would be filed by Inlet against the Harrisons and Burnett for “abuse of process and related matters.” With that letter, Nilson also enclosed a draft bill of complaint. This draft complaint differed from the one provided to Nilson by Martin in that Burnett was added as a defendant. The meeting of the parties suggested by Nilson did not take place. Citing a conflict of interest, Burnett informed Nilson that he could no longer participate in any settlement negotiations or advise the Harrisons about settlement. Burnett’s concern about a conflict of interest was based on his belief that his representation of the Harrisons might be compromised by the suit against him personally.

See The Maryland Lawyers’ Rules of Professional Conduct, Rule 1.7 (1991). Burnett was concerned that, if he had counseled the Harrisons to withdraw their opposition to the Inlet project, his advice might be perceived as being partially motivated by his own self-interest. It might give the appearance that his actions were directed at avoiding being a defendant in a lawsuit, rather than being motivated solely by his clients’ best interest. On April 11, 1988, Nilson, on behalf of Inlet, filed suit against the Harrisons and Burnett for abuse of process and malicious interference with prospective business advantage (herein collectively the abuse of process suit).

The ad damnum clause sought compensatory and punitive damages in the amount of $22,000,000. For approximately 18 months, Nilson took no steps to prosecute the claims asserted by Inlet. Subsequent to the filing of the abuse of process suit, the Circuit Court for Worcester County affirmed the decisions of the Board of Zoning Appeals, rejecting the challenges filed by the Harrisons. The Harrisons appealed that decision and, in an unreported decision, the Court of Special Appeals reversed the circuit court, thereby finding that the Harrisons’ challenges to the Inlet project were well founded.

Following the Court of Special Appeals’ resolution of the challenges to the Inlet project in the Harrisons’ favor, the circuit court found in favor of the Harrisons and Burnett in Inlet’s abuse of process suit. Count I (abuse of process) was dismissed as to all defendants, and Count II (malicious interference with prospective business advantage) was dismissed as to Burnett. Summary judgment was entered in favor of the Harrisons on Count II. The Harrisons and Burnett filed motions for costs and attorney’s fees pursuant to Rule 1-341.

After a hearing, the circuit court denied the Harrisons’ motion but granted Burnett’s motion and assessed costs and attorney’s fees against Inlet, Nilson, and Piper and Marbury in the amount of $15,368.23. In rendering his decision, the trial judge stated: “Everybody knows what the facts are. To put them in their simplest terms, it appears to the court that the parties to this litigation were originally jointly involved in developing certain property in Ocean City, Maryland. That there was an—I don’t want to say falling out among thieves, but falling out among the parties.

That Inlet Associates, the plaintiff in this particular action, attempted to scale down the project in pursuance of certain permits which had previously been received, but that there were ongoing hearings before the Board of Zoning Appeals and other administrative bodies in Worcester County and/or Ocean City. I think there were [six] appeals____ While all this was going on these cases were at that point pending, either in the Circuit Court for Worcester County or on appeal to the appellate courts of this State. The plaintiffs hired Mr. George Nilson of the firm of Piper and Marbury, at the behest of Mr. Martin____ I assume, for the express purpose, that the court finds, to see if there was not some manner in which all the other ongoing litigation could be settled.

One of the provisions of the retainer of Mr. Nilson was a provision for a bonus if the case was settled within a short period of time, and if not then he would be paid at his regular office rate. It is obvious to the court that being the provision, even though it’s not in there, time was of the essence. His efforts to effect settlement negotiations within the short period of time did not come to fruition____ During this period a draft copy of, with some modifications, the complaint which was ultimately filed in this case being sent to Mr.

Burnett, the court’s thinking was an obvious act of intimidation to effect a settlement. It is the court’s thinking in a hearing on this matter in Worcester County on October 12 of 1988, this member of the court granted—October 20, 1988, granted Mr. Burnett’s motion to dismiss both counts of the complaint, first count of which alleged abuse of process, and the second count which alleged malicious interference with a business relationship. The motion was denied as to malicious interference with a business relationship as far as the Harrisons were concerned.

As a matter of law those are the facts boiled down to their very basics. That’s not as lengthy a statement as I’d like to give you, but I think I touched the major points. As a matter of law reasonable basis for believing that a case is colorable and/or has a colorable claim or defense is that it generates a factual issue for the fact finder at trial, and that provides substantial justification for initiating or defending an action, as I understand the law to be as set forth in [.Needle v. White, 81 Md.App. 463, 568 A.2d 856, cert denied, 319 Md. 582, 573 A.2d 1338 (1990) ], ... I’ll take the Harrisons first. I cannot on the facts before me, and which were heard at argument in October of 1988, say that that whole case lacked substantial justification.

