United States District Court, N.D. California
ORDER ON MOTION FOR SANCTIONS Re: Dkt. Nos. 57,
Haywood S. Gilliam, Jr. United States District Judge.
Pending before the Court is Defendant's motions for
sanctions under 28 U.S.C. § 1927 or the Court's
inherent powers. No. 18-cv-03977, Dkt. No. 57; No.
18-cv-03978, Dkt. No. 43 (“Mot.”). Defendant
requests sanctions based on Plaintiffs counsel's pursuit
of “frivolous claims in [both] matter[s] over the
course of many months through pleading after amended
pleading.” Mot. at 3. For the following reasons, the
Court DENIES both motions.
Any attorney or other person admitted to conduct cases in any
court of the United States or any Territory thereof who so
multiplies the proceedings in any case unreasonably and
vexatiously may be required by the court to satisfy
personally the excess costs, expenses, and attorneys'
fees reasonably incurred because of such conduct.
28 U.S.C. § 1927. Sanctions are appropriate under §
1927 only on a showing “of the attorney's
recklessness or bad faith.” Estate of Blas Through
Chargualaf v. Winkler, 792 F.2d 858, 860 (9th Cir.
1986); see also Kohler v. Flava Enterprises, Inc.,
779 F.3d 1016, 1020 (9th Cir. 2015) (section 1927 requires
proving that “the opposing party acted with
‘subjective bad faith'” (citation and
quotations omitted)). For purposes of § 1927, bad faith
is present “when an attorney knowingly or recklessly
raises a frivolous argument . . . or argues a meritorious
claim for the purpose of harassing an opponent.”
Estate of Blas, 792 F.2d at 860 (citations omitted).
the court's inherent power, federal courts may impose
sanctions only when there is a “specific finding of bad
faith.” In re Keegan Mgmt. Co., Sec. Litig.,
78 F.3d 431, 436 (9th Cir. 1996). While recklessness is
sufficient for § 1927, “mere recklessness, without
more, does not justify sanctions under a court's inherent
power.” Fink v. Gomez, 239 F.3d 989, 993-94
(9th Cir. 2001). Sanctions are available for a “variety
of types of willful actions, including recklessness when
combined with an additional factor such as frivolousness,
harassment, or an improper purpose.” Id. at
994. “For purposes of imposing sanctions under the
inherent power of the court, a finding of bad faith
‘does not require that the legal and factual basis for
the action prove totally frivolous; where a litigant is
substantially motivated by vindictiveness, obduracy, or mala
fides, the assertion of a colorable claim will not bar the
assessment of attorney's fees.'” Id.
at 992 (citation and quotations omitted).
Court finds that sanctions are not warranted under §
1927 or the Court's inherent powers. The Court finds
nothing in the record proving that Plaintiff's counsel
acted in bad faith, or knowingly or recklessly raised a
frivolous claim. While counsel very likely was ignorant or
negligent in failing to understand that alter ego liability
was a threshold issue because he made the choice to name
Kenna as a defendant instead of Tradehill, ignorance or
negligence is not a basis for sanctions under either §
1927 or the Court's inherent powers. See
Fink, 239 F.3d at 993. There is nothing in the record to
suggest that Plaintiff's counsel filed the Second Amended
Complaint based on a vexatious or dishonest motive.
counsel's conduct does not compare to the sanctionable
conduct in Defendant's cited cases. See Mot. at
13 (citing cases). For example, in Wages v. I.R.S.,
the court found that sanctions were appropriate since
plaintiff “attempt[ed] to file an amended complaint
that did not materially differ from one which the district
court had already concluded did not state a claim,
and by continually moving for alterations in the
district court's original judgment despite that
court's clear unwillingness to change its mind. 915 F.2d
1230, 1235 (9th Cir. 1990) (emphasis added). Additionally,
plaintiff in Wages attempted to file an amended
complaint substantially the same as the first even after the
court dismissed with prejudice some of the claims, and
dismissed without prejudice the remaining claims
“because even if they were properly served, no
Bivens action would lie.” Id. at
1233. Plaintiff filed no Rule 60 motion here, nor did the
Court dismiss with prejudice any claims prior to Plaintiffs
filing their Second Amended Complaint. Those facts were
particularly significant in Wages. Similarly, in
Johnson v. University of Rochester Medical Center,
the court found that counsel made repeated allegations that
defendant made an unsolicited, libelous statement about
plaintiff, when the same counsel “requested and
authorized the release of the allegedly libelous
statement.” 642 F.3d 121, 126 (2d Cir. 2011). This
information allowed the court to find that counsel
“pursued claims she knew had no basis in law or
fact.” Id. No such evidence of specific
knowledge or bad faith is presented here.
it is clear that Plaintiffs' counsel failed to understand
the legal landscape of alter ego liability. After Defendant
filed its first motion to dismiss, counsel recognized the
weakness of the allegations, conceded that the unfair
competition claims should be dismissed, and sought leave to
amend before the Court ruled on the initial motion to
dismiss. The Court then granted Defendant's motion to
dismiss the first amended complaint noting that the threshold
issue was Plaintiffs' failure to plead alter ego
liability. Plaintiffs then filed a Second Amended Complaint
where they “narrowed their state law causes of action
to two: (1) conversion, as to all Plaintiffs; and (2)
misrepresentation, as to Plaintiff Johnson alone.” Dkt.
No. 56 at 3. As noted in the Court's Order dismissing the
case, “when confronted with their failure to amend the
complaint in any way on [the alter ego liability] matter, . .
. Plaintiffs' only response was the following:
A clarification is in order. Plaintiff[s] [is/are] not suing
Tradehill, nor [is/are] plaintiff[s] stating any causes of
action against Tradehill. Furthermore, plaintiff[s] [is/are]
not pleading against Kenna based on alter ego liability.
Plaintiff[s] [is/are] not alleging that Kenna is liable
because of his actions on behalf of Tradehill as its CEO.
Plaintiff[s] [is/are] alleging that Kenna converted
[their] bitcoin. The cause of action for conversion is
pleaded as against Kenna and the Doe defendants as
individuals only, in their capacity as individuals only, not
based on alter ego liability. Paragraph 6 therefore needs to
be stricken to avoid this ambiguity. Plaintiff[s]
stipulate[s] that it be stricken.”
Id. at 4. This explanation highlights
Plaintiffs' counsel's fundamental misunderstanding.
As the Court subsequently explained, “Plaintiffs
must plead alter ego because they brought suit
against Tradehill's CEO, rather than Tradehill
itself.” Id. After the Court's clear