IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
No. 99-20787
MERCURY AIR GROUP, INC.,
Plaintiff-Appellant,
BRIAN HOGAN; MCBREEN, MCBREEN & KOPKO,
Appellants,
versus
JOHN M. MANSOUR; Et Al,
Defendants,
JOHN M. MANSOUR, DAVID A. BANMILLER, HOWARD M. BABCOCK,
Defendants-Appellees.
Appeal from the United States District Court
for the Southern District of Texas
January 11, 2001
Before GARWOOD, HIGGINBOTHAM, and STEWART, Circuit Judges.
CARL E. STEWART, Circuit Judge:
Mercury Air Group, Inc. (“Mercury”) appeals from a grant of summary judgment by the
district court in favor of John M. Mansour1 (“Mansour”) because it determined that there was an
absence of evidence to support Mercury’s misrepresentation-based 10(b)(5) claims. Mercury also
appeals the district court’s decision to award FED. R. CIV. P. 11 (“Rule 11") and 28 U.S.C. § 1927 (“§
1927" or “Section 1927") sanctions to Mansour because it found that Mercury sued with bad faith
and with an improper purpose. Because we find that the district court did not err in granting the
motion for summary judgment and t hat it did not abuse its discretion in awarding sanctions to
Mansour, we affirm the ruling.
FACTUAL & PROCEDURAL HISTORY
Mercury, a 40-year-old company with annual revenues of $250 million, provides fuel to small
commercial and commuter airlines. Eighty percent of its revenues are generated by the sale of fuel.
Its usual business practice is to invest in and to extend credit to start-up airlines in order to obtain fuel
agreements with them.
Mansour is Chairman and largest shareholder of Sun Jet Holdings Corp. Sun Jet Holdings
Corp. operated Sun Jet International (“Sun Jet”), a start-up niche airline which provided flights with
limited frequencies to cost-conscious travelers.
In late May or early June 1996, Mercury contacted Banmiller, CEO of Sun Jet, about entering
into a fuel agreement and the possibility of investing in Sun Jet. Mercury also received a copy of Sun
Jet’s Private Placement Memorandum (“PPM”) and an Addendum to the PPM dated May 30, 1996,
which lowered Sun Jet’s income projections. The PPM stated that Sun Jet did not intend to update
or to revise the projections.
On July 16, 1996, Mercury’s Board of Directors decided to invest $500,000 in Sun Jet,
1
Mansour also includes David A. Banmiller and Howard M. Babcock.
2
conditioned on the execution of a fuel agreement. On August 14, 1996, Sun Jet transmitted its
second quarter financial statements to its shareholders, which it did not provide to Mercury. The
statements indicat ed, as of June 30, 1996, that Sun Jet had fallen significantly below the income
projections detailed in the PPM and Addendum. On August 15, 1996, the parties entered into an
irrevocable stock subscription agreement, and on August 21, 1996, Mercury invested $500,000 in
Sun Jet. On September 17, 1996, Mercury received the second quarter financial statements.
Thereafter, it extended $1 million in unsecured fuel credit to Sun Jet on October 1, 1996. Sun Jet
later filed for bankruptcy in June 1997. Mercury lost its investment and filed suit against Mansour.
Seymour Khan (“Khan”), Mercury’s Chairman and CEO, testified in a deposition that he was
the only person at Mercury who spoke with Mansour and Banmiller regarding the information upon
which its Board of Directors decided to invest in Sun Jet. Khan also testified that had he received
the second quarter financial statements as of July 16, 1996, he still would have invested in Sun Jet.
Khan also admitted that although Mansour and Banmiller made no false statements to him before July
16, 1996, and that the fact s upo n which Sun Jet based its May 30th projections in the Addendum
were not false, he hoped to discover information which would provide Mercury a basis for pursuing
the lawsuit against Mansour. Khan further stated that although he had no contact with Babcock, a
director of Sun Jet, Mercury included him as a party because his name appeared on the PPM. Khan
also admitted that he had made no independent investigation of Sun Jet.
