Pathe Computer Control Systems Corp. v. Kinmont Industries, Inc., No. 91-1534

• Decision Date: 07 October 1991
• Docket Number: No. 91-1534
• Citation: 955 F.2d 94
• Parties: PATHE COMPUTER CONTROL SYSTEMS CORP., Plaintiff, Appellee, v. KINMONT INDUSTRIES, INC., et al., Defendants, Appellees, Robert E. Margulies, Appellant. . Heard
• Court: U.S. Court of Appeals — First Circuit

Page 94

955 F.2d 94

22 Fed.R.Serv.3d 218

PATHE COMPUTER CONTROL SYSTEMS CORP., Plaintiff, Appellee, v. KINMONT INDUSTRIES, INC., et al., Defendants, Appellees Robert E. Margulies, Appellant.

No. 91-1534.

United States Court of Appeals, First Circuit.

Heard Oct. 7, 1991.

Decided Jan. 28, 1992.

Robert E. Margulies with whom Frank E. Catalina and Margulies, Wind, Herrington & Katz, Jersey City, N.J., were on brief, for appellant.

Mark C. Michalowski with whom James Pollock, Kay L. Lackey, and Sherburne, Powers & Needham, Boston, Mass., were on brief, for appellee Abbey Holding, Inc.

Before BREYER, Chief Judge, BROWN, ^* Senior Circuit Judge, and TORRUELLA, Circuit Judge.

BREYER, Chief Judge.

The district court assessed a $7500 sanction against Robert Margulies, the plaintiff's counsel in this case, because, in the court's view, 1) a motion to transfer the case from Massachusetts to North Carolina "was brought for the purpose of delay," and 2) counsel's pursuit of his client's "fraud" claim was not in "good faith." Fed.R.Civ.P. 11. Counsel appeals the sanctions. After reviewing the record, we conclude that the first ground--the transfer motion--provides a legally adequate basis for a sanction, but the second ground does not.

I Background

The essential background facts of this litigation are the following. Beginning sometime in 1987 and continuing through the first half of 1988, the plaintiff, Pathe Computer Control Systems (Pathe), negotiated with Judd York to buy several North Carolina companies that York owned (which companies we shall collectively call "Kinmont"). On July 20, 1988, York sold the companies instead to the defendant Abbey Holding, Inc. (Abbey). Pathe believed that York had behaved unfairly, and it brought a lawsuit against York, Abbey, and Kinmont in federal court in New Jersey. Pathe claimed, among other things, that York, by keeping the York/Abbey negotiations secret, had "defrauded" Pathe. Pathe said that Abbey had conspired with York to commit this fraud. Pathe added that Abbey had unlawfully interfered with Pathe's contractual relations. The New Jersey federal court transferred the Pathe/Abbey case to Massachusetts, where, after discovery, the Massachusetts lower court granted Abbey's motion for summary judgment. Subsequently, the Massachusetts court assessed the $7500 sanction that is the subject of this appeal. We shall consider each of the sanction's supporting grounds--the "transfer motion" and the "fraud claim"--in turn.

II

The Transfer Motion

On March 26, 1990, more than three weeks after Abbey filed the dispositive summary judgment motion, Pathe filed a motion to transfer its case against Abbey from the District of Massachusetts to the Western District of North Carolina. The relevant statute, 28 U.S.C. § 1404(a), says,

For the convenience of parties and witnesses, in the interest of justice, a district court may transfer any civil action to any other district or division where it might have been brought.

The district court denied the motion, holding that North Carolina was not a "district" where Pathe's case "might have been brought." It later based its sanction, in part, on the ground that Pathe had "interposed" this motion "for an[ ] improper purpose," namely, "to cause unnecessary delay." Fed.R.Civ.P. 11. The district court, more directly aware of litigatory detail than we, has considerable legal leeway in making this latter determination. Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 110 S.Ct. 2447, 110 L.Ed.2d 359 (1990) (adopting abuse of discretion standard). Two features of this case convince us that it did not act beyond its legal powers.

First, the timing of the motion is consistent with a last minute Pathe effort to delay a likely adverse decision on the merits of the case. Pathe did not file its motion until after the completion of discovery, more than three weeks after Abbey filed its dispositive motion for summary judgment. Pathe claims that its transfer motion was kindled by the fact that the New Jersey court (which had kept Pathe's case against York) transferred that sister case (against York) to North Carolina. But that New Jersey event took place more than four months before Pathe brought its Massachusetts motion. Moreover, by the time Pathe filed its Massachusetts transfer motion, and with the completion of discovery, the weakness of its substantive claims had become apparent.

Second, Pathe did not present to the district court at the time of its transfer motion any plausible reason to believe that Abbey had sufficient contacts with North Carolina to justify a finding that this was a district where Pathe's "civil action" against Abbey "might have been brought," as the statute requires. In light of the previous (New Jersey/Massachusetts) transfers, and the related jurisdictionally-based court decisions, the district court could reasonably have thought counsel fully understood § 1404(a)'s legal requirements.

