Unpublished Disposition, 914 F.2d 1496 (9th Cir. 1990)

No. 89-55027.

United States Court of Appeals, Ninth Circuit.

Before DAVID R. THOMPSON and TROTT, Circuit Judges, and THEIS, District Judge^* .

MEMORANDUM^**

Plaintiffs-appellants Conwell S. Worthington, II and Michael Coleman appeal the district court's order dismissing their lawsuit, brought by them and their corporation, Coleman-Worthington Productions, Inc., dba Creative Productions, Ltd., against the defendants-appellees. They also appeal the district court's order imposing sanctions of $49,550 jointly and severally against them and their attorney, Irving Meyer. Meyer joins in the appeal from the order imposing monetary sanctions. The district court found that Coleman, Worthington, and Meyer intentionally perpetrated a fraud upon the court. The district court had jurisdiction under 28 U.S.C. §§ 1331, 1338. We have jurisdiction under 28 U.S.C. § 1291. See Unioil v. E.F. Hutton & Co., Inc., 809 F.2d 548, 556 (9th Cir. 1986), cert. denied, 484 U.S. 822 (1987). We affirm in part, reverse in part, and remand for further proceedings.¹ 

FACTS

Worthington was originally employed by the Crystal Cathedral to direct the 1983 stage production of "The Glory of Christmas." In May 1984, the Crystal Cathedral hired Worthington and Coleman, through their production companies, to direct the 1984 Glory of Christmas. During that year, Coleman and Worthington allegedly created and staged the first production of "The Glory of Easter." Modifications were made for the subsequent year's presentation of both shows in 1985 and the Easter show in 1986. Coleman and Worthington registered their copyrights in four works, two versions of each show. In May 1986, Coleman and Worthington were told that they would not be used for future productions.

Coleman and Worthington alleged in their complaint that the Crystal Cathedral (through various employees) infringed their copyrights in these shows. Coleman and Worthington also alleged other claims, many of which the district court dismissed on September 13, 1988. The dismissal of these claims is not appealed.

On December 6, 1988, the district court dismissed all remaining claims. The district court found that Coleman, Worthington, and Meyer "perpetrated a fraud on this Court by intentionally making material, false allegations in a complaint filed with this Court on May 11, 1988, and by willfully supporting their false allegations with a bogus contract that was and is attached as Exhibit 1 [the June 1984 agreement]." Coleman-Worthington Prod., No. SA-88-297, mem. disp. at 2 (C.D. Cal. Dec. 6, 1988).

Among other things, the Court finds that the evidence, including the deposition transcripts of plaintiffs Conwell S. Worthington, II, and Michael Coleman, establishes that at least 19 months before filing this lawsuit, the plaintiffs knew that Exhibit 1 was not a true copy of any contract executed by the defendants as alleged in the complaint. In addition, the Court notes that the signature page of Exhibit 1, a purported June 1984 Agreement, is more likely a copy of the signature page from a July 6, 1983 contract and that it is likely that the plaintiffs manufactured every page of Exhibit 1.

Id. "The Court further finds that on July 22, 1988, the plaintiffs and their counsel, and each of them, deliberately concealed and suppressed their knowledge that Exhibit 1 was not a true copy of any executed contract." Id. The district court also found "that the plaintiffs and their counsel have made numerous bad-faith arguments, both written and oral, in opposing the motion for sanctions, and that these arguments were made with the specific intent to further mislead and deceive the Court." Id. at 4.

The district court noted that its failure to dismiss the copyright claim at a hearing on August 8, 1988 was expressly contingent upon the existence of the June 1984 agreement. While the district court acknowledged that the plaintiffs may have believed that they had a colorable copyright claim, they could not "knowingly misrepresent the facts upon which their claim rests and then later attempt to change the facts of their claim when their misrepresentation is discovered." Id. at 3.

The district court also imposed monetary sanctions against plaintiffs-appellants and their counsel Meyer for the defendants'-appellees' reasonable attorney fees and costs incurred in defending the action. The court set the amount of this sanction at $49,550. It found this sum to be "reasonable in light of the liability [$55,000,000] that the complaint threatened to impose upon the defendants had [the] fraud on the Court been successful ..., and the wide publicity the case received and could be expected to receive in the media." Id. at 3-4. The district court explicitly based this sanction on its inherent powers, Rule 11, and 28 U.S.C. § 1927.

