Justia Federal District Court Opinions

Rule 11¹ of the Federal Rules of Civil Procedure requires district courts to sanction attorneys and the parties they are representing when they prosecute baseless claims. The sanction must be appropriate and may include "the reasonable expenses incurred" because of the prosecution, such as a reasonable attorney's fee. When a party prosecutes a frivolous appeal, Rule 38² of the Federal Rules of Appellate Procedure authorizes the court of appeals to award the appellee "just damages and single or double costs."

In this case, Ronald O. Pelletier and his attorney, Herbert P. Schlanger, prosecuted a baseless set of claims against Gary D. Zweifel in the district court. The court rejected Pelletier's claims; it dismissed some of them by granting Zweifel's motion to dismiss for failure to state a claim for relief and the remainder by granting Zweifel's motion for summary judgment. After the district court disposed of all of Pelletier's claims, Zweifel moved the court, pursuant to Rule 11, to impose sanctions on the ground that the claims presented against him were baseless and had been brought in bad faith. The court denied his motion.

Pelletier now appeals. He contends that the district court erred in dismissing some of his claims and, with respect to other claims, in granting Zweifel summary judgment; according to Pelletier, these claims are well founded in the law, and have sufficient factual support to withstand summary disposition. Zweifel also appeals.³ He contends that the district court abused its discretion in refusing to sanction Pelletier and Schlanger under Rule 11.

We affirm the district court's orders of dismissal and of summary judgment. We reverse, however, the district court's order denying Zweifel Rule 11 relief. The claims Pelletier and Schlanger brought against Zweifel are baseless and, moreover, were prosecuted in bad faith. We accordingly remand the case for the imposition of such sanctions as will recompense Zweifel for the expenses that he incurred, including attorney's fees, in defending this suit in the district court. The appeal Pelletier and Schlanger brought to this court is frivolous. Therefore, pursuant to Rule 38, we award Zweifel double costs and attorney's fees, which shall be assessed by the district court on remand, when it imposes the Rule 11 sanctions.

We organize this opinion as follows. In part I, we set forth the facts, reading Pelletier's complaint⁴ in the light most favorable to him, with respect to the claims dismissed under Fed.R.Civ.P. 12(b)(6), and giving him the benefit of every reasonable inference, with respect to the claims disposed of on summary judgment under Fed.R.Civ.P. 56. In part II, we address the merits of the claims the district court rejected on summary judgment, demonstrating that those claims are indeed baseless. In part III, we address the claims that Pelletier contends the district court should not have dismissed for failure to state a claim for relief, demonstrating that they are likewise baseless. In part IV, we consider the Rule 11 issues, concluding that Pelletier and Schlanger prosecuted Pelletier's claims in bad faith. In part V, we address the Rule 38 issues, concluding that Pelletier's appeal is frivolous.

A. Introduction.

The controversy before us began as a contest over the control of a travel agency in Atlanta, Georgia, Buckhead House of Travel, Inc. (House of Travel). The contest was between Ronald O. Pelletier and C.M. Culpepper. Pelletier, who claimed a 40% ownership in House of Travel's common stock, sought to obtain control over the company's finances and day-to-day affairs from Culpepper, who had founded the company and held 50% of its stock. Pelletier took the contest to the courts, suing Culpepper in both the state and federal courts in Atlanta. When House of Travel went into chapter 11 bankruptcy proceedings, Pelletier sold his interest in the company and dismissed his suits against Culpepper. The sale did not make Pelletier whole; the price he received for his House of Travel interest did not fully compensate him for the price he had paid for it and the cost of his litigation with Culpepper. He thus looked elsewhere for relief, and decided to sue House of Travel's (and, for a time, Culpepper's) lawyer, Gary D. Zweifel, and his law firm, Lokey & Bowden. He brought two suits: one in state court against Zweifel and Lokey & Bowden, the other--the instant case against Zweifel alone--in federal court.

Culpepper founded House of Travel in 1970. Soon thereafter he acquired a partner, Leroy Langston, an attorney; each owned 50% of the company's 100 shares of common stock.⁵ House of Travel prospered under Culpepper's and Langston's ownership, but their relationship eventually deteriorated. We focus in this appeal on what transpired after Culpepper and Langston decided to part company. First, we describe a stock transaction involving Culpepper, Langston, and William Charles Hurst, Leon Hurst and Pelham Robinson (collectively, the Hurst Group) in which the Hurst Group acquired 80% of Langston's House of Travel shares. Next, we examine the Hurst Group's sale of these shares first to Travel, Incorporated and then (while Travel, Incorporated still owned the shares) to Pelletier. Finally, we focus on Pelletier's sale of the same shares to Elite Travel, Inc. Each of these transactions produced bitter litigation in state and federal court and, ultimately, the case at hand.

B. The Culpepper/Langston/Hurst Group Transaction.

On October 7, 1983, Culpepper and Langston entered into a written stock purchase agreement with the Hurst Group, pursuant to which Culpepper and Langston would each sell the Hurst Group 80% of their House of Travel shares for $32,000. The agreement set a closing date of October 14, 1983.

On October 14, the Hurst Group tendered payment (in the form of cash and a note to be secured by a pledge of the stock it would be receiving from Langston) to Langston; he accepted the payment and transferred 40 of his House of Travel shares to William Charles Hurst, who received the shares and held them in his name for the benefit of the Hurst Group. When the Hurst Group tendered payment to Culpepper, however, Culpepper refused to sell. Culpepper maintained that he and the Hurst Group had secretly agreed that his promise to sell his shares would not be enforced--the promise would be used only to induce Langston to sell his shares.

Culpepper stood his ground, and the Hurst Group decided, for the time being at least, to work with him in the effort to make House of Travel prosper. The two Hursts joined Culpepper on the company's board of directors, which had three members,⁶ and agreed that Culpepper would continue to serve as president of the company. William Charles Hurst became the company's vice president and Leon Hurst its secretary and treasurer.⁷

Under House of Travel's bylaws, it took a unanimous vote of the company's directors before the board of directors could act.⁸ The Hursts believed that Georgia law precluded the board from changing this requirement⁹ and therefore made no attempt to use their numerical advantage on the board to manage the company through the board of directors. As a result, Culpepper used his authority as president to dictate the day-to-day operations of the company. This arrangement, however, did little to enhance House of Travel's profitability. Although the sales volume and daily cash flow steadily increased, the company's operating expenses and need for ready cash increased further. This problem was caused, in part, by the manner in which Culpepper and the Hurst Group dealt with the company's funds; they repeatedly diverted such funds to their own personal use. In addition, Culpepper, as the firm's president, paid himself a handsome salary (given the volume of business he generated) and overpaid his wife and son, who were part-time workers. This practice of using company funds for personal expenditures became a source of strife and, eventually, even criminal accusation: Culpepper accused the members of the Hurst Group of embezzling company funds; they replied in kind.

C. The Hurst Group/Travel, Incorporated Transaction.

By fall of 1984, the Hurst Group wanted out and was actively seeking a buyer for its House of Travel shares. It soon found one--Travel, Incorporated (TI). On November 1, 1984, Wil Brown, TI's president, signed a stock sale and consulting agreement with William Charles Hurst, Leon Hurst, and Pelham Robinson. Brown paid William Charles Hurst $5000 to convey the Hurst Group's shares to TI. William Charles Hurst could not find the Group's stock certificate, so he executed an assignment separate from certificate and promised to give TI any documents that would substantiate his ownership. He further agreed that in the event he found the certificate, he would transfer it to TI immediately. TI also paid Leon Hurst and Robinson $47,500 each for management, promotion, and marketing services they promised to give to TI.

The contract bound the Hurst Group to seek the specific enforcement of its October 7, 1983 stock purchase agreement with Culpepper, wherein he promised to sell the Hurst Group 40 of his House of Travel shares. If the Hurst Group succeeded in acquiring these shares from Culpepper, it would transfer them to TI for the price it paid Culpepper, thus making TI the owner of 80% of House of Travel's stock.¹⁰ The Hurst Group and TI did not want Culpepper to know of their agreement, and the Hurst Group acted accordingly; it did nothing that would indicate to Culpepper that it had sold its stock. In fact, it took steps to gain control of the company. On November 9, 1984, the Hurst Group, carrying out its contractual obligation to TI, brought suit against Culpepper in the Superior Court of Fulton County, Georgia, seeking the specific performance of its October 7, 1983 agreement with Culpepper.¹¹

When TI purchased the Hurst Group's stock, it insisted on the right to rescind the purchase at its sole and unfettered discretion. Accordingly, its agreement with the Hurst Group contained the following condition subsequent: TI could rescind the agreement within 180 days if it determined, in its discretion, that it would not be able to acquire Culpepper's shares either directly from him or through the Hurst Group's suit for specific performance of the October 7, 1983 contract. TI simply would give Leon Hurst and Robinson written notice of its decision to rescind and tender an assignment of the shares. Leon Hurst and Robinson executed a promissory note that would obligate them to pay TI $95,000 if TI rescinded, and Leon Hurst secured the note by deeding TI a tract of land in Spalding County, Georgia.¹² William Charles Hurst executed a separate $5000 promissory note that was payable upon rescission and secured by a pledge of the House of Travel shares TI would return to the Hurst Group, or their proceeds. On December 1, 1984, a month after TI bought the stock, Wil Brown purportedly told one of the Hursts that TI was rescinding the transaction. Thereafter, the Hurst Group, apparently believing that this oral communication had operated to rescind its sale to TI,¹³ began looking for a buyer of the shares it had sold to TI.

