Western Systems, Inc. v. Ulloa

• Court: U.S. Court of Appeals — Ninth Circuit
• Writing for the Court: Before ALARCON, D.W. NELSON and CANBY; D.W. NELSON
• Citation: Western Systems, Inc. v. Ulloa, 958 F.2d 864 (9th Cir. 1992)
• Decision Date: 23 June 1992
• Docket Number: Nos. 90-15732,91-15110,s. 90-15732
• Parties: WESTERN SYSTEMS, INC.; Lee M. Holmes, Plaintiffs-Appellees, v. Richard F. ULLOA; David J. Ulloa, Defendants-Appellants.

Page 864

958 F.2d 864

WESTERN SYSTEMS, INC.; Lee M. Holmes, Plaintiffs-Appellees, v. Richard F. ULLOA; David J. Ulloa, Defendants-Appellants.

Nos. 90-15732, 91-15110.

United States Court of Appeals Ninth Circuit.

Argued and Submitted Nov. 8, 1991.

Decided March 4, 1992.

As Amended June 23, 1992.

Myles T. Yamamoto, Love & Yamamoto, Honolulu, Hawaii, for Richard Ulloa.

Mark Snyder Holmes, Gana, Guam, Vernon F.L. Char, Char, Sakamoto, Ishii & Lum, Michael J. Yashii, Honolulu, Hawaii, for Western Systems, Inc.

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

Before ALARCON, D.W. NELSON and CANBY, Circuit Judges.

D.W. NELSON, Circuit Judge:

Western Systems and the Ulloas (David and Richard) filed suits against each other in the United States District Court in Guam in 1972. The suits concerned in part the validity of an agreement giving the Ulloas some rights to ownership of stock in Western Systems. Western Systems prevailed in both suits. Western's efforts to collect its judgment from the Ulloas continued until 1989, when the federal court litigation was finally concluded by settlement. These cases were the subject of no less than four appeals to the Ninth Circuit. The same day the federal cases settled, the Ulloas filed two suits in Guam Superior Court, alleging claims closely related to those litigated in the 1972 federal suit. Western sought and obtained a federal court injunction prohibiting the Ulloas from proceeding with the territorial court actions. Western was also awarded sanctions by the district court. The Ulloas appeal both rulings. We affirm both the injunction and the award of sanctions, but remand the amount of the sanction to the district court for reconsideration.

FACTUAL AND PROCEDURAL BACKGROUND

This appeal is the latest sortie in nineteen years of shareholder litigation over the Guam cable television corporation, now called Western Systems, Inc. The facts are long, involved, and only somewhat relevant to the current appeal. The Ulloas founded Western's predecessor company (MCS), which soon ran into financial trouble. The Ulloas sold their interests to the Guam Economic Development Authority (GEDA) for $1 each on May 21, 1971. Under this agreement, GEDA assumed MCS's debts, agreed not to sell the company for 180 days, and gave the Ulloas a right of first refusal of stock GEDA wished to sell.

GEDA found a buyer for MCS within the 180 day period. Because the May 21 Agreement prevented it from selling the company during this period, GEDA entered into two Agreements with the Ulloas, on July 20, 1971 and August 4, 1971, which superseded the May 21 Agreement. Under these Agreements, appellee Holmes bought 70% of the MCS stock. Holmes remains the majority shareholder of Western today. The Agreements also gave the Ulloas and other original shareholders two rights. First, they could buy their pro rata share of 15% of the stock for $1 per share (the "p 2 Option"). Second, five individuals (including David Ulloa) could buy another 3% of the stock each, at $4 per share, once MCS had paid its debts to GEDA (the "p 3 Option"). All parties to this appeal were parties to these agreements.

In 1971, David Ulloa exercised both his and Richard Ulloa's rights under p 2. However, the Ulloas failed to pay for their stock, and MCS cancelled their subscription in 1972 pursuant to the terms of the Agreement.

On February 28, 1972, the Ulloas filed suit against GEDA and Holmes, seeking to cancel the August 4 Agreement and to have all MCS stock returned to them. This was case number 24-72. On November 28, 1972, GEDA, Holmes, and MCS sued the Ulloas, claiming that they had issued watered stock to themselves during the time they controlled MCS. This was case number 197-72. The District Court decided against the Ulloas in both cases in 1977. We affirmed both decisions. See Guam Economic Development Authority v. Ulloa, 628 F.2d 1356 (9th Cir.1980) (197-72); Ulloa v. Guam Economic Development Authority, 580 F.2d 952 (9th Cir.1978) (24-72).

As a result of these decisions, Holmes, GEDA and MCS were awarded a $189,000 judgment against the Ulloas for watered stock. ¹ After the Ulloas failed to pay, the district court issued a writ of execution on March 27, 1979. Pursuant to that writ, the federal marshal levied "any and all contract rights" David Ulloa had pursuant to the August 4 agreement. These rights were sold (to Holmes) at a judicial sale on April 12, 1979. David Ulloa did not appeal the execution, levy, or sale. Further efforts to enforce the judgment continued until 1989. ²

On December 5, 1989, the parties settled the claim against the Ulloas for $238,000. That same day, the Ulloas filed two suits in Guam Superior Court against Western Systems. The first, CV 1223-89, seeks rights to 30% of MCS (now Western) stock pursuant to the August 4, 1971 agreement. The second, CV 1224-89, asks the Guam Superior Court to declare "null and void" the March 27, 1979 federal court order of execution, levy and sale of David Ulloa's contract rights.

