Edward Kountze v. Tyler Gaines ( 2008 )

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
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No. 07-2535
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Edward H. Kountze, in his capacity *
as Trustee and on behalf of the *
Gilbert M. and Martha H. Hitchcock *
Foundation, a Nebraska Nonprofit *
Organization, *
*
Appellant, *
* Appeal from the United States
v. * District Court for the
* District of Nebraska.
*
Tyler B. Gaines; Neely Kountze; *
Mary Kountze; John Webster; *
John Does 1-3; Thomas R. Burke; *
Hotz, Weaver, Flood, Breitkreutz & *
Grant; Gilbert M. and Martha H. *
Hitchcock Foundation, a Nebraska *
Nonprofit Corporation, *
*
Appellees. *
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Submitted: December 14, 2007
Filed: July 3, 2008
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Before LOKEN, Chief Judge, WOLLMAN and SHEPHERD, Circuit Judges.
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SHEPHERD, Circuit Judge.
In this appeal, we review the district court’s grant of summary judgment in
favor of Appellees based on Appellant’s lack of standing and the district court’s
decision to impose sanctions against the appellant under Federal Rule of Civil
Procedure 11. We affirm the grant of summary judgment and the imposition of
sanctions.
I.
The Gilbert M. and Martha H. Hitchcock Foundation (the Foundation) was
established for charitable, religious, and educational purposes. The Foundation was
funded through a bequest in Martha H. Hitchcock’s will and has contributed millions
of dollars to various charitable organizations since 1962. The Foundation is governed
by a Board of Trustees (the Board). Sometime around 2002, relations among the
members of the Board soured.
On January 21, 2003, Tyler B. Gaines, Neely Kountze, Mary Kountze, and John
Webster (Trustees) filed a state-court derivative action seeking, among other things,
the removal of three other trustees, including Edward Kountze (Edward), the
Appellant in this matter. On September 2, 2004, a state district court, following a
bench trial, ordered the removal of Edward from the Board.
While the state-court action was being appealed, Denman Kountze, Jr., who was
Edward’s father, President of the Foundation, and a trustee on the Board, filed a
derivative action in federal district court. In this action, he claimed that the Trustees
breached their fiduciary duties to the Foundation when they approved the expenditure
of funds to pay legal fees to the Hotz, Weaver, Breitkreutz & Grant law firm (Hotz
Weaver) and Thomas Burke for legal services provided during the state-court
proceedings. In the action, Denman Kountze, Jr., sought a judgment against Hotz
Weaver and Burke requiring that all monies drawn on the Foundation and paid to Hotz
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Weaver or Burke since September 20, 2004, be disgorged and returned to the
Foundation with interest, and that the Trustees be held liable for any monies not
repaid. Additionally, Denman Kountze, Jr., asked that the court order the Trustees to
return to the Foundation any monies they received as reimbursement for legal fees and
costs relating to the state-court actions. The district court dismissed Hotz Weaver
from the action with prejudice because the complaint failed to state a claim against
Hotz Weaver. Upon notice of the death of Denman Kountze, Jr., the district court
dismissed the remainder of the action.
Meanwhile, in the appeal of the state court’s decision removing Edward, the
Nebraska Supreme Court reversed and remanded because notice was not provided to
the state Attorney General as required under Nebraska Revised Statute section 21-
1949. See Gilbert M. and Martha H. Hitchcock Foundation v. Kountze, 720 N.W.2d
31, 36-39 (Neb. 2006). Proper notice was then given to the Nebraska Attorney
General who declined to enter an appearance in the matter. On March 5, 2007, the
state district court reentered its previous order removing Edward from the Board. On
January 8, 2007, in the interim between the Nebraska Supreme Court’s reversal and
the Nebraska district court’s reentry of its order, Edward filed a derivative action in
federal district court against the Trustees, Hotz Weaver, and Burke, seeking recovery
of the funds expended by the Foundation to pay the legal fees in the state-court action.
