Bank of New York Mellon v. City of Richmond, California et al

Filing 59

RESPONSE (re 55 MOTION for Sanctions ) by Trustees filed byBank of New York Mellon, Bank of New York Mellon Trust Company, N.A., U.S. Bank National Association, Wilmington Trust Company, Wilmington Trust, National Association. (Hershman, Brian) (Filed on 11/22/2013)

1
2
3
4
5
6
7
8
9
10
11
12
13

JONES DAY
BRIAN D. HERSHMAN (SBN 168175)
[e-mail]
555 South Flower Street, 50th Floor
Los Angeles, CA 90071-2300
Tel: [phone]
Fax: [phone]
JONES DAY
MATTHEW A. MARTEL (pro hac vice)
[e-mail]
JOSEPH B. SCONYERS (pro hac vice)
[e-mail]
100 High Street, 21st Floor
Boston, MA 02110-1781
Tel: [phone]
Fax: [phone]
Attorneys for Plaintiff
U.S. BANK NATIONAL ASSOCIATION, as
Trustee for the trusts listed on Exhibit B to the
Second Amended Complaint
[Additional counsel listed on signature page]

14

UNITED STATES DISTRICT COURT

15

NORTHERN DISTRICT OF CALIFORNIA

16
17
18
19
20
21
22
23

THE BANK OF NEW YORK MELLON
(f/k/a The Bank of New York), et al.

Plaintiffs,
v.
CITY OF RICHMOND, CALIFORNIA, a
municipality, et al.
Defendants.

Case No. 13-cv-3664-CRB
TRUSTEES’ OPPOSITION TO
MOTION FOR RULE 11 SANCTIONS

Date:
Time:
Judge:

January 24, 2014
10:00 a.m.
Hon. Charles R. Breyer
Courtroom 6, 17th Floor

24
25
26
27
28
OPPOSITION TO RULE 11 MOTION
Case No. 13-cv-3664-CRB

1

TABLE OF CONTENTS

2

Page

3

INTRODUCTION AND SUMMARY OF ARGUMENT .............................................................. i
STATEMENT OF ISSUE TO BE DECIDED ................................................................................ 1
PROCEDURAL BACKGROUND ................................................................................................. 1
A.
The Initiation of the Seizure Program ..................................................................... 1
B.
The Related Wells Fargo Case ................................................................................ 3
C.
The Rule 11 Correspondence .................................................................................. 4
D.
The Motion to Dismiss Hearing In This Action ..................................................... 5
ARGUMENT .................................................................................................................................. 6
A.
Rule 11 Standard ..................................................................................................... 6
B.
The Trustees’ Complaint Was Neither Frivolous Nor Filed For an Improper
Purpose .................................................................................................................... 7
C.
The Trustees Acted Properly In Opposing Defendants’ Motion to Dismiss .......... 9
D.
Defendants’ Request for Sanctions Is Improper ................................................... 11
CONCLUSION ............................................................................................................................. 13

4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28

-i-

OPPOSITION TO RULE 11 MOTION
Case No. 13-cv-3664-CRB

1

TABLE OF AUTHORITIES

2

Page

3

CASES

4

Allstate Ins. Co. v. Tricare Mgmt. Activity,
662 F. Supp. 2d 883 (W.D. Mich. 2009) .................................................................................. 9

5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28

BE&K Constr. Co. v. NLRB,
536 U.S. 516 (2002) .................................................................................................................. 9
Bill Johnson’s Rests., Inc. v. NLRB,
461 U.S. 731 (1983) .............................................................................................................. ii, 9
Camreta v. Greene,
131 S. Ct. 2020 (2011) ........................................................................................................ ii, 10
Cunningham v. Cnty. of Los Angeles,
879 F.2d 481 (9th Cir. 1988)..................................................................................................... 7
Federal Savings & Loan Ins. Corp v. Molinaro,
923 F.2d 736 (9th Cir. 1991)................................................................................................... 10
Hamer v. Career Coll. Ass’n,
979 F.2d 758 (9th Cir. 1992)..................................................................................................... 7
Holgate v. Baldwin,
425 F.3d 671 (9th Cir. 2005)..................................................................................................... 7
In re Keegan Mgmt. Co., Sec. Litig.,
78 F.3d 431 (9th Cir. 1996)....................................................................................................... 7
Long v. Marubeni Am. Corp.,
406 F. Supp.2d 285 (S.D.N.Y. 2005) ................................................................................ 10, 11
MedImmune, Inc. v. Genentech, Inc.,
549 U.S. 118 (2007) .......................................................................................................... 10, 11
Operating Eng’rs Pension Trust v. A-C Co.,
859 F.2d 1336 (9th Cir. 1988)............................................................................................ i, 6, 8
Sch. Dist. No. 1J, Multnomah Cnty., Oregon v. ACandS, Inc.,
5 F.3d 1255 (9th Cir. 1993)..................................................................................................... 12
Tovar v. U.S. Postal Serv.,
3 F.3d 1271 (9th Cir. 1993)..................................................................................................... 12
Townsend v. Holman Consulting Corp.,
929 F.2d 1358 (9th Cir. 1990)................................................................................................... 7
- ii -

OPPOSITION TO RULE 11 MOTION
Case No. 13-cv-3664-CRB

1

TABLE OF AUTHORITIES
(continued)

2
3
4
5
6

Page
United Mine Workers v. Ill. State Bar Ass’n,
389 U.S. 217 (1967) .................................................................................................................. 9
Welbon v. Burnett,
Nos. 07-4248, 07-2992, 08-123, 2008 WL 789896 (N.D. Cal. Mar 24, 2008) ...................... 11

7

Wells Fargo Nat’l Bank Ass’n v. Vann,
No. 12-05725, 2013 WL 791474 (N.D. Cal. Mar. 4, 2013).................................................... 11

8

STATUTES

9

Cal. Civ. Proc. Code § 1245.240..................................................................................................... 1

10

Cal. Gov. Code § 7267.2(a)(2) ........................................................................................................ 2

11

OTHER AUTHORITIES

12
13

Fed. R. Civ. P. 11(b)(2) ............................................................................................................. 7, 11
Fed. R. Civ. P. 11(c)(2) ............................................................................................................. 5, 13

14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
- iii -

OPPOSITION TO RULE 11 MOTION
Case No. 13-cv-3664-CRB

1

MEMORANDUM OF POINTS AND AUTHORITIES

2

INTRODUCTION AND SUMMARY OF ARGUMENT

3

Defendants1 ask this Court to punish the Trustees2 for seeking to have their day in court.

