Skidmore Energy, Inc. v. KPMG , 455 F.3d 564 ( 2006 )

United States Court of Appeals
Fifth Circuit
F I L E D
REVISED JULY 27, 2006
July 7, 2006
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT Charles R. Fulbruge III
Clerk
No. 05-10819
SKIDMORE ENERGY, INC.; GEOSCIENCE INTERNATIONAL, INC.;
Plaintiffs-Appellants,
versus
KPMG, Et Al.,
Defendants
MAGHREB PETROLEUM EXPLORATION, SA; MIDEAST FUND FOR MOROCCO,
LTD.; CRAIN, CATON & JAMES, PC; REUVEN M. BISK; SALEH ABDELLAH
KAMEL; ABDELLAH KAMEL; SAMAHA TRADING UK; MOHAMMED BENSLIMANE;
MOULAY ABDELLAH ALAOUI; SHEZI NACKVI; RICHARD MENKIN;
MEDIHOLDING, SA;
Defendants-Appellees.
--------------------
Appeal from the United States District Court
for the Northern District of Texas
--------------------
Before SMITH, WIENER and STEWART, Circuit Judges.
WIENER, Circuit Judge:
Plaintiffs-Appellants Skidmore Energy, Inc. and Geoscience
International, Inc. (collectively, “Appellants”) appeal the
district court’s award of sanctions totaling $530,667.32 against
them and their trial counsel, Gary Sullivan, under Federal Rule of
Civil Procedure 11. The district court apportioned the sanctions
three-fourths to Sullivan and one-fourth jointly to Appellants.
The subject of this appeal is solely the one-fourth apportioned to
Appellants; Sullivan is not an appellant herein. We conclude that
the district court did not abuse its discretion in awarding
sanctions or in assessing one-fourth of the award jointly against
Appellants; neither do we perceive clear error in the court’s
determination of Defendants-Appellees’ reasonable litigation
expenses and attorneys’ fees or in using that as the appropriate
measure of sanctions. Accordingly, we affirm.
I. FACTS AND PROCEEDINGS
This lawsuit addresses an ongoing dispute that arose from oil
and gas exploration activities in Morocco. One year after they
were sued in Morocco for their alleged breach of contract, fraud,
and mismanagement of the venture in which they were involved,
Appellants filed the instant lawsuit in the Northern District of
Texas addressing the same matters already being litigated against
Appellants in Morocco. In their Complaint, which named 21 mostly
foreign defendants, Appellants claimed damages of $3 billion based
on Sherman Act and RICO violations, as well as breach of fiduciary
duty, aiding and abetting breach of fiduciary duty, libel, civil
conspiracy to suppress oil reserves, and fraud. They alleged inter
alia that Defendants were involved in financing terrorist
organizations, money laundering, and organized crime. The
Complaint was ultimately dismissed in April 2005.
Defendants-Appellees (11 of the 21 defendants) filed a motion
in the district court for Rule 11 sanctions in August 2004,
asserting that the suit lacked both legal and factual evidentiary
2
support. Two hearings on the motion were conducted in February
2005. The district court heard the testimony of several witnesses,
including corporate representatives of both Appellants, and the
court itself questioned their counsel, Gary Sullivan. At the
conclusion of the hearings, the district court found that Rule 11
violations had indeed been committed and that Defendants-Appellees’
reasonable litigation expenses and attorneys’ fees were an
appropriate sanction. After reviewing detailed submissions from
Defendants-Appellees concerning their fees and expenses, the
district court entered an Order awarding sanctions totaling
$530,667.32. Appellants were jointly assessed one-fourth of this
amount; Sullivan was assessed three-fourths. This appeal followed.
II. STANDARD OF REVIEW
“We review all aspects of the district court’s decision to
invoke Rule 11 and accompanying sanctions under the abuse of
discretion standard.”1 Appellate review is deferential because
the imposition or denial of sanctions of necessity
involves a fact-intensive inquiry into the circumstances
surrounding the activity alleged to be a violation of
Rule 11. The perspective of a district court is
singular. The trial judge is in the best position to
review the factual circumstances and render an informed
judgment as he is intimately involved with the case, the
litigants, and the attorneys on a daily basis.2
1
Am. Airlines, Inc. v. Allied Pilots Ass’n, 968 F.2d 523,
529 (5th Cir. 1992).
