Appeal
from the Superior Court No. 3 AN-15-05969 CI of the State of
Alaska, Third Judicial District, Anchorage, Patrick J. McKay,
Judge.
James
B. Gottstein, Law Offices of James B. Gottstein, Anchorage,
for Appellant.
No
appearance by Appellees Legislative Affairs Agency or 716
West Fourth Avenue LLC.
Before: Stowers, Chief Justice, Winfree, and Maassen, Bolger,
and Carney, Justices.
OPINION
MAASSEN, Justice.
I.
INTRODUCTION
A
building owner sued an agency of the Alaska Legislature and a
private developer, alleging that the agency and developer had
entered into an illegal lease for the building next door. The
complaint sought both declaratory relief invalidating the
lease and monetary compensation calculated as a percentage of
the savings once the lease was invalidated. The building
owner succeeded in invalidating the lease but lost the
compensation claim; the superior court concluded that the
claim had no basis in Alaska law. The court later found that
the compensation claim was frivolous and justified a sanction
under Alaska Civil Rule 11. The building owner appeals that
decision.
We
conclude that the compensation claim was based on a
nonfrivolous argument for establishing new law and thus did
not violate Rule 11. We therefore reverse.
II.
FACTS AND PROCEEDINGS
A.
Facts
In
September 2013 the Alaska Legislative Affairs Agency executed
a lease agreement with 716 West Fourth Avenue LLC (716 West
Fourth) for the Legislative Information Office building (LIO
building) in downtown Anchorage. The agreement called for
significant renovation and expansion. 716 West Fourth agreed
to demolish an adjoining building and increase the square
footage of the LIO building from 23, 645 to 64, 048 - a 170%
increase in space. The Agency agreed to pay up to $7.5
million for certain "tenant improvements, " which
the superior court later characterized as a "virtual
'gutting' and reconstruction of the existing rental
space." The agreement also extended the term of the
lease and increased the Agency's monthly rent from $56,
863.05 to $281, 638.00
B.
Proceedings
Alaska
Building, Inc., the owner of property next door to the LIO
building, filed a lawsuit in superior court challenging the
lease agreement and renovation. Count one of the complaint
sought a declaration that the lease agreement violated AS
36.30.083(a), which permits the Alaska Legislature to extend
an existing real property lease - rather than soliciting
competitive bids for a new lease pursuant to certain
statutory procedures - only if the extension would achieve
"a minimum cost savings of at least 10 percent below the
market rental value." A second count of the complaint
alleged that the expansion and renovation project "was
negligently designed, managed, or constructed, . . .
resulting in damage to the Alaska Building." The
complaint's prayer for relief included the claim central
to this appeal: that if Alaska Building succeeded in
invalidating or reforming the lease agreement, it should
receive judgment in an amount equal to 10 percent of the
resulting savings to the Agency.
On the
Agency's motion, the superior court ordered Alaska
Building to sever count two - the property damage claim -
from the complaint and file it as a separate action. Alaska
Building accordingly filed an amended complaint that omitted
count two, while retaining the claim for 10 percent of the
Agency's potential savings. The defendants then moved for
a ruling on that claim, contending that it had no legal
basis. The superior court granted the motion, concluding that
Alaska Building had "no legal grounds on which to
request 10% of any lease savings."
The
parties then litigated the remaining claims. Alaska Building
continued to argue that the lease agreement was illegal,
while the Agency argued that the lease was a valid
"extension" under AS 36.30.083 and that some
portions of the dispute were nonjusticiable political
questions. 716 West Fourth argued for "summary
dismissal" of all remaining claims on justiciability
grounds. The court ruled in Alaska Building's favor,
deciding that the issue was justiciable and that the lease
violated the law because it was "not an agreement to
extend a lease but rather a wholly new lease instrument
altogether and should have been competitively bid."
This
ruling ended the parties' substantive dispute. The court
determined that Alaska Building was the prevailing party on
the lease validity issue and awarded it attorney's fees
of over $26, 000 against 716 West Fourth, of which
approximately $17, 000 was jointly owed by the Agency. The
Agency moved for attorney's fees as well, arguing that it
had prevailed against Alaska Building on count two - the
property damage claim that had been severed - and the
percentage-of-savings claim. The Agency also requested
sanctions under Alaska Civil Rule 11 because of the
percentage-of-savings claim, arguing that Alaska Building
"had no good faith basis or legal support for
bringing" it. The court granted the Agency's fees
motion, concluding that the percentage-of-savings claim was
frivolous and awarding the Agency $2, 217.80 in
attorney's fees under Alaska Civil Rules 82 and 11.