The second count, motion to dismiss, was to the interference with a contract, was denied because the court at that time stated or at least felt—if it wasn’t stated, it was the court’s opinion that if the facts alleged in that court could be proved as to the Harrisons there may have well been substantial justification for the institution of the action. We do, however, find that the claim against Mr. Burnett was instituted in bad faith and without substantial justification. Mr.

Nilson to his credit very candidly admitted in oral argument in October of ’88 that there was no post-process abuse to substantiate the claim for abuse of process, and that frankly pertained to the Harrisons under the first count; and I think the motion was granted as to both parties as to the first count. But as to the second count as it pertains to Mr. Burnett, I find there was not a colorable claim; and again, frankly no evidence or allegation of malice, nor was there any substantial justification for the filing of that claim. We are, therefore, constrained to grant Mr.

Burnett’s motions for sanctions, the amount of which I think is undisputed to be $15,368.23. That is assessed against Inlet Associates, Inc., Piper and Marbury, and George Nilson. Motion for sanctions by the Harrisons is denied.” Inlet and Nilson appealed the assessment of costs and attorney’s fees against them in favor of Burnett. The Harrisons appealed the decision of the trial court denying their motion for costs and attorney’s fees.

Inlet also appealed the judgments in favor of the Harrisons and Burnett in the underlying tort action. This Court granted the petition for writ of certiorari filed by Inlet and Nilson prior to consideration of the case by the Court of Special Appeals. As we stated at the outset, the issue raised by the petition for writ of certiorari was what standard of appellate review should be applied where a trial court imposes sanctions in the form of costs and attorney’s fees pursuant to Rule 1-341. At oral argument, we were informed by counsel for Inlet and Nilson that Inlet is defunct and no longer seeks a reversal of the judgment in favor of the defendants on the abuse of process and malicious interference with prospective business advantage counts.

The validity of these counts may still be relevant to the two remaining appeals, i.e., the appeal by Nilson of the award of costs and attorney’s fees to Burnett, and the Harrisons’ appeal of the failure to award them costs and attorney’s fees. STANDARD OF REVIEW Rule 1-341 provides: “In any civil action, if the court finds that the conduct of any party in maintaining or defending any proceeding was in bad faith or without substantial justification the court may require the offending party or the attorney advising the conduct or both of them to pay to the adverse party the costs of the proceeding and the reasonable expenses, including reasonable attorney’s fees, incurred by the adverse party in opposing it.” Apparently recognizing that the standard of review may well be dispositive of this appeal, Nilson and Inlet assert that the “clearly erroneous” standard is not the appropriate standard of review of a trial court’s decision to award costs and attorney’s fees pursuant to Rule 1-341. They contend that de novo review is desirable in order to “create uniformity in the treatment of Rule 1-341 cases.” They point out that other courts have recognized and applied a de novo standard of review to test the legal conclusion of whether the imposition of sanctions was justified and cite by way of example, Zaldivar v. City of Los Angeles, 780 F.2d 823 (9th Cir.1986); Eastway Const. Corp. v.

City of New York, 762 F.2d 243 (2nd Cir.1985), cert denied, 484 U.S. 918, 108 S.Ct. 269, 98 L.Ed.2d 226 (1987); Turner v. Duke University, 325 N.C. 152, 381 S.E.2d 706 (1989). The parties agree that this Court has never expressly adopted a standard of review where sanctions have been imposed under Rule 1-341. They disagree, however, as to what standard we should apply.

The Court of Special Appeals has spoken on the issue and has adopted the “clearly erroneous” standard. See, e.g., Needle, 81 Md.App. 463, 568 A.2d 856; Bohle v. Thompson, 78 Md.App. 614, 639, 554 A.2d 818, 830, cert denied, 316 Md. 364, 558 A.2d 1206 (1989); Dent v. Simmons, 61 Md.App. 122, 127, 485 A.2d 270, 272 (1985).

Compare Cooter & Gell v. Hartmarx Corp., 496 U.S.-, 110 S.Ct. 2447, 110 L.Ed.2d 359 (1990), where the Supreme Court held that federal appellate courts should apply the abuse of discretion standard in reviewing a district court’s decision to impose sanctions under Rule 11 of the Federal Rules of Civil Procedure. The standard for appellate review depends in some measure on whether we view a finding of bad faith or lack of substantial justification as a finding of fact which should not be set aside unless clearly erroneous, Rule 8-131(c), or as a conclusion of law subject to de novo review. We find persuasive logic and reasoning in the recent case of American Hospital Association v.

