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WO

IN THE UNITED STATES DISTRICT COURT 

FOR THE DISTRICT OF ARIZONA 

KCI Restaurant Management LLC, et al., 

Plaintiffs, 

v. 

Theodore M Seldin, et al., 

Defendants. 

No. CV-18-00202-PHX-DGC 

ORDER 

 Defendants Theodore Seldin and many others (“Defendants”) seek Rule 11 

sanctions against Plaintiffs KCI Restaurant Management, LLC (“KCIR”) and KCI 

Acquisitions II, LLC. Doc. 57. The motion is fully briefed and no party requests oral 

argument. Docs. 65,66. The Court will deny the motion. 

I. Background. 

 This case arises from a complex set of relationships and events that produced 

bankruptcy litigation, a state court lawsuit, a Nebraska arbitration, and this case. The facts 

are not easily grasped, and the Court will recount only those essential to this ruling. 

 KCIR and its subsidiary managed Defendants’ investment business from 2004 to 

2013. See Doc. 1 ¶¶ 19-24. Plaintiffs terminated the agreement with Defendants in 2013 

just after collecting $1,814,511 in management fees. Id. ¶¶ 31, 33. The business filed for 

bankruptcy in 2013, and the trustee filed two complaints against KCIR for return of 

management fees. Id. ¶¶ 35-36. KCIR spent approximately $640,000 defending and 

ultimately settling these claims. Id. ¶¶ 47,57. 
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Meanwhile, Defendants initiated a Nebraska arbitration against an unspecified 

party. Defendants argued in the arbitration that they were entitled to two-thirds of a portion 

of KCIR’s management fees because KCIR’s receipt of the fees was a violation of a 

corporate opportunity that their position in the company entitled them to share. 

Id. ¶¶ 37-38. The arbitrator agreed and awarded Defendants two-thirds of the $1,075,007 

portion they contested. Id. ¶ 39. 

Plaintiffs then sued Defendants for indemnification, contribution, unjust 

enrichment, and breach of fiduciary duty. See Doc. 1. Plaintiffs claimed that if Defendants 

were entitled to recover this sum in arbitration, then they also were partly responsible for 

defending against the claims brought by the bankruptcy trustee and should be required to 

reimburse Plaintiffs for some of the costs Plaintiffs incurred in defending against those 

claims. Id. ¶¶ 40-41. Defendants characterized this assertion as an end-run around the 

arbitrator’s award. Doc. 23 at 5. 

 The Court dismissed the case for failure to state a claim, finding that Plaintiffs could 

not seek partial indemnification from Defendants and did not allege facts showing that 

Defendants were liable to the bankruptcy estate for purposes of contribution, that 

Defendants were enriched by Plaintiffs’ defense of the bankruptcy claims, or that 

Defendants owed Plaintiffs a fiduciary duty. Defendants now move for Rule 11 sanctions. 

II. Legal Standard.

Courts may impose sanctions “when a filing is frivolous, legally unreasonable, or 

without factual foundation, or is brought for an improper purpose.” See Fed. R. Civ. P. 

11(c); Estate of Blue v. County of Los Angeles, 120 F.3d 982, 985 (9th Cir. 1997). Courts 

must “exercise extreme caution” in imposing Rule 11 sanctions. Larez v. Holcomb, 16 

F.3d 1513, 1522 (9th Cir. 1994); see also Operating Eng’rs Pension Trust v. A-C Co., 859 

F.2d 1336, 1344 (9th Cir. 1988) (Rule 11 sanctions are to be reserved for “rare and 

exceptional” cases). Rule 11 sanctions are imposed at the Court’s discretion. See Air 

Separation, Inc. v. Underwriters at Lloyd’s of London, 45 F.3d 288, 291 (9th Cir. 1995) 

(“Although courts may impose sanctions . . . they are not required to do so.”). 
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III. Discussion. 

 Defendants first argue that sanctions are appropriate because KCI’s allegations did 

not satisfy the legal requirements for indemnification, unjust enrichment, contribution, and 

breach of fiduciary duties, the claims were frivolous under Rule 11. See Doc. 57 at 13-17. 

KCI initially pled arguable claims for relief. See Stewart v. Am. Int’l Oil & Gas Co., 845 

F.2d 196, 201 (9th Cir. 1988). KCI’s claims were plausible under the common law, and 

the Court cannot conclude KCI asserted them without reasonable and competent inquiry 

even though the Court ultimately determined that KCI’s conclusions were erroneous. See 

Rachel v. Banana Republic, Inc., 831 F.2d 1503, 1508 (9th Cir. 1988). The Court will 

deny Defendants’ motion on this ground. 

Defendants next argue that KCI harassed them with patently frivolous claims for 

the “improper purpose of nullifying a final, binding, and non-appealable arbitration award 

that [had] been confirmed as a final judgment.” [Doc. 57 at 12]. Plaintiffs’ claims followed 

a period of intense and contentious arbitration and litigation over complex issues. As both 

Plaintiffs and Defendants acknowledge, Plaintiffs were not parties to the arbitration. See

Docs. 57 at 10; 65 at 15. Contrary to Defendants’ arguments, it is questionable whether 

Plaintiffs had the opportunity to bring these claims in earlier proceedings. Further, 

Defendants arguments rely heavily on the frivolousness of Plaintiffs’ claims, but the Court 

has already determined that Plaintiffs’ claims were not frivolous. The Court cannot 

conclude that Plaintiffs used their claims to harass Defendants and nullify a final arbitration 

award. 

IT IS ORDERED that Defendants’ motion for Rule 11 sanctions (Doc. 57) is 

denied. 

Dated this 6th day of December, 2018.