Sparling v. Hoffman Const. Co., Inc., s. 87-3931

• Decision Date: 21 December 1988
• Docket Number: 87-4436,Nos. 87-3931,s. 87-3931
• Parties: RICO Bus.Disp.Guide 7095 Michael J. SPARLING; Jean Sparling; Active Erectors & Installers, Inc., Plaintiffs-Appellants, v. HOFFMAN CONSTRUCTION COMPANY, INC.; Industrial Indemnity Company of the Northwest, Defendants-Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 635

864 F.2d 635

RICO Bus.Disp.Guide 7095

Michael J. SPARLING; Jean Sparling; Active Erectors &amp Installers, Inc., Plaintiffs-Appellants, v. HOFFMAN CONSTRUCTION COMPANY, INC.; Industrial Indemnity Company of the Northwest, Defendants-Appellees.

Nos. 87-3931, 87-4436.

United States Court of Appeals Ninth Circuit.

Argued and Submitted Nov. 3, 1988.

Decided Dec. 21, 1988.

Edward D. Campbell, Seattle, Wash., for plaintiffs-appellants.

Richard S. Twiss, Joseph E. Bringman, Seattle, Wash., for defendants-appellees.

Appeal from the United States District Court for the District of Alaska.

Before NELSON, BOOCHEVER and BRUNETTI, Circuit Judges.

BOOCHEVER, Circuit Judge:

Michael and Jean Sparling are the sole shareholders of Active Erectors & Installers, Inc. (Active). The Sparlings and Active appeal from the dismissal of their complaint. They contend that for various reasons Active's claims should not have been dismissed; that the change of venue from Washington to Alaska was improper; that the complaint adequately alleged a claim for fraud; that the Sparlings' claims were not derivative of Active's; and that the award of attorney's fees under Alaska law was improper. We affirm.

PROCEDURAL BACKGROUND

On December 6, 1984 the Sparlings and Active filed suit in U.S. District Court in Washington against Hoffman Construction Co. and Industrial Indemnity Co. of the Northwest. The controversy arose out of a construction contract between Active, a subcontractor, and Hoffman, the general contractor, for the construction of a high school in Homer, Alaska. Active provided payment and performance bonds to Hoffman on which Industrial was the surety. Federal jurisdiction was based on diversity of citizenship.

This complaint was captioned "Complaint to Cancel Bond and for Damages." The appellants later claimed that the gist of the four causes of action in this complaint was that Hoffman fraudulently induced Active to enter this contract and give the bonds, and tortiously interfered with known business relations of the Sparlings. This is not apparent from the complaint.

Hoffman moved for a more definite statement, to stay proceedings until the matter was arbitrated, and to transfer the action to Alaska. The plaintiffs filed a motion to amend the complaint (even though they could have amended their complaint without leave of the court) and lodged their proposed amended complaint. This complaint would have added RICO claims by Active and the Sparlings.

Without having ruled on the motion to amend, the district judge in Washington dismissed all of Active's claims because the contract between Active and Hoffman required such claims to be submitted to arbitration.

The judge also granted Hoffman's motion to transfer the case to Alaska pursuant to 28 U.S.C. section 1404(a). The plaintiffs' subsequent motion for reconsideration was denied.

Hoffman moved the district court in Alaska for a 12(b)(6) dismissal or for summary judgment on the Sparlings' claims. At the hearing on this motion on June 2, 1986, Judge Fitzgerald informed the Sparlings' counsel that the complaint was being dismissed for failure to plead fraud with particularity. The judge informed the Sparlings' counsel of an additional defect in the complaint. He granted the Sparlings twenty days to amend the complaint. He warned that the Sparlings were "going to run out of opportunities to replead this." Referring to the proposed amended complaint, the judge said "I have looked at the amended complaint, and this is going to be the last time out." The next day the order was filed requiring the Sparlings to serve and file an amended complaint within twenty days.

Instead of complying with this order, twenty-seven days later the Sparlings filed a notice of appeal to the Ninth Circuit. This appeal was voluntarily dismissed on September 22, 1986.

On July 15, 1986, Hoffman moved to dismiss with prejudice all claims because of the Sparlings' failure to comply with the order to amend the complaint. In response the Sparlings argued that the district judge's ruling at the June second hearing was unclear, and that they did not know whether the court was granting them leave to amend and whether the court found the proposed amended complaint defective. By an order filed December 19, 1986, the judge denied Hoffman's motion to dismiss and granted the Sparlings twenty days to amend their complaint.

On January 7, 1987 the Sparlings filed an amended complaint identical to the proposed amended complaint which the judge found defective in June, 1986. This complaint contained allegations on the first four causes of action nearly identical to the original complaint which was dismissed, and not in any respect revised to correct the deficiencies mentioned by the judge.

