Case 2:21-cv-08773-RSWL-RAO Document 33 Filed 06/28/22 Page 1 of 11 Page ID #:706 'O' 1 2 3 4 5 6 7 8 UNITED STATES DISTRICT COURT 9 CENTRAL DISTRICT OF CALIFORNIA 10 CV 21-08773-RSWL-RAOx 11 THOMAS AYER, an individual; ALEXIS AYER, ORDER re: Defendants’ 12 an individual; and HOVIK GROZIAN, an individual, Motion for Attorneys’ Fees 13 14 Plaintiffs, [27] v. 15 16 MICHAEL WHITE, an individual; DAVID GREEN, 17 an individual; R4U 18 VENTURES, a Texas limited liability company; and 19 DOES 1-50 inclusive, 20 Defendants. 21 22 Plaintiffs Thomas Ayer, Alexis Ayer, and Hovik 23 Grozian (collectively, “Plaintiffs”) brought the instant 24 Action against Defendants Michael White, David Green, 25 and R4U Ventures, LLC (collectively, “Defendants”), 26 asserting nine causes of action arising out of 27 Defendants’ allegedly fraudulent scheme to induce 28 Plaintiffs into investing in various real property sales 1 Case 2:21-cv-08773-RSWL-RAO Document 33 Filed 06/28/22 Page 2 of 11 Page ID #:707

1 and development projects. On March 4, 2022, the Court

2 dismissed [23] the Action for lack of personal

3 jurisdiction over Defendants. 4 Currently before the Court is Defendants’ Motion 5 for Attorneys’ Fees [27] (the “Motion”). Defendants 6 seek attorneys’ fees as sanctions for Plaintiffs’ 7 litigation conduct pursuant to either Rule 11 of the 8 Federal Rules of Civil Procedure, 28 U.S.C. § 1927, or 9 the Court’s inherent power. Having reviewed all papers 10 submitted pertaining to this Motion, the Court NOW FINDS 11 AND RULES AS FOLLOWS: the Court DENIES Defendants’ 12 Motion. 13 I. BACKGROUND 14 The parties’ underlying dispute arises from a 15 series of real estate transactions in which Defendants 16 agreed to construct, and Plaintiffs agreed to purchase, 17 single-family residences on various lots located in 18 Texas. See Order re: Mot. to Dismiss 2:3-4:15, ECF No. 19 23. On September 30, 2021, R4U Ventures, LLC (“R4U”) 20 filed suit in Hunt County, Texas (the “Texas Action”), 21 against Thomas Ayer and Hovik Grozian to collect certain 22 funds related to the construction projects. See Decl. 23 of Scott Dilbeck in Supp. of Mot. for Att’y Fees 24 (“Dilbeck Decl.”) ¶ 4, ECF No. 27-2; id. Ex. 1A. After 25 counsel for Ayer and Grozian did not agree to accept 26 service on behalf of his clients, R4U’s counsel made 27 attempts at in-person service of the Texas complaint but 28 2 Case 2:21-cv-08773-RSWL-RAO Document 33 Filed 06/28/22 Page 3 of 11 Page ID #:708

1 was unsuccessful.1 Dilbeck Decl. ¶¶ 6-7.

2 On November 8, 2021, Plaintiffs filed the instant

3 Action in this Court. See Compl., ECF No. 1. On 4 December 1, 2021, Defendants filed a motion to dismiss 5 this Action for lack of personal jurisdiction. See Mot. 6 to Dismiss, ECF No. 12. On December 10, 2021, 7 Plaintiffs’ counsel offered to transfer this case to the 8 United States District Court for the Northern District 9 of Texas. Dilbeck Decl. ¶ 14; id. Ex. 1L. Defendants’ 10 counsel refused, stating that the action did not belong 11 in federal court because Plaintiffs’ civil RICO claim 12 would likely be dismissed and thus there would be no 13 basis for subject matter jurisdiction. Id. ¶ 14; id. 14 Ex. 1L. 15 While the motion to dismiss remained pending before 16 this Court, on December 20, 2021, Ayer and Grozian 17 removed the Texas Action to the Northern District of 18 Texas, claiming that their RICO counterclaim provided 19 the court with subject matter jurisdiction over the 20 case. Id. Ex. 1C. Two days later, the district court 21 issued an order to show cause as to why the case should 22 not be remanded for lack of subject matter jurisdiction. 23 Id. Ex. 1D. The case was ultimately remanded to Texas 24 state court on January 10, 2022.2 Id. Ex. 1F.

