Gottlieb v. Westin Hotel Co.
| Decision Date | 02 April 1993 |
| Docket Number | No. 92-1234,92-1234 |
| Citation | 990 F.2d 323 |
| Parties | Stanley M. GOTTLIEB, individually and on behalf of all others similarly situated, Plaintiff-Appellant, v. WESTIN HOTEL COMPANY, a Delaware corporation, Westin Realty Corporation, a Delaware corporation, Westin Hotels Limited Partnership, a Delaware limited partnership, Westin St. Francis Limited Partnership, a Delaware limited partnership, Westin Chicago Limited Partnership, a Delaware limited partnership, St. Francis Hotel Corporation, 909 North Michigan Avenue Corporation, Merrill Lynch, Pierce, Fenner & Smith, Inc., and Smith Barney, Harris Upham & Company, Inc., Defendants-Appellees. |
| Court | U.S. Court of Appeals — Seventh Circuit |
Ronald A. Schy (argued), Laurence M. Landsman, Beigel & Sandler, Chicago, IL, for plaintiff-appellant.
David L. Carden, Lee A. Russo (argued), Robert C. Micheletto, Jones, Day, Reavis & Pogue, Chicago, IL, for Westin Hotel Co., Westin Realty Corp., Westin Hotels Ltd. Partnership, Westin St. Francis Ltd. Partnership, Westin Chicago Ltd. Partnership, St. Francis Hotel Corp., and 909 North Michigan Avenue Corp., defendants-appellees.
Alan N. Salpeter, Lillian K. Miller, Mayer, Brown & Platt, Chicago, IL, for Merrill Lynch, Pierce, Fenner & Smith, Inc., and Smith Barney, Harris Upham & Co. Inc., defendants-appellees.
Before CUMMINGS and MANION, Circuit Judges, and FAIRCHILD, Senior Circuit Judge.
On July 9, 1991, Stanley M. Gottlieb 1 filed a complaint in the Circuit Court of Cook County, Illinois against Westin Hotel Company and eight others. Plaintiff alleged that he acted on behalf of himself and a class consisting of investors who purchased units in the Westin Hotels Limited Partnership ("the WHL Partnership"), one of the named defendants. Two other defendants were Westin St. Francis Limited Partnership and Westin Chicago Limited Partnership. These three limited partnerships are significant on this appeal because if they had not been named as defendants, diversity jurisdiction would exist. Their presence prevents diversity.
Defendants filed a Notice of Removal to federal district court, claiming diversity jurisdiction under 28 U.S.C. §§ 1332 and 1441. They conceded that diversity of citizenship was not present if the three partnerships were considered, but asserted that any citizenship ascribed to the three defendants should be disregarded "since those defendants were, in a legal sense, fraudulently joined as defendants for the purpose of attempting to defeat the removal jurisdiction of this Court."
Plaintiff moved for remand, denying both fraudulent joinder of the partnerships and that the amount in controversy exceeded $50,000. Judge Holderman found that fraudulent joinder had not been shown and ordered a remand. Gottlieb v. Westin Hotel Co., No. 91 C 5148, 1991 WL 281155 (N.D.Ill. Dec. 30, 1991) ("Mem.Op."). He found that there was at least a possibility that a state court would find that the three partnerships were "person[s] by or on behalf of whom said sale was made" and therefore fraudulent joinder had not been shown. Mem.Op. at 4 (brackets in original).
Plaintiff also asserted that defendants lacked a reasonable basis for removal, and that Rule 11 sanctions should be imposed against the attorneys who signed the Notice of Removal. Judge Holderman first found that the defendants had presented a good faith argument regarding the amount in controversy. Mem.Op. at 5-6. With respect to defendants' claim of fraudulent joinder, he concluded that "[a]lthough this is a close case for purposes of Rule 11, the court is convinced that the argument was made in good faith based on the facts." Mem.Op. at 6-7. He denied sanctions.
Plaintiff's complaint alleged, among other things, violations of the Illinois Securities Law of 1953, Ill.Rev.Stat., ch. 121 1/2 p 137.1 et seq.; the Illinois Consumer Fraud and Deceptive Business Practices Act, Ill.Rev.Stat., ch. 121 1/2 p 261, et seq.; common law fraud; and breaches of fiduciary duty. This class action was brought on behalf of approximately 9,500 investors in the WHL Partnership. In addition to the three partnerships, the defendants are the Westin Hotel Company, Westin Realty Corporation, St. Francis Hotel Corporation, 909 North Michigan Avenue Corporation, Merrill Lynch, Pierce, Fenner & Smith, Inc. ("Merrill Lynch") and Smith Barney, Harris Upham & Company, Inc. ("Smith Barney").
