$72 Million Sanctions Award Against FDIC Reversed and Remanded

The Fifth Circuit reversed one of the largest sanctions awards ever imposed in Fed. Deposit Ins. Corp. v. Maxxam, Inc., 2008 U.S. App. LEXIS 7221 (5th Cir. April 3, 2008). The Court reversed outright $56 million of a $72 million sanctions award and vacated and remanded the remainder -- although millions will likely still have to be paid.

A key contention of the defendants was that the FDIC was pursuing litigation against them for the ulterior purpose of forcing a settlement that would require the defendant Hurwitz to part with redwoods known as the Headwaters that the Administration wanted for conservation purposes. The Fifth Circuit found that the FDIC’s lawsuit had merit at the time it was commenced but was pursued for improper purposes (within the meaning of Rule 11) after the FDIC should have desisted. Several interesting and important aspects of the opinion:

• “Doubtless many plaintiffs have multiple purposes in pursuing litigation. And so long as the merits of their claim, viewed objectively, are supported by a good-faith belief that the allegations are well founded and not frivolous, the subjective motivation for pursuing the claim and the multiple purposes are ordinarily of no moment. As the Supreme Court held in Hartman v. Moore, [547 U.S. 250, 260 (2006)] ‘It may be dishonorable to act with an unconstitutional motive and perhaps in some instances be unlawful, but action colored by some degree of bad motive does not amount to a constitutional tort if that action would have been taken anyway.’”

• The existence of an “improper purpose” within Rule is to be judged objectively. “We recognize the difficulty in identifying an ‘improper purpose’ objectively, as an ‘improper purpose’ connotes intent. However, we have consistently emphasized that we must follow an objective inquiry.”

• “[A] finding that acquiring the Headwaters was one of the purposes of the FDIC and OTS's [Office of Thrift Supervision’s] prosecution would not be clearly erroneous. So we are left to either conclude that a valid purpose -- within the compass of its statutory charge and adequately grounded in fact and law, viewed objectively, leaves the improper purpose irrlevant — at least so long as the litigation would have been pursued by the government agencies with no redwood acquisition in the picture, or that by some measure, acquiring the Headwaters was a dominant purpose. Yet determining improper purpose by the strength of the various motivations -- proper and improper -- in bringing suit would lead us too far into the territory of subjective inquiry.”

• “There are strong arguments that for kindred reasons judicial inquiry ought to end at the conclusion that while there were multiple purposes, at least one of which was the ‘improper’ purpose of acquiring the redwoods, the litigation would have been pursued, the redwoods aside. Locating purposes is a difficult task itself, but gauging the substantiality of one over the other beyond the sine qua non inquiry pursues an abstraction -- an evil thought that animated no act.”

• “We apply a similar standard to sanctions assessed for an improper purpose [i.e., similar to Hartman]: while the presence of probable cause weakens the relevance of other bad motives in a malicious prosecution case, a good faith basis for bringing suit is proof of a proper purpose and increases the difficulty of proving that the suit would not have been filed but for an improper purpose. As we will explain, insisting that a claim of improper purpose in the prosecuting of a claim contain an element of causation — that the claim would not otherwise have been pursued — in no way undermines this court's insistence that improper purpose is an independent requirement of Rule 11. It rather insists that an improper purpose cannot stand on its own if it lacks this but-for causative force.”

• “We must conclude that a finding that the FDIC would not have brought suit absent the redwoods issue is against the great weight of the evidence.”

• “Despite the lack of an improper purpose as the ‘but for’ motivation behind the suit, we affirm the district court's finding of improper purpose because its finding that the FDIC pursued the litigation with redwoods in mind and with a motivation of increasing the costs of litigation and forcing settlement was not clearly erroneous.”

• “To recapitulate, we affirm the court's sanctions for the costs of the case before it on the narrow grounds that, under Rule 11, the FDIC improperly pursued the case to delay the case and increase the costs of litigation. Because the court grounded its sanctions for the FDIC and ancillary proceedings in its findings that the FDIC filed frivolous pleadings with an improper purpose and prosecuted the suit to delay the case and increase costs, we VACATE and REMAND this portion of the sanction for further proceedings consistent with this opinion.”

• Inherent power sanctions of more than $50 million imposed to punish the pursuit of a contemporaneous proceeding before the Office of Thrift Supervision were reversed outright: “Chambers [v. NASCO] does not grant such broad inherent power to support the district court's imposition of more than $ 50 million in sanctions for a proceeding that was not before the district court and did not challenge the district court's authority in the FDIC suit, particularly because that court rejected the FDIC's efforts to stay its case pending the OTS proceedings' outcome.... We are persuaded that in imposing the $ 50 million in sanctions for an administrative proceeding in Washington, DC, the district court abused its discretion, and that only the costs related to the district court proceedings are sustainable.”

• “For the $ 1,192,838.82 in costs imposed for ‘ancillary’ proceedings, the court determined that the proceedings ‘were necessary because the government refused to produce documents to which Hurwitz was entitled. Though most of those actions were against OTS, they related directly to the FDIC's case here.’ We are unable to determine from the opinion which of these costs related solely to the OTS proceedings, and which were directly intertwined with or interfered with the district court's proceedings. The district court is in a better position to delineate these costs; we therefore VACATE and REMAND this portion of the sanction for further proceedings consistent with this opinion.”

• “For the sanctions that arose from the district court proceedings, the court awarded $ 6,959,876.96 in interest on the cost of attorney's fees.... The FDIC argues that this was an award of prejudgment interest and that sovereign immunity prevents the district court from assessing prejudgment interest as part of its sanctions.”

• “The question of the scope of a waiver of sovereign immunity falls away when a court acts under its sanctioning powers and does not abuse its discretion in so doing. The threshold question in a sanctions case is whether the court has the power to sanction a party for frustrating its Article III functions. The government, as a party to a lawsuit, is subject to the same ethical and procedural rules as a private litigant, and risks the same sanctions if it fails to abide by these rules. As discussed above, the district court did not abuse its discretion in assessing sanctions against the FDIC for prosecuting the case with at least the intent to delay and increase Hurwitz's costs.”

• “The district court's sanctions in this case in the form of the cost of attorney's fees, including the cost of money to pay for those fees, are no different from an assessment of the expenses ‘attributable to the government's conduct.’"

• “The assessment of attorneys' fees and interest on those fees is an appropriate sanction in this case.... The district court's assessment of costs is unlike a traditional award of prejudgment interest, such as a pre-existing debt that a defendant failed to pay to a plaintiff, wherein the non-payment of money deprived the plaintiff of funds and the interest on those funds. Rather, it captures the actual costs of the attorney's fees by including the cost of a loan that might be required to pay those fees — i.e., the opportunity cost of money that could have been used for other purposes but instead went to the payment of fees.”

• “We therefore REVERSE the district court's award of $ 56,920,241.53 in principal and interest for the OTS action. We VACATE and REMAND the award of $ 1,192,838.82 of principal and interest for the ancillary actions for the court to determine which of the costs were for actions that interfered with the court's proceedings. Finally, we VACATE and REMAND the award of $ 14,142,067.16 in principal and interest for the FDIC suit for the court to determine which of the costs resulted from the FDIC's manner of prosecuting the suit to cause harassment and delay.”

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