Trulis v. Barton

Citation107 F.3d 685
Decision Date25 February 1997
Docket Number94-55049 and 94-55234,Nos. 94-55024,s. 94-55024
Parties, 97 Cal. Daily Op. Serv. 1296, 97 Daily Journal D.A.R. 1915 Thomas TRULIS; Eamon J. McClory; Erv Grosch; Thomas Swarthout; Al Simon; Tom Ewing; Michael Barrack, Plaintiffs-Appellants, v. J. Porter BARTON; Jon T. Brown; Phillip R. Jacoby, Jr., et al., Defendants, and Myron Sukut; Carl Berg; Clyde Berg; Berg & Berg Developers; Baccarat Electronics, Inc., Defendants-Appellees. Thomas TRULIS; Eamon J. McClory; Erv Grosch; Thomas Swarthout; Al Simon; Tom Ewing; Michael Barrack, Plaintiffs-Cross-Appellees, v. J. Porter BARTON; Myron Sukut; Jon T. Brown; Phillip R. Jacoby, Jr., et al., Defendants, and Carl Berg; Clyde Berg; Berg & Berg Developers; Baccarat Electronics, Inc., Defendants-Cross-Appellants. Thomas TRULIS; Eamon J. McClory; Erv Grosch; Thomas Swarthout; Al Simon; Tom Ewing; Michael Barrack, Plaintiffs-Cross-Appellees, Daniel J. Callahan; Jeffrey S. Benice, Cross-Appellees, v. J. Porter BARTON, et al., Defendant, and Carl Berg; Clyde Berg; Berg & Berg Developers; Baccarat Electronics, Inc., Defendants-Cross-Appellants.
CourtUnited States Courts of Appeals. United States Court of Appeals (9th Circuit)

Appeals from the United States District Court for the Central District of California, Dickran M. Tevrizian, District Judge, Presiding. D.C. No. CV-92-05837-DT.

Before: FLETCHER, BRUNETTI, and T. G. NELSON, Circuit Judges.

AMENDED OPINION

BRUNETTI, Circuit Judge:

In the primary appeal, we are called on to put an end to a lawsuit that a bankruptcy court in a collateral proceeding has already held is released and barred. In the cross-appeal, we consider how much attorney misconduct a court should tolerate before imposing sanctions.

I.

This case began with the bankruptcy of the Marbella Golf and Country Club (the Country Club), which had operated at a loss since its opening. To fund its operational deficit, the Country Club filed a voluntary bankruptcy petition to restructure the rights of its members. There are several classes of Country Club members: Series A Charter Gold Members, Series B Charter Gold Members, Series C Gold Members, Charter Silver Members, and House Members.

Shortly after the Country Club filed for bankruptcy, Jeffrey S. Benice, then an attorney with Brobeck, Phleger and Harrison, filed the present action on behalf of certain Country Club members. Specifically, the complaint named as plaintiffs Thomas Trulis, Eamon J. McClory, Erv Grosch, Thomas Swarthout, Al Simon, Tom Ewing, and Michael Barrack. Daniel Callahan was originally named as a plaintiff in the action, but his name was removed as a plaintiff when the First Amended Complaint was filed. At that time he became co-counsel with Benice.

The complaint alleged that the Country Club founders, directors, and attorneys (collectively the "Berg Defendants") violated various securities regulations and the Racketeer Influenced and Corrupt Organizations Act, and committed fraud, negligent misrepresentation, breach of contract, and other wrongdoing in connection with the Country Club's inception and operation. The complaint alleged damages estimated at over $10,000,000.00.

Meanwhile, back in the bankruptcy proceeding, a seven-member committee was formed to represent the interests of the Series B Members (Committee). The Committee chose the law firm of Paul, Hastings, Janofsky & Walker to represent it. Another committee was formed to represent the interests of the Series A and Silver Members, which chose the law firm of Allen, Matkins, Leck, Gamble & Mallory to represent it.

The Country Club proposed an Initial Plan of Reorganization and filed a Disclosure Statement in the bankruptcy court. The Committee representing the Series B Members vigorously opposed this Initial Plan by filing in the bankruptcy court an Objection to the Country Club's Disclosure Statement. The Objection outlined the claims Country Club Members had against the Berg Defendants. One of their more serious grounds for opposition was the plan provisions that released any claims Series B Members might have against the directors and management of the Country Club. So there could be no mistake about what claims they sought to protect from the release provision of the Initial Plan, the Committee attached to its Objection a copy of the First Amended Complaint in this litigation, which was authored by Benice.

