Case No. 1 — Sanctions Against Counsel

Auto-Owners Ins. Co. v. Summit Park Townhome Ass’n, 2018 WL 1559980 (10th Cir. Mar. 30, 2018) (amended opinion):

BACHARACH, Circuit Judge.

*1 These matters are before us, sua sponte, to withdraw and amend the decisions issued in these appeals originally on March 23, 2018. Those original opinions are hereby VACATED, and the attached revised opinions shall issue effective the date of this order and with a filing date of today. The Clerk is directed to issue and distribute the amended opinions accordingly.

 

Entered for the Court

 

ELISABETH A. SHUMAKER, Clerk

Mr. William Harris and Mr. David Pettinato are two attorneys who represented Summit Park Townhome Association. While representing Summit Park against its insurer, the two attorneys were sanctioned for failing to disclose information. In this appeal, the attorneys challenge the sanctions based on five arguments:

1. The district court lacked authority to require the disclosure requirements.

2. The attorneys did not violate the court’s disclosure requirements.

3. The district court awarded attorneys’ fees beyond the scope of an earlier sanctions order.

4. The district court’s award of attorneys’ fees resulted in a deprivation of due process.

5. The amount of attorneys’ fees awarded was unreasonable.

We affirm. Regardless of whether the district court had authority to require the disclosures, the attorneys were obligated to comply. They did not, and the district court acted reasonably in issuing sanctions, determining the scope of the sanctions, and calculating the amount of the sanctions.

I. Mr. Harris and Mr. Pettinato were sanctioned for failing to comply with the disclosure order.

This appeal grew out of an insurance dispute. Summit Park sustained hail damage and filed a claim with its insurer, Auto-Owners Insurance Company. The parties agreed that damage had occurred but disagreed on the dollar amount of the damage. Auto-Owners sued for a declaratory judgment to decide the value.

Summit Park retained Mr. Harris and Mr. Pettinato, who successfully moved to compel an appraisal based on the insurance policy. In the event of an appraisal, the insurance policy required:

[E]ach party will select a competent and impartial appraiser. The two appraisers will select an umpire. If they cannot agree, either may request that selection be made by a judge of a court having jurisdiction. The appraisers will state separately the value of the property and amount of loss. If they fail to agree, they will submit their differences to the umpire. A decision agreed to by any two will be binding.

Appellee’s Supp. App’x, vol. 1 at 123.

Based on continuing disputes between the parties, Auto-Owners asked the district court to resolve these disputes by ordering an “appraisal agreement.” The court did so and ordered disclosure of facts potentially bearing on the appraisers’ impartiality:

An individual who has a known, direct, and material interest in the outcome of the appraisal proceeding or a known, existing, and substantial relationship with a party may not serve as an appraiser. Each appraiser must, after making a reasonable inquiry, disclose to all parties and any other appraiser any known facts that a reasonable person would consider likely to affect his or her impartiality, including (a) a financial or personal interest in the outcome of the appraisal; and (b) a current or previous relationship with any of the parties (including their counsel or representatives) or with any of the participants in the appraisal proceeding .... Each appraiser shall have a continuing obligation to disclose to the parties and to any other appraiser any facts that he or she learns after accepting appointment that a reasonable person would consider likely to affect his or her impartiality.

*2 Appellants’ App’x, vol. 1 at 245-46. The court warned: “Notice is given that, if the court finds that the parties and/or their counsel have not complied with this order, the court will impose sanctions against the parties and/or their counsel pursuant to the court’s inherent authority.” Id. at 248 (capitalization removed).

Before the court imposed these requirements, Summit Park selected Mr. George Keys as its appraiser. This selection led Auto-Owners to express doubt about Mr. Keys’s impartiality. But Auto-Owners did not object to Mr. Keys or move to compel further disclosures.

Mr. Keys and the court-appointed umpire agreed on an appraisal award of over $10 million, which was 47% higher than Summit Park’s own public adjuster had determined. Auto-Owners then launched an investigation, which culminated in an objection to Mr. Keys. In the objection, Auto-Owners argued that Mr. Keys was not impartial and that Summit Park had failed to disclose evidence bearing on his impartiality. The district court credited these arguments, disqualifying Mr. Keys and vacating the appraisal award.