4

See Notice of Motion and Motion for Rule 11 Sanctions (D.E. #55) (“Sanctions Mot.”).

5

Specifically, Defendants ask this Court to take the extreme step of imposing Rule 11 sanctions

6

because, according to Defendants, the Trustees should have known at the time they filed their

7

complaint that the Court would dismiss their lawsuit as unripe and therefore the Trustees’ lawsuit

8

was frivolous. Id. at 5-7.

9

There is absolutely no merit to Defendants’ assertion that the Trustees’ lawsuit

10

challenging Defendants’ unconstitutional seizure program was frivolous. As demonstrated in the

11

Trustees’ opposition to Defendants’ motion to dismiss, the Trustees had valid and good faith

12

arguments as to why the substantial and concrete actions taken by Defendants to implement their

13

seizure program were ripe for review by the Court. Although the Court ultimately disagreed with

14

the Trustees’ position, that in no way justifies Rule 11 sanctions. Essentially, Defendants ask this

15

Court to transform Rule 11 sanctions from the “rare and exceptional case where the action is

16

clearly frivolous” (Operating Eng’rs Pension Trust v. A-C Co., 859 F.2d 1336, 1344 (9th Cir.

17

1988), to one where the losing party on a motion to dismiss is automatically subject to punitive

18

sanctions. The Ninth Circuit has expressly cautioned against such a transformation. See id.

19

Defendants also criticize the Trustees for proceeding with their lawsuit after this Court

20

dismissed the complaint in a related case filed by Wells Fargo Bank, National Association,

21

Deutsche Bank National Trust Company and Deutsche Bank Trust Company Americas (the

22

“Wells Fargo case”). Defendants assert that the Trustees should have voluntarily dismissed their

23

lawsuit, and abandoned efforts on behalf of the trusts to seek adjudication by this Court, because

24

different plaintiffs in a different case advancing different legal and factual arguments failed to

25
26
27
28

1

Defendants the City of Richmond (“City” or “Richmond”), Richmond City Council,
Mortgage Resolution Partners L.L.C. (“MRP”), and Gordian Sword LLC are referred to
collectively as “Defendants.”
2
Plaintiffs The Bank of New York Mellon, The Bank of New Mellon Trust Company,
U.S. Bank National Association, Wilmington Trust Company, and Wilmington Trust, National
Association are referred to collectively as the “Trustees.”
-i-

OPPOSITION TO RULE 11 MOTION
Case No. 13-cv-3664-CRB

1
2

convince the Court as to the ripeness of their claims.
Defendants’ assertion is mistaken for multiple reasons. As a matter of law, the decision in

3

the Wells Fargo case was not binding authority on this Court (or any other court for that matter).

4

See Camreta v. Greene, 131 S. Ct. 2020, 2033 n.7 (2011). The Trustees had every right to

5

zealously pursue the trusts’ rights in this case in an effort to protect the trusts’ assets from

6

Defendants’ unlawful seizure program.

7

Moreover, as this Court recognized, Defendants’ arguments were different from those

8

advanced in the Wells Fargo case. The Wells Fargo plaintiffs focused on ripeness for the

9

preliminary injunction they sought and the harm that would be caused by the City filing an

10

eminent domain lawsuit. In contrast, here, the Trustees focused on the threat of litigation

11

embodied in the July 31 offer letters, which threats already had occurred and were sufficiently

12

concrete to permit the Court to issue a declaratory judgment. See Declaration of Brian D.

13

Hershman in Support of Trustees’ Opposition to Motion for Rule 11 Sanctions (“Hershman

14

Decl.”), ¶ 2, Ex. A at 13:21-14:7 (motion to dismiss hearing transcript). The Trustees contended

15

(and still contend) that the decision of the City Council to send the offer letters, followed by the

16

supermajority vote by the City Council not to revoke the offer letters, was sufficient to meet the

17

standard for Article III ripeness. The Trustees had every right to pursue this approach,

18

notwithstanding the lack of success of the Wells Fargo plaintiffs in advancing different legal

19

arguments and theories.

20

Further, Defendants’ unsupported assertion that the Trustees are seeking to chill the

21

political process is backwards. The Trustees have a First Amendment right to petition the

22

government, including by filing a lawsuit challenging Defendants’ unconstitutional seizure

23

program. See Bill Johnson’s Rests., Inc. v. NLRB, 461 U.S. 731, 741 (1983) (“[T]he right of

24

access to the courts is an aspect of the First Amendment right to petition the Government for

25

redress of grievances . . . .”). The notion that a party should be punished for challenging

26

governmental action because it might “chill” the government is antithetical to the democratic

27

process. Rather, what is “chilling” is Defendants’ attempt to use Rule 11 to deter the Trustees

28

from exercising their rights and to stamp out vigorous debate over Defendants’ seizure program.
- ii -

OPPOSITION TO RULE 11 MOTION
Case No. 13-cv-3664-CRB

1
2

Such attempts are a plainly improper abuse of Rule 11.
The Trustees were confronted with a novel and plainly unconstitutional effort by

3

Defendants to take the mortgage loans and cause immense harm to the trusts. After observing

4

numerous concrete steps by Defendants to implement their seizure program (detailed below),

5

including a letter threatening to initiate eminent domain proceedings if offers to purchase were

6

not accepted, the Trustees, acting on behalf of the trusts, elected to seek review by this Court.