Mercury filed suit against Mansour in Texas state court alleging violations of 17 C.F.R. §
240.10b-5 (“Rule 10b-5"), California state security laws, common law misrepresentation, negligence,
conspiracy to commit securities fraud and misrepresentation, and breach of fiduciary duty. Mansour
removed the case to federal court and moved for summary judgment and sanctions under Rule 11 and
3
§ 1927. The district court granted both motions and awarded Mansour $203,641 in sanctions for its
reasonable attorneys’ fees and expenses. Subsequently, Mercury filed a motion for reconsideration
and a first supplemental motion for reconsideration. Mercury also sought leave to file a reply brief
in support of its supplemental motion, but the district court refused to grant leave. The district court
later denied Mercury’s motion for reconsideration and entered final judgment. Mercury now appeals
the summary judgment and the sanctions.
DISCUSSION
This Court reviews summary judgments de novo. Krim v. BancTexas Group, Inc., et al., 989
F.2d 1435, 1444 (5th Cir. 1993). The moving party for summary judgment must show that “there
is no genuine issue of material fact and that the moving party is entitled to judgment as a matter of
law.” FED. R. CIV. P. 56(c). In response, the non-movant must “go beyond the pleadings and her own
affidavits, or by the depositions, answers to interrogatories, and admissions on file, designate ‘specific
facts’ showing that there is a genuine issue for trial.” Celotex Corp. v. Catrett, 477 U.S. 317, 324,
106 S. Ct. 2548, 2554, 91 L. Ed. 2d 265 (1986). Lastly, this Court should regard the evidence in the
light most favorable to the nonmovant. Matsushita Electric Industrial Co. v. Zenith Radio Corp., 475
U.S. 574, 587-88, 106 S. Ct. 1348, 1356, 89 L. Ed. 2d 538 (1986).
I. Rule 10b-5 claims
Mercury argues that Mansour violated Rule 10b-5 when it failed to disclose the updated2
2
An ancillary issue is whether Mercury pleaded that Mansour had a duty to update the
second quarter financial statements. Having reviewed the pleadings, we are satisfied that the duty
to update was pled. It is, however, less clear that this argument was presented as a major
argument to the district court with explication.
4
projections based on the second quarter statements. In order to demonstrate a violation of Rule 10b-
5, the plaintiff must show: 1) a material misstatement or omission 2) which occurred in connection
with the purchase or sale of securities 3) that was made with scienter3 4) harm, and 5) causation.
Krim, 989 F.2d at 1446 n. 10; Rubinstein, 20 F.3d at 166. In addition, the Fifth Circuit requires that
the plaintiff perform due diligence in order to protect her interests. Krim, 989 F.2d at 1446 n.10
(citing Stephenson v. Paine Webber Jackson & Curtis, Inc., 839 F.2d 1095 (5th Cir. 1988)).
Mercury first alleged in its complaint that Mansour violated Rule 10b-5 by materially
misrepresenting Sun Jet’s financial condition. It conceded, however, that there was no evidence of
a material misrepresentation made to it by Mansour. Kahn testified, for example, that there was
“nothing to his knowledge” that was available as of July 16, 1996, the date Mercury decided to invest
in Sun Jet, that presented a different financial position for the company than was described in the
PPM and the Addendum. Moreover, Kahn admitted that not only had Mansour not made any false
statements regarding Sun Jet, but also that many of the risk factors, as outlined in the cautionary
language of the investment materials, were unpredictable. Thus, the district court granted Mansour’s
motion for summary judgment because there was no evidence which raised a genuine issue of material
fact with respect to Mercury’s misrepresentation-based claims.
Mercury also alleged common law negligence in its complaint, which the district court
construed as negligent misrepresentation. The court found that Mercury failed to explain the basis
for this claim because Mercury was unable to identify the duty owed by Mansour to it whi ch it
believed Mansour breached.
3
Scienter is the intent to deceive, manipulate, or defraud. Rubinstein v. Collins, 20 F.3d
160, 169 (5th Cir. 1994). It also encompasses reckless indifference such that the omission or
misrepresentation was “so obvious that the defendant must have been aware of it.” Id.
5
On appeal, Mercury argues that Mansour violated Rule 10b-5 when it failed to update the
projections in the investment materials based on the second quarter statements. It is, however,
unclear on what basis Mercury makes this argument. It appears that Mercury is alleging that
Mansour negligently misrepresented Sun Jet’s financial condition, since the company’s actual financial
health differed markedly from that predicted by the projections. This argument is meritless, given
the concessions Mercury made in the district court, the warnings contained in the investment
materials,4 and the lack of precedent to support Mercury’s position.
