Townsend v. Holman Consulting Corp., AFL-CI

• Decision Date: 06 September 1990
• Docket Number: Nos. 87-5825,AFL-CI,87-6154,D,s. 87-5825
• Citation: 914 F.2d 1136
• Parties: , 17 Fed.R.Serv.3d 801 Patrick TOWNSEND, Karen Townsend, Plaintiffs-Appellants, v. HOLMAN CONSULTING CORPORATION, Defendant, and Towers, Perrin, Forster & Crosby; Trust Services of America, Inc.; American Insurance Administrators; International Union of Operating Engineers, Local 12,efendants-Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1136

914 F.2d 1136

59 USLW 2169, 17 Fed.R.Serv.3d 801

Patrick TOWNSEND, Karen Townsend, Plaintiffs-Appellants, v. HOLMAN CONSULTING CORPORATION, Defendant and Towers, Perrin, Forster & Crosby; Trust Services of America, Inc.; American Insurance Administrators International Union of Operating Engineers, Local 12, AFL-CIO Defendants-Appellees.

Nos. 87-5825, 87-6154.

United States Court of Appeals Ninth Circuit.

Argued and Submitted Jan. 18, 1990.

Decided Sept. 6, 1990.

Fred L. Wright and Ralph Rogari, Torrance, Cal., for plaintiffs-appellants.

Robert G. Wilson and John P. Reitman, Wilson & Reitman, Los Angeles, Cal., for defendants-appellees.

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

Before GOODWIN, Chief Judge, WALLACE, TANG, FLETCHER, PREGERSON, POOLE, NELSON, CANBY, NOONAN, O'SCANNLAIN, and TROTT, Circuit Judges.

FLETCHER, Circuit Judge:

Fred Wright, attorney for the Townsends, appeals two orders of the district court imposing sanctions under Rule 11 of the Federal Rules of Civil Procedure. He argues that even though he signed pleadings containing certain frivolous requests for relief, the pleadings nonetheless could not be the subject of sanctions because they also included certain non-frivolous requests for relief. A three-judge panel of this court, struggling with seemingly inconsistent decisions concerning Rule 11 sanctions, ruled in Wright's favor and reversed the orders imposing sanctions. Townsend v. Holman Consulting Corp., 881 F.2d 788 (9th Cir.1989). Judge Noonan dissented. We vacate the panel's decision, affirm the district court in part, and remand in part.

I

Following an unsuccessful state court action, Townsend sued in federal district court to compel his employer's Employee Benefit Plan (Plan) to pay certain medical benefits. The action sought money damages and a declaration voiding certain contracts under which the Plan had agreed to indemnify its fiduciaries. These claims have been resolved in an unpublished memorandum disposition and are not before us.

Townsend's complaint named numerous defendants, including the law partnership of Wilson & Reitman (Wilson), the Plan's attorneys. Townsend alleged that Wilson advised the Plan to adopt certain provisions challenged in the suit, counseled the Plan's administrators not to make certain payments to Townsend, and improperly obstructed Townsend's unsuccessful state court suit.

Wilson moved to dismiss the complaint and requested sanctions under Rule 11. Included with this motion was the affidavit of one of the attorneys, which stated that Wilson played no role in the adoption, implementation or administration of the Plan. A second affidavit, from the Plan's president, similarly stated that Wilson played no role in the adoption of the Plan, and in fact the firm was unaware of the existence of the Plan prior to the filing of the state court action. Townsend offered no evidence to rebut the affidavits. It is undisputed that Wilson played no role in the actions of the Plan which gave rise to the claims against the other defendants.

Townsend then filed a first amended complaint. The amendment deleted the allegation that Wilson had given advice to adopt the Plan. However, it continued to name Wilson and to allege that Wilson was involved in the conduct for which Townsend sought relief.

Wilson again moved, with supporting papers, to dismiss and for Rule 11 sanctions. Following a hearing, the district court again dismissed the complaint, giving Townsend leave to file a second amended complaint against all parties except Wilson. The court also imposed a $3,000 sanction against Wright for persisting in naming the Plan's attorneys. The court found that Wright had sued Wilson without reasonable investigation, without adequate basis in law or fact, and for purposes of harassment. Wright appealed the sanction order.

After filing a notice of appeal, Wright moved for reconsideration of the sanction order, or in the alternative for a stay pending appeal. The district court denied this motion, and imposed an additional $500 sanction against Wright on the ground that his motion for reconsideration was frivolous because his prior filing of a notice of appeal divested the district court of jurisdiction and on the ground that his motion for a stay was frivolous because it failed to comply with Fed.R.Civ.P. 62. Wright appealed the order that imposed the further sanction. This appeal was consolidated with Wright's appeal of the first sanction order.