Alaska
Building appeals only the Rule 11 decision, arguing that the
percentage-of-savings claim, though novel and ultimately
unsuccessful, was not frivolous. The Agency and 716 West
Fourth did not participate in the appeal.
III.
STANDARD OF REVIEW
We
review for abuse of discretion a trial court's decision
to impose Rule 11 sanctions, [1] and we will find an abuse
of discretion only when the trial court's decision is
"manifestly unreasonable."[2] We have held that
the deferential abuse of discretion standard is appropriate
in the Rule 11 context because the trial court, unlike an
appellate court, is "intimate[ly] familiar[] with the
proceedings below"[3] and generally "better
situated" than an appellate court "to marshal the
pertinent facts and apply the fact-dependent legal standard
mandated by Rule ll."[4]
But
sanctions under Rule 11(b)(2) - which requires a court to
determine whether a party's "claims, defenses, and
other legal contentions are warranted by existing law or by a
nonfrivolous argument for... establishing new law" - are
unlikely to depend solely on questions of fact. Although a
Rule 11 motion may require the court to "consider
factual questions regarding the nature of the attorney's
prefiling inquiry and the factual basis" of the
party's position, [5] "whether a pleading is
'warranted by existing law or a good faith argument'
for changing the law" is likely to be a legal
issue.[6] But a trial court's erroneous
determination of a legal issue, like its clearly erroneous
finding of fact, may persuade us that it was an abuse of
discretion to award Rule 11 sanctions.[7]
Rule 11
"creates an objective standard of 'reasonableness
under the circumstances.' "[8] The rule may
therefore require a court to consider a party's legal
position within a particular factual context; for example, a
court may need to consider the amount of time an attorney had
to inquire into the relevant facts and applicable law before
meeting a filing deadline. But in this case the superior
court's decision did not depend on the circumstances of
the case or the adequacy of the attorney's preliminary
inquiry. The court did not hear evidence or make findings of
fact but determined that Alaska Building's
percentage-of-savings claim was frivolous as a matter of law.
The
issue before us is thus not fact-dependent and does not
require "intimate familiarity" with the superior
court proceedings. The primary question is a "purely
legal" one, more analogous to "whether the
attorney's legal argument was correct" than to
"whether an attorney's prefiling inquiry was
reasonable."[9] In determining whether the
percentage-of-savings claim was a "a nonfrivolous
argument ... for establishing new law, "[10] we apply
our independent judgment and "adopt the rule of law most
persuasive in light of precedent, reason, and
policy."[11]
IV. DISCUSSION
Alaska
Building argues first that the superior court abused its
discretion because it "failed to make a clear record
concerning the reason[]" for imposing Rule 11 sanctions.
We have held that trial courts "should, as a matter of
sound practice, make a clear record concerning the reason for
imposing [a] particular sanction" and cite "the
authority relied upon."[12] We have cautioned that
"[f]ailure to do so may require a reversal and remand
for entry of such findings."[13] The sanctions order in
this case stated "that Plaintiffs request for relief in
the form of 10% of the alleged savings to the [Agency] for
lease invalidation was frivolous" but did not explain
why. The superior court did discuss the claim fully in its
earlier order granting the defendants' motion for a
ruling of law. The court summarized Alaska Building's
asserted rationale - "to make meaningful the right of
citizen-taxpayers to seek judicial redress of illegal
government action"-but concluded that the claim had
"no legal grounds": the court reasoned that
"there [was] no statutory authority that would allow
th[is] court to create such an incentive" to public
interest litigation and that the "argument is one of
public policy, which is better left to [the]
legislature." But that earlier order did not
characterize the claim as frivolous or imply that it had been
brought in bad faith. Given the absence of relevant findings,
our usual course would be to vacate the sanctions order and
remand for further proceedings.[14]
In this
case, however, a remand is not necessary because we agree
with Alaska Building's argument that, as a matter of law,
the percentage-of-savings claim was not
frivolous.[15] While the claim had little
reasonable likelihood of success, we conclude that it was a
"nonfrivolous argument... for establishing new law,
" something Rule 11 expressly permits.[16]
Rule 11 provides:
By presenting to the court a pleading, written motion, or
other paper ... an attorney . . . certifies that to the best
of [his] knowledge, information, and belief, formed after an
inquiry reasonable under the circumstances ... the claims,
defenses, and other legal contentions are warranted by
existing law or by a nonfrivolous argument for extending,
modifying, or reversing existing law or for establishing new
law.
