Court Opinion

ID: 9011474
Source: CourtListenerOpinion
Date Created: 2022-11-27 13:56:35.667882+00
Date Added: 2024-06-11T17:11:23.420447
License: Public Domain

KOZINSKI, Circuit Judge,
dissenting for the most part:
The right to make contracts is more than just a socially useful convention; it’s an important aspect of personal autonomy. By contract, we can order some of the most important aspects of our existence: housing, health care, education, the pursuit, of a profession or vocation, sometimes even marriage. Having the power to bind ourselves in exchange for similar concessions from others gives us a significant measure of control over our lives.
Signing a contract does not, of course, guarantee we will be better off. A system of mutual, free exchange gives us only the opportunity to better ourselves; business acumen, diligence and luck will affect the final tally. The right to contract therefore means the right to take chances, to play hunches, to make mistakes; it means having to live by our decisions, no matter how they turn out: “Wise or not, a deal is a deal.” United Food & Commercial Workers Union v. Lucky Stores, Inc., 806 F.2d 1385, 1386 (9th Cir.1986).
While my colleagues don’t quarrel with these principles, they do much to undermine them. Confronted with a contract clause they find unpalatable, they refuse to enforce it under the guise of interpretation. But the reasons they offer are not merely unpersuasive; they’re transparent. The clause in question says precisely what the sellers claim: It entitles them to attorney’s fees for *1355litigation arising out of misrepresentations by the subscribers as to what they did and did not rely on. Reasonable minds can differ as to whether such a clause violates public policy; I believe it does not, but the contrary view is certainly defensible. See pp. 1357-58 infra. Less defensible is ducking the issue by twisting the law of contract beyond recognition. Becaus.e I cannot agree with the majority’s result, and because I see nothing but mischief growing from the way it gets there, I dissent from all but minor portions of the opinion.
A. We must decide whether the following language in the subscription- agreement means what it says:
The Subscriber hereby agrees to indemnify ... the Sellers ... against any losses, claims, damages, liabilities, expenses (including attorneys’ reasonable fees and disbursements) ... resulting from the untruth of any of the warranties and representations contained- herein, 'or the breach by the Subscriber of any of the covenants made by him herein.
The majority concedes that “viewed in isolation” this provision could expose 'the subscribers to liability for the sellers’ attorney’s fees. Maj. op. at 1351. It’s hard to reach any other conclusion:
(1) The subscribers made several warranties, among them that they wouldn’t rely on any oral representations in entering the agreement.
(2) They then brought this lawsuit claiming that they in fact did rely ón oral representations.
(3) The sellers were required to defend the lawsuit at considerable expense because the subscribers lied when they warranted they wouldn’t rely on oral representations.
(4) The indemnity clause holds sellers harmless for losses “including attorney’s reasonable fees and disbursements ... resulting from the untruth of any of the warranties.”
(5) The sellers’ expenses (consisting largely of attorney’s fees) seem to be exactly what the quoted language covers.

Q.E.D.