With vacatur of the appraisal award, Auto-Owners moved for sanctions against Mr. Harris and Mr. Pettinato, seeking attorneys’ fees and expenses based on violation of the disclosure order. The district court granted the motion, assessing sanctions against Mr. Harris and Mr. Pettinato for $354,350.65 in attorneys’ fees and expenses.

II. Mr. Harris and Mr. Pettinato were bound by the court’s disclosure order.

Mr. Harris and Mr. Pettinato challenge the district court’s authority to enter the disclosure order. But even if the court had exceeded its authority, Mr. Harris and Mr. Pettinato would still have needed to comply with the disclosure order. If the two attorneys believed that the order had been unauthorized, they could have sought reconsideration or a writ; but they could not violate the order. See Maness v. Meyers, 419 U.S. 449, 458 (1975) (“If a person to whom a court directs an order believes that order is incorrect the remedy is to appeal, but, absent a stay, he must comply promptly with the order pending appeal.”).

There is “impressive authority for the proposition that an order issued by a court with jurisdiction over the subject matter and person must be obeyed by the parties until it is reversed by orderly and proper proceedings.” United States v. United Mine Workers, 330 U.S. 258, 293 (1947). The parties agree that the district court had jurisdiction over the subject matter and parties; thus, the attorneys and parties bore an obligation to comply in the absence of an appellate challenge. See United States v. Beery, 678 F.2d 856, 866 (10th Cir. 1982) (“Since the court entering these orders had jurisdiction over both the subject matter and [the defendant], [the defendant] was bound by these orders until reversed or otherwise set aside ....”); see also GTE Sylvania, Inc. v. Consumers Union of U.S., Inc, 445 U.S. 375, 386 (1980) (applying “the established doctrine that persons subject to an injunctive order issued by a court with jurisdiction are expected to obey that decree until it is modified or reversed, even if they have proper grounds to object to the order”). In light of the duty to comply, violation of the order could trigger sanctions. See United Mine Workers, 330 U.S. at 294 (quoting Howat v. Kansas, 258 U.S. 181, 190 (1922)).¹

 

*3 * * *

 

Regardless of whether the district court had authority to issue the disclosure order, Mr. Harris and Mr. Pettinato

• bore an obligation to comply in the absence of an appellate challenge and

• could be sanctioned for noncompliance.

III. Mr. Harris and Mr. Pettinato violated the disclosure order.

The district court concluded that the two attorneys had violated the disclosure order. Challenging this conclusion, Mr. Harris and Mr. Pettinato make two arguments:

1. The district court misinterpreted the term “impartial.”

2. Mr. Harris and Mr. Pettinato disclosed sufficient information about Mr. Keys.

Both arguments fail.

A. Standard of Review

We ordinarily review sanctions under the abuse-of-discretion standard. Russell v. Weicker Moving & Storage Co., 746 F.2d 1419, 1420 (10th Cir. 1984) (per curiam). But Mr. Harris and Mr. Pettinato urge a legal error consisting of misinterpretation of the term “impartial.” For the challenge involving the meaning of “impartial,” we engage in de novo review. Hamilton v. Boise Cascade Express, 519 F.3d 1197, 1202 (10th Cir. 2008). We otherwise confine our review to the abuse-of-discretion standard.

B. Mr. Harris and Mr. Pettinato failed to disclose information specified in the disclosure order.

The district court required disclosure of

• the appraiser’s “financial or personal interest in the outcome of the appraisal,”

• any “current or previous relationship” between the appraiser and Summit Park’s counsel, and

• any other facts subsequently learned that “a reasonable person would consider likely to affect” the appraiser’s impartiality.

Appellants’ App’x, vol. 1 at 245-46.

1. Mr. Harris and Mr. Pettinato did not disclose the extent of their relationships with Mr. Keys.

Regardless of whether the district court had correctly defined “impartial,” the disclosure order itself was clear in what was required. For example, the order expressly required disclosure of the attorneys’ current or previous relationships with the appraiser. The failure to disclose this information constituted a sanctionable violation regardless of the court’s interpretation of the word “impartial.”

