RELIGIOUS TECHNOLOGY CENTER, etc., et al., Plaintiffs,
Frank GERBODE, et al., Defendants.
No. CV 93-2226 AWT.
United States District Court, C.D. California.
May 2, 1994.
Andrew H. Wilson, Wilson, Ryan & Campilongo, San Francisco, CA, Helena K.
Kobrin, Bowles & Moxon, Los Angeles, CA, for plaintiffs Religious Technology
Center and Church of Scientology Intern.
Jerold Fagelbaum, Los Angeles, CA, Gary M. Bright, Bright & Powell,
Carpinteria, CA, for defendants David Mayo and Church of New Civilization.
MEMORANDUM DECISION AND ORDER ON MOTION FOR ATTORNEYS' FEES
TASHIMA, District Judge.
*1 This case is the continuation of long-standing and acrimonious
litigation between plaintiff Religious Technology Center (RTC) and defendants
David Mayo, Julie Mayo and the Church of the New Civilization. Plaintiffs
allege that defendants violated the Racketeer Influenced and Corrupt
Organization Act (RICO), 18 U.S.C. s 1961 et seq., by engaging in acts of
mail fraud and wire fraud in connection with the formation and operation of
purportedly non-profit corporations. These corporations were sham entities,
used only to fund prior litigation against RTC, [FN1] Religious Technology
Center v. Scott, No. CV 85-711 AWT, and Religious Technology Center v.
Wollersheim, No. CV 85-7197 AWT (Scott/Wollersheim litigation). Plaintiffs
alleged injury from these RICO violations was substantial monetary loss in
attorneys' fees and litigation costs incurred in the Scott/Wollersheim
The amended complaint and the action were dismissed because the damages
alleged in the three RICO claims were not proximately caused by the alleged
predicate acts. 28 U.S.C. s 1964(c) limits those who may sue for a RICO
violation only to those who are injured "by reason of" the claimed violation.
The Supreme Court has interpreted this language to require a direct link
between the alleged RICO violation and the injury, in order to prove
causation. Holmes v. SIPC, 112 S.Ct. 1311 (1992). Based on Holmes, the
court held that "any direct injury from a fraudulently obtained tax exempt
status is to the United States (IRS) and not to plaintiffs."
Defendants now seek attorneys' fees from plaintiffs and their attorneys
Bowles & Moxon, and Cooley, Manion, Moore & Jones in the amount of $80,030 for
having to defend against this action. The motion is based on F.R.Civ.P. 11,
28 U.S.C. s 1927 and on the court's inherent powers. In this case, the court
concludes that proceeding under either s 1927 or its inherent powers adds
nothing to the outcome of the motion. [FN2] Therefore, this motion shall be
treated as a motion made under Rule 11.
I. Governing Law
Rule 11 now provides, in part:
By presenting to the court ... a pleading ... an attorney ... is certifying
that to the best of the person's knowledge, information, and belief, formed
after an inquiry reasonable under the circumstances,--
(1) it is not being presented for any improper purpose, such as to harass or
to cause unnecessary delay or needless increase in the cost of litigation;
(2) the claims, defenses, and other legal contentions therein are warranted
by existing law or by a nonfrivolous argument for the extension, modification,
or reversal of existing law or the establishment of new law.
F.R.Civ.P. 11(b)(1) & (2). Rule 11 was amended effective December 1,
1993. The original complaint herein was filed on January 22, 1993. The
amended complaint was filed on October 12, 1993. [FN3] The order of dismissal
was entered on December 1 and this motion was filed on January 3, 1994. The
parties differ on whether this motion should be governed by Rule 11 before
or after its December 1 amendment. The answer is that newly-amended Rule 11
applies in part only.
*2 Generally, on the issue of the retroactive application of a new
statute, "where the congressional intent is clear, it governs." Kaiser
Aluminum & Chem. Corp. v. Bonjorno, 494 U.S. 827, 837 (1990). [FN4] Here, the
order of the Supreme Court, in adopting the amendments under the Rules Enabling
Act, is clear: The amendments "shall take effect on December 1, 1993, and
shall govern all proceedings in civil cases thereafter commenced and, insofar
as just and practicable, all proceedings in civil cases then pending."
