Unpublished Disposition, 907 F.2d 154 (9th Cir. 1988)

MEMORANDUM^* 

This is an appeal by the plaintiffs, Mercury Service, Inc. and Mercury Refueling, Inc. (collectively "Mercury"), from a grant of summary judgment in favor of the defendant, Allied Bank of Texas ("Allied"). The action arises from Allied's dishonor due to insufficient funds of two checks written to Mercury by Centurion Petroleum Corporation ("Centurion") on its Allied checking account. Mercury claims the dishonors were improper and that Allied is otherwise liable for Centurion's inability to pay its debts to Mercury. We affirm.

DISCUSSION

Mercury claims the district court erred in: (1) not awarding it full costs under its Rule 11 sanctions motion; (2) granting summary judgment to Allied on its claims for wrongful offset/dishonor, breach of covenant of good faith and fair dealing and bad faith denial of contract, and for alleged violations of the Bank Holding Company Act ("BHCA"); (3) denying its request for additional discovery under Rule 56(f); and (4) denying its requests for leave to amend the complaint.

In its order of August 14, 1987, the district court determined its jurisdiction over Allied and awarded Mercury $3,000 in sanctions against both Allied and its counsel based on Allied's submission of the Eldred declaration. The declaration falsely stated that it was based on personal knowledge and contained other misleading representations concerning Allied's contacts with California. Mercury argues that the court erred in failing to award it $75,000 in compensatory damages for its time and effort spent in opposing Allied's motion to dismiss for lack of personal jurisdiction.

Fed. R. App. P. 3(c) provides that the notice of appeal "shall designate the judgment, order or part thereof appealed from." Allied argues that this court lacks jurisdiction to review the sanctions order because Mercury's notice of appeal did not designate that order, but rather only specified the order of September 14, 1988, granting summary judgment, as the subject of this appeal.

We have held that "an appeal from the final judgment draws in question all earlier nonfinal orders and all rulings which produced the judgment." Munoz v. Small Business Admin., 644 F.2d 1361, 1364 (9th Cir. 1981). An order imposing sanctions against both the client and counsel is nonfinal or interlocutory in nature. Kordich v. Marine Clerks Ass'n, 715 F.2d 1392, 1393 (9th Cir. 1983). Therefore, we may properly review the sanctions order in this appeal from the final judgment.

Fed. R. Civ. P. 11 provides that if a party or an attorney files a paper which is not "well grounded in fact," the court "shall impose ... an appropriate sanction, which may include an order to pay to the other party or parties the amount of the reasonable expenses incurred because of the filing, ... including a reasonable attorney's fee." The appropriateness of the sanction imposed is reviewed for abuse of discretion. Aetna Life Ins. Co. v. Alla Medical Servs., Inc., 855 F.2d 1470, 1474 (9th Cir. 1988).

Mercury claims the district court erred in relying on a punitive rather than a compensatory measure of damages. The court, however, was not required to award any compensatory sanctions at all. We have stated that "Rule 11 'provides for sanctions, not fee shifting. It is aimed at deterring, and, if necessary punishing improper conduct rather than merely compensating the prevailing party.' " United States ex rel. Leno v. Summit Constr. Co., 892 F.2d 788, 791 n. 4 (9th Cir. 1989) (quoting Schwarzer, Sanctions Under the New Federal Rule 11--A Closer Look, 104 F.R.D. 181, 185 (1985)).

Nevertheless, in its order denying Mercury's motion for reconsideration, the court stated that the $3,000 award was "intended ... to be both punitive and compensatory." The court found that "the filing of the Declaration put the plaintiffs to some unnecessary work."¹  Mercury appears, however, to have sought recovery of all of its attorneys fees and costs incurred during the year it spent opposing Allied's motion to dismiss. Only the reasonable expenses incurred because of the filing may be included in an award of sanctions. Matter of Yagman, 796 F.2d 1165, 1185 (9th Cir. 1986) (as amended 803 F.2d 1085).

"The measure to be used [in awarding sanctions] is not actual expenses and fees but those the court determines to be reasonable." Id. (quotation omitted). The $3,000 award is reasonable and does not represent an abuse of discretion.

