Rule 11 Safe Harbor Triggered by Motion, Not Brief, Declarations — Motion Must Give Sufficient Notice of Conduct at Issue — Discovery re Sanctions only in Extraordinary Circumstances; No Trial Required (Good Quotes)

Burbidge Mitchell & Gross v. Peters, 2015 U.S. App. LEXIS 14405 (10th Cir. Aug. 17, 2015):

This diversity case involves the tort of wrongful use of civil proceedings. The case was filed by the Utah law firm of Burbidge, Mitchell & Gross (BMG) against former client C&M Properties, LLC (C&M), which had sued BMG for legal malpractice.1 BMG also named as defendants C&M's manager, certain current and former members of C&M, their counsel and related entities.

1   "Prior to 2006, BMG was known as Burbidge and Mitchell." Aplt. App., Vol. I at 46. Although much of this case occurred while the firm operated as Burbidge and Mitchell, we refer to the firm throughout this order and judgment as BMG for simplicity's sake.

The federal district court granted summary judgment motions filed by the defendants, and BMG now appeals. The district court also sanctioned two of the defendants under Fed. R. Civ. P. 11. One of the sanctioned defendants, Paul H. Peters, cross-appeals. Exercising jurisdiction under 28 U.S.C. § 1291, we affirm the district court's orders in the appeal and the cross-appeal.

I. Wrongful Use of Civil Proceedings

A. Background

As this court has previously observed, this case is "an already overlong and overly complex matter." In re C&M Props., L.L.C. (C&M Props., L.L.C. v. Burbidge), 563 F.3d 1156, 1168 (10th Cir. 2009). To avoid making it even more so, we recount only those facts [*3]  necessary to the resolution of the instant appeal and cross-appeal.

C&M was formed in June 1997 for the purpose of developing real property. Its initial members included Raymond Klein, Robert Sacks, Kenneth Griswold, and later, Griswold's company, Wolf Mountain Resorts, L.C. Klein was C&M's day-to-day manager. Paul Peters served as counsel to Wolf Mountain.

In 1998, C&M learned of an opportunity to acquire a parcel of real property known as the "Weight Parcel." When the members of C&M discovered that one of their own, Sacks, had arranged to buy the parcel for himself, Klein hired BMG, which had represented Klein in a prior matter known as the Keyvani Action. Eventually, the Weight Parcel matter was settled, with C&M obtaining an option to buy part of the parcel and agreeing to buy out Sacks' interest in C&M.

To fund Sacks' removal, C&M found an investor, Timothy Olson. In September 1999, Olson bought into C&M through his company, High Mountain Partners, LLC, which he managed as trustee of the JJRRNL Trust 1998. Following an amendment to C&M's operating agreement, the membership interests in C&M were as follows: Klein (32.5%); Wolf Mountain (32.5%); High Mountain (25%); and John Shirley [*4]  (10%).

Over the ensuing months, various disputes arose among the members and/or their attorneys. For instance, represented by BMG, C&M sued Peters and Wolf Mountain, claiming that Peters had fraudulently altered the size of a C&M easement to benefit a company he controlled. Additionally, BMG "helped Klein draft a letter," Aplt. App., Vol. III at 800, threatening to "deny Mr. Griswold any rights to manage [C&M], and any rights as a member," id., Vol. I at 205-06. Still yet another dispute resulted in litigation pursued by BMG on behalf of C&M against Wolf Mountain, Griswold, and Peters, accusing them of interfering with attempts to develop and sell C&M's real property.

By April 2001, C&M was in financial distress and its members were divided. In particular, Klein recommended to Olson and Shirley that they "meet with the attorneys and finish a plan that does as much damage to . . . Wolf [Mountain] as possible." Aplee. Suppl. App., Vol. V at 1225. In turn, Olson expressed his dissatisfaction with Klein's management of C&M over "the past 18 months" and with "continu[ing] to be the source for all [of C&M's] cash needs." Aplt. App., Vol. IV at 1080.

Near the end of July 2001, Olson met with Peters and discussed the appearance that BMG's loyalty was divided between Klein and C&M. They also discussed obtaining [*5]  "disinterested impartial counsel [for C&M]" and removing Klein as a C&M manager. Id., Vol. III at 968.

On September 5, 2001, BMG withdrew as C&M's counsel when Olson declined to further fund C&M's litigation costs. Several days later, Olson called a meeting of the members to consider, among other things, "claims the Company may have against attorneys, members and managers," Aplee. Suppl. App., Vol. V at 1255. Klein forwarded the meeting's agenda to BMG, retrieved numerous documents from C&M's files held by BMG, and prohibited BMG from releasing any C&M files without his authorization.

On October 30, 2001, Olson and Griswold (through High Mountain and Wolf Mountain, respectively) utilized their combined majority membership interests in C&M to remove Klein as a manager, citing, among other things, his failure to disclose that "Richard Burbidge and Jefferson Gross . . . are his attorneys in direct conflict of interest of [C&M]." Aplt. App., Vol. I at 290. Olson also initiated a complaint with the Utah State Bar, claiming that BMG "used their position as [C&M's] lawyers to benefit Mr. Klein personally." Aplee. Suppl. App., Vol. V at 1350.