On January 30, 1987 Hoffman again moved to dismiss the complaint because the Sparlings had failed to comply with the order that they amend their complaint to plead fraud with particularity, and because the Sparlings had no standing to assert the corporation's RICO claim. After a hearing, Judge Kleinfeld dismissed the first four claims with prejudice because the Sparlings had not corrected the deficiencies despite "plenty of opportunity for discovery, amendment and a warning from Judge Fitzgerald." He dismissed the Sparlings' RICO claim, holding that it was a corporate claim and that the Sparlings had therefore not stated a claim upon which relief could be granted. The plaintiffs then voluntarily dismissed Industrial Indemnity.

The court granted Hoffman's motion for attorney's fees. Only part of the fees claimed were awarded because the court found the Sparlings' claims were not frivolous or in bad faith and because the fees seemed high and were not itemized. This award was based on Alaska law "because the contract so provides" and "[e]ven if it did not, Alaska law would control under conflict of laws principles."

DISCUSSION

I. The Dismissal of Active's Claims

The district court dismissed Active's claims because Active had agreed to submit these claims to arbitration. Active argues that this dismissal was improper for several reasons.

A.

First, Active contends that dismissal was improper because Hoffman only requested a stay pending arbitration, not a dismissal. The fact that a dismissal was not requested, however, does not make it improper. "A trial court may act on its own initiative to note the inadequacy of a complaint and dismiss it for failure to state a claim...." Wong v. Bell, 642 F.2d 359, 361 (9th Cir.1981) (citing 5 C. Wright & A. Miller, Federal Practice and Procedure Sec. 1357 at 593 (1969)). The court must give notice of its intention to dismiss and give the plaintiff some opportunity to respond unless the "[p]laintiffs cannot possibly win relief." Wong, 642 F.2d at 362.

In opposition to the motion for a stay the plaintiffs argued that the arbitration clause did not apply because the plaintiffs were fraudulently induced to enter the contract. As the district court pointed out, however, fraud claims must be submitted to arbitration unless the arbitration clause itself was fraudulently induced. Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 402-04, 87 S.Ct. 1801, 1805-06, 18 L.Ed.2d 1270 (1967). The plaintiffs did not claim that the clause itself was fraudulently induced. Thus the plaintiffs could not possibly win relief and the dismissal was appropriate even though it was on the court's own motion.

B.

Second, Active argues that the district court lacked discretion to dismiss Active's claims because the provision for stay in 9 U.S.C. section 3 is the defendant's only remedy where there is an arbitration clause. In Martin Marietta Aluminum, Inc. v. General Electric Co., 586 F.2d 143 (9th Cir.1978), this court affirmed a district court's grant of summary judgment where the contract provided that a request for arbitration within six months after a controversy arose was a condition precedent to the institution of litigation and where " '[t]he language contained in the arbitration provision is sufficiently broad to bar all of plaintiff's claims.' " Id. at 147-48 (quoting the district court opinion). The plaintiff in Martin Marietta argued that 9 U.S.C. section 3 required the defendant to apply for a stay pending compliance with the contractual arbitration clause. This court held that 9 U.S.C. section 3 gives a court authority, upon application by one of the parties, to grant a stay pending arbitration, but does not preclude summary judgment when all claims are barred by an arbitration clause. Thus, the provision did not limit the court's authority to grant a dismissal in this case.

The district court acted within its discretion when it dismissed Active's claims. As in Martin Marietta, the arbitration clause was broad enough to bar all of the plaintiff's claims since it required Active to submit all claims to arbitration.

C.

Third, Active contends that dismissal was improper because a motion to amend the complaint to add a RICO claim was pending, and Active was entitled to the amendment as a matter of right under Rule 15(a) of the Federal Rules of Civil Procedure.

Active's motion to amend was unnecessary. Active could have amended without leave of the court, since no responsive pleading had been filed. See 6 C. Wright & A. Miller, Federal Practice & Procedure Sec. 1480 (1971). The court should have granted this unnecessary request. See Kirk v. United States, 232 F.2d 763, 770 (9th Cir.1956); Stewart v. RCA Corp., 790 F.2d 624, 631 (7th Cir.1986). Allowing the amendment, however, would not have altered the outcome. RICO claims are arbitrable. Shearson/American Express Inc., v. McMahon, 482 U.S. 220, 107 S.Ct. 2332, 2345, 96 L.Ed.2d 185 (1987). The arbitration provision in the Active-Hoffman contract by its terms applies to any dispute which arises. This provision is broad enough to encompass RICO claims. It is similar to the one the Supreme Court held required submission of RICO claims to...