2
Thomas v. Capital Sec. Servs., Inc., 836 F.2d 866, 873
(5th Cir. 1988) (en banc).
3
A district court abuses its discretion if it imposes sanctions
based on (1) an erroneous view of the law or (2) a clearly
erroneous assessment of the evidence.3
“Determinations of hours and rates [for calculating reasonable
litigation expenses and attorneys’ fees] are questions of fact. ...
Accordingly, we review the district court’s determination of
reasonable hours and reasonable rates for clear error.”4
III. ANALYSIS
A. Propriety of Sanctions Against Appellants
The district court did not abuse its discretion in awarding
sanctions against Appellants. Rule 11 provides for sanctions
against “the attorneys, law firms, or parties that have violated
[the Rule] or are responsible for the violation.”5 The Advisory
Committee notes regarding the 1983 Amendment further make clear
that
If the duty imposed by the rule is violated, the court should
have the discretion to impose sanctions on either the
attorney, the party the signing attorney represents, or both,
... and the new rule so provides. ... Even though it is the
attorney whose signature violates the rule, it may be
appropriate under the circumstances of the case to impose a
sanction on the client.6
3
Smith v. Our Lady of the Lake Hosp., Inc., 960 F.2d 439,
444 (5th Cir. 1992).
4
Louisiana Power & Light Co. v. Kellstrom, 50 F.3d 319, 324
(5th Cir. 1995) (citation omitted).
5
FED. R. CIV. P. 11(c) (emphasis added).
6
FED. R. CIV. P. 11 Advisory Committee Notes (emphasis
added).
4
We have previously approved sanctions against a client as well as
his attorney, because both have a duty “to conduct a reasonable
inquiry into the facts or law before filing the lawsuit.”7
1. No Sanctioning of Clients for Legally Frivolous Pleading
Although a represented party may be held responsible for a
pleading that violates Rule 11, the 1993 Amendment to the Rule
specifically provides that “[m]onetary sanctions may not be awarded
against a represented party for a violation of subdivision (b)(2)”
concerning legally frivolous pleadings, which are peculiarly within
the province of lawyers.8 Appellants thus argue that the district
court abused its discretion in sanctioning them for filing a
legally frivolous pleading, for which only their lawyer could
properly be sanctioned. They further assert that the district
court made no specific findings that they had knowingly
participated in sanctionable conduct.9 Although this last point is
7
Jennings v. Joshua Indep. Sch. Dist., 948 F.2d 194, 197
(5th Cir. 1991).
8
FED. R. CIV. P. 11(c)(2)(A); Bynum v. Am. Airlines, No. 04-
20921 (5th Cir. Feb. 6, 2006) (unpublished) (“monetary sanctions
can be imposed against the attorney but not the client for
violations of Rule 11(b)(2)”). Under subdivision (b)(2) the
person presenting the pleading certifies that “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.” FED. R. CIV. P. 11(b)(2).
9
See Byrne v. Nezhat, 261 F.3d 1075, 1117-18 (11th Cir.
2001) (discussing liability of client for “knowing participation”
in sanctionable conduct, misrepresenting facts, or for being the
“mastermind” behind a frivolous case).
5
perhaps debatable,10 the district court would have abused its
discretion if it had sanctioned Appellants for violating Rule
11(b)(2) by filing a legally frivolous pleading.
2. Sanctions for Factually Frivolous Pleading
The district court did not, however, sanction Appellants for
the legally frivolous nature of their pleading: It sanctioned them
for the numerous factually groundless allegations in their
Complaint, for which clients may properly be sanctioned.11 The
district court observed the “common thread weaving its way through
this case ... is the puzzling lack of legal or factual support
articulated for the pleadings,” and repeatedly noted “Plaintiffs’
failure to articulate any evidentiary support for their claims.”
The court discussed in detail the testimony of Michael Gustin,
10
In its Orders of March 17 and May 18, 2005, the district
court agreed with Defendants-Appellees that Appellants had “taken
a commercial legal dispute in Morocco between well-defined
parties and used it as a vehicle to harass and embarrass them by
suing numerous individuals with little or no connection to the
dispute and publicly accusing them in the suit of unfounded
sensational wrongdoing,” and that they exhibited a “reckless
willingness to impose the burden of unwarranted litigation upon
others,” thereby knowingly participating in conduct violative of
Rule 11(b)(1) (improper purpose). The court described Appellants
as “active participants.” Also, the record contains a March 2004
letter from Sullivan to Michael Gustin, Skidmore’s owner,
acknowledging the aggressive legal positions they were advancing,
the possibility of sanctions, and stating that “part of this
reason for our lawsuit was to act as a counteroffensive to the
lawsuit ... in Morocco.”
