Schwarz v. Folloder

• Decision Date: 01 August 1985
• Docket Number: No. 83-2743,83-2743
• Citation: 767 F.2d 125
• Parties: Fed. Sec. L. Rep. P 92,237, 2 Fed.R.Serv.3d 1089 Charles N. SCHWARZ, Jr., et al., Plaintiffs-Appellees, v. Harry FOLLODER, et al., Defendants, Alexander Grant & Company, Defendant-Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 125

767 F.2d 125

Fed. Sec. L. Rep. P 92,237, 2 Fed.R.Serv.3d 1089

Charles N. SCHWARZ, Jr., et al., Plaintiffs-Appellees, v. Harry FOLLODER, et al., Defendants Alexander Grant & Company, Defendant-Appellant.

No. 83-2743.

United States Court of Appeals Fifth Circuit.

Aug. 1, 1985.

McDermott, Will & Emery, Alan S. Rutkoff, Howard L. Kastel, Chicago, Ill., for defendant-appellant.

Baker & Botts, Alvin M. Owsley, Jr., Houston, Tex., for Reynolds, Allen, Cook, & White.

Fleming & Jones, Larry R. Jones, Houston, Tex., for W. Harold Sellers and Bradley.

John D. Giplin, Gary L. Crofford, Houston, Tex., for Charles N. Schwarz, Jr.

William H. White & Associates, Margaret A. Pollard, Houston, Tex., for plaintiffs-appellees.

Appeal from the United States District Court for the Southern District of Texas.

Before GOLDBERG, POLITZ and WILLIAMS, Circuit Judges.

GOLDBERG, Circuit Judge:

This case presents us with the anomalous situation of a defendant appealing from a dismissal with prejudice against the plaintiffs. Despite its apparent success on the merits, the appellant--Alexander Grant & Company, a national partnership of certified accountants--disagrees with two aspects of the district court's disposition: first, it argues that the district court improperly refused to enter "judgment" in its favor, thereby denying it both "prevailing party" status and the accompanying award of costs; second, it argues that it was entitled to an award of attorney's fees since the plaintiffs acted in bad faith.

In general, awards of costs and attorney's fees--like other aspects of trial management--are entrusted to the sound discretion of the trial court. However, in ruling on motions for costs and attorney's fees, the district court cannot act arbitrarily. "[D]iscretionary choices are not left to a court's 'inclination, but to its judgment; and its judgment is to be guided by sound legal principles.' " Friendly, Indiscretion About Discretion, 31 Emory L.J. 747, 784 (1982) (quoting Chief Justice Marshall's opinion in United States v. Burr, 25 F.Cas. 30, 35 (C.C.Va.1807)). At a minimum, the district court must listen to a party's arguments and give reasons for its decision. Because we find that the district court failed in these duties, we vacate its orders denying costs and attorney's fees and remand.

I

The present case was commenced in April 1976, when a complaint alleging securities act violations ¹ and common law fraud was filed on behalf of seventy named plaintiffs against Alexander Grant & Company and two individuals, Harry Folloder and James R. Lyne. The complaint alleged that the defendants had conspired to defraud the plaintiffs by misrepresenting the financial condition of Franklin Bank, a now-defunct Houston bank. The plaintiffs claimed that they had purchased stock in the Bank in reliance upon the defendants' misrepresentations, and sought money damages and rescission of the sale. In response, Alexander Grant claimed that the plaintiffs had independent knowledge of the Bank's financial condition at the time of the sale and that therefore the plaintiffs had not relied on the financial statements audited by Grant. ² In addition, Folloder and Lyne counterclaimed against various plaintiffs who had given them promissory notes in payment for the stock purchases.

Because the merits of the suit against Alexander Grant are not before us on appeal, we need not consider the facts of the case further. Suffice it to say that during six years of pretrial preparation, twenty-one of the seventy original plaintiffs were dismissed from the case for failure to respond to discovery requests. An additional seven plaintiffs were voluntarily dismissed pursuant to Fed.R.Civ.P. 41(a)(2). Alexander Grant contested five of these dismissals, including the dismissal of the lead plaintiff, Charles N. Schwarz, claiming (1) that it was entitled to an award of costs and attorney's fees and (2) that the plaintiffs' complaints should be stricken as a sham under Fed.R.Civ.P. 11. The district court denied all of Grant's motions.

On August 9, 1983, the claims of the remaining plaintiffs proceeded to trial before the district court. After only one witness had been heard, however, the plaintiffs reached a settlement with Folloder and Lyne, agreeing to pay Folloder and Lyne $250,000 to settle their counterclaims. ³ Pursuant to this settlement, the various claims and counterclaims between the plaintiffs on the one hand and Folloder and Lyne on the other were voluntarily dismissed.