Mercury nonetheless contends that the reasonable investor would find the updated income
projections material to its investment decision. The relevant inquiry for analyzing the materiality of
such predictions is whether a reasonable investor would have considered the information material
according to the “total mix of information.” Krim, 989 F.2d at 1445; see also Isquith v. Middle South
Utilities, Inc., et al., 847 F.2d 186, 207 (5th Cir. 1988) (stating that the correct standard is “whether
the information disclosed would have been misleading . . . to a reasonable potential investor who read
the information as a whole”). In addition, the materiality of predictions is analyzed on a case-by-case
basis. Isquith, 847 F.2d at 206.
Mercury correctly notes that ordinarily a reasonable investor may deem a significant decrease
in projected income material to its decision to invest in an entity. In the instant case, however, this
determination of materiality to a reasonable investor is overshadowed by Kahn’s admission that
despite the disappointing results from the second quarter financial statements, Mercury still would
4
The PPM warned, for instance, that the projections regarding Sun Jet’s “future
performance are necessarily subject to a high degree of uncertainty” and that the company did not
“intend to update or otherwise revise the projections to reflect circumstances existing after the
date hereof or to reflect the occurrence of future events.”
6
have invested in Sun Jet. Additionally, even after it had received the statements, Mercury extended
$1 million in unsecured credit, an amount that was at least twice its initial investment. Therefore,
based on the facts and circumst ances of this case, we conclude that Mercury did not consider the
updated projections controlling of its investment decision, and the trial court did not err in granting
summary judgment in favor of Mansour.5
Although we agree with Mansour that the updated projections were not controlling, our
inquiry, however, is not ended because Mercury further argues that the district court relied on the
incorrect date for purposes of assessing whether Mansour made a material misrepresentation by not
informing Mercury of the updated second quarter projections. The district court relied on July 16,
1996, the date on which Mercury’s Board of Directors voted to invest in Sun Jet. In particular, the
court relied on Kahn’s testimony that, as of July 16th, there was “nothing to his knowledge” that
presented a different financial position for Sun Jet than was described in the PPM and the Addendum.
In contrast, Mercury contends that August 15, 1996, the date on which it signed the irrevocable stock
subscription agreement, is the crucial date for determining whether there was a material
misrepresentation. We hold that July 16th is the relevant date because regardless of when Mercury
actually invested in Sun Jet, the key decision to invest in the airline was made on July 16th by
Mercury’s Board of Directors. Thus, the district court did not err.
II. Rule 11 and Section 1927 sanctions
5
The district court also cited the “bespeaks caution” doctrine as a basis for granting
Mansour’s motion for summary judgment. In addition, Mansour argues that Mercury’s lack of
due diligence is an alternative basis for affirming summary judgment. Because we find that the
dispositive issue is whether Mansour had a duty to update the projections, we decline to address
these issues.
7
This Court reviews Rule 11 sanctions for abuse of discretion. Matta v. May, 118 F.3d 410,
413 (5th Cir. 1997). A court abuses its discretion regarding sanctions when its “ruling is based on an
erroneous view of the law or on a clearly erroneous assessment of the evidence.” Id. Moreover, the
imposition of sanctions is o ften a fact-intensive inquiry, for which the trial court is given wide
discretion. Thomas v. Capital Security Services, Inc., 836 F.2d 866, 873 (5th Cir. 1988) (en banc).
The district court granted Mansour’s motion for Rule 11 and § 1927 sanctions because Kahn candidly
testified that he hoped to discover information that would reveal a basis for a lawsuit against
Mansour. The court also cited Mercury’s inability to provide extrinsic evidence to rebut Mansour’s
motion for summary judgment.6 Rule 11 states that attorneys must not file suit for any improper
purpose or without evidentiary support for the allegations contained in the complaint. FED. R. CIV.
P. 11(a)(1), 11(a)(3). Moreover, an attorney must have made a reasonable inquiry into the facts and
law of a case at the time which she affixes her signature on any papers to the court. Thomas, 836
F.2d 884. In addition, courts must impose the least severe sanction on attorneys and parties who
violate Rule 11. Merriman v. Security Insurance Co. of Hartford, 100 F.3d 1187, 1194 (5th Cir.
1996). This Court, however, has affirmed a district court’s determination that the least severe
sanction for a lawsuit that is wholly frivolous is the imposition of reasonable attorneys’ fees and
expenses. Granader v. McBee, 23 F.3d 120, 124 (5th Cir. 1994).
