Riverhead Sav. Bank v. National Mortg. Equity Corp.

• Decision Date: 12 January 1990
• Docket Number: No. 88-6135,88-6135
• Citation: 893 F.2d 1109
• Parties: RIVERHEAD SAVINGS BANK; First Federal Savings and Loan Association, Plaintiffs-Appellees, and Federal Savings and Loan Insurance Corporation, as receiver for Umpqua Savings and Loan Association, Third Party Defendant, v. NATIONAL MORTGAGE EQUITY CORPORATION, David A. Feldman, Wehner and Perlman, Defendants-Appellants.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1109

893 F.2d 1109

15 Fed.R.Serv.3d 1351

RIVERHEAD SAVINGS BANK; First Federal Savings and Loan

Association, Plaintiffs-Appellees,

and

Federal Savings and Loan Insurance Corporation, as receiver

for Umpqua Savings and Loan Association, Third

Party Defendant, v. NATIONAL MORTGAGE EQUITY CORPORATION, David A. Feldman, Wehner and Perlman, Defendants-Appellants.

No. 88-6135.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Aug. 9, 1989.

Decided Jan. 12, 1990.

Rodney M. Perlman, Wehner & Perlman, Los Angeles, Cal., for defendants-appellants.

David L. Furth, Shartsis, Friese & Ginsburg, San Francisco, Cal., for plaintiffs-appellees.

Robert J. Yorio, Owen, Wickersham & Erickson, San Francisco, Cal., for third party defendant.

Appeal from the United States District Court for the Central District of California.

Before FLETCHER, NELSON, Circuit Judges, and CARROLL, District Judge. ^*

NELSON, Circuit Judge:

The underlying case from the district court is composed of a number of consolidated cases. All cases concern the promotion and sale of mortgage pool certificates by National Mortgage Equity Corporation and David Feldman (collectively NMEC). Plaintiffs-appellees Riverhead and First Federal (savings banks) purchased mortgage backed pass-through certificates from NMEC. Riverhead purchased one of the certificates packaged by NMEC from appellee Umpqua, a third-party defendant with respect to the claims at issue on this appeal.

Appellants, NMEC and its attorneys, Wehner & Perlman, appeal an order imposing sanctions on them jointly and severally for filing frivolous counterclaims against Riverhead and First Federal and a frivolous third-party claim against Umpqua. We find that we have no jurisdiction to hear the appeal from the imposition on appellants of sanctions payable to Riverhead and First Federal because the issue has been mooted by settlement. The lower court order remains standing as entered. The controversy with respect to the award of fees to Umpqua is still live, and we have jurisdiction to review it under the collateral order doctrine. Because we find that NMEC's claim for equitable indemnity against Umpqua was not frivolous, we reverse the district court's order for sanctions in favor of Umpqua.

FACTUAL AND PROCEDURAL BACKGROUND

Riverhead sued NMEC, among other defendants including Umpqua, for federal securities laws violations, RICO violations, fraud, breach of fiduciary duty, breach of the covenant of good faith and fair dealing, breach of contract, and negligent performance of duty. In its complaint, Riverhead alleged that NMEC knew that the properties securing the mortgages NMEC packaged were overvalued, falsely appraised, and inadequately secured the loans; that the loans had a high default rate; and that the mortgagors were not creditworthy. Riverhead alleged that NMEC packaged the certificates knowing that these defects would result in a substantial loss of the moneys invested in the certificates NMEC packaged. Riverhead sought repayment of the amounts it paid for the certificate it purchased from Umpqua and punitive damages. First Federal brought similar claims against NMEC for its role in packaging the mortgages and marketing the pass-through certificates.

Concurrently with its answers to the First Federal and Riverhead complaints, NMEC filed cross-claims and third-party claims against Riverhead and its officers. NMEC sued Riverhead for trade libel, libel, and slander, alleging that Riverhead had made false claims about NMEC that resulted in the loss of NMEC's business. NMEC sued Riverhead's officers for equitable indemnity, alleging that they had failed to exercise due diligence in purchasing the certificates. NMEC sued First Federal for breach of contract, alleging that First Federal violated express written warranties regarding its expertise to evaluate the certificate and the mortgages. NMEC also sued First Federal for fraud on the ground that First Federal had represented falsely its expertise and review of the investment. NMEC sued Umpqua for equitable indemnity, alleging that to the extent that it was liable to Riverhead for failing to carry out its responsibilities in providing suitable mortgage loans for the Umpqua/Riverhead certificate or failing to advise Riverhead of material facts with regard to Riverhead's purchase of the certificate, Umpqua was responsible because it sold the certificate to Riverhead.