ANALYSIS

Sanctions, including both dismissal and monetary sanctions, are reviewed for abuse of discretion. See Televideo Sys., Inc. v. Heidenthal, 826 F.2d 915, 916 (9th Cir. 1987) (per curiam) (dismissal); Zaldivar v. City of Los Angeles, 780 F.2d 823, 828 (9th Cir. 1986) (Rule 11); Estate of Blas through Chargualaf v. Winkler, 792 F.2d 858, 860 (9th Cir. 1986) (section 1927).

In reviewing the district court's findings of fact in connection with the motion for sanctions, "we review those findings under the clearly erroneous standard to determine whether they are supported by the record." Wyle v. R.J. Reynolds Indus., Inc., 709 F.2d 585, 589 n. 2 (9th Cir. 1983) (inherent powers); see also Zaldivar, 780 F.2d at 828 (Rule 11); United States v. Associated Convalescent Enter., Inc., 766 F.2d 1342, 1345 (9th Cir. 1985) (section 1927). "A finding is 'clearly erroneous' when although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed." United States v. United States Gypsum Co., 333 U.S. 364, 395 (1948); see, e.g., United States v. McConney, 728 F.2d 1195, 1201 (9th Cir. 1984) (en banc).

B. The District Court's Findings of Fraud on the Court

Fraud on the court must be proved by clear and convincing evidence. England v. Doyle, 281 F.2d 304, 309-10 (9th Cir. 1960) (setting aside judgment under Fed. R. Civ. P. 60(b)). A fraud on the court is an unconscionable plan or scheme designed to improperly influence the court in its decision. Id. at 309; Phoceene Sous-Marine v. U.S. Phosmarine, Inc., 682 F.2d 802, 805 (9th Cir. 1982). "A finding of fraud on the court is justified only by the most egregious misconduct directed to the court itself, such as bribery of a judge or jury or fabrication of evidence by counsel, [citations] and must be supported by clear, unequivocal and convincing evidence." In re Coordinated Pretrial Proceedings in Antibiotic Antitrust Actions ("Phizer"), 538 F.2d 180, 195 (8th Cir. 1976), cert. denied, 429 U.S. 1040 (1977).

The record contains declarations which state that Coleman and Worthington were present at an October 1987 meeting with Crystal Cathedral representatives. At this meeting, the representatives demonstrated the inauthenticity of the June 1984 agreement. The signature page of that agreement did not conform to the rest of the agreement, and when the signature page was compared to the July 1983 agreement the signatures and margins were obviously identical. Although Coleman and Worthington contended in their depositions that they were not present at the October 1987 meeting, the district court found that the testimony of the attorney for the Crystal Cathedral, to the effect that Coleman and Worthington were present at the meeting, was more credible. The court found that Coleman and Worthington knew the June 1984 agreement was not authentic. Despite this knowledge, Coleman and Worthington continued to press their lawsuit, a lawsuit which was founded on the "bogus" 1984 agreement.

We conclude there was clear and convincing evidence that Coleman and Worthington intentionally deceived the court as to the authenticity of the June 1984 agreement. The district court's finding that they perpetrated a fraud on the court is not clearly erroneous.

The district court also found that Meyer perpetrated a fraud on the court. No evidence was presented, however, which supports a finding of intentional misrepresentation or fraud by Meyer. Meyer was Coleman's and Worthington's second attorney. At the time of the October 1987 meeting, Coleman and Worthington were represented by their first attorney, Donovan. There was no showing that Donovan made Meyer aware that the signature page to the June 1984 agreement was inauthentic. No papers were produced which disclosed this fact to Meyer and no testimony asserted such knowledge. Meyer was not at the October 1987 meeting. The only evidence as to whether Meyer knew the 1984 agreement was a "bogus" document was inconsistency of the signature page and the remainder of the June 1984 agreement, the obvious similarity between the signature page and the July 1983 agreement, and the fact that Coleman's and Worthington's prior attorney, Donovan, told Meyer there was a "problem" with the signature page. Meyer confronted his clients with these circumstances and asked them for an explanation. His clients told him that they had found the 1984 agreement with the questionable signature page attached to it. Meyer accepted this explanation, believed it to be true, prepared and filed the complaint, and prosecuted the lawsuit on the basis that the June 1984 agreement was authentic.