D. The Pelletier/Hurst Group Transaction.

1. Pelletier Negotiates to Obtain the Hurst Group's Stock and Culpepper's Control of House of Travel.

In early December 1984, Pelletier heard from Culpepper and others that House of Travel was in serious financial trouble and that the Hurst Group wanted to sell its interest in the company. (Culpepper did not know that the Hurst Group had sold its shares to TI.) Pelletier, who owned a local travel agency, Travel Agency Group, believed that House of Travel, which still enjoyed an excellent reputation in the Atlanta area, had great potential and would be a good investment.¹⁴

Pelletier promptly contacted the Hurst Group and found that it was willing to sell its shares. He did not want to acquire a minority interest in the company (the Hurst Group ostensibly held 40%, and Culpepper 50%, of House of Travel's shares), however, unless he could also acquire from Culpepper the power to manage the company's finances and day-to-day operations--powers that Culpepper possessed as House of Travel's president. He therefore asked Culpepper whether Culpepper would be willing to transfer such powers to him if Pelletier bought the Hurst Group's shares and obtained additional capital for the company. Pelletier thought that Culpepper would agree to do this because Culpepper had said that he was fed up with the Hurst Group's practice of using company funds to pay their personal obligations and wanted them out.¹⁵ Pelletier also asked Culpepper whether he would agree to a neutral board of three directors, consisting of Pelletier, Culpepper, and an independent third party chosen by them.¹⁶ (Apparently, Pelletier, unlike the Hursts, did not believe that the affirmative vote of all three directors was necessary for the board to act. He later changed his mind, though, concluding that to neutralize Culpepper's vote the board of directors would have to be increased to four. See infra p. 1478.)

Culpepper indicated a willingness to do these things, and Pelletier said that he would have his attorney draw up a management agreement, reducing their understanding to writing. Following his discussion with Culpepper, Pelletier gave his notes of the discussion to Frank M. Conner III, an associate with the Alston & Bird law firm in Atlanta, and instructed Conner to draft a written agreement that would accomplish his objective.

2. Pelletier Buys the Hurst Group's Stock.

On December 29, Pelletier acquired the Hurst Group's interest in House of Travel, pursuant to a stock purchase agreement Conner drafted and the parties signed that day. The agreement recited that, upon its execution, Pelletier became the owner of the Hurst Group's House of Travel stock. In payment for the stock, Pelletier gave the Hurst Group $10,000 in cash, a check for $82,600, which the Hurst Group was to hold "in escrow" until January 15, 1985, and a promissory note in the sum of $50,000, payable on January 15, 1986. Pelletier, in turn, received the following: an affidavit executed by William Charles Hurst (in whose name the stock certificate for the Hurst Group's shares had been held) stating that House of Travel should issue a new stock certificate to Pelletier to indicate his acquisition of the Hurst Group's interest in the company;¹⁷ the resignations of the two Hursts from their positions as officers and directors of House of Travel; and the Hurst Group's promise to use its best efforts to obtain releases for House of Travel from certain debts. It was agreed that Pelletier would not deliver the Hursts' resignations to the company, and the resignations would remain secret, until Pelletier had entered into a written management agreement with Culpepper.

Finally, in a subsidiary agreement, which, for obvious reasons, was not to be disclosed to Culpepper, the Hurst Group agreed to use its best efforts in pursuing its state court claim against Culpepper for the specific performance of their October 7, 1983 stock purchase agreement, and to allow Pelletier to select the lawyer to represent the Hurst Group in prosecuting the case. If, in that case, the Hurst Group obtained a decree requiring Culpepper to tender his House of Travel shares to the Hurst Group, then Pelletier would purchase these shares from the Hurst Group for $1000.¹⁸

Pelletier wanted the subsidiary agreement as a means of protection; he did not trust Culpepper and, as he later testified when deposed in this case, he "might [have been] foolish [to] think[ ] that it was going to be so easy to get Culpepper to agree to what he already agreed to; in other words, to get it on paper." Thus, by gaining control over the Hurst Group's prosecution of its suit against Culpepper and, if the suit was successful, an additional 40% of House of Travel's outstanding shares, Pelletier minimized the negative consequences of Culpepper's refusal to agree "on paper."

3. Pelletier Fails to Gain Control.

With the stock purchase agreement and the secret subsidiary agreement in hand, Pelletier and Conner met with Culpepper on January 8, 1985, at Conner's law office, to discuss the management agreement Conner had drafted at Pelletier's request. Zweifel, whose law firm, Lokey & Bowden, represented House of Travel, attended the meeting to advise Culpepper whether the agreement Pelletier would be presenting would serve House of Travel's best interests and, further, would be consistent with the company's charter and bylaws. Pelletier had never met, or even heard of, Zweifel and thought that Zweifel was there to represent Culpepper. We accept Pelletier's interpretation of Zweifel's role for purposes of deciding this appeal: at the meeting, Zweifel acted as counsel for both Culpepper and House of Travel.

Zweifel arrived at Conner's office ahead of Culpepper and Pelletier, and Conner handed him a draft of the agreement Pelletier had asked him to prepare. Zweifel read the draft and told Conner (before Culpepper and Pelletier appeared) that Culpepper would never sign the agreement. For one thing, the draft provided no consideration flowing from Pelletier either directly or indirectly (through House of Travel) to Culpepper.

Conner's draft, in its preamble, stated that Pelletier was "in the process of consummating the acquisition of [the Hurst Group's] stock," but that "[p]rior to consummating the acquisition of the [Hurst Group's stock], it [was] necessary for Pelletier to enter into an agreement with Culpepper," i.e., the agreement Conner had drafted. This quoted language indicated, falsely, that Pelletier had not yet purchased the Hurst Group's stock; actually, as we have noted, Pelletier had bought the stock ten days earlier, on December 29, 1984, pursuant to the stock purchase agreement Conner, himself, had prepared.¹⁹

As soon as Pelletier and Culpepper arrived at Conner's office, Pelletier made his presentation. He predicted an optimistic future for House of Travel if Culpepper signed the management agreement Conner had drafted and if Pelletier's purchase of the Hurst Group's stock went through. Pelletier knew, of course, that he had already bought that stock,²⁰ but he wanted Culpepper, and Zweifel, to believe that his deal with the Hurst Group was still in the negotiation stage.²¹ After Pelletier finished his presentation, he summarized the management agreement Conner had prepared. Zweifel then commented on the document. He said, quite bluntly, that the proposed agreement was "not what [House of] Travel needed." At this point, Culpepper said that he wanted to confer privately with Zweifel, and they withdrew to another room. There, Zweifel advised Culpepper not to sign the document, explaining that the agreement was one-sided: Pelletier would not be obligated to do anything for Culpepper or the company.²² Culpepper decided to follow Zweifel's advice, and they returned to Conner's office and informed Pelletier and Conner that their negotiations had ended. At this point, Pelletier abandoned his efforts to get a management agreement from Culpepper; to accomplish his objective, the managerial control of the company, Pelletier would use the courts--in particular, the courts' power to issue injunctions and temporary restraining orders.

4. Pelletier Goes to Court to Gain Control.

On January 9, the day after Culpepper refused to sign the contract Conner had prepared, Pelletier wrote Peter Q. Bassett, one of the partners in Conner's law firm who specialized in litigation. Attached to Pelletier's letter were a series of exhibits, including Pelletier's December 29, 1984 stock purchase agreement with the Hurst Group and a statement entitled: "Facts Regarding Buckhead House of Travel." The letter and the exhibits, collectively, informed Bassett that Pelletier had purchased the Hurst Group's House of Travel stock on December 29, 1984; that Culpepper had induced Pelletier to purchase the stock by telling Pelletier that, if Pelletier bought the Hurst Group's stock, he would be willing to give him control over the financial affairs of the company and its day-to-day operations; that Pelletier had Conner prepare a formal agreement to this effect; and that when Conner presented the agreement to Culpepper on January 8, 1985, Culpepper refused to sign it. The letter and exhibits also informed Bassett of the suit the Hurst Group had brought against Culpepper in state court, seeking the specific performance of Culpepper's contractual obligation to sell it 40 of his House of Travel shares, and that the Hurst Group had given Pelletier the right to control the prosecution of that suit with a lawyer of his choice.

