CANBY, Circuit Judge: Certain defendants in McGonigle v. Combs, 968 F.2d 810 (9th Cir.1992), appeal the district court’s
summary judgment rejecting their counterclaim for attorneys’ fees. The counterclaim alleged that the defendants were entitled to recover their fees because the plaintiffs’ breaches of certain warranties triggered an indemnification clause to which plaintiffs had agreed. In addition, defendant Frank Bryant appeals the district court’s denial of his requests for attorneys’ fees under
Section 11(
e) of the Securities Act of 1933, 15 U.S.C. § 77k(e) (1988), Rule 11 of the Federal Rules of Civil Procedure, and Rule 37(
e) of the Federal Rules of Civil Procedure. We reverse and remand the district court’s denial of Bryant’s request for attorneys’ fees under
Section 11(e), and we affirm the district court’s rejection of the remaining claims. THE DEFENDANTS’ CONTENTION THAT THE SUBSCRIPTION AGREEMENT ENTITLES THEM TO ATTORNEYS’ FEES Factual Background This counterclaim is one of many components of a complex securities litigation involving Spendthrift Farms, a thoroughbred horse breeder. Plaintiffs were investors in a private placement of Spendthrift' stock; when the thoroughbred market declined, they sued a string of defendants, alleging a variety of fraudulent acts and omissions. The district court granted
summary judgment for the defendants on most of the claims and directed a verdict on several others; the jury returned a complete defense verdict on the remaining claims. The merits of the lawsuit are considered in McGonigle v. Combs, and other related issues are treated in Schultz v. Hembree, 975 F.2d 572 (9th Cir.1992).
After the defendants prevailed on all counts, several of them — Frank Bryant; Robert McGuiness and his employer, the investment banker Bateman Eichler, Hill Richards, Incorporated; and Charles Hembree and his law firm, Kincaid Wilson, Schaeffer & Hembree, P.S.C.' — pressed this counterclaim seeking reimbursement of the attorneys’ fees they incurred. The basis of these defendants’ counterclaim is a subscription agreement attached as an appendix to the Private Placement Memorandum (“PPM”) for the private offering of shares in Spendthrift.
Each of the plaintiffs signed the subscription agreement in the course of his or her purchase of shares in Spendthrift. The subscription agreement contains, inter alia, twenty-two “representations and warranties” that occupy more than three pages of single-spaced type.
These representations include, for example, that “it has been called to [the investor’s] attention both in the [Private Placement] Memorandum and by those individuals with whom he has dealt in connection with his investment in the shares that his investment in the Company involves a substantial degree of financial risk,” and that “[the investor] has received no representations or warranties from the Sellers or any of the Sellers [sic] officers, directors, employees or agents other than those contained in the [Private Placement] Memorandum.” Each investor further warrants, among other things: that he has a net worth of at least $5,000,000 and is knowledgeable in financial matters; that he has read the PPM; that he understands that the shares are subject to restrictions on transfer; that he is not purchasing the shares with a view to resale; and that he will not sell or transfer his shares without providing the sellers with an unqualified opinion of counsel that the-sale or transfer “complies with the 1933 Act and any applicable federal and state securities laws and regulations.” The subscription agreement also contains an indemnification clause, which states as follows: 5.
Indemnification. The foregoing representations and warranties are made by the Subscriber with the intent that they may be relied upon in determining his qualification ' and suitability to purchase Shares, and the Subscriber hereby agrees that such representations and warranties shall survive his purchase thereof.
The Subscriber hereby agrees to indemnify and hold harmless the Company, the Sellers and agents of each of them from and against any losses, claims, damages, liabilities, expenses (including attorneys’ reasonable fees and disbursements), judgements and amounts paid in settlement resulting from the untruth of any of the warranties and representations contained herein, or the breach by the Subscriber of any of the covenants made by him herein.
