Townsend v. Holman Consulting Corp.

• Decision Date: 07 August 1989
• Docket Number: 87-6154,Nos. 87-5825,D,AFL-CI,s. 87-5825
• Citation: 881 F.2d 788
• Parties: , 14 Fed.R.Serv.3d 43 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 788

881 F.2d 788

58 USLW 2161, 14 Fed.R.Serv.3d 43

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 Oct. 5, 1988.

Decided Aug. 7, 1989.

Fred L. Wright, Torrance, Cal., for plaintiffs-appellants.

Robert G. Wilson, Wilson & Reitman, Los Angeles, Cal., for the Towers defendants-appellees.

Della Bahan, Reich, Adell & Crost, Los Angeles, Cal., for the IUOE # 12 defendants-appellees.

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

Before PREGERSON, REINHARDT and NOONAN, Circuit Judges.

REINHARDT, Circuit Judge:

With this case, we return to a subject which has occupied much of this court's time in the last several years: the appropriateness of monetary sanctions leveled by a district judge against an attorney under Fed.R.Civ.P. 11. The rule states in relevant part:

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 ... If a pleading, motion, or other paper is signed in violation of this rule, the court, upon motion or upon its own initiative, shall impose upon the person who signed it ... an appropriate sanction, which may include an order to pay the other party or parties the amount of the reasonable expenses incurred because of the filing ..., including a reasonable attorney's fee.

The underlying action in this case concerned the efforts of Patrick and Karen Townsend to recover expenses and damages suffered when Patrick Townsend's employer allegedly amended his employee benefit plan in violation of the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. Sec. 1001 et seq. The Townsends' complaint went through several iterations, the first two of which named as defendants the legal counsel for the benefit plan. After each of the Townsends' attempts to sue them, the plan's lawyers moved for sanctions under Rule 11. The second time the district court imposed sanctions, in the amount of $3000. Counsel for the Townsends appealed the sanction order, and subsequently filed a motion in the district court for reconsideration of the sanctions or a stay of their imposition pending appeal. Finding that these requests themselves violated the Rule, the district judge imposed a further sanction of $500. For the reasons set forth below, we reverse both sanction orders.

I.

Patrick Townsend, an employee of a California contracting company, participated through his employer in the Southern California Rock Products and Ready Mixed Concrete Industries Employee Benefit Plan ("the Plan"). In 1984, the Plan adopted a new program governing mental health benefits, which it called the Membership Aid Program ("MAP"). In early 1985, Townsend's daughter was hospitalized for psychiatric treatment; one month later he was advised by the Plan that he had reached the limit for psychiatric coverage imposed by the MAP.

Believing that the MAP was an unlawful reduction in benefits and alleging a variety of state tort claims, the Townsends through their counsel, a sole practitioner, filed suit in a California state court. ¹ Named in the suit was the Plan itself as well as a series of purported Plan fiduciaries. Although the parties differ over what happened in the state proceedings, it is undisputed that the Townsends were unable to gain much of the discovery they sought from the defendants, and all of their claims, save one brought for a violation of the California Insurance Code, were ultimately dismissed. They then proceeded to federal court.

In December 1986 the Townsends filed a federal complaint, in the District Court for the Central District of California. Again suing the Plan and its alleged fiduciaries, the Townsends sought to void a series of agreements under which the Plan had promised to indemnify the fiduciaries against certain types of judgments. The suit sought damages for the medical expenses the Townsends had incurred beyond the limit imposed by the MAP and for various violations of ERISA. Also named in the suit were the Plan's attorneys, who were alleged to have advised the Plan to adopt the MAP in the first place, to have engaged in obstructionist litigation tactics in the ill-fated state proceeding, and to have advised the Plan's administrators not to make payments to which the Townsends were allegedly entitled under the Plan.

