United States Court of Appeals,

                                            Fifth Circuit.

                                            No. 92-8386.

          CJC HOLDINGS, INC., d/b/a ArtCarved, A Corporation, Plaintiff-Appellant,

                                                  v.

                          WRIGHT & LATO, INC., Defendant-Appellee.

                                           April 29, 1993.

Appeal from the United States District Court for the Western District of Texas.

Before POLITZ, Chief Judge, JOLLY and DAVIS, Circuit Judges.

       POLITZ, Chief Judge:

       CJC Holdings, Inc. and its attorneys appeal the imposition of sanctions under Rule 11 of the

Federal Rules of Civil Procedure. Concluding that the district court misapprehended the plausibility

of the legal position urged in the offending filing, we reverse.

                                             Background

       CJC Holdings, d/b/a ArtCarved, sued Wright & Lato, Inc. for trade dress infringement and

obtained a default judgment in the court a%22 quo. After moving unsuccessfully to set aside that

judgment, Wright & Lato appealed to this court but did not post a supersedeas bond to stay the

judgment. ArtCarved took steps to collect the judgment by moving to register it in the district court

in New Jersey, Wright & Lato's principal place of business. Wright & Lato did not respond to that

motion. Instead it filed an action in the District of New Jersey asking that court to declare the

judgment of the district court in Texas void for lack of personal jurisdiction and to enjoin ArtCarved

from enforcing it. The New Jersey court denied relief.1 ArtCarved then asked the court a%22 quo

to sanction Wright & Lato and its counsel under 28 U.S.C. § 1927 and its inherent powers for their

suit in New Jersey. Finding that it lacked jurisdiction to sanction conduct occurring in another court,

the district court refused to impose sanctions on Wright & Lato. Rather, after notice and hearing,

   1
     Promptly thereafter, Wright & Lato filed a proper supersedeas bond and obtained a stay. We
affirmed the trial court's refusal to set aside the default judgment but vacated its award of
attorneys' fees. 

(5th Cir.1992).
it sanctioned ArtCarved under Rule 11 for failing to conduct a reasonable legal inquiry as to the

proper forum for its motion, 

. ArtCarved timely appealed.

                                                 Analysis

          We review imposition of Rule 11 sanctions for abuse of discretion. If the district court relied

on a materially incorrect view of the law, we must vacate the sanctions.2 We conclude that the

district court so erred herein.

           The issue before us is not whether the Western District of Texas was the proper forum for

ArtCarved's motion for sanctions. Rule 11 does not require that the legal theory espoused in a filing

prevail.3 The essential issue is whether the signatories of ArtCarved's motion fulfilled their duty of

reasonable inquiry into the relevant law. Indicia of reasonable inquiry into the law include the

plausibility of the legal theory espoused and the complexity of the issues raised.4 Even if erroneous,

a legal posture does not violate Rule 11 unless it is "unreasonable from the point of view both of

existing law and of its possible extension, modification, or reversal."5

          The district court relied principally on our decision in In re Case6 to determine that it lacked

power to sanction Wright & Lato's conduct before the district court of New Jersey. We held therein

that a bankruptcy court could not sanction conduct occurring in a separate state court proceeding

under 28 U.S.C. § 1927 or its inherent powers. Case, however, is in apparent tension with Chambers

v. NASCO, Inc.7 In Chambers, the Supreme Court rejected the argument that the district court did

not have the inherent power to sanction a party for his conduct before other tribunals. It declared:

"As long as a party receives an appropriate hearing, ... the party may be sanctioned for abuses of


   2
   Cooter & Gell v. Hartmarx Corp., 

, 

, 

(1990);
Smith v. Our Lady of the Lake Hospital, Inc., 

(5th Cir.1992).
   3
       Smith International, Inc. v. Texas Commerce Bank, 

(5th Cir.1988).
   4
       Thomas v. Capital Security Services, Inc., 

(5th Cir.1988) (en banc).
   5
       Smith 

.
   6
       

(5th Cir.1991).
   7
       --- U.S. ----, 

, 

(1991).
process occurring beyond the courtroom, such as disobeying the court's orders."8 The district court

carefully distinguished Chambers on its facts. It inadvertently overlooked, however, that ArtCarved's

counter-argument that Chambers governed was at least reasonable.

          Although we attempted in Case to reconcile our holding with Chambers, it is at least arguable

that the cases cannot be reconciled; in that event, Chambers controls. The argument that the facts

of the case at bar are closer to those in Chambers than in Case is at least plausible.

          Case involved a note that the debtor in bankruptcy had signed as part of his reorganization

plan. When he defaulted, the creditor bank sued in state court. As a defense and counterclaim Case

maintained that he had been fraudulently induced to sign the note. The bankruptcy proceedings were

reopened and the bankruptcy court found that Case had raised this defense solely for purposes of

delay. We partially reversed the bankruptcy court's award of sanctions, stating:

          The state court proceeding in the instant case is completely collateral to the proceedings in
          bankruptcy court. The conduct of the parties in the state action cannot be said to affect the
          exercise of the judicial authority of the bankruptcy court or limit the bankruptcy court's power
          to control the behavior of parties and attorneys in the litigation before it. Inherent power
          must arise from the litigation before that court. Although the substantive issue in the state
          court proceeding is the same, the conduct of the parties in that suit is unconnected to the
          present action.9

          By contrast, the bad-faith conduct in Chambers was undertaken in direct defiance of the

sanctioning court. Chambers was an action for specific performance of a contract to sell a television

station. After signing the contract the owner, Chambers, changed his mind. His efforts to avoid the

sale included, inter alia, a filing with the Federal Communications Commission seeking permission

to replace existing transmission facilities with a new transmission tower to be built on a site beyond

the reach of the contract. This filing not only directly violated the district court's order to maintain

the status quo pending the outcome of the litigation but also, if successful, would have eviscerated

the court's ability to enforce specific performance if it so ordered.

          In the case at bar, Wright & Lato asked the district court in New Jersey to nullify the order

of the district court in Texas and to enjoin its enforcement. Of critical importance, according to

   8
       --- U.S. at 

.
   

.
ArtCarved, was Wright & Lato's representation to the New Jersey court that the Texas court had

refused to consider its objections to personal jurisdiction after it had admitted to the Texas court that

the case was not in a procedural posture for consideration of that issue. We express no opinion about

the propriety of Wright & Lato's conduct; that matter is not before us. We agree with ArtCarved,

however, that it might be characterized as the type of defiant, bad-faith conduct towards the Texas

court that the Supreme Court intended to reach in Chambers and that we distinguished from the facts

before us in Case.

           As we recognized in Thomas, misapplication of Rule 11 can chill counsel's enthusiasm and

stifle the creativity of litigants in pursuing novel factual or legal theories,"10 contrary to the intent of

its framers.11 For this reason, a trial court should not impose Rule 11 sanctions for advocacy of a

plausible legal theory, particularly where, as here, the law is arguably unclear.

          We REVERSE the imposition of sanctions against ArtCarved and its attorneys.




   10
        

.
   11
        Fed.R.Civ.P. 11, Advisory Committee Notes.