Richard Kelter v. Associated Financial Group, Inc.

FILED
NOT FOR PUBLICATION JUN 08 2010
MOLLY C. DWYER, CLERK
UNITED STATES COURT OF APPEALS U .S. C O U R T OF APPE ALS
FOR THE NINTH CIRCUIT
RICHARD KELTER, Individually and as No. 09-55429
Trustee of the Richard Kelter Trust Dated
June 30, 2004, D.C. No. 8:07-cv-01170-AG-RNB
Plaintiff - Appellee,
MEMORANDUM *
v.
ASSOCIATED FINANCIAL GROUP,
INC.; et al.,
Defendants - Appellants,
and
JEFFREY A. FORREST; et al.,
Defendants.
Appeal from the United States District Court
for the Central District of California
Andrew J. Guilford, District Judge, Presiding
Argued and Submitted April 8, 2010
Pasadena, California
*
This disposition is not appropriate for publication and is not precedent
except as provided by 9th Cir. R. 36-3.
Before: D.W. NELSON and REINHARDT, Circuit Judges, and WHALEY, Senior
District Judge.**
At the district court, Appellee brought several securities fraud claims against
Appellants and other defendants related to the collapse of his investments in an
equity fund named APEX Equity Options Fund, LP. Appellee alleged that
defendant Jeffrey Forrest (not party to this appeal) fraudulently misrepresented the
nature and risks of the APEX Fund, and that Appellants Associated Financial
Group, Inc. (“AFG”), Associated Securities Corp. (“ASC”) and Associated
Planners Investment Advisory, Inc. (“APIA”) (collectively, “Associated
Defendants”), were liable as Forrest’s principals. The district court granted the
Associated Defendants summary judgment on January 14, 2009. On January 28,
2009, the Associated Defendants moved for attorneys’ fees and costs under the
Private Securities and Litigation Reform Act of 1995 (“PSLRA”), 15 U.S.C. § 78u-
4(c), arguing that Appellee lacked sufficient factual and legal bases for naming the
Associated Defendants in his First Amended Complaint. (ER 248-69). The district
court found the matter appropriate for decision without oral argument and denied
the motion on February 20, 2009. (ER 007-08). The district court found that the
Associated Defendants failed to timely serve its motion for fees on Respondent
before filing and therefore failed to allow Respondent twenty-one days to withdraw
**
The Honorable Robert H. Whaley, United States District Judge for the
Eastern District of Washington, sitting by designation.
the challenged paper, as required by Fed. R. Civ. P. 11(c)(2). (ER 007). The district
court also found “no indication that [Respondent]’s actions were frivolous,
unreasonable, objectively baseless, or brought for an improper purpose.” (ER 008).
Appellants challenge both grounds on which the district court denied their
motion for fees, arguing that the district court erred in applying Rule 11's safe
harbor provision and in determining that Rule 11 sanctions were unwarranted.
Because we affirm the district court’s substantive ruling that Appellee’s actions
were not frivolous, unreasonable, objectively baseless, or brought for an improper
purpose, we decline to reach the question of whether the district court improperly
applied Rule 11's safe harbor provision.
We have jurisdiction pursuant to 28 U.S.C. § 1291. “We review a district
court’s decision to deny attorneys’ fees for an abuse of discretion. A trial court
abuses its discretion if its ruling on a fee motion is based on an inaccurate view of
the law or a clearly erroneous finding of fact.... Factual findings underlying the
district court's decision are reviewed for clear error.” Barrios v. California
Interscholastic Fed’n, 277 F.3d 1128, 1133 (9th Cir. 2002) (internal citations
omitted). Courts reviewing a motion for sanctions under Rule 11 apply a
reasonable inquiry test, which “is meant to assist courts in discovering whether an
attorney, after conducting an objectively reasonable inquiry into the facts and law,
would have found the complaint to be well-founded.” Holgate v. Baldwin, 425
F.3d 671, 677 (9th Cir. 2005). When a complaint is at issue, “‘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.’” Id. at
676 (quoting Christian v. Mattel, Inc., 286 F.3d 1118, 1127 (9th Cir. 2002)). “As
shorthand for this test, we use the word ‘frivolous’ ‘to denote a filing that is both
baseless and made without a reasonable and competent inquiry.’” Id. (quoting
Moore v. Keegan Mgmt. Co., 78 F.3d 431, 434 (9th Cir. 1996)). The
reasonableness standard governing a Rule 11 inquiry is objective. G.C. and K.B.
