LAUREL BEELER, Magistrate Judge.
In this diversity case, the plaintiff, Anthony P. Miele III, sued Franklin Resources, Inc. ("Franklin Resources"), an investment management organization, and its former President, Chief Executive Officer, and Chairman of the Board, Charles Johnson, for claims arising out of Franklin Resources's and Mr. Johnson's alleged failure to safeguard Mr. Miele III's shares of Franklin Resources that he asserts were transferred in the 1990s without his consent and which now would be worth approximately $136,000,000. (First Amended Complaint ("FAC"), ECF No. 17.
Insofar as they apply, the court incorporates by reference the factual and legal discussions in its order granting in part and denying in part the defendants' motion to dismiss. (See 8/18/2015 Order, ECF No. 45.) The court adds to the factual discussion in that order the following facts, which are relevant to the defendants' motion for sanctions.
In support of their motion, the defendants submit two documents. The first document is a cover letter that Mr. Miele III's counsel sent to Franklin Resources on December 5, 2015 (about one month before he filed his Original Complaint and instituted this action). (Gray Decl., Ex. E, ECF No. 20-2 at 27-29.) In that letter, which attached a copy of a draft complaint, Mr. Miele III's counsel says that Mr. Miele III is contemplating litigation against Franklin Resources and invites Franklin Resources to negotiate with him to resolve the dispute over Mr. Miele III's shares without litigation. (Id.) The defendants highlight the following two paragraphs of the letter:
(Id. at 28-29.)
The second document is the draft complaint that Mr. Miele III's counsel attached to the cover letter. (Gray Decl., Ex. E, ECF No. 20-2 at 30-64 ("DC").) The draft complaint contains allegations that Mr. Miele III did not include in the complaints he later filed: the Original Complaint and the First Amended Complaint. Among the omitted allegations are the following.
In December 1974, Evelyn Miele (Mr. Miele III's mother), J.P. Miele (Mr. Miele III's uncle), and Anthony Miele Sr. (Mr. Miele III's grandfather) met with their accountant and attorneys from McCarter & English regarding the Miele Jr. Estate. (DC ¶ 74.) During this meeting, McCarter & English received the 4,000-share stock certificate in the name of "Anthony P. Miele Jr. TTEE Anthony P. Miele III." (Id. ¶ 75.) The stock certificate was kept in a safety deposit box opened for the Miele Jr. Estate until after 1982, when the Miele Jr. Estate was wound up. (Id. ¶ 76.)
After Mr. Miele Jr. died, his two brothers, Richard Miele and J.P. Miele, took over his businesses. (Id. ¶ 77.) In 1975, J.P. Miele mailed to an attorney at McCarter & English a letter he received from Franklin Resources which was addressed to Mr. Miele Jr. as trustee for Mr. Miele III. (Id. ¶ 78.) The letter was a consolidated statement of income. (Id.) In 1976 and 1977, J.P. Miele sent to the attorney at McCarter & English two more statements from Franklin Resources which had been addressed to Mr. Miele Jr. (Id. ¶ 79.)
In 1976, an unknown individual opened a trust account with BoNY. (Id. ¶ 80.) The account was opened in the name of "Anthony P. Miele Jr. TTEE Anthony P. Miele III," using Mr. Miele III's Social Security number. (Id.) The address associated with the account was that of J.P. Miele's law firm. (Id.)
Between 1977 and 1978, the record address listed for the 4,000 shares of Franklin Resources owned by "Anthony P. Miele Jr. TTEE Anthony P. Miele III" was changed from the address for one of Mr. Miele Jr.'s businesses to the address for J.P. Miele's law firm. (Id. ¶ 81.)
In 1982, J.P. Miele sent a letter to the attorney at McCarter & English enclosing a dividend check payable to "Anthony P. Miele Jr. TTEE Anthony P. Miele III" and a stock certificate for 1,000 shares of Franklin Resources, which has been issued pursuant to a stock split. (Id. ¶ 82.) The attorney at McCarter & English then mailed the check to Ms. Miele and also told her that it would add the 1,000-share stock certificate to the safety deposit box containing the 4,000-share stock certificate. (Id. ¶ 83.) Later that year, J.P. Miele sent another dividend check payable to "Anthony P. Miele Jr. TTEE Anthony P. Miele III" to the attorney at McCarter & English. (Id. ¶ 85.) The attorney then mailed the check to Ms. Miele. (Id.) Mr. Miele III's minor-child tax return for 1982 reflected the two dividend checks issued by Franklin Resources. (Id. ¶ 86.)