In conjunction with the settlement, the plaintiffs also sought to dismiss their claims against Alexander Grant. Grant was willing to allow all but two of the plaintiffs to dismiss their claims voluntarily--with prejudice but without costs or attorney's fees. However, Grant opposed the dismissal of one individual plaintiff, Harold Sellers, of the Houston law firm of Reynolds, White, Allen & Cook, moving orally for a judgment on the merits against these plaintiffs and for an award of costs and attorney's fees. The district court rejected Grant's claims from the bench, declared a mistrial, and subsequently granted the Rule 41(a) motions of Sellers and the Reynolds, White firm to dismiss their claims with prejudice.

On October 14, 1983, Grant filed a written motion for an award of attorney's fees and costs against Schwarz, Sellers, of the Reynolds, White firm; for a hearing in connection therewith; and for reconsideration of the court's prior orders declaring a mistrial and permitting the voluntary dismissal, with prejudice of the claims asserted by these plaintiffs. The district court denied this motion on October 26 without holding an evidentiary hearing, issuing an opinion, or making any written findings of fact or conclusions of law. It disposed of the remaining claims in the case on November 9, 1983. On December 6, 1983, Grant filed its notice of appeal, which specified that Grant was appealing not only the orders relating to the dismissals of Schwarz, Sellers, and the Reynolds, White firm, but also the earlier orders dismissing the claims of four other plaintiffs. ⁴

II

Rule 41(a)(2) of the Federal Rules of Civil Procedure permits a district court to dismiss an action at the plaintiff's request upon such terms and conditions as the court deems proper. The decision to dismiss an action rests within the sound discretion of the trial court and may only be reversed for an abuse of that discretion. La-Tex Supply Co. v. Fruehauf Trailer Division, 444 F.2d 1366, 1368 (5th Cir.), cert. denied, 404 U.S. 942, 92 S.Ct. 287, 30 L.Ed.2d 256 (1971); 9 C. Wright & A. Miller, Federal Practice and Procedure Sec. 2364 (1971). In determining whether to grant a dismissal, the principal consideration is whether the dismissal would prejudice the defendant. If a dismissal would unfairly prejudice the defendant, then the plaintiff's motion to dismiss should be denied. Id. Sec. 2364, at 165, 169.

Rule 41(a)(2) does not limit when a district court may dismiss a claim. However, if a dismissal is without prejudice to the plaintiff, then the later it is granted the more likely it is to harm the defendant by subjecting him to the potential of additional litigation expenses. See Williams v. Ford Motor Credit Co., 627 F.2d 158, 160 (8th Cir.1980) (district court abused its discretion by granting dismissal at end of trial, after defendant had made motion for judgment notwithstanding the verdict); cf. Evans v. Teche Lines, 112 F.2d 933, 934 (5th Cir.1940) (decision whether to grant dismissal after defendant has moved for directed verdict is discretionary). See generally 9 C. Wright & A. Miller, supra, Sec. 2364, at 169-71. The situation is different in the case of a dismissal with prejudice. "Dismissal of an action with prejudice is a complete adjudication of the issues presented by the pleadings and is a bar to a further action between the parties. An adjudication in favor of the defendants, by court or jury, can rise no higher than this." Smoot v. Fox, 340 F.2d 301, 303 (6th Cir.1964); see also Sheridan v. Fox, 531 F.Supp. 151, 155 (E.D.Pa.1982); Wainwright Securities, Inc. v. Wall Street Transcript Corp., 80 F.R.D. 103, 105 (S.D.N.Y.1978) ("[A] dismissal with prejudice has the effect of a final adjudication on the merits favorable to the defendant."). Consequently, no matter when a dismissal with prejudice is granted, it does not harm the defendant: The defendant receives all that he would have received had the case been completed. ⁵ Sheridan, 531 F.Supp. at 155.

In the present case, the district court dismissed with prejudice the claims of five of the appellees prior to trial and of the remaining two appellees during trial. We do not find any error in these dismissals. The dismissals prior to trial were an ordinary exercise of the district court's discretion under Rule 41(a)(2). The dismissals during trial were similarly permissible under Rule 41(a)(2) since they barred further adjudication and hence were not prejudicial to Alexander Grant. ⁶

Alexander Grant claims that it was harmed by the dismissals, even though the dismissals were with prejudice to the other side, since the dismissals denied Grant a judgment on the merits. We fail to perceive the significance of this semantic debate. As we noted earlier, a dismissal with prejudice gives the defendant the full relief to which he is legally entitled and is tantamount to a judgment on the merits. Grant argues that a judgment on the merits is nevertheless different from--and superior to--a dismissal with prejudice since it vindicates the prevailing party. Grant, however, misconceives the nature of the relief to which it is entitled. Grant is not legally entitled to receive a gold star for its conduct. Although parties may, at times, vindicate their conduct through litigation, the business of courts is to adjudicate legal rights, not to dispense seals of approval. Thus, while a judgment by any other name may not smell as sweet, a defendant...