Blanco River, LLC v. Green, 2012 U.S. App. LEXIS 378 (5th Cir. Jan. 6, 2012):

Blanco River, L.L.C., a real estate investment vehicle, is a limited liability Arizona corporation that sought to purchase and develop land bordering the Blanco River in Texas. Green was the manager of this venture, which failed. Blanco River sued Green, alleging breach of fiduciary duty, conversion, and breach of contract. Green removed the suit to federal district court. Among other allegations, Blanco River asserted that Green had expended the venture's capital funds for his personal pursuits, including expenditures at "high-end strip clubs," for limousine services, at designer retail stores, for hotel rooms, and for multiple hotel rooms on a single day. Improper cash withdrawals were also alleged. Green denied the allegations and as an affirmative defense, contended that John Aird, a significant shareholder in Blanco River who animated the suit against Green, was not authorized to bring suit on behalf of Blanco River. ***

[On] January 13, the district court granted summary judgment in favor of Blanco River and against Green, providing: "On its motion for summary judgment, Blanco River, LLC, recovers $396,575.00 in damages and $7,250.00 in attorney's fees from Christopher Green."

Green filed an appeal from this summary judgment, but he subsequently dismissed that appeal pursuant to Fed. R. App. P. 42(b). Blanco River initiated post-judgment discovery, to which Green responded through his new attorney Gallman. Green's response to each interrogatory was a variant of the assertion that Aird lacked any authority to take legal action on behalf of Blanco River.

Green, represented by Gallman, also filed an action in state court in Hays County, Texas seeking a declaratory judgment that Aird did not have the authority to seek to collect the judgment against Green on behalf of Blanco River. Green also alleged in his state court suit that Aird had improperly been reimbursed $150,000 of his investment in Blanco River, and Green sought a return of that amount to the limited liability corporation.

Blanco River then took further action in federal district court, filing a motion to compel post-judgment discovery and for sanctions. Blanco River attached to its motion a November 2009 letter from Gallman to an investor in Blanco River asking for a capital call, in which Gallman stated that Blanco River had secured its judgment against Green in federal district court without allowing Green to respond and that "Aird did not 'prove' any cause of action against Mr. Green" in that suit. The letter also attached Green's responses to the post-judgment interrogatories, which contained Green's assertions that Aird had no authority to act for Blanco River.

At a hearing on these matters, the district court suggested that Blanco River file a motion to enjoin Green's Hays County action as well as a purported attack on the judgment against Green in an Illinois state court proceeding to register that judgment. Blanco River then filed such a motion. Two days prior to the hearing on the injunction and other pending matters, the Hays County suit was "non-suited with prejudice" by Green through Gallman as his counsel.

*** The district court ultimately entered *** a separate order sanctioning Green and Gallman $4,000, jointly and severally, to cover Blanco River's attorneys' fees in seeking to enforce the judgment obtained against Green. The district court's written order stated that Green and Gallman had "filed a collateral attack" in state court on the district court's judgment and that the state court suit had "no basis in fact or law" and it "had no legitimate purpose." Green and Gallman were also enjoined in another order from "interfering in the collection of this court's judgment," citing the Hays County suit, the proceedings in Illinois, and Gallman's failure to investigate Green's "fals[e]" accusations that the district court had denied due process in granting summary judgment against Green that, even if true, would "not support a collateral attack" on the judgment. ***

The sanctions order does not state the authority under which it is issued. The record of the hearing indicates that Rule 11 of the Federal Rules of Civil Procedure was not the basis, and as noted by Green and Gallman, the procedural requirements for imposing Rule 11 sanctions were not met. The sanctions order also discusses the filing of the Hays County suit. We have indicated that one cannot use Fed. R. Civ. P. 11 "to regulate state court activities." [Willy v. Coastal Corp., 915 F.2d 965, 968 n.8 (5th Cir. 1990)]

Alternatively, Blanco River contends that by unreasonably and vexatiously multiplying the proceedings in this case, the filing of the Hays County suit could be sanctioned pursuant to 28 U.S.C. § 1927. Yet the court sanctioned both Green and Gallman, and § 1927 only reaches attorneys.

It appears that the sanctions against Green and Gallman were imposed pursuant to the court's inherent authority. This authority includes that to punish "defiant, bad-faith conduct" in state court that hinders an order of a federal court. [CJC Holdings, Inc. v. Wright & Lato, Inc., 989 F.2d 791, 794 (5th Cir. 1993).] The Supreme Court has held that the inherent power "reaches both conduct before the court and that beyond the court's confines" such that courts may achieve "submission to their lawful mandates." [Chambers, 501 U.S. at 43-44.]

