Unpublished Disposition, 936 F.2d 579 (9th Cir. 1989)

No. 89-55736.

United States Court of Appeals, Ninth Circuit.

Before CANBY and RYMER, Circuit Judges, and LEVI, District Judge.^* 

MEMORANDUM^** 

Stephen L. Thomas, counsel to Steven Schwaber, bankruptcy Trustee for Universal Heritage Investment Corporation ("UHIC"), appeals the imposition of Rule 11 sanctions against him for opposing National Union Fire Insurance Company's ("National Union") motion for summary judgment.¹  National Union contends that the appeal is frivolous and requests sanctions under Fed. R. App. P. 38. We affirm the trial court and deny sanctions on appeal.

UHIC is a securities broker/dealer firm. Anna Marie Murphy, a retired school teacher, entrusted her life savings to Hugh Mulhern, the Branch Manager of UHIC's Newport Beach office. Mulhern, together with a fellow UHIC employee, squandered Murphy's money. Upon Murphy's death in 1979, her executor discovered the loss and filed a suit in California superior court against UHIC in 1980 ("Murphy lawsuit"). UHIC claims that service of the summons and complaint in the Murphy lawsuit was its first notice of Mulhern's conduct.

UHIC, as a licensed stockbroker, maintained constant coverage under a Securities Dealers' Blanket Bond as required by the National Association of Securities Dealers ("NASD"), against the dishonesty of its "employees." During the period from 1977 to 1985, UHIC twice changed sureties. The Hartford Accident and Indemnity Company ("Hartford") issued a bond to UHIC for the years 1977 to 1979, Insurance Company of North America ("INA") issued bonds covering 1979 to 1982, and National Union issued bonds covering 1983 to 1985.

UHIC did not notify its surety bond carriers of the Murphy lawsuit until 1985. All carriers denied coverage. On August 12, 1985, the California superior court entered judgment for $1.3 million in favor of Murphy's estate. UHIC filed bankruptcy the day judgment was filed.

Each bond covers "losses" "discovered" during the period of bond coverage. The bonds are a standardized form. The Hartford and INA bonds did not define either the term "loss" or the term "discovery." The National Union bond, however, was a later version of the standardized form and contained the following statement regarding when a "loss" would be deemed "discovered":

Discovery occurs when the Insured becomes aware of facts which would cause a reasonable person to assume that a loss covered by the bond has been or will be incurred even though the exact amount or details of loss may not be then known. Notice to the insured of an actual or potential claim by a third party which alleges that the Insured is liable under circumstances, which if true, would create a loss under this bond constitutes such discovery.

Section 4 of the National Union bond. Points and Authorities in Support of National Union's Motion for Summary Judgment, 3:29-4:5.

Mulhern's fraudulent conduct occurred during the Hartford bond, the Murphy lawsuit was filed against UHIC while the INA bond was effective, and the actual Murphy judgment against UHIC occurred during the National Union bond period. Each carrier denied the "loss" was "discovered" during its coverage: National Union claimed that the "loss" was "discovered" during INA's coverage; INA argued that the "loss" was "discovered" during National Union's bond period; and Hartford argued that the "loss" was "discovered" during either INA's or National Union's bond.

UHIC sued all three sureties, and it is the sanctions order in this case that we now review. In March of 1988, Trustee Schwaber substituted into the case as Trustee for UHIC. Stephen L. Thomas, the appellant here, later substituted in as counsel for Trustee Schwaber. Thomas, on behalf of Schwaber, filed a Second Amended Complaint on September 19, 1988. On December 1, 1988, the suit by UHIC was ordered consolidated with a related case brought by the Estate of Murphy against the same three defendants. In December of 1988, UHIC and defendants filed cross motions for summary judgment. The motion by UHIC was signed by Thomas. UHIC moved for summary judgment on the ground that all three defendants owed UHIC a duty to defend, which each had violated.²  National Union moved for summary judgment and requested sanctions on the ground that the "loss" was "discovered"--as those terms were defined in Section 4 of its bond--prior to the coverage period, and thus that it was not liable.

In his opposition to National Union's motion for summary judgment, filed January 10, 1989, Thomas sought to rebut National Union's argument regarding the language in Section 4. He quoted the first sentence from Section 4 of the bond, and then engaged in close analysis of the language to show that it was subject to interpretation. He did not include the second sentence of Section 4 in his analysis of text. He also relied on case law discussions interpreting "discovery of loss," but those cases involved bonds that did not define "discovery of loss."

On January 11, 1989, National Union notified Thomas by letter that it would seek sanctions under Rule 11 for plaintiff's failure to conduct an adequate investigation prior to filing the suit against it. National Union agreed to drop its request for sanctions, if appellant submitted to judgment with prejudice within 24 hours. Thomas apparently took no action in response to the letter. In its reply filed January 13, 1989, National Union requested sanctions under Rule 11.

In Thomas's reply to National Union's opposition, he again argued the correctness of his legal position that National Union was liable on its bond to UHIC. He relied on language in the bond concerning the insurer's agreement to indemnify the insured for attorney's fees and costs. This language provided that National Union would indemnify the insured for attorney's fees and costs "on account of any loss, claim or damage which, if established against the insured, would constitute a valid and collectible loss sustained by the Insured under the terms of this bond." Thomas focussed on the language "sustained by the Insured" and argued that since no loss was "sustained" until 1985--during the period of National Union's bond--"without question" National Union had a duty to defend. Plaintiff's Reply to National Union's Request for Sanctions 3:12-16.