After the defendants filed a motion to dismiss and their first request for Rule 11 sanctions, the Townsends amended their complaint. The First Amended Complaint was in many respects little changed from the initial complaint. Importantly for present purposes, however, it no longer alleged that the Plan's attorneys had had any role, let alone an illicit one, in the adoption of the MAP, although it still named them as defendants. Defendants again moved to dismiss, resurrecting their motion for Rule 11 sanctions. In March 1987, the district judge granted the motion to dismiss, giving the Townsends 30 days to file a new pleading against all parties except the attorneys. The claims against the attorneys were dismissed with prejudice. The judge imposed Rule 11 sanctions in the amount of $3000, finding the conduct of the Townsends' attorney in suing the Plan's lawyers "plainly nothing short of outrageous." The Townsends' attorney appealed the imposition of sanctions in April 1987.

Also in April, the Townsends filed their Second Amended Complaint, again seeking to void the Plan's indemnification agreements and to receive damages. The defendants filed alternative motions to dismiss or for summary judgment. In May, the Townsends' attorney moved for reconsideration of the sanctions order. Alternatively, the attorney sought to stay its execution, without the requirement of a bond, pending appeal. Both sets of motions were heard by the district judge in June 1987. He dismissed all of the Townsends' claims with prejudice. He also denied the motion to reconsider the Rule 11 sanctions, or to stay the sanctions order, ruling that the Townsends' attorney's appeal of the order two months earlier had divested the district court of jurisdiction. The judge believed that the filing of the post-appeal motions flouted "obvious and well known principle[s] of law;" consequently, he deemed the reconsideration motion and the attorney's failure to offer some justification for a waiver of the supersedeas bond requirement of Fed.R.Civ.P. 62(d) in seeking a stay of the sanctions to be sanctionable in themselves, imposing on the Townsends' counsel an additional $500 in sanctions.

The Townsends appealed the dismissal of their claims and their attorney appealed the imposition of the $500 sanction. These appeals were consolidated with the earlier appeal of the district court's initial sanctions order, and with the appeal of the final order of dismissal. ²

II.

The issue before us is whether, under the law of this circuit, the Townsends' First Amended Complaint and/or their attorney's motion for reconsideration or a stay of the sanctions warranted the imposition of Rule 11 sanctions. In resolving this issue we first consider the general construction afforded the Rule in this circuit, and then examine the specifics of the conduct deemed sanctionable here.

A. The Scope and Purpose of Rule 11

Since Rule 11 was amended six years ago, it has increasingly become the wellspring of the very "satellite litigation" we have consistently decried. See, e.g., Greenberg v. Sala, 822 F.2d 882, 887 (9th Cir.1987); Golden Eagle, 801 F.2d at 1537. Requests for sanctions are regularly appended to motions to dismiss pleadings or for summary judgment; fully a thousand opinions have been published explaining the Rule and honing its interpretation. See Note, A Uniform Approach to Rule 11 Sanctions, 97 Yale L.J. 901 (1988). The saving grace of this effort, if there is one, is the enunciation, in a relatively short period, of some well-defined principles which should govern the imposition of sanctions.

With the Rule's amendment in 1983, we revised our prior characterization of sanctionable conduct in a significant way by removing the longstanding requirement that the subjective bad faith of the pleader be demonstrated. Zaldivar v. City of Los Angeles, 780 F.2d 823, 829 (9th Cir.1986). In Zaldivar, we concluded that subjective analysis of an attorney's conduct is inconsistent with the new Rule's focus on "reasonableness," a concept normally thought to admit only of objective inquiry. Id.; see also Hudson v. Moore Business Forms, Inc., 836 F.2d 1156, 1159 (9th Cir.1987).

The Rule applies to "pleading[s], motion[s] and other paper[s] of a party," punishing those which: (1) constitute "frivolous filings" or (2) use "judicial procedures as a tool for harassment." Stewart, 845 F.2d at 201. Pleadings of the latter type are more generally known as papers "filed for an improper purpose." Hudson, 836 F.2d at 1159, quoting Golden Eagle, 801 F.2d at 1536. The notion of "frivolousness" for purposes of Rule 11 has been limited to situations where a pleading is manifestly "baseless" or "lacking in plausibility." Rachel v. Banana Republic, Inc., 831 F.2d 1503, 1508 (9th Cir.1988); quoting California Architectural Bldg. Prods., Inc. v. Franciscan Ceramics, Inc., 818 F.2d 1466, 1472 (9th Cir.1987). As we explain below, we focus in this case on the "frivolous" prong of Rule 11.

Our cases have...