Unpublished Disposition, 852 F.2d 571 (9th Cir. 1986)

MEMORANDUM^** 

Appellant, Jeff Liebling, claims that the district court erred in denying his motion for sanctions against plaintiffs-appellees and their attorney, Gerald F. Sullivan. We affirm.

* In July 1986, appellees (Robert Jones, et al.) filed a complaint alleging breach of contract, fraud under 18 U.S.C. § 1962 and a constructive trust. Appellees named appellant and 46 other individuals in the complaint.

Appellees alleged that between December 1982 and September 1984, appellant Liebling and others offered an investment package, operating as a tax shelter, to appellees. The package included purchase of marine dry cargo ship containers. The IRS subsequently denied any credits or deductions to appellees on the basis of the marine dry cargo container program, since the program failed to qualify as a legal tax shelter.

The complaint also alleged that all defendants, including Liebling, made false representations to appellees which induced appellees to purchase such containers. The fraud continued to deprive appellees of the funds they had invested in this purchase through July 1986.

On September 9, 1986, Liebling filed his answer to the complaint, as well as counterclaims. Appellees subsequently moved to dismiss Liebling from the suit. On September 11, 1986, the district court ordered Liebling dismissed.

On September 23, 1986, Liebling filed a motion for Fed. R. Civ. P. 11 sanctions against appellees and their attorney, Gerald F. Sullivan.

Appellees' attorney submitted a number of documents in response to appellant's motion for sanctions. These documents indicate that appellant had knowledge of the marine dry cargo container program. The documents also indicate that appellees' attorney had knowledge of a Justice Department action which alleged a tax "scam" in connection with this container program. Appellant's business had purchased the entity against which the IRS had filed a suit. Appellant had been operating as agent for the entity against which the IRS filed suit, and appeared to be assisting in its defense. The documents also indicate that appellant had extensive knowledge of the tax "scam."

The district court denied Liebling's motion for Rule 11 sanctions. Liebling timely appeals.

II

We review de novo the legal conclusion that the pleadings do not violate Rule 11. Greenberg v. Sala, 822 F.2d 882, 885 (9th Cir. 1987); Zaldivar v. City of Los Angeles, 780 F.2d 823, 830 (9th Cir. 1986). The factual determinations are reviewed on the clearly erroneous standard; the appropriateness of sanctions is reviewed for abuse of discretion. Zaldivar, 780 F.2d at 829.

Appellant Liebling argues that the district court erred by not imposing sanctions under Fed. R. Civ. P. 11 against appellees and their attorney, since the complaint contained factual errors and since appellant refuted the allegations with evidence allegedly available to the appellees.

By signing a pleading, an individual certifies that the pleading is well-grounded in fact, and is warranted on existing law as a result of his reasonable inquiry. If a Rule 11 violation is established, expenses, including reasonable attorneys fees, may be awarded to the opposing party. Fed. R. Civ. P. 11. Whether a pleading is meritorious or frivolous is decided on objective reasonableness, not the subjective intent of a pleader. Zaldivar, 780 F.2d at 829-30.

A complaint is only factually frivolous if a competent attorney, after reasonable inquiry, could not form the reasonable belief that it is well-founded in fact. Greenberg, 822 F.2d at 887.

In this case, the record indicates that appellant had knowledge of the container sales program; he had knowledge of legal action against the business entity which undertook the container program; he owned the business which purchased the challenged entity; and he was participating in the legal defense of that entity. Moreover, appellant appears to have possessed substantial knowledge relating to the tax avoidance scheme. A competent attorney could reasonably have concluded that the complaint was well-founded in fact. Appellees' attorney could reasonably have believed that appellant Liebling was involved in the challenged enterprise, and filed a complaint against appellant, inter alia, on behalf of the damaged investors. See Greenberg, 822 F.2d at 887; Zaldivar, 780 F.2d at 830.¹  Accordingly, the district court neither abused its discretion nor committed clear error in denying the motion for Rule 11 sanctions.

AFFIRMED.