The Initial Plan was rejected. Between February and June of 1993, the respective counsel for the Country Club and the members' committees entered negotiations seeking to develop an acceptable reorganization plan. Meanwhile, Benice and Callahan convened a meeting of the Series B Members. They advertised the meeting as a question and answer meeting for Series B Members regarding the bankruptcy plan. According to one of the attendees, however, the real purposes of the meeting were to "drum up support for [this] lawsuit[,]" to "convince all 'B' members to vote no on the plan[,]" and to launch "a character assassination of Mr. Berg." To entice those in attendance to join the suit, Callahan suggested that "the lawsuit could be worth up to 20 or even as high as 50 million dollars." He also promised that the case "would not be a drawn out process. 'We can be ready to go to trial in 30 days.' "

The same attendee reported that at the meeting, "Mr. Benice stated that although he was not a member of the club he felt it would be ridiculous for any 'B' member to release and indemnify (give up the right to sue) [sic] the developer." Despite his own warning that the Plan's release provisions would bar them from pursuing this lawsuit, Benice then promised the attendees that even if the Plan passed "his law firm [Brobeck] would take the case on a contingency basis[.]"

Despite Benice and Callahan's efforts, and after another version (the Amended Plan) failed, the various interests in the bankruptcy eventually agreed on the Joint Plan of Reorganization. The Joint Plan proposed creating a new club. Like the proposals that preceded it, the Joint Plan gave members the choice of voting in favor of the Plan and obtaining membership in the new club, or voting against the Plan and relinquishing their membership in return for a promissory note. Members were also offered as a third option, freezing their memberships without paying dues and selling their memberships within seven years. Most importantly, the Joint Plan required, like the versions that preceded it, that those who elected to become a member of the new club release any claims they had against the Berg Defendants.

Six-hundred and eighty-six of the 702 Country Club members, an overwhelming majority, voted to adopt the Joint Plan, including the release provision. Each of the named plaintiffs in this case voted in favor of the Joint Plan.

At about the same time that members were reviewing the Joint Plan and casting their votes in favor of it, most of the named plaintiffs sought to be dismissed from this suit. Despite explicit orders from his clients, however, Benice never filed any releases on behalf of any of the named plaintiffs.

After the Country Club Members approved the Joint Plan, the bankruptcy court confirmed it in an order stating:

... Series B Charter Gold Members who elected to become Series B Gold New Club Members under the Plan and Services B Charter Gold Members who elected to enter into the Membership Freeze Program under the Plan are hereby deemed to release, and are permanently and forever enjoined and barred from commencing or continuing any action against, the Developer and the Developer Affiliates with regard to any claims such Series B Charter Gold Members have against such entities, except for Homeowner Claims.

In re Marbella Golf and Country Club, No. SA 20014-JB, at 4-5 (Bankr.C.D.Cal.1993) (emphasis added). The bankruptcy court included a virtually identical order pertaining to Series A Members' release of claims. No party to this action appealed from the bankruptcy court's order confirming the Joint Plan.

After confirmation of the Joint Plan, the Berg Defendants wrote to Benice. They demanded dismissal of this suit. The Berg Defendants pointed out that the plaintiffs had released their claims by voting for the Joint Plan, that most of the named plaintiffs had sought dismissals, and that the bankruptcy court order confirming the Joint Plan explicitly barred this suit. Benice refused to dismiss the action.

Consequently, the Berg Defendants filed a Motion for Summary Judgment. Undeterred by the release provisions of the Joint Plan and the bankruptcy court's order, Benice opposed the Berg Defendants' motion for summary judgment by arguing that under California law the release provisions in the confirmed Joint Plan were unenforceable. Benice steadfastly maintained that his clients were unaware that adoption of the Joint Plan released the Berg Defendants.

Contrary to Benice's claims of his clients' ignorance, however, at least one of Benice's clients understood the legal significance of the confirmation of the Joint Plan. In support of the Berg Defendants' motion for summary judgment, Trulis attested, "I was aware...

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