Recognizing that the quoted language “could be read so broadly,” id., the majority nonetheless concludes that it unambiguously provides the contrary. Indeed, “no rational trier of fact could.attribute to the clause the [contrary]- meaning urged by the defendants.” Id,, at n. 3. The majority thus holds that a trier of fact would have to be drunk or crazy to construe the contract to mean what it says. ., .
California law is just the opposite.' If the language of a contract is susceptible to two different meanings, each side is entitled to put on evidence supporting its preferred construction. See; e.g., Pacific Gas & Elec. Co. v. G.W. Thomas Drayage & Rigging Co., 69 Cal.2d 33, 37, 69 Cal.Rptr. 561, 442 P.2d 641 (1968). Even if the language seems susceptible. to only one meaning, a party may still put on evidence that a second meaning reflects the parties’ actual intent. Id. at 39-40, 69 Cal.Rptr. 561, 442 P.2d 641; see also Brinderson-Newberg Joint Venture v. Pacific Erectors, Inc., 971 F.2d 272, 276-77 . (9th Cir.1992) (following Pacific Gas). I don’t understand how we can deny the sellers a trial to prove that the parties in fact intended that the clause “be read so broadly.” Maj. op. at 1351.
B. But why does the majority so categorically reject the plain language of the contract? The indemnification clause follows language, the majority explains, which suggests the warranties were made to ensure compliance with thé private placement exemption to the federal securities laws. Maj. op. at 1351. For example, each subscriber agreed not to transfer his shares, as required by Rule 506, the exemption relied on here. See 17 C.F.R. §§ 230.506, 230.502(d). Assuring compliance with the securities laws was no doubt the reason for some of the warranties.
Many other warranties do not track the rule, however. Investors in private placements need only be worth $1 million, whereas éaeh subscriber here warranted he had a net worth of at least $5 million. Id. § 230.-501(a)(5). The subscribers also said they understood the financial statements were unaudited, even though the SEC rules don’t require audited statements for Rule 506 of*1356ferings, nor any such warranties by subscribers. Id. § 230.502(b). Similarly, each investor warranted he had read the offering memorandum, and that the books and accounts of the company were available to him; the regulations state that “[t]he issuer is' not required to furnish [such information] to any accredited investor,” id. § 230.502(b)(1), which all of these subscribers were-. Clearly the sellers sought and obtained warranties beyond those required by the securities laws.
Most telling is the warranty at issue hére — that the subscribers weren’t relying on representations made outside the offering materials. One searches in vain for this requirement in Rule 506 or anywhere else in the securities laws. How does this dovetail with the majority’s conclusion that the warranties served no purpose other than to protect the private placement exemption? What becomes of this warranty under the majority’s approach? Are we free to interpret the contract — and declare that no rational trier of fact could do otherwise — so as to render this warranty a nullity?
Left to my own devices, I’d just read the disputed language as written. But if we’re going to triangulate the meaning of the indemnity clause by reference to neighboring clauses, surely we must look at all such clauses. The majority does the sellers an injustice by failing to even acknowledge these other provisions.
C. The majority also maintains the indemnity provision wasn’t specific enough to put the subscribers on notice. See Maj. op. at 1351-52. It relies on Zissu v. Bear, Stearns & Co., 805 F.2d 75, 79-80 (2nd Cir.1986), for the proposition that the subscribers weren’t fairly apprised they could be liable for attorney’s fees if their securities suit was unsuccessful. But the indemnity clause at issue in Zissu only provided for indemnity “against any and all loss, damage or liability due to or arising out of a breach of any representation or warranty.” Id. at 77 (emphasis supplied by Zissu). Accordingly, Zissu refused to enforce the agreement because “no mention of attorneys’ fees was made in the indemnification clause.” Id. at 79. The Second Circuit left room for the use of süch a clause, but held that “a higher level of specificity is required when attorneys’ fees are being assessed against a plaintiff suing for securities fraud.” Id. at 80.
Here we have just such a higher level of specificity; Every subscriber agreed to indemnify the sellers “from and against any losses,- claims, damages, liabilities, [and] expenses (including attorneys’ reasonable fees and disbursements) ... resulting from the untruth of any of the warranties” (emphasis added). -The lack of notice that troubled the Second Circuit in Zissu just isn’t a problem here. See Barnebey v. E.F. Hutton & Co., 715 F.Supp. 1512, 1519-22 (M.D.Fla.1989).
More fundamentally, I question the majority’s solicitude for these subscribers. These weren’t mom and pop investors who mortgaged their retirement to buy palladium mines in Zanzibar. They weren’t forced into the contract by economic duress; they weren’t badgered by salesmen who pounded down their doors on Saturday morning. These were seasoned business people who commanded considerable resources. Many of them had substantial experience with horse breeding; some had already been doing -business with Spendthrift.1 Most retained independent investment advisers and lawyers, and took their sweet time buying into the deal.2 They risked what they war*1357ranted were disposable resources, hoping to get even richer. They gambled — and they lost.
Under these circumstances, what on earth does it mean to say the subscribers didn’t have notice of the attorney’s fee indemnity clause? It’s axiomatic that a contract gives its signatories notice of what it says. We may blunt the cutting edge of this principle when one of the parties is illiterate, or subject to economic duress, or when we see legal filigree buried deep within a long, printed contract. But what justifies departing from this principle here? If these subscribers can’t be held to the terms. of the contract they signed, who ever can?
D. We get a glimpse of what animates the majority’s legal aerobics in the part of the opinion where they dispatch the sellers’ suggested interpretation: “But if the indemnity clause is so interpreted to apply to the plaintiffs’ lawsuit for oral misrepresentations, its literal terms would require the plaintiffs to pay the defendants’ judgment and attorney’s fees even if plaintiffs prevailed!” Maj. op. at 1352. The majority twice describes this as an absurd result, but nowhere really explores the issue. Which is too bad, because this is the meat of the coconut — the difficult public policy question at the heart of this dispute.
Before addressing this issue, however, I note that the majority does more than interpret the contract. By twice labelling the result suggested by the sellers as “absurd,” the majority is saying it wouldn’t enforce the clause even if the contract clearly and unambiguously provided what the, sellers claim it does, and even if it gave ample notice to the subscribers. An absurd result, after all, remains absurd even if it’s explicitly enshrined in the contract. The majority thus writes off what might be a perfectly acceptable and useful provision in a private placement agreement without even a close look. It would be far better if the majority confrontéd the issue squarely.
