United States Court of Appeals

FOR THE EIGHTH CIRCUIT

___________

No. 02-3162

___________

MHC Investment Co., *

*

Plaintiff, *

* Appeal from the United States

v. * District Court for the Southern

* District of Iowa.

Racom Corporation, *

*

Defendant, *

*

Shuttleworth & Ingersoll, *

*

Appellant. *

*

___________________ *

*

Racom Corporation, *

*

Third Party Plaintiff, *

*

v. *

*

Ronald W. Stepien, Dennis H. Melstad, *

David Sokol, *

*

Third Party Defendants. *

___________

Submitted: January 17, 2003

Filed: March 17, 2003

___________
1

The Honorable Robert W. Pratt, United States District Judge for the Southern

District of Iowa. 

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Before MORRIS SHEPPARD ARNOLD, BRIGHT, and SMITH, Circuit Judges.

___________

BRIGHT, Circuit Judge.

MHC Investment Company (MHC), a subsidiary of MidAmerican Energy,

invested $10 million in Racom Corporation (Racom), a seller and servicer of two-way

radio equipment and systems. MHC filed suit against Racom alleging breach of

contract. Racom hired the law firm of Shuttleworth & Ingersoll (Shuttleworth).

Racom responded by pleading affirmative defenses of fraudulent inducement, lack

of authority on the part of Racom's Board of Directors (Board) to enter the agreement,

and lack of consideration. Racom also filed counterclaims against MHC for fraud,

slander per se, breach of fiduciary duty, and civil Racketeer Influenced and Corrupt

Organization Act (RICO) 18 U.S.C. §§ 1961-1968. MHC moved for summary

judgment on Racom's counterclaims. Racom moved to extend summary judgment

proceedings pursuant to Federal Rule of Civil Procedure 56(f), so that it could

conduct further discovery. The district court1

 denied Racom's motion and its motion

to reconsider. Then, the district court granted MHC's motions for summary judgment.

The district court asked Shuttleworth to explain why the district court should

not sua sponte impose sanctions against Shuttleworth for pursuing frivolous defenses

and claims and attempting to delay payment of more than $10 million that Racom

owes MHC. After a show cause hearing, the court, in a written opinion, determined

that Shuttleworth violated Federal Rule of Civil Procedure 11. The court ordered

sanctions to be paid to the court in the amount of $25,000. Shuttleworth appeals,

arguing that the district court erred in imposing sanctions. We affirm.
2

The Series A Preferred Stock had a cumulative dividend rate of eight percent

per annum with dividends payable semi-annually. Dividends were deferred for the

first two years. 

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I. BACKGROUND

On July 16, 1996, MHC (through its predecessor-in-interest MidAmerican

Capital Company) invested $10 million in Racom by purchasing preferred stock in

Racom.2

 As part of the stock purchase agreement, MHC gained two of seven seats

on Racom's Board. Eventually, Dennis Melstad, MHC's president, and Ronald

Stepien held MHC's two seats on the Board. Stepien served as the vice president, and

later president, of MidAmerican Energy. 

The stock purchase agreement also gave MHC a "put" on its preferred share,

by which MHC could tender the preferred share back to Racom for its original price,

in addition to any accrued or unpaid dividends, in the event that Racom did not meet

certain specified financial conditions by July 16, 2001. Under this provision, MHC

would have until September 16, 2001, to tender the put and then Racom was required

to meet the obligation with cash within ninety days of receiving MHC's notice of

exercising its right.

On June 29, 1998, MHC loaned Racom $9.75 million for one year to resolve

a dispute with another shareholder. After one year, MHC extended the loan at a

higher interest rate. 

In January 1999, MHC accepted forty-five shares of Racom's common stock

in exchange for its forbearance of certain rights relating to payment of dividends due

but not paid. In addition, the common stock agreement also stated that Racom would

issue an additional 280 shares of common stock should MHC exercise its put right.
3

Around this time, Racom hired Shuttleworth to represent its interests. Racom

had other long time counsel. However, that counsel had a conflict of interest and

contacted Shuttleworth to take over representation of Racom. 

4

According to Shuttleworth, the district court dismissed this action after the

parties finalized a settlement. 

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Beginning in mid-2001, Melstad, on behalf of MHC, began preparing for

MHC's exit from Racom. On September 12, 2001, MHC exercised its put right.

MHC estimated that Racom was obligated to pay $15,155,366.60 based on accrued

and unpaid dividends.3

 After MHC exercised its put rights, Racom removed Melstad

and Stepien from Racom's Board. 

