Newsome et al v. Gallacher et al
Filing
145
OPINION AND ORDER by Chief Judge Gregory K Frizzell ; denying 93 Motion for Sanctions (pll, Dpty Clk)
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF OKLAHOMA
P. DAVID NEWSOME, JR., LIQUIDATING
TRUSTEE OF MAHALO ENERGY (USA),
INC.,
Plaintiff,
v.
WILLIAM GALLACHER, DUNCAN
CHISHOLM, GARY H. DUNDAS, JEFF
G. LAWSON, JAMES BURNS, KEVIN
WOLFE, DAVID E. BUTLER and
GRANT A. MACKENZIE,
Defendants.
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Case No. 11-CV-140-GKF-PJC
OPINION AND ORDER
Before the court is the Motion for Sanctions [Dkt. #93] filed by defendants Grant A.
MacKenzie and Jeff G. Lawson. MacKenzie, a partner of former defendant Burnet, Duckworth
& Palmer, LLP (“BDP”) and Lawson, a former partner of BDP, seek Rule 11 sanctions against
plaintiff P. David Newsome, Jr., Liquidating Trustee of Mahalo Energy (USA), Inc. (“Trustee”),
and his attorneys, for reasserting legal malpractice allegations and claims in the First Amended
Complaint, despite the court’s earlier dismissal of such claims and the appellate court’s
affirmance of the dismissal. The Trustee opposes the motion. [Dkt. #134].
I. Procedural History
In May 2009, Mahalo USA filed a Chapter 11 bankruptcy petition in the United States
District Court for the Eastern District of Oklahoma. Plaintiff was appointed as the liquidating
trustee and successor-in-interest to the claims of the reorganized debtor. On March 8, 2011, the
Trustee filed this action against former officers and directors of Mahalo USA and its parent,
Mahalo Energy Ltd. (“Parent”), a Canadian company, as well as BDP and Lawson. The
Trustee’s Complaint asserted claims for breach of fiduciary duties and aiding and abetting breach
of fiduciary duties. The claims against BDP were based on legal services its attorneys provided
the Parent and affiliates. The claims against Lawson were based both on the legal services he
performed as a BDP partner and on his role as an officer of the Parent.
BDP and Lawson filed a Motion to Dismiss the legal services-related claims, asserting
lack of personal jurisdiction and failure to state a claim. [Dkt. #19]. The motion was supported
by the declarations of Lawson, individually, and MacKenzie, on behalf of BDP, concerning their
contacts with Oklahoma. [Id., Exs. 1 and 2]. The court granted defendants’ motion to dismiss.
[Dkt. #55]. On appeal, the Tenth Circuit affirmed the dismissal of BDP and of Lawson in his
capacity as a partner of the law firm. Newsome v. Gallacher, 722 F.3d 1257, 1279-81 (10th Cir.
2013).
In so ruling, the Tenth Circuit characterized the breach of fiduciary claims against BDP
and Lawson as claims for legal malpractice. Id. at 1279. It concluded that “[t]he law firm
establishes by affidavit that it performed all of its services related to this lawsuit in Canada” and
“Newsome does not contradict this.”1 Id. at 1280. It noted that courts are split regarding whether
out-of-state legal work on an out-of-state matter can subject an out-of-state lawyer to personal
jurisdiction in the client’s home forum. Id. Siding with the majority view, it stated:
[A]n out-of-state attorney working from out-of-state on an out-of-state matter
does not purposefully avail himself of the client’s home forum’s laws and
privileges, at least not without some evidence that the attorney reached out to the
client’s home forum to solicit the client’s business. Other distinguishing factors
1
The Tenth Circuit’s analysis focused on BDP, but in a footnote it stated, “This analysis also applies to Lawson in
his capacity as an attorney for the firm.” Id. at 1279 n.7.
2
may be relevant as well, which we need not catalogue here. In this case, the law
firm is a Canadian entity hired by Canadian-owned and-headquartered companies
to perform legal work from Canada on transactions consummated in Canada.
