Mhc Investment Co. v. Racom Corp.
Decision Date | 17 March 2003 |
Docket Number | No. 02-3162.,02-3162. |
Citation | 323 F.3d 620 |
Parties | MHC INVESTMENT CO., Plaintiff, v. RACOM CORPORATION, Defendant, Shuttleworth & Ingersoll, Appellant. Racom Corporation, Third Party Plaintiff, v. Ronald W. Stepien, Dennis H. Melstad, David Sokol, Third Party Defendants. |
Court | U.S. Court of Appeals — Eighth Circuit |
Nicholas Critelli, Jr., argued, Des Moines, IA (on the brief David L. Brown) for appellant.
Before MORRIS SHEPPARD ARNOLD, BRIGHT, and SMITH, Circuit Judges.
MHC Investment Company (MHC), a subsidiary of MidAmerican Energy, invested $10 million in Racom Corporation (Racom), a seller and servicer of two-way radio equipment and systems. MHC filed suit against Racom alleging breach of contract. Racom hired the law firm of Shuttleworth & Ingersoll (Shuttleworth). Racom responded by pleading affirmative defenses of fraudulent inducement, lack of authority on the part of Racom's Board of Directors (Board) to enter the agreement, and lack of consideration. Racom also filed counterclaims against MHC for fraud, slander per se, breach of fiduciary duty, and civil Racketeer Influenced and Corrupt Organization Act (RICO) 18 U.S.C. §§ 1961-1968. MHC moved for summary judgment on Racom's counterclaims. Racom moved to extend summary judgment proceedings pursuant to Federal Rule of Civil Procedure 56(f), so that it could conduct further discovery. The district court1 denied Racom's motion and its motion to reconsider. Then, the district court granted MHC's motions for summary judgment.
The district court asked Shuttleworth to explain why the district court should not sua sponte impose sanctions against Shuttleworth for pursuing frivolous defenses and claims and attempting to delay payment of more than $10 million that Racom owes MHC. After a show cause hearing, the court, in a written opinion, determined that Shuttleworth violated Federal Rule of Civil Procedure 11. The court ordered sanctions to be paid to the court in the amount of $25,000. Shuttleworth appeals, arguing that the district court erred in imposing sanctions. We affirm.
On July 16, 1996, MHC (through its predecessor-in-interest MidAmerican Capital Company) invested $10 million in Racom by purchasing preferred stock in Racom.2 As part of the stock purchase agreement, MHC gained two of seven seats on Racom's Board. Eventually, Dennis Melstad, MHC's president, and Ronald Stepien held MHC's two seats on the Board. Stepien served as the vice president, and later president, of MidAmerican Energy.
The stock purchase agreement also gave MHC a "put" on its preferred share, by which MHC could tender the preferred share back to Racom for its original price, in addition to any accrued or unpaid dividends, in the event that Racom did not meet certain specified financial conditions by July 16, 2001. Under this provision, MHC would have until September 16, 2001, to tender the put and then Racom was required to meet the obligation with cash within ninety days of receiving MHC's notice of exercising its right.
On June 29, 1998, MHC loaned Racom $9.75 million for one year to resolve a dispute with another shareholder. After one year, MHC extended the loan at a higher interest rate.
In January 1999, MHC accepted forty-five shares of Racom's common stock in exchange for its forbearance of certain rights relating to payment of dividends due but not paid. In addition, the common stock agreement also stated that Racom would issue an additional 280 shares of common stock should MHC exercise its put right.
Beginning in mid-2001, Melstad, on behalf of MHC, began preparing for MHC's exit from Racom. On September 12, 2001, MHC exercised its put right. MHC estimated that Racom was obligated to pay $15,155,366.60 based on accrued and unpaid dividends.3 After MHC exercised its put rights, Racom removed Melstad and Stepien from Racom's Board.
This resulted in MHC filing two lawsuits in November 2001 against Racom in Delaware, Racom's place of incorporation. In the first lawsuit, MHC and Melstad sought inspection of certain corporate books and records of Racom. The second lawsuit alleged that Racom illegally removed MHC's representatives from Racom's Board. A different law firm represented Racom in the Delaware action.
On December 10, 2001, Racom filed a declaratory action in Iowa state court, seeking a determination of the validity of certain actions of Racom's Board and the validity of the original stock purchase agreement. MHC removed the case to federal court in Iowa.4
On December 12, 2001, MHC filed the instant action seeking repayment of the loan and the issuance of additional common stock. Before Racom had an opportunity to respond, MHC moved for summary judgment on January 2, 2002.
Approximately three weeks later, Racom deposed Melstad, Stepien, Garry Osborn,5 and Gregg Miller6 in the Delaware litigation. In addition, MHC produced approximately 2500 pages of documents for the Delaware litigation, which included a partially redacted MHC "Exit Strategy" memo. The parties had not conducted or requested any discovery in the Iowa litigation.
On January 17, 2002, Shuttleworth filed an answer and counterclaim on behalf of Racom to the Iowa federal claims. The pleadings asserted compulsory counterclaims of fraud, RICO, slander per se, and breach of fiduciary duty. Shuttleworth asserted defenses of fraudulent inducement, lack of corporate board authority, and lack of consideration. Shuttleworth believed that MHC had committed fraud in order to takeover Racom's business, that Melstad and Stepien did not act in the best interest of Racom, that Melstad and Stepien had not been elected by Racom's shareholders as provided for in Racom's charter, and that several agreements between MHC and Racom were invalid.
