IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

No. 99-20787

MERCURY AIR GROUP, INC.,

Plaintiff-Appellant,

BRIAN HOGAN; MCBREEN, MCBREEN & KOPKO,

Appellants,

versus

JOHN M. MANSOUR; Et Al,

Defendants,

JOHN M. MANSOUR, DAVID A. BANMILLER, HOWARD M. BABCOCK,

Defendants-Appellees.

Appeal from the United States District Court

for the Southern District of Texas

January 11, 2001

Before GARWOOD, HIGGINBOTHAM, and STEWART, Circuit Judges.

CARL E. STEWART, Circuit Judge:

Mercury Air Group, Inc. (“ Mercury”) appeals from a grant of summary judgment by the1 Mansour also includes David A. Banmiller and Howard M. Babcock.

2 district court in favor of John M. Mansour 1 (“Mansour”) because it determined that there was an

absence of evidence to support Mercury’s misrepresentation-based 10(b)(5) claims. Mercury also

appeals the district court’s decision to award FED

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. 11 ( “Rule 11") and 28 U.S.C. § 1927 (“§

1927" or “Section 1927") sanctions to Mansour because it found that Mercury sued with bad faith

and with an improper purpose. Because we find that the district court did not err in granting the

motion for summary judgment and t hat it did not abuse its discretion in awarding sanctions to

Mansour, we affirm the ruling.

FACTUAL & PROCEDURAL HISTORY

Mercury, a 40-year-old company with annual revenues of $250 millio n, provides fuel to small

commercial and commuter airlines. Eighty percent of its revenues are generated by the sale of fuel.

Its usual business practice is to invest in and to extend credit to start-up airlines in order to obtain fuel

agreements with them.

Mansour is Chairman and largest shareholder of Sun Jet Holdings Corp. Sun Jet Holdings

Corp. operated Sun Jet International (“Sun Jet”), a start-up niche airline which provided flights with

limited frequencies to cost-conscious travelers.

In late May or early June 1996, Mercury contacted Banmiller, CEO of Sun Jet, about entering

into a fuel agreement and the possibility of investing in Sun Jet. Mercury also received a copy of Sun

Jet’s Private Placement Memorandum (“PPM”) and an Addendum to the PPM dated May 30, 1996,

which lowered Sun Jet’s income projections. The PPM stated that Sun Jet did not intend to update

or to revise the projections.

On July 16, 1996, Mercury’s Board of Directors decided to invest $500,000 in Sun Jet

,3

conditioned on the execution of a fuel agreement. On August 14, 1996, Sun Jet transmit ted its

second quarter financial statements to its shareholders, which it did not provi de to Mercury . The

statements indicat ed, as of June 30, 1996, that Sun Jet had fallen significantly below the income

projections detailed in the PPM and Addendum. On August 15, 1996, the parti es entered i nto an

irrevocable stock subscription agreement, and on August 21, 1996, Mercury invested $500,000 in

Sun Jet. On September 17, 1996, Mercury received the second quarter financial statements.

Thereafter, it extended $1 millio n in unsecured fuel credit to Sun Jet on October 1, 1996. Sun Jet

later filed for bankruptcy in June 1997. Mercury lost its investment and filed suit against Mansour.

Seymour Khan (“Khan”), Mercury’s Chairman and CEO, testified in a deposition that he was

the only person at Mercury who spoke with Mansour and Banmiller regarding the information upon

which its Board of Directors decided to invest in Sun Jet. Khan also testified that had he received

the second quarter financial statements as of July 16, 1996, he still would have invested in Sun Jet.

Khan also admitted that although Mansour and Banmiller made no false statements to him before July

16, 1996, and that t he fact s upo n which Sun Jet based its May 30th projections in the Addendum

were not false, he hoped to discover information which would provide Mercury a basis for pursuing

the lawsuit against Mansour. Khan further stated that although he had no contact with Babcock, a

director of Sun Jet, Mercury included him as a party because his name appeared on the PPM. Khan

also admitted that he had made no independent investigation of Sun Jet.

Mercury filed suit against Mansour in Texas state court alleging violat i ons of 17 C.F.R. §

240.10b-5 (“Rule 10b-5"), California state security laws, common law misrepresentation, negligence,

conspiracy to commit securities fraud and misrepresentation, and breach of fiduciary duty. Mansour

removed the case to federal court and moved for summary judgment and sanctions under Rule 11 and2 An ancillary issue is whether Mercury pleaded that Mansour had a duty to update the

second quarter financial statements. Having reviewed the pleadings, we are satisfied that the duty

to update was pled. It is, however, less clear that this argument was presented as a major

argument to the district court with explication.