In his letter, Pelletier instructed Bassett "to proceed in this matter as aggressively and expeditiously as possible," and "to consider the following courses of action." First, Pelletier instructed Bassett to consider instituting a judicial proceeding to have "a receiver immediately appointed" to take over House of Travel's operations. Alternatively, Bassett was to consider asking the court to "appoint a Provisional Director" for the company. This would give the company four directors--Culpepper, Charles and Leon Hurst, whose resignations Pelletier told Bassett to "sit on" so that they could continue to function as Pelletier's nominees, and the provisional director, who presumably would side with the Hursts, thus giving Pelletier the 75% vote he thought House of Travel's bylaws required before the board of directors could act.²³ Second, Pelletier instructed Bassett to consider bringing on behalf of Langston, not Pelletier, a shareholders' derivative action against Culpepper "on grounds of misfeasance and R.I.C.O. (if we can substantiate any criminal acts)." Third, Pelletier instructed Bassett to "[c]ommence depositions immediately" in the Hurst Group's suit against Culpepper for specific performance. In giving Bassett this instruction, Pelletier was apparently exercising the right the Hurst Group had given him in the December 29 subsidiary agreement to control the prosecution of that suit.

Fourth, and finally, Pelletier instructed Bassett, "as economic pressure," to "have several of [House of Travel's] corporate lenders place [it] in default." Pelletier thought that this might cause Culpepper to accede to his demands. Pelletier added that making Culpepper "deal with [the Hursts and Robinson] is probably the greatest pressure we can place on Culpepper. Economic pressures would come a close second."

On the same day, January 9, that Pelletier was instructing Bassett on how to proceed against Culpepper, Conner was communicating with Zweifel by telephone. Conner called Zweifel to inform him that Pelletier had purchased the Hurst Group's interest in House of Travel.²⁴ He took Zweifel by surprise; Zweifel thought that Culpepper's refusal to sign the management agreement Conner had presented to him on January 8 had caused Pelletier to abandon his plan to purchase the Hurst Group's stock.

After informing Zweifel that Pelletier had acquired the Hurst Group's interest, Conner asked Zweifel to issue Pelletier a stock certificate for his 40 shares. Conner told Zweifel that he did not have the Hurst Group's stock certificate; William Charles Hurst had lost it. Conner said that Hurst had given him an affidavit, stating that he had lost the certificate, and asked Zweifel whether he would honor the affidavit and issue Pelletier a certificate. Zweifel said that he would if Conner would write him a letter confirming that this stock transaction had taken place and enclosing Hurst's affidavit. Conner wrote Zweifel the next day, January 10, as requested.

A day or so after Zweifel received Conner's letter and Hurst's affidavit, he prepared a new certificate in Pelletier's name and asked Leon Hurst, House of Travel's secretary, to sign it. Leon Hurst told Zweifel to mail the certificate to his attorney, Brant Jackson, and stated that he would sign the certificate at Jackson's office and deliver it to Pelletier. On January 15, Zweifel drafted a letter to Jackson, stating that he was forwarding a House of Travel stock certificate to him at Leon Hurst's request, but the next day, before Zweifel could mail the letter, Bassett called him to say that he had just filed suit (which the parties, and therefore we, refer to as the shareholders' derivative suit) in the Superior Court of Fulton County, Georgia, against House of Travel, Culpepper, and the two Hursts. The plaintiffs, Bassett said, were Pelletier and Langston.

Bassett's complaint contained six claims for relief. Three of these were claims Pelletier had instructed Bassett to pursue: count one of the complaint requested, on behalf of both plaintiffs, the appointment of a receiver pursuant to Ga.Code Ann. Sec. 9-8-1 (1982);²⁵ count two requested, again on behalf of both plaintiffs, the appointment of a provisional director pursuant to Ga.Code Ann. Secs. 14-2-940, -941 (1989);²⁶ and count three, a shareholders' derivative claim brought only by Langston, sought money damages against Culpepper for violations of the Georgia RICO statutes, Ga.Code Ann. Secs. 16-14-1 to -15 (1988). Of the remaining counts, which were lodged against Culpepper alone, one count sought money damages for both plaintiffs on the ground that Culpepper had breached "fiduciary duties and other duties owed by Culpepper as shareholder and President, to Plaintiffs." The second count sought money damages for Pelletier for Culpepper's breach of an oral promise he had made to Pelletier, prior to Pelletier's December 29, 1984 acquisition of the Hurst Group's House of Travel stock, to transfer to Pelletier "complete financial control" of House of Travel and "supervisory responsibility" over its employees. The third count sought money damages for Pelletier on the ground that Culpepper never intended to perform the oral promise referred to in the preceding count and thereby fraudulently induced Pelletier to purchase the Hurst Group's stock.

In addition to the relief described above, Bassett's complaint asked for a temporary restraining order against Culpepper, requiring that Culpepper maintain the status quo in House of Travel's day-to-day operations and that he make the company's books and records available for inspection by the company's officers, directors, and shareholders. The complaint also prayed that the court convert the temporary restraining order into a preliminary and, then, a permanent injunction.

Meanwhile, Pelletier apparently had second thoughts on who should prosecute the Hurst Group's specific performance action against Culpepper--Bassett or another attorney. Pelletier decided that a different attorney should handle that case, and on January 13, 1985, he contacted Herbert P. Schlanger. Pelletier told Schlanger about the case and that the Hurst Group, by contract, had given him the right to prosecute its claim against Culpepper with an attorney of his choice. Pelletier wanted Schlanger to handle the prosecution of the case. He explained that the Hurst Group would remain in the case as the party plaintiff, but only as his, Pelletier's, nominee--Pelletier, not the Hurst Group, would be Schlanger's client and would pay all of Schlanger's fees and expenses. Schlanger accepted the assignment.

The next day, Pelletier contacted Schlanger again, to tell him that Bassett would soon (on January 16) be filing a shareholders' derivative suit against Culpepper and House of Travel and that William and Leon Hurst would be named as co-defendants in the case. Pelletier explained that he and Langston were bringing the suit; he also explained that they would be seeking no relief of any kind against the Hursts.²⁷ Rather, Culpepper was their target; by having the Hursts in the case as cooperating parties defendant, they could bring more pressure on Culpepper. Pelletier asked Schlanger if he would file an appearance in the case as counsel for the Hursts and, at the same time, represent his, Pelletier's, interests in the matter. Schlanger said that he would take on this additional assignment, and for the next three and a half months, i.e., until the prosecution of the suit was stayed automatically by House of Travel's commencement of chapter 11 proceedings in the bankruptcy court, Schlanger, while ostensibly representing the Hursts, followed Pelletier's instructions and represented his interests. As Pelletier later testified on deposition in the instant case, he paid all of the fees Schlanger charged and the expenses he incurred in representing the Hursts; he and Schlanger maintained the same attorney-client relationship during the prosecution of the shareholders' derivative suit against Culpepper that they maintained during the prosecution of the Hurst Group's suit against Culpepper. In short, according to Pelletier, the Hursts were to take "whatever steps were necessary" to accomplish his objectives.

Following his conversation with Pelletier, and before Bassett filed his suit, Schlanger decided that it "might be a good tactical move" for Pelletier if the Hurst Group sued Culpepper in federal court for securities fraud.²⁸ He discussed the idea with Pelletier and one of the Hursts, and they agreed that Schlanger should file the suit. Proceeding with great haste, Schlanger drafted a complaint and showed it to Bassett--"to ensure that [he] was not misstating the facts as [they] knew them at the time." Bassett found no misstatements, and, on January 16, the same day Bassett brought the shareholders' derivative action in state court, Schlanger filed suit in the federal district court in Atlanta: he named the Hurst Group as plaintiff and Culpepper as defendant. Schlanger also moved the district court to issue a temporary restraining order--an order that contained the same provisions as the temporary restraining order Bassett was simultaneously requesting the state court to issue.

Schlanger based his complaint, which was framed in one count, on the same transaction that gave rise to the Hurst Group's specific performance action against Culpepper, i.e., the Hurst Group's October 7, 1983 contract with Culpepper and Langston for the purchase of 80% of House of Travel's shares of common stock. Schlanger did not, however, seek Culpepper's performance of that contract; rather, he sought the recovery of money damages under 15 U.S.C. Secs. 77l (1), (2), 77q(a), and 78j(b) (1988) and Rule 10b-5, 17 C.F.R. Sec. 240.10b-5 (1990).²⁹ Schlanger alleged, in his complaint, that Culpepper, at the time he entered into the agreement, fraudulently misrepresented that he intended to discharge the obligations he was assuming and thereby induced the Hurst Group to purchase Langston's House of Travel shares. Schlanger alleged that Culpepper's conduct violated the federal securities laws and rendered him answerable to the Hurst Group for money damages under those laws.

The complaints in Bassett's and Schlanger's suits were filed at about the same time on January 16, around 9:00 a.m.; by 9:15 a.m., Bassett had the temporary restraining order he had prayed for in his complaint. At this point Bassett called Zweifel to say that he had just sued House of Travel, Culpepper, and the Hursts in state court and had obtained a temporary restraining order, which, among other things, prevented Culpepper from altering or removing House of Travel business documents or selling or encumbering its assets except in the ordinary course of business. During the conversation, he and Zweifel discussed the possibility of substituting a consent decree for the temporary restraining order and decided to meet later in the day to explore the possibility further.

They met shortly before noon; Schlanger and Culpepper joined them. The meeting, which went until late in the afternoon, resulted in a consent decree, incorporating the provisions of the temporary restraining order and describing the House of Travel records Culpepper was to produce and how he was to produce them. In exchange for the consent decree, Schlanger agreed not to pursue his request for a temporary restraining order in the federal district court, and he informed the district court that he no longer needed the order. (According to the clerk's docket sheet for the case, Schlanger told the court that the case had been settled. When, thereafter, he failed promptly to dismiss the case, the court dismissed it sua sponte without prejudice.)

