United States District Court, D. Arizona
G. Campbell Senior United States District Judge
Theodore Seldin and many others (“Defendants”)
seek Rule 11 sanctions against Plaintiffs KCI Restaurant
Management, LLC (“KCIR”) and KCI Acquisitions II,
LLC. Doc. 57. The motion is fully briefed and no party
requests oral argument. Docs. 65, 66. The Court will deny the
case arises from a complex set of relationships and events
that produced bankruptcy litigation, a state court lawsuit, a
Nebraska arbitration, and this case. The facts are not easily
grasped, and the Court will recount only those essential to
and its subsidiary managed Defendants' investment
business from 2004 to 2013. See Doc. 1 ¶¶
19-24. Plaintiffs terminated the agreement with Defendants in
2013 just after collecting $1, 814, 511 in management fees.
Id. ¶¶ 31, 33. The business filed for
bankruptcy in 2013, and the trustee filed two complaints
against KCIR for return of management fees. Id.
¶¶ 35-36. KCIR spent approximately $640, 000
defending and ultimately settling these claims. Id.
¶¶ 47, 57.
Defendants initiated a Nebraska arbitration against an
unspecified party. Defendants argued in the arbitration that
they were entitled to two-thirds of a portion of KCIR's
management fees because KCIR's receipt of the fees was a
violation of a corporate opportunity that their position in
the company entitled them to share. Id. ¶¶
37-38. The arbitrator agreed and awarded Defendants
two-thirds of the $1, 075, 007 portion they contested.
Id. ¶ 39.
then sued Defendants for indemnification, contribution,
unjust enrichment, and breach of fiduciary duty. See
Doc. 1. Plaintiffs claimed that if Defendants were entitled
to recover this sum in arbitration, then they also were
partly responsible for defending against the claims brought
by the bankruptcy trustee and should be required to reimburse
Plaintiffs for some of the costs Plaintiffs incurred in
defending against those claims. Id. ¶¶
40-41. Defendants characterized this assertion as an end-run
around the arbitrator's award. Doc. 23 at 5.
Court dismissed the case for failure to state a claim,
finding that Plaintiffs could not seek partial
indemnification from Defendants and did not allege facts
showing that Defendants were liable to the bankruptcy estate
for purposes of contribution, that Defendants were enriched
by Plaintiffs' defense of the bankruptcy claims, or that
Defendants owed Plaintiffs a fiduciary duty. Defendants now
move for Rule 11 sanctions.
may impose sanctions “when a filing is frivolous,
legally unreasonable, or without factual foundation, or is
brought for an improper purpose.” See Fed. R.
Civ. P. 11(c); Estate of Blue v. County of Los
Angeles, 120 F.3d 982, 985 (9th Cir. 1997). Courts must
“exercise extreme caution” in imposing Rule 11
sanctions. Larez v. Holcomb, 16 F.3d 1513, 1522 (9th
Cir. 1994); see also Operating Eng'rs Pension Trust
v. A-C Co., 859 F.2d 1336, 1344 (9th Cir. 1988) (Rule 11
sanctions are to be reserved for “rare and
exceptional” cases). Rule 11 sanctions are imposed at
the Court's discretion. See Air Separation, Inc. v.
Underwriters at Lloyd's of London, 45 F.3d 288, 291
(9th Cir. 1995) (“Although courts may impose sanctions
. . . they are not required to do so.”).
first argue that sanctions are appropriate because KCI's
allegations did not satisfy the legal requirements for
indemnification, unjust enrichment, contribution, and breach
of fiduciary duties, the claims were frivolous under Rule 11.
See Doc. 57 at 13-17. KCI initially pled arguable
claims for relief. See Stewart v. Am. Int'l Oil &
Gas Co., 845 F.2d 196, 201 (9th Cir. 1988). KCI's
claims were plausible under the common law, and the Court
cannot conclude KCI asserted them without reasonable and
competent inquiry even though the Court ultimately determined
that KCI's conclusions were erroneous. See Rachel v.
Banana Republic, Inc., 831 F.2d 1503, 1508 (9th Cir.
1988). The Court will deny Defendants' motion on this
next argue that KCI harassed them with patently frivolous
claims for the “improper purpose of nullifying a final,
binding, and non-appealable arbitration award that [had] been
confirmed as a final judgment.” [Doc. 57 at 12].
Plaintiffs' claims followed a period of intense and
contentious arbitration and litigation over complex issues.
As both Plaintiffs and Defendants acknowledge, Plaintiffs
were not parties to the arbitration. See Docs. 57 at
10; 65 at 15. Contrary to Defendants' arguments, it is
questionable whether Plaintiffs had the opportunity to bring
these claims in earlier proceedings. Further, Defendants
arguments rely heavily on the frivolousness of
Plaintiffs' claims, but the Court has already determined
that Plaintiffs' claims were not frivolous. The Court
cannot conclude that Plaintiffs used their claims to harass
Defendants and nullify a final arbitration award.
IS ORDERED that Defendants' motion for Rule 11