Talece Inc. v. Zhang

• Court: District Court, N.D. California
• Decided: January 25, 2021
• Docket: 5:20-cv-03579
• Status: Unknown

Opinion

1 2 3 4 5 UNITED STATES DISTRICT COURT 6 NORTHERN DISTRICT OF CALIFORNIA 7 SAN JOSE DIVISION 8 9 TALECE INC., Case No. 20-cv-03579-BLF

10 Plaintiff, ORDER DENYING DEFENDANT’S 11 v. MOTION FOR RULE 11 SANCTIONS

12 ZHENG ZHANG, [Re: ECF 20] 13 Defendant.

15 16 Plaintiff Talece Inc. (“Plaintiff”) sued Defendant Zheng Zhang (“Defendant”) for breach 17 of fiduciary duty, unjust enrichment, conversion, and accounting. See Ex. A, Compl. (“Compl.”), 18 ECF 1-1.1 On July 13, 2020, Plaintiff filed a motion to remand, which this court denied on 19 September 8, 2020. See Mot. to Remand, ECF 17; Order Den. Mot. to Remand, ECF 23. In 20 connection with the motion to remand, Defendant filed a motion for sanctions alleging that 21 Plaintiff’s motion was legally and factually baseless, inadequately researched, and filed for 22 improper purpose. See Mot. 2-3. (“Mot.”), ECF 20. Pursuant to Civil Local Rule 7-1(b), the 23 Court finds the motion to be suitable for decision without oral argument. After considering the 24 briefing, the Court DENIES the motion. 25 26 1 Although the Complaint has been superseded by the First Amended Complaint, ECF 36, this 27 motion relates to the initial Complaint and thus this Order will evaluate the motion based on the I. BACKGROUND 1 Plaintiff filed the present action against Defendant, its former CEO, in Santa Clara County 2 Superior Court on May 18, 2020. See Compl. ¶¶ 3, 9. Plaintiff accused Defendant of embezzling 3 the corporation’s capital funds and stealing the corporation’s software and codes, among other 4 allegations. Compl. ¶¶ 14–19. Plaintiff alleged four separate causes of action for breach of 5 fiduciary duties, unjust enrichment, conversion, and accounting. See Compl. ¶¶ 21–41. Defendant 6 removed the action to federal court on the basis of diversity jurisdiction pursuant to 28 U.S.C. §§ 7 1332, 1441, and 1446 on May 28, 2020. See Not. of Removal, ECF 1. In response, Plaintiff 8 brought a motion to remand, pursuant to 28 U.S.C. § 1447(c), on July 13, 2020. See Mot. to 9 Remand. Plaintiff’s motion to remand was denied on September 8, 2020. See Order Den. Mot. to 10 Remand. 11 Defendant now brings a motion for sanctions pursuant to Rule 11, based on Plaintiff’s motion 12 to remand. See Mot. 2–3. Defendant alleges that Plaintiff violated Rule 11 because the motion to 13 remand contains legal claims and factual allegations that have no evidentiary support, Plaintiff did 14 not adequately research the factual allegations, and Plaintiff filed the motion for an improper 15 purpose. See id. Specifically, Defendant argues that Plaintiff made factual contentions regarding 16 Defendant’s immigration status that were false and unsupported by any evidence. See id. at 3. 17 Plaintiff filed an opposition to Defendant’s motion for sanctions. See Opp’n to Mot. 18 (“Opp’n”), ECF 22. In this opposition, Plaintiff included a Declaration from Lani Su, Defendant’s 19 LinkedIn profile, a 2020 statement of information for BuildSimHub, and 2019-2020 statements of 20 information for Telece Inc., supporting Plaintiff’s contentions that Plaintiff had circumstantial 21 evidence to believe that Defendant was applying for citizenship. See Decl. of Lani Su (“Su 22 Decl.”) ¶¶ 6–10; Ex. A-D, ECF 22-1. Defendant filed a reply in support of its motion. See Reply 23 to Opp’n to Mot. (“Reply”), ECF 26. 24 25 II. LEGAL STANDARD 26 Rule 11 of the Federal Rules of Civil Procedure imposes upon attorneys a duty to certify 27 that they have read any pleadings or motions they file with the court and that such 1 improper purpose. Fed. R. Civ. P. 11(b); Business Guides, Inc. v. Chromatic Comm. Enters., Inc., 2 498 U.S. 533, 542 (1991). If a court finds that Rule 11(b) has been violated, the court may impose 3 appropriate sanctions to deter similar conduct. Fed. R. Civ. P. 11(c)(1); see also Cooter & Gell v. 4 Hartmarx Corp., 496 U.S. 384, 393 (1990) (“[T]he central purpose of Rule 11 is to deter baseless 5 filings in district court.”). However, “Rule 11 is an extraordinary remedy, one to be exercised 6 with extreme caution.” Operating Eng’rs Pension Trust v. A-C Co., 859 F.2d 1336, 1345 (9th Cir. 7 1988). Rule 11 sanctions should be reserved for the “rare and exceptional case where the action is 8 clearly frivolous, legally unreasonable or without legal foundation, or brought for an improper 9 purpose.” Id. at 1344. “Rule 11 must not be construed so as to conflict with the primary duty of 10 an attorney to represent his or her client zealously.” Id. 11 In determining whether Rule 11 has been violated, a “court must consider factual questions 12 regarding the nature of the attorney’s pre-filing inquiry and the factual basis of the pleading.” 13 Cooter, 496 U.S. at 399. However, courts should “avoid using the wisdom of hindsight and 14 should test the signer’s conduct by inquiring what was reasonable to believe at the time the 15 pleading, motion, or other paper was submitted.” Fed. R. Civ. P. 11 Advisory Comm. Notes 16 (1983 Amendment). “[T]he imposition of a Rule 11 sanction is not a judgment on the merits of an 17 action. Rather, it requires the determination of a collateral issue: whether the attorney has abused 18 the judicial process, and, if so, what sanction would be appropriate.” Cooter, 496 U.S. at 396. 