The district court could reasonably find that the two attorneys had failed to disclose the extent of their relationships with Mr. Keys. For example, the attorneys failed to disclose that

• other attorneys in their law firm (the Merlin Law Group) had worked with Mr. Keys on appraisals for at least 33 clients,

• Merlin attorneys had represented Mr. Keys on various matters for over a decade,

• Merlin’s founder and Mr. Keys had co-founded a Florida lobbying operation, whose “number one goal [was] to protect policyholders and the public adjusting profession,” Appellee’s Supp. App’x, vol. 4 at 812, and

• Merlin attorneys had served as the incorporator and registered agent for one of Mr. Keys’s companies.²

*4 Mr. Harris and Mr. Pettinato argue that their disclosures were sufficient. They made two disclosures:

1. “Mr. Keys does not have any significant prior business relationship with [Merlin], Summit Park, or C3 Group. Mr. Keys has acted as a public adjuster and/or appraiser on behalf of policyholders that [Merlin] has represented in the past, however, this obviously does not affect his ability to act [as] an appraiser in this matter.” Appellant’s App’x, vol. 2 at 292.

2. “Mr. Keys has acted as a public adjuster and/or appraiser on behalf of policyholders that [Merlin] has represented in the past. Mr. Keys has no financial interest in the claim, and has no previous relationship with the policyholder in this matter.” Id. at 298.

In addition, Mr. Keys disclosed:

I do not have a material interest in the outcome of the Award and have never acted either for or against Summit Park Townhome Association. My fee agreement is based upon hourly rates plus expenses... I do not have any substantial business relationship or financial interest in [Merlin]. There have been cases where both [Merlin] and Keys Claims Consultants acted for the same insured but under separate contracts.

Id. at 307-08.

Mr. Harris and Mr. Pettinato make two defenses of their disclosures:

1. They disclosed enough information about Mr. Keys’s impartiality.

2. Mr. Harris and Mr. Pettinato lacked personal knowledge about the undisclosed facts.

These arguments fail.

First, the district court acted within its discretion in concluding that Mr. Harris and Mr. Pettinato had failed to disclose the extent of their relationships with Mr. Keys. The two attorneys disclosed only that Mr. Keys had worked as an appraiser on behalf of Merlin’s clients, and Mr. Keys stated that he lacked a substantial business relationship with Merlin. The district court could reasonably find that these disclosures had failed to provide meaningful information about the extent of the relationships between the two attorneys and Mr. Keys.

Second, Mr. Harris and Mr. Pettinato cannot avoid sanctions based on their asserted lack of knowledge about Mr. Keys’s contacts with other Merlin attorneys. Mr. Harris and Mr. Pettinato knew about some of the contacts, as reflected in Mr. Pettinato’s description of his firm’s connection with Mr. Keys: “Both Mr. Keys and his staff have assisted me as well as my firm in resolving an untold number of large multi-million dollar losses to an amicable resolution and settlement to the policyholders’ benefit and satisfaction.” Appellee’s Supp. App’x, vol. 4 at 704. In addition, however, Mr. Harris and Mr. Pettinato bore an obligation to make “a reasonable inquiry.” Appellant’s App’x, vol. 2 at 245. In light of this obligation, Mr. Harris and Mr. Pettinato could not profess ignorance while failing to inquire about contacts with other Merlin attorneys.

In these circumstances, the district court acted within its discretion in finding a failure to disclose the extent of the relationships between the two attorneys and Mr. Keys.

2. Mr. Harris and Mr. Pettinato distort the effect of the district court’s definition of “impartial.”

*5 The district court required disclosure not only of the appraiser’s relationship with counsel but also of known facts that a reasonable person would consider likely to affect the appraiser’s impartiality. This part of the disclosure requirement was tied to the court’s definition of the term “impartial.”

Mr. Harris and Mr. Pettinato focus on the court’s definition of “impartial,” arguing that it was wrong and that the court failed to adequately inform Mr. Harris and Mr. Pettinato of the scope of their obligations. But in the disclosure order itself, the court stated what it meant by “impartial”: “An individual who has a known, direct, and material interest in the outcome of the appraisal proceeding or a known, existing, and substantial relationship with a party may not serve as an appraiser.” Id. at 245. Because the court stated precisely what it meant by “impartial,” Mr. Harris and Mr. Pettinato knew what was required. And as we have discussed, Mr. Harris and Mr. Pettinato could not disobey the order even if the court had based the disclosure requirements on a misguided definition of “impartial.”³