Western and Holmes promptly filed a petition in the United States District Court seeking to enjoin the Guam court suits. The district court granted the injunction, and in addition awarded $28,117.06 in fees and costs to Western as sanctions for the Ulloas' bad faith in filing the lawsuits. The Ulloas appealed the injunction (90-15732) and the sanctions (91-15110). These appeals are consolidated before this Court.

STANDARD OF REVIEW

District court injunctions are normally reviewed only for an abuse of discretion. Multnomah Legal Serv. Workers Union v. Legal Services Corp., 936 F.2d 1547, 1552 (9th Cir.1991). However, applying an erroneous legal standard is an abuse of discretion. Golden v. Pacific Maritime Ass'n, 786 F.2d 1425, 1426-27 (9th Cir.1986), as amended, 40 Fair Emp.Prac. Cases (BNA) 1500, 1501 (9th Cir.1986). The question whether the district court had the power to issue the injunction is therefore reviewed de novo, while its decision to exercise that power is reviewed for an abuse of discretion. See Lou v. Belzberg, 834 F.2d 730, 733-34 (9th Cir.1987), cert. denied, 485 U.S. 993, 108 S.Ct. 1302, 99 L.Ed.2d 512 (1988).

Similarly, "an appellate court should apply an abuse-of-discretion standard in reviewing all aspects of a district court's Rule 11 determination." Cooter & Gell Co. v. Hartmarx Corp., 496 U.S. 384, 110 S.Ct. 2447, 2461, 110 L.Ed.2d 359 (1990). Failure to apply a correct legal standard constitutes an abuse of discretion. Id.

DISCUSSION

1. The Relitigation Exception to the Anti-Injunction Act

The two suits filed in Guam territorial court sought three basic kinds of relief. First, both David and Richard Ulloa claimed that they should have been offered the stock of other MCS shareholders who did not exercise their rights under p 2 of the August 4, 1971 Agreement. ³ Second, David Ulloa claims that he should have been offered 3% of MCS stock pursuant to p 3 when MCS repaid its debt to GEDA in full. ⁴ Finally, David Ulloa seeks to have the Guam Superior Court declare "null and void" the federal court execution, levy and sale of "any and all contract rights" he possessed by virtue of the August 4 Agreement.

The Anti-Injunction Act, 28 U.S.C. § 2283, provides:

A court of the United States may not grant an injunction to stay proceedings in a State court except as expressly authorized by Act of Congress, or where necessary in aid of its jurisdiction, or to protect or effectuate its judgments.

The Act reflects fundamental principles of equity, comity, and federalism which normally counsel against federal interference with state judicial proceedings. ⁵ Exceptions to the Act are to be strictly construed. Choo v. Exxon Corp., 486 U.S. 140, 146, 108 S.Ct. 1684, 1689, 100 L.Ed.2d 127 (1988).

The key exception in this case is the final one, authorizing a federal court to issue injunctions "to protect or effectuate its judgments" (the "relitigation exception"). The parties do vigorous battle over the scope of this exception. Western contends that the exception applies whenever res judicata would bar relitigation of a claim. Res judicata bars both claims actually litigated and those that arise from the same transaction and could have been litigated in a prior proceeding. Restatement (Second) Judgments § 24(1). The Ulloas, on the other hand, argue that section 2283 allows federal courts to enjoin relitigation only of issues actually litigated in the federal proceeding. The Supreme Court has in the past expressly refused to decide this question. See Parsons Steel v. First Alabama Bank, 474 U.S. 518, 526 n. 4, 106 S.Ct. 768, 773 n. 4, 88 L.Ed.2d 877 (1986).

David Ulloa asked the Guam court to declare the federal order "null and void." State courts have no power to void federal court decrees. A federal court may enjoin such impermissible collateral attacks on federal judgments. See Williams Natural Gas Co. v. Oklahoma City, 890 F.2d 255, 264 (10th Cir.1989) (error not to enjoin collateral attack by state court on the validity of federal judgment), cert. denied, --- U.S. ----, 110 S.Ct. 3236, 111 L.Ed.2d 747 (1990). Whether the standard is res judicata or "issues actually litigated", therefore, the district court was correct to enjoin David Ulloa's claims. They have actually been litigated and decided in federal court. ⁶

The same cannot be said, though, of Richard Ulloa's claim to refusal rights (and for fraud) under p 2. While Western notes that the Ulloas obtained the stock ledger and other corporate records during discovery in case no. 197-72, and thus knew of their refusal rights and could have raised them, Richard Ulloa's refusal rights were not "issues ... actually litigated" in either case no. 24-72 or 197-72. ⁷ The validity of the injunction against his claims therefore depends on whether res judicata or "issues ... actually litigated" is the proper standard for applying the relitigation exception to section 2283.

For years the...