Unioil, Inc. v. E.F. Hutton & Co., Inc.
| Decision Date | 26 February 1987 |
| Docket Number | No. 85-6024,85-6024 |
| Citation | 809 F.2d 548 |
| Parties | 1987-1 Trade Cases 67,608 UNIOIL, INC., et al., Plaintiffs, and Heck Oil, Inc.; Heck & Heck, Inc.; and Mark Zelezny, Plaintiffs-Appellants, v. E.F. HUTTON & CO., INC.; Kurt Feshback; Stockbridge Partners, Inc.; Richard Jacoby; Haim Pekelis; Shearson-American Express, Inc.; and Goldman Sachs & Co.; and Donaldson, Lufkin & Jenrette Securities Corp., Defendants-Appellees. |
| Court | U.S. Court of Appeals — Ninth Circuit |
Alioto & Alioto, Joseph L. Alioto, Joseph M. Alioto, Patricia E. Henle, Sharon S. Chandler, Lewis, D'Amato, Brisbois & Bisgaard, San Francisco, Cal., Roy G. Weatherup, Robert L. Kaufman, Haight, Dickson, Brown & Bonesteel, Santa Monica, Cal., for plaintiffs-appellants.
C. Stephen Howard, Tuttle & Taylor, Inc., Paul A. Richler, Judith K. Otamura-Kester, Los Angeles, Cal., Keesal, Young & Logan, Terry Ross, Ben Suter, San Francisco, Cal., Frank Kaplan, Alschuler, Grossman & Pines, Los Angeles, Cal., for defendants-appellees.
Appeal from the United States District Court for the Central District of California.
Before WALLACE, FARRIS, and CANBY, Circuit Judges.
Heck & Heck, Inc. and Heck Oil, Inc. (the Heck companies) and Zelezny, along with their counsel, Joseph L. Alioto (Alioto) of the firm of Alioto & Alioto, and Donald Barton (Barton) of the firm of Donaldson & Barton, appeal from the district court's order granting their motion under rule 41(a)(2), Fed.R.Civ.P., for voluntary dismissal of their claims on condition that they reimburse the defendants $165,774.84 in expenses and attorneys' fees. Alioto appeals from the district court's order imposing sanctions against him for violations of rule 11, Fed.R.Civ.P., in the amount of $294,141.10. We dismiss the appeal from the rule 41(a)(2) order for lack of appellate jurisdiction. We have jurisdiction pursuant to 28 U.S.C. Sec. 1291 over Alioto's appeal from the rule 11 sanctions, and we affirm.
Unioil, Inc. (Unioil) is a company engaged in oil and gas exploration and production. During 1983, the price of Unioil's publicly traded stock soared from $1.25 per share early in the year to $13.75 per share in mid-December. At the beginning of February 1984, the stock was trading around $10 per share.
In early February 1984, Unioil's stock sharply declined. On February 7, the Wall Street Journal published an article reporting that several professional investors were selling Unioil stock "short" (i.e., were selling for future delivery stock that they did not yet own) in the belief that it was overvalued. The article stated that some of Unioil's public announcements had proven to be too optimistic. It also disclosed that Unioil's chairman of the board of directors, Richards, had twice previously been cited by the Securities and Exchange Commission for making false and misleading statements. In the days following publication of this article, Unioil stock further plummeted to $2.625 per share.
On March 21, 1984, Unioil, Richards, the Heck companies and Zelezny, filed a complaint in district court. The Heck companies owned large blocks of Unioil shares. Zelezny, a stockbroker, also owned Unioil shares. In addition, the named plaintiffs purported to be representatives of a class of all other Unioil shareholders. Alioto and Barton acted jointly as counsel for all plaintiffs. They sued several brokerage houses and individuals (the defendants), alleging a concerted scheme to sell Unioil stock short in violation of federal antitrust and securities laws, RICO, and various California laws. The complaint further alleged that the defendants had defamed Unioil and Richards.
The role of Zelezny in this purported class action litigation merits special focus. Since the Heck companies were major shareholders of Unioil and appeared to be closely aligned with Unioil management including Richards, Zelezny was the only named plaintiff with the appearance of independence from Unioil leadership. Zelezny had his first contact with this litigation when Barton, the referring co-counsel, approached him in February 1984 about the alleged market manipulation of Unioil stock. Barton, not Zelezny, first raised the subject of Zelezny's becoming a named plaintiff in the case.