" [T]he plain language of Rule 56(c) mandates the entry of summary judgment, after adequate time for discovery and upon motion, against a party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial." Celotex Corp. v. Cartrett, 477 U.S. 317, 322 (1986).

The district court held that "Allied was entitled to the setoff [of $24,722] taken against Centurion's deposited funds on July 17, 1984." The debit represented the June interest payment Centurion owed under the terms of the $2 million Line of Credit Agreement. A bank has a right "to apply deposited funds as a setoff against a [matured] debt owed by the depositor to the bank." Crocker Citizens Nat'l Bank v. Control Metals Corp., 566 F.2d 631, 637 (9th Cir. 1977); Kruger v. Wells Fargo Bank, 11 Cal. 3d 352, 357, 113 Cal. Rptr. 449, 451 (1974).

There are no facts to support Mercury's argument that Allied's set-off was improper because the interest debt had not matured by July 17, 1984. Mercury does not deny that the loan agreement provided that the interest payments were due at the end of each month. Even counting a two week grace period, the June interest payment was overdue on July 17, 1984.

Similarly, there are no facts to support Mercury's argument that the "equitable exception" to a bank's right of setoff applied in this case. See Energetics, Inc. v. Allied Bank of Texas, 784 F.2d 1300, 1302 (5th Cir. 1986). There is no evidence to suggest the funds in Centurion's checking account were held in a fiduciary capacity. The two loan agreements between Centurion and Allied did not provide that the loan proceeds or the checking account funds were to be used solely to pay Centurion's vendors and were thus held in trust for that purpose.

We also reject Mercury's argument that a genuine issue of material fact exists as to whether there were sufficient funds in the Centurion account to pay both checks on the day of presentment. Mercury's allegation that five prior debits to Centurion's account totalling $54,548.49 were somehow improper is speculative and unsupported by the evidence. An unfavorable presumption will not arise from Allied's failure to produce the five checks where Mercury failed to appeal the magistrate's determination that those checks were not subject to discovery, and Mercury is precluded from raising it here. See Palmer v. United States, 794 F.2d 534, 540 (9th Cir. 1986). The statement of Centurion officer Wayne Lovett that he would not have issued the checks if there had not been sufficient funds is insufficient to create a genuine issue of fact for trial.

It is undisputed that Centurion misapplied the loan proceeds after misrepresenting its true financial condition to Allied in order to obtain the lines of credit. Mercury argues that Allied is vicariously liable for Centurion's debts under the doctrines of in pari delicto and alter ego because one of Allied's loan officers, Gilbert Hicks, allegedly participated in the fraud. We agree with the district court that these two doctrines are "inapplicable to the facts of this case."

In exceptional cases, a third party whose interests are affected may invoke the in pari delicto doctrine to invalidate an illegal contract between others. See River Garden Farms, Inc. v. Superior Court, 26 Cal. App. 3d 986, 1000, 103 Cal. Rptr. 498, 508 (1972). However, there is no evidence that the loan agreements between Allied and Centurion were illegal. Moreover, even if they were, the remedy is invalidation and thus Mercury, as the alleged intended beneficiary of those agreements, would no longer have a cause of action based on those agreements.

Alternatively, Mercury claims that as the sole source of capital behind the sham entity (Centurion), Allied should be directly liable for Centurion's debts to Mercury under an alter ego theory. Alter ego liability exists where there is "such a unity of interest and ownership that the individuality, or separateness, of the said person and corporation has ceased." Thomson v. L.C. Roney & Co., 112 Cal. App. 2d 420, 428, 246 P.2d 1017 (1952). There is no evidence Allied owned or controlled Centurion, or that they were not in fact separate entities.