As soon as the meeting ended, the attorneys submitted the consent decree, which had been signed by Bassett (on behalf of Pelletier and Langston), Schlanger (on behalf of the Hursts), Zweifel (on behalf of House of Travel), and Culpepper, to the superior court judge who had issued the temporary restraining order. The judge approved the decree, and it took effect that day.

The next morning, January 17, Schlanger, Pelletier, Leon Hurst, and Pelham Robinson appeared at House of Travel's office to examine the company's records. After a brief conversation with Culpepper and Zweifel, they began their examination. Schlanger asked to see the company's accounts receivable and several other documents, many of which would reveal the identity of most of House of Travel's clients, and Zweifel objected. Pelletier owned a competing travel agency, and Zweifel believed that to permit Pelletier access to these documents would be to disclose House of Travel's "trade secrets," something he was not prepared to do. Schlanger announced that he would have the superior court settle the matter, and later in the day, he, Bassett, Zweifel, and Hamilton Lokey and Gerald Handley (partners of Zweifel's) appeared before the judge who had signed the consent decree. After hearing from counsel, the judge concluded that Culpepper and House of Travel had not been complying with the consent decree and directed them to obey it. The judge, however, understood Zweifel's concern that Pelletier not obtain the identity of House of Travel's clients, and, in the handwritten order he issued following the hearing, he provided that the names of the clients be redacted from the company's records before the records were produced for examination. The following morning, the examination of the records continued without further dispute.

The next significant events took place on January 25. First, Bassett amended the complaint in the shareholders' derivative suit to add a count seeking the liquidation of House of Travel pursuant to Ga.Code Ann. Sec. 14-2-1430 (1989). Bassett alleged that the company's three directors were hopelessly deadlocked, i.e., neither faction on the board, Culpepper or the two Hursts, was able to muster the 75% affirmative vote the company's bylaws required for the directors to act; that the appointment of a provisional director, pursuant to Ga.Code Ann. Sec. 14-2-941, would not alleviate the situation; that House of Travel's management, i.e., Culpepper, was wasting the company's assets; and that unless the company were liquidated, its shareholders would lose what equity they still had in the company. Bassett requested the appointment of a receiver to accomplish the liquidation.

Second, Schlanger, having appeared as counsel for the Hurst Group in its specific performance action against Culpepper, noticed Culpepper's deposition in that case for February 4, 1985. Schlanger used the Hurst Group's right to depose Culpepper in that case as a means of interrogating him in the two suits that had been brought on January 16--the state court shareholders' derivative suit and the federal court securities fraud suit.³⁰ (Both the Georgia and federal procedural rules, which dictated when the deposition of a defendant could be taken, prohibited the taking of Culpepper's deposition in those two cases for thirty days from the date, January 16, the complaints were filed unless leave of court were obtained.³¹ By using the specific performance action as the vehicle for noticing Culpepper's deposition, Schlanger was able to circumvent these prohibitions.)

Third, Zweifel, as House of Travel's counsel, responded to Pelletier's demand that Zweifel issue him a stock certificate for the House of Travel shares he had purchased from the Hurst Group on December 29, 1984. Zweifel did so by writing Pelletier, in care of his attorney, Bassett, and, also, William Charles Hurst, in care of his attorney, Schlanger. The two letters were identical, and advised Pelletier and Hurst that a new certificate would not issue for the following reasons: (1) the allegations of the complaints in the Hurst Group's state and federal court suits against Culpepper for specific performance and for securities fraud, respectively, raised the question whether the Hurst Group actually owned any House of Travel stock, i.e., whether Culpepper's allegedly fraudulent conduct on October 7, 1983, had, in effect, vitiated the Hurst Group's purchase of Langston's shares in the company; (2) assuming that it acquired the stock, the Hurst Group had pledged the stock to Langston as security for a $26,000 promissory note, and, according to House of Travel's corporate minute book, the pledge was still in effect--Zweifel advised that until Langston assured him that the stock had been released from the pledge, he could not issue a new certificate; (3) before a new certificate could issue, William Charles Hurst would have to produce his stock certificate or, in lieu thereof, as required by Ga.Code Ann. Sec. 11-8-405(2)(b) (1982), a bond, issued by a commercial surety, in the amount of $150,000--approximately the price Pelletier paid the Hurst Group for its shares--indemnifying House of Travel for any damages it might sustain for wrongfully issuing a certificate to Pelletier; (4) the Hurst Group's certificate contained a legend which indicated that the shares represented by the certificate could not be sold or transferred unless a registration statement was filed as prescribed by federal law or the sale or transfer was exempt from registration under both federal and state law. Zweifel advised that he would not issue Pelletier a certificate unless the Hurst Group and Pelletier demonstrated that a registration statement had been filed or that the sale was exempt from registration.

The same day, January 25, Zweifel sent Schlanger copies of the letters he had written to Pelletier and William Charles Hurst. In the cover letter accompanying the copies, he told Schlanger that, given the uncertainty as to who owned the 40 shares at issue--Langston, the Hurst Group, or Pelletier³²--he would not permit Pelletier or the Hursts to examine any of House of Travel's records. Zweifel added that if Schlanger insisted on such examination, he would seek direction from the superior court in the form of a clarification of the consent decree the court had signed; he indicated that he was willing to appear before the court at Schlanger's convenience. Schlanger promptly moved the superior court to hold House of Travel and Culpepper in contempt, for refusing to comply with the consent decree, and requested an emergency hearing on the matter. The hearing was never held.

Sometime between January 25--when he amended the complaint in the shareholders' derivative suit to seek the appointment of a receiver and the liquidation of House of Travel--and February 4, Bassett discovered that he had erred in concluding that a simple majority of House of Travel's three directors could not amend the company's bylaw that required 75% of the directors to agree before the board of directors could act. Bassett had overlooked the Georgia statute that gave a simple majority of a corporation's directors the power to amend a company bylaw that imposed a supermajority voting requirement for board action. See Ga.Code Ann. Sec. 14-2-1022(a)(2) and supra note 9. Given this statute, Bassett concluded that the two Hursts could override Culpepper's negative vote and change House of Travel's bylaws to provide that a simple majority of directors could exercise the board's powers. In short, the Hursts could strip Culpepper of his president's role, manage the company for Pelletier, and possibly make the liquidation of the company unnecessary. Bassett promptly shared his discovery with Schlanger, and they agreed that the Hursts, speaking through Schlanger, would immediately call a special meeting of House of Travel's board of directors.³³

On February 4, Schlanger, acting for the Hursts (and, through them, Pelletier), wrote Culpepper's and House of Travel's attorneys--Nicholas P. Chilivis, whom Culpepper had recently retained, and Zweifel--and requested that Culpepper, as company president, schedule a special meeting of the board at a time no later than February 11 for the purposes of, among other things, (1) amending the company's bylaws to change the 75% supermajority voting requirement to a simple majority voting requirement; (2) discharging the company's officers and appointing new officers; and (3) discharging the company's counsel (Lokey & Bowden), and retaining new counsel. A day or two later, Schlanger, Chilivis, and Zweifel agreed that a special meeting would take place on February 8, instead of February 11, but it was postponed to enable Pelletier and Culpepper, and their attorneys, to discuss the possibility of a settlement. They were unable to reach a settlement, and on February 11 Schlanger wrote Chilivis and Zweifel again, asking them to reschedule the board meeting for a time no later than February 15. Gerald Handley, a Lokey & Bowden partner who had been assisting Zweifel in the House of Travel matters, responded: he told Schlanger that a settlement was still possible and asked for more time. Schlanger declined to give it and, moreover, treated Handley's response as a refusal by Culpepper to reschedule the board meeting. The company's bylaws provided that, if the president refused to call a special meeting when requested by a director, any two directors could do so. On February 12, drawing on this provision, the Hursts, acting through Schlanger, noticed a special meeting for 3:00 p.m. on February 15 at the Lokey & Bowden law office.

The meeting took place as scheduled, but it lasted only a few minutes. Schlanger, who came with the Hursts, wanted the meeting recorded, so he brought a court reporter. Zweifel, who was there with Culpepper, objected to the court reporter's and Schlanger's presence. When the reporter and Schlanger left the room, the meeting began. Leon Hurst moved that paragraph 3.10 of the bylaws--the 75% supermajority provision--be amended to permit the board to act on a simple majority vote. William Charles Hurst seconded the motion, and it passed, Culpepper voting no. According to some corporate minutes Schlanger later prepared (based on what the Hursts told him), Leon Hurst then moved that the meeting be "adjourned" in accordance with "paragraph 3.13 of the bylaws ... until 4:30 p.m. at the offices of Herbert P. Schlanger." The motion carried (on the Hursts' vote), and the meeting adjourned. At this point, Schlanger returned to the room and stated that the meeting would continue at his office with or without Culpepper and Zweifel and that the court reporter would be present to record the meeting. Culpepper and Zweifel attended the meeting, under protest.

