Storz Management Company et al v. Carey et al

Filing 153

ORDER signed by District Judge Troy L. Nunley on 2/28/2021 DENYING 27 Motion for Sanctions. (Mena-Sanchez, L)

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UNITED STATES DISTRICT COURT

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EASTERN DISTRICT OF CALIFORNIA

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STORZ MANAGEMENT COMPANY, a
California Corporation, and STORZ
REALTY, INC.,

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Plaintiffs,

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No. 2:18-cv-00068-TLN-DB

ORDER DENYING DEFENDANTS’
MOTION FOR SANCTIONS

v.
ANDREW CAREY, an individual, and
MARK WEINER, an individual,
Defendants.

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This matter is before the Court on Defendants Andrew Carey (“Carey”) and Mark

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Weiner’s (“Weiner”) (collectively, “Defendants”) Motion for Sanctions. (ECF No. 27.)

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Plaintiffs Storz Management Company (“SMC”) and Storz Realty, Inc. (“SRI”) (collectively,

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“Plaintiffs”) filed an opposition. (ECF No. 32.) Defendants filed a reply. (ECF No. 36.) For the

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reasons set forth below, the Court DENIES Defendants’ motion.

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I.

FACTUAL AND PROCEDURAL BACKGROUND

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Plaintiffs allege that Defendants, who were SMC’s Chief Executive Officer and Chief

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Financial Officer/Chief Operating Officer, secretly started a competing business — called

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“Monolith” — while employed by SMC. (ECF No. 7 at 2.) Plaintiffs filed the operative First

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Amended Complaint (“FAC”) on January 30, 2018, stating claims for: (1) violation of the Defend

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Trade Secrets Act; (2) breach of fiduciary duty; (3) breach of contract; (4) breach of implied

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covenant of good faith and fair dealing; (5) intentional interference with contractual relationship;

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(6) fraud; (7) violation of California’s Unfair Competition Law; and (8) violation of the Computer

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Fraud and Abuse Act. (See id.)

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Defendants filed the instant Motion for Sanctions on March 5, 2018, requesting various

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sanctions under Federal Rule of Civil Procedure (“Rule”) 11. (ECF No. 27.) Specifically,

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Defendants request the Court impose monetary sanctions in the amount of $17,995, deny

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Plaintiffs’ motion for preliminary injunction (ECF No. 8),1 and strike John Maxey’s (“Maxey”)

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declaration in support of that motion (ECF No. 12). (ECF No. 27 at 5.)

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II.

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Rule 11 states in relevant part:

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By presenting to the court a pleading, written motion, or other paper — whether by
signing, filing, submitting, or later advocating it — an attorney or unrepresented
party certifies that to the best of the person’s knowledge, information, and belief,
formed after an inquiry reasonable under the circumstances . . . the factual
contentions have evidentiary support or, if specifically so identified, will likely have
evidentiary support after a reasonable opportunity for further investigation or
discovery.

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STANDARD OF LAW

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Fed. R. Civ. P 11(b)(3). A court may impose sanctions for factual misrepresentations that violate

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Rule 11(b). See Fed. R. Civ. P. 11(c). However, the Ninth Circuit has warned that “Rule 11 is an

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extraordinary remedy, one to be exercised with extreme caution.” Operating Engineers Pension

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Tr. v. A-C Co., 859 F.2d 1336, 1345 (9th Cir. 1988).

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The Court denied Plaintiffs’ motion for preliminary injunction by written order on
February 19, 2021, finding Plaintiffs failed to establish irreparable injury. (See ECF No. 152.)
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III.

ANALYSIS

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The thrust of Defendants’ argument is that Plaintiffs should be sanctioned for falsely

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claiming in several court documents that they were unaware of Monolith’s existence — or

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Defendants’ involvement with Monolith — leading up to Defendants’ termination in December

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2017. (ECF No. 27 at 4.) Defendants argue Plaintiffs were aware of Monolith’s existence for

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more than a year before SMC used Monolith as a pretextual ground to terminate Defendants.

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(Id.) More specifically, Defendants argue that Maxey, one of SMC’s directors, invested in a

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Monolith mobile home park project as early as November 2016 and signed documents to that

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effect. (Id.) Defendants further argue that Maxey received quarterly distributions from the

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investment, and SMC managed the mobile home park and received five percent of all gross

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revenue. (Id.) Defendants argue Plaintiffs’ counsel was on notice of these facts one month

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before filing this action and failed to conduct a reasonable investigation. (Id.)

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In opposition, Plaintiffs argue the statements at issue are not false. (ECF No. 32 at 4.)

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Plaintiffs argue SMC’s Board did not have knowledge of Monolith — and certainly not the full

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scope of Defendants’ involvement with Monolith or that they were using SMC’s resources —

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until November 2017. (Id. at 14.) Plaintiffs argue Maxey has no recollection of signing any

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documents identifying Monolith and that the true investor in the Monolith project was his brother,

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William. (Id. at 16–17.) Plaintiffs submit declarations from John and William Maxey to support

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these assertions. (See ECF Nos. 32-3, 32-4.)

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Rule 11 contemplates that factual contentions may require “a reasonable opportunity for

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further investigation or discovery.” Fed. R. Civ. P. 11(b)(3). It remains unclear whether

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Plaintiffs knew the exact nature of Defendants’ involvement with Monolith long before

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Defendants’ termination, or what effect such knowledge might have on Plaintiffs’ claims. Both

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sides have presented evidence to support their conflicting versions of events. Based on the

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limited evidence before the Court at this early stage, Defendants have not persuaded the Court

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that sanctions are warranted, especially not the sanctions Defendants request. The Court recently

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denied Plaintiffs’ motion for preliminary injunction (ECF No. 152), and therefore Defendants’

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request that the Court deny the motion for preliminary injunction and strike Maxey’s declaration
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in support of that motion is moot. Defendants also argue they incurred unnecessary expenses

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responding to Plaintiffs’ motion for preliminary injunction and seek monetary sanctions in the

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amount of $17,995. (ECF No. 27 at 5.) Even though the Court ultimately denied Plaintiffs’

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motion for preliminary injunction based on a lack of irreparable injury, the Court cannot say that

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Plaintiffs’ motion was entirely devoid of factual support such that sanctions are warranted. To

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the contrary, Plaintiffs provided multiple sources of evidentiary support for their assertion that

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SMC’s Board as a whole was unaware of Defendants’ Monolith activities — or at least the true

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extent of those activities — until just prior to Defendants’ termination. (See, e.g., ECF Nos. 10,

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11.) Further discovery may reveal additional facts that contradict Plaintiffs’ claims, but the Court

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declines to impose the “extraordinary remedy” of Rule 11 sanctions based on what is essentially a

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factual dispute. Operating Engineers, 859 F.2d at 1345. The Court also declines to grant

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Plaintiffs’ request for attorneys’ fees at this time.

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IV.

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For the foregoing reasons, Defendants’ Motion for Sanctions (ECF No. 27) is hereby

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CONCLUSION

DENIED.
IT IS SO ORDERED.

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DATED: February 28, 2021

Troy L. Nunley
United States District Judge

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