7

After engaging the parties’ counsel in a spirited and thoughtful exchange at oral argument, this

8

Court concluded that the claims are not yet ripe. But it is a tremendous leap from that conclusion

9

to a finding that the Trustees were acting frivolously and for an improper purpose. This Court

10

should not chill zealous and good faith advocacy by condoning Defendants’ efforts to seek Rule

11

11 sanctions, and should instead deny Defendants’ motion.

12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
- iii -

OPPOSITION TO RULE 11 MOTION
Case No. 13-cv-3664-CRB

1
2

STATEMENT OF ISSUE TO BE DECIDED
Whether Defendants’ motion for Rule 11 sanctions should be denied.

3
4

PROCEDURAL BACKGROUND
To fully understand why the Trustees’ actions were neither frivolous nor brought for an

5

improper purpose, it is important to understand the procedural history and the factual background

6

which prompted the Trustees to file this action on behalf of the trusts.

7

A.

8

Over the last two years, mayors and city councils throughout the United States have been

9

The Initiation of the Seizure Program

considering the merits and legality of utilizing eminent domain to seize residential mortgage

10

loans. For the most part, these discussions remained theoretical, as every city council to consider

11

the issue rejected the option; many citing concerns about the Constitutionality of such a seizure

12

program and/or because of the risks associated with such a venture. See Hershman Decl., ¶¶ 3-4,

13

Exs. B, C (collection of news articles). That remained the case until earlier this year, when

14

Richmond became the first city to take concrete steps to implement MRP’s seizure program.

15

First, on or about April 2, 2013, Richmond entered into an “Advisory Services

16

Agreement” with MRP, engaging MRP to, among other things, advise the City regarding the

17

acquisition of mortgage loans through eminent domain. See Hershman Decl., ¶ 5, Ex. D

18

(Advisory Services Agreement). The Advisory Services Agreement was supported by the City

19

Manager, and approved by the City Council by a vote of 6-0, with one council member absent.

20

See id., ¶ 6, Ex. E at 7-8 (Richmond City Council minutes for April 2, 2013 meeting). Notably,

21

the approval was by a supermajority of the City Council – the same number of votes needed to

22

adopt a resolution of necessity and initiate eminent domain proceedings. See Cal. Civ. Proc.

23

Code § 1245.240.

24

Second, on or about June 28, 2013, defendant MRP sent warning letters to financial

25

institutions throughout the United States, stating that “underwater” mortgage “loans would be

26

acquired as part of a public program.” See, e.g., Hershman Decl., ¶¶ 7-8, Ex. F (June 28, 2013

27

MRP letter to The Bank of New York Mellon and The Bank of New York Mellon Trust

28

Company), Ex. G (June 28, 2013 MRP letter to U.S. Bank National Association).
-1-

OPPOSITION TO RULE 11 MOTION
Case No. 13-cv-3664-CRB

1

Third, Defendants hired a third party to appraise more than 624 loans held by the Trustees

2

and other trustees and servicers. See id., ¶¶ 9-11, Ex. H (City of Richmond July 31, 2013 “offer

3

letter” to The Bank of New York Mellon and The Bank of New York Mellon Trust Company),

4

Ex. I (City of Richmond July 31, 2013 “offer letter” to U.S. National Bank Association), Ex. J

5

(City of Richmond July 31, 2013 “offer letter” to Wilmington Trust Company and Wilmington

6

Trust National Association). The stated purpose of the appraisal was to allow Richmond to

7

determine the fair market value of the residential loans so that Richmond could make formal

8

offers to purchase the loans – a prerequisite to initiating eminent domain proceedings. See Cal.

9

Gov. Code § 7267.2(a)(2).

10

Fourth, on or about July 31, 2013, the City sent threatening letters to approximately 32

11

trustees and servicers of residential mortgage backed securitization (“RMBS”) trusts, including

12

the Trustees. See Hershman Decl., ¶¶ 9-11, Exs. H, I, J. In the letters, the City offered to

13

purchase specifically identified targeted loans, held in specifically identified trusts, at specifically

14

identified prices, including trusts administered by the Trustees. See Hershman Decl., ¶¶ 9-11,

15

Exs. H, I, J. The City notified each Trustee that a third party had appraised the mortgage loans

16

and that the offer purportedly represented the fair market value of the loans. See Hershman Decl.,

17

¶¶ 9-11, Exs. H, I, J. Significantly, the City warned that, if the Trustees refused the offers, the

18

City could “proceed with the acquisition of the Loans through eminent domain.” Hershman

19

Decl., ¶¶ 9-11, Exs. H, I, J.

20

Richmond’s decision to send the July 31, 2013 letters was the final straw. The Trustees

21

were convinced that Defendants’ seizure program violated numerous provisions of the United

22

States and California Constitutions, as well as other federal and state laws, and that the actions

23

taken to date by Richmond had caused cognizable harm. The Trustees decided to seek judicial

24

review with respect to the Constitutionality of the program before further harm ensued to the

25

trusts. On August 7, 2013, The Bank of New York Mellon filed this action seeking declaratory

26

and injunctive relief and asserting that the seizure program was unlawful. See Complaint (D.E.

27

#1). The other trustees joined the action shortly thereafter, and the Trustees filed the Second

28

Amended Complaint (D.E. #36) (“SAC”) on August 26, 2013, pursuant to a stipulation with
-2-

OPPOSITION TO RULE 11 MOTION
Case No. 13-cv-3664-CRB

1

Defendants. See Stipulation for Filing of SAC (D.E. #17).