C. Breach of Covenant of Good Faith and Fair Dealing

We reject Mercury's argument that Allied is liable in tort for breach of the covenant of good faith and fair dealing based upon its quasi-fiduciary obligations owed to the public as a lender and processor of checks. While a bank owes fiduciary duties to its depositors, see Commercial Cotton Co. v. United Cal. Bank, 163 Cal. App. 3d 511, 209 Cal. Rptr. 551 (1985), there is no authority for imposing similar fiduciary or quasi-fiduciary duties on a bank to the creditors of its depositors or to the public in general.² 

Similarly, Mercury does not have a cause of action against Allied for contractual breach of the implied covenant of good faith and fair dealing because there was no contract between them. Nor does Mercury have a cause of action for bad faith denial of contract. This is a tort action which "occurs when a party 'seeks to shield itself from liability by denying, in bad faith and without probable cause' that the contract exists." Price v. Wells Fargo Bank, 213 Cal. App. 3d 465, 261 Cal. Rptr. 735 (1989) (quoting Seaman's Direct Buying Serv., Inc. v. Standard Oil Co., 36 Cal. 3d 752 (1984)). Mercury does not identify the contract which Allied is attempting to deny in bad faith.

While conceding its complaint failed to state a cause of action under the Bank Holding Company Act ("BHCA"), 12 U.S.C. § 1971, Mercury set forth evidence of other BHCA anti-tying violations in its summary judgment opposition papers. Mercury argues it was improper to grant summary judgment on those new claims. However, the court did not grant summary judgment on those claims, but rather denied Mercury's request to amend its complaint to include those new claims. See infra Part IV.

III. RULE 56(f) MOTION TO CONDUCT FURTHER DISCOVERY

Prior to the ruling on summary judgment, Mercury filed a motion to reopen discovery pursuant to Fed. R. Civ. P. 56(f), which was denied by the district court. The court held:

Mercury's motion to reopen discovery fails to specify what facts it hopes to discover that would alter the [court's rulings] and is therefore insufficient under Fed. R. Civ. P. 56(f). Its assertion that such discovery is necessary to conduct investigation of a potential RICO claim is frivolous; to permit such discovery in the absence of a good faith pleading asserting such a cause of action would contravene Fed. R. Civ. P. 9(b) and 11 and be an abuse of the discovery process. Moreover, discovery has been extended twice at Mercury's request and it is the opinion of this Court that Mercury has had ample opportunity for discovery on any conceivable claim in this action.

The district court's refusal to permit further discovery under Rule 56(f) is reviewed for abuse of discretion. Mackey v. Pioneer Nat'l Bank, 867 F.2d 520, 523 (9th Cir. 1989).

Rule 56(f) provides that the district court may order a continuance to permit further discovery if the party opposing summary judgment needs time to discover central facts. "Rule 56(f) requires affidavits setting forth particular facts expected from the movant's discovery. A Rule 56(f) motion must show how additional discovery would preclude summary judgment and why a party cannot immediately provide 'specific facts' demonstrating a genuine issue of material fact." Id. at 523-24.

Mercury's Rule 56(f) motion did not show how additional discovery would preclude summary judgment. In fact, the further discovery requested by Mercury went primarily towards uncovering new and unpled RICO and BHCA claims, rather than towards the state law claims which were the subject of the motion for summary judgment. Therefore, the "facts" Mercury hoped to uncover from further discovery had little or no bearing on the summary judgment motion which was before the court.

Additionally, it is not an abuse of discretion to deny a Rule 56(f) motion if the movant has already been granted several discovery extensions, Hancock v. Montgomery Ward Long Term Disability Trust, 787 F.2d 1302, 1306 (9th Cir. 1986), or has otherwise "fail [ed] to diligently pursue discovery before summary judgment."³  Mackey, 867 F.2d at 524. This lawsuit was filed on July 10, 1985. Three whole years passed before Mercury was forced to oppose Allied's motion for summary judgment. Mercury was also granted two discovery extensions. Under these circumstances, it was not an abuse of discretion to deny Mercury's Rule 56(f) motion.

Mercury claims the district court improperly denied its request to amend its complaint to conform to the evidence obtained during discovery to include new BHCA claims and a RICO cause of action. See Fed. R. Civ. P. 15(b). The denial of leave to amend after a responsive pleading has been filed is reviewed for abuse of discretion, although such denial is "strictly" reviewed in light of the strong policy of permitting amendment. Thomas-Lazear v. FBI, 851 F.2d 1202, 1206 (9th Cir. 1988).

