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Gomes v. American Century Companies

May 14, 2010

NELSON GOMES, INDIVIDUALLY, DERIVATIVELY AND ON BEHALF OF ALL OTHERS SIMILARLY SITUATED, PLAINTIFF,
v.
AMERICAN CENTURY COMPANIES, INC.; AMERICAN CENTURY GLOBAL INVESTMENT MANAGEMENT, INC.; JAMES E. STOWERS, JR.; JAMES E. STOWERS, III; JONATHAN S. THOMAS; THOMAS A. BROWN; ANDREA C. HALL; DONALD H. PRATT; GALE E. SAYERS; M. JEANNINE STRANDJORD; TIMOTHY S. WEBSTER; WILLIAM M. LYONS; ENRIQUE CHAN; MARK KOPINSKI; AND BRIAN BRADY, DEFENDANTS, AMERICAN CENTURY WORLD MUTUAL FUNDS, INC., DOING BUSINESS AS AMERICAN CENTURY INTERNATIONAL DISCOVERY FUND, NOMINAL DEFENDANT.



The opinion of the court was delivered by: Frank C. Damrell, Jr. United States District Judge

MEMORANDUM AND ORDER

This matter is before the court on defendants' motion for sanctions against plaintiff's counsel under Federal Rule of Civil Procedure 11, 28 U.S.C. § 1927, and the courts inherent authority. For the reasons set forth below,*fn1 defendants' motion is DENIED.*fn2

BACKGROUND

On August 4, 2009, Nelson Gomes ("plaintiff") initiated this action by filing a complaint that based venue on 28 U.S.C. § 1391 and 18 U.S.C. § 1965, the Racketeer Influenced and Corrupt Organizations Act's ("RICO") venue provision. ("Pl.'s Compl. ["Compl."], filed Aug. 4, 2009 [Docket # 2], ¶ 29.) Plaintiff asserted claims for violation of RICO, breach of fiduciary duty, negligence, and waste. (Id. ¶ 5.) Plaintiff alleges that defendants, American Century World Mutual Funds, Inc., its parent companies, directors, and officers, engaged in a pattern of racketeering activity by allowing a mutual fund, which plaintiff had invested in, to invest money in an illegal gambling business. (Id. ¶ 3.) When law enforcement officials began enforcement proceedings against the illegal gambling business, the market value of plaintiff's mutual fund investment declined. (Id.)

On November 10, 2009, defendants filed a motion to transfer venue. (Defs.' Mtn. to Transfer Venue, filed Nov. 10, 2009 [Docket # 11].) Defendants sought transfer to the Southern District of New York, where similar recent disputes between some of the same defendants and plaintiff's counsel had been litigated and decided in defendants' favor. (Defs.' Mem. in Support of Mtn. to Transfer Venue ["Defs.' Venue Motion"], filed Nov. 10, 2009 [Docket # 12], 1:2-4, 2-4); see McBrearty v. Vanguard Group, Inc., 2009 WL 875220 (S.D.N.Y. April 2, 2009) (Cote, J.), aff'd 353 Fed. Appx. 640 (2d Cir. 2009), petition for cert. filed, 78 U.S.L.W. 3590 (Mar. 30, 2010) (No. 09-1187) (dismissing a similar claim on motion to dismiss for failure to state a claim for lack of proximate causation). In their motion, defendants contended that the case had no connection with the Eastern District of California other than the fact that the plaintiff resides within the District; defendants also contented that the court lacked personal jurisdiction over several of the defendants. On January 22, 2010, plaintiff filed a notice of voluntary dismissal pursuant to Federal Rule of Civil Procedure ("FRCP") 41(a)(1)(A)(I), closing the case. Defendants' motion was never ruled on by this court.

On February 4, 2010, defendants filed a request to reopen the case for the limited purpose of filing a motion for sanctions. (Docket # 16.) The court noted that the request was procedurally improper but allowed defendants to file a properly noticed motion for sanctions, which they did on March 18, 2010. (Docket # 18.) Defendants assert that they should be entitled to sanctions for attorneys' fees pursuant to FRCP 11, 28 U.S.C. § 1927, and the court's inherent authority because plaintiff's assertion that venue was proper in the Eastern District of California was frivolous and done in a bad faith attempt at forum shopping.