Sullivan, 938 F.2d 216 (D.C.Cir.1991) where the court stated: “When the question requires a court to determine credibility or to compare the weights of evidentiary items, an appellate court must remember two humbling factors: (1) ‘the superiority of the trial judge’s position to make determinations of credibility,’ and (2) the principle that ‘[t]he trial judge’s major role is the determination of fact, and with experience in fulfilling that role comes expertise.’ [Anderson v. Bessemer City, 470 U.S. 564, 574,105 S.Ct. 1504, 1512, 84 L.Ed.2d 518, 529 (1985) ]. Therefore, we conclude that the question of bad faith in the context of the common law exception to the American rule on counsel fees—involving as it does credibility determinations and evidentiary weighing as opposed to the application of rules of the law to matters of fact (either conceded or already determined)—is one of fact requiring a clearly erroneous standard of review, not one of law requiring de novo review. It is certainly possible in a specific case that an evidentiary base might not support findings of fact consistent with a finding of bad faith as a matter of law or that subsidiary findings on such evidence might not support an ultimate finding of bad faith.” Id. at 221-222.

There is an additional aspect of appellate review of a trial judge’s decision to award sanctions under Rule 1-341. If the judge makes the requisite finding that a litigant acted in bad faith or without substantial justification, the judge should not automatically impose sanctions. After finding bad faith or lack of substantial justification, the judge should then exercise discretion in deciding, in light of those findings, whether costs and/or attorney’s fees should be awarded. The predecessor to Rule 1-341 was Rule 604b.

That rule provided: “In an action or part of an action, if the court finds that any proceeding was had (1) in bad faith, (2) without substantial justification, or (3) for purposes of delay, the court shall require the moving party to pay to the adverse party the amount of the costs thereof and the reasonable expenses incurred by the adverse party in opposing such proceeding, including reasonable attorneys’ fees.” (Emphasis added.) Rule 604b made sanctions mandatory after a finding of bad faith or lack of substantial justification. On August 1, 1983, the Honorable John F. McAuliffe, then Chairman of the Rules Committee and now a member of this Court, in a letter to this Court acknowledged the change from the mandatory nature of sanctions under former Rule 604b to the permissive nature of sanctions under the present Rule 1-341, “While the subcommittee acknowledges the substitution of the word ‘may’ for the word ‘shall’ in this Rule, it notes that this change is not consistent with the current trend towards strengthening the provisions for sanctions designed to curb abuses of the rules.

The Supreme Court recently ordered that FRCP 11 be amended, effective August 1, 1983. The amendment substitutes mandatory language for permissive language relative to imposition by the court of sanctions. Current Maryland Rule 604b, from which Rule 1-341 is derived, is also phrased in terms of mandatory imposition of sanctions once the court makes a finding that a proceeding was had for an improper purpose.” Thus, before imposing sanctions in the form of costs and/or attorney’s fees under Rule 1-341, the judge must make two separate findings that are subject to scrutiny under two related standards of appellate review. First, the judge must find that the proceeding was maintained or defended in bad faith and/or without substantial justification.

This finding will be affirmed unless it is clearly erroneous or involves an erroneous application of law. Second, the judge must find that the bad faith and/or lack of substantial justification merits the assessment of costs and/or attorney’s fees. This finding will be affirmed unless it was an abuse of discretion. BAD FAITH OR LACK OF SUBSTANTIAL JUSTIFICATION The parties are in agreement, and we concur, that the test for determining lack of substantial justification, which should be applied in the instant case, is whether Nilson had a reasonable basis for believing that the claims would generate an issue of fact for the fact finder. This test has been utilized by the Court of Special Appeals in several cases.

For example in Needle v. White, 81 Md.App. at 476, 568 A.2d at 863, the Court of Special Appeals defined substantial justification as “a reasonable basis for believing that a case will generate a factual issue for the fact-finder at trial.” See also Newman v. Reilly, 314 Md. 364, 550 A.2d 959 (1988), where this Court stated that, to constitute substantial justification, the parties position should be “fairly debatable” and “within the realm of legitimate advocacy.” Id. at 381, 550 A.2d at 967-68. Additional guidelines are also found in the comment to Rule 3.1 of the Maryland Lawyers’ Rules of Professional Conduct, which states that an action is frivolous if “the lawyer is unable either to make a good faith argument on the merits of the action taken or to support the action taken by a good faith argument for extension, modification or reversal of existing law.” “In bad faith” means vexatiously, for the purpose of harassment or unreasonable delay, or for other improper reasons.

See Roadway Exp., Inc. v. Piper, 447 U.S. 752, 766, 100 S.Ct. 2455, 2464, 65 L.Ed.2d 488, 501 (1980); Johnson v. Baker, 84 Md.App. 521, 581 A.2d 48, cert. denied, 322 Md. 131, 586 A.2d 13 (1990). THE HARRISONS’ APPEAL The Harrisons assert that the trial judge erred in failing to award them costs and attorney’s fees pursuant to Rule 1-341. They argue that the judge was in error if he found that Inlet’s suit against them did not lack substantial justification.