The majority’s error begins and ends with its phrasing of the issue. After all, if you assume a securities law violation, it makes no sense to suggest that a defrauded plaintiff will have to indemnify the defrauding defendant by paying back the 10b-5 judgment plus attorneys’ fees. But the whole purpose of a provision like the one we are construing is to forestall a 10b-5 violation by limiting the information the investors rely on. Properly framed, the critical question here is: May sophisticated, well-counselled parties, using disposable assets, dealing at their leisure and from arms’ length, limit by contract what information they will consider in making a major investment?
A perfectly respectable argument can be made that such a provision runs afoul of section 29(a) of the Securities Exchange Act of 1934, which states that “[a]ny condition, stipulation, or provision binding any person to waive compliance” with the federal securities laws and regulations is void. 15 U.S.C. § 78cc(a); see also id. § 77n. Enforcement of the indemnity provision could be seen as a waiver of the securities laws because it bars securities lawsuits based on misstatements of fact not contained in the offering materials. Rule 10b-5, after all, prohibits “any untrue statement of a material fact ... in connection with the purchase or sale of any security,” not merely those made in the private placement memorandum. 17 C.F.R. § 240.10b-5 (emphasis added). Giving effect to the indemnity clause might prevent a meritorious securities action based on misrepresentations made by the promoters orally or in writings outside the formal offering package. An indemnity clause could thus be viewed as an end-run around the securities laws.
In fact, it’s the very opposite. The whole point of requiring a written prospectus that conforms to the SEC’s precise guidelines, see Reg.D, 17 C.F.R. §§ 230.501-.508, is to en*1358sure that the parties rely on unbiased written data, not on half-whispered oral representations. Letting parties warrant that they are relying only on those offering materials serves this policy admirably: It forces potential subscribers to look closely at the written materials and avoids the ambiguity and claims of fraud inevitably fostered by collateral oral promises. The warranty, moreover, focuses on reliance, the key element in establishing liability under Rule 10b-5. See Basic, Inc. v. Levinson, 485 U.S. 224, 243, 108 S.Ct. 978, 989, 99 L.Ed.2d 194 (1988) (misstatements lead to liability only if they’re relied on); Ernst & Ernst v. Hochfelder, 425 U.S. 185, 206, 96 S.Ct. 1375, 1387, 47 L.Ed.2d 668 (1976) (same). Reliance is, by its nature, subjective; it’s easily fabricated or distorted, particularly after the deal sours. Letting parties agree about what they will and will not consider in making a sophisticated, face-to-face securities investment would avoid the cost, uncertainty and delay of securities litigation that now turns on inherently unknowable mental processes.
Much is at stake here for everyone involved. This litigation — although it resulted in a complete defense victory, mostly on summary judgment — devoured a staggering quantity of productive resources. The record consists of 50 cubic feet of paper and weighs over half a ton. There were 4500 entries in the docket sheets below, including almost 400 orders and rulings by the district court. Fifty-seven briefs, consisting of nearly 1800 pages, were filed on appeal, yielding three published opinions. See Schultz v. Hembree, 975 F.2d 572 (9th Cir.1992); McGonigle v. Combs, 968 F.2d 810 (9th Cir.1992). Some 200 attorneys contributed to this conflagration, supported by legions of paralegals, summer associates and other staff. The attorneys’ fees, for the seven defendants who requested them, amounted to more than $3.5 million. This says nothing of the fees incurred by the 13 plaintiffs and the 14 defendants who didn’t request reimbursement; it doesn’t take into account other litigation expenses such as photocopying, telephone, facsimile and messenger charges; deposition transcripts; airfares, limousines and hotel rooms; power meals in swank restaurants. See generally Lisa Gibbs, Skadden Calls Fee Routine; Florida Calls It Gouging, American Lawyer, July/Aug.1991, at 19 (billing dispute involving, among other things, a $17 fee for courier delivery of a 75-cent newspaper).
Chasing down ephemeral oral representations may be great fun for the lawyers- — and so profitable, too — but it does nothing to ensure the integrity or regularity of our securities markets. To the contrary, fear of this type of scorched earth litigation — the juridical equivalent of the firebombing of Dresden — will only discourage people like the sellers from entering into such transactions. That the plaintiffs were able to inflict major financial damage on their adversaries, using as their launch vehicle a case so thin it was never allowed to reach the jury,3 will surely send a chill down the spine of anyone contemplating selling securities — or engaging in any other type of business — in our litigation-minded society. Assuming, as we must, that our national interest is served when financial markets function efficiently, unbe-clouded by the risk of kamikaze litigation, a clear statement that we will enforce a subscriber’s warranty he hasn’t considered matters outside the offering materials would have an entirely salutary effect.
Doing so would inflict no injustice. The subscribers were sophisticated and obviously wielded substantial bargaining power. They got legal and financial advice galore before committing to the deal. See nn.1-2 supra. Had they relied on oral representations made by the sellers, they could (and should) have said so before the money was paid and the securities delivered. See Henry Klehm III, Comment, Contractual Shifting of Defense Costs in Private Offering Securities Litigar *1359tion, 136 U.Pa.L.Rev. 971, 998-1002 (1988). I see no reason in the language or policies of the securities laws to make for them a softer bed than they’ve made for themselves.
That’s why the majority’s twice-asserted declaration of absurdity is entirely beside the (exclamation) point. Of course it would violate public policy, as well as the express terms of section 29(a), for parties to agree to pay back any damages they suffer under the securities laws. But it isn’t nearly so absurd — indeed it makes considerable sense— to let parties limit by contract what they will and will not take into account when negotiating sophisticated financial transactions. The majority dismisses a lawful and potentially beneficial device by the use of a punctuation mark.
Conclusion
I agree that the district court applied an incorrect legal standard in ruling on Frank Bryant’s request for attorneys’ fees pursuant to section 11(e) of the Securities Act of 1933; accordingly, I concur in remanding for a determination of which claims the district court believes bordered on the frivolous. I also agree that the district court didn’t abuse its discretion in refusing to award Bryant fees under Fed.R.Civ.Proc. 11 and 37(c). But I strongly disagree with, and therefore dissent from, everything else in the majority opinion.

