Free Response to Order to Show Cause - District Court of Arizona - Arizona

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The Phoenix Plaza 21 st Floor 2929 North Central Avenue Phoenix, Arizona 85012-2794 P.O. Box 36379 Phoenix, Arizona 85067-6379 Telephone Facsimile 602.640.9000 602.640.9050

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Mark I. Harrison, 001226 Sarah Porter, 014409 OSBORN MALEDON, P.A. 2929 North Central Avenue Suite 2100 Phoenix, Arizona 85012-2794 (602) 640-9000 Attorneys for Greg & Linda Hancock and Robert Frisbee, Counsel of Record

IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF ARIZONA MERITAGE HOMES CORPORATION, a Maryland Corporation, formerly dba Meritage Corporation; HANCOCK-MTH Builders, Inc., an Arizona corporation; HANCOCK-MTH Communities, Inc., an Arizona corporation, dba Meritage Homes Construction, Inc.; and MERITAGE HOMES OF ARIZONA, INC., an Arizona Corporation, Plaintiffs, vs. RICKY LEE HANCOCK and BRENDA HANCOCK, husband wife; GREGORY S. HANCOCK and LINDA HANCOCK, husband and wife; RICK HANCOCK HOMES LLC, an Arizona Limited Liability Company; RLH Development, LLC, an Arizona Limited Liability Company; and J2H2, LLC, an Arizona Limited Liability Company, Defendants. and ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) No. CV 04-0384-PHX-ROS

RESPONSE TO ORDER TO SHOW CAUSE

Case 2:04-cv-00384-ROS

Document 225

Filed 12/05/2005

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The Phoenix Plaza 21 st Floor 2929 North Central Avenue Phoenix, Arizona 85012-2794 P.O. Box 36379 Phoenix, Arizona 85067-6379 Telephone Facsimile 602.640.9000 602.640.9050

GREG HANCOCK, an individual,

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) ) Defendant, Counter-claimant ) and Third-party Plaintiff, ) ) vs. ) ) STEVEN J. HILTON, an individual; JOHN ) R. LANDON, an individual; LARY W. ) SEAY, an individual; and SNELL & ) WILMER, LLP, an Arizona professional ) corporation, ) ) Third-Party Defendants. ) ) MEMORANDUM This is the Response of Defendant Greg Hancock and his counsel, Robert Frisbee, to the Court's November 16, 2005 Order to show good cause why they should not be held in contempt for failing to comply with the Court's order directing them to dismiss Hancock's state court claims and pay state court defendant Meritage's costs and fees associated with the state court cause of action. Defendant Hancock and Mr. Frisbee's conduct does not merit a contempt citation. They believed that the wording of the Order requiring them to dismiss their state court claims "with prejudice" would fatally compromise those claims. The Court apparently came to the same conclusion because on May 31, 2005, it amended its prior Order, sua sponte, to make it "without prejudice." On a more fundamental level, they believed that the Order was "transparently invalid" as a matter of law. [See Section II(B)(2), infra]. Their response was to petition the Ninth Circuit Court of Appeals for relief from the Order and seek a stay of the Order in this Court. Before the Order issued from this Court, the state court claims were already subject to

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motions to dismiss in the superior court. When the petition was denied, three months later, those motions were pending. Hancock and Frsibee's failure to dismiss during the delayed window of opportunity that followed the Ninth Circuit's denial does not amount to contempt of court because at that point the motions to dismiss pending in state court precluded voluntary dismissal of the claims. Moreover, because the Dismissal Order was issued in contravention of federal law, Greg Hancock and Robert Frisbee's non-compliance with the Dismissal Order is excusable. And even if their non-compliance were not excusable, sanctions would not be warranted here, because their non-compliance did not cause any meaningful harm to this Court or to the other parties in this action and because it was not undertaken in bad faith. I. Factual Background A. Relevant Procedural History

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These proceedings on the Court's Order to Show Cause arise from the Court's April 27th Order on the parties' motions and cross-motions for summary judgment. One part of the Order, made without a request from the parties, commanded Defendant Greg Hancock1 to "dismiss his state law cause of action with prejudice within ten (10) days from the date of this Order," and to pay Meritage Corporation's "costs and fees in conjunction with the state court cause of action." [Order at 8:21-22, 9:12-14 (Docket # 157)] This command placed Hancock and his counsel, Robert