Edward also sought the removal of the Trustees from the Board.
Hotz Weaver moved to dismiss under Federal Rule of Civil Procedure 12(b)(6),
arguing that its dismissal with prejudice in the prior action filed by Denman Kountze,
Jr., precluded Edward’s claims. In response to the motion, Edward voluntarily
dismissed Hotz Weaver. Burke also filed a Rule 12(b)(6) motion to dismiss, claiming
that the claims made against Burke are identical to those made against Hotz Weaver
and thus are precluded by the prior dismissal with prejudice. The Trustees moved
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alternatively for dismissal, abstention under the Colorado River1 abstention doctrine,
or for a stay of the proceedings pending further consideration by the state court. After
the state court reentered its order removing Edward from the Board, the Trustees filed
a supplemental motion to dismiss. In the supplemental motion, the Trustees argued
that Edward lacked standing to bring a derivative suit on behalf of the Foundation
because Edward had not been a member of the Board since September 3, 2004, when
the state court originally entered its removal order. Edward responded that because
the initial removal order was invalid, he remained a member of the Board and thus had
standing to initiate the derivative action. The Trustees replied that even if the
Nebraska Supreme Court’s reversal reinstated Edward to the Board, it did not extend
Edward’s term beyond January 2005, the natural expiration of his last term on the
Board, and therefore, Edward lacked standing in January 2007 to initiate the
derivative action. Burke also sought dismissal on this standing ground.
The district court2 granted Hotz Weaver’s motion to dismiss. The district court3
then entered an order stating that the Trustees and Burke had submitted evidence that
Edward’s term had expired in 2005 and thus Edward lacked the standing to sue on
behalf of the Foundation. The court stated that it would construe the motions to
dismiss as motions for summary judgment. The court then specified five material
facts alleged in the motions to dismiss and ordered Edward to respond to each factual
allegation as required by Local Civil Rule 56.1(b)(1) for the District of Nebraska.
1
Colorado River Water Conservation Dist. v. United States, 424 U.S. 800
(1976).
2
The Honorable Joseph F. Bataillon, Chief Judge, United States District Court
for the District of Nebraska.
3
The Honorable Laurie Smith Camp, United States District Judge for the
District of Nebraska, to whom the case was transferred following the dismissal of the
Hotz, Weaver, Flood, Breitkreutz & Grant law firm.
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The five allegations were:
1. Edward Kountze was elected to the Foundation’s Board of Trustees
in 2002.
2. Edward Kountze’s term of office was for three years.
3. Edward Kountze’s term of office expired in 2005.
4. Edward Kountze was not a member of the Foundation’s Board of
Trustees on January 8, 2007.
5. Edward Kountze is not presently a member of the Foundation’s Board
of Trustees.
(District Court Docket # 43.)
In response to the district court’s order and the motions to dismiss, Edward
cited to his complaint wherein he stated he was a trustee of the Foundation. He also
stated that he “has been a Trustee continuously since 1992.” The district court
observed that Edward had failed to “specifically address any of the facts stated in [the]
Memorandum and Order.” Therefore, the court found the specified facts had not been
controverted and thus were admitted. Accordingly, the court held that Edward was
not a member of the Board when he filed the suit and he lacked capacity to bring the
action. The district court entered summary judgment in favor of the Trustees,
dismissing the complaint with prejudice.
The Trustees and Hotz Weaver also sought sanctions against Edward and his
attorneys, contending that Hotz Weaver was named as a defendant in an attempt to
disqualify the firm from representing the Foundation and the Trustees. The court4
granted the motion for sanctions, finding that the claims asserted against Hotz Weaver
4
The Honorable F. A. Gossett, United States Magistrate Judge for the District
of Nebraska.
