UNPUBLISHED

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

INTEGRATED HEALTHCARE SYSTEMS,
INCORPORATED; THE INTEGRATED
SYSTEMS TECHNOLOGY, INCORPORATED
401(K) PLAN; MICHAEL J. BLACK;
STEVEN W. BINGAMAN,
Plaintiffs-Appellants,

and

INTEGRATED SYSTEMS TECHNOLOGY,
INCORPORATED,
Plaintiff,
                                                               No. 98-1480
v.

EUGENE HORBACH,
Defendant-Appellee,

and

EDWARD I. GASKELL; ROBERT
PATENAUDE; E & H INVESTMENTS,
INCORPORATED; E & H PROPERTIES,
INCORPORATED,
Defendants.

Appeal from the United States District Court
for the Eastern District of Virginia, at Alexandria.
Leonie M. Brinkema, District Judge.
(CA-96-1380-A)

Argued: January 27, 1999

Decided: June 14, 1999

Before WILKINSON, Chief Judge, and NIEMEYER and
TRAXLER, Circuit Judges.

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Vacated and remanded by unpublished opinion. Judge Niemeyer
wrote the opinion, in which Chief Judge Wilkinson and Judge Traxler
joined.

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COUNSEL

ARGUED: Leonard Anthony Rodes, TRACHTENBERG & RODES,
L.L.P., New York, New York, for Appellants. Stephen Michael Say-
ers, HUNTON & WILLIAMS, McLean, Virginia, for Appellee.

_________________________________________________________________

Unpublished opinions are not binding precedent in this circuit. See
Local Rule 36(c).

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OPINION

NIEMEYER, Circuit Judge:

This appeal requires us to determine whether an indemnity provi-
sion contained in a Stock Purchase Agreement enables the seller to
recover costs and attorneys fees incurred in defending an action
brought by the purchaser challenging, indeed, contradicting, one of
the purchaser's representations contained in the Agreement. The dis-
trict court, concluding that the purchaser violated the Agreement and
was subject to the indemnity provision, awarded the seller $162,417
in attorneys fees and costs. For the reasons that follow, we vacate the
judgment and remand for further proceedings.

I

Eugene Horbach agreed to sell his 70% interest in Integrated Sys-
tems Technology, Inc. ("IST") to Traverse Technologies, Inc. (later to
become Integrated Healthcare Systems, Inc.) (hereafter "Integrated
Healthcare") for $1 million in cash, a $150,000 note, and a warrant
to purchase additional IST stock. In the Stock Purchase Agreement,
Horbach represented and warranted to Integrated Healthcare that he

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"makes no representations or warranties as to the assets, financials, or
any other aspects of IST." Similarly, Integrated Healthcare repre-
sented and warranted to Horbach that it "is purchasing the Shares
after complete due diligence of IST and with no representations or
warranties from [Horbach] as to the value of the Shares or the finan-
cial condition of IST."

Horbach and Integrated Healthcare amended the Stock Purchase
Agreement on two separate occasions after Integrated Healthcare
failed to satisfy its obligations under the Agreement's original terms.
In late 1994, Horbach filed suit to collect $200,000 due him on the
promissory note executed in connection with the second amendment
of the Stock Purchase Agreement. The parties partially settled that
action in February 1995, and completely settled it in September 1995.
As part of the final settlement, Horbach accepted a $150,000 note
from Integrated Healthcare, and the two parties executed mutual
releases.

About a year later, on August 27, 1996, Integrated Healthcare com-
menced this action, alleging that Horbach, among others, fraudulently
induced it into executing the Stock Purchase Agreement by misrepre-
senting IST's financial condition. Specially, Integrated Healthcare
alleged that Horbach, among others, "made various representations
[regarding IST's financial statements] on which they intended [Inte-
grated Healthcare] to rely and on which [Integrated Healthcare] did
in fact rely in determining the price to be paid for the SHARES." Hor-
bach filed counterclaims in this action not only to collect the balance
due on the outstanding note, but also to collect costs and attorneys
fees under an indemnity provision contained in the Stock Purchase
Agreement. The indemnity provision provided in part:

          [Integrated Healthcare] agrees to indemnify[Horbach] and
          hold him harmless from and against any and all losses, lia-
          bilities, obligations, damages and deficiencies resulting from
          any misrepresentation, breach or nonperformance by[Inte-
          grated Healthcare] of its representations, warranties, cove-
          nants and other obligations hereunder, and all actions, suits,
          proceedings, demands, assessments, judgments, costs and
          expenses, including reasonable attorney's fees and disburse-

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          ments, incident to any misrepresentation, breach or nonper-
          formance.

Horbach also filed a motion under Fed. R. Civ. P. 11 requesting sanc-
tions against Integrated Healthcare's counsel for filing the action in
view of Integrated Healthcare's prior representation and warranty in
the Stock Purchase Agreement and its 1995 release of Horbach.

On a motion for summary judgment, the district court entered judg-
ment in favor of Horbach against Integrated Healthcare in the amount
of $167,624 for amounts due on the outstanding note between them.
Following a bench trial, it also concluded that Integrated Healthcare's
filing of the suit against Horbach violated Integrated Healthcare's
prior representation in the Stock Purchase Agreement and that the
indemnity provision entitled Horbach to recover costs and attorneys
fees in the amount of $162,417. The court denied Horbach's motion
against Integrated Healthcare's counsel under Rule 11 because its
local counsel did not sign the pleadings and its lead counsel tried to
effect dismissal of Integrated Healthcare's complaint. This appeal
ensued.