4 § 1927. The district court granted both motions and awarded Mansour $203,641 in sanctions for its

reasonable attorneys’ fees and expenses. Subsequently, Mercury filed a motion for reconsideration

and a first supplemental motion for reconsideration. Mercury also sought leave to file a reply brief

in support of its supplemental motion, but the district court refused to grant leave. The district court

later denied Mercury’s motion for reconsideration and entered final judgment. Mercury now appeals

the summary judgment and the sanctions.

DISCUSSION

This Court reviews summary judgments de novo. K rim v. BancTexas Group, Inc., et al.

, 989

F.2d 1435, 1444 (5 th Cir. 1993). The moving party for summary judgment must show that “there

is no genuine issue of material fact and that the moving party is entitled to judgment as a matter of

law.” FED

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. 56(c)

. In response, the non-movant must “go beyond the pleadings and her own

affidavits, or by the depositions, answers to interrogatories, and admissions on file, designate ‘specific

facts’ showing that there is a genuine issue for trial.” C elotex Corp. v. Catrett , 477 U.S. 317, 324,

106 S. Ct. 2548, 2554, 91 L. Ed. 2d 265 (1986). Lastly, this Court should regard the evidence in the

light most favorable to the nonmovant. M atsushita Electric Industrial Co. v. Zenith Radio Corp.

, 475

U.S. 574, 587-88, 106 S. Ct. 1348, 1356, 89 L. Ed. 2d 538 (1986).

I. Rule 10b-5 claims

Mercury argues that Mansour violated Rule 10b-5 when it failed to disclose the updated 23 Scienter is the intent to deceive, manipulate, or defraud. Rubinstein v. Collins

, 20 F.3d

160, 169 (5 th Cir. 1994). It also encompasses reckless indifference such that the omission or

misrepresentation was “so obvious that the defendant must have been aware of it.” Id.

5 projections based on the second quarter statements. In order to demonstrate a violation of Rule 10b5, the plaintiff must show: 1) a material misstatement or omission 2) which occurred in connection

w it h the purchase or sale of securities 3) that was made with scienter 3 4) harm, and 5) causation.

Krim

, 989 F.2d at 1446 n. 10; Rubinstein

, 20 F.3d at 166

. In addition, the Fifth Circuit requires that

the plaint iff perform due dili gence i n order to protect her i nterests. K rim

, 989 F.2d at 1446 n.10

(citing Stephenson v. Paine Webber Jackson & Curtis, Inc.

, 839 F.2d 1095 (5 th Cir. 1988)).

Mercury first alleged in its complaint that Mansour violated Rule 10b-5 by materially

misrepresenting Sun Jet’s financial condition. It conceded, however, that there was no evidence of

a material misrepresentation made to it by Mansour. Kahn t estified, for example, that there was

“nothing to his knowledge” that was available as of July 16, 1996, the date Mercury decided to invest

in Sun Jet, that presented a different financ ial position for the company than was described in the

PPM and the Addendum. Moreover, Kahn admitted that not only had Mansour not made any false

statements regarding Sun Jet, but also that many of the risk factors, as outlined i n the cauti onary

language of the investment materials, were unpredictable. Thus, the district court granted Mansour’s

motion for summary judgment because there was no evidence which raised a genuine issue of material

fact with respect to Mercury’s misrepresentation-based claims.

Mercury also alleged common law negligence in its complaint, which the district court

construed as negligent misrepresentation. The court found that Mercury failed to explain the basis

for this claim because Mercury was unable to identify the duty owed by Man sour to it whi ch i t

believed Mansour breached.4 The PPM warned, for instance, that the projections regarding Sun Jet’s “future

performance are necessarily subject to a high degree of uncertainty” and that the company did not

“intend to update or otherwise revise the projections to reflect circumstances existing after the

date hereof or to reflect the occurrence of future events.”

6 On appeal, Mercury argues that Mansour vio lat ed Rule 10b-5 when it failed to update the

projections in the investment materials based on the second quarter statements. It is, however,

unclear on what basis Mercury makes this argument. It appears that Mercury is alleging that

Mansour negligently misrepresented Sun Jet’s financial condition, since the company ’s actual financial

health differed markedly from that predicted by the projections. This argument is meritless, given

the concessions Mercury made in the distr ict co urt , the warnings contained in the investment

materials, 4 and the lack of precedent to support Mercury’s position.

