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Peddlers Square, Inc. v. Scheuermann

February 01, 2001


Before Terry and Steadman, Associate Judges, and Pryor, Senior Judge.

The opinion of the court was delivered by: Terry, Associate Judge

Appeal from the Superior Court of the District of Columbia (Hon. Frederick H. Weisberg, Trial Judge)

Argued October 13, 1999

The principal issue before us is whether the trial court acted properly in imposing sanctions under Super. Ct. Civ. R. 11 as it existed at the time the offending conduct occurred, rather than under the revised version of the rule, with its 1995 "safe harbor" amendment. Appellant argues that the court abused its discretion because application of the amended Rule 11 would have resulted in a finding of no violation, and hence no sanctions. In addition, appellant argues that even if the former Rule 11 applies, the award of sanctions was excessive and that the court should have held a hearing before imposing any sanctions at all. We affirm.


A. Factual Background

The District of Columbia Condominium Act of 1976 established a two-year warranty for purchasers of units in a condominium conversion project, and required that condominium developers post financial security for their warranty obligations. In 1989 Peddlers Square, Inc., a developer, converted an apartment building in Northwest Washington into a condominium and offered its individual units for sale. Peddlers Square then contracted with the Madison National Bank to issue an irrevocable letter of credit in the amount of $170,000 to secure the required statutory warranty. The beneficiaries of the letter of credit were the Unit Owners Association of the Lynshire Condominium ("the Lynshire") and the Mayor of the District of Columbia, or his designee. The letter of credit obligated the bank to disburse to the beneficiaries, upon request, up to $170,000 for warranty repairs when presented with certain supporting documents. *fn1

In the latter part of 1990, the Lynshire, which had claims under the statutory warranty, hired Carl Sontz, a professional engineer, to conduct a study of the building. Mr. Sontz's report, dated April 9, 1991, included an itemized estimate of $177,000 as the cost of certain necessary repairs. In particular, Mr. Sontz concluded that it would cost $100,000 to repair the mortar joints in the exterior brick walls and $45,000 to install firewalls in the open attic space. Relying on these estimates, the Lynshire on May 6 instructed its attorney, John Scheuermann, to draw the necessary funds from the bank in accordance with the letter of credit. Accordingly, Mr. Scheuermann sent a letter and a copy of Mr. Sontz's report to Peddlers Square advising it of the Lynshire's warranty claims and its intent to "look to this [letter of credit] to satisfy the cost of necessary repairs and/or to acquire that which is required by law." At the same time, Mr. Scheuermann notified the Mayor's Representative of his intention to draw the full amount under the letter of credit immediately, citing "[r]ecent press reports . . . that the Madison National Bank was in serious financial trouble and likely to fail."

Four days later, on May 10, 1991, the draw documents were presented at the Madison National Bank. That same day, however, the bank was taken over by the Federal Deposit Insurance Corporation (FDIC), and as a result the money sought under the letter of credit could not be paid. After a series of other events not pertinent to this appeal, the Lynshire directed Mr. Scheuermann to file suit on its behalf against Peddlers Square, based on the alleged warranty violations. He did so on April 28, 1992.

While the suit against Peddlers Square was pending, the FDIC, which had initially repudiated the letter of credit, decided in September 1992 that it would approve the draw. The first payment of $71,255.50 under the letter of credit was made on September 25, 1992, with a statement that other payments were to follow. After negotiations with the Mayor's Representative, it was agreed that these funds would be held in an interest-bearing trust account, with Mr. Scheuermann as trustee, and that he would disburse money as needed to the Lynshire for warranty-related expenses, upon receipt of invoices or other suitable documentation.

On October 13, 1992, Mr. Scheuermann filed a motion to dismiss the Lynshire's suit against Peddlers Square on the ground that the money sought "had been paid . . . and recovery from [Peddlers Square] would, in effect, `duplicate the compensation already received (and to be received) from the FDIC.' " Mr. Scheuermann served a copy of the motion on Peddlers Square's counsel and informed him that he intended "to place all funds received . . . into an account in trust in the names of the city and the condominium for the specific purpose of effectuating repairs." The motion to dismiss, which Peddlers Square did not oppose, was granted in November 1992. Over the next two years, Mr. Scheuermann disbursed approximately $65,000 from the trust account to the Lynshire for repairs to the building and related services, for which the Lynshire provided invoices.

In June 1993, Craig Bernstein, the president of Peddlers Square, noticed scaffolding on the Lynshire building. According to Mr. Bernstein, this was the first time Peddlers Square became aware that funds had been drawn under the letter of credit. Thereafter Peddlers Square, through its counsel, requested Mr. Scheuermann to cease all disbursement of these funds. Mr. Scheuermann rejected the request, however, and the warranty repairs continued.

On January 24, 1994, Peddlers Square and six of its principal owners *fn2 filed suit against the Lynshire, Mr. Scheuermann, the Lynshire's property management company, and the District of Columbia. The complaint alleged, inter alia, that the defendants had committed fraud in drawing funds under the letter of credit. Specifically, Peddlers Square asserted that the Lynshire and Mr. Scheuermann knew that the Sontz report was inaccurate and contained "false representations of material facts as to the soundness of the structure . . . and the quality of the construction," and that they had used this false information to induce the Madison National Bank and the FDIC to honor the draw. In support of this assertion, Peddlers Square stated that it had retained its own expert, Harvey Fernebok, in May 1991 to study the alleged structural deficiencies of the Lynshire building. Mr. Fernebok's written report, of which Peddlers Square alleged the Lynshire and Mr. Scheuermann were aware, disputed many of Mr. Sontz's findings.

On August 11, 1994, the trial court dismissed Peddlers Square's complaint as to the management company and the District of Columbia. As against the Lynshire, the court dismissed the fraud count without prejudice but allowed the unjust enrichment and conversion counts to remain pending. As to Mr. Scheuermann, the fraud count was dismissed without prejudice for inadequate pleading, with ...

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