In December 2001, C&M filed for bankruptcy protection. C&M's bankruptcy plan was approved and became effective in October 2002, resulting in High Mountain becoming [*6]  the sole member of C&M and Olson becoming the sole manager.

In January 2003, C&M sued BMG for legal malpractice in Utah state court. C&M alleged that BMG had (1) breached its fiduciary duties to C&M by failing to disclose its prior and continuing representation of Klein; and (2) negligently advised C&M "to unilaterally cancel and disregard the ownership equity and management interests of Wolf Mountain." Aplt. App., Vol. I at 64, 69. C&M further alleged that if it had known of BMG's "conflict of interest and divided loyalty," it would not have followed the "ruinous advice and methods of [BMG]." Id. at 65.

BMG immediately removed the malpractice case to the federal bankruptcy court and moved for dismissal. In July 2003, a bankruptcy judge construed the motion as seeking summary judgment, and, in the course of denying it, found that "[p]rior to and during C&M's representation by [BMG], Klein was separately and personally represented by [BMG]." Id., Vol. II at 430. A six-year odyssey through the federal courts ensued. Finally, in 2009, this court placed the matter firmly back in the state court, see In re C&M Props., 563 F.3d at 1167-68, where BMG obtained summary judgment in April 2011.

With its victory in hand, BMG then sued Olson, Griswold, Peters, C&M, High Mountain, and the JJRRNL [*7]  Trust in Utah state court for "initiating and pursuing" the legal malpractice case. Aplt. App., Vol. I at 53. BMG's complaint contained three causes of action: (1) wrongful use of civil proceedings; (2) civil conspiracy; and (3) aiding and abetting. The defendants removed the case to federal court based on diversity jurisdiction and they moved for summary judgment. The district court granted the defendants' motions, finding "that C&M had facts sufficient to justify its belief that BMG had breached the fiduciary duties owed to C&M and to reasonably believe that it could potentially convince a judge or jury to rule in its favor." Id., Vol. VII at 2415.

***

II. RULE 11 SANCTIONS

A. Background

Soon after BMG's wrongful-use-of-civil-proceedings action was removed to federal court, Griswold moved to compel arbitration under "the written arbitration clause in the agreement pursuant to which [BMG] was engaged as counsel" in 1999. Aplee. Suppl. App., Vol. I at 47. Griswold stated that while he did not have "a copy of the Engagement Agreement," he understood that it "contained an arbitration provision." Id. at 50-51. Peters, who was proceeding pro se, submitted a declaration stating that he was "informed that the Engagement Agreement included a standard form arbitration clause," id. at 58, and he joined in Griswold's motion.

In August 2011, BMG's counsel notified Griswold and Peters by letter that BMG would file a Rule 11 sanctions motion if they did not withdraw the motion to compel arbitration. BMG's counsel explained that "[t]he evidence is clear that [BMG] did not enter into a written engagement [*18]  agreement with [C&M]." Id. at 130. Enclosed with the notification letter was the Rule 11 motion, but there was no "supporting memorandum or exhibits." BMG's Response to Cross-Appeal at 56.

Thirty-five days later, on September 7, 2011, BMG filed its Rule 11 motion along with a supporting memorandum, which cited declarations from Klein, Gross, and Burbidge. In November, Peters withdrew his joinder in the motion to compel arbitration, explaining that he had "recently discovered evidence from which compulsory counter and cross claims will involve parties and subject matter not encompassed by the current[ ] part[ies'] rights to arbitration." Aplee. Suppl. App., Vol. II at 556.

After a hearing, the district court granted BMG's Rule 11 motion, concluding "that the evidentiary support [for the motion to compel arbitration and the joinder therein] was insufficient." Id., Vol. III at 646. The court explained:

   I don't know if there was an engagement agreement and it contained an arbitration provision. . . . I just know there is not enough evidentiary support to say that there was one.

. . .

I do have enough to say that an insufficient reasonable inquiry was made, that the evidentiary support was insufficient to support the factual contentions, nor did anyone attempt to say that [*19]  it is likely if we could go into discovery, that it is likely that then we will have evidentiary support after this reasonable opportunity for further investigation.

Id. at 645-46. Accordingly, the district court sanctioned Griswold and Peters the sum of $33,622.86, "payable in equal parts by (1) Mr. Griswold and his attorney; and (2) Mr. Peters." Id., Vol. IV at 987.

 

B. Standards of Review

We review the district court's imposition of Rule 11 sanctions for abuse of discretion. Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 405 (1990). "A district court would necessarily abuse its discretion if it based its ruling on an erroneous view of the law or on a clearly erroneous assessment of the evidence." Id.