The meeting resumed at 5:00 p.m.; the Hursts, Culpepper, and Zweifel were present. As the first order of business, Leon Hurst moved that the board invite Schlanger and Bassett to join the meeting. William Charles Hurst seconded the motion, it passed, Culpepper voting against it, and Schlanger and Bassett entered the room. Next, Leon Hurst moved that the court reporter join them. The motion passed, Culpepper again voting no. After the court reporter entered the room and began transcribing what took place, Culpepper objected to any further proceedings on the ground that the meeting had been improperly called. In his view, because the meeting at the Lokey & Bowden law office had been adjourned, it could not be resumed without three days' notice, as provided in the bylaws; consequently, any action taken at that time would be null and void. The Hursts ignored Culpepper's objection and proceeded with the agenda set forth in the written notice they had given Culpepper on February 12. Turning to that agenda, the Hursts, over Culpepper's negative vote, (1) replaced themselves as the company's vice president and secretary/treasurer with James Lurwig; (2) gave Lurwig most of Culpepper's authority as company president; and (3) replaced Lokey & Bowden with Cofer, Beauchamp, Hawes & Harrold as counsel for the company.³⁴

Following these events of February 15, a potential purchaser of House of Travel's assets appeared on the scene and for three weeks--until it became apparent that a deal could not be made--the parties put aside their differences. On March 10, hostilities resumed--at a board of directors meeting. All three directors were present, together with their attorneys--Gary P. Bunch³⁵ representing Culpepper and Schlanger representing the Hursts (and therefore Pelletier). Bassett also attended the meeting--to protect Pelletier's interests. The agenda was the same as the agenda set forth in the Hursts' notice of the February 15 board meeting. Over Culpepper's negative vote, the Hursts ratified the actions taken on February 15, and they went one step further: they fired Culpepper as company president and gave the office to James Lurwig.

On March 12, James Lurwig had his first contact with House of Travel's employees. He visited the company's Buckhead office, where most of the employees were stationed, introduced himself as the new president, and, after indicating what he expected from them, asked for their cooperation. Schlanger and Pelletier were present when Lurwig addressed the employees; the record, however, does not indicate what their participation, if any, may have been. During Lurwig's meeting with the employees, either Culpepper or Bunch made a telephone call to the Buckhead office. The receptionist took the call and, when the meeting was over, told her co-employees that Culpepper wanted to see them at the company's branch office in Smyrna. Several employees went to the branch office and met with Culpepper and Bunch. They returned late that afternoon. Lurwig was still there. They told him that they would not feel comfortable working for him, picked up their belongings, and left.³⁶

Sometime during the afternoon of March 12, Bunch telephoned Donald Rickertsen, a lawyer who specialized in bankruptcy matters. House of Travel's financial condition had been deteriorating, and the litigation pending against the company was threatening to put it under. Bunch thought that a chapter 11 reorganization might benefit the company and wanted Rickertsen's advice. After a brief conversation, they decided that a meeting that evening with Culpepper and Zweifel would be helpful.

They met at Zweifel's office, and Culpepper and Zweifel briefed Rickertsen on House of Travel's recent history. Zweifel advised Rickertsen that, as far as he was concerned, Culpepper was still the company's president and that his firm was still its counsel. Zweifel, of course, knew that House of Travel's board of directors had fired Culpepper on March 10; he felt, however, that the board's action was invalid. In his view, nothing the board had done at the behest of the Hursts had any validity. He considered the Hursts--who owned no interest in the company--to be Pelletier's nominees. As such, they had not been functioning as independent directors, as the law required.³⁷

After he had been briefed, Rickertsen concluded that chapter 11 proceedings would benefit House of Travel and that Culpepper, as its president, could authorize the filing of a chapter 11 petition. Acting as Culpepper directed, Rickertsen filed the petition the following day, March 13.

Also on March 12, TI's attorneys notified the Hurst Group by letter that TI was rescinding the stock sale agreement it had made with the Hurst Group on November 1, 1984. The letter contained an acknowledgment for the members of the Hurst Group to sign, indicating that TI had rescinded the agreement, and the attorneys asked them to sign it. On March 26, the Hursts and Robinson signed the acknowledgment, as TI had requested; TI's president, in turn, executed an assignment, which sold, assigned, and transferred the 40 shares of House of Travel stock TI had purchased on November 1, 1984, back to William Charles Hurst.

By admitting in writing that TI had purchased its House of Travel stock on November 1, 1984, and that TI had maintained ownership of the stock until it rescinded the purchase on March 26, 1985, the Hurst Group effectively acknowledged that it had no House of Travel stock to sell Pelletier on December 29, 1984. Pelletier had already paid the Hurst Group $142,600 for the stock ($10,000 in cash on December 29, 1984, a check for $82,600, which the Hurst Group was to hold until January 15, 1985, and a $50,000 promissory note due on January 15, 1986), and, moreover, Pelletier, representing himself as a House of Travel stockholder, had filed the shareholders' derivative suit in the state superior court. The Hurst Group had a serious problem on its hands. What if Pelletier or Schlanger, who owed his allegiance to Pelletier, found out about the TI transaction? At the very least, Pelletier would want his money back.

The record does not indicate when, if ever, the Hursts or Pelham Robinson informed Pelletier or Schlanger that they had no House of Travel stock to sell on December 29, 1984; all we know is that Zweifel discovered this fact in the fall of 1987, while he and his law firm were defending the suit Schlanger had brought against them on behalf of Pelletier on January 23, 1986--charging them with having breached the fiduciary duties they owed Pelletier as a House of Travel shareholder.

Meanwhile, Schlanger--apparently believing that Culpepper, who was still holding himself out as the firm's president despite the board's action of March 10, had convinced House of Travel's employees to leave their posts--turned once again to the courts for relief; this time, he chose the shareholders' derivative suit Bassett had filed for Pelletier and Langston against Culpepper, House of Travel, and the Hursts on January 16. On March 13, Schlanger, appearing as the Hursts' attorney, filed a cross-claim against Culpepper, seeking compensatory and punitive damages, a declaratory judgment, and preliminary and permanent injunctive relief. Schlanger alleged that, on March 10, 1985, the Hursts, constituting two-thirds of House of Travel's board of directors, had amended the company's bylaws to provide that the board of directors could act on a simple majority vote of its members (rather than the previously required supermajority vote); that, once the bylaws were amended, the board, acting on the Hursts' votes, discharged Culpepper as the company's president; that Culpepper refused to acknowledge the board's action and continued to exercise the authority of the office; that Culpepper was wasting the company's assets in a variety of ways; and that, unless restrained by an injunctive order, he would continue to injure the company. Schlanger asked the court to declare valid the bylaw amendment and Culpepper's discharge, and to enjoin Culpepper from holding himself out as House of Travel's president. Schlanger also asked for compensatory and punitive damages for the injury Culpepper had inflicted on the company.

As soon as he filed his cross-claim, Schlanger moved the court for a temporary restraining order, to prevent Culpepper from interfering with House of Travel's day-to-day operations. Schlanger scheduled a hearing on his motion for 2:00 p.m. that day, March 13, before the superior court judge presiding over the case, and immediately notified all counsel of record--serving them by hand copies of the notice of hearing, the Hursts' cross-claim, and their motion for a temporary restraining order.

The hearing was held as scheduled. Present were five attorneys: Schlanger (representing the Hursts), Bassett (representing Pelletier and Langston), Bunch (representing Culpepper), and Lokey and Handley of Lokey & Bowden (representing House of Travel). Schlanger outlined the facts he had recited in the Hursts' cross-claim and their motion for temporary restraining order.

5. The Bankruptcy Court Takes Control.

While Schlanger and the other attorneys were addressing the superior court, Rickertsen was at the federal courthouse in Atlanta; at 4:41 p.m., he filed a chapter 11 petition for House of Travel. Moments later, the superior court judge announced that he was granting the relief Schlanger was seeking, and would enter a formal written order in the morning. Shortly thereafter, Rickertsen called the judge, informed the judge that he had just filed a chapter 11 petition on behalf of House of Travel, and said that the Hursts' application for a temporary restraining order had been stayed. At that moment, the prosecution of all of Pelletier's, and Langston's, claims in that case ceased. (A few months later, after he sold his House of Travel stock to Elite Travel, Inc., Pelletier dismissed the suit with prejudice.)

The next day, March 14, Cofer, Beauchamp, Hawes & Harrold, having been employed by the Hursts as House of Travel's new counsel, moved the bankruptcy court to dismiss the petition Rickertsen had filed. Schlanger, appearing for the Hursts, joined in the motion. The movants alleged that the petition had been filed without House of Travel's authorization; they represented that Culpepper, who had signed the petition as the company's president, did not occupy that office at the time, and thus had no authority to speak for the company. Before the bankruptcy court could rule on the motion, the parties--Pelletier, Langston, the Hursts, and Culpepper--and Rickertsen, acting as reorganization counsel for the debtor, agreed that the Hursts would ratify the filing of the petition. They also agreed that Lurwig would manage the day-to-day operations of House of Travel as debtor-in-possession. After they reduced their agreement to writing, the Hursts ratified the filing of the petition, and the bankruptcy court rejected as moot the motion to dismiss the chapter 11 proceedings.