Investments, Inc. v. Wilson, 326 F.3d 1096, 1109 (9th Cir. 2003).
Appellants argue that Respondents’ factual and legal investigation was
deficient in numerous respects. Reviewing all of these alleged deficiencies as a
whole, we cannot say that the district court abused its discretion in finding that
“this situation is not one of the ‘rare and exceptional’ cases that warrant the
extraordinary remedy of Rule 11 sanctions.” (ER 008, quoting Operating
Engineers Pension Trust v. A-C Co., 859 F.2d 1336, 1344 (9th Cir. 1988)).
Appellants liken this case to In re Connetics, 542 F. Supp. 2d 996, 1005-06 (N.D.
Cal. 2008), where plaintiffs relied solely on an SEC complaint and press release as
the basis for their claims. We disagree. In addition to a newspaper article Appellee
discovered characterizing ASC as defendant Forrest’s principal for the sale of
APEX, Appellee’s counsel investigated their client’s files and found letterhead
suggesting an agency relationship between Forrest and both ASC and APIA.
Moreover, Appellee’s investigation turned up a corporate relationship between
both entities and AFG, but without discovery the precise nature of the relationship
was impossible to determine. Had Appellee not stipulated to dismissal of AFG and
APIA after discovery revealed no basis for their liability, an award of fees might
well have been appropriate. See, e.g., Edgerly v. City and County of San Francisco,
— F.3d —, 2010 WL 986764 at *11 (9th Cir. 2010) (affirming an award of post-
discovery fees where a plaintiff failed to dismiss a defendant after discovery
confirmed no basis for liability). However, the fact that Appellee did voluntarily
dismiss those entities supports the district court’s finding that the Second Amended
Complaint (“SAC”)’s allegations were made in good faith based on the
information available to Appellee at that time.
Also, the facts known to Appellee and pled in the SAC support a good faith
argument that ASC may have been vicariously liable for Forrest’s alleged
misrepresentations. There was no dispute that Forrest was ASC’s agent for
purposes other than selling APEX, and Forrest represented himself as an ASC
agent (through his letterhead and business cards) in his dealings with Appellee
regarding APEX. Though Appellee’s arguments did not prevail (and he failed to
raise the more meritorious argument under 15 U.S.C. 78t(a) that he now raises on
appeal), we do not find his arguments to constitute the kind of objectively baseless
claims that have previously been the subject of fee awards. See, e.g., Patton v.
County of Kings, 857 F.2d 1379, 1381-82 (9th Cir. 1988) (affirming an award of
fees where a plaintiff raised one claim that was directly contrary to established
precedent, and a second claim without citing any authority in support).
Likewise, Appellee’s argument with respect to the time-barred claims was
objectively reasonable, even if it was contrary to the cases on which the district
court relied. See Operating Engineers Pension Trust v. A-C Co., 859 F.2d 1336,
1344 (9th Cir. 1988) (“Forceful representation often requires that an attorney
attempt to read a case or an agreement in an innovative though sensible way. Our
law is constantly evolving, and effective representation sometimes compels
attorneys to take the lead in that evolution.”). Again, Appellee failed to make what
would have been his best argument (one under the “inquiry-plus-reasonable-
diligence test” recently adopted in Betz v. Trainer Wortham & Co., Inc., 519 F.3d
863, 876 (9th Cir. 2008)), but he nonetheless asserted a position that has been
accepted by the Ninth Circuit under different facts. Therefore, we conclude that
Appellee did not engage in the kind of egregious conduct that would require
reversal of the district court’s denial of fees.
AFFIRMED.