19 III. DISCUSSION 20 In the Ninth Circuit, Rule 11 sanctions are appropriately imposed where: (1) a paper is 21 filed with the court for an improper purpose; or (2) the paper is “frivolous.” Townsend v. Holman 22 Consulting Corp., 929 F.2d 1358, 1362 (9th Cir. 1990) (en banc). A “frivolous” argument or 23 claim is one that is “both baseless and made without a reasonable and competent inquiry.” Id. 24 (emphasis added). Accordingly, when sanctions are sought on the basis of a complaint, the Court 25 must determine: “(1) whether the complaint is legally or factually ‘baseless’ from an objective 26 perspective, and (2) if the attorney has conducted ‘a reasonable and competent inquiry’ before 27 signing and filing it.” Christian v. Mattel, Inc., 286 F.3d 1118, 1127 (9th Cir. 2002). 1 motion to remand that is based on plainly false factual contentions which have no evidentiary 2 support and are not specifically identified to have evidentiary support after a reasonable 3 opportunity for further investigation or discovery.” Mot. 2 (emphasis in original). Plaintiff 4 counters that the motion was filed “in good faith,” and after a “reasonable inquiry into the law and 5 facts of this case.” See Opp’n. 2. The Court finds that Defendant’s motion for sanctions is 6 unwarranted. 7 Defendant’s assertion that Plaintiff’s motion is “repetitive” is incorrect. Defendant alleges 8 that Plaintiff first requested remand in its opposition to Defendant’s motion to dismiss. See Mot. 9 4. Defendant refers to one line in the conclusion of Plaintiff’s opposition brief where Plaintiff 10 requested as relief that Defendant’s motion to dismiss be denied, and the case be remanded. See 11 Opp’n to Mot. to Dismiss 6, ECF 11. A single line in an opposition to a motion to dismiss cannot 12 reasonably be construed as a motion for affirmative relief, and neither Defendant nor the Court 13 interpreted it that way at the time. 14 Defendant further argues that Plaintiff’s motion to remand was frivolous, arguing that 15 Plaintiff’s attorneys failed to conduct an inquiry before asserting factual allegations, which 16 resulted in a motion that was not based on actual factual or legal support. See Mot. 7-8. 17 Defendant claims that Plaintiff’s counsel “did not conduct any semblance of an investigation into 18 the factual contentions they put forth because they do not have any evidence to support these 19 contentions.” Mot. 8. However, Plaintiff has produced the declaration of Lani Su, Defendant’s 20 LinkedIn profile, a 2020 statement of information for BuildSimHub, and 2019-2020 statements of 21 information for Telece in support of Plaintiff’s contentions that Defendant was applying for 22 citizenship, and Plaintiff’s counsel asserts that he did conduct an investigation into the asserted 23 factual contentions. See Opp’n. 5-7; Su Decl ¶¶ 6–10; Exh. A-D. Plaintiff’s counsel argues he did 24 not “solely rely on his client’s statements” or on “unverified hearsay” as Defendant claims, but on 25 a sworn declaration and business records that demonstrate Defendant’s connection to the United 26 States, specifically California. See id; Mot. 8. The Court agrees with Plaintiff that the motion was 27 not frivolous or baseless. 1 irrelevant case law are also unsupported. See Mot. 9. Defendant argues that “Plaintiff 2 || intentionally misconstrued 28 U.S.C. § 1332(a)(2) to read that diversity jurisdiction does not exist 3 || between a citizen of a state and a temporary visa holder who can apply for permanent residence 4 status.” Id. However, Plaintiff actually argued that diversity jurisdiction does not exist because 5 || Defendant had applied for, and would likely receive, permanent resident status. See Mot. to 6 || Remand. 5. Plaintiff further cited Congressional intent that diversity be eliminated between a U.S. 7 Citizen and a foreign national who is deeply connected to the state in which the U.S. citizen is 8 || domiciled, which Plaintiff argued should apply to Defendant because of Defendant’s extensive 9 || business connections to California. See id. at 4. Although Plaintiff was ultimately incorrect in its 10 allegations, Defendant has not demonstrated that Plaintiff intentionally misconstrued the law. 11 There is no evidence to support Defendant’s final contention that Plaintiff's motion was 12 || filed for improper purpose. See Mot. 10. Plaintiff submits that it had circumstantial evidence 5 13 from which Plaintiff mistakenly, but in good faith, believed that Defendant had applied for 14 || permanent residency. See Opp’n. 2,5. Although the Court ultimately disagreed with Plaintiff and 15 found that there was subject matter jurisdiction based on diversity of citizenship, the Court does 16 || not find that Plaintiff filed the instant action for a frivolous or improper purpose.

18 || Iv. ORDER 19 For the foregoing reasons, Defendant’s Motion for Rule 11 Sanctions is DENIED. 20 21 IT IS SO ORDERED. 22 || Dated: January 25, 2021 kom Lh hon tn 23 LEMANS BETH LABSON FREEMAN 24 United States District Judge 25 26 27 28