Charles N. Schwarz, Jr. v. Harry Folloder, Alexander Grant & Company

Citations: 767 F.2d 125; 2 Fed. R. Serv. 3d 1089; 1985 U.S. App. LEXIS 20773Docket: 83-2743

Court: Court of Appeals for the Fifth Circuit; August 1, 1985; Federal Appellate Court

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A defendant, Alexander Grant Company, is appealing a district court's dismissal with prejudice against the plaintiffs in a securities fraud case, arguing that the court improperly denied it "prevailing party" status and an award of costs, as well as attorney's fees due to the plaintiffs' alleged bad faith. The court emphasizes that while trial courts have discretion in awarding costs and fees, their decisions must be grounded in sound legal principles and should include consideration of the parties' arguments. The district court failed to provide adequate reasoning for its decisions, leading to the appellate court vacating the denial of costs and fees and remanding the case. The case originated in April 1976, involving allegations of conspiracy to defraud the plaintiffs regarding the financial status of Franklin Bank, with claims of misrepresentation leading to stock purchases. Throughout six years of pretrial, numerous plaintiffs were dismissed, and Alexander Grant contested these dismissals, seeking costs and asserting that the plaintiffs' complaints were frivolous, but the district court denied these motions.

On August 9, 1983, the remaining plaintiffs settled their claims against Folloder and Lyne for $250,000 after only one witness was heard in court, leading to the voluntary dismissal of all claims and counterclaims between the parties. The plaintiffs also sought to dismiss their claims against Alexander Grant, who agreed to dismiss all but two plaintiffs—specifically opposing the dismissal of Harold Sellers from Reynolds, White, Allen. Cook, representing Grant, moved for a judgment and for costs and attorney's fees, but the district court rejected Grant's motion, declared a mistrial, and granted the voluntary dismissal of Sellers' claims with prejudice.

On October 14, 1983, Grant filed a motion for attorney's fees and costs against Schwarz and Sellers, seeking a hearing and reconsideration of the mistrial and dismissal orders. The district court denied this motion on October 26 without holding a hearing or issuing written findings. It disposed of the remaining claims on November 9, 1983. Following this, Grant filed a notice of appeal on December 6, 1983, challenging the dismissals involving Schwarz, Sellers, and four other plaintiffs.

Rule 41(a)(2) of the Federal Rules of Civil Procedure allows a district court to dismiss an action at the plaintiff's request under terms it deems appropriate. Such decisions are at the court's discretion and can only be reversed for abuse thereof. Key considerations for dismissals include potential prejudice to the defendant, with a dismissal potentially harming the defendant if granted late and exposing them to further litigation costs.

The district court erred in dismissing the case with prejudice after the defendant's motion for judgment notwithstanding the verdict. While the court has discretion to grant dismissal following a directed verdict motion, a dismissal with prejudice constitutes a complete adjudication, barring further action between the parties and serving as a final judgment in favor of the defendant. In this instance, the district court's dismissals of five appellees' claims pre-trial and two during trial were found to be appropriate exercises of discretion under Rule 41(a)(2), as they did not prejudice the defendant, Alexander Grant. 

Alexander Grant claimed harm from these dismissals, arguing it denied them a judgment on the merits. However, the court clarified that a dismissal with prejudice provides the same relief as a judgment on the merits, and Grant's desire for vindication does not alter its legal rights. The court emphasized that the judicial role is to adjudicate legal rights rather than to provide validation to the parties' conduct.

Furthermore, Grant's motion for costs was denied. According to Rule 54(d), costs are typically awarded to the prevailing party unless otherwise directed. Given that a dismissal with prejudice is equivalent to a judgment on the merits, Alexander Grant is deemed the prevailing party and thus entitled to recover costs.

A dismissal with prejudice constitutes an adjudication on the merits for res judicata purposes, establishing the hospital as the prevailing party in the litigation. Relevant case law supports this, indicating that a defendant is entitled to recover costs following such a dismissal. However, under Rule 54(d), while prevailing parties generally receive costs, the court retains discretion to deny them unless otherwise directed. The district court required Grant to bear its own costs without providing reasoning, which raises concerns about whether the court mischaracterized Grant's status as a prevailing party or had other justifications for denying costs. This lack of explanation necessitates a remand for reconsideration, affirming that Grant is a prevailing party entitled to costs. Additionally, Grant claims entitlement to attorney's fees based on allegations of bad faith against the appellees, arguing that they did not rely on Grant's audited financial statements when purchasing Franklin Bank, which undermines the validity of their claim. Grant contends that the suit was without merit, as the appellees should have been aware of this when filing.

Under the "American rule," prevailing parties generally cannot recover attorney's fees, as established in Alyeska Pipeline Service Co. v. Wilderness Society. However, exceptions exist, including situations where a party or their attorney has acted in bad faith or with oppressive intent, allowing the court to award fees to the opposing party. Additionally, 28 U.S.C. § 1927 permits courts to require attorneys to pay fees if they unreasonably and vexatiously multiply proceedings. Grant claims entitlement to attorney's fees under both equitable and statutory rules, as well as under Fed. R. Civ. P. 11, which allows for disciplinary action against attorneys filing false pleadings.