25 1 Grozian and Ayer were eventually served with the Texas 26 complaint on November 22, 2021, and December 6, 2021, respectively. Dilbeck Decl. ¶ 10. 27 2 On April 6, 2022, the district court granted R4U’s request 28 for attorneys’ fees as sanctions for the removal. Id. Ex. 1G. The court concluded that basing removal jurisdiction on a 3 Case 2:21-cv-08773-RSWL-RAO Document 33 Filed 06/28/22 Page 4 of 11 Page ID #:709

1 On February 25, 2022, Plaintiffs initiated a new

2 action in the Northern District of Texas, alleging

3 essentially the same claims they alleged in the instant 4 Action and in the counterclaims in the original Texas 5 Action. Id. Ex. 1H. Defendants filed a motion to 6 dismiss that new action, and the parties stipulated to 7 dismiss it on April 21, 2022. Id. Ex. 1I. 8 On April 14, 2022, this Court granted [23] 9 Defendants’ motion to dismiss for lack of personal 10 jurisdiction over Defendants. The Court granted 11 Plaintiffs 30 days’ leave to amend, but Plaintiffs 12 declined to amend their Complaint. On April 14, 2022, 13 the Court dismissed the Action with prejudice [25]. On 14 April 28, 2022, Defendants filed the instant Motion for 15 Attorneys’ Fees [27]. Plaintiffs opposed [30] on May 16 17, 2022. Defendants replied [31] on May 24, 2022. 17 II. DISCUSSION 18 A. Legal Standard 19 1. Rule 11 Sanctions 20 Attorneys are subject to sanctions where they 21 present to the court claims, defenses, or other legal 22 contentions that are not warranted by existing law or by 23 a nonfrivolous argument for a change in law. Fed. R. 24 Civ. P. 11(b)(2). An attorney seeking to bring a motion 25 for Rule 11 sanctions must serve the motion upon the 26

27 counterclaim was objectively unreasonable, and R4U was therefore entitled to recover the fees it incurred as a result of the 28 removal. Id. Ex. 1G at 6. 4 Case 2:21-cv-08773-RSWL-RAO Document 33 Filed 06/28/22 Page 5 of 11 Page ID #:710

1 opposing party and wait twenty-one days before filing

2 the motion with the Court to provide the party an

3 opportunity to withdraw or appropriately correct the 4 challenged paper. Fed. R. Civ. P. 11(c)(2). This “safe 5 harbor” provision is strictly enforced, and failure to 6 comply will preclude the moving party from obtaining an 7 award of sanctions. Holgate v. Baldwin, 425 F.3d 671, 8 678 (9th Cir. 2005) (“We must reverse the award of 9 sanctions when the challenging party failed to comply 10 with the safe harbor provisions, even when the 11 underlying filing is frivolous.”). 12 2. 28 U.S.C. § 1927 13 Courts may award sanctions against any attorney 14 “who so multiplies the proceedings in any case 15 unreasonably and vexatiously.” 28 U.S.C. § 1927. An 16 award of sanctions under § 1927 requires a finding of 17 “bad faith or conduct tantamount to bad faith,” namely 18 “recklessness when combined with an additional factor 19 such as frivolousness, harassment, or an improper 20 purpose.” Fink v. Gomez, 239 F.3d 989, 994 (9th Cir. 21 2001). Because § 1927 only authorizes sanctions against 22 attorneys who wrongfully multiply proceedings once a 23 case has already commenced, an attorney may not be 24 sanctioned under § 1927 for the filing of a complaint. 25 Id. at 435. The decision whether to award sanctions 26 under § 1927 is largely left to the court’s discretion. 27 United States v. Associated Convalescent Enters., Inc., 28 766 F.2d 1342, 1345 (9th Cir. 1985). 5 Case 2:21-cv-08773-RSWL-RAO Document 33 Filed 06/28/22 Page 6 of 11 Page ID #:711