In 1983, due to a stock split, Franklin Resources issued a 5,000-share stock certificate to "Anthony P. Miele Jr. TTEE Anthony P. Miele III." (Id. ¶ 87.) The "shares" were deposited in the BoNY account opened in 1976 for "Anthony P. Miele Jr. TTEE Anthony P. Miele III." (Id.) Later in 1983, the attorney at McCarter & English sent a letter to Ms. Miele dated September 29, 1983, which enclosed the 4,000-share and 1,000-share stock certificates that had been held in a safety deposit box by McCarter & English until then. (Id. ¶ 88.) The attorney told Ms. Miele that changing the registration of the stock to a new custodian would require a court to appoint a new one, and he recommended leaving the registration unchanged until Mr. Miele III turned 14 years old, when he could appoint his own custodian, or until Mr. Miele III turned 18 years old, when he could claim the shares himself. (Id.) The attorney also told Ms. Miele that if the dividends from the shares were not already being mailed to her address, she should write to Franklin Resources and request that all dividends be sent there. (Id.) Ms. Miele acknowledged receiving this letter on October 11, 1983. (Id.)
At some time during 1983 or 1984, J.P. Miele's law firm moved from its location. (Id. ¶ 89.)
In 1983, Mr. Miele III should have received $1,100 in dividends from Franklin Resources, but he did not, and no dividends were listed on his minor child tax return for that year. (Id. ¶ 90.) In 1984, Mr. Miele should have received $2,700 in dividends from Franklin Resources, but he did not, and his minor child tax return listed only $1,355 in dividends. (Id.)
In 1992, the IRS audited Mr. Miele III's tax return for 1989, the year that he turned 18 years old. (Id. ¶ 91.) Based on a Form 1099-DIV from Franklin Resources and issued to Mr. Miele III, the IRS found that Mr. Miele had not reported $41,250 in dividends from Franklin Resources. (Id.) These dividends correspond to the 93,750 shares of Franklin Resources that Mr. Miele should have owned in 1989. (Id.) Mr. Miele III, however, never received the $41,250 in dividends or the Form 1099-DIV, which is why he did not report them on his 1989 tax returns. (Id.)
The defendants also submit declarations describing oral statements that Mr. Miele III's counsel made. Mr. Miele III's counsel made the first statement on May 17, 2013. (Gray Decl., ¶ 5, ECF No. 20-2 at 2-3.) He told Franklin Resources's vice president and secretary that when Mr. Miele III was 18 or 19 years old, Mr. Mulvihill went to the Miele house to meet with Mr. Miele III. (Id.) During the meeting, Mr. Mulvihill presented Mr. Miele III with some documents to sign. (Id.) In return for signing the documents, Mr. Mulvihill gave Mr. Miele III $2,000,000. (Id.) Mr. Miele III's counsel also said that when Mr. Mulvihill died, his estate was worth at least $49,000,000. (Id.) Finally, Mr. Miele III's counsel also stated that he believed the stock certificates for Mr. Miele III's shares were "put into street name with Prudential Bache Securities in 1989." (Id.)
Mr. Miele III's counsel made the second statement on May 7, 2015, during counsels' meet-and-confer for this motion for sanctions. The defendants' counsel says that Mr. Miele III's counsel stated:
(Cotchett Decl., ¶ 6, ECF No. 20-1 at 3.)
When a district court decides to impose sanctions or discipline, it must clearly delineate under which authority it acts to insure that the attendant requirements are met. Weissman v. Quail Lodge, Inc., 179 F.3d 1194, 1200 (9th Cir. 1999) (citing Keegan Management Co. Sec. Litig., 78 F.3d 431, 435 (9th Cir. 1996) ("For a sanction to be validly imposed, the conduct must be sanctionable under the authority relied on.") (internal quotation marks and citation omitted)). "The imposition of sanctions requires a statement of reasons for the district court's action, including the need for the particular sanctions imposed." Couveau v. Am. Airlines, Inc., 218 F.3d 1078, 1081 (9th Cir. 2000) (citing G.J.B. & Assocs., Inc. v. Singleton, 913 F.2d 824, 830 (10th Cir. 1990) ("If the district court ultimately imposes sanctions, detailed findings are necessary to identify the objectionable conduct and provide for meaningful appellate review.")).