E. The Pelletier/Elite Travel, Inc. Transaction.

On May 4, while the bankruptcy proceedings were pending, Pelletier sold his interest in House of Travel, i.e., "all of his right, title and interest in and to any and all shares of stock of [House of Travel] which he may currently have or ever has had," to Elite Travel, Inc. (Elite), a travel agency. The sale was made pursuant to a written agreement, drafted by Schlanger and Bunch, between Elite, Joyce Carson (Elite's president), House of Travel, and Culpepper, "on the one hand," and Pelletier, "on the other." For his interest in House of Travel, Pelletier received $50,000, half in cash and half in the form of a promissory note executed by Elite, Carson, and Culpepper. Pelletier also received from House of Travel a partial assignment of any claims that it might have against Zweifel and Lokey & Bowden. The terms of the assignment were, essentially, as follows: (1) Pelletier alone would decide what claims, if any, House of Travel had against Zweifel and Lokey & Bowden and whether to pursue them; (2) if he decided to bring suit against Zweifel and Lokey & Bowden, Pelletier, with leave of the bankruptcy court, would bring it in House of Travel's name, with a lawyer of his choice, and at his (Pelletier's) expense; and (3) of the net proceeds of any recovery, Pelletier would receive 70%, House of Travel 20%, and Elite 10%. Finally, Pelletier agreed to dismiss with prejudice the two state court suits he had been prosecuting: his (and Langston's) shareholders' derivative suit against Culpepper, House of Travel, and the Hursts, and the Hurst Group's suit against Culpepper for specific performance.

After this transaction, Pelletier's position vis-a-vis Zweifel and Lokey & Bowden was as follows. First, he could no longer claim that he was a House of Travel shareholder;³⁸ therefore, he could not bring a shareholders' derivative suit against Zweifel and Lokey & Bowden based on any claims House of Travel may have had against them--he no longer had standing to prosecute such a suit. Second, any claim Pelletier brought against these lawyers would have to be based on their breach of a duty they owed to him. (As we recite infra, Pelletier, on January 23, 1986, sued Zweifel and Lokey & Bowden in state court claiming the breach of such a duty. In that suit, he alleged that Zweifel and Lokey & Bowden, as House of Travel's counsel, had a fiduciary duty to him, as a shareholder; that in representing the company they breached this duty; and that, as a result of such breach, he suffered substantial injury--in part through the depreciation in value of his House of Travel stock.) Third, Pelletier could sue Zweifel and Lokey & Bowden in House of Travel's name to recover damages for their breach of a duty owed to House of Travel if the bankruptcy court granted him leave to do so.

Schlanger, representing Pelletier, submitted the Elite agreement to the bankruptcy court on June 3, and requested the court to approve the provision giving Pelletier the right to sue Zweifel and Lokey & Bowden on behalf of House of Travel. Rickertsen opposed Schlanger's request, objecting to the manner in which Schlanger proposed to divide the proceeds of any recovery Pelletier might obtain. Rickertsen thought that House of Travel's share was too small. Before the court could rule on the matter, Schlanger and Rickertsen worked out a new allocation: Pelletier would receive 66 2/3% of any recovery, and House of Travel would receive 33 1/3%. Schlanger and Rickertsen submitted the new arrangement to the court for approval on October 2, 1985. The court set the matter down for a hearing on October 23, and when no party objected, the court approved it, in a written order, on October 24.

Neither Zweifel nor Lokey & Bowden received a copy of the October 24 order. Several weeks later, a member of the firm learned about it, and on January 13, 1986, Lokey & Bowden (1) moved the court to vacate the order, contending that it had not been given notice of the October 23 hearing--consequently, the order should not stand, and (2) objected to the court's confirmation of a plan that had been proposed for House of Travel's reorganization. Lokey & Bowden served a copy of its motion and its objection on Schlanger, as Pelletier's attorney, by hand the following day, January 14; the same day, the bankruptcy court scheduled a hearing on the matter for January 30, 1986.

Schlanger and Pelletier, realizing that the bankruptcy court might vacate the October 24 order and deny Pelletier permission to sue Zweifel and Lokey & Bowden in House of Travel's name, decided to sue them in Pelletier's name instead. Thus, on January 23, 1986, Schlanger, on behalf of Pelletier, filed a complaint against Zweifel and Lokey & Bowden in the Superior Court of Fulton County charging them with having breached a fiduciary duty they purportedly owed Pelletier. According to the complaint, Zweifel and Lokey & Bowden, as House of Travel's counsel, "had a fiduciary duty to advance the best interests of [the company] and not to prefer the interest of one putative shareholder over that of another. Moreover, because [House of] Travel was a close corporation, the duties of Lokey & Bowden and Mr. Zweifel extended not only to the corporation as a whole, but to each of its shareholders." These attorneys, according to Schlanger's allegations, breached such duty by preferring the interests of Culpepper over those of Pelletier, to wit: Zweifel, after Pelletier had purchased the Hurst Group's House of Travel stock, advised Culpepper not to sign the management agreement that Culpepper had, prior to the purchase, told Pelletier that he would sign; Culpepper's refusal to sign the agreement caused Pelletier to suffer great injury--in particular, loss of shareholder equity and the litigation expenses Pelletier incurred in trying to resolve his dispute with Culpepper; Zweifel and Lokey & Bowden, in representing both Culpepper and House of Travel, had a conflict of interest and should have withdrawn; they did not, and instead, had Culpepper bring House of Travel to the bankruptcy court.³⁹ According to Pelletier, the conduct of Zweifel and his law firm injured him in an amount in excess of $1 million; he therefore sought compensatory damages in that amount. Pelletier also sought $2 million in punitive damages, alleging that the defendants intended to injure him.

On January 24, the day after this suit was filed, Schlanger served on Lokey & Bowden Pelletier's memorandum in opposition to Lokey & Bowden's motion to vacate the October 24 order of the bankruptcy court. At the same time, Schlanger furnished Zweifel and the law firm a "courtesy copy" of the complaint Pelletier had filed against them in the superior court the day before.

On January 30, the bankruptcy court convened the hearing on Lokey & Bowden's motion to vacate the October 24 order and its objection to the confirmation of the plan to reorganize House of Travel. Present at the hearing were, among others, Robert Bartlett, counsel for Lokey & Bowden, Zweifel, who was there as a party (representing Lokey & Bowden), Schlanger, and Rickertsen. The court first considered the motion to vacate. Bartlett informed the court of the suit Pelletier had brought against Zweifel and Lokey & Bowden on January 23. Reminding the court that the firm had filed a claim, as an unsecured creditor, against the debtor's (House of Travel's) estate, he said that if Pelletier insisted on going forward with his suit, the law firm would have to amend its claim to include whatever expenses and losses it, and Zweifel, sustained because of the litigation. According to House of Travel's bylaws, Bartlett explained, the law firm and Zweifel were entitled to indemnification for any losses they might suffer by reason of their representation of House of Travel. Bartlett therefore asked the court not to confirm the proposed plan of reorganization; rather, the court should defer its confirmation ruling until the law firm could decide whether an amendment of its unsecured claim would be necessary. When the court indicated that, even if it confirmed the plan, it would give Lokey & Bowden the right to file an amended claim later, Bartlett withdrew his objection to confirmation. On February 4, 1986, the court, in a written order, confirmed the proposed plan of reorganization,⁴⁰ without prejudice to Lokey & Bowden's and Zweifel's right to file an amended, unsecured creditor's claim in the event they suffered any loss at the hands of Pelletier. The court also vacated its October 24 order, which meant that Pelletier could not sue Zweifel and Lokey & Bowden in House of Travel's name.

F. The Case at Hand: Pelletier's RICO Suit.

At the conclusion of the January 30 hearing, as Zweifel was leaving the courtroom, a process server presented him with the complaint in the instant case (the RICO suit); Schlanger had filed it, on behalf of Pelletier, in the district court that morning.

The complaint consisted of a chronological history of House of Travel and focused on three of the four stock transactions described above--the Langston/Hurst Group transaction of October 7, 1983; the Pelletier/Hurst Group transaction of December 29, 1984; and the Pelletier/Elite transaction of May 4, 1985⁴¹--and House of Travel's chapter 11 proceeding in the bankruptcy court. Pelletier alleged that each of these transactions, and the chapter 11 proceeding, was the product of a scheme that Culpepper had devised in September 1983 (1) to induce his House of Travel coshareholder to sell and/or a third party to buy the coshareholder's House of Travel stock; (2) to induce the purchaser, after the stock changed hands, to obtain working capital for the company; and, then, (3) to bleed the company of its new working capital. According to the complaint, this is how Culpepper executed his scheme. First, whenever House of Travel fell into financial difficulties, Culpepper would look for an investor to replace his coshareholder and to obtain working capital for the company. When he found a good prospect, Culpepper would tout House of Travel as a good investment--that simply needed more working capital. Culpepper would explain that the company's lack of sufficient working capital was due to his coshareholder's misfeasance. When the prospect indicated an unwillingness to purchase a minority interest in the company, Culpepper would promise to give him effective control of the company by vesting him with the power to manage it. If this satisfied the prospect and he agreed to buy out the coshareholder and arrange for new working capital, Culpepper would induce his coshareholder to sell by convincing him that if he did not sell, he would lose his entire investment in House of Travel.