Sanctions under the court's inherent authority require a finding of bad faith. Green asserts that there was no finding of bad faith by the district court. We have said that "[w]hen bad faith is patent from the record and specific findings are unnecessary to understand the misconduct giving rise to the sanction, the necessary finding of 'bad faith' may be inferred." In reviewing sanctions, we have inferred that "it would be empty formalism to find an abuse of discretion for failure to invoke the magic words bad faith." But reversal of sanctions is warranted where "the district court merely made general complaints about the sanctioned party."

The record supports the conclusion that the district court found bad faith. Post-judgment interrogatories asked Green to provide his full name, current address, current business affiliations, and financial information, among other requests for information. The answers filed by Gallman on behalf of Green to each and every post-judgment interrogatory asserted the same objection, which included an assertion that John Aird had never been authorized to bring any legal action on behalf of Blanco River and that Aird was not authorized by Blanco River to collect the judgment that Blanco River had obtained against Green. Gallman had also asserted in correspondence regarding the judgment that it was rendered without an opportunity for Green to be heard or to respond. The district court explored these matters in some detail with Gallman at the hearing on the request for sanctions. Gallman acknowledged that whether Blanco River was authorized to bring the suit against Green that resulted in a judgment against him was subsumed in the underlying suit and the final judgment in that case. The authority of Blanco River to sue was also a matter that could and should have been appealed if Green disputed the underlying authority to bring suit. Gallman acknowledged this as well as the fact that he, as counsel for Green, filed and later dismissed an appeal from the judgment against Green. ***

The facts in the record support a finding of bad faith in answering the post-judgment interrogatories and in correspondence regarding efforts to collect the judgment. The court's comments at the hearing on the request for sanctions are tantamount to such a finding.

Although the district court's written order imposing sanctions stated, "The [Hays County] suit had no basis in fact or law. It was simply an attempt to impede the enforcement of the judgment and had no legitimate purpose," the record of the hearing makes clear that the district court was not basing sanctions on any action that Green or Gallman took in the Hays County suit. The district court expressly stated that it was not imposing sanctions based on actions in that state court proceeding. Instead, the district court expressly indicated at the hearing that it was basing the sanctions on the conduct of Green and Gallman in connection with efforts to collect the judgment in the district court. Given the facts, the district court's finding of bad faith is not an abuse of discretion.

Green and Gallman contend that the district court could not award $4,000 in sanctions unless it determined, based on a sworn statement or billing records, that the total hours claimed were reasonable and reasonably expended. However, the case that they cite in support of this proposition pertained to an award of more than $4,000,000 as attorneys' fees as damages, in addition to actual damages, in an anti-trust suit. 20 Here, the district court used the amount of fees that Blanco River incurred in pursuing post-judgment remedies in the district court as a proxy for the amount that should be imposed as sanctions. The district court inquired at one juncture how much Aird had been charged in defending the Hays County suit and was told the amount was approximately $12,000. The district court then stated on the record that it was not going to sanction actions in the state court suit, but would sanction actions regarding post-judgment discovery pertaining to the judgment issued by the district court. Blanco River's attorneys were asked how much they had expended in pursuing post-judgment remedies, and the response, from an officer of the court, was "approximately $3,700, $3,728." The district court then chose $4,000 as the amount of the sanction. There was no objection that sworn testimony or affidavits were required, or that the district court was without authority to choose some amount, even if unrelated to actual attorneys' fees, as the amount of sanctions. We cannot say on the record before us that the district court abused its discretion in selecting $4,000 as the amount of sanctions to be imposed. ***

The injunction as issued, however, fails to comport with Fed. R. Civ. P. 65(d). That rule requires that an injunction "state its terms specifically" and "describe in reasonable detail--and not by referring to the complaint or other document--the act or acts restrained or required." An injunction cannot be overly vague — a question of procedural due process — or overly broad — a question of substantive law. After discussing the Hays County suit, the same defense raised in the Illinois registration dispute, and the post-judgment discovery objections, the injunction enjoins Green and Gallman "from interfering in the collection of this court's judgment." Previously this court determined an injunction to be overly vague where the injunction prohibited the release of personal information that would allow a recipient "to ascertain the name, address, ranch, or location" of those protected by the injunction. 30 We held that this was overly vague because the defendants would be forced to determine what information might allow a third party to ascertain the prohibited identities and addresses. In the instant case, Green and Gallman are enjoined from taking actions that may be lawful and permissible in response to collection efforts. For example, would Green be in violation of the injunction if he filed for relief under the Bankruptcy Code? Would Gallman be in violation if he asserted proper, lawful objections to impermissible efforts to collect the judgment? As a result, the injunction does not comport with Fed. R. Civ. P. 65(d).