Stewart v. American Intern. Oil & Gas Co.

• Decision Date: 20 April 1988
• Docket Number: No. 87-1791,87-1791
• Citation: 845 F.2d 196
• Parties: Ronald E. STEWART; John A. Gromala; John E. Donahue; Gerald R. Harland; Keith S. Humphreys; John D. Drake; Tom Dufour; Roger Sohnrey; Oklahoma Energy Investors; S & H Diversified; Sohnrey Bros., Plaintiffs, v. AMERICAN INTERNATIONAL OIL & GAS CO. and James A. Ragland, Defendants. MERIDIAN RESERVE OF OKLAHOMA, INC., Successor by Merger to American International Oil & Gas Company, Defendant/Third-Party Plaintiff/Appellant, v. LIBERTY EXPLORATION COMPANY, INC.; Robert Mills; Transworld Exploration Co.; A. Dale Smith; Orval C. White; Noble C. White; Noble Operating, Inc., Third-Party Defendants/Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 196

845 F.2d 196

10 Fed.R.Serv.3d 1119

Ronald E. STEWART; John A. Gromala; John E. Donahue;

Gerald R. Harland; Keith S. Humphreys; John D. Drake; Tom

Dufour; Roger Sohnrey; Oklahoma Energy Investors; S & H

Diversified; Sohnrey Bros., Plaintiffs, v. AMERICAN INTERNATIONAL OIL & GAS CO. and James A. Ragland,

Defendants.

MERIDIAN RESERVE OF OKLAHOMA, INC., Successor by Merger to

American International Oil & Gas Company, Defendant/Third-Party Plaintiff/Appellant, v. LIBERTY EXPLORATION COMPANY, INC.; Robert Mills;

Transworld Exploration Co.; A. Dale Smith; Orval

C. White; Noble C. White; Noble

Operating, Inc., Third-Party

Defendants/Appellees.

No. 87-1791.

United States Court of Appeals Ninth Circuit.

Argued and Submitted Jan. 11, 1988.

Decided April 20, 1988.

Michael D. Welch, Bartko, Welch, Tarrant & Miller, San Francisco, Cal., for defendant/third-party plaintiff-appellant.

Robert D. Baron, Eric S. Eissenstat, Fellers, Snider, Blankenship, Bailey & Tippens, Oklahoma City, Okl., for third-party defendants-appellees.

Appeal from the United States District Court for the Eastern District of California.

Before NOONAN and THOMPSON, Circuit Judges, and KELLEHER, ^* District Judge.

KELLEHER, District Judge:

Ronald E. Stewart, et al. (the Stewart Group), sued Meridian Reserve of Oklahoma, Inc. (Meridian), alleging that Meridian had defrauded it in connection with the sale of interests in certain oil and gas leases. Meridian filed a third-party complaint against Liberty Exploration Company, Inc. (Liberty) and Transworld Exploration Company (Transworld) seeking, inter alia, indemnity and contribution for any judgment the Stewart group might obtain against Meridian. ¹ The district court dismissed the third-party complaint because it failed to show any derivative or secondary liability, as required under Fed.R.Civ.P. Rule 14. Thereafter, the district court imposed Fed.R.Civ.P. Rule 11 sanctions against Meridian, finding that the third-party complaint was frivolous and filed for an improper purpose. Meridian appeals the order of dismissal of its third-party complaint and the order imposing sanctions. We affirm both orders.

FACTUAL BACKGROUND

This case stems from the sale of interests in a number of oil and gas wells located in Oklahoma. In May of 1981, American International Oil and Gas Company (American) purchased these wells from Liberty and Transworld. Two months later, in a separate transaction, American sold the wells to the Stewart group.

In June of 1983, the Stewart group brought an action in the Eastern District of California against defendant/third-party plaintiff/appellant Meridian, successor by merger to American, and American's president, James Ragland. At the time American sold the wells to the Stewart group, it and Ragland allegedly made certain representations to the Stewart group concerning the drilling and operating costs of the wells which induced the Stewart group to complete the transaction. The Stewart group later discovered that these representations For nearly two years Meridian disputed jurisdiction and service of process. Unsuccessful in this endeavor, Meridian next attempted to transfer the action from the Eastern District of California to Oklahoma pursuant to 28 U.S.C. Sec. 1404(a). In August of 1985, the district court denied the motion to transfer.

were false. In its complaint, the Stewart group alleged that American, now Meridian, and Ragland violated Section 10(b) of the Securities Exchange Act of 1934, Securities and Exchange Commission Rule 10b-5, California Corporations Code sections 25110, 25401, 25501, 25503 and committed common law fraud, all on the basis of the representations American and Ragland made regarding the wells.

Meridian, however, had not been otherwise idle. In May of 1985, while its motion to transfer was pending, Meridian filed its third-party complaint against Liberty and Transworld, alleging RICO violations, securities violations, fraud, and seeking indemnity and contribution for any judgment the Stewart group might recover against Meridian. The purported core of Meridian's argument was that it had merely repeated to the Stewart group the very representations that Liberty and Transworld had made to Meridian when they sold the wells to them two months earlier. Liberty and Transworld each filed a motion to dismiss the third-party complaint. The Stewart group also moved to dismiss the third-party complaint.