Further, the law firm never reached out to Mahalo USA in Oklahoma to solicit its
business, but instead had Mahalo USA’s business by virtue of representing its
Canadian parent company in Canada. Save for “facilitat[ing]” the placement of
liens on Oklahoma property and receiving payments from Mahalo USA’s
Oklahoma bank accounts, the law firm had virtually no connection to Oklahoma
as relevant to the circumstances that gave rise to this lawsuit.
Id. at 1280-81. The court held that personal jurisdiction was lacking over both BDP and Lawson
in his capacity as a partner of BDP, and “the district court properly dismissed the law firm [and
Lawson] for lack of personal jurisdiction.”
Id. at 1279 n.7, 1281.2
After remand, the Trustee—with leave of court—filed a First Amended Complaint. [Dkt.
#76]. The amended complaint contained additional allegations about Lawson and added
MacKenzie as a defendant. [Id.].
The First Amended Complaint alleged, in pertinent part, that both Lawson and
MacKenzie performed legal work for Mahalo USA and/or the Parent outside their capacity as
BDP attorneys. [Id., ¶¶47-48, 72-74]. It asserted claims for breach of fiduciary duty and aiding
and abetting breach of fiduciary duty against all defendants, including Lawson and MacKenzie.
[Id., ¶¶173-209].
On November 1, 2013, Lawson and MacKenzie filed a Motion to Dismiss [Dkt. #81],
asserting the claims against them for legal malpractice were precluded by the Tenth Circuit’s
prior decision and alternatively, the Trustee had failed to allege acts conferring personal
jurisdiction over them for alleged legal malpractice. They asked the court to strike all allegations
concerning their actions as lawyers and they sought sanctions. [Id.].
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The Tenth Circuit held that this court does have personal jurisdiction over Lawson in his capacity as a director of
the Parent. Id. at 1281.
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The same day, counsel for defendants sent a letter to counsel for the Trustee attaching a
Motion for Sanctions and demanding that the Trustee strike legal malpractice allegations and
claims in the First Amended Complaint within the next 21 days. [Dkt. #134, Ex.1, Nov. 1, 2013
Letter from Paula J. Quillin to Trustee’s Counsel, with attached Motion for Sanctions]. Counsel
for the Trustee declined to strike the allegations. [Dkt. #134-1, Ex. 2, Nov. 14, 2013 Letter from
Ali M. M. Mojdehi to Quillen]. Thereafter, defendants filed the pending motion.
The court granted the Motion to Dismiss, finding the Trustee’s claims against Lawson
and MacKenzie, to the extent they were based on performance of legal services, were precluded
by the Tenth Circuit’s earlier decision; declining to exercise pendent jurisdiction over the legal
malpractice claims; and striking allegations pertaining to Lawson’s and/or MacKenzie’s alleged
roles as attorneys. [Dkt. #131 at 14-16].
In so ruling, the court stated:
The First Amended Complaint, in essence, substitutes MacKenzie for BDP and
beefs up earlier allegations about legal work BDP/McKenzie/Lawson did for the
Parent, Mahalo USA and other related entities. The only new substantive
allegation—that MacKenzie and Lawson performed legal work outside their
capacity as BDP attorneys—is conclusory in nature, and the amended complaint
alleges no facts to support such a conclusion. The Trustee has failed to carry his
burden of establishing personal jurisdiction with respect to the legal malpractice
claims.
[Id. at 14].
II. Legal Standard
Fed. R. Civ. P. 11(a) requires that every pleading, written motion and other paper must be
signed by at least one attorney of record. Rule 11(b) states:
Representations to the Court. By presenting to the court a pleading, written
motion, or other paper—whether by signing, filing, submitting, or later
advocating it—an attorney . . . certifies that to the best of the person’s knowledge,
information, and belief, formed after an inquiry reasonable under the
circumstances:
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(1) it is not being presented for any improper purposes, such as to harass,
cause unnecessary delay, or needlessly increase the cost of litigation;
(2) the claims, defenses, and other legal contentions are warranted by
existing law or by a nonfrivolous argument for extending, modifying,
or reversing existing law or for establishing new law;
(3) 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; and
(4) the denials of factual contentions are warranted on the evidence or, if
specifically so identified, are reasonably based on belief or a lack of
information.
