McMahan v. Toto

• Decision Date: 10 July 2001
• Docket Number: Nos. 00-10323,00-14728,s. 00-10323
• Parties: (11th Cir. 2001) D. BRUCE MCMAHAN, NEMESIS VERITAS, f.k.a. Mcmahan & Company, Plaintiffs-Appellants, v. WILLIAM A. TOTO, Defendant-Appellee. D. BRUCE MCMAHAN, NEMESIS VERITAS, f.k.a. Mcmahan & Company, Plaintiffs-Appellants, Cross-Appellees, v. WILLIAM A. TOTO, Defendant-Appellee, Cross-Appellant
• Court: U.S. Court of Appeals — Eleventh Circuit

Page 1120

256 F.3d 1120 (11th Cir. 2001)

D. BRUCE MCMAHAN, NEMESIS VERITAS, f.k.a. Mcmahan & Company, Plaintiffs-Appellants, v. WILLIAM A. TOTO, Defendant-Appellee.

D. BRUCE MCMAHAN, NEMESIS VERITAS, f.k.a. Mcmahan & Company, Plaintiffs-Appellants, Cross-Appellees, v. WILLIAM A. TOTO, Defendant-Appellee, Cross-Appellant.

Nos. 00-10323, 00-14728

IN THE UNITED STATES COURT OF APPEALS

FOR THE ELEVENTH CIRCUIT

July 10, 2001

[Copyrighted Material Omitted]

Appeals from the United States District Court for the Southern District of Florida. D.C. Docket No. 96-08294 CV-DMM

Before CARNES and MARCUS, Circuit Judges, and HAND^*, District Judge.

CARNES, Circuit Judge:

Along with several other limited partners in McMahan, Brafman, Morgan & Company ("MBM"), William A. Toto filed a RICO action in federal court in New York against that company and D. Bruce McMahan after the Internal Revenue Service imposed penalties and disallowed deductions related to the company that he and the other limited partners had claimed. Several of the limited partners in that suit were dismissed, because their claims were precluded by release and assignment provisions contained in agreements between them and McMahan, MBM's principal general partner, in which he bought back their partnership interests. McMahan and MBM subsequently brought suit in state court against those limited partners alleging that by participating in the RICO action they had breached the release and assignment provisions of their agreements with him. The state court granted summary judgment in favor of the limited partners.

Before summary judgment was granted in the state court action, McMahan and MBM filed this diversity jurisdiction lawsuit in the Southern District of Florida against Toto for tortious interference with contractual relations, based on his actions in instituting the RICO action and encouraging the limited partners who were later dismissed to participate in that lawsuit. The district court granted summary judgment to Toto and entered various orders relating to fees, costs, and sanctions. McMahan and MBM then appealed, and Toto cross-appealed.¹

In order to dispose of this appeal, an issue we must decide is whether the state court's decision collaterally estops McMahan and MBM from establishing that the dismissed limited partners breached their agreements, which is an essential element of the tortious interference claim. If it does, then a second and third issue are presented. The second issue is whether the district court abused it discretion by not imposing sanctions against MBM and McMahan or their counsel pursuant to Fla. Stat. § 57.105 and 28 U.S.C. § 1927. The third issue is whether under Florida's offer of judgment statute Toto is entitled to recover the attorney's fees he incurred since the making of an offer to settle the tortious interference claim.

As we will soon explain in full, we decide that collateral estoppel does bar the tortious interference claim, and that the district court did not abuse its discretion in declining to award sanctions. However, we decide that the district court erred in awarding attorney's fees pursuant to the offer of judgment statute.

I. BACKGROUND

A. FACTS

In September of 1980, MBM² was formed for the purpose, among other things, of trading government securities and commodities. From 1980 through 1982, between 300 and 400 investors purchased limited partnership interests in MBM, lured by the promise of significant tax benefits. Toto bought in for $200,000 and received one partnership unit in MBM in return.

However, the promised tax benefits were, like many things in life, too good to be true, and the IRS subsequently disallowed many of the deductions claimed by the limited partners relating to MBM and imposed draconian penalties. The IRS notified Toto in late 1987 of its audit of MBM, and Toto eventually paid approximately $630,000 to settle his dispute regarding deductions he claimed relating to his investment in MBM.