Notwithstanding the foregoing, however, no representation, warranty, acknowledgement or agreement by the Subscriber made herein shall in any manner be deemed to constitute a waiver of any rights granted to him under Federal or State securities laws. The defendants argue that, in pursuing this litigation, the plaintiffs breached their warranties in the Subscription Agreement by averring, for example, that they relied on representations made by the defendants outside of the PPM and that they were misled into believing that their investment in Spendthrift entailed little risk.
The defendants contend that, in light of those breaches, the indemnification clause obligates the plaintiffs to pay the defendants’ attorneys’ fees. Discussion The material facts are not in dispute; the plaintiffs acknowledged for purposes of
summary judgment that they breached certain provisions of the security agreement in bringing their lawsuit. The plaintiffs contend, however, that they are not obligated to reimburse the defendants for their attorneys’ fees because the indemnification clause is limited to liability arising from breaches that cause the sellers to lose their private placement registration exemption under SEC Rule 506, 17 C.F.R. § 230.506 (1992), or comparable exemptions under state blue sky laws. The sellers have not lost any such exemption.
Thus the only question before us is a straightforward one: Does the indemnification clause obligate the plaintiffs, who are assumed to have breached their warranties, to pay the attorneys’ fees of the defendants that were incurred in defending the plaintiffs’ unsuccessful claims? The first page of the PPM states that [t]he Sellers will impose certain standards which prospective investors must meet in order to be eligible to purchase the shares.
These suitability standards are designed to assure compliance with Section 4(1) of the Securities Act of 1933 and Regulation D promulgated by the Securities and Exchange Commission thereunder and with the Blue Sky Laws of the states in which this offering will be made. This concern that the offering meet all the requirements for a registration exemption is reflected in the representations and warranties of the subscription agreement, which—as both the plaintiffs and the defendants acknowledge—contain the “suitability standards” mentioned in the sentence above.
As a result, many of the representations in the subscription agreement track, verbatim, the language of Regulation D.
More important for our purposes, the opening sentence of the indemnification clause focuses on the suitability standards: “The foregoing representations and warranties are made by the Subscriber with the intent that they may be relied upon in determining his qualification and suitability to purchase Shares, and the Subscriber hereby agrees that such representations and warranties shall survive his purchases thereof.” This language indicates that the focus of the indemnification was on ensuring, first, that the suitability standards were met, so that the sellers could retain their private placement registration, and, second, that, if the registration were lost and damages resulted, the investor who caused the loss would be liable.
The defendants would have us focus on the second sentence of the indemnification clause, which states that [t]he Subscriber hereby agrees to indemnify and hold harmless the Company, the Sellers and agents of each of them from and against any losses, claims, damages, liabilities, expenses (including attorneys’ reasonable fees and disbursements), judge-ments and amounts paid in settlement resulting from the untruth of any of the warranties and representations contained herein, or the breach by the Subscriber of any of the covenants made by him herein.
The defendants point to the broad language of this sentence in support of their contention that the indemnification is not limited to a loss of the registration exemption, but rather applies to all losses that result from a breach of a representation or warranty — even losses arising from this suit brought by the indem-nitors. It is true that this sentence, viewed in isolation, could be read so broadly. But this sentence does not appear in isolation. It immediately follows a sentence focusing on the suitability standards for a private placement exemption. The
section of the document in which it appears focuses primarily on the suitability standards. The placement of the indemnification (i.e., immediately after the
section on the suitability standards) gives no intimation of a broader purpose than to indemnify for liability arising from loss of the private placement exemption. Moreover, the first page of the PPM sets the stage by focusing on suitability standards. In light of this context, we conclude that the unambiguous expressed intent of the clause is that any investor whose breach of a representation causes the sellers to lose their private placement exemption is obligated to reimburse the sellers for their losses.
In our view, a reasonable investor who read the PPM and the subscription agreement would so interpret the indemnification clause. This analysis comports with that of the leading case on the application of indemnification clauses, Zissu v. Bear, Stearns & Co., 805 F.2d 75 (2d Cir.1986). Zissu, like our case, involved a plaintiff who brought suit under the securities laws, alleging, among other things, that he had relied on certain oral misrepresentations. Id. at 76. As was the case here, Zissu had warranted in his subscription agreement that no oral representations had been made to him. Id. at 77.