2

B.

3

The Trustees were not the only trustees to receive threatening letters from the City in

The Related Wells Fargo Case

4

connection with the seizure program. Wells Fargo Bank, National Association, Deutsche Bank

5

National Trust Company and Deutsche Bank Trust Company Americas (each, as trustee) also

6

received letters on or about July 31, 2013, offering to purchase specifically identified targeted

7

loans, and warning that the City may commence eminent domain proceedings if the offers to

8

purchase were rejected. See Complaint (D.E. #1) at ¶ 66, Wells Fargo Bank, Nat’l Ass’n, et al. v.

9

City of Richmond, California, et al., No. 3:13-cv-03663 (N.D. Cal. 2013).

10

On August 7, 2013, the Wells Fargo plaintiffs filed a complaint against the City and MRP

11

seeking declaratory and injunctive relief and asserting that the City’s seizure program violated the

12

United States and California Constitutions. See Complaint at ¶ 1, id. Not only did the Wells

13

Fargo plaintiffs file a complaint, they simultaneously filed a motion for preliminary injunction

14

seeking to stop the City’s seizure program in its tracks. See Motion for Preliminary Injunction

15

(D.E. #8), id.

16

Significantly, after the Wells Fargo plaintiffs filed their complaint and just two days

17

before the preliminary injunction/motion to dismiss hearing, the Richmond City Council

18

considered and voted on three resolutions related to the seizure program. See Hershman Decl.,

19

¶ 12, Ex. K at 7-9 (Richmond City Council minutes for September 10, 2013 meeting). First, the

20

council voted to pursue the formation of a Joint Powers Authority with other municipalities to

21

effectuate the seizure program. See id. Second, the council rejected, by a supermajority vote, a

22

resolution to withdraw the July 31, 2013 offer letters and terminate the seizure program. Third,

23

the council rejected a resolution to refrain from further implementing the seizure program until

24

MRP could provide adequate insurance. See id. The outcome of the votes on each resolution

25

demonstrate that the council was undeterred by the filing of the Wells Fargo action and this case,

26

and that there was no “chilling” on the legislative process in Richmond.

27
28

On September 12, 2013, the Court held a hearing on the Wells Fargo plaintiffs’ motion for
preliminary injunction and Defendants’ motion to dismiss the Wells Fargo complaint. On
-3-

OPPOSITION TO RULE 11 MOTION
Case No. 13-cv-3664-CRB

1

September 16, 2013, the Court entered its order dismissing the Wells Fargo case without

2

prejudice, finding that the claims were not ripe for adjudication. See Order on Defendants’

3

Motion to Dismiss (D.E. # 78), Wells Fargo Bank, Nat’l Ass’n, et al., No. 13-cv-03663.

4

C.

5

After the hearing on the motion for preliminary injunction/motion to dismiss in the Wells

The Rule 11 Correspondence

6

Fargo case, but before the Court issued any ruling, Defendants contacted the Trustees’ counsel

7

and demanded that the Trustees voluntarily dismiss their complaint with the threat that, if they did

8

not, Defendants would file an expedited motion to dismiss and “consider pursuing Rule 11

9

remedies.” See Decl. of S. Leyton in Supp. of Motion for Rule 11 Sanctions (D.E. #55-1)

10
11

(“Leyton Decl.”), ¶ 2, Ex. A.3
In response, the Trustees declined to dismiss their case, but agreed to provide Defendants

12

the professional courtesy of extending the time for Defendants to respond to the SAC. See id.

13

Defendants accepted the Trustees’ offer, and the parties stipulated to a 15-day extension for

14

Defendants to file their responsive pleading. See Stipulation to Extend Time to Answer

15

Complaint (D.E. #23).

16

Thereafter, on September 24, 2013, Defendants sent a draft Rule 11 motion threatening to

17

seek sanctions and an order dismissing the case with prejudice if the Trustees persisted in seeking

18

an adjudication by the Court with respect to Defendants’ motion to dismiss. See Leyton Decl.,

19

¶¶2-3. The Trustees responded by explaining that Defendants’ Rule 11 threat was improper

20

because, among other things, Defendants stipulated to the filing of the SAC, the arguments being

21

advanced by the Trustees were different from those raised by the Wells Fargo plaintiffs, and the

22

lawsuit was not being pursued for an improper purpose. See Hershman Decl., ¶ 13, Ex. L

23

(October 15, 2013 letter from M. Martel to S. Leyton). Finally, the Trustees reminded

24
25
26
27
28

3

In addition to threatening Rule 11 sanctions, Defendants indicated that, if the Trustees
would not voluntarily dismiss, Defendants intended to file an ex parte application to advance the
hearing on the motion to dismiss and to request that the Court rule without a hearing. See Leyton
Decl., ¶ 2, Ex. A. The Trustees declined to accede to Defendants’ demands, and Defendants
thereafter filed their ex parte application for an order shortening time and waiving hearing on the
motion. See Defs’ Ex Parte Motion to Shorten Time and Forego Hearing (D.E. #29). Both of
Defendants’ requests were denied by the Court. See Order Denying Defendants’ Ex Parte Motion
to Shorten Time (D.E. #33).
-4-

OPPOSITION TO RULE 11 MOTION
Case No. 13-cv-3664-CRB

1

Defendants that if they followed through on their threat and filed a Rule 11 motion, “the Court

2

may, following denial of the motion, award the Trustees their ‘reasonable expenses, including

3

attorney’s fees, incurred for the motion’” pursuant to Fed. R. Civ. P. 11(c)(2). Id.

4

D.

