Unpublished Disposition, 912 F.2d 469 (9th Cir. 1990)

No. 89-15242.

United States Court of Appeals, Ninth Circuit.

Before HUG and SCHROEDER, Circuit Judges, and JAMES A. VON DER HEYDT,^*  District Judge.

MEMORANDUM^** 

This is an appeal from the imposition of Rule 11 sanctions in a very unusual case. The district court sanctioned William and Patricia Millard (Millards) after it granted Marriner's motion for summary judgment based on res judicata, collateral estoppel and failure to state a claim. The case involves two separate suits stemming from Micro/Vest Corporation's partial acquisition of the highly successful Computerland store chain.

The Millards own IMS, the parent company of Computerland. In 1976, IMS received a $250,000 loan from Marriner which it used to start Computerland. In return for the loan, IMS granted Marriner an option for 20% of its stock. In 1981, Marriner sold the note to Micro/Vest, an alleged competitor of Computerland. The Millards refused to honor the assignment of the note and Micro/Vest brought suit to compel its enforcement. The Millards filed a cross-complaint against Micro/Vest, Marriner and Marriner's President, Loring Reed. The Millards alleged that Marriner and Reed induced them to enter the original loan agreement through fraud and through negligent misrepresentation. They also asserted various contract claims arising from the sale of the note. The jury found for Micro/Vest, Marriner and Reed on all grounds and awarded Micro/Vest 20% of the stock, dividends, attorney's fees and $125 million in punitive damages.

After losing the Micro/Vest suit, the Millards learned some disturbing facts about the conduct of the defendants during that suit. A newly published book on the Micro/Vest acquisition posited that Micro/Vest bribed Marriner's directors to prevent them from disclosing Reed's pecuniary interest in the outcome of the litigation and the identity of the purchasers of the note. After winning the Micro/Vest action, Marriner promptly sued its prior co-plaintiffs asserting that they had engaged in fraud, breaches of fiduciary duty and wrongful appropriation of a corporate opportunity. The parties began to call each other liars and Marriner's lawyer stated that in-fighting could only produce victory for the Millards. The parties settled the case, sealed the entire record and effectively thwarted the Millards' attempts to discover any information in connection with the litigation.

The Millards then brought the underlying suit in the case at bar focusing on the defendants' conduct during and after the Micro/Vest litigation. The Millards were clearly aware of the res judicata and collateral estoppel problems posed by their second suit and went to great lengths to focus their complaint on conduct that could not have been part of the first Micro/Vest case. Their complaint states:

Plaintiffs, in bringing this litigation, do not seek or want to relitigate issues addressed in the initial Micro/Vest litigation. That judgment is presently on appeal.... This action is intended to hold the defendants legally accountable for their post-Micro/Vest conspiracies and wrongful actions or omissions to act, and for their recently discovered breaches of fiduciary duties, frauds, and abuses of legal process in connection with the Micro/Vest litigation, all of which are ongoing and continue to the very date of this filing.

The Millards' efforts to avoid res judicata and collateral estoppel preclusion proved unsuccessful. We have no reason to question the district court's holding that the Millards in reality were seeking damages for the same alleged wrong, namely the assignment of stock to a competitor, and that under California law the claims were waived. In Clark v. Yosemite Community College Dist., 785 F.2d 781, 784 (9th Cir.) 1986), we held that under California law res judicata bars the maintenance of a second action where that suit involves the same wrong by the defendant and the same injury to the plaintiff as that adjudicated in an earlier suit. We held the second action barred even if plaintiff " 'pleads different theories of recovery, seeks different forms of relief and/or adds new facts supporting recovery.' " Id. (quoting Eichman v. Fotomat Corp., 147 Cal. App. 1170, 1174-75 (1983)).

However, the fact that the second suit was precluded does not necessarily mean that Rule 11 has been violated. Sanctions are inappropriate if competent counsel could "form a reasonable belief that the pleading or other paper is warranted by existing law or a good faith argument for the extension, modification or reversal of existing law." Community Elec. Service of Los Angeles, Inc. v. National Elec. Contractors Assoc., Inc., 869 F.2d 1235, 1243 (9th Cir.), cert. denied, 110 S. Ct. 236 (1989); Golden Eagle Distrib. Corp. v. Burroughs Corp., 801 F.2d 1531, 1538 (9th Cir. 1986). A district court's imposition of sanctions under such circumstances constitutes an abuse of discretion. See Cooter & Gell v. Hartmarx Corp., et al., 58 U.S.L.W. 4763, 4769 (June 11, 1990).

There is support under California law for the proposition that one can sue a fiduciary for conduct during a trial that breaches a fiduciary duty to act fairly toward the other party in litigation. Jorgensen v. Jorgensen, 32 Cal. 2d 13, 193 P.2d 728, 732 (1948), citing 3 Freeman, Judgments, 5th ed., p. 2576 (fiduciary's failure to perform duty to speak or to make disclosures during judicial proceeding is fraud "for which equity may relieve from a judgment thereby obtained"); In re Estate of Anderson, 149 Cal. App. 3d 336, 348-50, 196 Cal. Rptr. 782, 790-91 (Ct.App.1983) (objectors to a bank sale of an estate were not barred by res judicata from challenging the sale despite a previous court order confirming the sale because bank breached its fiduciary duty by failing to disclose material information regarding the sale and thus prevented the objectors from presenting the full case against it). This proposition has also found some support among academicians. See Notes, "Civil Remedies for Perjury," 1977 Ariz.L.Rev. 349 (one may possibly sue a fiduciary for breach of a fiduciary duty where fiduciary committed perjury despite the fact that perjury is generally not actionable). Furthermore, the California Supreme Court has noted that even if an injured party may not be able to set aside a judgment procured by fraud, "it is still a fraud which will support an action for a remedy for the private wrong thus committed." Carpenter v. Sibley, 153 Cal. 215, 94 P. 879, 880 (1908).

The Millards, therefore, could reasonably argue that Marriner, et al.'s perjury and concealment of evidence during and after the Micro/Vest suit was actionable under either a breach of fiduciary duty or fraud rationale. This is particularly so given the rather strong factual foundation supporting an inference of perjury or other fraud surrounding the Micro/Vest action. A published book hypothesized that witnesses in the Micro/Vest action had been bribed. The very fact that the victorious plaintiffs in Micro/Vest subsequently sued each other for fraud and breaches of fiduciary duties, called each other liars, speculated that their in-fighting would produce a victory for the Millards as well as sealed the record in their subsequent litigation raises a reasonable suspicion that the parties had conspired against the Millards in Micro/Vest.

The Millards' complaint was not completely without any legal foundation. See Community, 869 F.2d at 1243. This is particularly so given the fact that California courts have been willing to recognize new causes of action in cases where "it becomes clear that the plaintiff's interests are entitled to legal protection against the conduct of the defendant." Smith v. Superior Court for County of L.A., 151 Cal. App. 3d 491, 495-96, 198 Cal. Rptr. 829, 832 (Ct.App.1984) (citing Prosser, Torts (4th ed. 1971) Sec. 1, pp. 3-4 and 4 Witkin, Summary of Cal. Law (8th ed. 1974), Torts Sec. 10, p 2310). Here, the complaint appears to have a strong factual foundation. We find the district court's imposition of sanctions under such circumstances to constitute an abuse of discretion. Couter, 58 U.S.L.W. at 4769.

REVERSED.

Judge von der Heydt dissents. He would affirm the district court.