Order, 113 S.Ct. 478 (Apr. 23, 1993). [FN5] See 28 U.S.C. s
2704(a) (Supreme Court may fix the extent to which newly-adopted rules shall
apply to pending proceedings, except that it shall not require application to
pending proceedings to the extent that retroactivity "would not be feasible or
would work an injustice"). Thus, to the extent it is "just and practicable,"
we apply the amended rule to this motion. See Leader Nat'l Ins. Co. v.
Industrial Indem. Ins. Co., No. 93-35921 slip op. at 2614 (9th Cir. Mar. 16,
1994)(applying amended F.R.App.P. 4(a)(4) retroactively because to do so "is
appropriate in this appeal").
Plaintiffs first contend that the motion should not be considered because it
was filed in violation of the "safe harbor" provision of the amended rule.
Rule 11(c)(1)(A) now provides that a motion for sanctions under the rule
shall not be filed until 21 days after it is served on opposing counsel and the
challenged paper "is not withdrawn or appropriately corrected." It would not
be "practicable" to require compliance with the "safe harbor" provision in this
case. [FN6] Amended Rule 11 became effective on the same date that this
action was dismissed. Thus, it would be futile to now require defendants to
comply with the "safe harbor" provision. See Agretti v. ANR Freight Sys.,
Inc., 1994 WL 46670 (N.D.Ill. Feb. 14, 1994)(impracticable and problematic
retroactively to apply "safe harbor" provision).
The only "RICO" injury claimed by plaintiffs is attorneys' fees incured in the
Scott/Wollersheim litigation. It is clear that these damages are not
recoverable under RICO because they do not meet the proximate cause requirement
of Holmes v. SIPC. Although plaintiffs cite numerous cases in support of
their contrary position, none supports plaintiffs' argument. Sedima,
S.P.R.L. v. Imrex Co., 473 U.S. 479, 496-97 (1985); Hecht v. Commerce
Clearing House, Inc., 897 F.2d 21, 23-24 (2d Cir.1990); and Bankers Trust
Co. v. Rhoades, 859 F.2d 1096, 1101 (2d Cir.1988), all recognize RICO's
proximate cause requirement--that a plaintiff's alleged RICO injury must be
proximately caused by the predicate acts. All of these cases make clear that a
remote injury will not be recoverable under RICO. Equally as important as the
holding and language of these cases is that all of them predate Holmes.
[FN7] Plaintiffs also cite one case which held that attorneys' fees could be
claimed as RICO damages. Alexander Grant and Co. v. Tiffany Indus., Inc.,
742 F.2d 408 (8th Cir.1984), vacated and remanded, 473 U.S. 922, reinstated
770 F.2d 717 (8th Cir.1985). In that case, which also predates Holmes,
the facts disclose that the damages claimed were the direct and proximate
result of the claimed fraud and RICO acts. Here, to reiterate, the only direct
injury by defendants' alleged tax fraud was to the Internal Revenue Service.
*3 Holmes was decided on March 24, 1992. 112 S.Ct. at 1311. The
amended complaint was filed on October 12, 1993. Thus, by the time the amended
complaint was filed, Holmes was "established law" which reasonable inquiry
(i.e., basic legal research) would have disclosed. This RICO complaint does
not pass muster under Rule 11(b)(2) that the claims be "warranted by
existing law." [FN8] Neither is any "nonfrivolous argument" made "for the
extension, modification, or reversal of existing law" in support of plaintiffs'
RICO theory. No logical argument does or can support plaintiffs' contention
that the creation of fraudulent tax-exempt organizations for the purpose of
evading income taxes proximately caused plaintiffs' injury in having to defend
the Scott/Wollersheim litigation. The claims are frivolous. [FN9] Alleging
the RICO claims in the amended complaint was objectively unreasonable under the
circumstances. Zaldivar v. City of Los Angeles, 780 F.2d 823, 829 (9th
III. Appropriate Sanction
A. Nature and Amount of Sanctions
Both amended Rule 11(c)(2) and the Advisory Committee's Notes which
accompany the December 1, 1993, amendment indicate that attorney's fees should
not automatically be imposed for a Rule 11 violation and that the court
should explore the adequacy of non-monetary sanctions as an effective
deterrent. However, the rule authorizes the award of attorney's fees if
"warranted for effective deterrence."