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were not warranted and that Edward’s “voluntary” dismissal of Hotz Weaver in light
of the motion to dismiss suggested that his actions in naming Hotz Weaver as a
defendant were improper. The court granted sanctions in the amount of $9,059,
reflecting the amount of money Hotz Weaver claims it expended in attorneys’ fees and
costs in defending this matter.
On appeal, Edward contends that material facts exist as to his capacity to bring
the derivative action and that the district court abused its discretion in imposing
sanctions. As to the capacity issue, Edward argues that his term had not expired
because no successor had been appointed to replace him. Appellees respond that this
argument was not raised before the district court, and thus may not be a basis for
reversal. In any event, Burke argues that a successor trustee was appointed and
Edward recognized such by naming as defendants “John Does 1-3.”5
Edward also challenges the imposition of sanctions, arguing that his decision
to name Hotz Weaver as a defendant in this action was appropriate and that he
voluntarily dismissed Hotz Weaver when the motion to dismiss was filed. Appellees
argue that Edward’s attorneys are the same as those who represented his father in the
prior action and were aware that Hotz Weaver had been dismissed with prejudice.
Therefore, Appellees claim that Hotz Weaver incurred unnecessary expenses in
defending this frivolous claim and the district court properly imposed sanctions
against Edward.
5
The complaint identifies the “John Doe” defendants as those who “supported
the control group [or named defendants] to get funds from the Foundation for the
personal benefit of the control group.” Compl. ¶ 3. The complaint also indicates that
the “control group of Defendants also elected and appointed at least one Doe
Defendant . . . to the remaining seat on the Board of Trustees.” Compl. ¶ 29.
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II.
A.
We review a grant of summary judgment de novo. Popp Telecom, Inc. v. Am.
Sharecom, Inc., 361 F.3d 482, 487 (8th Cir. 2004). “[W]e view the facts in the light
most favorable to the non-moving party and apply the same standard as the district
court: summary judgment is appropriate where the pleadings, discovery materials,
and any affidavits show that there is no genuine issue as to any material fact and that
the movant is entitled to judgment as a matter of law.” Hohn v. Spurgeon, 513 F.3d
827, 829 (8th Cir. 2008) (citing Fed. R. Civ. P. 56(c); Tamko Roofing Prods., Inc. v.
Smith Eng’g Co., 450 F.3d 822, 829 (8th Cir.2006)).
The district court identified five specific factual statements from the motions
to dismiss and ordered Edward to respond to those factual allegations, including that
Edward’s term had expired prior to his initiating the action. Edward’s response failed
to refute those allegations, relying instead on a statement made in his complaint and
a bare statement made in his affidavit that he remained on the Board because he was
reinstated to the Board as a result of the Nebraska Supreme Court’s decision. This
was insufficient to raise a genuine issue for trial, and the district court was justified
in holding that Edward was not a member of the Foundation’s Board when he initiated
the action. “Once [Appellees] met [their] burden of demonstrating a lack of genuine
issues of material fact, [Edward] was required to designate specific facts creating a
triable controversy.” Jaurequi v. Carter Mfg. Co., Inc., 173 F.3d 1076, 1085 (8th Cir.
1999) (quoting Barge v. Anheuser-Busch, Inc., 87 F.3d 256, 260 (8th Cir. 1996)).
Simply referencing the complaint, or alleging that a fact is otherwise, is insufficient
to show there is a genuine issue for trial. See Celotex Corp. v. Catrett, 477 U.S. 317,
324 (1986) (holding that non-movant may not resist a proper summary judgment
motion by referencing pleadings).
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Edward now claims on appeal that under Nebraska law he remained on the
Board until a replacement was named. See Neb. Rev. Stat. § 21-1972(d) (“Despite the
expiration of a director’s term, the director continues to serve until the director’s
successor is elected, designated, or appointed and qualifies, or until there is a decrease
in the number of directors.”). This issue was never raised before the district court, the
record on this claim was not developed below, and we refuse to consider it now. See
Snider v. United States, 468 F.3d 500, 512 (8th Cir. 2006) (“As a general rule, we will
not consider issues raised for the first time on appeal. We may, however, consider an
issue for the first time on appeal when the argument involves a purely legal issue in
which no additional evidence or argument would affect the outcome of the case, or
where manifest injustice might otherwise result.” (internal citation and quotations
omitted)).