Perhaps Meyer should have disbelieved his clients. Perhaps he should have undertaken a more thorough investigation as to the authenticity of the June 1984 agreement. From our review of the entire record, however, and based upon the evidence before the district court, we are left with the definite and firm conviction that the district court erred in finding that Meyer had intentionally misrepresented to the court the authenticity of the June 1984 agreement. Thus, we conclude the district court's finding that Meyer perpetrated a fraud on the court is clearly erroneous.

As part of the sanctions imposed, the district court dismissed Coleman's and Worthington's lawsuit. As we have previously noted, the district court's finding that Coleman and Worthington fraudulently deceived the court as to the authenticity of the June 1984 agreement is not clearly erroneous.

A district court has the inherent power to dismiss an action if a party has willfully deceived the court and engaged in conduct utterly inconsistent with the orderly administration of justice. United States v. National Medical Enter., Inc., 792 F.2d 906, 912 (9th Cir. 1986); Fjelstad v. American Honda Motor Co., 762 F.2d 1334, 1338 (9th Cir. 1985); Wyle, 709 F.2d at 589.

In the exercise of the court's inherent power, it may impose sanctions, including dismissal. See Hamilton Copper & Steel Corp. v. Primary Steel, Inc. ("Hamilton"), Nos. 88-5834, 88-6021, slip op. at 3020 (9th Cir. Mar. 23, 1990). Dismissal is a harsh penalty and should only be imposed in extreme circumstances. Id.; Raiford v. Pounds, 640 F.2d 944, 945 (9th Cir. 1981). Especially in the early stages of a case, a district court must consider less severe penalties. Raiford, 640 F.2d at 945. We have recognized that "courts have inherent power to dismiss an action when a party has willfully deceived the court and engaged in conduct utterly inconsistent with the orderly administration of justice." Wyle, 709 F.2d at 589. Despite the harshness of dismissal, "we will overturn a dismissal sanction only if we have a definite and firm conviction that it was clearly outside the acceptable range of sanctions." Malone v. United States Postal Serv., 833 F.2d 128, 130 (9th Cir. 1987), cert. denied, 109 S. Ct. 59 (1988).

We have identified five factors that a district court must weigh in determining whether to dismiss a case as a punitive measure. See, e.g., United States for the Use of Wiltec Guam, Inc. v. Kahaluu Const. Co., 857 F.2d 600, 603 (9th Cir. 1988); Malone, 833 F.2d at 130; Thompson v. Housing Auth. of the City of Los Angeles, 782 F.2d 829, 831 (9th Cir.), cert. denied, 479 U.S. 829 (1986). Absent the egregious circumstances present here, the lack of prejudice to the defendant²  and the district court's apparent failure to consider alternative sanctions could lead us to hold that dismissal was an abuse of discretion. See Hamilton, slip op. at 3020 ("We hold it was an abuse of discretion for the district court to dismiss this action without considering and trying less drastic alternatives particularly in the absence of prejudice to the defendant and other exceptional circumstances."); see also National Medical, 792 F.2d at 912 ("The district court abuses its discretion if it imposes a sanction of dismissal without first considering the impact of the sanction and the adequacy of less drastic sanctions."); Wiltec Guam, 857 F.2d at 604; Halaco Eng'g Co. v. Costle, 843 F.2d 376, 381 (9th Cir. 1988); Malone, 833 F.2d at 132; Raiford, 640 F.2d at 945.

Here, Coleman and Worthington intentionally deceived the court and knowingly filed, and relied upon, a document which was central to their lawsuit and which they knew to be inauthentic. This conduct was sufficiently egregious that under Malone, the district court was not required to consider alternative sanctions. Malone, 833 F.2d at 132; see also Wiltech Guam, 857 F.2d at 604 (egregious circumstances will warrant dismissal "where it is clear that no other alternative would have been reasonable"). Upon review of the five factors to be considered in determining whether to impose the sanction of dismissal, we are not left with a "definite and firm conviction that [dismissal of the case] was clearly outside the acceptable range of sanctions." Malone, 833 F.2d at 130; cf. North American Watch Corp. v. Princess Ermine Jewels, 786 F.2d 1447, 1451 (9th Cir. 1986) (holding that dismissal was not an abuse of discretion where a party willfully violated discovery order and misled the court); Professional Seminar Consultants, Inc. v. Sino Am. Technical Exch. Council, Inc., 727 F.2d 1470, 1474 (9th Cir. 1984) (holding dismissal not abuse of discretion where defendants willfully, deliberately, and intentionally submitted false documents to support claims). We conclude that the district court did not err in dismissing the plaintiffs'-appellants' lawsuit.