3. The district court reasonably found a violation of the disclosure order tied to this test of “impartial.”

Based on this definition, the district court required disclosure of any facts that a reasonable person would view as likely to affect the appraiser’s impartiality. Mr. Harris and Mr. Pettinato argue that evidence of an appraiser’s advocacy was unlikely to affect the appraiser’s impartiality. See Owners Ins. Co. v. Dakota Station II Condominium Ass’n, 2017 WL 3184568, at *4 (Colo. App. July 27, 2017), cert. granted, 2018 WL 948601 (Colo. Feb. 20, 2018). For the sake of argument, let’s assume that Mr. Harris and Mr. Pettinato are right. Still, the district court could reasonably view Mr. Keys’s undisclosed prior statements as likely to affect his impartiality based on a known, direct, and material interest in the outcome.

For example, in a presentation to a group of public adjusters in Florida, Mr. Keys taught participants how to “harvest the claim money” from an insurer during an appraisal. Appellants’ App’x, vol. 2 at 342. And one of Mr. Keys’s companies maintains a website stating: “Our purpose is simple: To shift the balance of power from the insurer to the policy holder ....” Appellee’s Supp. App’x, vol. 4 at 729. The district court could reasonably view these undisclosed statements as proof of a material interest in an outcome favoring the policyholder over the insured.

Evidence also suggests that Mr. Harris and Mr. Pettinato were aware of Mr. Keys’s bias. For example, in an advertisement on Mr. Keys’s website, Mr. Pettinato endorsed Mr. Keys, saying: “Both Mr. Keys and his staff have assisted me as well as my firm in resolving an untold number of large multi-million dollar losses to an amicable resolution and settlement to the policyholders’ benefit and satisfaction.” Id. at 704. And a profile on Merlin’s website reported that Mr. Keys “ha[d] dedicated his professional life to being a voice for policyholders in property insurance claims.” Id. at 723. In this profile, Mr. Keys stated: “I was taught to always handle a claim as if my momma was the insured.” Id.

*6 * * *

In sum, the district court did not abuse its discretion in finding that Mr. Harris and Mr. Pettinato had violated the disclosure order.

C. Waiver

Mr. Harris and Mr. Pettinato contend that Auto-Owners waived its objection to the sufficiency of the disclosures by failing to object despite knowledge of Mr. Keys’s relationship with Merlin and past expressions of bias toward policyholders. We disagree. Auto-Owners had some knowledge about Mr. Keys’s bias but did not know much of what had been withheld. Without full knowledge of the undisclosed information, Auto-Owners did not waive its right to seek sanctions for nondisclosure.

IV. The district court reasonably interpreted the scope of its sanctions order.

In sanctioning the two attorneys, the court invoked 28 U.S.C. § 1927. Under § 1927, an attorney “who so multiplies the proceedings in any case unreasonably and vexatiously may be required by the court to satisfy personally the excess costs, expenses, and attorneys’ fees reasonably incurred because of such conduct.” 28 U.S.C. § 1927. Applying this statute in the sanctions order, the court found that Mr. Harris and Mr. Pettinato had unreasonably prolonged the proceedings:

I note that Section 1927 indicates a purpose to compensate victims of abusive litigation practices, not to deter and punish offenders. With this purpose in mind, I reject Auto-Owners’ request for fees for proceedings in this Court that relate to conducting the appraisal process and conducting the appraisal process itself because Auto-Owners would have incurred these fees regardless of Harris’ and Pettinato’s misconduct. I grant the request, however, as to Auto-Owners’ investigation into George Keys and its objections to his participation in the appraisal, as this work would not have taken place in the absence of Harris’ and Pettinato’s misconduct. The award shall be assessed against Harris and Pettinato jointly and severally.

Appellants’ App’x, vol. 3 at 607 (citations & internal quotation marks omitted).

Mr. Harris and Mr. Pettinato challenge the scope of this order. They concede that the award covered Auto-Owners’ objection to Mr. Keys ($186,705.50) and investigation of Mr. Keys ($33,805). But the attorneys disagree with the inclusion of attorneys’ fees for

• Auto-Owners’ preparation of the motion for sanctions ($51,309.50),

• Auto-Owners’ preparation of the application for attorneys’ fees and expenses ($16,960.50), and

• Auto-Owners’ other related work ($61,662.50).