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In this Response, "Hancock" refers to Defendants Greg Hancock and Linda Hancock and not to Defendant Rick Hancock or his spouse or to Defendant Rick Hancock Homes, LLC. 3
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Frisbee, in an untenable position: If they complied, they would forfeit their state causes of action. If they did not, they risked fall-out from failing to comply. In the face of this dilemma, Hancock, acting through Frisbee, appropriately sought relief from the Order. On May 10, 2005, Hancock filed a petition for a writ of mandamus in the Ninth Circuit Court of Appeals. [Petition for Writ of Prohibition and Mandamus (May 10, 2005)] Hancock also provided this Court and the other parties in this action copies of the petition, as required by Rule 21 of the Federal Rules of Appellate Procedure. [Id. at 27] In spite of the fact that the April 27th Order was now subject to a petition for relief in the Ninth Circuit, on May 19, 2005, Plaintiff Meritage Corporation and Third-Party Defendants filed a motion for an order to show cause why Greg Hancock should not be held in contempt for failing to abide by the April 27th Order. [Motion for Order to Show Cause (May 19, 2005) (Docket # 167)] Hancock, through counsel, filed a response requesting that the motion be denied and moving, in the alternative, that the Order be stayed until the Ninth Circuit's ruling on the Petition. [Response and Motion (May 24, 2005) (Docket # 173)] Thereafter, on May 31, 2005, this Court issued an Amended Order stating: In this Court's original Order, filed on April 27, 2005 (Doc. # 157), the Court inadvertently ordered that Greg Hancock dismiss his state law cause of action with prejudice. The Order is amended to require Greg Hancock to dismiss his state court cause of action without prejudice. In all other respects, the April 27, 2005 Order is unchanged. [Amended Order (Docket # 174)] However, the Court never ruled on the Plaintiffs' Motion for an Order to Show Cause or on Hancock's request for a stay pending the Ninth Circuit's decision on the Petition.

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While the Amended Order mitigated the most devastating aspects of the April 27th Order, it did not entirely alleviate the problem. For one thing, the April 27th order required Hancock to pay Meritage's costs and fees incurred in the state court action. In addition, dismissing the superior court action meant that to pursue his claims, Hancock might have to re-file the claims later, exposing him to a statute of limitations defense. Although the statute of limitations would probably be deemed to be tolled under Arizona's saving statute, Ariz. Rev. Stat. § 12-504, that was not a foregone conclusion. "Where there has been a voluntary dismissal after the statute of limitations for the claim has expired, the plaintiff must apply for leave to refile [under A.R.S. § 12-504], which preserves the Court's power to place equitable conditions on the reinstitution of claims previously voluntarily dismissed." Daniel J. McAuliffe, Arizona Civil Rules Handbook at 447 (Thomson/West 2005) (citing Jepson v. New, 772 P.2d 16 (Ariz. Ct. App. 1989), decision vacated in part, 792 P.2d 728 (Ariz. 1990); Flynn v. Cornoyer-Hedrick Architects & Planners, Inc., 772 P.2d 10 (1989). Moreover, Hancock's state claims were already subject to Meritage's2 motions to dismiss with prejudice. [See CV2004-017311 Case History (attached herewith as Exhibit 1)] These motions were fully briefed by December 2004, months before this Court's Dismissal Order issued.3 As those motions were supported by exhibits and affidavits outside the pleadings, they arguably constituted motions for summary