Based on the facts previously set forth and the oral opinion of the trial judge, we hold that the judge did conclude that Inlet’s suit against the Harrisons had substantial justification and that this finding was not clearly erroneous. The Harrisons also contend that, because the judge clearly found bad faith in Inlet’s suit against Burnett, he must have by implication also found bad faith in Inlet’s suit against them. We do not agree. In Zdravkovich v.

Bell Atlantic-Tricon Leasing Corp., 323 Md. 200, 592 A.2d 498 (1991), this Court stated: “The imposition of sanctions pursuant to Rule 1-341 requires an explicit finding that a claim or defense was ‘in bad faith or without substantial justification.’ The record must reflect that the trial judge made the requisite findings, as well as the basis for those findings.” Id. at 210, 592 A.2d at 503. Even though the trial judge found bad faith in Inlet’s suit against Burnett, the judge did not explicitly find that Inlet’s suit against the Harrisons was filed or pursued in bad faith. The failure to find bad faith in the suit against the Harrisons was not clearly erroneous. Thus, since there was no express finding of either bad faith or lack of substantial justification, the Harrisons were not entitled to an award of costs and counsel fees under Rule 1-341.

We note that even if the Harrisons were correct in their suggestion that the judge found bad faith or lack of substantial justification, a decision to deny costs or attorney’s fees to the Harrisons would not be an abuse of discretion. NILSON’S APPEAL Burnett acted as counsel for the Harrisons in pursuing their remedies as aggrieved property owners and taxpayers. For the purposes of this case, we will assume that an attorney could be personally liable for an abuse of process or malicious interference with prospective business advantage based on a suit filed on behalf of a client. See Annotation, Civil Liability of Attorney for Abuse of Process, 97 A.L.R.3d 688 (1980). Nilson first contends that the trial court misstated and misapplied the standard for determining whether an action was instituted without substantial justification.

This argument is based upon a statement made by the judge that: “As a matter of law reasonable basis for believing that a case is colorable and/or has a colorable claim or defense is that it generates a factual issue for the fact finder at trial, and that provides substantial justification for initiating or defending an action, as I understand the law to be as set forth in [Needle v. White, 81 Md.App. 463, 568 A.2d 856 (1990) ], ... I’ll take the Harrisons first.” We do not believe that this single ambiguous statement indicates that the judge misperceived or misapplied the law. In fact, taken in context it indicates just the opposite. In the next sentence, the judge determines that Inlet’s suit against the Harrisons did not lack substantial justification.

That single statement taken out of context does not negate the presumption that the trial judge knew and properly applied the law. The trial judge was not clearly erroneous in sanctioning Nilson and Inlet for the abuse of process suit against Burnett. Although the judge did not find bad faith or lack of substantial justification in Inlet’s suit against the Harrisons, he expressly found both in Inlet’s suit against Burnett. The complaint in the abuse of process suit, as originally drafted by Martin, named the Harrisons as defendants; it did not name Burnett.

The judge could conclude that Nilson knew that Burnett had simply pursued several lawsuits on behalf of his clients and that Nilson had no reason to believe that Burnett had the intent to maliciously interfere with prospective business advantage or the intent to utilize legal process in an improper manner or for a result not contemplated by law. Nilson’s bill of complaint on behalf of Inlet was predicated on the lack of merit of the Harrisons’ legal challenges to the Inlet project. Burnett believed and convinced the Court of Special Appeals that the Harrisons’ challenges had merit. The trial judge expressly found that, under the circumstances of this case, mailing the draft complaint to Burnett was an act of intimidation clearly intended to force Burnett and the Harrisons to settle other collateral litigation.

From these facts, the judge could have inferred that Burnett was joined in the abuse of process suit, not because Inlet and Nilson wished to recover tort damages from him, but to intimidate him into encouraging his clients to dismiss their legal challenges to the Inlet project. Further inferences of bad faith may be drawn from a letter by Martin to Nilson telling Nilson that he should inform Alvin I. Frederick (counsel retained to represent Burnett in the abuse of process litigation) that, “if the Harrisons would simply drop their lawsuits in the Circuit Court for Worcester County, the entire matter would go away.” Filing a lawsuit against an attorney based on conduct as an advocate that is filed not for the purpose of seeking redress, but for the purpose of coercing the attorney to settle other collateral litigation, can certainly justify a finding of bad faith. The trial judge was not clearly erroneous in finding both bad faith and lack of substantial justification in Inlet’s suit against Burnett, and the judge did not abuse his discretion in assessing costs and attorney’s fees under Rule 1-341. JUDGMENT OF THE CIRCUIT COURT FOR WORCESTER COUNTY AFFIRMED. COSTS TO BE PAID BY PETITIONERS.