5

On November 1, 2013, the Court held a hearing on Defendants’ motion to dismiss in this

The Motion to Dismiss Hearing In This Action

6

action. The Court noted the differences between the arguments that the Wells Fargo plaintiffs

7

made and those being advanced by the Trustees:

8
9
10
11
12

THE COURT: So that’s the issue. It’s different. You have your letters out there.
You’re threatening litigation that’s very real, and therefore they should be able to
argue for declaratory relief because of that distinction. How that distinguishes it
from the other proceedings we’ve had, I’m not sure it distinguishes -- it may be
now there’s a different argument that’s being advanced -- I’m not sure that
argument couldn’t have been advanced the last time around, but it wasn’t. Not to
the extent that they’ve advanced it anyway.

13

MR. FALK: We weren’t here, your Honor.

14

THE COURT: They weren’t here. New day. New lawyer. New argument. There
we go. Okay.

15

Hershman Decl. ¶ 2, Ex. A at 13:21-14:7.

16
17

After further discussion, the Court honed in on the distinctions between the Wells Fargo

18

plaintiffs’ arguments and the Trustees’ arguments. In particular, the Wells Fargo plaintiffs

19

focused on events that had not yet occurred (the passage of a resolution of necessity and the filing

20

of an eminent domain action) and asserted that those events were a foregone conclusion. The

21

Trustees, on the other hand, asserted that their claims were ripe because of actions already taken

22

by the City Council, namely the decision to send the July 31, 2013 letters threatening to initiate

23

eminent domain proceedings if offers to purchase were not accepted and the Council’s recent vote

24

not to withdraw the letters. Id. at 11:19-13:19. Those votes already had occurred¸ and the

25

Trustees asserted that the threatening letter was, in and of itself, causing harmful uncertainty that

26

justified declaratory relief. Id. at 15:25-16:16. As the Court explained:

27
28

THE COURT: Well, I think counsel’s argument, as I understand it, is -- you’re
both right and wrong. He would say, Of course, we’re very concerned about the
ultimate harm that would occur if these proceedings proceeded. That is, in fact, if
-5-

OPPOSITION TO RULE 11 MOTION
Case No. 13-cv-3664-CRB

1
2
3
4
5
6
7
8

eminent domain proceeded. Yes, that would be terrible. That would be very
harmful. But he says, But that doesn’t mean that because the horrible thing has
yet to occur, that something harmful is not occurring right now. And he’s saying
that -- as I understand it -- he’s saying, The very -- the fact is that the city has
notified, as I understand it, notified individuals or homeowners that their house
may be subject to these proceedings -- is that correct? I haven’t seen the letter; I
don’t know what’s actually gone out.
MR. FALK: Notified the trustees of all the loans that they propose to take.
THE COURT: And that’s the harm -- and that’s a harm in and of itself that makes
it ripe for determination.
Id.

9
10

After taking the matter under submission, the Court issued a detailed Order explaining

11

why, in the Court’s view, the arguments being advanced by the Trustees still were insufficient to

12

establish Article III ripeness. See Order Granting Defendants’ Motion to Dismiss (D.E. #53).

13

But at no point during the contested, lengthy oral argument or in the Court’s written Order did the

14

Court suggest, much less assert, that the Trustees’ ripeness arguments were frivolous or somehow

15

improper. On the contrary, the Court concluded the oral argument by indicating he understood

16

the arguments, would go back and take a look at the exhibits the Trustees referenced during the

17

oral argument, and thanked counsel for the debate, noting the Court “appreciate[d] it.” Hershman

18

Decl. ¶ 2, Ex. A at 29:12-30:8.
ARGUMENT

19
20

A.

Rule 11 Standard

21

As the Ninth Circuit has recognized, “Rule 11 is an extraordinary remedy, one to be

22

exercised with extreme caution.” Operating Eng’rs, 859 F.2d at 1344. Therefore, courts should

23

“reserve sanctions for the rare and exceptional case where the action is clearly frivolous, legally

24

unreasonable or without legal foundation, or brought for an improper purpose.” Id.

25

Moreover, because the primary duty of an attorney is to represent his or her client

26

zealously, Rule 11 must be construed in a manner that does not create a conflict with the

27

attorney’s obligations. Id. While the goal of Rule 11 is to deter plainly frivolous conduct, the

28

Rule must be read “‘in light of concerns that it will spawn satellite litigation and chill vigorous
-6-

OPPOSITION TO RULE 11 MOTION
Case No. 13-cv-3664-CRB

1

advocacy[.]’” In re Keegan Mgmt. Co., Sec. Litig., 78 F.3d 431, 435 (9th Cir. 1996) (quoting

2

Cooter & Gell v. Hartmarx Corp. et al., 496 U.S. 384, 393 (1990)).

3

When, as here, a complaint is the primary focus of Rule 11 proceedings, a district court

4

“must conduct a two-prong inquiry to determine (1) whether the complaint is legally or factually

5

baseless from an objective perspective, and (2) if the attorney has conducted a reasonable and

6

competent inquiry before signing and filing it.” Holgate v. Baldwin, 425 F.3d 671, 676 (9th Cir.

7

2005) (internal quotation marks omitted). As a matter of law, a complaint cannot form the basis

8

for Rule 11 sanctions when it is “warranted by existing law or by a nonfrivolous argument for

9

extending, modifying, or reversing existing law or for establishing new law.” Fed. R. Civ. P.

10

11(b)(2); see also Holgate, 425 F.3d at 676. Further, “[a]lthough the ‘improper purpose’ and

11

‘frivolousness’ inquiries are separate and distinct, . . . with regard to complaints which initiate

12

actions, . . . such complaints are not filed for an improper purpose if they are non-frivolous.”

13

Townsend v. Holman Consulting Corp., 929 F.2d 1358, 1362 (9th Cir. 1990).