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The defendants in the superior court action include Meritage Corporation, Steven Hilton, John Landon, Larry Seay and Snell & Wilmer LLP. In this Response, unless otherwise indicated, they are referred to collectively as "Meritage." As used herein, "Dismissal Order" refers collectively to the April 27th Order and the May 31st Amended Order.
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judgment under Ariz. R. Civ. P. 56, foreclosing Hancock's opportunity to file a voluntary dismissal pursuant to Ariz. R. Civ. P. R. 41(a). See Ariz. R. Civ. P. 12(b). Finally, Hancock and Frisbee believed that the Amended Order was illegal. As discussed below, the federal court is prohibited from interfering in state court proceedings except in limited circumstances not presented in this case. This Court had never articulated a reason for ordering Hancock to dismiss his claims in superior court, and it had intruded upon the superior court's authority to determine the disposition of the case and whether to order Hancock to pay Meritage's costs and fees. For these reasons, the Amended Order did not change Hancock and Frisbee's desire for appellate review. Acting on the advice of the Clerk of the Ninth Circuit Court, Hancock filed a supplemental letter attaching the Amended Order and pointing out that "the amended order still purports to extend the [district] court's jurisdiction to the state court, where no such jurisdiction exists." [Letter of Robert Frisbee re Case No. 05-72891 (June 2, 2005) (attached herewith as Exhibit 2)]. On August 1, 2005, in response to Hancock's motion, the superior court continued the case on the inactive calendar and setting a status conference in early November. [(Minute Entry, (August 4, 2005) (attached herewith as Exhibit 3)] Two days later, noting that the superior court had not yet ruled on the motions to dismiss, Meritage filed an objection to continuing the case on the inactive calendar. [Case History (Exh. 1)] On August 30, 2004, the superior court denied the request to remove the case from the inactive calendar but invited Meritage to renew the motions to dismiss. [Minute Entry (August 30, 2005) (attached herewith as Exh. 4)] Meritage accepted that invitation and on September 7, 2005, the court set a date for oral

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argument on the motions to dismiss. [Minute Entry (September 7, 2005) (attached herewith as Exhibit 5)] At the November 4, 2005 hearing on the motions, Frisbee offered to voluntarily dismiss the claims. [Minute Entry (November 7, 2005) (attached herewith as Exhibit 6)] Meritage rejected the offer. At the conclusion of the hearing, the superior court granted Meritage's motion, dismissing Hancock's abuse of process claim with prejudice and taking under advisement whether to dismiss the malicious prosecution claim with or without prejudice. [Id.] Meanwhile, in mid-August, Hancock and Frisbee heard from the Ninth Circuit that the Petition for a Writ of Prohibition and Mandamus had been denied. [Order of Ninth Circuit (Entered August 10, 2005, Docket # 197)] At that point--after Meritage had raised the issue of the pending motions to dismiss--it became apparent that Hancock could not dismiss the action without incurring a motion by Meritage for fees and costs. Therefore, Hancock elected to wait until the hearing on the motions. On November 16, 2005, twelve days after Hancock and Frisbee had offered to voluntarily to dismiss the claims without prejudice, this Court issued its Order requiring Hancock and Frisbee to show good cause why they should not be cited for contempt of court for failure to comply with the Dismissal Order. B. Robert Frisbee and Greg Hancock

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Robert Frisbee has practiced law for some forty years. In that time, he has handled hundreds of cases in many states. He can avow to the Court that he has never been the subject of contempt proceedings. In addition, both Frisbee and Hancock can avow that they are not contemptuous of the Court and that they respect the district court's authority to manage proceedings and control the conduct of litigation. Robert

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Frisbee can also avow that all decisions regarding compliance with the Dismissal Order were made by him alone: Greg Hancock was not involved in decisions regarding the Dismissal Order. II. Discussion A. A Contempt Citation Would Be Superfluous Because the Claims Are Already Dismissed. The district court may impose sanctions for contempt of court for one of two

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purposes: to compel compliance with the court's directives or to compensate the
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contemnor's adversary for injuries resulting from the contemnor's non-compliance.
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Shuffler v. Heritage Bank, 720 F.2d 1141, 1147 (9th Cir. 1983); see also In re Crystal Palace Gambling Hall, Inc., 817 F.2d 1361, 1366-67 (9th Cir. 1987) (noting that sanctions for civil contempt are determined by the court's "`desire to . . . compensate

