Court Opinion

ID: 44555
Source: CourtListenerOpinion
Date Created: 2010-04-25 22:24:19+00
Date Added: 2024-06-11T17:17:16.495356
License: Public Domain

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