6
Other reasons that the district court gave were Mercury’s suing for breach of fiduciary
duty when there was no fiduciary duty and including Babcock as a party to the suit when he had
no contact with Mercury. The district court also noted that Mercury, while represented by the
same counsel as in the instant case, filed similar lawsuits in federal district courts in California and
New York against Jet USA Airlines, a small, start-up airline. The courts, however, dismissed the
cases. In addition, the trial court noted that Mercury had ample time to discover extrinsic
evidence, and it did not request an extension of time for discovery in its response to the motion
for summary judgment.
8
Mercury contends that the allegations asserted in the pleadings are admissions by Mansour
and could have been used to respond to the summary judgment motion. However, the law is clear
that more than mere allegations must be used by a non-movant to respond to such a motion. Celotex,
477 U.S. at 324. In addition, counsel for Mercury asserts that it should not be held liable under Rule
11 because it conducted a more than reasonable inquiry into the law and facts of the suit by
undergoing more than 150 hours of investigation approximately six months before it filed the suit.
It also contends that it should not be held responsible for Kahn’s admission that he hoped to discover
a basis for pursuing the lawsuit against Mansour.
These arguments, however, do not belie the fact that despite its investigation, had counsel
paid sufficient attention to Kahn’s statements in the deposition, it would have determined that there
is no basis for this suit. Kahn occupies the highest position in Mercury, and his statements under oath
regarding the merits of the suit cannot be ignored. Mercury nonetheless argues that Kahn’s
statements should not be used against him, as Kahn is simply a combative non-lawyer who is
unfamiliar with discovery. Although Kahn is not an attorney and is likely unknowledgeable about
discovery and the legal process, he is the CEO and Chairman of Mercury, a longtime veteran of the
airline business, and the only person at Mercury with whom Mansour had contact regarding the
decision to invest in the airline.
More importantly, Kahn and Mercury were represented by counsel who, by all accounts, had
previously initiated similar frivolous lawsuits in other jurisdictions. It seems inescapable that counsel
for Mercury were aware of the portent of Kahn’s statements. Therefore, counsel’s decision to pursue
the lawsuit, despite Kahn’s testimony that it was inherently baseless, indicates that the trial court did
not abuse its discretion when it awarded Mansour its reasonable attorneys’ fees and expenses under
9
Rule 11 because of an improper purpose. See, e.g., Topalian v. Ehrman, 3 F.3d 931, 935 (5th Cir.
1993) (citing from the Advisory Committee Note to Rule 11 that “[i]f the duty imposed by the rule
is violated . . . it may be appropriate under the circumstances of the case to impose a sanction on the
client”); Devine v. Wal-Mart Stores, Inc., 52 F.Supp. 2d 741 (S.D. Miss. 1999) (imposing Rule 11
sanctions on a client who brought a lawsuit in bad faith).
This Court also reviews § 1927 sanctions for abuse of discretion. Federal Deposit Insurance
Corp. v. Calhoun, 34 F.3d 1291 (5th Cir. 1994). The statute states that an attorney who
“unreasonably” and “vexatiously” multiplies a case’s proceedings may be required to absorb the costs
and attorneys’ fees of her actions. 28 U.S.C. § 1927 (2000). This Court has determi ned that a
finding of “unreasonable” and “vexatious” multiplicative proceedings necessitates “evidence of bad
faith, improper motive, or reckless disregard of the duty owed to the court.” Edwards v. General
Motors Corp., 153 F.3d 242, 246 (5th Cir. 1998). The statute, however, does not apply when an
attorney has represented her client “with vigor.” Smith, 960 F.2d at 448.
Mercury argues that counsel did not unreasonably and vexatiously multiply this suit’s
proceedings and that it brought the case with legitimate zeal. Given Kahn’s testimony regarding the
purpose of this suit, as well as the lack of extrinsic evidence to support the response to the summary
judgment motion, it is undeniable that counsel for Mercury unreasonably and vexatiously multiplied
this suit’s proceedings by choosing to pursue this lawsuit in the face of such bald evidence that there
was no suit to pursue. Thus, we find that the district court did not abuse its discretion when it
awarded sanctions under § 1927.
CONCLUSION
10
Because we find that Mansour had no duty to update the investment materials, the suit was
brought for an improper purpose, and counsel for Mercury unreasonably and vexatiously multiplied
the proceedings of this suit, we AFFIRM the district court’s grant of summary judgment and its
award of Rule 11 and § 1927 sanctions to Mansour.
AFFIRMED.
11