MHC INVESTMENT CO., Plaintiff, v. RACOM CORPORATION, Defendant, Shuttleworth & Ingersoll, Appellant. Racom Corporation, Third Party Plaintiff, v. Ronald W. Stepien, Dennis H. Melstad, David Sokol, Third Party Defendants.
No. 02-3162
United States Court of Appeals, Eighth Circuit.
Submitted: Jan. 17, 2003. Filed: March 17, 2003.
323 F.3d 620
III.
Since the district court did not abuse its discretion in writing the jury instructions or in awarding attorneys’ fees from a nominal award, we affirm the district court.
Nicholas Critelli, Jr., argued, Des Moines, IA (on the brief David L. Brown) for appellant.
Before MORRIS SHEPPARD ARNOLD, BRIGHT, and SMITH, Circuit Judges.
MHC Investment Company (MHC), a subsidiary of MidAmerican Energy, invested $10 million in Racom Corporation (Racom), a seller and servicer of two-way radio equipment and systems. MHC filed suit against Racom alleging breach of contract. Racom hired the law firm of Shuttleworth & Ingersoll (Shuttleworth). Racom responded by pleading affirmative defenses of fraudulent inducement, lack of authority on the part of Racom‘s Board of Directors (Board) to enter the agreement, and lack of consideration. Racom also filed counterclaims against MHC for fraud, slander per se, breach of fiduciary duty, and civil Racketeer Influenced and Corrupt Organization Act (RICO)
The district court asked Shuttleworth to explain why the district court should not sua sponte impose sanctions against Shuttleworth for pursuing frivolous defenses and claims and attempting to delay payment of more than $10 million that Racom owes MHC. After a show cause hearing, the court, in a written opinion, determined that Shuttleworth violated
I. BACKGROUND
On July 16, 1996, MHC (through its predecessor-in-interest MidAmerican Capital Company) invested $10 million in Racom by purchasing preferred stock in Racom.2 As part of the stock purchase agreement, MHC gained two of seven seats on Racom‘s Board. Eventually, Dennis Melstad, MHC‘s president, and
The stock purchase agreement also gave MHC a “put” on its preferred share, by which MHC could tender the preferred share back to Racom for its original price, in addition to any accrued or unpaid dividends, in the event that Racom did not meet certain specified financial conditions by July 16, 2001. Under this provision, MHC would have until September 16, 2001, to tender the put and then Racom was required to meet the obligation with cash within ninety days of receiving MHC‘s notice of exercising its right.
On June 29, 1998, MHC loaned Racom $9.75 million for one year to resolve a dispute with another shareholder. After one year, MHC extended the loan at a higher interest rate.
In January 1999, MHC accepted forty-five shares of Racom‘s common stock in exchange for its forbearance of certain rights relating to payment of dividends due but not paid. In addition, the common stock agreement also stated that Racom would issue an additional 280 shares of common stock should MHC exercise its put right.
Beginning in mid-2001, Melstad, on behalf of MHC, began preparing for MHC‘s exit from Racom. On September 12, 2001, MHC exercised its put right. MHC estimated that Racom was obligated to pay $15,155,366.60 based on accrued and unpaid dividends.3 After MHC exercised its put rights, Racom removed Melstad and Stepien from Racom‘s Board.
This resulted in MHC filing two lawsuits in November 2001 against Racom in Delaware, Racom‘s place of incorporation. In the first lawsuit, MHC and Melstad sought inspection of certain corporate books and records of Racom. The second lawsuit alleged that Racom illegally removed MHC‘s representatives from Racom‘s Board. A different law firm represented Racom in the Delaware action.
On December 10, 2001, Racom filed a declaratory action in Iowa state court, seeking a determination of the validity of certain actions of Racom‘s Board and the validity of the original stock purchase agreement. MHC removed the case to federal court in Iowa.4
On December 12, 2001, MHC filed the instant action seeking repayment of the loan and the issuance of additional common stock. Before Racom had an opportunity to respond, MHC moved for summary judgment on January 2, 2002.
Approximately three weeks later, Racom deposed Melstad, Stepien, Garry Osborn,5 and Gregg Miller6 in the Delaware litigation. In addition, MHC produced approximately 2500 pages of documents for the Delaware litigation, which included a partially redacted MHC “Exit Strategy” memo. The parties had not conducted or requested any discovery in the Iowa litigation.
