Unpublished Disposition, 921 F.2d 279 (9th Cir. 1987)

MEMORANDUM^** 

Marvin L. Dixon appeals from an order imposing Rule 11 sanctions for his suit against the government regarding payment of his student loans. This court has jurisdiction of the timely appeal. 28 U.S.C. § 1291.

The following facts are taken verbatim from appellant's brief:

Plaintiff Marvin L. Dixon (hereinafter "Dixon") had, while a medical student, obtained a series of federally insured student loans. After graduation he commenced repaying those loans but, due to financial problems, Dixon was unable to make the requisite payments and the loans went into default. Although he kept making payments until August 1987, he was not able to bring the loans back into balance.

In August 1987 the government made a written offer to compromise plaintiff's loans for the sum of $13,316. Thereafter, on August 30, 1987, the United States made a second written offer to compromise and settle the then outstanding loans for the sum of $2,308. The outstanding balance then owed, principle [sic] and interest, was $15,668.73. On September 15, 1987, Dixon accepted the second offer and mailed a check for the full amount of the compromise to the United States.

In October 1987 the United States returned Dixon's check to him with a form letter stating that his records showed a higher balance owed. In November 1987 and January 1988 Dixon wrote and requested an explanation of the rejection of his check in the full amount demanded in the settlement offer. In February 1988, some four months after he sent his check to the government, and after numerous attempts to ascertain the facts, Dixon was finally sent a letter which maintained that the offer he accepted had been a "typographical" error. The government did not disclose to Dixon how such an error could have been "typographical", how it came about, or that the person responsible for making it was without authority to do so--the latter point, however, the government argued at the time of its motion for summary judgment.

Mr. Dixon sued to enforce the government's offer to settle the loan for $2,308. The district court granted summary judgment for the government and sanctioned Mr. Dixon and his attorney under Rule 11 for bringing the suit. Mr. Dixon's attorney does not appeal for himself. The government opposed the sanctions in the district court because it would have brought suit anyway to collect the loan. The government did not file an appellate brief in this case.

Rule 11 determinations are reviewed for an abuse of discretion. Cooter & Gell v. Hartmarx Corp., 110 S. Ct. 2447, 2461 (1990); United States v. Stringfellow, 911 F.2d 225, 226 (9th Cir. 1990). Rule 11 sanctions are appropriate when (1) after reasonable inquiry, a competent attorney could not maintain that the motion is well-grounded in fact, existing law, or make a good faith argument for the extension, modification, or reversal of existing law or (2) the motion is filed for an improper purpose such as harassment or delay. Fed. R. Civ. P. 11; see Golden Eagle Distrib. Corp. v. Burroughs Corp., 801 F.2d 1531, 1536 (9th Cir. 1986).

The district court held that Mr. Dixon's claim was frivolous and not warranted by existing law:

It is absurd to think that the government of the United States would accept, under these circumstances, $2,308 as payment in full for a debt of $15,000.... [E]ven a first year law student knows that an offer that the offeree had reason to know was made erroneously cannot be accepted to form a valid contract, and if acceptance is attempted, the contract would be voided under the doctrine of mistake.

Although the difference between the offer and the outstanding balance was great, the explanation that it was a typographical error, when the numbers do not resemble the outstanding balance or the earlier offer, did not render Mr. Dixon's further pursuit of the matter without foundation. Mr. Dixon's attorney testified in an affidavit that although he realized that the difference between the offer and amount of the debt was substantial, in his experience he had seen compromises of 70-90% on old non-performing loans. Declaration of Gerard Launay at 6, Dixon v. United States Department of Education (N.D. Cal.) (No. C-88-4766 JPV). In fact, he knew that the government had recently compromised a 9-year old student loan debt of $16,341.00 for $3,500.00--numbers remarkably similar to those in this case.

Mr. Launay listed several general questions about current government policies and specific questions about the handling of Mr. Dixon's loan that he planned to investigate further during discovery. He did not ask these questions before filing the complaint because the answers could only be found in the government's internal memos and in their negotiating strategy--both matters that the government, for its own benefit, would not necessarily discuss openly except in court-supported discovery. If these questions were answered in Mr. Dixon's favor, Mr. Dixon's claim would have prevailed. Id. at 7-8.

The experience and reasonable investigation of Mr. Dixon's attorney showed that the complaint, although a long shot, had some basis in fact and in law that might prove successful following discovery. It did not. However, the benefit of hindsight cannot affect Rule 11 determinations. Further, sanctions against Mr. Dixon, not sanctions against Mr. Dixon's attorney, are at issue here. The legal system should encourage rather than discourage reasonable reliance, judged from a layperson's perspective, on the advice of an attorney. Business Guides, Inc. v. Chromatic Communications Enterprises, Inc., 892 F.2d 802, 810 (9th Cir. 1989), cert. granted, 110 S. Ct. 3235 (1990) ("Obviously, what is objectively reasonable for a client may differ from what is objectively reasonable for an attorney.") We cannot say that Mr. Dixon's reliance on Mr. Launay's experience, investigation, and advice was unreasonable given the facts and the applicable law. The district court abused its discretion in sanctioning Mr. Dixon.

The attorney fees assessed against Mr. Dixon were part of the district court's Rule 11 sanctions. The order imposing Rule 11 sanctions against Mr. Dixon, including the award of attorney fees, is REVERSED.