Wavetronix, LLC et al v. Swenson et al

Filing 129

MEMORANDUM DECISION AND ORDER. IT IS ORDERED that the Mr. Atkin pay a $10,000 sanction to the DBSI Liquidating Trust within 30 days of the date of this Order. Signed by Judge B. Lynn Winmill. (caused to be mailed to non Registered Participants at the addresses listed on the Notice of Electronic Filing (NEF) by (cjm)

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF IDAHO

WAVETRONIX LLC, an Idaho limited
liability company; David Arnold; and
Michael Jensen,
Plaintiffs,

Case No. 4:12-cv-00244-BLW

v.
Douglas Swenson, Conrad Myers,
individually but not in his capacity as
Trustee of the DBSI Liquidating Trust;
John D. Foster, Thomas Var Reeve,
Charles Hassard, Paul Judge, Gary
Bringhurst, Walter Mott, Jeremy Swenson,
John Mayeron, William Rich, and John
Does 1 through 20,
Defendants.

MEMORANDUM DECISION AND
ORDER

INTRODUCTION
This case stems from the collapse of DBSI, Inc., a sprawling real estate investment
empire. DBSI was comprised of hundreds of corporations and properties, but was
controlled and successfully ran by Defendant Douglas Swenson and his “cabal of
insiders” for many years. In 2008, during the midst of the economic downturn, various
DBSI entities filed for bankruptcy in the District of Delaware. A plan of reorganization
was confirmed in October of 2010. The reorganization plan created four trusts and called
for the appointment of a trustee for each. Former defendant Conrad Myers was appointed

MEMORANDUM DECISION AND ORDER - 1

as the Liquidating Trustee for the DBSI Liquidating Trust, and former defendant William
Rich served as one of Myers’ professional advisors.
In its decision dated March 29, 2013, the Court granted sanctions pursuant to Rule
11 for Wavetronix’s1 having filed claims in this Court against Myers and Rich for ultra
vires acts and for acts in continuance of the business of Stellar. The Court asked for
briefing on two issues: (1) whether monetary sanctions should be imposed against both
Plaintiffs and their counsel, or only against counsel; and (2) the appropriate amount and
nature of that sanction (e.g., a fine payable to the court, a reprimand, or reasonable
attorneys’ fees).
For the reasons set forth below, the Court will order sanctions only against
counsel, and not Wavetronix, and finds sanctions in the amount of $10,000 will
sufficiently deter counsel, as well as others, from engaging in similar conduct in the
future. Counsel shall pay the funds to the DBSI Liquidating Trust.
ANALYSIS
Both Wavetronix and Myers and Rich agree that Rule 11 sanctions should only be
imposed against counsel, Mr. Blake Atkin. Rule 11 states that sanctions may be imposed
upon an “attorney or unrepresented party” who signs, submits, files or advocates a
pleading. The issues at play in this litigation are complex, and there is no good reason to
impose sanctions on represented parties. The Court will therefore only impose sanctions
on counsel, and not his clients.

1

The Court will refer to all Plaintiffs collectively as Wavetronix.

MEMORANDUM DECISION AND ORDER - 2

Having limited sanctions to counsel, the Court must consider the appropriate
amount and nature of the sanction. Myers and Rich have requested an award of $40,000
in attorneys’ fees and costs as a sanction under Rule 11. Myers and Rich claim that they
incurred attorney fees in excess of $25,000 in connection with the work performed on the
Rule 11 motion alone.
“Rule 11 ‘provides for sanctions, not fee shifting. It is aimed at deterring, and, if
necessary punishing improper conduct rather than merely compensating the prevailing
party.’” United States ex rel. Leno v. Summit Constr. Co., 892 F.2d 788, 790 n. 4 (9th Cir.
1989). Following the 1993 amendments to Rule 11, “the main purpose of Rule 11 is to
deter improper behavior, not to compensate the victims of it or punish the offender.” 5A
Chas A. Wright, et al., Federal Practice & Procedure § 1336.3 (3d ed.2004). The text of
Rule 11 provides that “[a] sanction imposed for violation of this rule shall be limited to
what is sufficient to deter repetition of such conduct or comparable conduct by others
similarly situated.” Fed.R.Civ.P. 11(c)(2). If warranted for effective deterrence, Rule 11
authorizes the Court to issue “an order directing payment to the movant of some or all of
the reasonable attorneys' fees and other expenses incurred as a direct result of the
violation.” Id.
In this case, a mere reprimand would be insufficient to deter counsel for
Wavetronix, but Myers and Rich provide little basis for the Court to find a sanction as
high as $40,000 is needed to deter counsel from filing similar claims in the future. The
Court does not doubt that Myers and Rich incurred over $40,000 in fees and expenses.
But the Court would guess that the Oregon firm and New Jersey firm Myers and Rich
MEMORANDUM DECISION AND ORDER - 3

hired, while very competent, charge higher hourly rate than attorneys in the Boise market
with similar years of experience. While Myers and Rich could explain the rates charged if
given an opportunity, such an additional step is not warranted because the $40,000 figure
requested appears to exceed the amount of sanctions warranted to deter future unfounded
claims by Mr. Atkin and others similarly situated.
Mr. Atkins says, and the Court believes, that he carefully researched the Barton
doctrine and concluded that he could properly plead the section 959(a) exception to the
Barton doctrine. Mr. Atkin was wrong. Mr. Atkin, however, does not have a history of
Rule 11 violations. Also, the claims against Myers and Rich were dismissed early in the
litigation. Under the circumstances presented here and taking into account that Mr. Atkin
appears to be a sole practitioner, the Court finds that a $10,000 monetary sanction should
be sufficient to deter him from filing similar claims in the future. As noted above, the
primary purpose of Rule 11 sanctions is deterrence, not compensation.
Mr. Atkin is ordered to pay this sanction within 30 days of the date of this Order.
The Court recognizes that the Advisory Committee Notes to the 1993 amendments to
Rule 11 indicate that “if a monetary sanction is imposed, it should ordinarily be paid into
court as a penalty.” However, the Court finds that it would be appropriate in this case to
order Mr. Atkin to pay this sanction to the DBSI Liquidating Trust to help ensure that
trust beneficiaries are not forced to bear the full brunt of paying for legally untenable
claims Mr. Atkins filed in this case.
ORDER
In accordance with the Memorandum Decision set forth above,
MEMORANDUM DECISION AND ORDER - 4

IT IS ORDERED that the Mr. Atkin pay a $10,000 sanction to the DBSI
Liquidating Trust within 30 days of the date of this Order.

DATED: May 1, 2013

_________________________
B. Lynn Winmill
Chief Judge
United States District Court

MEMORANDUM DECISION AND ORDER - 5