On January 17, 2002, Shuttleworth filed an answer and counterclaim on behalf of Racom to the Iowa federal claims. The
On March 8, 2002, MHC filed a motion for summary judgment on Racom‘s counterclaims in the Iowa case. Racom responded by filing for a continuance pursuant to
As previously stated, the district court ordered a show cause hearing to allow Shuttleworth an opportunity to explain why the district court should not impose sanctions against it. At the hearing, Shuttleworth called five attorneys as witnesses. Four of the witnesses were Shuttleworth attorneys: Kevin Collins, the partner responsible for the case; Sarah Gayer, the associate who drafted the resistances to MHC‘s summary judgment motions; Caroll Reasoner, a partner with the firm specializing in corporate law who consulted with Collins and Gayer on the case; and Bob Houghton, who testified to the prestige of the law firm and the accomplishments of its attorneys. Finally, H. Richard “Dick” Smith, a long time Iowa practitioner, testified that in his professional judgment Shuttleworth did not violate Rule 11 because they acted reasonably and in good faith. The court determined that Shuttleworth and its attorneys violated Rule 11 by pursuing frivolous defenses and claims with the purpose of delaying payment to MHC. The court sanctioned Shuttleworth in the amount of $25,000. Shuttleworth timely appeals.
II. DISCUSSION
A. Rule 11 Standards
Rule 11 sanctions are imposed only in response to claims that are not “warranted by existing law or by a nonfrivolous argument for the extension, modification, or reversal of existing law.”
(b) Representations to Court. By presenting to the court (whether by signing, filing, submitting, or later advocating) a pleading, written motion, or other paper, an attorney or unrepresented party is certifying that to the best of the person‘s knowledge, information, and belief, formed after an inquiry reasonable under the circumstances,—
(1) it is not being presented for any improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation;
(2) the claims, defenses, and other legal contentions therein are warranted by existing law or by a nonfrivolous argument for the extension, modification, or reversal of existing law or the establishment of new law ....
We review the district court‘s imposition of sanctions under Rule 11 for the abuse of discretion. See Black Hills Inst. of Geological Research v. South Dakota Sch. of Mines & Tech., 12 F.3d 737, 745 (8th Cir.1993). We will only reverse a sanction when the district court based its decision “on an erroneous view of the law or on a clearly erroneous assessment of the evidence.” See Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 405 (1990); see also Miller v. Bittner, 985 F.2d 935, 938 (8th Cir.1993). We give “[d]eference to the determination of courts on the front lines of litigation” because these courts are “best acquainted with the local bar‘s litigation practices and thus best situated to determine when a sanction is warranted.” Cooter & Gell, 496 U.S. at 404. “Such deference will streamline the litigation process by freeing appellate courts from the duty of reweighing evidence and reconsidering facts already weighed and considered by the district court; it will also discourage litigants from pursuing marginal appeals, thus reducing the amount of satellite litigation.” Id.
Reviewing the district court‘s imposition of Rule 11 sanctions necessarily requires an examination of the underlying factual and legal claims, as well as the appropriateness of the sanction imposed. See Id. at 399.
B. Racom‘s Defenses and Counterclaims
As stated previously, Shuttleworth, on behalf of Racom, asserted several defenses and counterclaims against MHC. We will address each individually.8 In its written Rule 11 opinion, the court focused on fraud, fraudulent inducement and lack of consideration.9 The court discussed the remaining claims in the summary judgment opinion.
At the outset, the district court noted that Racom‘s claims lacked a specific allegation of any representation that was false or a particular concealed fact. See Rosen v. Bd. of Med. Exam‘r of Iowa, 539 N.W.2d 345, 349 (Iowa 1995)
The district court also determined that Shuttleworth failed to show any evidence of fraud. Shuttleworth responds that it could have produced evidence had the district court provided it with an opportunity to conduct discovery. However, Shuttleworth has failed to articulate what additional evidence it sought to support its claims. Shuttleworth also fails to explain why it did not conduct any discovery after MHC filed the Iowa lawsuit. The district court could properly determine that Racom‘s claims of fraud and fraudulent inducement did not have any basis in fact, nor did it rest on any legal grounds.
Second, the district court also examined Racom‘s affirmative defense of lack of consideration. Shuttleworth, on behalf of Racom, presented the argument that because MHC agreed to forebear on the dividend payments owed to them, the forbearance was not adequate consideration to support the bargain. We determine that the district court did not err in concluding that the argument lacked any legal basis. See Federal Land Bank of Omaha v. Woods, 480 N.W.2d 61, 65 (Iowa 1992) (“‘Consideration’ is either a benefit given or to be given to the person who makes the promise [or some other person] or a detriment experienced or to be experienced by the person to whom the promise is made [or some other person].“).
Third, Shuttleworth based Racom‘s breach of fiduciary duty on two incidents, the 1999 Agreements and Melstad‘s participation in MHC‘s exit strategy from Racom. As to the 1999 agreements, Racom did not allege that the MHC board representatives withheld any relevant information about their relationship to MHC or their knowledge of the transaction from the Racom Board. Nor did Racom allege that the MHC board representatives participated in any way in the negotiations to undermine the arms-length nature of the valid agreements.