Culpepper, the complaint alleged, devised this scheme sometime prior to October 7, 1983, and he used it for the first time to get Langston to sell, and the Hurst Group to buy, 40 of his 50 House of Travel shares (i.e., 40% of the company). Culpepper purportedly convinced Langston that both of them should sell 40 shares to the Hurst Group, but only Langston completed the transaction. Culpepper, when House of Travel's financial condition subsequently deteriorated, executed his scheme again in December 1984; in an effort to salvage his investment, he allegedly induced Pelletier to buy out the Hurst Group and to obtain a line of credit for House of Travel. The inducement, according to the complaint, was Culpepper's promise to give Pelletier his, Culpepper's, authority to manage the company; after Pelletier bought the Hurst Group's interest, however, Culpepper reneged on his promise. Culpepper allegedly executed his scheme for a third time on May 4, 1985, inducing Pelletier to sell to Elite the House of Travel shares he had acquired from the Hurst Group.

Zweifel and his law firm, according to the complaint, joined Culpepper's scheme, as coconspirators, in the fall of 1984, shortly before Pelletier purchased the Hurst Group's stock; they joined the scheme, the complaint said, to protect and enhance the stream of income they had been receiving from House of Travel in the form of attorney's fees. Thereafter, Zweifel purportedly became aware of Pelletier's plan to purchase the Hurst Group's interest in House of Travel and Culpepper's intention to induce Pelletier to go forward with the purchase, and to obtain a line of credit for the company, by promising to give Pelletier the authority to manage the company. On January 8, 1985, however, after Pelletier had purchased the Hurst Group's stock and obtained the line of credit, Zweifel counseled Culpepper to renege on his promise and thereby helped Culpepper maintain control over the company. When, in March 1985, the Superior Court of Fulton County, Georgia upheld the decision of House of Travel's board of directors (in which the Hursts, at Pelletier's direction, voted to replace Culpepper as House of Travel's president and Zweifel's law firm as its counsel), Zweifel, with the help of Donald L. Rickertsen, counseled Culpepper to file a chapter 11 petition, and thus put House of Travel in the hands of the bankruptcy court. Zweifel did this, it was alleged, to enable Culpepper to continue his control, at least temporarily, over House of Travel's affairs.

The complaint alleged that, while House of Travel was before the bankruptcy court, four other individuals and two corporations, in addition to Zweifel and his law firm, joined Culpepper's scheme, as coconspirators. They were Rickertsen, who represented House of Travel during the chapter 11 proceeding, Frank Carmines and Charles Crumley, the bankruptcy examiner and auditor, respectively, assigned to the chapter 11 case, Elite and its president, Joyce Carson, and House of Travel. Collectively, these coconspirators helped Culpepper get rid of Pelletier, as Culpepper's coshareholder in House of Travel, by fraudulently inducing Pelletier to sell his House of Travel stock to Elite. The fraud was principally this. Part of the consideration Pelletier received for the stock was House of Travel's assignment to Pelletier of any claims it may have had against Zweifel and Lokey & Bowden; Pelletier could not sue on these claims, however, without the bankruptcy court's approval. Rickertsen and Carmines, acting for all of the coconspirators, promised Pelletier that they would not oppose the granting of such approval, but they did not intend to abide by their promise; when Pelletier, through Schlanger, petitioned the bankruptcy court for leave to sue, Rickertsen and Zweifel objected and the court sustained their objection. As a result, Pelletier was never able to sue Zweifel and Lokey & Bowden on House of Travel's claims, and, according to Pelletier, a substantial portion of the consideration he received for his House of Travel stock thus went for naught.

Pelletier alleged that the foregoing conduct rendered Zweifel liable to him for money damages on ten grounds, or counts. Count one alleged that Zweifel and his coconspirators had violated four federal RICO criminal provisions, 18 U.S.C. Secs. 1962(a)-(d) (1988), and sought treble damages under RICO's civil remedies statute, 18 U.S.C. Sec. 1964(c) (1988), for these violations. Section 1962(a) makes it a crime for anyone who has derived income from "a pattern of racketeering activity ... in which such person has participated as a principal ... to use or invest, directly or indirectly, any part of such income ... in acquisition of any interest in, or the establishment or operation of, any enterprise ... engaged in ... interstate ... commerce." Pelletier alleged that Zweifel violated section 1962(a) in that, while representing House of Travel and Culpepper as an attorney, he received such income and invested it in the operation of the following enterprises engaged in interstate commerce: House of Travel, Lokey & Bowden, and the Bankruptcy Court for the Northern District of Georgia. The pattern of racketeering activity that allegedly generated the income, and in which Zweifel supposedly engaged, consisted of the criminal acts, called "predicate acts," of mail,⁴² wire,⁴³ securities,⁴⁴ and bankruptcy⁴⁵ fraud; using interstate facilities to further an unlawful activity;⁴⁶ extortion under color of official right;⁴⁷ state law barratry;⁴⁸ state law false statements;⁴⁹ and witness tampering, in violation of both federal and state law.⁵⁰

Section 1962(b) imposes criminal liability on anyone, who "through a pattern of racketeering activity ... acquire[s] or maintain[s], directly or indirectly, any interest in or control of any enterprise ... engaged in ... interstate ... commerce." Pelletier alleged, in count one, that Zweifel, through the predicate acts described above, maintained an interest in or control of the same three enterprises: House of Travel, Lokey & Bowden, and the bankruptcy court.

Section 1962(c) makes it a crime for any person "employed by or associated with any enterprise engaged in ... interstate ... commerce ... to conduct or participate, directly or indirectly, in the conduct of such enterprise's affairs through a pattern of racketeering activity." Pelletier alleged that Zweifel, while employed or associated with House of Travel, Lokey & Bowden, and the bankruptcy court conducted or participated in the conduct of their affairs through the commission of the predicate acts described above.

Section 1962(d) makes it a crime for anyone to conspire to violate the substantive offenses of sections 1962(a)-(c). Pelletier alleged that Zweifel's conduct, as described in the complaint, violated this conspiracy provision. Pelletier, however, did not point to the particular conduct that constituted a violation of section 1962(d). Rather, in alleging this RICO violation--and those above (sections 1962(a), (b), and (c)), Pelletier simply left it to the reader to discern which allegations of fact gave rise to Zweifel's liability under RICO.

Counts two through nine of Pelletier's complaint sought money damages for several predicate acts that allegedly gave rise to the count one RICO violations. Count two of Pelletier's complaint alleged that Zweifel, in counseling Culpepper to renege on his promise to transfer managerial control over House of Travel's affairs to Pelletier and in failing to inform Pelletier of the extent of the Hurst Group's misappropriation of the company's funds, committed securities fraud in violation of 15 U.S.C. Sec. 78j(b) and Rule 10b-5, 17 C.F.R. Sec. 240.10b-5 (1990) (hereinafter Rule 10b5).⁵¹ Counts three, four, and five alleged that Zweifel, by engaging in such conduct, also committed securities fraud in violation of 15 U.S.C. Secs. 77l (1), (2)⁵² and 77q(a),⁵³ and the Georgia code, Ga.Code Ann. Sec. 10-5-12 (1989),⁵⁴ and count six alleged that, by engaging in such conduct, he committed common law fraud. Count seven alleged that Zweifel breached his fiduciary duty to Pelletier, as a House of Travel shareholder (in essence, the same claim Pelletier raised in the state court suit he filed against Zweifel and Lokey & Bowden on January 23, 1986). Count eight alleged that Zweifel had committed state law barratry,⁵⁵ presumably by advising Rickertsen that Culpepper was still House of Travel's president and had authority to file a chapter 11 petition on its behalf. Count nine alleged that Zweifel made false statements,⁵⁶ presumably to the state superior court (in Pelletier's, and Langston's, shareholders' derivative suit or in the Hurst Group's suit for specific performance) and in an affidavit he signed with respect to the Culpepper-Langston-Hurst Group transaction. Finally, in count ten, Pelletier alleged that Zweifel injured him through state law racketeering activity in violation of Ga.Code Ann. Sec. 16-14-1 et seq. (1988).⁵⁷

Zweifel, on February 20, moved the court to dismiss Pelletier's RICO suit for failure to state a claim for relief or, alternatively, to require Pelletier to file a more definite statement, contending that Pelletier's allegations were so muddled that he could not frame a responsive pleading.⁵⁸ The next day, February 21, Zweifel and Lokey & Bowden removed Pelletier's state court suit (brought on January 23) to the federal district court, contending that the suit involved a matter pending in the bankruptcy court and thus, under 28 U.S.C. Sec. 1334 (1988), fell within the district court's subject matter jurisdiction. Then, on February 28, they answered Pelletier's complaint in that suit. In their answer, they alleged that Pelletier was not, and had never been, a House of Travel shareholder;⁵⁹ therefore, he could not recover from them on the theory that their conduct depreciated his ownership interest in the company. They alleged, alternatively, that, assuming that Pelletier had been a House of Travel shareholder during the relevant period, they could not be liable to him for breaching the fiduciary duty described in his complaint because no such duty existed under Georgia law.⁶⁰ Accordingly, as a separate affirmative defense, Zweifel and Lokey & Bowden alleged that the complaint failed to state a claim for relief.