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the contemnor's adversary for the injuries which result from the noncompliance'" and
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that sanctions must be limited to the adversary's actual loss). In this case, citing
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Hancock and Frisbee for contempt would accomplish neither of those two objectives.
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There is no need to compel compliance because the claims in the superior court case
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are already subject to a pending order of dismissal. And Meritage cannot be said to
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be meaningfully injured by Hancock and Frisbee's noncompliance. Shuffler, 720 F.2d
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at 1148-49 (remanding contempt citation to district court for statement of purpose of
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contempt sanctions and findings supporting an appropriate fine reflecting adverse
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parties "actual losses resulting from the period of actual contempt").
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To the degree that they "disobeyed" the Court's Dismissal Order, the
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disobedience occurred only for a few weeks following their receipt in mid-August of
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the Ninth Circuit's denial of their petition. Until that point, Hancock and Frisbee had
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no reason to seek the dismissal. They had requested a stay of the Dismissal Order in this Court and had appropriately sought relief from the Order in the Ninth Circuit. After the Ninth Circuit issued its decision denying the petition, there was a small window of time--beginning in mid-August--when Hancock and Frisbee arguably could have sought dismissal. However, when that window opened, Meritage's motions to dismiss were fully briefed--they had been since December 2004. Meritage had already raised the issue of the languishing motions to dismiss, and shortly thereafter, at the end of August, the superior court had responded, inviting Meritage to renew the motions. It should be noted that at that point, Hancock and Frisbee were faced with a new problem. If they sought voluntary dismissal without prejudice, in compliance with this Court's order, they risked having Meritage object. Indeed, at the oral argument on the motions to dismiss, when Frisbee did offer to dismiss the claims voluntarily, Meritage objected, demanding fees and a dismissal with prejudice. Moreover, Hancock and Frisbee certainly cannot be said to have flouted the Dismissal Order following this Court's Order to Show Cause. By the time the Order to Show Cause issued--almost two weeks after the November 4th oral argument on Meritage's motions to dismiss, when Frisbee offered voluntarily to dismiss the claims--the claims were already subject to an order of dismissal and the matter was out of Hancock and Frisbee's control. The claims are subject to a pending order of dismissal. Hancock and Frisbee's non-compliance following the Ninth Circuit's denial of their petition did not harm any party. The record shows that Hancock and, in particular, Frisbee, attempted to protest

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against the Dismissal Order in an appropriate way, seeking review and a stay. In light of these facts, a contempt citation would not serve a valid purpose. B. Imposing Sanctions for Frisbee and Hancock's Failure to Dismiss Would Be Inappropriate in View of the Fact that the Dismissal Order Violates Federal Law. 1. The Dismissal Order Violates the Anti-Injunction Act.

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The Dismissal Order is prohibited by the Anti-Injunction Act, 28 U.S.C. § 2283, which provides: A court of the United States may not grant an injunction to stay proceedings in a State Court except as expressly authorized by Act of Congress, or where necessary in aid of its jurisdiction or to protect or effectuate its judgments. As the Supreme Court explained in its landmark opinion in Atlantic Coast Line Railroad Co. v. Brotherhood of Locomotive Engineers, 398 U.S. 281 (1970), the AntiInjunction Act defines a "line of demarcation" between the state and federal systems, ensuring that the state and federal courts operate independently of each other and placing exacting limits on the district court's ability to interfere in state court proceedings. 398 U.S. at 286 ("Obviously this dual system could not function if the state and federal courts were free to fight each other for control of a particular case."). Thus, the Act "is an absolute prohibition against enjoining state court proceedings, unless the injunction falls within one of three specifically defined exceptions." Id.; see also Bennett v. Medtronic, 285 F.3d 801, 806 (9th Cir. 2002) (noting that AntiInjunction Act creates presumption in favor of permitting parallel proceedings in state and federal court and that federal court may interfere only where state court proceedings threaten "to render the exercise of federal jurisdiction nugatory").