Here, because of the long and acrimonious history of repeated litigation
between these parties, the court finds that a partial award of attorneys' fees
is necessary as a deterrent to the bringing of further frivolous actions.
Further, because the case has been concluded by dismissal of the amended
complaint, other sanctions, which might be effective in the context of ongoing
litigation, are unavailable. Because only partial fees are being awarded, as
authorized by Rule 11(c)(2), the court also imposes a monetary penalty to be
paid to the court as an additional deterrent equal to that portion of
reasonable fees not awarded to defendants.
Defendants seek attorneys' fees in the amount of $80,030. The hours on which
this amount is based, however, include all hours expended in defending against
this case in its entirely. Attorney Helena K. Kobrin, who signed the amended
complaint, and her law firm Bowles & Moxon, did not associate in as counsel of
record until April 19, 1993, when this action was transferred to this
district. The action was commenced in the Northern District of California on
January 22, 1993. The attorneys of record, who filed the original complaint,
were Wilson, Ryan & Campilongo, and Michael T. Stoller. No sanctions are
sought against these attorneys. Attorney Kobrin and Bowles & Moxon cannot be
held responsible for the costs of defending the action before they became
attorneys of record for plaintiffs.
Further, the action continued to be litigated on the original complaint after
transfer to this district. It was not until October 12, 1993, that Attorney
Kobrin filed the amended complaint. It is that pleading which has been held to
be frivolous. Thus, sanctions shall be limited to reasonable fees incurred by
defendants after the filing of the amended complaint. [FN10]
*4 Rule 11(c)(1)(A) now makes it discretionary with the court as to
whether or not to award attorneys' fees to the prevailing party "incurred in
presenting or opposing the motion." [FN11] The rule does not require the
presence of any exceptional circumstances for the award of such fees, but only
that the award be "warranted." Again, because of the long-standing and
acrimonious litigation between the parties, the court finds that the award of
fees for the preparation of the Rule 11 motion is warranted in this case.
In calculating the reasonable fees in this case, the court employs the
lodestar method. Commencing with their first telephone conference on October
12, 1993, to discuss the amended complaint, defense counsel incurred,
respectively, a total of 47.1 hours (for Mr. Fagelbaum) and 39.3 hours (for Mr.
Bright), plus an additional 49.2 hours of a law clerk's time, to the conclusion
of the case, including work on the pending motion. The court finds these hours
to be reasonable.
Defendants seek an award based on an hourly rate of $225 for the work of
Jerold Fagelbaum. While the court agrees that this rate is well within the
range of fees charged by competent attorneys in the community for similar work,
for this case, the court finds that it is somewhat inflated. Mr. Fagelbaum has
represented the same parties in the related litigation. He is very familiar
with the context of this litigation. The work in this case and on this motion
was not unusual or complex. [FN12] The court finds that an hourly rate of $200
is a reasonable hourly rate for Mr. Fagelbaum's work, especially when compared
to the rate awarded below for the work of Mr. Bright.
Defendants seek an award based on an hourly rate of $150 for the work of Gary
M. Bright and a rate of $50 per hour for his law clerk. The court finds these
rates to be reasonable.