Eventually, McMahan offered to buy back the interests of all of the MBM limited partners. As part of the sale of their interest to McMahan, each tendering limited partner executed a contract of sale and security agreement providing for the assignment to McMahan of all rights to any cause of action the limited partner may have in connection with (1) the original sale of the partnership interest to the limited partner, and (2) the conduct of MBM's business prior to the sale of the limited partner's interest. Each contract also provided that each tendering limited partner released MBM and its general partners from all claims arising from disallowance by the IRS of any tax benefits stemming from MBM.³ Each contract provided that it would be governed by New York law. On December 31, 1984, McMahan bought back the interests of more than 80% of the limited partners of MBM. Toto, however, did not sell his limited partnership interest to McMahan.

In 1988 or early 1989, Toto contacted the law firm of Biegel & Sandler ("B&S") about filing a lawsuit against MBM and McMahan. Not prepared to fund the litigation himself, however, Toto contacted other MBM limited partners beginning in 1990 regarding his intention to sue and inquiring as to their interest in joining him. In June of 1991 B&S also contacted the limited partners, stating that it required a minimum $25,000 retainer to pursue the action. B&S proposed that each limited partner contribute an amount equal to 1% of his or her investment in MBM towards the retainer, to be credited against a 1/3 contingency fee for B&S.

Eventually, fifteen limited partners retained B&S and filed suit in June of 1992 against MBM and McMahan (and others), alleging civil violations of the Racketeer Influenced and Corrupt Organizations Act and various state law theories of recovery ("the RICO Action"), claiming damages from the loss of their limited partnership investments, the disallowance of tax deductions, and imposition of penalties. The suit was filed in the United States District Court for the District of New Jersey, but that court determined that venue was inappropriate and the case was transferred to the Southern District of New York in July of 1993.

However, some of the limited partners who had joined in the RICO Action had, as part of the sale of their interests back to McMahan, signed a contract whereby they assigned and released certain rights. MBM and McMahan moved for summary judgment against these limited partners, whom we will call "the Releasors," arguing that they were prevented from bringing such an action by the terms of the contracts. On February 7, 1995, the district court granted the motion, rejecting the Releasors' argument that the assignments and releases were invalid because they were induced by fraud, and holding that the asserted claims were within the scope of the assignments and/or releases given by the Releasors. See Toto v. McMahan, Brafman, Morgan & Co., 1995 WL 46691, at *14 (S.D. N.Y. 1995).

On January 5, 1996, MBM and McMahan filed a complaint against the Releasors in the Supreme Court of New York which asserted, among other things, a cause of action for breach of contract based on the Releasors' participation in the RICO Action despite the assignment and release provisions contained in the contracts.⁴ MBM and McMahan sought damages in the amount of $30,000,000 as a result of the breach of their agreements by the Releasors. On May 19, 1998, the Appellate Division of the Supreme Court of New York held that the Releasors were entitled to summary judgment on the breach of contract cause of action, because the assignment and release provisions of the contracts constituted releases, and not covenants not to sue:

The assignment and release clauses contained in the contracts constitute releases, not implied covenants not to sue, because they relate to claims extant at the time the parties entered into the contracts. A release is a provision that intends a present abandonment of a known right or claim. By contrast, a covenant not to sue also applies to future claims and constitutes an agreement to exercise forbearance from asserting any claim which either exists or which may accrue . . . The provisions at issue do not speak to the future, but rather are related to known events that had transpired prior to execution of the contracts, namely the Internal Revenue Service audit and the operation of the MBM partnership. Absent a covenant not to sue, there exists no implicit agreement by defendants to pay the attorneys' fees, as would result from breach of a covenant not to sue.

McMahan & Co. v. Bass, 673 N.Y.S.2d 19, 21 (N.Y. App. Div. 1998). The parties filed a Stipulation of Discontinuance with Prejudice on September 2, 1999, thereby foreclosing any further appeal.

B. PROCEDURAL HISTORY

Not content with merely suing the Releasors, MBM and McMahan filed this lawsuit against Toto on May 6, 1996. Count I of their Second Amended Complaint alleged that Toto committed tortious interference with contractual relations by inducing the Releasors to participate in the RICO Action, even though he knew at the time that they had by the terms of the contracts released MBM and McMahan from any and all claims. Count II alleged Toto had engaged in malicious prosecution by prosecuting the RICO Action with full knowledge that it was barred by the assignments and releases contained in the contracts and without the consent of one of the Releasors.

On March 29, 1999, the district court granted Toto's motion for summary judgment as to Count II, the malicious prosecution claim, and that part of the case is not at issue in this appeal. But at the same time the court denied Toto's motion for summary judgment on Count I, the tortious interference claim. On May 11, 1999, acting pursuant to Fla. Stat. § 45.061 and, in the alternative, Fla. Stat. § 768.79, Toto made an offer to settle for $100 the litigation on Count I. His offer read as follows:

Defendant, WILLIAM A....