The same day, February 28, that Zweifel and Lokey & Bowden filed this answer to Pelletier's state court complaint (which they had removed to the district court), the district court heard the alternative motions Zweifel had addressed to Pelletier's RICO suit. When the hearing began, District Judge G. Ernest Tidwell, to whom the case had been assigned, told Schlanger, who was there for Pelletier, that he was "treading on mighty dangerous grounds"; he then asked Schlanger if he was "familiar with Rule 11." Schlanger replied that he was familiar with the Rule and did not think he was violating it. He said, "we have got more facts on this case than any ... RICO case I know that's been filed in this court." The court countered this statement by observing that the pivotal allegations of Pelletier's complaint constituted nothing more than bald conclusions and that, if Schlanger wanted to pursue the case, he would have to amend his complaint. As the hearing progressed, Judge Tidwell indicated that his respect for Hamilton Lokey was such that he might not be able to be fair to Pelletier; accordingly, he said that he would probably recuse himself. He did so on March 3, without ruling on Zweifel's motion to dismiss, and the case was assigned to District Judge Orinda D. Evans. She presided over the case to its conclusion.

On March 19, Zweifel and Lokey & Bowden moved the district court for judgment on the pleadings in the state court suit they had removed to federal court, i.e., they asked the court to decide the case on the basis of their affirmative defense of failure to state a claim for relief. Before the court could issue a ruling, however, Pelletier moved the court to remand the proceedings to the state court.

On April 7, Schlanger filed an amended complaint, the complaint now before us, in Pelletier's RICO suit. The new complaint was seventy pages long and incorporated by reference four large volumes of evidentiary exhibits. The amended complaint replicated, in substance, the allegations in Pelletier's original complaint. As before, however, Schlanger did not connect his factual allegations with his legal conclusions. Framed in eight counts, the amended complaint repled eight of the ten counts of the original complaint; counts six and seven of the original complaint, asserting common law fraud and breach of fiduciary duty claims, had been dropped, and counts eight, nine, and ten of the original complaint became counts six, seven, and eight of the amended complaint. On April 18, Zweifel moved the court to dismiss the amended complaint for failure to state a claim for relief or, alternatively, to require Pelletier to file a more definite statement.⁶¹

On April 24, 1986, while he was preparing his memorandum in opposition to Zweifel's motion to dismiss Pelletier's amended complaint in the RICO case, and while the district court was considering Zweifel's and Lokey & Bowden's motion for judgment on the pleadings in the removed state court action, Schlanger returned to the bankruptcy court and House of Travel's chapter 11 proceeding and filed an "Application to Permit the Pursuit of Certain Claims and Causes of Action." In this application, he represented that House of Travel had some meritorious malpractice claims against Zweifel and Lokey & Bowden and asked the court to allow Pelletier to pursue them in another forum. Schlanger also proposed a new allocation of any recovery that might result: 60% would go to Pelletier and 40% to House of Travel. (The original Elite agreement, as noted supra, had provided that Pelletier would receive 70%, House of Travel 20%, and Elite 10% of any recovery Pelletier obtained.) The bankruptcy court advised Schlanger that it would not rule on his application until it could assess the strength of House of Travel's claims against the lawyers. To assist it in making such an assessment, the court appointed an attorney, John J. Goger, to examine the claims and to determine whether granting the application would be in the best interest of the debtor's estate.

On September 22, 1986, Pelletier's litigation against Zweifel--his removed state court action against Zweifel and Lokey & Bowden and his RICO suit against Zweifel--was once again divided when Judge Evans, granting Pelletier's motion to remand, sent Pelletier's suit against Zweifel and Lokey & Bowden back to state court. In remanding the case, she left undecided the defendants' motion for judgment on the pleadings (based on their affirmative defense of failure to state a claim for relief) and directed them to present the motion to the state court. They did so, and the state court denied the motion.

On October 2, 1986, in the RICO case, Judge Evans heard argument on Zweifel's alternative motions to dismiss or for a more definite statement and took them under advisement. That same day, Goger, having finished the task the bankruptcy court had given him, presented his findings to the court. As noted, Goger had been told to evaluate the claims that Schlanger contemplated bringing against Zweifel and Lokey & Bowden. He focused, in particular, on Schlanger's claim that Zweifel had fraudulently induced Pelletier to purchase the Hurst Group's House of Travel shares, on December 29, 1984, by persuading Culpepper not to enter into the management agreement Culpepper had told Pelletier that he would sign. Goger also examined Schlanger's claims that Zweifel and his firm had engaged in abusive litigation tactics in defending House of Travel in Pelletier's (and Langston's) shareholders' derivative suit; that Zweifel had, without cause, prevented the sale of House of Travel's assets to willing purchasers; that Zweifel had prevented Culpepper and Pelletier from settling their differences; and that Zweifel and Lokey & Bowden had committed bankruptcy fraud by having Culpepper file an unauthorized chapter 11 petition in behalf of House of Travel. After a thorough review of the evidence, Goger concluded, and reported to the bankruptcy court, that "there does not appear to be substantial justification for a lawsuit against [Zweifel and] Lokey & Bowden asserting an entitlement to damages for alleged negligence and breaches of fiduciary duties." Goger referred the court to Fed.R.Civ.P. 11 and stated that, "[w]hile any litigation presents uncertainties, and the discovery of new facts is certainly possible, the possibility of affirmative recovery in the instant case is sufficiently remote, and the possibility of an award under Rule 11 ... is sufficiently great that the pursuit of the asserted claims of [House of Travel] against Lokey & Bowden should not be undertaken." Goger therefore recommended that the court deny Pelletier's application.

Schlanger, of course, and Pelletier received a copy of Goger's report. They objected to Goger's recommendation, and the court held a hearing on whether to grant Pelletier's application. Schlanger appeared at the hearing and argued in support of the application. Goger, in response, defended his recommendation. He repeated the statement he had made in his report about the possibility of Rule 11 sanctions if Pelletier sued Zweifel and Lokey & Bowden; in Goger's opinion, the risk of sanctions counseled against the bringing of suit. The bankruptcy court agreed, and denied Pelletier's application on December 3, 1986.

On January 9, 1987, Judge Evans ruled on Zweifel's alternative motions--for dismissal or for a more definite statement--in the RICO case. The court dismissed counts three, four, six, seven, and eight for failure to state a claim for relief: count three, a federal securities claim under 15 U.S.C. Secs. 77l(1), (2), did not state a claim for relief since an indispensable element of that claim was that the defendant sold securities--yet neither Zweifel nor his clients sold securities to Pelletier; counts four, securities fraud in violation of 15 U.S.C. Sec. 77q(a), six, state law barratry, and seven, state law false statements, failed because the statutory provisions they relied upon did not create private rights of action; and count eight, the Georgia RICO claim, failed because Pelletier had not pled any predicate acts of racketeering. Finally, the court struck from count one, as immaterial or as insufficient, all references to the predicate acts of extortion, barratry, false statements, and witness tampering. Judge Evans did not grant Pelletier leave to replead any of these counts, and Pelletier did not ask her to amend her order to allow him to do so.⁶²

Seven months later, on August 7, 1987, Pelletier moved for leave to file a second amended complaint. The proposed complaint strengthened his Georgia RICO claim by alleging several predicate acts of racketeering. It deleted, however, all reference to his federal securities claims under 15 U.S.C. Secs. 77l and 77q, and dropped the false statements and barratry counts (although they were retained as predicate acts for the Georgia RICO claim). Pelletier also sought to assert a new claim--the claim he had brought against Zweifel (and Lokey & Bowden) in the state superior court on January 23, 1986.

That same day, August 7, Zweifel moved for summary judgment on the remaining counts of the amended complaint: count one (the RICO claim based on Zweifel's alleged violations of subsections (a) through (d) of section 1962), count two (the securities fraud claims under section 78j(b) and Rule 10b-5), and count five (the securities fraud claims under Georgia's equivalent of Rule 10b-5).

In October 1987, while his motion for summary judgment was pending in the district court, Zweifel discovered that the Hurst Group did not have any House of Travel stock to sell to Pelletier on December 29, 1984; it had already sold all of its House of Travel shares to TI. Armed with this information, Zweifel moved the district court for leave to file a supplemental affidavit in support of his motion for summary judgment and to engage in further discovery. (At the same time, Zweifel and Lokey & Bowden, relying on Zweifel's discovery of the Hurst Group's sale to TI, moved the state court for summary judgment in Pelletier's tort action against them. The court denied their motion, and they appealed. See infra at 1495.) In his motion, Zweifel asserted that Pelletier never owned any House of Travel shares and, consequently, could not prevail on any claims whose sufficiency depended on Pelletier's ownership of such stock. The district court granted Zweifel's motion, observing that the Hurst Groups' sale to TI was "highly material" to Pelletier's claims against Zweifel.

On January 6, 1988, Judge Evans denied Pelletier's motion for leave to file a second amended complaint, noting that Pelletier had delayed too long before he moved to amend--a full seven months since she had entered the dismissal order. Judge Evans also observed that the new state law clai