C. Discussion

Peters first argues that he withdrew his joinder in the motion to compel within Rule 11's twenty-one-day safe-harbor period. See Fed. R. Civ. P. 11(c)(2) (providing that a sanctions motion "must not be filed or be presented to the court if the challenged paper . . . is withdrawn . . . within 21 days after service"). But BMG served Peters with a copy of the sanctions motion in August 2011, and he did not withdraw his joinder until November--far outside the safe-harbor period.

Nevertheless, Peters argues that the safe-harbor period did not begin to run until BMG served the memorandum and declarations it [*20]  ultimately relied on to support the sanctions motion. He seems to rely on local court rules requiring that motions have supporting memoranda. From this requirement, he deduces that a Rule 11 motion lacking such a memorandum is not complete and cannot trigger the safe-harbor period.

Peters' logic is not persuasive. Rule 11 discusses the safe-harbor provision only in terms of "[t]he motion." See Fed. R. Civ. P. 11(c)(2). The advisory committee notes to the rule do so as well, explaining that "the 'safe harbor' period beings to run only upon service of the motion." Id. advisory committee's note to 1993 amendment (emphasis added). "The drafters of the rule surely understood th[e] distinction [between a motion and supporting memoranda] when crafting the safe harbor requirement." Star Mark Mgmt., Inc. v. Koon Chun Hing Kee Soy & Sauce Factory, Ltd., 682 F.3d 170, 176 (2d Cir. 2012) (per curiam). We thus join the Second Circuit in declining "to read into the rule a requirement that a motion served for purposes of the safe harbor period must include supporting papers such as a memorandum of law and exhibits." Id.

We caution, however, that the motion must provide sufficient "notice [of the claimed sanctionable conduct] for the protection of the party accused of sanctionable behavior." Roth v. Green, 466 F.3d 1179, 1192 (10th Cir. 2006) (internal quotation marks omitted). We agree with the district [*21]  court that BMG provided "enough evidentiary support or factual detail or reasoning to put [Griswold and Peters] on notice" of the conduct claimed to be sanctionable--i.e., moving to compel arbitration in the absence of an agreement to arbitrate. Aplee. Suppl. App., Vol. III at 643. Specifically, BMG's sanctions motion warned: (1) there was no "copy of any written engagement agreement containing an agreement to arbitrate"; (2) C&M's former manager, Raymond Klein, "does not know of any written engagement agreement"; (3) BMG partners Burbidge and Gross "testified . . . in their depositions taken in the underlying litigation in May 2010 [that they were unaware of any written engagement agreement]"; and (4) after BMG had delivered "14 boxes of documents" to C&M's bankruptcy counsel, Peters "had not found a retainer agreement" and was told during a C&M meeting that "no member had any knowledge of [such an agreement]." Id., Vol. I at 115-16. This information was sufficient to trigger Rule 11's safe-harbor period.

Peters next challenges the district court's finding that there was insufficient evidentiary support for the existence of an engagement agreement containing an arbitration clause. He maintains that the district court rendered that finding without [*22]  considering a "secret audio recording[ ]" from 2001 in which Klein tells another C&M member, "There is a conflict disclaimer that we all signed." Cross-Aplt. Opening Br. at 54, 55. But Peters does not provide any explanation why we should overlook the general rule that this court does not consider matters not raised below. See Richison v. Ernest Grp., Inc., 634 F.3d 1123, 1128 (10th Cir. 2011) (stating that if a "theory simply wasn't raised before the district court, we usually hold it forfeited"). And even if he did, we fail to see how the existence of a conflict disclaimer (shown by hearsay) has any bearing on the existence of an engagement agreement containing an arbitration clause.

Peters also contests the district court's finding that he failed to conduct a reasonable inquiry before joining the motion to compel arbitration. He asserts that he reviewed "thousands of pages of documents and deposition transcripts," Cross-Aplt. Opening Br. at 57, and learned of an arbitration clause in C&M's internal operating agreement among its members and in a letter from Gross stating that BMG "did not enter into a separate written engagement agreement" with C&M, id. at 59 (emphasis omitted). But this information does not at all suggest the existence of an engagement agreement [*23]  containing an arbitration clause.

Finally, Peters argues that the district court abused its discretion by not allowing discovery or conducting a trial on the existence of the engagement agreement. We disagree. There is no requirement in Rule 11 for a sanctions trial. Indeed, the Rule 11 advisory committee explains that to minimize "the cost of satellite litigation over the imposition of sanctions, the [district] court must to the extent possible limit the scope of sanction proceedings to the record." Fed. R. Civ. P. 11 advisory committee's note to 1983 amendment. And even for pre-sanctions discovery, the committee indicates it should be contemplated "only in extraordinary circumstances," id., which Peters has not identified.6

6   To the extent Peters challenges the district court's order denying the motion to compel arbitration, he lacks standing, as he withdrew his joinder in that motion.

III. Conclusion

The judgment of the district court is affirmed. BMG's motion to file a supplemental appendix is granted.

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