Pelletier v. Zweifel

Citation921 F.2d 1465
Decision Date29 January 1991
Docket Number89-8667,Nos. 89-8334,s. 89-8334
PartiesFed. Sec. L. Rep. P 95,841, 21 Fed.R.Serv.3d 1217, RICO Bus.Disp.Guide 7682 Ronald O. PELLETIER, Plaintiff-Appellant, v. Gary D. ZWEIFEL, Defendant-Appellee. Ronald O. PELLETIER, Plaintiff-Appellee, v. Gary D. ZWEIFEL, Defendant-Appellant.
CourtUnited States Courts of Appeals. United States Court of Appeals (11th Circuit)

Herbert P. Schlanger, Atlanta, Ga., for Ronald O. Pelletier.

Robert E. Hicks, Robert A. Bartlett, Hicks, Maloof & Campbell, Atlanta, Ga., for Gary D. Zweifel.

Appeals from the United States District Court for the Northern District of Georgia.

Before TJOFLAT, Chief Judge, JOHNSON and ANDERSON, Circuit Judges.

TJOFLAT, Chief Judge:

Rule 11 1 of the Federal Rules of Civil Procedure requires district courts to sanction attorneys and the parties they are representing when they prosecute baseless claims. The sanction must be appropriate and may include "the reasonable expenses incurred" because of the prosecution, such as a reasonable attorney's fee. When a party prosecutes a frivolous appeal, Rule 38 2 of the Federal Rules of Appellate Procedure authorizes the court of appeals to award the appellee "just damages and single or double costs."

In this case, Ronald O. Pelletier and his attorney, Herbert P. Schlanger, prosecuted a baseless set of claims against Gary D. Zweifel in the district court. The court rejected Pelletier's claims; it dismissed some of them by granting Zweifel's motion to dismiss for failure to state a claim for relief and the remainder by granting Zweifel's motion for summary judgment. After the district court disposed of all of Pelletier's claims, Zweifel moved the court, pursuant to Rule 11, to impose sanctions on the ground that the claims presented against him were baseless and had been brought in bad faith. The court denied his motion.

Pelletier now appeals. He contends that the district court erred in dismissing some of his claims and, with respect to other claims, in granting Zweifel summary judgment; according to Pelletier, these claims are well founded in the law, and have sufficient factual support to withstand summary disposition. Zweifel also appeals. 3 He contends that the district court abused its discretion in refusing to sanction Pelletier and Schlanger under Rule 11.

We affirm the district court's orders of dismissal and of summary judgment. We reverse, however, the district court's order denying Zweifel Rule 11 relief. The claims Pelletier and Schlanger brought against Zweifel are baseless and, moreover, were prosecuted in bad faith. We accordingly remand the case for the imposition of such sanctions as will recompense Zweifel for the expenses that he incurred, including attorney's fees, in defending this suit in the district court. The appeal Pelletier and Schlanger brought to this court is frivolous. Therefore, pursuant to Rule 38, we award Zweifel double costs and attorney's fees, which shall be assessed by the district court on remand, when it imposes the Rule 11 sanctions.

We organize this opinion as follows. In part I, we set forth the facts, reading Pelletier's complaint 4 in the light most favorable to him, with respect to the claims dismissed under Fed.R.Civ.P. 12(b)(6), and giving him the benefit of every reasonable inference, with respect to the claims disposed of on summary judgment under Fed.R.Civ.P. 56. In part II, we address the merits of the claims the district court rejected on summary judgment, demonstrating that those claims are indeed baseless. In part III, we address the claims that Pelletier contends the district court should not have dismissed for failure to state a claim for relief, demonstrating that they are likewise baseless. In part IV, we consider the Rule 11 issues, concluding that Pelletier and Schlanger prosecuted Pelletier's claims in bad faith. In part V, we address the Rule 38 issues, concluding that Pelletier's appeal is frivolous.

A. Introduction.

The controversy before us began as a contest over the control of a travel agency in Atlanta, Georgia, Buckhead House of Travel, Inc. (House of Travel). The contest was between Ronald O. Pelletier and C.M. Culpepper. Pelletier, who claimed a 40% ownership in House of Travel's common stock, sought to obtain control over the company's finances and day-to-day affairs from Culpepper, who had founded the company and held 50% of its stock. Pelletier took the contest to the courts, suing Culpepper in both the state and federal courts in Atlanta. When House of Travel went into chapter 11 bankruptcy proceedings, Pelletier sold his interest in the company and dismissed his suits against Culpepper. The sale did not make Pelletier whole; the price he received for his House of Travel interest did not fully compensate him for the price he had paid for it and the cost of his litigation with Culpepper. He thus looked elsewhere for relief, and decided to sue House of Travel's (and, for a time, Culpepper's) lawyer, Gary D. Zweifel, and his law firm, Lokey & Bowden. He brought two suits: one in state court against Zweifel and Lokey & Bowden, the other--the instant case against Zweifel alone--in federal court.