14

B.

15
16

The Trustees’ Complaint Was Neither Frivolous Nor Filed For an Improper
Purpose

In deciding whether a complaint is frivolous for Rule 11 purposes, it is well-established

17

that the Court’s inquiry must focus on the attorney’s conduct in light of the situation which

18

existed when the allegedly frivolous document was filed. See Hamer v. Career Coll. Ass’n, 979

19

F.2d 758, 759 (9th Cir. 1992). The type of hindsight analysis that Defendants ask this Court to

20

engage in is expressly forbidden. See Cunningham v. Cnty. of Los Angeles, 879 F.2d 481, 490

21

(9th Cir. 1988) (reversing the imposition of Rule 11 sanctions as improper because the claims

22

were not frivolous at the time of filing). Thus, for purposes of Rule 11, this Court must examine

23

the status at the time the Trustees filed the complaint; i.e. before this Court’s ruling in the Wells

24

Fargo action.

25

Applying this standard, Rule 11 sanctions plainly are not warranted. As an initial matter,

26

Defendants’ position is puzzling in light of the fact that Defendants stipulated to the filing of the

27

SAC. See Stipulation for Filing of SAC. Defendants fail to explain why they stipulated to the

28

filing of the SAC if, as they now contend, they believed that the SAC was frivolous and being
-7-

OPPOSITION TO RULE 11 MOTION
Case No. 13-cv-3664-CRB

1
2

filed for an improper purpose.
Second, the Trustees’ challenge to Defendants’ unconstitutional seizure program plainly

3

was not frivolous. At the time the Trustees filed their lawsuit, the City had taken substantial and

4

concrete steps to implement their program: (1) the City contracted with MRP to assist with the

5

acquisition of mortgage loans through eminent domain; (2) the City hired third parties to appraise

6

the loans so that offers could be made and, if rejected, eminent domain proceedings initiated; and

7

(3) the City sent letters to the Trustees offering to purchase specifically identified loans and

8

threatening to initiate eminent domain proceedings if the offers were not accepted. Under these

9

circumstances, the Trustees’ efforts to seek a judicial declaration can in no way be seen as

10

frivolous or improper.

11

Third, although Defendants assert that there should not have been “any reasonable doubt”

12

that the Trustees’ claims were not ripe at the time the action was commenced (Sanctions Mot. 1),

13

Defendants did not and cannot cite any definitive authority holding that a declaratory relief action

14

is not ripe in this unique context. On the contrary, the precise issue here is unsettled. The

15

Trustees cited substantial authority in their opposition to Defendants’ motion to dismiss

16

demonstrating that, in similar situations, courts have permitted declaratory relief actions and

17

found that such challenges, in the face of threatened litigation, were ripe. The Trustees

18

understand that the Court rejected these arguments, concluding that different ripeness rules apply

19

when the threat of litigation—like other significant municipal action—could be carried out only

20

after legislative action. See Order Granting Defendants’ Motion to Dismiss at 4-5. But the fact

21

that the Court disagreed with the Trustees does not mean that the law is not unsettled, much less

22

that Rule 11 sanctions are appropriate. The Ninth Circuit has clarified that Rule 11 is limited to

23

the “rare and exceptional case where the action is clearly frivolous, legally unreasonable or

24

without legal foundation, or brought for an improper purpose.” Operating Eng’rs, 859 F.2d at

25

1344. None of those elements are present here.

26

Moreover, this is not a case where, as in those relied on by Defendants (Sanctions Mot. 5),

27

pro se plaintiffs filed successive complaints without conducting appropriate inquiry. Here,

28

experienced attorneys from four different well respected law firms evaluated Defendants’ actions
-8-

OPPOSITION TO RULE 11 MOTION
Case No. 13-cv-3664-CRB

1

and determined that a declaratory relief action was ripe for review. Again, the fact that the Court

2

concluded to the contrary does not mean the arguments advanced by these attorneys and law

3

firms were frivolous or improper.

4

Finally, Defendants’ unsupported assertion that the Trustees refused to dismiss the SAC to

5

“further chill the political and legislative process” (Sanctions Mot. 1,3,8) is simply wrong and,

6

paradoxically, describes precisely what Defendants’ baseless sanctions motion is seeking to

7

achieve. The First Amendment right to petition the government, including the courts, is one of

8

“the most precious of the liberties safeguarded by the Bill of Rights,” United Mine Workers v. Ill.

9

State Bar Ass’n, 389 U.S. 217, 222 (1967); see also Bill Johnson’s Rests., Inc., 461 U.S. at 741,

10

and protects “petitioning whenever it is genuine, not simply when it triumphs,” BE&K Constr.

11

Co. v. NLRB, 536 U.S. 516, 532 (2002). Further, “even unsuccessful but reasonably based suits

12

advance some First Amendment interests” in that they “raise matters of public concern.” Id.

13

Here, far from “chilling” government action, the Wells Fargo case and this case prompted the

14

City Council to engage in further debate about the merits of the seizure program. See Hershman

15

Decl., ¶ 12, Ex. K, at 9. And it is evident that this debate did not “chill” the political and

16

legislative process. After the filing of the Wells Fargo case and this case, Richmond held three

17

council votes related to its loan seizure program, and each vote reaffirmed the City’s intention to

18

move forward. See Hershman Decl., ¶ 12, Ex. K at 9. In fact, it is Defendants’ abuse of Rule 11

19

that is improperly attempting to “chill” protected First Amendment activity by the Trustees. The

20

Trustees had every right to challenge Defendants’ unconstitutional seizure program, including by

21

petitioning the government through this lawsuit. Rule 11 sanctions should not be used to chill

22

such activity. See Allstate Ins. Co. v. Tricare Mgmt. Activity, 662 F. Supp. 2d 883, 896 (W.D.