Thus, the reasonable lodestar fees for the respective attorneys are:
For Jerold Fagelbaum 47.1 hrs.@$200 $ 9,420.00
For Gary M. Bright 39.3 hrs.@$150 5,895.00
For Bright's Law Clerk 49.2 hrs.@$50 2,460.00
TOTAL LODESTAR AMOUNT $17,775.00
The court awards to defendants as a sanction under Rule 11 and in partial
reimbursement of the costs they incurred in defending against the frivolous
amended complaint one-half of the lodestar amount, or $8,887.50. A like amount
is assessed as a monetary penalty and shall be payable to the Clerk of the
B. Persons to be Sanctioned
Amended Rule 11(c)(2)(A) now prohibits the imposition of monetary sanctions
on a represented party, such as RTC, for a violation of Rule 11(b)(2).
[FN13] Therefore, to the extent sanctions are sought against plaintiff RTC,
the motion must be denied.
However, amended Rule 11(c) now authorizes sanctions to be imposed on law
firms, as well as the particular attorney who signs the offending pleading.
[FN14] More specifically, Rule 11(c)(1)(A) goes on to provide that "Absent
exceptional circumstances, a law firm shall be held jointly responsible for
violations committed by its partners, associates, and employees."
*5 There are no such "exceptional circumstances" here to warrant the
imposition of sanctions only on Attorney Kobrin and not on her law firm,
Bowles & Moxon. Although, in light of Pavelic & LeFlore, this is a new
rule, it would not work an injustice on Bowles & Moxon to apply the rule of
law-firm-joint-liability retroactively. As the Advisory Committee has
explained, this is nothing more than an application of "established principles
The motion also seeks sanctions against the law firm of Cooley, Manion,
Moore & Jones, P.C. That law firm, as well as the law firm of Wilson, Ryan &
Campilongo, [FN15] along with Bowles & Moxon, appears as counsel of record for
plaintiffs on the amended complaint. However, it was Attorney Kobrin of
Bowles & Moxon who signed the complaint.
Rule 11(c) provides that the court may "impose an appropriate sanction upon
the attorneys, law firms, or parties that have violated subdivision (b) or are
responsible for the violation." While this language, standing alone, does not
clearly indicate that the rule is intended to catch within its sweep a co-
counsel law firm which did not actually sign the offending pleading, the
Advisory Committee's Notes do provides some clarification.
The revision permits the court to consider whether other attorneys in the
firm, co-counsel, other law firms, or the party itself should be held
accountable for their part in causing a violation.
Advisory Committee Notes to 1993 Amendment to Rule 11.
It, thus, appears that the court has the authority to sanction a co-counsel
law firm, as well as the primary offending firm, even though co-counsel did not
sign the offending pleading. In order to do so, however, the record must show
that firm's culpability--in the Committee's words, evidence of its "part in
causing a violation." Here, the court finds that the record is insufficient to
establish that any law firm besides Bowles & Moxon was responsible for the
drafting and filing of the amended complaint. Therefore, the motion will be
denied as against Cooley, Manion, Moore & Jones.
For the reasons set forth above, the motion of defendants David Mayo, Julie
Mayo and Church of New Civilization (defendants) for sanctions under Rule 11
is granted in part, to the extent set forth below. Accordingly,
IT IS ORDERED:
1. Defendants shall recover from Attorney Helena K. Kobrin and the law firm of
Bowles & Moxon, jointly and severally, monetary sanctions under Rule 11 in
the sum of $8,887.50, as partial reimbursement for attorneys' fees incurred in
defending against the amended complaint.
2. In addition, Attorney Helena K. Kobrin and the law firm of Bowles & Moxon,
jointly and severally, shall pay to the Clerk of the Court a monetary penalty
in the sum of $8,887.50, as a further sanction.
3. The sums set forth in paragraphs 1 and 2 are payable within 20 days hereof
and if not paid within said period shall be subject to execution as a final
*6 4. Except to the extent it is granted in paragraphs 1, 2 and 3, above,
defendants' motion for attorneys' fees is denied.
FN1. Plaintiffs continue to assert, in opposition to this motion, that
"defendants have been and continue to be supported in their litigation
efforts by a millionaire non-party through means of fraudulently tax-exempt
corporations." Opp. at 2.
