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Sanctions — While Civil Contempt Cannot Be Imposed in The Absence of Subject Matter Jurisdiction, a $10,000 Penalty for Disregard of Court Order Is Permissible — Failure of Due Process to Impose Penalty without Warning

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Tellado v. IndyMac Mortg. Servs., 2013 U.S. App. LEXIS 2817 (3d Cir. Feb. 11, 2013):

This appeal is from the District Court's order to cancel a mortgage loan made by IndyMac Bank, FSB, to Jose and Maria Tellado. After IndyMac failed and was placed into receivership, with the Federal Deposit Insurance Corporation (FDIC) as its receiver, the mortgage loan was purchased from the FDIC by OneWest Bank, FSB. OneWest challenges the District Court's August 8, 2011, order directing OneWest to cancel the loan and refund to the Tellados all payments made under the mortgage loan agreement. OneWest also challenges the $10,000 penalty that the District Court levied against OneWest for failing to comply with the District Court's order to produce its Chief Executive Officer (CEO) at trial. For the reasons that follow, we will reverse both the District Court's August 8, 2011, order and the penalty order. penalty order. ***

OneWest *** filed a motion to dismiss under Rule 12(b)(6), a motion for summary judgment, and a motion to dismiss for lack of subject matter jurisdiction. The District Court denied all of these requests for relief. On November 3, 2010, the District Court scheduled the case for a bench trial beginning on November 8. In the scheduling order, the District Court also ordered the CEO of OneWest to appear at the trial.

After the bench trial, the District Court ruled in the Tellados' favor. ***

Subsequently, without further notice or hearing, the District Court on December 1, 2010, imposed a $10,000 penalty on OneWest under Rule 16(f)(1)(C) because OneWest's CEO had not appeared at trial as provided for in the court's scheduling order. OneWest appealed. It argues that the District Court erred in multiple ways in finding for the Tellados after trial and in denying OneWest's motions to dismiss and for summary judgment. OneWest also contends that the District Court erred in imposing a $10,000 penalty because OneWest had failed to follow the order requiring the presence of its CEO at trial. ***

A. Subject Matter Jurisdiction

OneWest argues that the District Court lacked subject matter jurisdiction over the Tellados' claim based on the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA). Whether subject matter jurisdiction exists is "a legal question over which we exercise plenary review." Nat. Union Fire Ins. Co. of Pittsburgh v. City Savings, F.S.B., 28 F.3d 376, 383 (3d Cir. 1994). ***

[T]he entirety of the Tellados' claim is jurisdictionally barred under section 1821(d)(13)(D), and the District Court did not have subject matter jurisdiction over it. ***

B. Penalty Order

1. Jurisdiction

Because we find the District Court lacked subject matter jurisdiction over the underlying matter, we must now determine whether the District Court also lacked jurisdiction to impose the $10,000 penalty against OneWest for failing to comply with the order to produce its CEO at trial. "A final determination of lack of subject-matter jurisdiction of a case in a federal court . . . does not automatically wipe out all proceedings had in the district court at a time when the district court operated under the misapprehension that it had jurisdiction." Willy v. Coastal Corp., 503 U.S. 131, 137 (1992); see also In re Orthopedic "Bone Screw" Prod. Liab. Litig., 132 F.3d 152, 156 (3d Cir. 1997) ("[D]espite the inability of a court to decide the merits of a case over which it lacks jurisdiction, a court does have the inherent authority both over its docket and over the persons appearing before it.").