23

Mich. 2009) (“[Because] the First Amendment articulates a general right to petition the

24

government, including the courts[,] . . . [s]anctions must not be applied to constrain novel or weak

25

arguments that nonetheless have an arguable basis in fact and law.”).

26

C.

27

As shown, the Trustees’ lawsuit was proper at the time it was filed in this Court.

28

Nevertheless, Defendants assert that the Trustees should have abandoned their claims after this

The Trustees Acted Properly In Opposing Defendants’ Motion to Dismiss

-9-

OPPOSITION TO RULE 11 MOTION
Case No. 13-cv-3664-CRB

1

Court ruled in the Wells Fargo action that the Wells Fargo plaintiffs’ lawsuit was not ripe.

2

According to Defendants, the Trustees were precluded from attempting to advance arguments to

3

distinguish their case, and instead should have simply dismissed their claims and foregone any

4

appeal. Defendants assert that the Trustees’ insistence that they have their day in court to protect

5

the trusts’ assets warrants Rule 11 sanctions. Defendants are mistaken for several reasons.

6

To begin, as a matter of law, the decision in the Wells Fargo case was not binding

7

authority on this Court (or any other court for that matter). As noted by the Supreme Court in

8

Camreta, 131 S. Ct. at 2033 n.7 (2011), “[a] decision of a federal district court judge is not

9

binding precedent in either a different judicial district, the same judicial district or even upon the

10

same judge in a different case.” (Internal quotation marks omitted.) Indeed, in a case with a

11

nearly identical procedural posture as this one, the court declined to impose Rule 11 sanctions

12

where the defendants filed a motion to dismiss essentially identical to one denied by the same

13

court in a case with different defendants. Long v. Marubeni Am. Corp., 406 F. Supp.2d 285, 303

14

(S.D.N.Y. 2005). The court held that: “While it may be predictable that the author of that opinion

15

would reject defendants’ motion, [the court’s previous decision] is a district court opinion, and is

16

not a binding precedent. . . . Defendants are perfectly entitled to challenge its correctness, in order

17

to preserve their apparent disagreement with its conclusion for appellate review.” Id.; see also

18

Federal Savings & Loan Ins. Corp v. Molinaro, 923 F.2d 736, 739 (9th Cir. 1991) (reversing

19

sanctions order because, although prior rulings with respect to other property owners had

20

arguably foreclosed the plaintiff’s claims, “none of the preceding orders in the litigation ever

21

adjudicated [defendant’s] claim to the property” at issue).

22

Moreover, here (unlike in Long and Molinaro), the Trustees made good faith arguments

23

that were different than those advanced in the Wells Fargo case, and the Trustees had the right to

24

attempt to persuade the Court as to the merits of the Trustees’ arguments. In particular, the

25

Trustees asserted that the City’s July 31, 2013 letters placed them in reasonable apprehension of

26

suit, which under the test set forth in MedImmune, Inc. v. Genentech, Inc., 549 U.S. 118 (2007),

27

was sufficient for ripeness purposes. Although the Court ultimately granted the motion to

28

dismiss, the Court’s conclusion was far from foregone, and the Trustees were “perfectly entitled”
- 10 -

OPPOSITION TO RULE 11 MOTION
Case No. 13-cv-3664-CRB

1

to advance arguments in an unsettled area of law. Long, 406 F. Supp.2d at 303. Further, even if

2

the area were settled, the Trustees were likewise entitled to advance arguments to “extend[],

3

modify[], or revers[e] existing law or [to] establish[] new law” (Fed. R. Civ. P. 11(b)(2)), which

4

is what occurred in MedImmune itself. Indeed, at the hearing on the motion to dismiss, the Court

5

did not chastise counsel for wasting the Court’s time. On the contrary, the Court recognized that

6

the arguments being advanced by the Trustees were “different,” agreed to take a fresh look at the

7

evidence, and indicated that the Court “appreciate[d]” the parties’ oral presentations. Hershman

8

Decl. ¶ 2, Ex. A at 13:21-14:7, 30:8.

9

Finally, the cases relied on by Defendants to suggest that Rule 11 sanctions are warranted

10

are wholly inapposite. In Welbon v. Burnett, Nos. 07-4248, 07-2992, 08-123, 2008 WL 789896

11

(N.D. Cal. Mar 24, 2008), a pro se plaintiff filed successive, frivolous lawsuits arising from the

12

same dispute. The court sanctioned the pro se plaintiff because he filed a complaint after

13

numerous courts (including the same district court) had dismissed several identical complaints

14

previously filed by the plaintiff. Id. at *4. The Trustees here have only filed one lawsuit and

15

have not presented their claims to any other court.

16

Defendants also misplace reliance on Wells Fargo Nat’l Bank Ass’n v. Vann, No. 12-

17

05725, 2013 WL 791474 (N.D. Cal. Mar. 4, 2013), the holding of which, if anything, confirms

18

that sanctions should not be imposed. In Vann, the pro se defendant on two occasions removed

19

the exact same unlawful detainer case, even though the Court explained on the first occasion that

20

it did not have jurisdiction to hear the matter. Id. at *1. The Court found that the defendant

21

removed the case in bad faith because case law precedents and its own previous order

22

“unequivocally prohibit[ed] removal under the circumstances of th[e] case.” Id. at *2. Even

23

under those significantly different circumstances, the Court declined to award Rule 11 sanctions.

24

Here, the Trustees were not acting in bad faith, advanced different legal arguments from the

25

Wells Fargo plaintiffs, and their lawsuit had never been addressed by any court prior to this

26

Court’s November 6 decision. There is no basis to impose Rule 11 sanctions.

27

D.