Furthermore, the indemnification clause in Zissii was similar to the one in this case, in that Zissu agreed to indemnify and hold harmless the sellers “against any and all loss, damage or liability due to or arising out of a breach of any representation or warranty” that he had made in the subscription agreement. Id.
The clause in Zissu did not mention attorneys’ fees, and the court underscored that omission, but the court’s reasoning went beyond the mere presence or absence of the words “attorneys’ fees”: The “any and all damages” clause of the Subscription Agreement in this case did not meet the requisite level of specificity necessary to hold Zissu liable to reimburse Encore and Bear Stearns for defense costs in their successful defense against Zissu’s securities claims. The clause Zissu signed did not put him on notice that he would be responsible for defendants’ legal fees incurred in the security fraud suit.
In fact, no mention of attorney’s fees was made in the indemnification clause. Instead, the warranties in question were necessary to exempt the limited partnership from the requirements of the 1933 Act and are so understood by investors. That being the case, the parties had little reason to expect that such warranties might also be the basis for the counterclaim made in the present case.
Thus, although New York courts have held that contractual indemnity provisions for attorneys’ fees will be enforced, and broad indemnification provisions like the one here should be read to extend to such fees, a higher level of specificity is required when attorneys’ fees are being assessed against a plaintiff suing for securities fraud. Id. at 79-80 (citations omitted). Zissu thus focused on both the absence of any reference to attorneys’ fees and the failure of the indemnification clause to put Zissu on notice that the clause was not limited to reimbursement for the loss of the registration exemption.
The defendants suggest that the subscription agreement’s reference to attorneys’ fees renders Zissu inapplicable, but we disagree. Our reading of Zissu is that a reference to attorneys’ fees is necessary but not sufficient; the crucial element of an indemnification is that it put potential investors on notice that the indemnification is not limited, and instead applies to fees and damages incurred in defending a claim brought by the subscribing indemnitor herself. The placement of the indemnifying language, as well as the language itself, must reveal its scope.
A person who contracts to pay an opponent’s attorneys’ fees if she sues unsuccessfully is agreeing to a departure from the standard American rule that a party prevailing in a lawsuit is not entitled to recover fees from the loser. See Alyeska Pipeline Service Co. v. Wilderness Society, 421 U.S. 240, 247, 95 S.Ct. 1612, 1616, 44 L.Ed.2d 141 (1975). It is not too much to ask that a clause effectuating such a deviation from the norm be explicit. The indemnification clause here is worded most peculiarly if its purpose was to shift fees in a 10b-5 case brought by the subscribing investor.
The clause nowhere states that, if the investor breaches a warranty in suing the sellers, and loses, then the investor must pay the defendants’ fees. Instead, it promises that the investor will indemnify the sellers from any losses, including attorneys’ fees, arising from untruth of any of the warranties signed by the investor — warranties with the stated purpose of preserving the private placement exemption.
The defendants’ position is that the expressed intent of the parties, as literally set forth in the indemnification clause, was to force the investors to reimburse the sellers for all costs and liability resulting from any breach of the representations and warranties. The language thus encompasses this case, they argue. But if the indemnity clause is so interpreted to apply to the plaintiffs’ lawsuit for oral misrepresentations, its literal terms would require the plaintiffs to pay the defendants’ judgment and attorneys’ fees even if plaintiffs prevailed!
In our view, the absurdity of such a result — an investor would have a meaningless right to sue, because she would have to pay the judgment and fees of the losing sellers — undermines the reasonableness of the defendants’
interpretation of the indemnification. The defendants respond by pointing out that
Section 29 of the Securities Act of 1934, 15 U.S.C. § 78cc (1988) (and its counterpart in the 1933 Act,
Section 14, 15 U.S.C. § 77n (1988)) would prohibit a culpable defendant from recovering his losses from the indemnitor plaintiff, thereby eliminating the danger of a successful investor having to reimburse herself. This argument misses the point. We do not suggest that courts would, in fact, require a successful investor litigant to pay her own recovery. The point is simply that, read as the defendants urge, the clause would seem to require that absurd result. That fact suggests to us that the indemnification clause cannot be given the broad reading that the defendants urge.