Meridian filed its third-party complaint despite the fact that it also had filed a substantially identical claim against Liberty in the Western District of Oklahoma. The Oklahoma action was nearing trial at the time Meridian filed its third-party complaint in California. ²

The district court dismissed Meridian's third-party complaint, ruling that it failed to satisfy the requirements of Fed.R.Civ.P. Rule 14(a) and failed to state claims upon which relief could be granted. The district court found the third-party complaint to be pretextual and yet another of Meridian's attempts to get the action transferred to Oklahoma in order to avoid defending itself in California.

Thereafter, Liberty and Transworld filed motions seeking to assess monetary sanctions in the amount of their attorneys' fees pursuant to Fed.R.Civ.P. Rule 11. The district court issued an order imposing sanctions against Meridian on the grounds that Meridian had no factual or legal basis for the third-party complaint and that it was filed for an improper purpose.

Meridian timely appeals under 28 U.S.C. Sec. 1291, claiming error by the district court in dismissing the third-party complaint and in imposing sanctions.

DISCUSSION

I. Dismissal of the Third-Party Complaint

The district court dismissed Meridian's third-party complaint because it failed to meet Rule 14 pleading requirements. The district court found that the transaction which gave rise to the original complaint and the transaction which gave rise to the third-party complaint were completely separate. Also, the district court ruled that several of the allegations in the third-party complaint failed as a matter of law. A trial court must act within its sound discretion when determining whether a third-party defendant may be impleaded under Rule 14. United States v. One 1977 Mercedes Benz, 708 F.2d 444, 452 (9th Cir.1983), cert. denied, 464 U.S. 1071, 104 S.Ct. 981, 79 L.Ed.2d 217 (1984). Thus, we review the district court's dismissal of the third-party complaint for an abuse of that discretion. Id.

Fed.R.Civ.P. 14(a) allows a defending party to bring in as a third-party defendant "a person not a party to the action who is or may be liable to him for all or part of the plaintiff's claim against him." Thus, a third-party claim may be asserted only when the third party's liability is in some way dependent on the outcome of the main claim and is secondary or derivative thereto. One 1977 Mercedes Benz, 708 F.2d at ... [the claim] cannot simply be an independent or related claim but must be based upon plaintiff's claim against defendant. The crucial characteristic of a Rule 14 claim is that defendant is attempting to transfer to the third-party defendant the liability asserted against him by the original plaintiff. The mere fact that the alleged third-party claim arises from the same transaction or set of facts as the original claim is not enough.

452. As Professors Wright and Miller explain:

6 Fed.Prac. & Proc. Sec. 1446 at 257 (1971 ed.). See also, 3 J. Moore, Federal Practice, paragraphs 14.04-14.15.

Here, the district court found that the third-party complaint failed to show the requisite derivative or secondary liability on the part of third-party defendants. The district court noted that the basic facts underlying the original complaint and the basic facts underlying the third-party complaint were disparate, and that each pleading described transactions connected solely by the fact that the same oil and gas wells were involved.

Moreover, the district court correctly found that as a matter of law Meridian was not entitled to indemnity or contribution for any of its fraud claims. Indemnity is unavailable under the federal securities laws. Laventhol, Krekstein, Horwath & Horwath v. Horwitch, 637 F.2d 672, 676 (9th Cir.1980), cert. denied, 452 U.S. 963, 101 S.Ct. 3114, 69 L.Ed.2d 975 (1981). A simple reading of the California statutes and the common law of fraud would have yielded the same conclusion--that a securities wrongdoer or anyone who has committed an active fraud cannot escape loss by shifting his responsibility to another party. See, e.g., Munoz v. Davis, 190 Cal.Rptr. 400, 403, 141 Cal.App.3d 420 (1983). The district court was also correct in finding that the RICO claim in the third-party complaint bore no relation whatsoever to the original complaint and failed to show derivative or secondary liability on the part of Liberty or Transworld.

As to Meridian's argument concerning contribution, even a casual inquiry into the law would have disclosed to Meridian that contribution was unavailable under these circumstances. Contribution will be required only from a joint tortfeasor. Laventhol, Krekstein, et al., 637 F.2d at 675. To establish that Liberty and Transworld were joint tortfeasors with Meridian, Meridian was required to show that Liberty and Transworld would be liable to the Stewart group for the same harm Meridian would be liable for. The record before the Court, clearly establishes that this is not the case.

Meridian also devotes much of its argument on appeal to the fact the district court noted that the Stewart group asserted no direct claims against Liberty or Transworld and that the original complaint and third-party complaint were dissimilar. Meridian claims that in doing so the district court was improperly requiring the third-party complaint to be a mirror image of the original complaint. However, contrary to Meridian's contention, the district court was not improperly applying Rule 14 pleading...