11
See FED. R. CIV. P. 11(b)(3) (factual evidentiary support);
see also Byrne, 261 F.3d at 1118.
6
Skidmore’s owner,12 who assured the court that he had reviewed the
pleadings before they were filed. Nevertheless, the district court
found, he was “entirely unable to articulate a factual nexus
between any of the Defendants and verifiable money laundering
activity,” organized crime, terrorism financing, or any of the
other “sensational allegations peppered throughout the complaint
and RCS.” The court found “[t]he bulk of Plaintiff[s’] causes of
action ... are without evidentiary support and thus appear to have
been instigated as a gamble that something might come of it rather
than on the basis of the facts at hand.” The court awarded
sanctions because it found “that reasonable factual and legal
inquiries would have prevented this suit from being filed.”
Moreover, adhering to the distinction between factual and
legal grounds for sanctions, the district court “fully considered
Sullivan’s missteps when apportioning [the] fee award such that
Plaintiffs bear responsibility for twenty-five percent of the award
and Sullivan seventy-five percent.” The district court did not
abuse its discretion in awarding sanctions against Appellants based
12
We acknowledge the argument of Appellants’ counsel that
only Skidmore’s — and not Geoscience’s — involvement in
sanctionable conduct is reflected in the Record. We also
observe, however, that these two entities were represented by
common counsel in the district court, as they are on appeal, and
that in all of their filings no distinction is made between them.
We cannot say, particularly in light of the district court’s
inherently superior vantage point, that the court erred in
sanctioning Appellants jointly.
7
on the lack of support for the factual allegations in their
pleading.
B. Quantum of Sanctions Award
Rule 11 expressly provides that when there is a violation of
the Rule, an appropriate sanction is “an order directing payment to
the movant of some or all of the reasonable attorneys’ fees and
other expenses incurred as a direct result of the violation.”13 The
district court entered its Sanctions Order following two hearings
in which it heard the testimony of several witnesses and questioned
Appellants’ trial counsel extensively, and following a review of
documentation supporting Defendants-Appellees’ claims for fees and
expenses.
1. Calculation of Reasonable Litigation Expenses and Attorneys’
Fees
The district court’s calculation of reasonable fees and
expenses was not clearly erroneous. The court conducted the
lodestar analysis by multiplying the reasonable number of hours
expended in defending the suit by the reasonable hourly rates for
the participating lawyers.14 As the hourly rates submitted by the
defense were not disputed,15 the sole factor for the court’s
determination was the reasonable number of hours expended. Relying
13
FED. R. CIV. P. 11(c)(2).
14
See Kellstrom, 50 F.3d at 324.
15
The district court also determined that “[t]he
Defendants’ attorneys’ hourly fees ... appear to be comparable
fees for representation of similar quality in this area.”
8
on defense counsel’s documentation, which “clearly indicate[d] the
nature and type of work performed or [sic] and detail[ed] how the
hours were spent on particular aspects of the case,” the court
concluded that the number of hours claimed by the defense was
reasonable. Among the court’s considerations were the complexity
of the litigation, the number of individual and mostly foreign
defendants, and the “vast array of claims asserted.” Given the
district court’s “intimate[] involve[ment] with the case, the
litigants, and the attorneys,”16 as well as its thorough discussion
in its Order granting the sanctions, its factual determination of
the reasonable number of hours expended was not clearly erroneous.17
2. Fees Unrelated to Sanctionable Conduct
Appellants complain, vaguely and conclusionally, that a
“significant portion” of the defense costs awarded were unrelated
to the sanctionable conduct or were incurred in representing
defendants other than the 11 that moved for sanctions. Beyond
these bare assertions, however, Appellants failed adequately to
brief the issue or to call our attention to anything in the record
that might support this contention. There is no readily apparent
indication that the district court’s assessment of the evidence
concerning fees and expenses was clearly erroneous. In fact, the
16
Thomas, 836 F.2d at 873.
17
In assessing the overall reasonableness of the defense
costs, we note, as the district court observed, that the
plaintiffs’ own costs were nearly $100,000 greater.