ANALYSIS

I. Rule 11 Sanctions

An attorney is subject to Rule 11 sanctions when, inter alia, he presents to the court "claims, defenses, and other legal contentions . . . [not] warranted by existing law or by a non-frivolous argument for the extension, modification, or reversal of existing law or the establishment of new law." Fed. R. Civ. P. 11(b)(2). When sanctions are sought by opposing counsel, opposing counsel must comply with Rule 11's "safe harbor" provision. See Barber v. Miller, 146 F.3d 707, 710-11 (9th Cir. 1998); Radcliffe v. Rainbow Constr. Co., 254 F.3d 772, 789 (2001) ("[T]he procedural requirements of Rule 11[(c)(2)]'s 'safe harbor' are mandatory.") Rule 11's safe harbor provision provides that a party may not file a motion for sanctions under Rule 11 unless the party against whom sanctions are sought is served with the motion and given 21 days to either withdraw or correct the paper that is the subject of the motion. Fed. R. Civ. Pro. 11(c)(2). Within the Ninth Circuit, the safe harbor provision is strictly enforced. Holgate v. Baldwin, 425 F.3d 671, 678 (2005) ("We enforce this safe harbor provision strictly."). Failure to follow the procedure set forth in Rule 11(c)(2) precludes the moving party from obtaining an award of sanctions. Radcliffe, 254 F.3d at 789.

Defendants do not, and cannot, claim that they have met the requirements of Rule 11's safe harbor provision. Rather, defendants argue that this court retains jurisdiction to award sanctions under Rule 11 under the circumstances of this case, where the plaintiff has voluntarily withdrawn the action pursuant to Rule 41(a)(1). However, the retention of jurisdiction is irrelevant to the court's analysis of whether defendants complied with the safe harbor provision.

Neither of the cases cited by defendants excuse compliance with Rule 11's safe harbor provision. In Madamba, the defendant moved for sanctions after summary judgment was entered in their favor during the safe harbor period; the defendant had served the sanction motion on the plaintiff after already filing a motion for summary judgment but before that motion had been ruled on by the court. Madamba v. Certified Grocers California, LTD, 1998 WL 339685, at *1 (9th Cir. May 12, 1998).*fn3 In denying the defendant's motion for sanctions after judgment had been entered the court noted that "sanctions may be imposed after a case has been resolved." Id. at *2 (citing Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 393-98 (1990)). However, the court neither addressed whether sanctions may be entered after a voluntary dismissal nor whether the court may totally disregard Rule 11's safe harbor provision. Indeed, the defendant in Madamba had complied with the safe harbor provision of Rule 11(c)(2) prior to filing the motion.

Similarly unpersuasive is defendants' reliance on Commercial Space Mgmt. Co. v. Boeing Co. 193 F.3d 1074 (1999). In Boeing, the court addressed whether a district court, after a notice of voluntary dismissal pursuant to Rule 41(a)(1), may determine whether the dismissal is one with or without prejudice. 193 F.3d at 1075-76. The court held that a notice of voluntary dismissal divests the court of jurisdiction, and therefore a district court cannot thereafter determine whether the dismissal was with or without prejudice. Id. at 1080. However, in a footnote, the court cited Cooter & Gell*fn4 for the proposition that a voluntary dismissal does not divest the district court of jurisdiction to impose sanctions. Boeing, 193 F.3d at n. 8. To the extent Boeing and Cooter & Gell hold that a case can remain open after it has been voluntarily dismissed for purposes of imposing sanctions, neither case concludes that the moving party is relieved of his burden to comply with Rule 11's safe harbor provision.

Furthermore, the Ninth Circuit has explicitly provided that the safe harbor provision is to be strictly enforced. See Radcliffe, 254 F.3d at 789. Under Rule 11, if a plaintiff voluntarily dismisses the action during the safe harbor period they will not be subject to monetary sanctions. Fed. R. Civ. Pro. 11(c)(2). To allow sanctions here, where plaintiff filed a voluntary dismissal prior to the sanctions motion being noticed, would ...


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