Mr. Margulies, to some degree at the sanctions hearing and more explicitly on appeal, tries to make up for this legal deficiency by arguing that Abbey's eventually successful (out-of-state) effort to acquire the stock of Kinmont, an in-state (i.e., North Carolina) company, itself created a basis for North Carolina jurisdiction to hear Pathe's fraud and contract-interference claims against Abbey. His arguments, in our view, however, amount to too little, too late.

His efforts to find North Carolina jurisdiction to sue Abbey in respect to Pathe's fraud claim against Abbey are beside the point. Mr. Margulies concedes that he had abandoned the fraud claim at approximately the same time he filed the transfer motion.

His present legal effort to find North Carolina jurisdiction for the contract-interference claim, in our view, is similarly inadequate. The record indicates that the relevant acquisition negotiations took place outside North Carolina. We can find no controlling authority, and plaintiff has offered none, for extending jurisdiction over an out-of-state corporation, where the plaintiff also resides out-of-state, the negotiations occurred out-of-state, and the dispute involved negotiations-related claims. And, to assert jurisdiction over an out-of-state parent (here Abbey) based on the forum contacts of its subsidiary requires rather special circumstances, which, as far as we can tell, are not here present. See Donatelli v. National Hockey League, 893 F.2d 459, 466 (1st Cir.1990) (subsidiary's contacts with forum state apply derivatively to parent company where "plus factors" exist, where "subsidiary enters the forum state as an agent for the parent, ... where the parent is exercising unusual hegemony over the subsidiary's operations and has dictated the entry, or where the subsidiary is a separate entity in name alone"); Escude Cruz v. Ortho Pharmaceutical Corp., 619 F.2d 902, 905 (1st Cir.1980). Cf. Southmark Corp. v. Life Investors, Inc., 851 F.2d 763, 774 n. 18 (5th Cir.1988) (where parent holding company merely operates subsidiary as an investment, subsidiary's contacts with forum state will not be imputed to parent); Levy v. Plastocks, Inc., 744 F.Supp. 570, 572 (S.D.N.Y.1990); Poe v. Babcock Int'l, PLC, 662 F.Supp. 4, 6-7 (M.D.Pa.1985). Margulies says that after Abbey bought Kinmont, it loaned Kinmont some money, but he failed to present timely affidavits to that fact, and, regardless, we doubt the loan makes any difference. See, e.g., Garshman v. Universal Resources Holding, Inc., 641 F.Supp. 1359, 1365 n. * (D.N.J.1986) (loans from parent to subsidiary insufficient to confer jurisdiction), aff'd on other grounds, 824 F.2d 223 (3d Cir.1987).

These legal jurisdictional arguments are too late because the place and the time to make them was in the district court and in support of the transfer motion. Mr. Margulies' failure to do so tends to support that court's belief that, at the time, he was not aware of any plausible legal ground in support of the transfer, and, in fact, interposed his motion for "purposes of delay."

We assume that Mr. Margulies' avant garde jurisdictional theories are plausible enough to have defeated a sanctions claim resting upon failure to make "reasonable inquiry" that the motion was "warranted" by existing law (or a "good faith" argument for modification)--even if he had raised those theories for the first time late in the day. Kale v. Combined Ins. Co., 861 F.2d 746, 759 (1st Cir.1988). But, we do not believe that the assertion of such a theory, for the first time, in sketchy form, at the district court's sanctions hearing, can automatically demonstrate lack of an "improper" delaying "purpose" for filing the original motion. See Lancellotti v. Fay, 909 F.2d 15, 18-19 (1st Cir.1990) ("the amended Rule ... reach[es] groundless but 'sincere' pleadings, as well as those which, while not devoid of all merit, were filed for some malign purpose."); Cohen v. Virginia Elec. & Power Co., 788 F.2d 247, 249 (4th Cir.1986) (where client and attorney "filed a motion that they had no intention of pursuing if it were opposed ... the district court did not abuse its discretion in finding that the motion for leave to amend was filed for an improper purpose" even if a legal basis for motion existed); Quadrozzi v. City of New York, 127 F.R.D. 63, 78 n. 27 (S.D.N.Y.1989); 2A Moore's Federal Practice p 11.02, at 11-25 (2d ed. 1991). Cf. Sheets v. Yamaha Motors Corp., 891 F.2d 533, 538 (5th Cir.1990); Aetna Life Ins. Co. v. Alla Medical Servs., Inc., 855 F.2d 1470, 1476 (9th Cir.1988). If anything, the lateness of its assertion tends to show the opposite.

In sum, whether or not we would have imposed an "improper purpose" sanction upon the transfer motion, we cannot say the district court's doing so exceeded its legal powers. Cooter & Gell, 496 U.S. 384, 110 S.Ct. 2447, 110 L.Ed.2d 359 (1990).

III The Fraud Claim

The district court also based its $7500 sanction upon Pathe's having pursued a meritless fraud claim against Abbey....