a. As to Coleman and Worthington

The district court awarded monetary sanctions of $49,550 jointly and severally against the plaintiffs-appellants and their attorney, Meyer. These sanctions were imposed pursuant to the district court's inherent powers, Rule 11, and 28 U.S.C. § 1927. As we have previously stated, the district court did not err in finding that the plaintiffs-appellants committed a fraud on the court. Monetary sanctions to punish such conduct are appropriate. See, e.g., Roadway Express, Inc. v. Piper, 447 U.S. 752, 765, 767 (1980). Accordingly, insofar as Coleman and Worthington are concerned, we need not consider whether imposition of the monetary sanctions against them was appropriate under Rule 11 or section 1927. Imposition of these sanctions was appropriate under the court's inherent powers. We do consider, however, the amount of the sanction award.

The district court's stated purpose for imposing monetary sanctions was to award the defendants attorney fees for defense of the lawsuit. The general rule that a party cannot recover attorney fees does not apply when the opposing party has acted in bad faith. Roadway, 447 U.S. at 766; Alyeska Pipeline Serv. Co. v. Wilderness Society, 421 U.S. 240, 258-59 (1975); Zambrano v. City of Tustin, 885 F.2d 1473, 1481 and n. 25, 1482 n. 27 (9th Cir. 1989); United States v. Blodgett, 709 F.2d 608, 610 (9th Cir. 1983). The court may award sanctions not only where the action is filed in bad faith, but also where there is bad faith in conduct during the lawsuit. Roadway, 447 U.S. at 765.

"Like other sanctions, attorney fees certainly should not be assessed lightly or without fair notice and an opportunity for a hearing on the record. But in a proper case, such sanctions are within a court's powers." Id. at 767. Here, the parties were warned that serious sanctions would be imposed if they were found to be lying. Plaintiffs-appellants had an opportunity to present affidavits in support of their opposition to the motion for sanctions, but failed to do so. They did not rebut defendants-appellees' affidavits in any manner.

When awarding attorney fees, however, a district court must consider the Kerr guidelines. Kerr v. Screen Extras Guild, Inc., 526 F.2d 67, 69-70 (9th Cir. 1975); Moore v. Jas. H. Matthews & Co., 682 F.2d 830, 838 (9th Cir. 1982). The Kerr guidelines take into account various factors. Not all twelve factors must be considered in every case, but remand is appropriate when the record does not indicate which, if any, of the factors were considered. Id. at 838-39. In the present case, the district court specifically considered the amount of threatened liability. This is one of the Kerr factors. However, the order discloses consideration of no other guideline factor. Lacking such a considered explanation on the record, we cannot give meaningful review to the attorney fee award. Id. at 838. Accordingly, we remand to the district court for consideration, on the record, of the Kerr factors in determining the amount of attorney fees to be assessed against Coleman and Worthington.

b. As to Meyer

With regard to the district court's imposition of monetary sanctions against Meyer, as we have previously stated, the district court clearly erred in finding that Meyer committed a fraud on the court. Accordingly, imposition of monetary sanctions against Meyer based upon the court's inherent powers was improper. See Zambrano, 885 F.2d at 1478; Nalaco, 843 F.2d at 380; Wyle, 709 F.2d at 589. We now consider whether monetary sanctions were properly imposed against Meyer under Rule 11 or 28 U.S.C. § 1927.