The defendants' seek sanctions against Mr. Miele III's counsel under Federal Rule of Civil Procedure 11 and 28 U.S.C. § 1927. The court's decision whether to impose sanctions under Rule 11 or section 1927 lies within its discretion. See Islamic Shura Council of Southern California v. F.B.I., 757 F.3d 870, 872 (9th Cir. 2014) (Rule 11 sanctions); Gomez v. Vernon, 255 F.3d 1118, 1135 (9th Cir. 2001) (section 1927 sanctions). The court exercises its discretion and denies the defendants' motion.
The defendants first argue that Mr. Miele III's counsel should be sanctioned under Rule 11 because Mr. Miele III's complaints are "frivolous." (Motion, ECF No. 20 at 17-25.) Rule 11 provides in pertinent part:
In applying this rule, the Ninth Circuit "has identified two circumstances in which sanctions [under Rule 11] are appropriate: [(1)] where a litigant makes a `frivolous filing,' that is, where he files a pleading or other paper which no competent attorney could believe was well grounded in fact and warranted by law; and [(2)] where a litigant files a pleading or other paper for an `improper purpose,' such as personal or economic harassment." Greenberg v. Sala, 822 F.2d 882, 885 (9th Cir. 1987) (citing Golden Eagle Distributing Corp. v. Burroughs Corp., 801 F.2d 1531, 1538 (9th Cir. 1986) and Zaldivar v. City of Los Angeles, 780 F.2d 823, 830-32 (9th Cir. 1986)); see Townsend v. Holman Consulting Corp., 929 F.2d 1358, 1362 (9th Cir. 1990).
"Where a complaint is in question, the `improper purpose' analysis is not necessary because a non-frivolous complaint cannot be said to be filed for an improper purpose." Greenberg, 822 F.2d at 885 (italics in original) (citing Golden Eagle, 801 F.2d at 1538, and Zaldivar, 780 F.2d at 832); cf. In re Itel Sec. Litig., 791 F.2d 672, 675 (9th Cir. 1986) (papers other than complaints may be filed for an improper purpose even though they are not frivolous).
"The word `frivolous' does not appear anywhere in the text of [Rule 11]; rather, it is a shorthand that [the Ninth Circuit] has used to denote a filing that is both baseless and made without a reasonable and competent inquiry." Townsend, 929 F.2d at 1362 (italics added); see Holgate v. Baldwin, 425 F.3d 671, 676 (9th Cir. 2005). The Ninth Circuit thus has made clear that "[w]here . . . the complaint is the primary focus of Rule 11 proceedings, a district court must conduct a two-prong inquiry to determine (1) whether the complaint is legally or factually `baseless' from an objective perspective, and (2) if the attorney has conducted `a reasonable and competent inquiry' before signing and filing it." Christian v. Mattel, Inc., 286 F.3d 1118, 1127 (9th Cir. 2002) (citing Buster v. Greisen, 104 F.3d 1186, 1190 (9th Cir. 1997)). This two-part frivolousness inquiry is conjunctive, which means that an attorney may not be sanctioned for filing a complaint that is not well-founded, so long as she conducted a reasonable inquiry, and an attorney also may not be sanctioned for a complaint which is well-founded, solely because she failed conduct a reasonable inquiry. In re Keegan Mgmt. Co. Sec. Litig., 78 F.3d 431, 434 (9th Cir. 1996)).
A party moving for Rule 11 sanctions bears the burden to show why sanctions are justified. See Tom Growney Equip., Inc. v. Shelley Irr. Dev., Inc., 834 F.2d 833, 837 (9th Cir. 1987). The Ninth Circuit has stated that Rule 11 sanctions are "an extraordinary remedy, one to be exercised with extreme caution." Operating Eng'rs Pension Trust v. A-C Co., 859 F.2d 1336, 1345 (9th Cir. 1988). Accordingly, they are reserved for "rare and exceptional case[s] where the action is clearly frivolous, legally unreasonable or without legal foundation, or brought for an improper purpose." Id. at 1344. To hold otherwise "would imply that attorneys in general should exercise little, if any, creativity in their representation of clients, that they should not argue for new but plausible interpretations of agreements, and that they should not read ambiguous cases in the way most favorable to their clients." Id. "Rule 11," in other words, "must not be construed so as to conflict with the primary duty of an attorney to represent his or her client zealously." Id.