This resulted in MHC filing two lawsuits in November 2001 against Racom in

Delaware, Racom's place of incorporation. In the first lawsuit, MHC and Melstad

sought inspection of certain corporate books and records of Racom. The second

lawsuit alleged that Racom illegally removed MHC's representatives from Racom's

Board. A different law firm represented Racom in the Delaware action.

On December 10, 2001, Racom filed a declaratory action in Iowa state court,

seeking a determination of the validity of certain actions of Racom's Board and the

validity of the original stock purchase agreement. MHC removed the case to federal

court in Iowa.4

 

On December 12, 2001, MHC filed the instant action seeking repayment of the

loan and the issuance of additional common stock. Before Racom had an opportunity

to respond, MHC moved for summary judgment on January 2, 2002. 
5

Osborn is vice president of financial services for MidAmerican.

6

Miller is the president of Racom. 

7

Sokol was the chief executive officer of MidAmerican Energy Company.

Sokol had not been deposed in the Delaware litigation. 

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Approximately three weeks later, Racom deposed Melstad, Stepien, Garry

Osborn,5

 and Gregg Miller6 in the Delaware litigation. In addition, MHC produced

approximately 2500 pages of documents for the Delaware litigation, which included

a partially redacted MHC "Exit Strategy" memo. The parties had not conducted or

requested any discovery in the Iowa litigation.

On January 17, 2002, Shuttleworth filed an answer and counterclaim on behalf

of Racom to the Iowa federal claims. The pleadings asserted compulsory

counterclaims of fraud, RICO, slander per se, and breach of fiduciary duty.

Shuttleworth asserted defenses of fraudulent inducement, lack of corporate board

authority, and lack of consideration. Shuttleworth believed that MHC had committed

fraud in order to takeover Racom's business, that Melstad and Stepien did not act in

the best interest of Racom, that Melstad and Stepien had not been elected by Racom's

shareholders as provided for in Racom's charter, and that several agreements between

MHC and Racom were invalid. 

On March 8, 2002, MHC filed a motion for summary judgment on Racom's

counterclaims in the Iowa case. Racom responded by filing for a continuance

pursuant to Federal Rule of Civil Procedure 56(f), requesting ninety days to conduct

discovery, including the opportunity to depose Stepien, Melstad, and David Sokol.7

After reviewing the Delaware depositions, including Stepien's and Melstad's

Delaware depositions, the district court denied Racom's motion, concluding that

further discovery was not "likely to uncover any information helpful to Racom in

defeating the motions for summary judgment." (App. at 161.) Racom then filed a
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motion for reconsideration, explaining the discovery conducted in the two Delaware

lawsuits was unrelated to its counterclaims. The district court also denied Racom's

motion for reconsideration. 

As previously stated, the district court ordered a show cause hearing to allow

Shuttleworth an opportunity to explain why the district court should not impose

sanctions against it. At the hearing, Shuttleworth called five attorneys as witnesses.

Four of the witnesses were Shuttleworth attorneys: Kevin Collins, the partner

responsible for the case; Sarah Gayer, the associate who drafted the resistances to

MHC's summary judgment motions; Caroll Reasoner, a partner with the firm

specializing in corporate law who consulted with Collins and Gayer on the case; and

Bob Houghton, who testified to the prestige of the law firm and the accomplishments

of its attorneys. Finally, H. Richard "Dick" Smith, a long time Iowa practitioner,

testified that in his professional judgment Shuttleworth did not violate Rule 11

because they acted reasonably and in good faith. The court determined that

Shuttleworth and its attorneys violated Rule 11 by pursuing frivolous defenses and

claims with the purpose of delaying payment to MHC. The court sanctioned

Shuttleworth in the amount of $25,000. Shuttleworth timely appeals.

II. DISCUSSION

A. Rule 11 Standards

Rule 11 sanctions are imposed only in response to claims that are not

"warranted by existing law or by a nonfrivolous argument for the extension,

modification, or reversal of existing law." Fed. R. Civ. P. 11(b)(2). This standard is

applied with particular strictness where, as here, the sanctions are imposed on the

court's own motion. In that circumstance–unlike the situation in which an opposing

party moves for Rule 11 sanctions–there is no "safe harbor" in the Rule allowing

attorneys to correct or withdraw their challenged filings. See Fed. R. Civ. P.
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11(c)(1)(A). Here, the district court determined that Shuttleworth violated Rule

11(b)(1) and (b)(2). Federal Rule of Evidence 11 reads, in pertinent part:

(b) Representations to Court. By presenting to the court

(whether by signing, filing, submitting, or later advocating) a pleading,

written motion, or other paper, an attorney or unrepresented party is

certifying that to the best of the person's knowledge, information, and

belief, formed after an inquiry reasonable under the circumstances, –

(1) it is not being presented for any improper purpose, such

as to harass or to cause unnecessary delay or needless increase in

the cost of litigation; 

(2) 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. 