It further suggests that a reasonable investor would not so interpret the language in agreeing to the clause. In light of these considerations, we conclude that the indemnification required by the clause in this case does not extend to fees or' damages incurred in defending claims brought by the subscribing indemnitor. We therefore affirm the district court’s refusal to award attorneys’ fees under this clause. BRYANT’S CHALLENGE TO THE DISTRICT COURT’S REFUSAL TO AWARD FEES UNDER
SECTION 11(
e) OF THE SECURITIES ACT OF 1933 AND RULES 11 AND 37(
c) OF THE FEDERAL RULES OF CIVIL PROCEDURE In addition to joining the main counterclaim, defendant Frank Bryant brought a counterclaim for his attorneys’ fees based on
Section 11(
e) of the Securities Act of 1933,15 U.S.C. § 77k(e), Rule 11 of the Federal Rules of Civil Procedure, and Rule 37(
e) of the Federal Rules of Civil Procedure. I. Bryant’s Request for Attorneys’ Fees Under
Section 11(
e) Section 11(
e) of the Securities Act of 1933 allows the district court to award attorneys’ fees if it “believes the suit or the defense to have been.without merit.” 15 U.S.C. § 77k(e). “The ‘without merit’ standard ... encompasses claims and defenses that ... border on the frivolous.” Western Federal Corp. v. Erickson, 739 F.2d 1439, 1444 (9th Cir.1984) (emphasis added). In its ruling on the defendants’ requests for attorneys’ fees, the district court stated that, “with respect to some of the claims against Mr, Bryant, McGuiness, [and] Central Bank, that they were — bordered on frivolous.” The district court did not award Bryant attorneys’ fees under
Section 11(e), however, stating that “[w]ith respect to
Section 11(e), the standard announced by the 9th Circuit is ... frivolous and brought in bad faith.... I didn’t think that these claims fall within that category.” As Bryant correctly points out, the district court applied an incorrect, legal standard to his request for attorneys’ fees; the court apparently believed that it had the discretion to award fees.only if the claims against Bryant were frivolous, when in fact it could award fees for those that merely bordered on the frivolous.
In light of this error, we remand for a determination of which claims bordered on the frivolous, and we direct the district court to consider awarding Bryant the attorneys’ fees he incurred in defending against those claims. II. Bryant’s Request for Attorneys’ Fees Under Rule 11 Bryant suggests that the district court applied an erroneous legal standard in rejecting his request for attorneys’ fees under Rule 11 of the Federal Rules of Civil Procedure. He states that the district court applied'the standard articulated in the panel decision of Townsend, v.
Holman Consulting Cow, 881 F.2d 788, 795 (9th Cir.1989) (Rule 11 sanctions appropriate only when all claims against all parties are frivolous), and that the district court’s alleged reliance on Townsend constituted reversible error in light of the en banc court’s rejection of the panel’s opinion. Townsend v. Holman Consulting Cow, 929 F.2d 1358 (9th Cir.1990) (en banc) (frivolous claims can be sanctioned even if pleading contains non-frivolous claims). The problem with Bryant’s argument is that we have no reason to believe that the district court relied on the Townsend panel decision.
The district court, in rejecting Bryant’s Rule 11 request for fees, correctly outlined the standard for awarding fees under Rule 11 (omitting any reference' to a requirement that all claims must be frivolous) and then stated that “I don’t think that any of the claims made here rise to that level.” The court’s use, of “any” indicates that it did not apply the Toumsend panel’s ruling, and that it concluded that each of the claims was neither frivolous nor brought for an improper purpose. The court did not abuse its discretion in so concluding.