In its written opposition to Allied's motion for summary judgment, Mercury requested leave to amend its complaint to include an allegation that Allied illegally required Centurion to use up the $2 million line of credit as a condition for extending the $1.5 million line of credit. The district court denied Mercury's request on the basis it was "prejudicially late" and "futile" because " [t]here is no evidence suggesting that the alleged wrongdoing--requiring that Centurion fully extend one line of credit before drawing upon a second--is a sufficiently direct cause of the injury suffered by Mercury to confer standing."

"Prejudice" is a valid reason to deny a party leave to amend. McGlinchy v. Shell Chemical Co., 845 F.2d 802, 809 (9th Cir. 1988). It is not an abuse of discretion to deny a request to add a new claim where, as here, the request is "raised at the eleventh hour, after discovery was virtually complete and the [defendant's] motion for summary judgment was pending before the court." Roberts v. Arizona Bd. of Regents, 661 F.2d 796, 798 (9th Cir. 1981).

It is also not an abuse of discretion to deny leave to amend where the amendment would be futile. Rutman Wine Co. v. E. & J. Gallo Winery, 829 F.2d 729, 738 (9th Cir. 1987). Mercury claims that Allied's requirement that Centurion first utilize the $2 million line of credit resulted in higher fees which in turn made Mercury so uncompetitive it could not pay its suppliers. To have standing under the BHCA, the plaintiff must demonstrate that its injuries are a direct consequence of the alleged illegal tying activities. Campbell v. Wells Fargo Bank, 781 F.2d 440, 443 (5th Cir.), cert. denied, 476 U.S. 1159 (1986). In Campbell, the court held that injuries suffered by investors as a result of the investees inability to meet its financial obligations because of the bank's illegal tying activities were not a direct consequence of those illegal activities. Accord Sundance Land Corp. v. Community First Fed. Sav. & Loan Ass'n, 840 F.2d 653 (9th Cir. 1988) (creditor of borrower lacked standing to sue the lender for damages allegedly caused by its illegal conditioning of credit under the anti-tying provision of Home Owner Loan Act, 12 U.S.C. § 1464). Thus, it is doubtful Mercury had standing to raise the BHCA "tying" claim, and hence the district court's refusal to permit the amendment was not an abuse of discretion.

At the close of the summary judgment hearing, Mercury moved orally for permission to amend the complaint to include a RICO cause of action. Citing the reasons stated in its denial of Mercury's request to reopen discovery under Rule 56(f), the district court denied the request as "unduly tardy and prejudicial to the defendant," and " [f]urther, the last-minute timing to the request casts some shadow over its purported good faith basis."

Undue delay, prejudice, and bad faith are all appropriate grounds for denying leave to amend. See Hurn v. Retirement Fund Trust of the Plumbing, Heating & Piping Indus., 648 F.2d 1252, 1254 (9th Cir. 1981). Moreover, Mercury admits that "it was several depositions short of ... being able to plead a RICO claim" at the time it made its request to amend. Specifically, while it claims it had confirmed through discovery that Centurion was a racketeering enterprise, further discovery was needed to uncover a "pattern" of racketeering activity supported by the predicate acts of mail and wire fraud. However, even assuming it could establish such a pattern, Mercury has failed to present any evidence of Allied's culpable participation in those unlawful activities.

Allied requests an award of sanctions, including attorneys' fees, and single or double costs pursuant to Fed. R. App. P. 38, Fed. R. Civ. P. 11, and 28 U.S.C. §§ 1912⁴  and 1927⁵ . An appeal is "frivolous" under Rule 38 if it is "wholly without merit." Kelley v. International Bhd. of Elec. Workers, 803 F.2d 516, 519 (9th Cir. 1986). We find no support, either factually or legally, for the claims asserted against Allied in this case. Accordingly, we find the appeal to be frivolous and award attorneys' fees and double costs to Allied.

AFFIRMED.