9
district court concluded that all of the defense costs arose from
the sanctionable conduct because otherwise the lawsuit would never
have been filed at all.18
3. “Snapshot” Test
Appellants argue that the district court impermissibly awarded
sanctions based on conduct after the sanctionable pleading was
signed, thereby imposing a continuing obligation on their trial
counsel to reevaluate the merits of the case as it developed. They
cite our en banc decision in Thomas v. Capital Security Services,
Inc. for its “snapshot” test: “Like a snapshot, Rule 11 review
focuses upon the instant when the picture is taken — when the
signature is placed on the document.”19 Therefore, “in considering
the nature and severity of the sanction to be imposed under Rule
11, the court should consider the state of mind of the attorney
when the pleading or other paper was signed.”20
Appellants’ contention is meritless, as the district court’s
Order of March 17, 2005, which the Appellants themselves quote at
length in their brief, makes clear:
18
In its Order of March 17, 2005, the court stated that
“because the Court further finds that reasonable factual and
legal inquiries would have prevented this suit from being filed
against these eleven defendants, the Defendants are awarded all
of their reasonable attorneys’ fees they expended in defending
this suit.”
19
836 F.2d at 874.
20
Id. at 875 (quotation omitted).
10
After reading all of his filings and exhibits, hearing
from his witnesses, and vigorously questioning him at
both hearings, it appears that, at the time Sullivan
filed his complaint and RCS and continuing through the
February 28, 2005 evidentiary hearing, he had no
evidentiary support for the factual allegations
underlying his causes of action and no “good reason to
believe” that the facts he alleged were likely to have
evidentiary support.
Appellants, in their quotation of the same passage, place emphasis
on the phrase, “and continuing through the February 28, 2005
evidentiary hearing,” as evidence that the district court did not
focus solely on the instant the Complaint was signed.
This argument misses the point of the Thomas “snapshot” test.
Prior to that decision, attorneys in this Circuit had a continuing
obligation to review and reevaluate their positions as the
litigation developed; a document that initially satisfied Rule 11
might later become the basis for sanctions if new facts were
discovered or circumstances changed such that there was no longer
a good faith basis for the earlier filing.21 Thomas’s “snapshot”
rule ensures that Rule 11 liability is assessed only for a
violation existing at the moment of filing. Although the district
court’s Order mentions the time between the filing of the complaint
and the evidentiary hearing, the court clearly concluded that
Sullivan’s filing never satisfied Rule 11 to begin with — that is,
at the time of filing — and the fact that he still had no
21
See Childs v. State Farm Mut. Auto. Ins. Co., 29 F.3d
1018, 1024 n.18 (5th Cir. 1994) (discussing Thomas).
11
evidentiary support by the time of the hearing only underscores the
violation.
4. Advance Warning for “Obviously Defective” Pleading
The en banc court in Thomas instructed that “where a complaint
or other paper is obviously defective within the context of Rule
11, ... a court should at minimum notify the individual certifying
the document that Rule 11 sanctions will be assessed at the end of
trial if appropriate.”22 Appellants seize on this language to
insist that the district court’s failure to warn their trial
counsel was an abuse of discretion.23 We have previously rejected
this contention, stating flatly that “Thomas did not establish a
rule that district courts, in all instances, must give the
offending party notice of a Rule 11 violation before applying
sanctions.”24 The district court was thus not required to save
Appellants from themselves or their attorney.
IV. CONCLUSION
The district court did not abuse its discretion in awarding
Defendants-Appellees their reasonable attorneys’ fees and expenses
as Rule 11 sanctions for the filing of this wholly frivolous
lawsuit. This sanction was imposed for both the legally frivolous
22
836 F.2d at 881.
23
Appellants’ own characterization of their Complaint as
“obviously defective” necessarily precludes any argument on
appeal that their filing was not sanctionable.
24
Harmony Drilling Co. v. Kreutter, 846 F.2d 17, 19 (5th
Cir. 1988).
12
nature of the suit and the obvious lack of evidentiary support for
the sensational allegations in the Complaint; and liability for the
sanctions award was appropriately apportioned between Appellants
and their trial counsel. Thus, the district court did not abuse
its discretion in awarding or apportioning sanctions and did not
commit clear error in its determination of the reasonable
litigation expenses and attorneys’ fees occasioned by the frivolous
filing. The district court’s Order is, in all respects,
AFFIRMED.
13