As
discussed above, "[t]he Rule creates an objective
standard of 'reasonableness under the circumstances,
' and is intended to be more stringent than a mere
'good faith' formula."[17] On the other
hand, the rule should not be used to " 'stifle
creative advocacy' or 'chill an attorney's
enthusiasm in pursuing factual or legal theories.'
"[18] As we have acknowledged before,
"a court cannot impose sanctions on a party simply for
losing."[19] "[T]he imposition of a Rule 11
sanction is not a judgment on the merits of an action.
Rather, it requires the determination of a collateral issue:
whether the attorney has abused the judicial process, and, if
so, what sanction would be appropriate."[20]
The
superior court concluded that Alaska Building's
percentage-of-savings claim had no basis in Alaska law. This
conclusion, while unassailable, shows only that Alaska
Building was unlikely to prevail on the merits unless it
could establish new law; it does necessarily follow that the
claim was frivolous.
We have
reversed sanctions awards in cases where the applicable law
provided no "direct[] support[]" for the sanctioned
party's position.[21] In Alaska State Employees
Association v. Alaska Public Employees Association, we
considered whether the superior court abused its discretion
by sanctioning a party for making two allegedly frivolous
arguments that depended on distinguishable federal
precedent.[22] We reversed the sanctions award,
reasoning that while the federal precedent did not
"directly support[]" the party's position, the
party nevertheless advanced a " 'a good faith
argument for the extension, modification, or reversal of
existing law' as permitted under Rule
ll."[23]
We
reached a similar conclusion in Luedtke v. Nabors Alaska
Drilling, Inc.[24] A defendant in that case
sought Rule 11 sanctions against a plaintiff, alleging that
he "adhered to several frivolous arguments"
throughout the course of the superior court
proceedings.[25] Several of these arguments we found
to be colorable - not frivolous at all.[26] Another argument
involved a claim for remedies including back pay, which the
plaintiff continued to assert even after the superior court
had ruled that back pay was not an available
remedy.[27] We conceded that the plaintiff
"might have followed a different course of action, such
as to petition for review of the superior court's order,
wait until final judgment to challenge it on appeal, or waive
the issue."[28] But we did not consider the
plaintiffs chosen course of action
sanctionable.[29] Instead, we concluded that the
plaintiffs attorney was "engaging in zealous advocacy on
behalf of his client, not frivolity, in continuing to press
the issue of remedies."[30]
In
contrast, we have upheld Rule 11 sanctions based on frivolous
claims when the sanctioned party exhibited an improper or
abusive purpose. In Keen v. Ruddy, for example, we
upheld an award of sanctions after concluding that the
plaintiffs' "legal theories were frivolous" and
that the superior court reasonably found that the plaintiffs
"acted in bad faith in bringing their
suit."[31] We further observed that the two
claims at issue - one for abuse of process and another for
declaratory judgment - failed, respectively, because the
allegations were "vague" and
"insufficient" and because "there was no
actual controversy" between the parties.[32] And in
Alaska Federal Savings & Loan Ass 'n of Juneau v.
Bernhardt, while emphasizing that the test under Rule 11
was one of objective reasonableness, we affirmed a superior
court's denial of sanctions in part because it was
"possible ... to reasonably infer that no improper
purpose was present" in the attorney's failure to
concede that he had erroneously sued someone other than the
proper defendant.[33]
We do
not mean to imply that sanctions may never be justified when
an attorney asserts a claim that is obviously lacking in
merit. But the clearer case for sanctions based on the
assertion of a claim involves both a lack of merit and an
improper purpose, as in Keen[34] As a general
proposition, we agree that "Rule 11 is designed ...