The district court granted the sanctions request against appellant, stating as follows:

In this case, a reasonable inquiry by the plaintiff's counsel would, of course, include an examination of the National Union bond. The language covering "discovery of loss" entirely vitiates the plaintiff's claim against defendant National Union. Defendant so informed the plaintiff by letter dated January 11, 1989. [citation omitted] Despite this notice and the clear lack of any reasonable basis on which to ground a claim against defendant National Union, the plaintiff elected to proceed with the action against National Union. Because the plaintiff has failed to make any legally plausible argument to avoid the operation of this clause, and the Court is at a loss to find one, sanctions are hereby ORDERED against the plaintiff.

Excerpt of Record 134:16-135:1.

The district court directed National Union to file a detailed affidavit stating the attorney's fees it had expended in defense of Thomas's summary judgment motion. National Union responded by requesting over $62,000 in fees incurred as a result of the summary judgment motion filed by plaintiff. The district court reduced the fee award to $4500 with $500 in costs, finding that National Union could have avoided most of its costs had it promptly moved to stay discovery and to dismiss.

Thomas appeals the June 2, 1989, sanctions award. National Union requests sanctions on appeal.

We review the district court's imposition of sanctions under Rule 11 for an abuse of discretion whether the district court's ruling is based on an assessment of the law or of the facts. Cooter & Gell v. Hartmax Corp., --- U.S. ----, 110 S. Ct. 2447, 2454, 110 L. Ed. 2d 359 (1990).³  Under Rule 11, sanctions must be awarded when a signed pleading, motion or other paper is not well grounded in fact and warranted by existing law or a good faith argument for the extension, modification or reversal of existing law. Fed. R. Civ. P. 11. An abuse of discretion may be found in the award of sanctions if a district court relies on "a materially incorrect view of the relevant law in determining that a pleading was not 'warranted by existing law or a good faith argument' for changing the law." Cooter & Gell, 110 S. Ct. at 2459. The determination whether an attorney has violated Rule 11 involves " 'fact-intensive close calls' " most suited to the district courts. Id. at 2460.

We find that the award of sanctions in this case, albeit somewhat harsh, was not an abuse of discretion. The language in Section 4 of the bond was clear and controlling. Yet this language went wholly unaddressed in Thomas' opening brief in his motion for summary judgment. Rather, he suggested that all three bonds had essentially similar language with regard to "discovery of loss."⁴  This was not accurate. Once the language in Section 4 was called to his attention by National Union's motion for summary judgment, Thomas had the opportunity to reevaluate his position and withdraw the motion as to National Union. Instead he elected to go forward with strained attempts to avoid the clear import of the Section 4 language. For example, in his opposition Thomas attempted to demonstrate that Section 4 was ambiguous by focussing on the first sentence of the section when the second sentence removed the supposed ambiguity. Plaintiff's Opposition to National Union's Cross-Motion for Summary Judgment, 5:21-6:17. Similarly, Thomas' reliance on the attorney's fees and costs provisions of the Bond in his reply was of no avail. That language provided for indemnification of fees and costs "on account of any loss, claim or damage which, if established against the insured, would constitute a valid and collectible loss sustained by the Insured under the terms of this bond " (emphasis added). A natural reading of the quoted language is that the insurer was responsible for fees and costs for claims--which, if proven--would be covered by the bond. But the bond covered only those losses discovered as defined in Section 4. Thomas attempted to imbue the word "sustained" with unjustified significance.

Appellant's brief suggests that since the entire summary judgment motion was not frivolous, sanctions were inappropriate under Townsend v. Holman Consulting, 881 F.2d 788 (9th Cir. 1989). Since the filing of the briefs in this appeal, however, the court reconsidered Townsend en banc and held that the presence of a non-frivolous allegation would not shelter a frivolous claim from sanctions. Townsend v. Holman Consulting, 929 F.2d 1358 (9th Cir. 1990). Here the district judge found that the claim against National Union was frivolous and should not have been maintained once the Section 4 language was called to Thomas' attention. Under the en banc decision in Townsend it is of no significance that the claims and arguments as against the other insurers were not frivolous.

The most compelling evidence in support of Thomas' appeal is that other lawyers also missed the significance of the language in Section 4. The complaint and first amended complaint were filed by two different law firms prior to Thomas' entry into the case. Moreover, it appears that National Union's lawyers were not aware of the Section 4 language until fairly late in the case. Of course, once they did become aware of the bond language, they put Thomas on notice of the particular language and gave him the opportunity to withdraw his motion with respect to National Union. But the actions of other lawyers surely are no excuse for Thomas' apparent failure to read the bond prior to filing the motion for summary judgment or for failing to withdraw the motion with respect to National Union once its lack of merit was made plain to him.⁵ 

The district court imposed sanctions because Thomas failed to make a reasonable inquiry before filing the summary judgment motion and because he advanced arguments that were not legally plausible after he was placed on notice of the language in Section 4 of the bond. We find no abuse of discretion in these findings. Moreover, the amount of the award was tempered and appropriate. The district court dramatically reduced National Union's fee request, on the basis that National Union unnecessarily delayed resolution of the case by failing to move for a stay of discovery and to dismiss.

Finally, we reject National Union's request for sanctions on this appeal under Fed. R. App. P. 38. Although we have affirmed the district court, the standard for granting Rule 11 sanctions continues to be a developing area of the law. As we have noted at several points in this opinion, since the filing of the briefs in this case the law relating both to imposition of sanction and appellate review of sanctions has changed. The appeal was not frivolous and therefore the request for sanctions is denied.

AFFIRMED.