Zelezny had not yet agreed to become a named plaintiff when Unioil announced in late February 1984 that it and a group of its shareholders had retained Alioto to institute a class action alleging market manipulation of Unioil stock. Alioto never spoke with Zelezny prior to filing the complaint, nor did he inquire whether Barton had investigated Zelezny's suitability as a named plaintiff in the purported class action. Alioto learned from Barton only that Zelezny had sold Unioil stock the day after the Wall Street Journal article appeared.
On May 3, 1984, the defendants commenced a deposition of Zelezny. The following day, Zelezny failed to appear for the continuation of his deposition. Instead, Barton announced that Zelezny had decided to withdraw as a named plaintiff and would not appear for further deposition questioning. The defendants then obtained a magistrate's order requiring Zelezny to complete his deposition. Zelezny appeared for three more days of testimony. Zelezny's deposition testimony was, in the judgment of the district court, "in many critical respects contrary to the allegations of the complaint": (1) whereas the complaint alleged that defendants' short selling and fraudulent misrepresentations drove the price of Unioil stock down and caused shareholders to sell at a loss, Zelezny testified that, aware that short selling was occurring, he purchased rather than sold Unioil shares in the belief that the price of the shares would eventually be driven up when the short sellers had to cover; (2) whereas the complaint alleged that plaintiffs sold Unioil shares at artificially depressed prices between December 1, 1983 and February 29, 1984, Zelezny testified that he thought that Unioil was selling at a fair price until February 7, 1984; and (3) whereas the complaint alleged that plaintiffs engaged in stock transactions based on false statements by defendants, Zelezny testified that he never bought or sold Unioil stock in reliance on anything said by any of the defendants.
On May 14, one day before Zelezny's deposition was to resume again, Barton announced that Zelezny would not appear, that neither plaintiffs nor their attorneys would appear for any further depositions, and that plaintiffs would voluntarily dismiss their complaint. On May 15, 1984, plaintiffs filed a notice purporting to dismiss their entire action without prejudice pursuant to Fed.R.Civ.P. 41(a)(1). One defendant objected to the notice on the ground that dismissal of an alleged class action requires court approval under rules 23(e) and 41(a)(1), Fed.R.Civ.P. Plaintiffs then moved pursuant to rule 41(a)(2), Fed.R.Civ.P., for a court order approving the dismissal of their action without prejudice. In support of their motion, plaintiffs cited three Unioil shareholder class actions that had been filed against Unioil and Richards in mid-April 1984. These actions named Unioil and Richards as defendants and alleged that mismanagement was the cause of the decline in the price of Unioil stock. Perceiving that Alioto and Barton would face a conflict of interest in representing both Unioil and the class of Unioil shareholders, plaintiffs stated their desire not to assert claims on behalf of the shareholder class.
In response to plaintiffs' rule 41(a)(2) motion, defendants asked the district court to require, as a condition of any dismissal without prejudice, that plaintiffs and their counsel pay defendants' attorneys' fees and costs incurred in the action. Pursuant to Fed.R.Civ.P. 11, defendants further sought sanctions of attorneys' fees and costs against plaintiffs' counsel on the grounds that plaintiffs' counsel undertook representation of plaintiffs with conflicting interests and failed to conduct a reasonable inquiry into the factual basis of the complaint. At this juncture, Unioil and Richards, through newly retained counsel, withdrew their motion for court approval of dismissal of their claims.
In November 1984, the district court entered an order granting the motion of the Heck companies and Zelezny for dismissal without prejudice of their individual and class claims on condition that these plaintiffs and/or their counsel--Alioto and Barton--"reimburse defendants for their costs and expenses, including attorneys' fees, reasonably incurred in defending against the class action claims." The district court imposed another condition that is not at issue on this appeal.
The district court also imposed rule 11 sanctions of attorneys' fees and costs against Alioto. The court held that Alioto's conduct had violated rule 11 in three respects: (1) Alioto did not conduct a reasonable investigation into the facts upon which the class allegations were made or into the potential conflict of interest that was inherent in undertaking representation of the class of Unioil shareholders in an action in which Unioil was one of the named plaintiffs; (2) Alioto tried to disengage from class discovery without cause and from the class action suit without court approval; (3) Alioto submitted declarations, in opposition to defendants' motions, that plainly did not comport with the requirements for statements under oath.
Alioto then moved the court to reconsider its order on the ground that the court had failed to consider material facts that had been brought to its attention. In an order dated January 14, 1985, the district judge found that Alioto's arguments were without basis and were made in bad faith. She therefore ordered that Alioto be further sanctioned under rule 11 in the amount of attorneys' fees and costs reasonably incurred by defendants in...
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