KCI Restaurant Management LLC et al v. Seldin et al

Filing 68

ORDER denying 57 Motion for Sanctions. Signed by Senior Judge David G Campbell on 12/6/2018.(DGC, nvo)

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IN THE UNITED STATES DISTRICT COURT

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FOR THE DISTRICT OF ARIZONA

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KCI Restaurant Management LLC, et al.,
Plaintiffs,

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Theodore M Seldin, et al.,

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ORDER

v.

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No. CV-18-00202-PHX-DGC

Defendants.

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Defendants Theodore Seldin and many others (“Defendants”) seek Rule 11

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sanctions against Plaintiffs KCI Restaurant Management, LLC (“KCIR”) and KCI

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Acquisitions II, LLC. Doc. 57. The motion is fully briefed and no party requests oral

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argument. Docs. 65,66. The Court will deny the motion.

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I.

Background.

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This case arises from a complex set of relationships and events that produced

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bankruptcy litigation, a state court lawsuit, a Nebraska arbitration, and this case. The facts

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are not easily grasped, and the Court will recount only those essential to this ruling.

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KCIR and its subsidiary managed Defendants’ investment business from 2004 to

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2013. See Doc. 1 ¶¶ 19-24. Plaintiffs terminated the agreement with Defendants in 2013

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just after collecting $1,814,511 in management fees. Id. ¶¶ 31, 33. The business filed for

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bankruptcy in 2013, and the trustee filed two complaints against KCIR for return of

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management fees. Id. ¶¶ 35-36. KCIR spent approximately $640,000 defending and

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ultimately settling these claims. Id. ¶¶ 47,57.

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Meanwhile, Defendants initiated a Nebraska arbitration against an unspecified

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party. Defendants argued in the arbitration that they were entitled to two-thirds of a portion

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of KCIR’s management fees because KCIR’s receipt of the fees was a violation of a

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corporate opportunity that their position in the company entitled them to share.

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Id. ¶¶ 37-38. The arbitrator agreed and awarded Defendants two-thirds of the $1,075,007

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portion they contested. Id. ¶ 39.

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Plaintiffs then sued Defendants for indemnification, contribution, unjust

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enrichment, and breach of fiduciary duty. See Doc. 1. Plaintiffs claimed that if Defendants

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were entitled to recover this sum in arbitration, then they also were partly responsible for

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defending against the claims brought by the bankruptcy trustee and should be required to

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reimburse Plaintiffs for some of the costs Plaintiffs incurred in defending against those

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claims. Id. ¶¶ 40-41. Defendants characterized this assertion as an end-run around the

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arbitrator’s award. Doc. 23 at 5.

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The Court dismissed the case for failure to state a claim, finding that Plaintiffs could

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not seek partial indemnification from Defendants and did not allege facts showing that

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Defendants were liable to the bankruptcy estate for purposes of contribution, that

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Defendants were enriched by Plaintiffs’ defense of the bankruptcy claims, or that

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Defendants owed Plaintiffs a fiduciary duty. Defendants now move for Rule 11 sanctions.

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II.

Legal Standard.

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Courts may impose sanctions “when a filing is frivolous, legally unreasonable, or

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without factual foundation, or is brought for an improper purpose.” See Fed. R. Civ. P.

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11(c); Estate of Blue v. County of Los Angeles, 120 F.3d 982, 985 (9th Cir. 1997). Courts

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must “exercise extreme caution” in imposing Rule 11 sanctions. Larez v. Holcomb, 16

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F.3d 1513, 1522 (9th Cir. 1994); see also Operating Eng’rs Pension Trust v. A-C Co., 859

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F.2d 1336, 1344 (9th Cir. 1988) (Rule 11 sanctions are to be reserved for “rare and

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exceptional” cases). Rule 11 sanctions are imposed at the Court’s discretion. See Air

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Separation, Inc. v. Underwriters at Lloyd’s of London, 45 F.3d 288, 291 (9th Cir. 1995)

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(“Although courts may impose sanctions . . . they are not required to do so.”).

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III.

Discussion.

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Defendants first argue that sanctions are appropriate because KCI’s allegations did

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not satisfy the legal requirements for indemnification, unjust enrichment, contribution, and

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breach of fiduciary duties, the claims were frivolous under Rule 11. See Doc. 57 at 13-17.

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KCI initially pled arguable claims for relief. See Stewart v. Am. Int’l Oil & Gas Co., 845

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F.2d 196, 201 (9th Cir. 1988). KCI’s claims were plausible under the common law, and

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the Court cannot conclude KCI asserted them without reasonable and competent inquiry

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even though the Court ultimately determined that KCI’s conclusions were erroneous. See

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Rachel v. Banana Republic, Inc., 831 F.2d 1503, 1508 (9th Cir. 1988). The Court will

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deny Defendants’ motion on this ground.

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Defendants next argue that KCI harassed them with patently frivolous claims for

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the “improper purpose of nullifying a final, binding, and non-appealable arbitration award

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that [had] been confirmed as a final judgment.” [Doc. 57 at 12]. Plaintiffs’ claims followed

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a period of intense and contentious arbitration and litigation over complex issues. As both

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Plaintiffs and Defendants acknowledge, Plaintiffs were not parties to the arbitration. See

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Docs. 57 at 10; 65 at 15. Contrary to Defendants’ arguments, it is questionable whether

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Plaintiffs had the opportunity to bring these claims in earlier proceedings. Further,

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Defendants arguments rely heavily on the frivolousness of Plaintiffs’ claims, but the Court

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has already determined that Plaintiffs’ claims were not frivolous. The Court cannot

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conclude that Plaintiffs used their claims to harass Defendants and nullify a final arbitration

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award.

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IT IS ORDERED that Defendants’ motion for Rule 11 sanctions (Doc. 57) is
denied.
Dated this 6th day of December, 2018.

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