The original panel reversed both sanction orders. First, the panel concluded that the district court's finding that Wright filed the complaint for purposes of harassment was not supported by the record. The panel further concluded that neither pleading could be sanctioned as frivolous because neither was frivolous in its entirety: the first amended complaint was not frivolous as to all the parties it named, and the motion for reconsideration was not frivolous in asking for a stay pending appeal. We took the case en banc to reconsider our cases regarding Rule 11 sanctions for partially frivolous pleadings.

II

Rule 11, Fed.R.Civ.P., provides:

The signature of an attorney or party constitutes a certificate by the signer that the signer has read the pleading, motion, or other paper; that to the best of the signer's knowledge, information, and belief formed after reasonable inquiry it is well grounded in fact and is warranted by existing law or a good faith argument for the extension, modification, or reversal of existing law, and that it is not interposed for any improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation.... If a pleading, motion, or other paper is signed in violation of this rule, the court ... shall impose ... an appropriate sanction.

Our cases have established that sanctions must be imposed on the signer of a paper if either a) the paper is filed for an improper purpose, or b) the paper is "frivolous." See Zaldivar v. City of Los Angeles, 780 F.2d 823, 832 (9th Cir.1986). The word "frivolous" does not appear anywhere in the text of the Rule; rather, it is a shorthand that this court has used to denote a filing that is both baseless and made without a reasonable and competent inquiry. Either the improper purpose or frivolousness ground is sufficient to sustain a sanction; however, if a district court cites both grounds, we should consider both on appeal because whether the paper is only frivolous or both harassing and frivolous could affect the nature of the sanction or the amount of damages awarded as a result of the sanction. Cf. Hudson v. Moore Business Forms, Inc., 836 F.2d 1156, 1163-64 (9th Cir.1987) (affirming the district court's reasoning only in part and remanding for recalculation of the award).

Although the "improper purpose" and "frivolousness" inquiries are separate and distinct, they will often overlap since evidence bearing on frivolousness or non-frivolousness will often be highly probative of purpose. The standard governing both inquiries is objective. Zaldivar, 780 F.2d at 829. With regard to complaints which initiate actions, we have held that such complaints are not filed for an improper purpose if they are non-frivolous. Id. at 832. Since subjective evidence of the signer's purpose is to be disregarded, id. at 829, the "improper purpose" inquiry subsumes the "frivolousness" inquiry in this class of cases. The reason for the rule regarding complaints is that the complaint is, of course, the document which embodies the plaintiff's cause of action and it is the vehicle through which he enforces his substantive legal rights. ¹ Enforcement of those rights benefits not only individual plaintiffs but may benefit the public, since the bringing of meritorious lawsuits by private individuals is one way that public policies are advanced. As we recognized in Zaldivar, it would be counterproductive to use Rule 11 to penalize the assertion of non-frivolous substantive claims, even when the motives for asserting those claims are not entirely pure. Id. at 834.

In this case, the district court imposed sanctions on account of allegations in the first amended complaint on both the frivolousness and the improper purpose grounds. The court stated

Plaintiff did not make the "reasonable inquiry" required by Rule 11 and it is found that suing the lawyers was not in good faith and for the purposes of harassment.

Because the finding of no reasonable inquiry is tantamount to a finding of frivolousness, we must address the frivolousness issue in this case. We would have to discuss the issue in any event, because a determination of improper purpose must be supported by a determination of frivolousness when a complaint is at issue. It is to the frivolousness issue that we now turn.

A.

Much of our Rule 11 jurisprudence concerning the "frivolousness" prong has been influenced by the misinterpretation of the following passage in Golden Eagle Distributing Corp. v. Burroughs Corp., 801 F.2d 1531, 1540-41 (9th Cir.1986):

Nothing in the language of the Rule or the Advisory Committee Notes supports the view that the Rule empowers the district court to impose sanctions on lawyers simply because a particular argument or ground for relief contained in a non-frivolous motion is found by the district court to be unjustified.

(Emphasis added). Golden Eagle addressed two questions: first, whether a lawyer's failure to identify a legal argument as an argument for the "extension" of existing law rather than as one for the application of existing law was sanctionable under Rule 11; second, whether a lawyer's failure to cite contrary authority in violation of American Bar Association ethical rules was sanctionable under the Rule. The court was dealing with legal arguments, not with allegations or claims. Although the italicized phrase, "ground for relief," from the above-quoted passage could be understood...