Mercury nonetheless contends that the reasonable investor would find the updated income

projections material to its investment decision. The relevant inquiry for analyzing the materiality of

such predictions is whether a reasonable investor would have considered the i nformation m ateri al

according to the “total mix of information.” K rim, 989 F.2d at 1445; see also Isquith v. Middle South

Utilities, Inc., et al.

, 847 F.2d 186, 207 (5 th Cir. 1988) (stating that the correct standard is “whether

the information disclosed would have been misleading

. . . to a reasonable potential investor who read

the information as a whole”). In addition, the materiality of predictions is analyzed on a case-by-case

basis. Isquith , 847 F.2d at 206.

Mercury correctly notes that ordinarily a reasonable investor may deem a significant decrease

in projected income material to its decision to invest in an entity. In the instant case, however, this

determination of materiality to a reasonable investor is overshadowed by Kahn’s admission that

despite the disappointing results from the second quarter financial statements, Mercury still would5 The district court also cited the “bespeaks caution” doctrine as a basis for granting

Mansour’s motion for summary judgment. In addition, Mansour argues that Mercury’s lack of

due diligence is an alternative basis for affirming summary judgment. Because we find that the

dispositive issue is whether Mansour had a duty to update the projections, we decline to address

these issues.

7 have invested in Sun Jet. Additionally, even after it had received the statements, Mercury extended

$1 million in unsecured credit, an amount that was at least twice its init ial investment. Therefore,

based on the facts and circumst ances of this case, we conclude that Mercury did not consider the

updated projections controlling of its investment decision, and the trial court did not err in granting

summary judgment in favor of Mansour. 5

Although we agree with Mansour that the updated projections were not controlling, our

inquiry, however, is not ended because Mercury further argues that the district court relied on the

incorrect date for purposes of assessing whether Mansour made a material misrepresentation by not

informing Mercury of the updated second quarter projections. The district court relied on July 16,

1996, the date on which Mercury’s Board of Directors voted to invest in Sun Jet. In particular, the

court relied on Kahn’s testimony that, as of July 16 th

, there was “nothing to his knowledge” that

presented a different financial position for Sun Jet than was described in the PPM and the Addendum.

In contrast, Mercury contends that August 15, 1996, the date on which it signed the irrevocable stock

subscription agreement, is the crucial date for determining whether there was a material

misrepresentation. We hold that July 16 t h is the relevant date because regardless of when Mercury

actually invested in Sun Jet, the key decision to invest in the airline was made on July 16 t h by

Mercury’s Board of Directors. Thus, the district court did not err.

II. Rule 11 and Section 1927 sanctions6 Other reasons that the district court gave were Mercury’s suing for breach of fiduciary

duty when there was no fiduciary duty and including Babcock as a party to the suit when he had

no contact with Mercury. The district court also noted that Mercury, while represented by the

same counsel as in the instant case, filed similar lawsuits in federal district courts in California and

New York against Jet USA Airlines, a small, start-up airline. The courts, however, dismissed the

cases. In addition, the trial court noted that Mercury had ample time to discover extrinsic

evidence, and it did not request an extension of time for discovery in its response to the motion

for summary judgment.

8 This Court reviews Rule 11 sanctions for abuse of discretion. M atta v. May

, 118 F.3d 410,

413 (5 th Cir. 1997). A court abuses its discretion regarding sanctions when its “ruling is based on an

erroneous view of the law or on a clearly erroneous assessment of the evidence.” Id. Moreover, the

imposition of sanctio ns is o ft en a fact-intensive inquiry, for which the trial court is given wide

discretion. T homas v. Capital Security Services, Inc. , 836 F.2d 866, 873 (5 th Cir. 1988) (en banc).

The district court granted Mansour’s motion for Rule 11 and § 1927 sanctions because Kahn candidly

testified that he hoped t o disco ver information that would reveal a basis for a lawsuit against

Mansour. The court also cited Mercury’s inability to provide extrinsic evidence to rebut Mansour’s

motion for summary judgment. 6 Rule 11 states that atto rneys must not file suit for any improper

purpose or without evidentiary support for the allegations contained in the complaint. F ED

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. 11(a)(1), 11(a)(3)

. M oreover, an attorney must have made a reasonable inquiry into the facts and

law of a case at the time which she affixes her signature on any papers to the court. T homas

, 836

F.2d 884. In addition, court s must impose the least severe sanction on attorneys and parties who

violate Rule 11. M erriman v. Security Insurance Co. of Hartford

, 100 F.3d 1187, 1194 (5 th Cir.