The imposition of Rule 11 sanctions does not require subjective bad faith. Zaldivar, 780 F.2d at 829. One prong of the rule tests frivolousness. "The standard is reasonableness. The 'reasonable man' against which conduct is tested is a competent attorney admitted to practice before the district court." Id. at 830. "Rule 11 permits sanctions only where the pleading as a whole is frivolous." Community Elec. Serv. of Los Angeles, Inc. v. National Elec. Contractors Ass'n, Inc., 869 F.2d 1235, 1242-43 (9th Cir.), cert. denied, 110 S. Ct. 236 (1989). The second prong of the rule tests improper purpose, but where a complaint is in question, "a non-frivolous complaint cannot be said to be filed for an improper purpose." Greenberg v. Sala, 822 F.2d 882, 885 (9th Cir. 1987) (per curiam). Once frivolousness is found, the court may inquire into improper purpose. Hudson v. Moore Business Forms, Inc., 836 F.2d 1156, 1162 (9th Cir. 1988).

"A complaint is factually frivolous if a competent attorney, after reasonable inquiry, could not form a reasonable belief that the complaint was well founded in fact." Greenberg, 822 F.2d at 887. "We have imposed Rule 11 sanctions where some error or admission by a litigant undermined his entire case at a stroke." Id.

"Before filing a civil action, the attorney has a duty to make an investigation to ascertain that it has at least some merit." Rhinhart v. Stauffer, 638 F.2d 1169, 1171 (9th Cir. 1980) (per curiam) (dismissal of action not abuse of discretion); see Unioil, 809 F.2d at 557 (attorney violates Rule 11 whenever he signs a pleading without conducting reasonable inquiry into factual foundation). The standard is one of reasonableness under the circumstances. Unioil, 809 F.2d at 557. Relevant circumstances include the attorney's reason to know of the inaccuracy, the extent of the attorney's relationship with the party providing information, the attorney's representations as to his experience and specialty, time and money constraints, and threatened liability. Id.

While Meyer's inquiry as to the circumstances surrounding the June 1984 agreement was far from exhaustive, he did question his clients concerning the document. His clients provided what he determined to be a reasonable explanation for the apparent difference between the signature page and the body of the agreement. Meyer did not match the signature page of the June 1984 agreement with the earlier July 1983 agreement. There were also a number of documents and agreements spanning the period of Coleman's and Worthington's business relationship with the Crystal Cathedral. In view of these circumstances, we cannot say that Meyer's investigation, such as it was, failed to meet the minimum requirements of Rule 11.

We also conclude that the district court's monetary sanctions against Meyer cannot be upheld under 28 U.S.C. § 1927. A sanction may not be imposed under this section "without an express finding that counsel acted willfully, intentionally, recklessly, or in bad faith." United States v. Austin, 749 F.2d 1407, 1408 (9th Cir. 1984). The record does not support a finding that Meyer acted in such a fashion.

The Crystal Cathedral requests double costs and attorney fees for defending the appeal. We have discretion to award damages, attorney fees, and single or double costs for bringing a frivolous appeal. Fed. R. App. P. 38; 28 U.S.C. § 1912; Glanzman v. Uniroyal, Inc., 892 F.2d 58, 61 (9th Cir. 1989); Wood v. Santa Barbara Chamber of Commerce, Inc., 699 F.2d 484, 485 (9th Cir. 1983), cert. denied, 465 U.S. 1080 (1984). We decline to award attorney fees or double costs. The appeal was not wholly without merit.

We also decline to sanction the appellants for failing to include a statement of jurisdiction in their opening brief with this court--a violation of Circuit Rule 28-2.2.

CONCLUSION

We reverse the district court's imposition of sanctions against Meyer. Sanctions against him are not warranted under the district court's inherent powers, or under Rule 11 or 28 U.S.C. § 1927. We affirm the district court's dismissal of the case based on Coleman's and Worthington's egregious intentional deceit. We vacate the amount of monetary sanctions the district court imposed against Coleman and Worthington, however, because these sanctions were based upon an award of attorney fees to the defendants-appellees and the record does not disclose that the district court considered the Kerr factors in fixing the amount of these fees. We remand to the district court for its consideration, on the record, of the Kerr factors in determining the amount of attorney fees to be assessed against Coleman and Worthington.

We decline to impose sanctions for this allegedly frivolous appeal, or for the failure to state jurisdiction in the plaintiffs'-appellants' opening brief.

The defendants-appellees shall recover seventy-five percent of their costs on appeal. These costs shall be recovered jointly and severally against Coleman, Worthington, and Coleman-Worthington Productions, Inc., dba Creative Productions, Ltd.

AFFIRMED in part, REVERSED in part, and REMANDED.