The defendants argue that the claims
First, the court concluded that the applicable two-year statute of limitations barred Mr. Miele III's negligence and negligent-prevention-of-assistance claims. The court found Mr. Miele III's arguments that these claims did not accrue until March or April 2014 to be unpersuasive, but it did not find them to be objectively baseless.
Second, though the court dismissed Mr. Miele III's breach-of-fiduciary-duty and fraudulent-concealment claims for failure to state a claim, the court does not think they were baseless. Mr. Miele III's breach-of-fiduciary-duty claim against Franklin Resources turned in part on whether Delaware or California law applied. Mr. Miele III failed to state a claim against Mr. Johnson for breach of his fiduciary duty of care because Mr. Johnson's actions, as a matter of law, did not involve a business decision. That does not mean that Mr. Miele III's counsel's position that Mr. Johnson's actions did involve a business decision was baseless. The court also determined that Mr. Johnson did not breach his fiduciary duty of loyalty because he did not engage in self-dealing or intentionally act contrary to Franklin Resources's interests, intentionally violate the law, or consciously disregard his known duties. Again, even though the court was not persuaded by Mr. Miele III's arguments, they were not baseless. Finally, as for Mr. Miele III's fraudulent-concealment claim, it failed because the court concluded that the defendants did not have a duty to disclose the allegedly concealed information to him. This claim was not baseless, either.
The defendants nonetheless argue that even if Mr. Miele III's claims are not legally and factually baseless based on the allegations in the First Amended Complaint, they are if the court considers the draft complaint and Mr. Miele III's counsel's oral statements. The court does not agree, at least not at this stage in the litigation.
The defendants' argument turns in part on the allegations in the draft complaint that Mr. Miele III's mother and uncle knew about the shares, received the stock certificates and dividends, and never registered the shares with a successor custodian (despite knowing about this issue from the attorney from McCarter & English). These allegations do not demonstrate that Mr. Miele III knew about the shares. More saliently, the defendants say that Mr. Miele knew about the shares at least as early as 1992, when the IRS audited him and found him liable for taxes on dividends from the shares. If true, the defendants argue that this establishes that all of his claims are barred by the statute of limitations. This could be a good argument. The court nonetheless is reluctant at this stage of the case to impose sanctions based on a draft complaint that Mr. Miele III never filed. Discovery has not started, and a record about the audit and Mr. Miele III's knowledge has not yet been made. A similar problem exists with the defendants' third argument: Mr. Miele knew about the shares when Mr. Mulvihill paid him $2,000,000 around 1990. But it is not just the lack of a record; even if the allegation is true, it is not clear that Mr. Miele III knew what this payment was for. The court cannot conclude that it was for the shares. Moreover, even if Mr. Miele III had knowledge of the shares' existence, his claims accrued when he had reason to suspect that he had been harmed by wrongdoing. See Fox v. Ethicon Endo-Surgery, Inc., 35 Cal.4th 797, 806 (Cal. 2005). Simply knowing that some shares exist might or might not, depending on the context, provide that reason.
The defendants also focus on Mr. Miele III's counsel's statement in the cover letter that, "[i]n the event we learn that culpability resides in [Mr.] Johnson or Franklin [Resources] we expect to pursue our client's claims vigorously unless settled earlier." The defendants ask the court to interpret this statement as an admission by Mr. Miele III's counsel that he did not have any evidence of the defendants' culpability. At this stage, the court is not willing to interpret a statement in a letter between counsel so strictly.
The court has considered all of the defendants' arguments and understands their perspective that Mr. Miele III's claims did not suggest a plausible right to relief against them and his counsel omitted and ignored information yet loaded the Original Complaint and First Amended Complaint with inflammatory allegations. Nonetheless, on this record, the court does not believe that Mr. Miele III's counsel should be sanctioned under Rule 11.