1996). This Court, however, has affirmed a district court’s determination that the least severe

sanction for a lawsuit that is wholly fri vo lo us is the imposition of reasonable attorneys’ fees and

expenses. Granader v. McBee , 23 F.3d 120, 124 (5 th Cir. 1994).9

Mercury contends that the allegations asserted in the pleadings are admissions by Mansour

and could have been used to respond to the summary judgment motion. However, the law is clear

that more than mere allegations must be used by a non-movant to respond to such a motion. C elotex

,

477 U.S. at 324. In addition, counsel for Mercury asserts that it should not be held liable under Rule

11 because it c o nducted a more than reasonable inquiry into the law and facts of the suit by

undergoing more than 150 hours of investigation approximately six months before it filed the suit.

It also contends that it should not be held responsible for Kahn’s admission that he hoped to discover

a basis for pursuing the lawsuit against Mansour.

These arguments, however, do not belie the f act t hat despite its investigation, had counsel

paid sufficient attenti on to Kahn’s statements in the deposition, it would have determined that there

is no basis for this suit. Kahn occupies the highest position in Mercury, and his statements under oath

regarding the merits of the suit c anno t be ignored. Mercury nonetheless argues that Kahn’s

st at ements should not be used against him, as Kahn is simply a combative non-lawyer who is

unfamiliar with discovery. Although Kahn is not an attorney and is likely unknowledgeable about

discovery and the legal process, he is the CEO and Chairman of Mercury, a longtime veteran of the

airline business, and the o nly person at Mercury with whom Mansour had contact regarding the

decision to invest in the airline.

More importantly, Kahn and Mercury were represented by counsel who, by all accounts, had

previously initiated similar frivolous lawsuits in other jurisdictions. It seems inescapable that counsel

for Mercury were aware of the portent of Kahn’s statements. Therefore, counsel’s decision to pursue

the lawsuit, despite Kahn’s testimony that it was inherently baseless, indicates that the trial court did

not abuse its discretion when it awarded Mansour its reasonable attorneys’ fees and expenses under10

Rule 11 because of an improper purpose. S ee, e.g., Topalian v. Ehrman , 3 F.3d 931, 935 (5 th Cir.

1993) (citing from the Advisory Committee Note to Rule 11 that “[i]f the duty imposed by the rule

is violated

. . . it may be appropriate under the circumstances of the case to impose a sanction on the

client”); Devine v. Wal-Mart Stores, Inc. , 52 F.Supp. 2d 741 (S.D. Miss. 1999) (imposing Rule 11

sanctions on a client who brought a lawsuit in bad faith).

This Court also reviews § 1927 sanctions for abuse of discretion. F ederal Deposit Insurance

Corp. v. Calhoun

, 34 F.3d 1291 (5 th Cir. 1994). The statute states that an attorney who

“unreasonably” and “vexatiously” mult iplies a case’s proceedings may be required to absorb the costs

and attorneys’ fees of her actions. 28 U.S.C. § 1927 (2000). Thi s Court has determi ned that a

finding of “unreasonable” and “vexatious” multiplicative proceedings necessitates “evidence of bad

faith, improper motive, or reckless disregard of the duty owed to the court.” E d wards v. General

Motors Corp.

, 153 F.3d 242, 246 (5 th Cir. 1998). The statute, however, does not apply when an

attorney has represented her client “with vigor.” Smith , 960 F.2d at 448.

Mercury argues that counsel did not unreasonably and vex at iously multiply this suit’s

proceedings and that it brought the case with legitimate zeal. Given Kahn’s testimony regarding the

purpose of this suit, as well as the lack of extrinsic evidence to support the response to the summary

judgment motion, it is undeniable that counsel for Mercury unreasonably and vexatiously mult iplied

this suit’s proceedings by choosing to pursue this lawsuit in the face of such bald evidence that there

was no suit to pursue. Thus, we find that the district court did not abuse its discretion when it

awarded sanctions under § 1927.

CONCLUSION11

Because we find that Mansour had no duty to update the investment materials, the suit was

brought for an improper purpose, and counsel for Mercury unreasonably and vexatiously mult iplied

the proceedings of this suit, we AFFI RM t he district court’s grant of summary judgment and its

award of Rule 11 and § 1927 sanctions to Mansour.

AFFIRMED.