We review the district court's imposition of sanctions under Rule 11 for the

abuse of discretion. See Black Hills Inst. of Geological Research v. South Dakota

Sch. of Mines & Tech., 12 F.3d 737, 745 (8th Cir. 1993). We will only reverse a

sanction when the district court based its decision "on an erroneous view of the law

or on a clearly erroneous assessment of the evidence." See Cooter & Gell v.

Hartmarx Corp, 496 U.S. 384, 405 (1990); see also Miller v. Bittner, 985 F.2d 935,

938 (8th Cir. 1993). We give "[d]eference to the determination of courts on the front

lines of litigation" because these courts are "best acquainted with the local bar's

litigation practices and thus best situated to determine when a sanction is warranted."

Cooter & Gell, 496 U.S. at 404. "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; it will also

discourage litigants from pursuing marginal appeals, thus reducing the amount of

satellite litigation." Id.
8

Shuttleworth filed a counterclaim against MHC for civil RICO. Shuttleworth

did not resist MHC's motion for summary judgment on the RICO claim. Therefore,

it is not part of the sanction issue.

9

The court explained:

At the hearing, the Racom attorneys did not volunteer much

testimony on the substantive grounds for why they believed there was

a factual or legal basis for the claims and defenses they asserted;

however, the Court did have an opportunity to query them on some,

particularly their fraud defense, their fraud counterclaim, and their lack

of consideration defense. The Court had less time to explore other

claims; however, their lack of sufficiency was thoroughly covered in the

summary judgment order.

(App. at 413.) 

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Reviewing the district court's imposition of Rule 11 sanctions necessarily

requires an examination of the underlying factual and legal claims, as well as the

appropriateness of the sanction imposed. See Id. at 399. 

B. Racom's Defenses and Counterclaims

As stated previously, Shuttleworth, on behalf of Racom, asserted several

defenses and counterclaims against MHC. We will address each individually.8

 In its

written Rule 11 opinion, the court focused on fraud, fraudulent inducement and lack

of consideration.9

 The court discussed the remaining claims in the summary

judgment opinion. 

At the outset, the district court noted that Racom's claims lacked a specific

allegation of any representation that was false or a particular concealed fact.

See Rosen v. Bd. of Med. Exam'r of Iowa, 539 N.W.2d 345, 349 (Iowa 1995) (listing

elements of fraud and fraudulent inducement). Instead, Shuttleworth maintained that
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MHC fraudulently concealed their intent to defraud Racom and take over the

company. The court explained that the issue was "whether concealing the intent to

negotiate a series of transactions as advantageous to oneself as possible, without any

further misrepresentations or concealment, and without regard to the welfare of the

transaction partner, constitutes fraud." (App. at 415.) The court noted that Racom

initially did not give up control of its Board, with only two of the seven members on

the Racom Board represented by MHC. Further, the court noted that the other five

board members made the same informed decisions. 

The district court also determined that Shuttleworth failed to show any

evidence of fraud. Shuttleworth responds that it could have produced evidence had

the district court provided it with an opportunity to conduct discovery. However,

Shuttleworth has failed to articulate what additional evidence it sought to support its

claims. Shuttleworth also fails to explain why it did not conduct any discovery after

MHC filed the Iowa lawsuit. The district court could properly determine that

Racom's claims of fraud and fraudulent inducement did not have any basis in fact, nor

did it rest on any legal grounds. 

Second, the district court also examined Racom's affirmative defense of lack

of consideration. Shuttleworth, on behalf of Racom, presented the argument that

because MHC agreed to forebear on the dividend payments owed to them, the

forbearance was not adequate consideration to support the bargain. We determine

that the district court did not err in concluding that the argument lacked any legal

basis. See Federal Land Bank of Omaha v. Woods, 480 N.W.2d 61, 65 (Iowa 1992)

("'Consideration' is either a benefit given or to be given to the person who makes the

promise [or some other person] or a detriment experienced or to be experienced by

the person to whom the promise is made [or some other person]."). 

