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CARDINAL HOLDING CO., et al. v. DEAL, et al.

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DEAL, et al.

November 5, 1999

Record No. 990014





Bonwill Shockley, Judge

PRESENT: Carrico, C.J., Compton, Lacy, Hassell,
Keenan, and Kinser, JJ., and Whiting, Senior Justice


This is an appeal of a sanctions award against
an attorney and the law firm that employed him. In accord with
familiar appellate principles, we will state the evidence in the
light most favorable to the prevailing party.

Cardinal Holding Company (Cardinal) and others,
filed a legal malpractice action against John F. Deal &
Associates, a law partnership, and two of its lawyers, John F.
Deal and Rhonda Cobler-Wells (collectively, Deal). The plaintiffs
sought damages in excess of 24 million dollars for Deal’s acts of
alleged legal malpractice while representing Alvin Q. Jarrett
and, later, his executors, T. Roy Jarrett and Harry W. Jarrett.
The professional law corporation of Ayers & Stolte, P.C., by
Robert H. Smallenberg, one of its members (collectively, Ayers),
prepared and signed the motion for judgment and subsequent
pleadings that eventually gave rise to the award of sanctions
against them.

Charles E. Ayers, Jr., one of the principals in
Ayers & Stolte, P.C., was associated with Alvin Jarrett in a
number of business ventures. He and law firms in which he was a
principal were also Alvin Jarrett’s legal counsel in various
matters. In July 1990, Deal replaced Mr. Ayers and his law firm
as Alvin Jarrett’s legal counsel in certain of these matters.
Deal’s representation continued until Alvin Jarrett’s death in
March 1991. Thereafter, Deal represented the executors of
Jarrett’s estate until some time in 1991 or 1992.

In June 1993, Mr. Ayers and two of his related
corporations executed settlement agreements with the executors of
the Jarrett estate. As a part of the first agreement, Mr. Ayers
agreed to assist in the liquidation of the Jarrett estate
including "the prosecution of the potential malpractice
action against John F. Deal, Esquire, [and] his law firm."

Also in 1993, on a date not disclosed in the
record, Mr. Ayers filed a malicious prosecution action against
Mr. Deal in the Circuit Court of Henrico County. The action was
based on Mr. Deal’s cooperation with the Commonwealth’s Attorney
of Henrico County in the prosecution of Mr. Ayers for alleged
criminal conduct in his representation of Alvin Jarrett. Mr.
Ayers and his counsel filed pleadings in the malicious
prosecution action in violation of the sanctions statute, and the
court required them to pay Mr. Deal $4,958.04 as sanctions to
reimburse him for his costs and attorney’s fees in defending the

When the executors decided that they did not
want to pursue the malpractice claim against Deal, a second
agreement was negotiated in February 1997 in which the claim was
assigned to Mr. Ayers and two corporations in which he was a
principal. Paragraph 14 of the second agreement provided that
"the rights of either party herein may not be assigned
without the prior written consent of the other party."

Shortly after the second agreement was signed,
Mr. Smallenberg wrote a letter to Stephen G. Test, counsel for
the executors, asking that paragraph 14 of the amended settlement
agreement be deleted. Mr. Test not only refused to do so, but he
also reminded Mr. Smallenberg that Test’s clients would
"object to the Agreement or any rights conveyed under the
Agreement being assigned without our consent."

In spite of this, the claim was assigned by Mr.
Ayers and his corporations to Cardinal. Thereafter, this action
was filed by Ayers not only in Cardinal’s name as assignee, but
also in the Jarretts’ names without their knowledge or consent or
that of their counsel.

Although the motion for judgment was filed on
March 21, 1997, Mr. Smallenberg delayed service of process on
Deal for almost a year. Mr. Deal learned that the action had been
filed before he was served with process and began preparations to
defend it.

After Mr. Smallenberg finally had process
served on March 20, 1998, Deal responded on April 10, 1998 with a
grounds of defense, a special plea in bar, and a counterclaim
against Cardinal for malicious prosecution. Paragraph 3 of Deal’s
counterclaim alleged that "[Cardinal] filed the Suit with
notice, actual or constructive, that legal malpractice claims are
non-assignable in the Commonwealth of Virginia. [Cardinal], as
purported assignee, has no basis in law to bring the Suit."
Hence, Deal sought sanctions.

At a hearing on June 10, 1998, more than 55
days after service of the counterclaim on counsel for Cardinal,
the court permitted Cardinal to file a late response to the
counterclaim. Cardinal denied the allegations of paragraph 3 of
the counterclaim in its grounds of defense.

On the same day, the court heard argument on
Cardinal’s motion to nonsuit its malpractice action against Deal
and Deal’s opposition thereto because of the pendency of its
counterclaim. The court took this issue under advisement. By
letter dated July 15, 1998, the court advised the parties that it
would sustain Cardinal’s motion for a nonsuit, but would hear
argument on the motion for sanctions on a date to be agreed upon
by counsel and the court.

Thereafter, counsel for Cardinal prepared, and
counsel for Deal signed, an order of nonsuit which did not
reflect the court’s decision to hear argument on the motion for
sanctions at a later date. Another circuit court judge entered
that order on August 10, 1998.

At a hearing on September 4, 1998, the court
overruled Ayers’ oral motion to dismiss Cardinal’s motion for
sanctions against Ayers based on the ground that the court had
lost jurisdiction to impose sanctions, more than 21 days having
elapsed since entry of the nonsuit order.
[2] After hearing
evidence and argument, the court awarded sanctions in favor of
Deal against Ayers in the sum of $22,181.17 to reimburse Deal for
attorney’s fees, costs, and time expended in defense of this
proceeding and "the sum of $10,000 to punish" Ayers.

The sanctions award was based on the following
pertinent provisions of Code ? 8.01-271.1 (the sanctions

Every pleading, written motion, and
other paper of a party represented by an attorney shall
be signed by at least one attorney of record in his
individual name. . . .

The signature of an attorney or party
constitutes a certificate by him that (i) he has read the
pleading, motion, or other paper, (ii) to the best of his
knowledge, information and belief, formed after
reasonable inquiry, it is well grounded in fact and is
warranted by existing law or a good faith argument for
the extension, modification, or reversal of existing law,
and (iii) it is not interposed for any improper purpose,
such as to harass or to cause unnecessary delay or
needless increase in the cost of litigation.

. . . .

An oral motion made by an attorney or
party in any court of the Commonwealth constitutes a
representation by him that (i) to the best of his
knowledge, information and belief formed after reasonable
inquiry it is well grounded in fact and is warranted by
existing law or a good faith argument for the extension,
modification or reversal of existing law, and (ii) it is
not interposed for any improper purpose, such as to
harass or to cause unnecessary delay or needless increase
in the cost of litigation.

If a pleading, motion, or other paper
is signed or made in violation of this rule, the court,
upon motion or upon its own initiative, shall impose upon
the person who signed the paper or made the motion, a
represented party, or both, an appropriate sanction,
which may include an order to pay to the other party or
parties the amount of the reasonable expenses incurred
because of the filing of the pleading, motion, or other
paper or making of the motion, including a reasonable
attorney’s fee.


Ayers’ jurisdictional argument is based on the
following assignment of error asserted by Ayers:

The trial court erred in awarding any
sanctions to the Jarretts when more than 21 days
elapsed after entry of the final order. (Emphasis added.)

Deal responds that (1) neither this nor any
other assignment of error relates the alleged jurisdictional
defect to the sanctions awarded to Deal, and that (2) in
any event, Cardinal remained in the case because it was the
defendant in Deal’s counterclaim which was still pending when the
court awarded sanctions. We need to consider only the first

During oral argument, Ayers maintained that the
reference in the assignment of error to the Jarretts instead of
to Deal was a typographic error which becomes manifest upon
reading the text of Ayers’ argument on brief. In effect, Ayers
seeks an amendment of the assignment of error to correct this
alleged typographic error.

In Hamilton Development Co., v. Broad Rock
, 248 Va. 40, 445 S.E.2d 140 (1994), we said:
"Appeals are awarded based on assignments of error. Rule
5:17(c). The language of an assignment of error may not be
changed . . . ." Id. at 44, 445 S.E.2d
at 143. Accordingly, Ayers is held to the assignment of error as
written and, because it fails to relate the jurisdictional
question to the sanctions awarded to Deal, we will not consider
the question.


Ayers concedes that legal malpractice actions
were not assignable at common law in Virginia. Ayers claims,
however, that it was objectively reasonable for lawyers to
believe that the common law in Virginia had been modified in 1977
by the enactment of the following pertinent provisions of Code
? 8.01-26:

Only those causes of action for damage
to real or personal property, whether such damage be
direct or indirect, and causes of action ex contractu are

Even if we were to decide that it was
objectively reasonable to believe that the statute had modified
the common law in 1977, no such belief could have been held after
our decision in MNC Credit Corp. v. Sickels, 255 Va. 314,
497 S.E.2d 331 (1998). In MNC Credit, we held that Code
? 8.01-26 "does not abrogate the common law rule which
prohibits the assignment of legal malpractice claims in this
Commonwealth because the General Assembly did not plainly
manifest an intent to do so." 255 Va. at 318, 497 S.E.2d at

We think that had Ayers made the
"reasonable inquiry" required of lawyers by Code
? 8.01-271.1, the holding in MNC Credit would have
been discovered by the time Ayers caused process to be served on
March 20, 1998. This was almost a month after the decision in MNC
was issued and made public on February 27, 1998.
Moreover, Mr. Smallenberg told the trial court that he acquired
actual knowledge of MNC Credit when served with Deal’s
responsive pleadings on April 13, 1998, "at the
latest." Those pleadings referred to MNC Credit.

Yet, 58 days later, on June 10, 1998, Ayers
prepared and Mr. Smallenberg, acting for the law firm, signed and
filed Cardinal’s grounds of defense to Deal’s counterclaim. In
the grounds of defense, Cardinal effectively asserted that it, as
the assignee of a legal malpractice action, had the right to
maintain the action.

Hence, the trial court did not err in basing
its sanctions award on the proposition that Ayers should have
known that legal malpractice claims cannot be assigned in
Virginia. Therefore, we need not consider the alleged errors in
basing the sanctions award on other grounds.


Next, we consider Ayers’ argument that since
Mr. Smallenberg was the only person who signed the offending
pleadings, the court erroneously imposed sanctions on Ayers &
Stolte, P.C., Mr. Smallenberg’s employer. Ayers thus seeks to
limit the scope of the sanctions statute solely to the individual
person who actually signed the pleadings.

Code ? 1-13 requires that we construe
certain statutory language "as set forth in . . .
following sections unless this construction would be inconsistent
with the manifest intention of the General Assembly." Code
? 1-13.19 directs that the word "’person’ shall
include any individual, corporation, . . . or other
legal entity." We find no manifest intention in the
sanctions statute to limit the application of the word
"person" to individuals, thereby excluding corporations
like Ayers & Stolte, P.C. See Landmark
Communications Inc. v. Commonwealth
, 217 Va. 699, 702, 233
S.E.2d 120, 123 (1977) (applying Code ? 1-13.19,
corporation held a "person" within scope of judicial
inquiry and review statute, Code ? 2.1-37.13), rev’d on
other grounds
, 435 U.S. 829 (1978).

Nor does the sanctions statute manifest an
intention to abrogate the general rule that a principal is liable
for its agent’s acts that are performed within the scope of the
agency. E.g., Miller v. Quarles, 242 Va. 343, 347,
410 S.E.2d 639, 642 (1991); United Brotherhood v. Humphreys,
203 Va. 781, 786-87, 127 S.E.2d 98, 101-02 (1962). Here, as Deal
notes, the corporate employer was shown as counsel of record for
Cardinal. Indeed, the offending pleadings bear a printed notation
that the pleading was "Prepared By: Law Offices Ayers &
Stolte, P.C."

The record also indicates that, in signing and
filing these pleadings, Mr. Smallenberg was acting for his
employer, Ayers & Stolte, P.C, and within the scope of that
employment. Mr. Smallenberg’s act was therefore the act of the
law firm since "{t}he act of the agent is the act of the
principal." Harris v. McKay, 138 Va. 448, 457, 122
S.E. 137, 140 (1924).

Thus, the firm itself, a person under the
provisions of Code ? 1-13.19 and, as such, covered by the
provisions of Code ? 8.01-271.1, effectively signed the
pleadings. Hence, we conclude that the court did not err in
awarding sanctions against the law firm of Ayers & Stolte,


Ayers attacks the computations and amounts of
the awards on several grounds. In reviewing the awards, we apply
an abuse of discretion standard. Oxenham v. Johnson, 241
Va. 281, 287, 402 S.E.2d 1, 4 (1991).

In the first ground, Ayers maintains that the
$22,181.17 compensatory award included time and costs incurred in
asserting Deal’s counterclaim. However, Ayers does not segregate
or identify those amounts and our review of the record indicates
that the award was $1,840 less than the fees and costs billed.

Under these circumstances, we are unable to
ascertain that the court included these amounts in its award.
Thus, the record is insufficient for us to decide whether the
court erred in doing so.

Next, Ayers contends that "[i]t is
inconceivable how the defendants racked up in excess of
$10,000.00 in attorneys’ fees prior to the nonsuit." Ayers
notes that there were no discovery proceedings during the three
months between the time the motion for judgment was served and
Ayers moved for a nonsuit. Ayers overlooks the evidence of the
time that Deal spent in preparing to defend the malpractice
action in the year that elapsed after the action was filed and
before Deal was finally served with process. Moreover, Ayers
fails to indicate that any particular charge was excessive. Under
these circumstances, we are unable to say that the trial court
abused its discretion in fixing the amount of the compensatory

Ayers further argues that the award constituted
"improper fee shifting" in that most of the fees
claimed were incurred in seeking sanctions, an activity allegedly
unrelated to Cardinal’s original unwarranted claim. We turn to
the statute to resolve this contention.

In empowering a court to award an
"appropriate sanction," Code ? 8.01-271.1 also
authorizes an award of a reasonable attorney’s fee and reasonable
expenses "incurred because of the filing of the
pleading." We read the quoted language as permitting not
only a recovery of such fees and expenses incurred in defending
against an unwarranted claim, but also a recovery of those fees
and expenses incurred in pursuing a sanctions award arising out
of such a claim. Scheiderer & Associates v. City of London,
689 N.E.2d 552, 554 (Ohio 1998). Accordingly, we find no merit in
this contention.

Finally, Ayers asserts that the $10,000 award
was actually an award of punitive damages and that the elements
necessary to support such an award were not established. We agree
with Deal’s response that this award was not an award of punitive
damages based on a common-law tort, but a part of the sanctions
award intended to punish Ayers under Code ? 8.01-271.1.

Although punitive damage awards and sanctions
awards share the common purpose of punishment and deterrence, Zedd
v. Jenkins
, 194 Va. 704, 707, 74 S.E.2d 791, 793 (1953)
(punitive damages); In re Kunstler, 914 F.2d 505, 522 (4th
Cir. 1990), cert. denied, 499 U.S. 969 (1991) (sanctions),
the two awards differ in significant ways. Punitive damages are
awarded "only when there is misconduct or actual malice, or
such recklessness or negligence as to evince a conscious
disregard of the rights of another [or in certain instances] if
the acts are done with malice or wantonness." Simbeck,
Inc. v. Dodd Sisk Whitlock Corp.
, 257 Va. 53, 58, 508 S.E.2d
601, 604 (1999)(citations omitted).

In contrast, sanctions are assessed because of
a violation of Code ? 8.01-271.1 which requires that a
lawyer’s pleadings, motions, and other papers, as well as oral
motions are to the best of his knowledge, information and belief,
formed after reasonable inquiry, . . . well grounded in
fact and . . . warranted by existing law or a good
faith argument for the extension, modification, or reversal of
existing law, and . . . [are] not interposed for any
improper purpose, such as to harass or to cause unnecessary delay
or needless increase in the cost of litigation.

Hence, the absence of evidence of those
elements necessary to support an award of punitive damages does
not affect an award of sanctions if, as in this case, the
evidence is sufficient to support such an award. In sum, we find
no merit in any of Ayers’ contentions regarding the amounts
awarded as sanctions.

For all the above reasons, we will affirm the
judgment of the trial court in awarding sanctions in favor of




[1] Ayers named T. Roy Jarrett and
Harry W. Jarrett, co-executors of the estate of Alvin Q. Jarrett,
"Estate of Alvin Q. Jarrett, and Alvin Q. Jarrett,
deceased" (collectively, the Jarretts) as plaintiffs. When
the Jarretts’ counsel learned of this and objected thereto, the
court advised the parties that it would sustain the Jarretts’
motions to dismiss them as parties plaintiff and for sanctions
against Ayers. Since there is no order in this record reflecting
those rulings, we do not consider either assignment of error
raising issues as to the award of sanctions to the Jarretts.

[2] The court sustained the
motion to dismiss the sanctions claim against Cardinal and no
cross-error was assigned to that ruling.