According to Mr. Harris and Mr. Pettinato, these activities fell outside of the initial sanctions order. We disagree.

In setting attorneys’ fees following the sanctions order, the district court explained:

Thus, viewed properly in its context, my award encompasses any fees incurred as a result of Harris’ and Pettinato’s misconduct. The fees requested by Auto-Owners for work on the third amended petition, the reservation of rights letter, and other matters described in the detailed billing records would not have been incurred but for Harris’ and Pettinato’s misconduct. I therefore conclude they are within the scope of the award.

*7 Appellants’ App’x, vol. 3 at 671. We give deference to the district court’s interpretation of its own order. See, e.g., Chi., Rock Island & Pac. R.R. v. Diamond Shamrock Ref. & Mktg. Co., 865 F.2d 807, 811 (7th Cir. 1988) (“We shall not reverse a district court’s interpretation of its own order ‘unless the record clearly shows an abuse of discretion.’ ” (quoting Arenson v. Chicago Mercantile Exch., 520 F.2d 722, 725 (7th Cir. 1975))).

With such deference, we conclude that the district court reasonably interpreted its prior sanctions order. The sanctions order had noted that § 1927 was designed “ ‘to compensate victims of abusive litigation practices.’ ” Appellants’ App’x, vol. 3 at 607 (quoting Hamilton v. Boise Cascade Express, 519 F.3d 1197, 1205 (10th Cir. 2008)). In light of this purpose, the court interpreted its sanctions order against Mr. Harris and Mr. Pettinato as encompassing all of the attorneys’ fees and expenses resulting from violation of the disclosure order. Id. This interpretation was reasonable.

The sanctions order expressly included the investigation of and objection to Mr. Keys. But the district court could reasonably interpret the sanctions order to go beyond the investigation and objection. If Mr. Harris and Mr. Pettinato had not violated the disclosure order, Auto-Owners would not have had to move for sanctions, seek attorneys’ fees and expenses, and complete other work. As a result, the district court could reasonably consider these litigation expenses as the product of the two attorneys’ misconduct. In these circumstances, it was reasonable for the district court to conclude that the earlier sanctions order had encompassed attorneys’ fees and expenses from the motion for sanctions, application for attorneys’ fees and expenses, and related work involving the motion and application.

V. The district court did not deprive the two attorneys of due process.

Alternatively, Mr. Harris and Mr. Pettinato assert a deprivation of due process based on an inability to respond to the district court’s inclusion of litigation activities outside of the initial sanctions order. We disagree.⁴ Auto-Owners filed an application for attorneys’ fees, and Mr. Harris and Mr. Pettinato had an opportunity to respond. In the response, they could have objected to any of the attorneys’ fees being sought. This opportunity supplied due process. See Resolution Tr. Corp. v. Dabney, 73 F.3d 262, 268 (10th Cir. 1995) (“[T]he opportunity to fully brief the issue is sufficient to satisfy due process requirements.”); see also Auto-Owners Ins. Co. v. Summit Park Townhome Ass’n, No. 16-1352, slip op. at 17-19 (10th Cir. Mar. 30, 2018) (to be published) (discussing a similar argument made by Summit Park Townhome Association).

VI. The amount of attorneys’ fees awarded was reasonable.

*8 Mr. Harris and Mr. Pettinato also argue that the court awarded an unreasonable amount of attorneys’ fees. We disagree.

We review a determination of attorneys’ fees for an abuse of discretion. See AeroTech, Inc. v. Estes, 110 F.3d 1523, 1528 (10th Cir. 1997). In applying the abuse-of-discretion standard, we consider whether the district court’s determination appears reasonable in light of the complexity of the case, the number of strategies pursued, and the responses necessitated by the other party’s maneuvering. See Robinson v. City of Edmond, 160 F.3d 1275, 1281 (10th Cir. 1998). But we do not require the district court to identify and justify every hour allowed or disallowed. See Malloy v. Monahan, 73 F.3d 1012, 1018 (10th Cir. 1996).

The district court closely reviewed the information in Auto-Owners’ request for fees, determining that most of the fee requests were reasonable given

• the circumstances of the case,

• the hourly rates prevailing in the community, and

• the use of billing judgment.