Fed. R. Civ. P. 11(b).
Under Rule 11(c), the court may impose “an appropriate sanction” against any attorney,
law firm, or party that violates Rule 11(b). A sanction imposed under Rule 11 “must be limited
to what suffices to deter repetition of the conduct or comparable conduct by others similarly
situated” and may include “an order directing payment to the movant of part or all of the
reasonable attorney’s fees and other expenses directly resulting from the violation.” Fed. R. Civ.
P. 11(c)(1) and (4).
A motion for sanctions must be made separately from any other motion, must describe
the specific conduct that allegedly violates Rule 11(b), and must be served on the opposing
party’s attorney, but it must not be filed or be presented to the court if the challenged claim or
contention is withdrawn or appropriately corrected within 21 days after service. Fed. R. Civ. P.
11(c)(2). If warranted, the court may award reasonable expenses, including attorney’s fees
incurred for the motion, to the prevailing party. Id.
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II. Analysis
The Trustee contends:
The Rule 11(c)(2) notice was deficient because defendants took the position that
his claims were barred by res judicata, issue and claim preclusion, while the court
ultimately concluded they were precluded by the “law of the case” doctrine.
His fiduciary role as trustee for a bankruptcy estate has statutory and common-law
duties to vindicate all apparent rights of their cestui que trust; therefore it is
inappropriate to sanction him for vigorously fulfilling these responsibilities.
His assertion of claims for breach of fiduciary duty against defendants based on
legal work they allegedly performed outside their capacity as BDP attorneys was
objectively reasonable, as was his argument that the court could and should
exercise pendent jurisdiction over the claims.
A. Adequacy of Rule 11(c)(2) Notice
The court rejects Trustee’s argument that defendants failed to comply with Rule 11(c)(2).
The rule requires movants to “describe the specific conduct that allegedly violates Rule 11(b).”
The draft Motion for Sanctions defendants served on the Trustee and his attorneys specifically
alleged:
Plaintiff and his attorneys filed a First Amended Complaint that contained
frivolous legal malpractice contentions that are not supported by law, made
assertions that have no evidentiary support and were duplicative of claims
previously adjudicated. Plaintiff and his attorneys are ignoring previous rulings
and attempting to seek reconsideration of the Court’s March 19, 2012 order which
was affirmed on appeal. (Dkt 55 & Dkt 63)[.] This court ruled that it lacked
personal jurisdiction over Lawson and over BDP, MacKenzie and Lawson’s law
firm, for legal advice and legal services. The unjustified filing of the first
amended complaint alleging these same dismissed claims has caused MacKenzie
and Lawson to incur unnecessary legal costs associated with the defense of this
frivolous action, including the necessary filing of the pending motion to dismiss.
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(Dkt. 81)[.]
attorneys.
Defendants are entitled to sanctions against Plaintiff and his
[Dkt. #134-1 at 8, Draft Motion for Sanctions]. This language clearly put the Trustee and his
attorneys on notice of the specific conduct defendants alleged violated Rule 11(b).
Defendants’ failure to allege the “law of the case” doctrine governed the issue did not render the
notice insufficient.
B. Fiduciary Role of Trustee
Citing Operating Eng’rs Pension Trust v. A-C Co., 859 F.2d 1336, 1343-44 (9th Cir.
1988),3 the Trustee argues “it would be incongruous to sanction a fiduciary for vigorously
fulfilling” his statutory and common-law duties to vindicate all apparent rights of his cestui que
trust. The appellate court in Operating Eng’rs, in reversing the district court’s sanctions against
the plaintiff trust, stated, “Before imposing sanctions on trust funds, trustees, or their counsel,
courts must consider the implications of the fiduciary duties and obligations placed on those
entities and weigh that factor carefully in reaching their judgments.” Id. at 1344. Further, the
court stated:
Rule 11 must not be construed so as to conflict with the primary duty of an
attorney to represent his or her client zealously. Forceful representation often
requires that an attorney attempt to read a case or an agreement in an innovative
though sensible way. Our law is constantly evolving, and effective representation
sometimes compels attorneys to take the lead in that evolution. Rule 11 must not
be turned into a bar to legal progress.