. Typical is Robert Stratmorc, an attorney who specialized in equestrian law and transactions, who grossed more than $15 million in thoroughbred trading the year of the Spendthrift offering and who holds lifetime breeding rights to Triple Crown winner Seattle Slew. See VII Joint ER, tab 20, exh. Q, at 149, 192. As defendants point out in their briefs, other subscribers included international fashion mogul Calvin Klein; Zenya Yoshida, Japan’s largest and most prominent horse breeder; and the Layman family, who has been involved with thoroughbred horses for over thirty years. See Defendants’ Brief at 8 & n. 4.

. For example, Barry Schwartz asked his lawyer and investment advisor, Raiph Finerman, to review the PPM. IV Joint ER, tab 19, exh. D, at 20, 99, 103. Attorney Finerman holds a masters degree in táxation and is a CPA. Id. at 12. Finerman first heard about the Spendthrift placement on June 20, 1983, and began reviewing the documents the next day. Id. at 99, 103. Finerman carefully studied’ the agreement, id. at 103, and had several conversations with persons at Spendthrift about the deal, id. at 104-05. Finerman discussed the fruits of his research thoroughly with Schwartz before advising him to *1357sign onto the deal. Id. at 118. Although Finer-man made an initial, tentative decision around July 1st, 1983, VIII Joint ER, tab 22, exh. I, at 144, Schwartz didn’t sign the agreement until July 13, 1983, three weeks after first receiving it. I Joint ER, tab 4, at 3. See also V Joint ER, tab 20, exh. F (George E. Layman, Jr., reviewed the deal with both an attorney and an accountant); IV Joint ER, tab 19, exh. E (Earl Schultz had two legal advisors, as well as the legal department of one of his companies, review the transaction before signing); VI Joint ER, tab 20, exh. P (Zenya Yoshida’s attorney approved the deal).

. The case of Frank Bryant, a Spendthrift consultant, is particularly alarming. His defense was that he joined Spendthrift after the sale of the shares and was not in any way involved in the conception or drafting of the PPM. See e.g., X Joint ER, tab 28 (Declaration of Frank L. Bryant in Support of his Motion for Summary Judgment or Summary Adjudication of Issues). Defending on this theory, and winning summary judgment, Bryant was nonetheless saddled with approximately $900,000 in legal fees. See Declaration of Thomas K. Bourke in Support of Bryant’s Motion for Award of Attorney’s Fees from Casares and Schultz at 3-4. If this is the face of victory, how much uglier could defeat be?