As to Melstad‘s participation in the exit strategy, the district court noted that MHC‘s primary concern in the exit strategy was to minimize the loss of their investment in Racom. “[I]t is clear from the memorandum that MHC‘s objective of preserving its investment was entirely aligned with the best interests of Racom because MHC could only protect its investment by maximizing Racom‘s value, whether or not that involved taking control of Racom.” (App. at 349.) In addition, the court noted MHC had a right, as a preferred shareholder, to protect its interests. See Odyssey Partners v. Fleming Co., 735 A.2d 386, 415 (Del.Ch.1999) (“Thus one who may be both a creditor and a fiduciary (e.g., a director or controlling shareholder) does not by reason of that status alone have special limitations imposed upon the exercise of his or her creditor rights.“). As the district court concluded, Shuttleworth failed to present facts supporting the breach of fiduciary duty claim.
Fourth, Shuttleworth asserted MHC and Melstad committed slander per se
The district court determined that the alleged statements did not amount to slander per se because the statements could not injure Racom‘s business. “The fact that Mr. White might be in charge of security at Mid-American Energy or that MHC requested that Racom not allow the lawsuit to affect service has no bearing on Racom‘s ability to conduct business, which involves dealing with law enforcement and emergency services.” (App. at 351.)
Finally, Shuttleworth asserted that the agreements lacked the necessary quorum of six Racom directors and that the directors violated their fiduciary duties in approving the agreements. Shuttleworth argued that the court should not enforce their agreement with MHC because when the initial 1996 agreement was made, Racom‘s Board lacked authority to enter into those agreements. However, the district court noted that Racom‘s corporate minutes reflected that at least six Racom board members were present at all board meetings, therefore, the evidence did not support this claim. We agree with the district court that the potential lack of the requisite number of board members was immaterial. See Rodgers v. Baughman, 342 N.W.2d 801, 806 (Iowa 1983) (“[A] party may waive a condition precedent to his own performance of a contractual duty, when such condition precedent exists for his sole benefit and protection, and compel performance by the other party who has no interest in the performance or nonperformance of the condition.“).
In addition, the district court determined that Racom failed to demonstrate that the directors’ informed decisions were not made “in good faith and in the honest belief that the action taken was in the best interests of the company.” Aronson v. Lewis, 473 A.2d 805, 812 (Del.1984) (applying Delaware‘s business judgment rule). Racom did not allege that any of the non-MHC directors who approved the transaction acted outside this standard.11 The court concluded that even under the most stringent standards Racom‘s breach of fiduciary duty claims fail.
Shuttleworth makes much of the fact that it spent hundreds of hours with its client and hundreds of hours in legal research. However, this case does not address the failure to adequately research the claim or facts of the case. Instead, Shuttleworth persisted in asserting claims and defenses which were not justifiable either in law or in fact.
We determine that the district court did not abuse its discretion in finding that the claims and defenses were not supported by fact and law. The district court also did not err in deciding that Shuttleworth used the claims and defenses for the purpose of delaying Racom‘s payment of money owed to MHC.
Our decision requires sensitivity to two areas. First, Rule 11 embraces the idea that on occasion attorneys engage in litiga-
C. Amount of Sanctions
Finally, we address whether the amount of sanctions imposed is consistent with the conduct in this case. Rule 11 states that sanctions “shall be limited to what is sufficient to deter repetition of such conduct or comparable conduct by others similarly situated.”
Here, the district court determined that non-monetary sanctions such as issuing an admonition, reprimand, or censure, or requiring participation in other educational programs was inappropriate. In addressing monetary sanctions, the court noted that since it initiated the Rule 11 proceeding, it was unable to direct monetary sanctions toward MHC in order to remedy their expenditure of attorney fees.
Given the sheer size of the judgment in a case of this type, the Court could not possibly levy a sanction large enough to deter such behavior in the parties themselves; however, the Court believes that a sanction that outweighs the fees that an attorney might receive to wage such claims might accomplish this goal. Moreover, the Court expects that a person facing the loss of their business will seek the counsel of their attorney and ask the attorney to do whatever they can to forestall the undesirable result. On the other hand, attorneys are responsible for limiting their advocacy to that permissible under Rule 11, as well as to avoid the creation of unnecessary litigation costs to the parties and the Court.
(App. at 422-23.) The court imposed a sanction in the amount of $25,000 or approximately three-fourths of fees and expenses of MHC‘s attorneys. This court previously adopted the determination of a three-fourths of fees and expenses as an appropriate sanction in Kirk Capital Corp. v. Bailey, 16 F.3d 1485, 1491 (8th Cir. 1994).12
III. CONCLUSION
We affirm the district court‘s decision to impose Rule 11 sanctions in the amount of $25,000 against Shuttleworth.