1 3. Inherent Authority

2 Federal courts have the inherent power to issue

3 sanctions “when the interests of justice so require.” 4 Hall v. Cole, 412 U.S. 1, 4-5 (1973). Sanctions in the 5 form of attorneys’ fees are appropriate where a party 6 has “acted in bad faith, vexatiously, wantonly, or for 7 oppressive reasons.” Chambers v. NASCO, Inc., 501 U.S. 8 32, 45-46 (1991). However, these sanctions “should be 9 reserved for the ‘rare and exceptional case where the 10 action is clearly frivolous, legally unreasonable or 11 without legal foundation, or brought for an improper 12 purpose.’” Primus Auto. Fin. Servs., Inc. v. Batarse, 13 115 F.3d 644, 649 (9th Cir. 1997) (quoting Operating 14 Eng’rs Pension Trust v. A–C Co., 859 F.2d 1336, 1344 15 (9th Cir. 1988)). Thus, a district court should not 16 invoke these powers before making a specific finding of 17 bad faith or conduct tantamount to bad faith. Fink, 239 18 F.3d at 994. 19 B. Analysis 20 Defendants assert that sanctions in the form of 21 attorneys’ fees should be awarded against Plaintiffs 22 pursuant to: (1) Rule 11 of the Federal Rules of Civil 23 Procedure; (2) 28 U.S.C. § 1927; and (3) the Court’s 24 inherent powers.3 See generally Defs.’ Mot. for Att’y 25 3 In their Reply, Defendants argue that sanctions are also 26 warranted under Local Rules 11-9 and 83-7. See Defs.’ Reply in 27 Supp. of Mot. (“Reply”) 15:6-16:6, ECF No. 31. Defendants did not raise this ground in their Motion, and therefore did not give 28 Plaintiffs an opportunity to respond to this argument. The Court thus declines to consider whether sanctions may be awarded under 6 Case 2:21-cv-08773-RSWL-RAO Document 33 Filed 06/28/22 Page 7 of 11 Page ID #:712

1 Fees (“Mot.”), ECF No. 27. The Court concludes that

2 sanctions are not justified under any of these

3 provisions. The Court addresses each potential source 4 of sanctioning power in turn. 5 1. Rule 11 Sanctions 6 Defendants may not seek Rule 11 sanctions because 7 they have failed to comply with Rule 11’s safe harbor 8 provision. See Fed. R. Civ. P. 11(c)(2). Defendants do 9 not dispute that they failed to serve their Motion on 10 Plaintiffs at least twenty-one days before filing it. 11 Rather, they argue that they “fulfilled the intent of 12 the safe harbor provision” because “Defendants’ counsel 13 attempted multiple times to communicate with Plaintiffs’ 14 lead counsel out of Texas” about the grounds for 15 sanctions. Reply 7:17-24. However, “informal warnings” 16 threatening a Rule 11 motion do “not satisfy the strict 17 requirement that a motion be served on the opposing 18 party twenty-one days prior to filing.” Radcliffe v. 19 Rainbow Constr. Co., 254 F.3d 772, 789 (9th Cir. 2001); 20 see also Barber v. Miller, 146 F.3d 707, 710-11 (9th 21 Cir. 2001). 22 Because Defendants failed to comply with Rule 11’s 23 safe harbor provision, Defendants are precluded from 24 seeking Rule 11 sanctions. See Holgate, 425 F.3d at 25 678. 26

27 Local Rules 11-9 and 83-7. See Zamani v. Carnes, 491 F.3d 990, 997 (9th Cir. 2007) (“The district court need not consider 28 arguments raised for the first time in a reply brief.”). 7 Case 2:21-cv-08773-RSWL-RAO Document 33 Filed 06/28/22 Page 8 of 11 Page ID #:713

1 2. 28 U.S.C. § 1927 and the Court’s Inherent

2 Powers

3 a. Plaintiffs Did Not Unreasonably or 4 Vexatiously Multiply Proceedings 5 As an initial matter, Defendants’ request for 6 sanctions pursuant to 28 U.S.C. § 1927 must be denied to 7 the extent they seek to sanction Plaintiffs for the 8 filing of this Action. Because § 1927 applies only to 9 inappropriate filings once a lawsuit has begun, it does 10 not authorize sanctions for the filing of an initial 11 pleading. In re Keegan, 78 F.3d at 435. Additionally, 12 § 1927 does not allow one court to sanction an attorney 13 for conduct before another court. GRiD Sys. Corp. v. 14 John Fluke Mfg. Co., Inc., 41 F.3d 1318, 1319 (9th Cir. 15 1994). 16 Defendants state that they seek to sanction 17 Plaintiffs’ “collective conduct,” including Plaintiffs’ 18 filing of this Complaint despite the Texas Action having 19 already commenced and Plaintiffs’ frivolous attempts to 20 establish jurisdiction in this Court. Reply 10:18-28. 21 But this Action was the first action to include this 22 particular set of plaintiffs and defendants, and the 23 defendants in the Texas Action had not been served at 24 the time that this Action was filed. Because nothing of 25 significance had yet occurred in the Texas Action and 26 Plaintiffs included new parties in this Action, the 27 Court cannot say that the filing of this action 28 impermissibly multiplied proceedings in violation of 8 Case 2:21-cv-08773-RSWL-RAO Document 33 Filed 06/28/22 Page 9 of 11 Page ID #:714