Third, Shuttleworth based Racom's breach of fiduciary duty on two incidents,

the 1999 Agreements and Melstad's participation in MHC's exit strategy from Racom.
10White is an officer of MHC's corporate parent, MidAmerican Energy

Company.

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As to the 1999 agreements, Racom did not allege that the MHC board representatives

withheld any relevant information about their relationship to MHC or their

knowledge of the transaction from the Racom Board. Nor did Racom allege that the

MHC board representatives participated in any way in the negotiations to undermine

the arms-length nature of the valid agreements. 

As to Melstad's participation in the exit strategy, the district court noted that

MHC's primary concern in the exit strategy was to minimize the loss of their

investment in Racom. "[I]t is clear from the memorandum that MHC's objective of

preserving its investment was entirely aligned with the best interests of Racom

because MHC could only protect its investment by maximizing Racom's value,

whether or not that involved taking control of Racom." (App. at 349.) In addition,

the court noted MHC had a right, as a preferred shareholder, to protect its interests.

See Odyssey Partners v. Fleming Co., 735 A.2d 386, 415 (Del. Ch. 1999) ("Thus one

who may be both a creditor and a fiduciary (e.g., a director or controlling shareholder)

does not by reason of that status alone have special limitations imposed upon the

exercise of his or her creditor rights."). As the district court concluded, Shuttleworth

failed to present facts supporting the breach of fiduciary duty claim. 

Fourth, Shuttleworth asserted MHC and Melstad committed slander per se

based on the actions of Russ White.10 Racom asserts MHC directed White to call

various Racom customers about the Delaware lawsuits. Racom alleged that during

the calls White falsely stated that he was the vice president in charge of security, as

opposed to vice president of general services. Further, White explained to the

customers that MHC had asked Racom to make sure that the lawsuits would not affect

service. 
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The district court determined that the alleged statements did not amount to

slander per se because the statements could not injure Racom's business. "The fact

that Mr. White might be in charge of security at Mid-American Energy or that MHC

requested that Racom not allow the lawsuit to affect service has no bearing on

Racom's ability to conduct business, which involves dealing with law enforcement

and emergency services." (App. at 351.) 

Finally, Shuttleworth asserted that the agreements lacked the necessary quorum

of six Racom directors and that the directors violated their fiduciary duties in

approving the agreements. Shuttleworth argued that the court should not enforce

their agreement with MHC because when the initial 1996 agreement was made,

Racom's Board lacked authority to enter into those agreements. However, the district

court noted that Racom's corporate minutes reflected that at least six Racom board

members were present at all board meetings, therefore, the evidence did not support

this claim. We agree with the district court that the potential lack of the requisite

number of board members was immaterial. See Rodgers v. Baughman, 342 N.W.2d

801, 806 (Iowa 1983) ("[A] party may waive a condition precedent to his own

performance of a contractual duty, when such condition precedent exists for his sole

benefit and protection, and compel performance by the other party who has no interest

in the performance or nonperformance of the condition."). 

In addition, the district court determined that Racom failed to demonstrate that

the directors' informed decisions were not made "in good faith and in the honest

belief that the action taken was in the best interests of the company." Aronson v.

Lewis, 473 A.2d 805, 812 (Del. 1984) (applying Delaware's business judgment rule).

Racom did not allege that any of the non-MHC directors who approved the
11The district court also noted that the MHC representatives did not constitute

a majority of the Racom Board, did not control or dominate the Board, and did not

withhold their interest in the 1999 Agreements with MHC. 

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transaction acted outside this standard.11 The court concluded that even under the

most stringent standards Racom's breach of fiduciary duty claims fail. 

Shuttleworth makes much of the fact that it spent hundreds of hours with its

client and hundreds of hours in legal research. However, this case does not address

the failure to adequately research the claim or facts of the case. Instead, Shuttleworth

persisted in asserting claims and defenses which were not justifiable either in law or

in fact. 

We determine that the district court did not abuse its discretion in finding that

the claims and defenses were not supported by fact and law. The district court also

did not err in deciding that Shuttleworth used the claims and defenses for the purpose

of delaying Racom's payment of money owed to MHC. 