The district court dismissed all of NMEC's cross and counter claims except the defamation claim against Riverhead. It imposed sanctions on NMEC for filing a frivolous motion. It reasoned that the claims against the savings banks were "completely frivolous" and that NMEC had sought grossly inflated damages. It also found that NMEC's claim for equitable indemnity against Umpqua was clearly contrary to settled law, citing Seamen's Bank for Savings v. Superior Court, 190 Cal.App.3d 1485, 236 Cal.Rptr. 31 (1987). The NMEC appealed both sanctions awards. Subsequently, NMEC settled its underlying dispute with Riverhead and First Federal. The settlement included a release by the savings banks of all right, claim, and interest in any outstanding and unpaid monetary sanctions awarded by the district court in favor of the savings banks and against NMEC or its counsel, including the savings banks' portion of the sanctions at issue in this appeal. The savings banks refused to include in the settlement, however, a vacation or setting aside of the district court's underlying Rule 11 order.

district court awarded $42,129.00 in sanctions to the savings banks--an amount equal to 75% of the banks claim for actual fees and costs in defending the motion. The court found the claim reasonable, but reasoned that one fourth of the costs were spent responding to the defamation claim, which was not resolved. The court also refused to impose $25,000 as a penalty. Umpqua had not requested a specific amount. The court awarded Umpqua $15,000 "[b]ased on a review of Umpqua's papers on the motions (as well as a review of all of the other papers) and the Court's knowledge of prevailing rates in San Francisco as well as in Los Angeles for work of this kind (which is in excess of $150 per hour)."

DISCUSSION

Whether specific conduct violated Rule 11 is a legal issue which we review de novo. Woodrum v. Woodward County, OK, 866 F.2d 1121, 1127 (9th Cir.1989).

I. Sanctions in Favor of the Savings Banks

During this appeal NMEC settled with the savings banks. NMEC and its attorneys maintain that they still have standing because of their interest in reputation. The savings banks stated in a letter to this court that they believe the settlement moots the appeal with regard to sanctions imposed in their favor. They did not, however, file a motion to dismiss the appeal as moot. Because mootness implicates the court's jurisdiction, we will consider the issue sua sponte. Taxpayers for Vincent v. Members of the City Council of Los Angeles, 682 F.2d 847, 849 n. 1 (9th Cir.1982), rev'd on other grounds, 466 U.S. 789, 104 S.Ct. 2118, 80 L.Ed.2d 772 (1984).

A. Mootness

Under Article II section 2 of the Constitution, the federal courts lack power to decide questions that cannot affect the rights of litigants in the case before them. DeFunis v. Odegaard, 416 U.S. 312, 316, 94 S.Ct. 1704, 1705-06, 40 L.Ed.2d 164 (1974) (per curiam). Therefore, if there is a complete settlement of the underlying cause of action the case is moot. Lake Coal Co. v. Roberts & Schaefer Co., 474 U.S. 120, 106 S.Ct. 553, 88 L.Ed.2d 418 (1985) (per curiam). If, then, NMEC and the savings banks were able to address and resolve the sanctions issue in their settlement the appeal is moot.

Sanctions under Rule 11 can be made payable either to the clerk of the court or to the opposing party. Because sanctions assessed against counsel or a party and payable to the clerk of court pursuant to the court's inherent powers are not subject to revocation by the parties, they are reviewable on appeal regardless of whether the parties settle. See Kleiner v. First Nat'l Bank of Atlanta, 751 F.2d 1193, 1200 (11th Cir.1985).

In this case, however, fees were directly payable to the savings banks and they released all right, claim and interest in any outstanding and unpaid monetary sanctions as part of the settlement. A determination by this court of the legal issues underlying the sanctions order is no longer necessary to compel payment of fees, and could not prevent it. See DeFunis, 416 U.S. at 317, 94 S.Ct. at 1706. Therefore, this settlement has mooted the portion of this appeal concerning attorney's fees and costs awarded to the savings banks. See Kleiner, 751 F.2d at 1199.

B. Vacating the Lower Court Order

The established practice of the appellate courts in dealing with a civil case which has become moot while on appeal due to circumstances over which appellant had no control is to reverse or vacate the judgment below. See United States v. Munsingwear, Inc., 340 U.S. 36, 39, 71 S.Ct. 104, 106, 95 L.Ed. 36 (1950). The court in Munsingwear reasoned that the lower court judgment should be vacated because it "clears the path for future relitigation of the issues between the parties and eliminates a judgment, review of which was prevented through happenstance. When that procedure is followed, the rights of all parties are preserved; none is prejudiced by a decision which in the statutory scheme was solely preliminary." Id. at 40, 71 S.Ct. at 107.

The Munsingwear reasoning, however, does not apply when an appellant, by his own act, has mooted an appeal. See Ringsby Truck Lines v. Western Conf. of Teamsters, 686 F.2d 720, 721 (9th Cir.1982). In that situation, vacating the judgment has a different effect. "If the effect of post-judgment settlements were automatically to vacate the trial court's judgment, any litigant dissatisfied with a trial court's findings would be able to have them wiped from the books." Id.

In the instant case the...