Integrated Healthcare contends (1) that the judgment for attorneys
fees and costs should not have been entered by the district court
against IST's 401(k) Plan and two of its officers; (2) that its filing of
suit did not amount to a misrepresentation under the Stock Purchase
Agreement for which Horbach could recover damages and attorneys
fees under the Stock Purchase Agreement's indemnity provision; (3)
that Horbach waived his right to recover under the Stock Purchase
Agreement by filing his claim beyond the expiration of the Agree-
ment's indemnity provision; and (4) that the parties' 1995 settlement
agreement released Integrated Healthcare from all liability under the
Stock Purchase Agreement.

II

In paragraph 6 of the Stock Purchase Agreement, Integrated
Healthcare represented that it was "purchasing[Horbach's] Shares
after complete due diligence of IST and with no representations or
warranties from [Horbach] as to the value of the Shares or the finan-
cial condition of IST." Likewise Horbach represented that he "makes

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no representations or warranties as to the assets, financials, or any
other aspect of IST." If Integrated Healthcare's representation was
false or inaccurate, then, under the indemnity provision contained in
the Stock Purchase Agreement, Horbach would be entitled to costs
and attorneys fees "incident to any misrepresentation." Horbach con-
tends that Integrated Healthcare's mere filing of a lawsuit against him
violated the Stock Purchase Agreement because in the lawsuit Inte-
grated Healthcare alleges, contrary to its representation in the Stock
Purchase Agreement, that it "did in fact rely" upon Horbach's certifi-
cations as to the accuracy of IST's financial condition.

What is certain in this case is that Integrated Healthcare has made
conflicting representations -- in the Stock Purchase Agreement it rep-
resented it was not relying on any representations of Horbach and in
its complaint it says that it was so relying. One is obviously false, but
which one has not been established. If the representation in the Stock
Purchase Agreement was false when made, then Integrated Health-
care's lawsuit must fail and it must indemnify Horbach for costs and
attorneys fees. But if the representation in the Agreement was true
and the allegations in the complaint were false, then Integrated
Healthcare pleaded falsely and may be subject to sanctions under
Rule 11. At the time the suit was filed, either of the possibilities were
still open, and accordingly, one cannot conclude that the mere filing
of the complaint constituted a breach of the Stock Purchase Agree-
ment.

Also Integrated Healthcare made no promise in the Stock Purchase
Agreement that it would or would not rely on Horbach's representa-
tions; rather, it made a representation about an existing state of mind,
which may or may not have been false. We have not been directed
to any evidence in the record by which to determine which represen-
tation of Integrated Healthcare was false.

But concluding that Integrated Healthcare did not breach the Stock
Purchase Agreement simply by filing suit does not relieve it of
responsibility for costs and attorneys fees in this case. This is so
because, under established contract principles, parties remain bound
by their representations in written agreements absent a showing of
fraud in the inducement. Accordingly, if we give effect to the Agree-
ment, then Integrated Healthcare could not have alleged, as it did in

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the complaint, that it relied on Horbach for his financial representa-
tions. Its doing so directly contradicted its prior, enforceable represen-
tations in the Stock Purchase Agreement, thereby causing Horbach to
spend substantial sums of money to defend. Thus, while we conclude
that the district court erred in awarding costs and attorneys fees under
the indemnity provision of the Stock Purchase Agreement because a
breach had not yet been established in the record before it, Horbach
still need not be denied the ability to recover his costs attributed to
Integrated Healthcare's false pleading.

Even though the district court ruled against Horbach on his Rule
11 motion, the court should not now be precluded from reconsidering
the motion, sua sponte or upon a new motion filed by Horbach, in
light of the ruling that we make in this case. Obviously the district
court's ruling on the Rule 11 motion was made in light of its determi-
nation that Horbach would collect costs and attorneys fees under the
Stock Purchase Agreement.

Accordingly, we vacate the district court's award of costs and
attorneys fees made under the Stock Purchase Agreement and remand
this case for the court's further consideration of whether to impose
sanctions against Integrated Healthcare or other appropriate persons
under Rule 11 or under the court's inherent power.*

VACATED AND REMANDED
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*We note that Rule 11 sanctions cannot be imposed for pleadings filed
in state court when the action is later removed to federal court. See Kirby
v. Allegheny Beverage Corp., 811 F.2d 253, 257 (4th Cir. 1987). But
Rule 11 sanctions are available for false pleadings filed in federal court
after the state court action is removed. See Meadow Ltd. Partnership v.
Meadow Farm Partnership, 816 F.2d 970, 970-71 (4th Cir. 1987). In this
case, Integrated Healthcare filed an amended complaint in federal court
in which it reasserted the factual allegations contained in its original
complaint filed in state court, which included its allegation that it in fact
relied on Horbach's representations regarding the financial condition of
IST. This complaint alone could support sanctions, if the district court
were to find the appropriate criteria to have been satisfied. See id.

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