1 § 1927. Gomes v. Am. Century Cos., Inc., No. 2:09–cv–

2 02153–FCD/KJM, 2010 WL 1980201, at *4 (E.D. Cal. May 17,

3 2010) (finding defendant’s allegation of plaintiff’s 4 forum-shopping behavior to be insufficient grounds for 5 § 1927 sanctions where the lawsuit before the court was 6 the first to be filed with that particular combination 7 of plaintiffs and defendants). 8 The only other potentially sanctionable filing in 9 this Action is Plaintiffs’ Opposition to Defendants’ 10 motion to dismiss. The Court does not find this filing 11 to have so unreasonably or vexatiously multiplied the 12 proceedings as to warrant § 1927 sanctions. See Roadway 13 Express, Inc. v. Piper, 447 U.S. 752, 753 (1980) 14 (holding that § 1927 is intended only to address abuses 15 of the judicial process). 16 b. Defendants Have Not Established that 17 Plaintiffs Acted in Bad Faith 18 Defendants have also failed to demonstrate the 19 requisite bad faith or recklessness to justify an award 20 of sanctions under either § 1927 or the Court’s inherent 21 powers. See Fink, 239 F.3d at 994. There is 22 insufficient evidence that Plaintiffs initiated their 23 Action here to delay or complicate the litigation, or 24 for some other improper purpose. Nothing significant 25 had happened in the Texas Action at the time this Action 26 was filed, and it was not unreasonable for Plaintiffs to 27 think that Defendants may agree to consolidate the 28 litigation and proceed before this Court. See La Cuna 9 Case 2:21-cv-08773-RSWL-RAO Document 33 Filed 06/28/22 Page 10 of 11 Page ID #:715

1 De Aztlan Sacred Sites Prot. Circle Advisory Comm. v.

2 U.S. Dep’t of the Interior, No. CV 11-00400 DMG (DTBx),

3 2011 WL 13131114, at *4 (C.D. Cal. Nov. 14, 2011) 4 (finding evidence of bad faith lacking for claims filed 5 in an improper venue because “venue is waivable and it 6 was not unreasonable ex ante to think that the named 7 defendants might have wanted to consolidate the various 8 litigations in a single proceeding”). 9 Moreover, Plaintiffs’ assertion of personal 10 jurisdiction in this Court, while ultimately rejected, 11 does not rise to the level of sanctionable conduct. 12 Plaintiffs’ jurisdictional arguments may have been weak, 13 but they were not entirely frivolous. “Determining 14 whether a court has personal jurisdiction over an out- 15 of-state defendant . . . is a fact-intensive inquiry and 16 is rarely so clear-cut as to make a claim frivolous.” 17 See Warner Bros. Home Ent, Inc. v. Shi, No. CV 12-07753 18 DMG (PLAx), 2013 WL 12116586, at *6 (C.D. Cal. Jan. 29, 19 2013). While Defendants may have been aware that their 20 jurisdictional arguments were unlikely to succeed, the 21 Court finds that this is not one of the exceptional 22 cases in which sanctions are warranted. See Gomes, 2010 23 WL 1980201, at *5; see also Calop Bus. Sys., Inc. v. 24 City of L.A., 984 F. Supp. 2d 981, 1020-21 (C.D. Cal. 25 2013) (stating that the court would exercise discretion 26 to decline sanctions even if proof of recklessness had 27 been present). 28 In sum, the Court concludes that sanctions are not 10 Case 2:21-cv-08773-RSWL-RAO Document 33 Filed 06/28/22 Page 11 of 11 Page ID #:716

1 warranted under either Rule 11, § 1927, or the Court’s

2 inherent powers. The Court therefore DENIES Defendants’

3 Motion. 4 III. CONCLUSION 5 Based on the foregoing, the Court DENIES 6 Defendants’ Motion for Attorneys’ Fees. 7 IT IS SO ORDERED. 8 9 DATED: June 28, 2022 ______/s_/ _R_o_n_al_d_ S_._W_. _L_e_w_______

HONORABLE RONALD S.W. LEW

10 Senior U.S. District Judge 11

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