Id.
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In Operating Eng’rs, employee benefit trusts sued an employer for $62,967.58 in unpaid contributions to trust
funds. Id. at 1337-38. After a bench trial, the district court ruled that the trusts were entitled to only a small part of
the amount claimed. Id. at 1338. The court denied the trusts’ request for attorney’s fees and, pursuant to Rule 11,
ordered the trusts to pay the employer $10,000 in attorney’s fees and costs. Id. at 1338. On appeal, the Ninth
Circuit reversed the court’s decision on the merits and its award of sanctions. Id. at 1342-45.
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Trustees have a duty to vigorously pursue the rights of the trust, just as attorneys have a
duty to represent their clients zealously. In considering defendants’ motion, the court has taken
into account the Trustee’s fiduciary obligations to the trust.
C. Objective Reasonableness of Claims
The Tenth Circuit has stated:
This circuit has adopted the view that an attorney’s actions must be objectively
reasonable in order to avoid Rule 11 sanctions. A good faith belief in the merit of
an argument is not sufficient; the attorney’s belief must also be in accord with
what a reasonable, competent attorney would believe under the circumstances.
White v. General Motors Corp., Inc., 908 F.2d 675, 680 (10th Cir. 1990) (citing Adamson v.
Bowen, 855 F.2d 668, 673 (10th Cir. 1988)).
A legal position is frivolous under Rule 11 if it is clear under existing precedents that
there is no chance of success and no reasonable argument to extend, modify or reverse existing
law. Greeley Pub. Co. v. Hergert, 233 F.R.D. 607, 612 (D. Colo. 2006). However, as one court
has stated:
[T]he Rule does not seek to stifle the exuberant spirit of skilled advocacy or to
require that a claim be proven before a complaint can be filed. The Rule attempts
to discourage the needless filing of groundless lawsuits. And we have recognized
that creative claims, coupled even with ambiguous or inconsequential facts, may
merit dismissal, but not punishment.
Hunter v. Earthgrains Co. Bakery, 281 F.3d 144, 153 (4th Cir. 2002) (citations omitted).
The Trustee asserts both his position on the effect of the Tenth Circuit’s ruling on
potential legal malpractice claims against the defendant attorneys and his position on pendent
jurisdiction were objectively reasonable.
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The court concludes the Trustee’s position on the effect of the Tenth Circuit’s decision—
although borderline—was one that a reasonable, competent attorney could believe was
objectively reasonable under the circumstances. The legal issue before the court—whether the
Tenth Circuit’s ruling precluded the Trustee from naming other partners of BDP, or from making
additional allegations and claims against Lawson—was complex. Additionally, both sides
displayed confusion about the legal effect of the Tenth Circuit’s personal jurisdiction ruling,
framing their arguments in terms of the doctrine of issue preclusion. But the court ultimately
determined the “law of the case” doctrine was the appropriate framework for analyzing the case.
Moreover, the Trustee’s argument for pendent jurisdiction was objectively reasonable.
As the court acknowledged in its order granting defendants’ Motion to Dismiss, when a court
possesses personal jurisdiction over a defendant for one claim, but lacks an independent basis for
personal jurisdiction over the defendant for another claim, it may assume pendent personal
jurisdiction over the second claim, provided the claim arises out of the same nucleus of operative
fact. [Dkt. #131 at 14] (citing U.S. v. Botefuhr, 309 F.3d 1263, 1272 (10th Cir. 2002)). The
court concluded the claims did not arise from the same core facts and that even if they did, it
would decline to exercise pendent jurisdiction over the legal malpractice claims. [Id. at 15].
However, the fact that the court ruled against the Trustee on pendent jurisdiction does not render
his position unreasonable. The pendent jurisdiction argument was warranted by existing law.
III. Conclusion
For the reasons set forth above, defendants’ Motion for Sanctions [Dkt. #93] is denied.
ENTERED this 25th day of August, 2014.
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