Culpepper founded House of Travel in 1970. Soon thereafter he acquired a partner, Leroy Langston, an attorney; each owned 50% of the company's 100 shares of common stock. 5 House of Travel prospered under Culpepper's and Langston's ownership, but their relationship eventually deteriorated. We focus in this appeal on what transpired after Culpepper and Langston decided to part company. First, we describe a stock transaction involving Culpepper, Langston, and William Charles Hurst, Leon Hurst and Pelham Robinson (collectively, the Hurst Group) in which the Hurst Group acquired 80% of Langston's House of Travel shares. Next, we examine the Hurst Group's sale of these shares first to Travel, Incorporated and then (while Travel, Incorporated still owned the shares) to Pelletier. Finally, we focus on Pelletier's sale of the same shares to Elite Travel, Inc. Each of these transactions produced bitter litigation in state and federal court and, ultimately, the case at hand.

B. The Culpepper/Langston/Hurst Group Transaction.

On October 7, 1983, Culpepper and Langston entered into a written stock purchase agreement with the Hurst Group, pursuant to which Culpepper and Langston would each sell the Hurst Group 80% of their House of Travel shares for $32,000. The agreement set a closing date of October 14, 1983.

On October 14, the Hurst Group tendered payment (in the form of cash and a note to be secured by a pledge of the stock it would be receiving from Langston) to Langston; he accepted the payment and transferred 40 of his House of Travel shares to William Charles Hurst, who received the shares and held them in his name for the benefit of the Hurst Group. When the Hurst Group tendered payment to Culpepper, however, Culpepper refused to sell. Culpepper maintained that he and the Hurst Group had secretly agreed that his promise to sell his shares would not be enforced--the promise would be used only to induce Langston to sell his shares.

Culpepper stood his ground, and the Hurst Group decided, for the time being at least, to work with him in the effort to make House of Travel prosper. The two Hursts joined Culpepper on the company's board of directors, which had three members, 6 and agreed that Culpepper would continue to serve as president of the company. William Charles Hurst became the company's vice president and Leon Hurst its secretary and treasurer. 7

Under House of Travel's bylaws, it took a unanimous vote of the company's directors before the board of directors could act. 8 The Hursts believed that Georgia law precluded the board from changing this requirement 9 and therefore made no attempt to use their numerical advantage on the board to manage the company through the board of directors. As a result, Culpepper used his authority as president to dictate the day-to-day operations of the company. This arrangement, however, did little to enhance House of Travel's profitability. Although the sales volume and daily cash flow steadily increased, the company's operating expenses and need for ready cash increased further. This problem was caused, in part, by the manner in which Culpepper and the Hurst Group dealt with the company's funds; they repeatedly diverted such funds to their own personal use. In addition, Culpepper, as the firm's president, paid himself a handsome salary (given the volume of business he generated) and overpaid his wife and son, who were part-time workers. This practice of using company funds for personal expenditures became a source of strife and, eventually, even criminal accusation: Culpepper accused the members of the Hurst Group of embezzling company funds; they replied in kind.

C. The Hurst Group/Travel, Incorporated Transaction.

By fall of 1984, the Hurst Group wanted out and was actively seeking a buyer for its House of Travel shares. It soon found one--Travel, Incorporated (TI). On November 1, 1984, Wil Brown, TI's president, signed a stock sale and consulting agreement with William Charles Hurst, Leon Hurst, and Pelham Robinson. Brown paid William Charles Hurst $5000 to convey the Hurst Group's shares to TI. William Charles Hurst could not find the Group's stock certificate, so he executed an assignment separate from certificate and promised to give TI any documents that would substantiate his ownership. He further agreed that in the event he found the certificate, he would transfer it to TI immediately. TI also paid Leon Hurst and Robinson $47,500 each for management, promotion, and marketing services they promised to give to TI.

The contract bound the Hurst Group to seek the specific enforcement of its October 7, 1983 stock purchase agreement with Culpepper, wherein he promised to sell the Hurst Group 40 of his House of Travel shares. If the Hurst Group succeeded in acquiring these shares from Culpepper, it...

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