According to the complaint, Gottlieb and other investors purchased limited partnership interests in the WHL Partnership from Westin Realty Corporation. 2 The WHL Partnership was formed for the purpose of owning and operating, through the St. Francis and Chicago Limited Partnerships (collectively, the "hotel partnerships") two hotels and the land on which they are located (the "hotels"). The hotels were directly owned by the hotel partnerships, of which the WHL Partnership is the sole limited partner. The WHL Prospectus (the "Prospectus") provides that:
[a]s a result of the transactions described [in the Prospectus], investors will own the entire limited partnership interest in the [WHL] Partnership, and the [WHL] Partnership, through its interest in the Hotel Partnerships, will own, control, finance, operate and deal with the Hotels. The two-tier structure, rather than direct ownership of the Hotels, is intended to permit the [WHL] Partnership to acquire the beneficial ownership and control of the Hotels....
Prospectus, at 27. Gottlieb alleged that he purchased his interest in the WHL Partnership "in reasonable reliance on the [o]ffering [m]aterials," Complaint p 20, at 7, and that these offering materials contained misrepresentations and omissions of material fact. Complaint p 23-37, at 8-14. In particular, Gottlieb alleged in Count I of the complaint that "the defendants, singly and in concert, and in connection with the purchase or sale of securities, did knowingly, willfully or recklessly" make untrue statements of material fact and omit to state material facts necessary to make the statements not misleading, employ manipulative, deceptive and fraudulent devices, schemes and artifices to defraud, and engage in acts, practices, and a course of conduct which operated as a fraud and deceit. Complaint p 48, at 16-17. Gottlieb alleged that this conduct constituted a violation of the Illinois Securities Law, Ill.Rev.Stat., ch. 121 1/2 p 137.1 et seq. Gottlieb provided notice to the defendants of his election to rescind his purchases and demanded damages in the amount of his investment, plus interest from the date of purchase, lost use of funds, consequential damages, and costs and attorneys' fees incurred by bringing the action. Complaint pp 49-52, at 17. 3
Under the Illinois Securities Act, joint and several liability exists by and among, inter alia, any "person by or on behalf of whom said sale was made." Ill.Rev.Stat., ch. 121 1/2 p 137.13 A. The defendants had argued that since Westin Realty, and not the WHL Partnership itself, acquired and sold the limited interests in the WHL Partnership, the limited partnerships were not persons by or on behalf of whom the sales were made. Judge Holderman noted the defendants' concession that "the original monies received from the limited partners [were] used to finance the acquisition and operations of the Hotels." He concluded that because the two-tier ownership structure gave the hotel partnerships direct ownership of the hotels and gave the WHL Partnership beneficial ownership and control of the hotels, "there is at least a possibility that a state court would find that the defendant limited partnerships were 'person[s] by or on behalf of whom said sale was made.' " Mem.Op. at 4 (bracket in original).
Under Federal Rule of Civil Procedure 11, every pleading, motion, or paper of a party represented by an attorney must be signed by the attorney of record. That signature constitutes a certificate by the signer,
that the signer has read the pleading, motion, or paper; that to the best of the signer's knowledge, information, and belief formed after reasonable inquiry it is well grounded in fact and is warranted by existing law or a good faith argument for the extension, modification, or reversal of existing law, and that it is not interposed for any improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation.
Fed.R.Civ.P. 11. Where a pleading, paper or motion is signed in violation of this rule, the court "shall" impose an appropriate sanction upon the person who signed it. Fed.R.Civ.P. 11. In re Ronco, Inc., 838 F.2d 212, 217 (7th Cir.1988) (citation omitted). Where counsel's inquiry was objectively reasonable under the circumstances of the case, however, Rule 11 sanctions are inappropriate. Fed. Deposit Ins. Corp. v. Tekfen Constr. & Installation Co., 847 F.2d 440, 442 (7th Cir.1988). As with any other pleading filed in federal court, Rule 11 applies to a notice of removal. See e.g., Hewitt v. City of Stanton, 798 F.2d 1230 (9th Cir.1986).
We review a district court's grant or denial of Rule 11 sanctions only for an abuse of discretion. Chambers v. NASCO, Inc., --- U.S. ----, ----, 111 S.Ct. 2123, 2138, 115 L.Ed.2d 27 (1991); Harrison v. Dean Witter Reynolds, Inc., 974 F.2d 873, 886 (7th Cir.1992); Kotsilieris v. Chalmers, 966 F.2d 1181, 1183 (7th Cir.1992). "If the district judge makes an error of law in assessing the legal merits of the party's case, that error may, of course, by itself, constitute an abuse of discretion." In re Ronco, 838 F.2d at 217.
Gottlieb contends that attorneys David L. Carden and Lillian...
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