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None of these three exceptions is present here. There is no federal law authorizing the Court's interference with the superior court proceedings in this case. The Dismissal Order cannot be characterized as "necessary in aid of" this Court's jurisdiction or to "protect or effectuate its judgments." The Atlantic Coast Line Court narrowly construed these two exceptions: [I]f the District Court does have jurisdiction, it is not enough that the requested injunction is related to that jurisdiction, but it must be `necessary in aid of' that jurisdiction. While this language is admittedly broad, we conclude that it implies something similar to the concept of injunctions to `protect or effectuate' judgments. Both exceptions to the general prohibition of § 2283 imply that some federal injunctive relief may be necessary to prevent a state court from so interfering with a federal court's consideration or disposition of a case as to seriously impair the federal court's flexibility and authority to decide that case. Id. at 1747-48. Greg Hancock's superior court case could have proceeded concurrently with the case in this Court. There is simply no basis for concluding that the superior court proceeding could have in any way affected this Court's ability to decide the case before it. There was no judgment in this lawsuit "to protect or effectuate" by prohibiting the superior court action from going forward. The District Court did not have a valid reason to intrude on the superior court's authority to dispose of the case and issue fee awards as that court saw fit. The fact that the Dismissal Order was directed at Hancock rather than the state court does not alter the conclusion that the Order contravenes the Anti-Injunction Act. District courts may not make an end-run around the Anti-Injunction Act by enjoining parties to a state court proceeding rather than the state court itself. Atlantic Coast Line, 398 U.S. at 287 ("It is settled that the prohibition of § 2283 cannot be evaded by addressing the order to the parties or prohibiting utilization of the results of a

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completed state proceeding."); Tropf v. Fidelity Nat. Title Ins. Co., 289 F.3d 929, 942(6th Cir. 2002), cert. denied, 537 U.S. 1118 (2003) (holding that Anti-Injunction Act prohibited district court from enjoining plaintiff to post a bond in or dismiss plaintiff's state court action on a claim identical to plaintiff's RICO claim in federal suit); Empire Blue Cross & Blue Shield v. Janet Greason's a Place for Us, 985 F.2d 459, 462-63 (9th Cir. 1993) (holding that Anti-Injunction Act prohibited district court from enjoining court ordered arbitration); Los Angeles Memorial Coliseum Comm'n v. City of Oakland, 717 F.2d 470 (9th Cir. 1983) (holding that Anti-Injunction Act could not be avoided by enjoining one of the parties rather than enjoining the state court proceedings).4 2. Because the Dismissal Order Is Invalid, a Contempt Citation Is Not Warranted.

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Hancock and Frisbee acknowledge that a party and his or her counsel do not have a right to independently review each and every court order and selectively obey only those orders they believe to be valid. However, case law has firmly established that a party and his or her counsel are permitted to disregard a "transparently invalid" court order without threat of a contempt citation. In re Providence Journal Co., 820 F.2d 1342, 1346-47 (1st Cir. 1986). An order is "transparently invalid" if it lacked "any pretence to validity at the time it was issued." Id. at 1347-48. Because it flies in the face of the Anti-Injunction Act, it is fair to characterize the Dismissal Order as transparently invalid and an unwarranted interference in state

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While the Petition for Writ of Prohibition and Mandamus touches on this issue (at 18-19), Frisbee acknowledges that his arguments may not have been sufficiently developed to permit the Court of Appeals to recognize that he was entitled to relief on the ground that the Dismissal Order violates the Anti-Injunction Act. 12
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court proceedings. Accordingly, Hancock and Frisbee's non-compliance was excusable. Id. Yet, Hancock and Frisbee did not simply flout the Order. They sought relief from the Dismissal Order in the Ninth Circuit. They requested a stay of the Order in this Court. Eventually they even offered to dismiss the claims without prejudice. For these reasons, citing Hancock and Frisbee for contempt is not warranted. 3. There is No Requisite Evidence of Bad Faith to Justify Sanctions pursuant to the Court's Inherent Power. In its November 16th Order to Show Cause, the Court raises the specter of its invoking its inherent powers to impose sanctions. [Order at 2 n. 1] The court notes

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that such sanctions must be supported by a finding of bad faith on the sanctioned
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party's part. [Id.]; Fink v. Gomez, 239 F.3d 989, 991-92 (9th Cir. 2001). There is no evidence of such bad faith conduct on the part of either Greg Hancock or Robert