Our decision requires sensitivity to two areas. First, Rule 11 embraces the idea

that on occasion attorneys engage in litigation tactics that are unjustifiable within the

broad bounds of our adversarial system, and that our system does not tolerate such

tactics. Cooter & Gell, 496 U.S. at 393. Second, our application of Rule 11 also

recognizes the adversarial nature of a system where attorneys zealously represent

their clients. However, the district court did not abuse its discretion in determining

that even those attorneys with the highest credentials can violate Rule 11 by pursuing

claims and defenses that do not have merit, and counsel should not put forth frivolous

claims before the court. The court concluded that "the behavior was not a single

incident, as this order and previous orders demonstrate, the Racom attorneys

established a pattern of persisting in these claims over the course of two separate

resistances to summary judgment motions, as well as two separate attempts to extend
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those proceedings without offering valid reasons to do so." (App. at 421.) After

reviewing the record, we cannot say that this conclusion amounts to an abuse of

discretion. Accordingly, we affirm the district court's decision to impose Rule 11

sanctions. 

C. Amount of Sanctions

Finally, we address whether the amount of sanctions imposed is consistent with

the conduct in this case. Rule 11 states that sanctions "shall be limited to what is

sufficient to deter repetition of such conduct or comparable conduct by others

similarly situated." Fed. R. Civ. P. 11(c)(2). 

Here, the district court determined that non-monetary sanctions such as issuing

an admonition, reprimand, or censure, or requiring participation in other educational

programs was inappropriate. In addressing monetary sanctions, the court noted that

since it initiated the Rule 11 proceeding, it was unable to direct monetary sanctions

toward MHC in order to remedy their expenditure of attorney fees. Fed. R. Civ. P.

11 advisory note ("a monetary sanction imposed after a court-initiated show cause

order be limited to a penalty payable to the court and that it be imposed only if the

show cause order is issued"). The court explained:

Given the sheer size of the judgment in a case of this type, the Court

could not possibly levy a sanction large enough to deter such behavior

in the parties themselves; however, the Court believes that a sanction

that outweighs the fees that an attorney might receive to wage such

claims might accomplish this goal. Moreover, the Court expects that a

person facing the loss of their business will seek the counsel of their

attorney and ask the attorney to do whatever they can to forestall the

undesirable result. On the other hand, attorneys are responsible for

limiting their advocacy to that permissible under Rule 11, as well as to

avoid the creation of unnecessary litigation costs to the parties and the

Court. 
12Shuttleworth relies on Kirk Capital, however, it is distinguishable on several

grounds. First, Kirk Capital addressed the prior Rule 11. We noted that the

application of the current Rule 11 would have justified a different result. Kirk Capital,

16 F.3d at 1488. Second, Kirk Capital did not address sua sponte sanctions, instead

it awarded attorney fees to the opposing party. Here, the district court used attorney

fees as a guideline to determine the appropriate award of sanctions owed to the court.

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(App. at 422-23.) The court imposed a sanction in the amount of $25,000 or

approximately three-fourths of fees and expenses of MHC's attorneys. This court

previously adopted the determination of a three-fourths of fees and expenses as an

appropriate sanction in Kirk Capital Corp. v. Bailey, 16 F.3d 1485, 1491 (8th Cir.

1994).12 

While the award here may seem rather large, such an award is appropriate. The

Seventh Circuit in Vollmer v. Publishers Clearing House, 248 F.3d 698 (7th Cir.

2001), determined that the district court's imposition of a $50,000 sanction was

extremely large compared with other sua sponte sanctions. Id. at 710. The court

approvingly noted that such a sanction may be appropriate, but "when the district

court is cursory or unclear about its reasoning for imposing significant monetary

sanctions, we have required that a more detailed explanation be provided." Id. 711.

Here, the district court explained in great detail its reasons for imposing $25,000 in
13The district court explained:

While the Rule 11 sanction is not intended to compensate MHC, and

cannot because the Court initiated this proceeding, the Court believes

$25,000 is appropriate in light of these costs that the Racom attorneys

forced MHC to incur. Moreover, the Court finds that given the large

amounts of money involved, a $25,000 sanction is the minimum amount

a Court can award in order to deter law firms from accepting fees in

order to wage frivolous claims and defenses in order to delay the

payment of large debts.

(App. at 423.) 

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sanctions.13 In addition, the sanction imposed is less than one percent of the amount

Racom attempted to avoid paying MHC. 

III. CONCLUSION

We affirm the district court's decision to impose Rule 11 sanctions in the

amount of $25,000 against Shuttleworth. 

A true copy.

Attest:

CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT.