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Garr v. U.S. Healthcare, Inc.

United States Court of Appeals for the Third Circuit
22 F.3d 1274 (3d Cir. 1994)


Facts

On November 4, 1992, the Wall Street Journal published an article stating that insiders of U.S. Healthcare, Inc. (U.S. Healthcare) (defendant) sold their stock before a drop in the price of the stock. That same day, James R. Malone, Jr., a lawyer whose firm specialized in securities litigation, filed a lawsuit on behalf of Robert K. Greenfield against U.S. Healthcare and its president, based on the insiders’ sale of their stock. On November 5, 1992, Malone filed another class action against the defendants on behalf of Allen Strunk. Prior to filing the Greenfield complaint, Malone conferred with his colleague, Arnold Levin, regarding the merits of the lawsuit. Malone informed Levin of the Wall Street Journal article and stated he had researched the action and believed it was merited. On November 6, 1992, Levin and attorney Harris J. Sklar filed a class action lawsuit on behalf of Scott and Patricia Garr (plaintiffs). The complaint was virtually identical to the Greenfield and Strunk complaints. On November 6, 1992, the defendants moved for Rule 11 sanctions against the plaintiffs’ attorneys in the Greenfield, Strunk, and Garr cases, claiming that the attorneys failed to conduct any factual or legal investigation and that, had they done so, they would have found there was no basis in fact or law to support the complaints. On November 8, 1992, the district court found that Malone’s inquiry into the facts was reasonable for the Greenfield and Strunk cases. However, the court found that Levin and Sklar’s lack of personal inquiry, and their reliance on Malone’s investigation, was unreasonable under the circumstances. Consequently, the court ordered Levin and Sklar to pay the defendants’ attorney’s fees, dismissed the Garr complaint, and referred the matter to the Disciplinary Board of the Supreme Court of Pennsylvania. Levin and Sklar appealed.

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Holding and Reasoning (Greenberg, J.)

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Dissent (Roth, J.)

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