28

As shown, Defendants come nowhere near satisfying the standard for imposing Rule 11

Defendants’ Request for Sanctions Is Improper

- 11 -

OPPOSITION TO RULE 11 MOTION
Case No. 13-cv-3664-CRB

1

sanctions. Moreover, there is no basis for the specific relief being sought. Defendants seek

2

attorney’s fees for (1) reviewing the SAC and “materials related to this case”; (2) briefing and

3

arguing the motion to dismiss; and (3) briefing and arguing the motion for sanctions. Sanctions

4

Mot. 7. Yet Defendants refuse to provide supporting documentation for the purported fees

5

incurred, instead indicating that they will do so “[w]hen filing the reply brief.” Id. Because

6

almost all of this information was available when Defendants filed their motion, the only purpose

7

in waiting until the reply brief is to prevent the Trustees from evaluating the data and responding

8

in their opposition. Such gamesmanship should not be tolerated. See Tovar v. U.S. Postal Serv.,

9

3 F.3d 1271, 1273 n.3 (9th Cir. 1993) (presenting new information in a reply is improper and

10
11

deprives the opposing party of an opportunity to respond).
Defendants also request that the SAC be dismissed with prejudice. Sanctions Mot. at 7-8.

12

However, the Court has already dismissed the SAC without prejudice, and Defendants cite no

13

authority for the proposition that this Court can subsequently convert the dismissal to one with

14

prejudice.4 Regardless, the request is plainly inappropriate. It is unclear what Defendants are

15

specifically requesting, but to the extent Defendants are asking the Court to forever bar the

16

Trustees from challenging the Constitutionality of an eminent domain action initiated by the City,

17

such a sanction plainly does not comport with due process. Defendants previously represented to

18

this Court that the Trustees’ claims were not ripe because the City may never adopt a resolution

19

of necessity, may never initiate eminent domain proceedings, and if they do go forward it is

20

unknown what form such actions will take. To request that the City be given carte blanche to

21

take such actions without allowing judicial review is patently absurd.

22

Finally, as Defendants themselves point out, when deciding whether to impose Rule 11

23

sanctions, the Court “may award to the prevailing party on the motion the reasonable expenses

24

and attorney’s fees incurred in presenting . . . the motion.” Sanctions Mot. 7 (emphasis supplied).

25
26
27
28

4

To the extent Defendants are seeking reconsideration of the Court’s dismissal without
prejudice, Defendants meet none of the criteria for reconsideration. See Sch. Dist. No. 1J,
Multnomah Cnty., Oregon v. ACandS, Inc., 5 F.3d 1255, 1263 (9th Cir. 1993) (“Reconsideration
is appropriate if the district court (1) is presented with newly discovered evidence, (2) committed
clear error or the initial decision was manifestly unjust, or (3) if there is an intervening change in
controlling law.”).
- 12 -

OPPOSITION TO RULE 11 MOTION
Case No. 13-cv-3664-CRB

1

As shown, neither the filing of the SAC nor the opposition to the motion to dismiss were

2

frivolous, and the Trustees should prevail on this Rule 11 motion.5

3
4

CONCLUSION
For the foregoing reasons, the Trustees respectfully request that the Court deny

5

Defendants’ motion for Rule 11 sanctions.

6

Dated: November 22, 2013

7
8

JONES DAY
Brian D. Hershman
Matthew A. Martel
Joseph B. Sconyers

9
By: /s/ Brian D. Hershman
Brian D. Hershman

10
11

Attorneys for Plaintiff
U.S. BANK NATIONAL ASSOCIATION,
as Trustee for the trusts listed on Exhibit B
to the Second Amended Complaint

12
13
14

Dated: November 22, 2013

15
16

MAYER BROWN LLP
Donald M. Falk
Bronwyn F. Pollock
Noah B. Steinsapir
Michael D. Shapiro

17
18

By: /s/ Bronwyn F. Pollock
Bronwyn F. Pollock

19

Attorneys for Plaintiffs
THE BANK OF NEW YORK Mellon (f/k/a
The Bank of New York) and THE BANK OF
NEW YORK MELLON TRUST
COMPANY, N.A. (f/k/a The Bank of New
York Trust Company, N.A.), as Trustees for
the Trusts listed on Exhibit A of the Second
Amended Complaint

20
21
22
23
24
25
26
27
28

5

The Court has the discretion to award the Trustees their reasonable fees as the prevailing
party. Fed. R. Civ. P. 11(c)(2).
- 13 -

OPPOSITION TO RULE 11 MOTION
Case No. 13-cv-3664-CRB

1
2

Dated: November 22, 2013

ALSTON & BIRD LLP
Kurt Osenbaugh
Whitney Chelgren

3
4
5
6
7
8

By: /s/ Kurt Osenbaugh
Kurt Osenbaugh
Attorneys for Plaintiffs
WILMINGTON TRUST COMPANY and
WILMINGTON TRUST, NATIONAL
ASSOCIATION, as Trustees for the Trusts
listed in Exhibit C to the Second Amended
Complaint

9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
- 14 -

OPPOSITION TO RULE 11 MOTION
Case No. 13-cv-3664-CRB

1
2

SIGNATURE ATTESTATION
I, Brian D. Hershman, attest that the concurrence in the filing of this Trustees’ Opposition

3

to Motion for Rule 11 Sanctions has been obtained from Kurt Osenbaugh and Bronwyn F.

4

Pollock.

5

Dated: November 22, 2013

JONES DAY

6
7

By: /s/ Brian D. Hershman
Brian D. Hershman

8
9

Attorney for Plaintiff
U.S. BANK NATIONAL ASSOCIATION, as
Trustee for the trusts listed on Exhibit B to the
Second Amended Complaint

10
11
12
13

LAI-3203323

14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
- 15 -

OPPOSITION TO RULE 11 MOTION
Case No. 13-cv-3664-CRB