We therefore reject Bryant’s challenge to the district court’s refusal to award fees under Rule 11. III. Bryant’s Request for Attorneys’ Fees Under Rule 37(
c) Bryant asserts that the district court applied an incorrect legal standard in refusing to award him fees 'under Rule 37(
c) of the Federal Rules of Civil Procedure; he suggests that. the, district court followed the plaintiffs’ erroneous contention that they could not be penalized for their refusal to admit ultimate issues of fact. Bryant misreads the district court’s ruling. The district court did not indicate that it adopted the plaintiffs’ position, nor did it appear to follow an incorrect legal standard. We find no abuse of discretion in the court’s ruling. We therefore reject Bryant’s contention that the district court erred in refusing to award attorneys’ fees under Rule 37(c).
CONCLUSION We affirm the district court’s refusal to grant attorneys’ fees under the indemnification clause of the subscription agreement. We also affirm the district court’s denial of Bryant’s request for attorneys’ fees under Rules 11 and 37(
c) of the Federal Rules of Civil Procedure. We remand to the district court Bryant’s request for attorneys’ fees under
Section 11(
e) of the Securities Act of 1933, so that the court can apply the proper standard. All parties except defendant-appellant Bryant are to bear their own costs on this appeal. Bryant is entitled to recover his costs from plaintiffs. AFFIRMED IN PART, REVERSED IN PART, AND REMANDED. . Defendant Frank Bryant also claims certain other damages arising from the plaintiffs' breach of warranties, which he asserts are covered by the indemnity clause. .
Investor Blas Casares contends on appeal that he did not sign the agreement until after the stock was issued in his name, and, therefore, that he is not bound by the indemnity provision. In light of our affirmance of the district court's ruling, we do not reach the question whether Casares was bound by that provision. . The defendants contend that, at most, the clause is ambiguous because the literal language of the indemnity clause can be read to cover this case. They assert that
summary judgment is therefore improper. We find no ambiguity, but in any event we conclude, for reasons set forth in the text of our opinion, that no rational trier of fact could attribute to the clause the meaning urged by the defendants. . Atari Corp. v. Ernst & Whinney, 981 F.2d 1025, 1031 (9th Cir.1992) (amended opinion), is clearly distinguishable.
There the clause in question indemnified "all present and former officers and directors of the Company to the fullest extent permitted by applicable law with respect to all, acts and omissions arising out of such individuals’ services as officers, directors or employees of the Company or any of its subsidiaries.” Nothing in the context narrowed the immense sweep of the indemnifying language. The clause was accordingly held to cover losses caused by an action brought by the indemnitor. In our case, as we explain in the text, the context discloses a narrower purpose. .
"We review the district court's rulings on Rule 11 issues under an 'abuse of discretion’ standard.” Townsend v. Holman Consulting Corp., 929 F.2d 1358, 1365-66 (9th Cir.1990) (en banc). In addition, we review a district court’s decision whether or not to award attorneys’ fees for abuse of discretion. Lange v. Penn Mutual Life Insurance Co. 843 F.2d 1175, 1184 (9th Cir.1988); Falstaff Brewing Corp. v. Miller Brewing Co., 702 F.2d 770, 784 (9th Cir.1983). "However, a district court abuses its discretion if it rests its conclusion on an erroneous legal premise, and questions of law are reviewed de novo.” FSLIC v.
Sahni, 868 F.2d 1096, 1097 (9th Cir.1989); see also Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 405, 110 S.Ct. 2447, 2460, 110 L.Ed.2d 359 (1990); Cunningham v. County of Los Angeles, 879 F.2d 481, 487 (9th Cir.1988), cert. denied, 493 U.S. 1035, 110 S.Ct. 757, 107 L.Ed.2d 773 (1990). .Bryant also challenges the district court's finding that the plaintiffs’ claims against him were not frivolous. Bryant does not point to any error of law but rather disputes the district court's conclusion that, though some claims bordered on the frivolous, none of them were frivolous.
We conclude that the district court did not abuse its discretion in so finding.