On March 8, 2002, MHC filed a motion for summary judgment on Racom's counterclaims in the Iowa case. Racom responded by filing for a continuance pursuant to Federal Rule of Civil Procedure 56(f), requesting ninety days to conduct discovery, including the opportunity to depose Stepien, Melstad, and David Sokol.7 After reviewing the Delaware depositions, including Stepien's and Melstad's Delaware depositions, the district court denied Racom's motion, concluding that further discovery was not "likely to uncover any information helpful to Racom in defeating the motions for summary judgment." (App. at 161.) Racom then filed a motion for reconsideration, explaining the discovery conducted in the two Delaware lawsuits was unrelated to its counterclaims. The district court also denied Racom's motion for reconsideration.
As previously stated, the district court ordered a show cause hearing to allow Shuttleworth an opportunity to explain why the district court should not impose sanctions against it. At the hearing, Shuttleworth called five attorneys as witnesses. Four of the witnesses were Shuttleworth attorneys: Kevin Collins, the partner responsible for the case; Sarah Gayer, the associate who drafted the resistances to MHC's summary judgment motions; Caroll Reasoner, a partner with the firm specializing in corporate law who consulted with Collins and Gayer on the case; and Bob Houghton, who testified to the prestige of the law firm and the accomplishments of its attorneys. Finally, H. Richard "Dick" Smith, a long time Iowa practitioner, testified that in his professional judgment Shuttleworth did not violate Rule 11 because they acted reasonably and in good faith. The court determined that Shuttleworth and its attorneys violated Rule 11 by pursuing frivolous defenses and claims with the purpose of delaying payment to MHC. The court sanctioned Shuttleworth in the amount of $25,000. Shuttleworth timely appeals.
Rule 11 sanctions are imposed only in response to claims that are not "warranted by existing law or by a nonfrivolous argument for the extension, modification, or reversal of existing law." Fed.R.Civ.P. 11(b)(2). This standard is applied with particular strictness where, as here, the sanctions are imposed on the court's own motion. In that circumstance-unlike the situation in which an opposing party moves for Rule 11 sanctions-there is no "safe harbor" in the Rule allowing attorneys to correct or withdraw their challenged filings. See Fed.R.Civ.P. 11(c)(1)(A). Here, the district court determined that Shuttleworth violated Rule 11(b)(1) and (b)(2). Federal Rule of Evidence 11 reads, in pertinent part:
(b) Representations to Court. By presenting to the court (whether by signing, filing, submitting, or later advocating) a pleading, written motion, or other paper, an attorney or unrepresented party is certifying that to the best of the person's knowledge, information, and belief, formed after an inquiry reasonable under the circumstances, —
(1) it is not being presented for any improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation;
(2) the claims, defenses, and other legal contentions therein are warranted by existing law or by a nonfrivolous argument for the extension, modification, or reversal of existing law or the establishment of new law ....
We review the district court's imposition of sanctions under Rule 11 for the abuse of discretion. See Black Hills Inst. of Geological Research v. South Dakota Sch. of Mines & Tech., 12 F.3d 737, 745 (8th Cir.1993). We will only reverse a sanction when the district court based its decision "on an erroneous view of the law or on a clearly erroneous assessment of the evidence." See Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 405, 110 S.Ct. 2447, 110 L.Ed.2d 359 (1990); see also Miller v. Bittner, 985 F.2d 935, 938 (8th Cir.1993). We give "[d]eference to the determination of courts on the front lines of litigation" because these courts are "best acquainted with the local bar's litigation practices and thus best situated to determine when...
To continue reading
Request your trial-
In re Engle Cases
...Sua sponte Rule 11 sanctions, then, must be reviewed with "particular stringency." Pennie, 323 F.3d at 90 ; MHC Inv. Co. v. Racom Corp., 323 F.3d 620, 623 (8th Cir. 2003) ; Hunter, 281 F.3d at 153 ; United Nat'l Ins. Co. v. R & D Latex Corp., 242 F.3d 1102, 1115 (9th Cir. 2001). Kaplan, 331......
-
Young v. Smith
...under Rule 11 where "the person who signed the pleadings should have been aware that they were frivolous"); MHC Inv. Co. v. Racom Corp., 323 F.3d 620, 623 (8th Cir. 2003) (affirming sua sponte imposition of $25,000 sanction under Rule 11 where counsel "violated Rule 11 by pursuing frivolous......
-
Weiss v. Thi of New Mexico At Valle Norte, LLC
...discovery order. The court could have reasonably halved that figure to come up with the $25,000 sanction. Cf. MHC Inv. Co. v. Racom Corp., 323 F.3d 620, 628 n. 13 (8th Cir.2003) (considering $25,000 the “minimum amount a [c]ourt can award in order to deter” a law firm's improper behavior); ......
-
Adams v. USAA Cas. Ins. Co.
...with ‘particular strictness' when sanctions are imposed on the court's own initiative...." Id . at 1010 (quoting MHC Inv. Co. v. Racom Corp ., 323 F.3d 620, 623 (8th Cir. 2003) ).8 Rule 11's main purpose "is to deter baseless filings.... Rule 11 imposes a duty on attorneys to certify that t......
-
Demurrers and Motions to Strike—they Aren't Just for Defendants Anymore
...56 Cal. App. 4th 819, 831 (1997).6. Ruth v. Unifund CCR Partners, 604 F.3d 908, 911 (6th Cir. 2010); MHC Invest. Co. v. Racom Corp., 323 F.3d 620 (8th Cir. 2003); Mayfield v. County of Merced, 2015 WL 791309, at *6 (E.D. Cal. 2015); Davis v. United States, 739 F. Supp. 2d 64 (D. Mass. 2010)......