Sanctions have been upheld in the absence of subject matter jurisdiction when the sanctions order is collateral to the merits. See Willy, 503 U.S. at 138 (upholding Rule 11 sanctions in a case in which the district court was later found to lack subject matter jurisdiction because the sanctions order did not "raise the issue of a district court adjudicating the merits of a 'case or controversy' over which it lacks jurisdiction"); In re Orthopedic "Bone Screw" Prod. Liab. Litig., 132 F.3d at 157 (vacating a sanctions order dismissing the case with prejudice when the district court was later determined to lack subject matter jurisdiction because the dismissal with prejudice had "the effect of adjudicating the merits of the case" but upholding a $500 monetary sanction against a litigant for failure to appear at a hearing). However, a civil contempt order would fall in the absence of subject matter jurisdiction. See U.S. Catholic Conference v. Abortion Rights Mobilization, Inc., 487 U.S. 72, 80 (1988) (holding that a civil contempt order for refusal to comply with a subpoena would fall if the district court lacked subject matter jurisdiction). In Willy, the Supreme Court distinguished between a civil contempt order and a Rule 11 sanction, noting that "[c]ivil contempt is designed to force the contemnor to comply with an order of the court" whereas "Rule 11 is designed to punish a party who has already violated the court's rules." Willy, 503 U.S. at 139. On that basis, the Court reasoned that a civil contempt order "should fall with a showing that the court was without authority to enter the decree," but a Rule 11 sanction, grounded in "[t]he interest in having the rules of procedure obeyed," should not. Id.

Here, the penalty order for defying the District Court's order requiring the presence of OneWest's CEO at trial is collateral to the merits of the underlying action. Additionally, although issued under Rule 16(f)(1)(C), the penalty order is analogous to the Rule 11 sanctions in Willy because it was designed to punish OneWest for its past violation of the order requiring the CEO's presence at trial. See Olcott v. Delaware Flood Co., 76 F.3d 1538, 1553 (10th Cir. 1996) (finding sanctions pursuant to Rules 16(f) and 37(b) analogous to Rule 11 sanctions in Willy and thus enforceable in the absence of subject matter jurisdiction). Issued after the conclusion of the trial, the penalty order could not effectively coerce compliance with an order requiring the CEO's presence at trial and thus is unlike a civil contempt order.

For these reasons, we find that the penalty order does not fall away based on the District Court's lack of subject matter jurisdiction over the underlying matter.

2. Due Process

OneWest challenges the penalty order on several other grounds. We address OneWest's argument that the penalty order violates due process.

We review sanctions orders for abuses of discretion, but "when the procedure the district court uses in imposing sanctions raises due process issues of fair notice and the right to be heard . . ., our review is plenary." Martin v. Brown, 63 F.3d 1252, 1262 (3d Cir. 1995). "A finding of contempt, even under the auspices of Rule 16, must satisfy due process requirements. . . . Due process requires that a potential contemnor be given notice and a hearing regardless of whether the contempt is civil or criminal in nature." Newton v. A.C. & S., Inc., 918 F.2d 1121, 1127 (3d Cir. 1990) (internal citations omitted). In Newton, we held that "a court may not find a party or counsel in civil contempt for settling a case after a deadline fixed by the court without affording them their due process rights of adequate notice and a prior hearing." Id. at 1129.

Here, the District Court imposed the $10,000 penalty without providing the parties notice or a hearing on the issue. The District Court heard argument regarding OneWest's failure to comply with the order requiring the CEO's presence at trial but did not issue the penalty order at that time or give notice of a possible penalty then or at any time prior to issuing the order. Nor was there a separate hearing on the issue of the penalty. Accordingly, the District Court violated due process requirements by not giving OneWest notice or the opportunity to be heard.

We conclude that the penalty must be reversed on this basis. Normally, we would vacate the order and remand the case to the District Court for further consideration of the penalty. However, we see nothing in the facts of this case that would justify a penalty. Therefore, the penalty order cannot stand.

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New York Attorneys JHA handles range the gamut of complex financial and commercial litigation and arbitration, including securities, RICO, corporate and contract disputes, credit default swaps, derivatives, and class, mass, and derivative actions. The firm also represents law firms in major disputes.
New York Attorneys JHA handles range the gamut of complex financial and commercial litigation and arbitration, including securities, RICO, corporate and contract disputes, credit default swaps, derivatives, and class, mass, and derivative actions. The firm also represents law firms in major disputes.

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