Because Edward was not a member of the Foundation’s Board in January 2007
when this action was filed, he lacked the capacity under Nebraska law to bring the
action. Neb. Rev. Stat. § 21-1949(a) (“A proceeding may be brought in the right of
a domestic or foreign corporation to procure a judgment in its favor by: (i) Any
member or members having five percent or more of the voting power . . . or (ii) any
director.”); (b) (“In any such proceeding, each complainant shall be a member or
director at the time of bringing the proceeding.”).
B.
Next, we consider whether the district court abused its discretion in the
imposition of sanctions pursuant to Federal Rule of Criminal Procedure 11. See Clark
v. United Parcel Serv., Inc., 460 F.3d 1004, 1008 (8th Cir. 2006) (standard of review),
cert. denied, 127 S. Ct. 2043 (2007). On February 16, 2007, Hotz Weaver filed a
motion to dismiss with prejudice and simultaneously sent opposing counsel a
proposed Motion for Sanctions in accordance with Rule 11’s 21-day notice
requirement. Edward filed a voluntary “Notice of Dismissal” on March 1, 2007,
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stating “[t]hese Defendants are dismissed without prejudice to any of Plaintiff’s claim
[sic] against other parties who remain in the litigation.” After that notice was filed,
counsel for Hotz Weaver sent a March 7, 2007 letter to Edward’s attorney demanding
that the voluntary dismissal be with prejudice. Edward’s counsel made no response
to this letter. At the district court’s request, Edward’s counsel sent a proposed order
clarifying that the dismissal would be with prejudice, however this proposed order
was never sent to Hotz Weaver. The district court dismissed the claims against Hotz
Weaver with prejudice.
The district court determined that, because in the prior action against Hotz
Weaver brought by Denman Kountze, Jr., Hotz Weaver was dismissed with prejudice,
Edward’s naming of Hotz Weaver in the current action must have been for an
improper purpose. Fed. R. Civ. P. 11(b)(1). As a result, the district court sanctioned
Edward and his attorneys $9,059, the amount of legal fees Hotz Weaver expended in
preparing a defense.
As we have explained, “a district court abuses its discretion by refusing to
sanction a plaintiff and his counsel under Rule 11 for filing and maintaining a
frivolous lawsuit when the plaintiff seeks to relitigate claims he had been denied leave
to serve against the same defendant in an earlier lawsuit.” Prof’l Mgmt. Assoc. v.
KPMG, LLP, 345 F.3d 1030, 1033 (8th Cir. 2003). In this case, the district court held
that Edward’s claims against Hotz Weaver were virtually identical to those filed by
his father. Further, the attorneys representing Edward are the same attorneys who
represented his father, and therefore they are charged with knowledge of the fact that
the claims against Hotz Weaver were barred by the prior dismissal. See King v.
Hoover Group, Inc., 958 F.2d 219, 223 (8th Cir. 1992) (holding that the district court
erred in refusing to impose sanctions against the plaintiff and his attorney where
plaintiff’s counsel “should have realized” that the action was barred by res judicata).
Because rulings on Rule 11 motions for sanctions involve “fact-intensive, close calls,”
we defer, in this case, to the district court’s judgment and superior perspective to
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properly consider a motion for sanctions. Cooter & Gell v. Hartmax Corp., 496 U.S.
384, 404 (1990) (“Deference to the determination of courts on the front lines of
litigation will enhance [appellate] courts’ ability to control the litigants before them.
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 . . . .”).
III.
Accordingly, we affirm in all respects.
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