FN2. Moreover, the court finds that defendants have not established the
"bad faith" component required for the imposition of sanctions under
either s 1927 or the court's inherent powers. See Chambers v. NASCO,
Inc., 111 S.Ct. 2123, 2133 (1991)(inherent powers); New Alaska Dev.
Corp. v. Guetschow, 869 F.2d 1298, 1306 (9th Cir.1989)(s 1927).
FN3. The amended complaint was prepared by Helena K. Kobrin of Bowles &
Moxon. Bowles & Moxon became associated as counsel of record for
plaintiffs on April 19, 1993, the day this action was transfered to this
district from the Northern District of California.
FN4. Thus, the court need not address the "apparent tension," between
Bradley v. Richmond School Bd., 416 U.S. 696, 711 (1974), and Bowen
v. Georgetown Univ. Hosp., 488 U.S. 204, 208 (1988), in the rule to be
applied when congressional intent is unclear. See Bonjorno, 494 U.S. at
836-37. See also Landgraf v. USI Film Prod., 62 U.S.L.W. 4255, 4267 (S.Ct.
Apr. 26, 1994)(applying Bowen canon of presumption against retroactivity
to the Civil Rights Act of 1991 in light of "no clear evidence of
congressional intent" to the contrary).
FN5. Another amendment to the Rules which also became effective on Dec. 1,
1993, was the addition of subdivision (2) to F.R.Civ.P. 54(d). Rule
54(d)(2)(B) provides that a motion for attorneys' fees "must be filed and
served no later than 14 days after entry of judgment." However, Rule
54(d)(2)(E) provides that subdivision (2) does not apply to "claims for
fees and expenses as sanctions for violations of these rules or under 28
U.S.C. s 1927."
FN6. It would appear to be problematical to comply with the "safe harbor"
provision in any case involving a challenge to a complaint. Even if the
frivolousness is immediately apparent on the face of the pleading at the
time of service, does service of a motion for sanctions under Rule 11
toll the 20-day period to answer under Rule 12(a)(1)(A)? If not, what
purpose does compliance with the "safe harbor" provision serve if the
complaint must be responded to before the 21-day waiting period expires?
If the frivolousness is not immediately apparent and the Rule 11 motion
is not made until after the complaint is dismissed, what useful purpose is
served by compliance with the "safe harbor" provision at that point?
Certainly, by that juncture, it is too late for the complaint to be
"withdrawn or appropriately corrected."
FN7. For this reason alone, plaintiffs' citation of lower court, pre-
Holmes cases cannot be viewed as a "nonfrivolous argument for the ...
modification, or reversal of existing law."
FN8. This substantive standard under Rule 11(b)(2) remains unchanged
from the pre-amendment version in effect at the time the amended complaint
FN9. Because the court finds the amended complaint to be sanctionable as
frivolous, under Rule 11(b)(2), it does not explore defendants' further
contention that it was filed for an improper purpose, in violation of
FN10. As the Advisory Committee's Notes to the Dec. 1, 1993, amendment to
Rule 11 state: "Any such award [of attorney's fees] to another party,
however, should not exceed the expenses and attorneys' fees for the
services directly and unavoidably caused by the violation of the
FN11. Prior controlling circuit law prohibited the award of such fees.
Lockary v. Kayfetz, 974 F.2d 1166, 1178 (9th Cir.1992).
FN12. The court notes that counsel hardly addressed the retroactivity
problems addressed in this opinion.
FN13. This amendment restricts the scope of Business Guides, Inc. v.
Chromatic Communications Enter., Inc., 498 U.S. 533 (1991).
FN14. This amendment overrules Pavelic & LeFlore v. Marvel
Entertainment Group, 493 U.S. 120 (1989), which construed the language of
Rule 11 before the 1993 amendment as authorizing sanctions only against
the attorney who signed the offending pleading.
FN15. No sanctions are sought against Wilson, Ryan & Campilongo.