Awards of attorney's fees are at the discretion of the trial court and may only be reversed for abuse of discretion; however, the court must provide reasons for its decisions to enable meaningful review. In this case, the trial court denied Grant's request for fees without explanation or factual findings, prompting a remand for further clarification. Grant argued that the appellees knew or should have known the factual allegations in their complaint were false. The district court's only indication of reasoning arose during a settlement conference, where it suggested it did not find the case frivolous enough to warrant fees.

The court does not recognize the appellees' statement as a valid "oral finding of fact" under Fed. R.Civ. P. 52(a), emphasizing that while findings need not be perfectly articulated, the intent behind the judge's words must be clear. In this case, the district court's language suggested a dismissal of the matter rather than a substantive ruling on attorney's fees. A sarcastic remark made during a settlement conference indicated potential bias against the request for fees, implying that the defendant's spending on defense was excessive for a frivolous lawsuit. This perspective, if the basis for denying fees, is deemed erroneous.

The court referenced the principle that plaintiffs should not bring baseless claims and then complain about the defendant's legal costs. However, the court refrains from deciding if the appellees acted in bad faith, leaving that determination to the district court upon remand. The district court is instructed to provide reasons for its decision regarding attorney's fees, and it may rely on existing testimony or hold a hearing if necessary.

Despite the case's lengthy litigation, the court requires a brief statement of reasons to facilitate efficient appellate review, resulting in a remand for further clarification on the attorney's fees decision. The ruling concludes with the case being vacated and remanded.

The plaintiffs had alleged violations of various securities laws, including the Securities Act of 1934 and the Texas Business and Commerce Code.

Grant has not conceded any wrongdoing in its audit of financial statements, although the issue of its conduct remains undecided due to the plaintiffs' case being halted on the second day of trial. On appeal, the plaintiffs attempted to introduce new evidence, specifically an affidavit from a certified public accountant claiming Grant acted improperly. This effort is deemed improper as it introduces new evidence not presented at trial, referencing precedents that affirm such actions are not permissible. 

Two plaintiffs were initially unreachable, resulting in their counterclaims not being dismissed until November 9, 1983. The appellees challenged the timeliness of Grant's appeal, but this argument is considered weak; the appeal period does not commence until all claims are resolved unless the district court certifies otherwise. Since no interlocutory orders were certified for appeal, Grant's notice of appeal filed on December 6 was timely, given that it fell within thirty days post the final order.

The plaintiffs cited cases suggesting the appeal clock could start before all claims are resolved, but the court disagreed, emphasizing that those exceptions do not necessitate immediate appeals. Furthermore, some courts hold that a plaintiff is entitled to a dismissal with prejudice if requested, and a trial judge cannot compel a plaintiff to present evidence if they wish to dismiss their case.

During the trial, the district court declared a "mistrial" upon granting dismissals, a term that typically applies to jury trials but can also denote any trial ended prematurely. Regardless of terminology, the court's actions were acceptable as they did not harm any party's rights. Ultimately, the dismissal with prejudice has been interpreted by some courts as non-appealable by the defendant.

In *Mobile Power Enters. Inc. v. Power Vac. Inc.*, the Tenth Circuit held that a defendant can recover costs after a dismissal without prejudice but not after a dismissal with prejudice. The author expresses confusion over this distinction, arguing that a dismissal with prejudice provides more relief to the defendant and thus should not prevent them from being considered a prevailing party, contrary to the court's ruling. 

The three appellees—Anthony Miglicco, Robert Clark, and Herman Lloyd—assert that Grant's counsel conceded their claims were not filed in bad faith during an August 11, 1983 settlement conference. However, since these appellees had already been dismissed from the case, the statement is interpreted as referring only to the remaining clients of Grant's counsel, not as an admission regarding attorney's fees against the appellees.

The appellees argue that reliance was not a necessary element of their case, citing various precedents. However, the author disagrees, referencing *Huddleston v. Herman, MacLean*, which clarifies that under Rule 10b-5, reliance on fraudulent omissions is presumed, although a defendant can still prevail by demonstrating that the plaintiff did not rely on the omitted information.

Grant contends that the lead plaintiff, Charles Schwarz, was aware of the Bank's poor financial state and misrepresented it to other buyers, suggesting that Schwarz, not Grant, should be the target of the lawsuit.

Lastly, 28 U.S.C. § 1927 allows courts to require attorneys who unreasonably multiply proceedings to personally cover excess costs and fees incurred due to such conduct. The discussion includes an example from *Durrett v. Jenkins Brickyard, Inc.*, where the appellate court reversed a district court's error in interpreting "bad faith," emphasizing the necessity for the lower court to provide clear reasoning for its decisions to enable meaningful appellate review.

Alexander Grant seeks a legal determination that the appellees acted in bad faith. However, the evidence presented indicates that the appellees did not directly rely on the financial statements audited by Grant, which alone does not prove bad faith. The appellees may have misinterpreted relevant legal precedent, believing reliance was unnecessary, or they might have thought they relied on the financial statements through their agent, Schwarz. Even if neither Schwarz nor the other appellees relied on the financial statements—a factual issue not resolved here—the lawsuit could still have been filed in good faith. Additionally, the Supreme Court's ruling in Roadway Express emphasizes that sanctions, including attorney's fees, should not be imposed lightly and require fair notice and an opportunity for a hearing.