28 U.S.C. § 1927 provides that "[a]ny attorney or other person admitted to conduct cases in any court of the United States or any Territory thereof who so multiplies the proceedings in any case unreasonably and vexatiously may be required by the court to satisfy personally the excess costs, expenses, and attorneys' fees reasonably incurred because of such conduct." Sanctions imposed under section 1927 may be imposed only based on activities before the sanctioning court. GriD Sys. Corp. v. John Fluke Mfg. Co., Inc., 41 F.3d 1318, 1319 (9th Cir. 1994) (per curiam). They also "must be supported by a finding of subjective bad faith." In Re Keegan Mgmt. Co., Sec. Litig., 78 F.3d at 436 (citations and quotation marks omitted). Such "[b]ad faith is present when an attorney knowingly or recklessly raises a frivolous argument, or argues a meritorious claim for the purpose of harassing an opponent." Id. When awarding sanctions under section 1927 (or pursuant to the court's inherent authority), district courts have discretion in determining whether sanctions are appropriate and, if so, in what amount. Trulis v. Barton, 107 F.3d 685, 694 (9th Cir. 1995); F.J. Hanshaw Enterprises, Inc. v. Emerald River Development, Inc., 244 F.3d 1128, 1135 (9th Cir. 2001).
The defendants' move for sanctions under section 1927 because Mr. Miele III's counsel refused to give them two allegedly exculpatory documents. (Motion, ECF No. 25; Reply, ECF No. 32 at 19.
Citing a single district court opinion—Fagundes v. Charter Builders, Inc., No. C 07-1111, 2008 WL 268977 (N.D. Cal. Jan. 29, 2008)—the defendants argue that Mr. Miele III's counsel's refusal to provide copies of these documents before discovery has commenced is sanctionable under section 1927 because Mr. Miele III withheld documents that "could expedite and potentially resolve the issues before" the court. (Reply, ECF No. 32 at 19.) Fagundes, however, is distinguishable from the circumstances here. In that case, the plaintiff alleged in her original complaint that she had filed a complaint with HUD notifying it of Fair Housing Act violations on July 25, 2003, but she did not provide, either along with her original complaint or her opposition to the defendants' motion to dismiss her original complaint, any documentary evidence to support her allegation. Fagundes, 2008 WL 268977, at *1. The defendants, on the other hand, produced in support of their motion, a HUD complaint that she filed on September 16, 2003. Id. This mattered because the applicable statute of limitations was tolled once the plaintiff notified HUD of the violations. See id. Based on the evidence before it, the district court found that the plaintiff's claims were time-barred because the tolling period did not start until September 16, 2003. Id. Because the plaintiff might have been able to amend her complaint to sufficiently allege a claim, the court gave her leave to do so. Id.
She did. Id. at *2. She once again alleged that she filed a HUD complaint on July 25, 2003, and this time she attached the July 25, 2003 HUD complaint to her first amended complaint. Id. at *2; see also Fagundes v. Charter Builders, Inc., No. C 07-1111, ECF No. 59 (Aug. 20, 2007). The defendants moved to dismiss the plaintiff's first amended complaint on statute of limitations grounds. Fagundes, 2008 WL 268977 at *3. The court denied the defendants' statute of limitations argument, concluding that, assuming the July 25, 2003 HUD complaint was authentic, the plaintiff's claims were timely. Id. But the court also sanctioned the plaintiff's counsel under section 1927 for multiplying the proceedings unreasonably. Id. at *4. The court stated:
Id. The court heard oral argument on the first motion to dismiss on July 13, 2007 but did not issue its order granting the motion until July 20, 2007, which gave the plaintiff's counsel one week to take the court up on its invitation and provide the July 25, 2003 HUD complaint, which would have resolved the issue then and there. See Fagundes v. Charter Builders, Inc., No. C 07-1111, ECF No. 55 (July 13, 2007) (hearing minute order).
Nothing like what happened in Fagundes has happened here. First, the court has not explicitly invited or required Mr. Miele III's counsel to provide any documents to it. Second, unlike in Fagundes, it is not entirely clear that the documents the defendants' counsel wants now would definitively solve the issue. In Fagundes, the parties fully briefed the statute of limitations issue, and the court fully considered it. Based on the documents it had, the court came out in favor of the defendants. Had the plaintiff simply provided the July 25, 2007 HUD complaint to the court, the court would have come out in favor of the plaintiff. Not providing it required another round of full briefing and another hearing and order. This is not the case here.
In sum, the court cannot conclude on this record that Mr. Miele III's counsel has unreasonably and vexatiously multiplied the proceedings by making the defendants' counsel wait until discovery opens to obtain documents relevant to this action. The court denies the defendants' motion for sanctions under section 1927.
The court denies the defendants' motion for sanctions. This disposes of ECF No. 20.
Townsend, 929 F.2d at 1362 (footnote and internal citations omitted).