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Frisbee.
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As an initial matter, all decisions regarding responding to the Dismissal Order
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were made by Robert Frisbee alone. Greg Hancock simply relied on his counsel, and
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therefore he cannot be deemed to have acted in bad faith.
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As discussed above, Robert Frisbee did not move to dismiss the superior court
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claims following the Ninth Circuit's decision for two reasons: (1) he believed that
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because the Dismissal Order was unlawful he was not compelled to comply with it;
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and (2) he concluded that, in view of the pending motions to dismiss with prejudice
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and the procedural posture of the case at the time of the Ninth Circuit's decision, it
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was not appropriate for him to seek dismissal. Moreover, he did offer, at the oral
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argument on the motions to dismiss, to dismiss the claims without prejudice. That
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offer was rebuffed.
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While it may be possible to take issue with Frisbee's reasoning, it does not rise to the level of sanctionable bad faith. He was in no way abusive of the judicial process; his conduct was not vindictive or obdurate. See Fink, 239 F.3d at 992-93 (summarizing cases in which sanctions imposed pursuant to the court's inherent power were reversed for want of evidence of bad faith). In the absence of any evidence of bad faith, sanctions in the exercise of the Court's inherent powers are not appropriate. 4. Hancock Has Already Incurred Significant Expense Seeking Review of the "Inadvertently" Worded Dismissal Order.

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In its original form, the Dismissal Order mistakenly commanded Hancock to dismiss his claims filed in state court "with prejudice" rather than "without prejudice." Had he complied, Hancock would have forfeited his right to pursue those claims. The Court did not correct its mistake until after Hancock had brought a Petition for Writ of Prohibition and Mandamus in the Court of Appeals, which was filed May 10, 2005. By that time, Hancock had already incurred substantial fees and costs pursuing the petition. If the Court had not made the mistake or had corrected it sooner, it is possible that Hancock would not have sought relief in the Ninth Circuit. In effect, Hancock has already paid enough of a penalty for conduct arising from circumstances partly attributable to the Court's error. Moreover, the superior court is currently considering Meritage's request for fees and costs in connection with the motion to dismiss. For this Court to impose a sanction for Hancock and Frisbee's non-compliance with the Dismissal Order leaves open the possibility that Hancock will be twice penalized. Surely, determination of the propriety of a fee award arising out of the dismissal of those claims is best left to

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the superior court. (Indeed, this scenario illustrates the sort of complications that arise when a district court attempts to exercise jurisdiction over state court proceedings and raises the question whether a sanction in this instance would constitute to yet another violation of the Anti-Injunction Act because such a sanction would be de facto a grant of Meritage's request for costs and fees now before the superior court.) IV. Conclusion For the reasons discussed above, a contempt citation against Greg Hancock and/or Robert Frisbee for their non-compliance with the Dismissal Order is not warranted. Hancock and Frisbee respectfully request that the Court decline to issue the citation. RESPECTFULLY SUBMITTED this 5th day of December, 2005. OSBORN MALEDON, P.A. By s/ Mark I. Harrison ___ Mark I. Harrison Sarah Porter 2929 North Central Suite 2100 Phoenix, Arizona 85012-2794 Attorneys for Greg & Linda Hancock and Robert Frisbee, Counsel of Record

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I hereby certify that on December 5, 2005, I electronically transmitted the attached document to the Clerk's Office using the CM/ECF System for filing and transmittal of a Notice of Electronic Filing to the following CM/ECF registrants: Ivan K. Mathew, Esq. MATHEW & MATHEW, PC 1850 N. Central Avenue Suite 1910 Phoenix, AZ 85004-0001 Attorney for Rick Hancock, etc.

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Dan W. Goldfine, Esq. Rick Erickson, Esq. SNELL & WILMER, LLP One Arizona Center 400 E. VanBuren Phoenix, AZ 85004-2202 Attorneys for Plaintiffs and Third-Party Defendants Hilton, Landon and Seay Kenneth J. Sherk FENNEMORE CRAIG, PC 3003 N. Central Avenue Suite 2600 Phoenix, AZ 85012-2913 Attorneys for Third-Party Defendant Snell & Wilmer

s/ Joni J. Jarrett-Mason___
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