First, the district court concluded that it was reasonable for Auto-Owners’ counsel to spend long hours because “Auto-Owners had over $30 million at stake” and the issues were complex. Appellants’ App’x, vol. 3 at 673-74. This conclusion was reasonable.

Second, the court considered the local market, the qualifications of the attorneys, and the contentiousness of the litigation. These considerations led the district court to find that the billing rates had been reasonable. In our view, this finding was permissible under the record.

Third, the court considered the use of billing judgment by Auto-Owners’ counsel through concessions such as staffing with lower-billing attorneys, declining to charge for all hours worked, and discounting hours worked by paralegals and secretaries.⁵ The district court acted reasonably in considering these concessions.

For these three reasons, we conclude that the district court did not abuse its discretion in calculating the amount of the sanction ($354,350.65).⁶

VII. Conclusion

The district court did not err in sanctioning Mr. Harris and Mr. Pettinato. Regardless of the validity of the disclosure order, compliance was required in the absence of an appellate challenge. Mr. Harris and Mr. Pettinato violated the order by failing to disclose information bearing on Mr. Keys’s impartiality. In light of this violation, the district court had the discretion to sanction Mr. Harris and Mr. Pettinato and set a reasonable amount. We therefore affirm the assessment of sanctions.

Footnotes
1	In United Mine Workers, the Supreme Court observed: It does not follow, of course, that simply because a defendant may be punished for criminal contempt for disobedience of an order later set aside on appeal, that the plaintiff in the action may profit by way of a fine imposed in a simultaneous proceeding for civil contempt based upon a violation of the same order. The right to remedial relief falls with an injunction which events prove was erroneously issued. 330 U.S. at 294-95. But Mr. Harris and Mr. Pettinato have raised no argument based on this language. Thus, we need not consider whether this language would affect the validity of the sanctions against Mr. Harris and Mr. Pettinato.
2	The district court also pointed out that Mr. Harris and Mr. Pettinato had failed to disclose a contingent-fee cap in Mr. Keys’s original contract. Auto-Owners asked Mr. Harris in writing for all “drafts, additions, amendments and/or revisions” of the agreement with Mr. Keys. Appellee’s Supp. App’x at 828. Mr. Harris responded that he would bring a copy of the agreement, implying that no other drafts existed. Id. at 827. Mr. Harris furnished the final version of the agreement, leading Auto-Owners to ask Summit Park’s former president whether the agreement had ever been revised. He responded: “Not to my knowledge.” Id. at 800. Mr. Harris and Mr. Pettinato later excused this statement on the ground that the former president had not been involved in the discussions with Mr. Keys regarding his contract. But Mr. Harris and Mr. Pettinato were intimately involved in those discussions, and Mr. Harris—who was accompanying the former president at the time—said nothing to correct the false statement. Instead, Mr. Harris and Mr. Pettinato waited until after completion of the appraisal to disclose the existence of a prior version of Mr. Keys’s agreement. With this disclosure, Auto-Owners learned that Mr. Keys had earlier worked under a contingent-fee cap, which raised his maximum fee based on the total amount recovered by Summit Park. This information revealed another false statement by Mr. Harris himself. While the contingent-fee cap had been in place, Mr. Harris represented to Auto-Owners that Mr. Keys had “no financial interest in the claim.” Id. at 327. This representation was false: at the time, the contingent-fee cap created a financial interest by allowing Mr. Keys to earn a greater fee based on the amount of the appraisal. Auto-Owners had no way of learning that the representation was false, however, until Mr. Harris eventually disclosed the existence of an earlier version of the agreement.
3	The district court ultimately held not only that the undisclosed facts would likely affect a reasonable person’s consideration of Mr. Keys as impartial (requiring disclosure), but also that Mr. Keys was ineligible to serve as an appraiser because of his partiality (requiring vacatur of the appraisal award). In vacating the appraisal award, the court expanded upon its definition of “impartial.” Vacatur of the appraisal award led to sanctions against Summit Park but not against Mr. Harris or Mr. Pettinato. These two individuals were sanctioned for violating the disclosure order, not selecting a biased appraiser.
4	Mr. Harris and Mr. Pettinato did not make this argument in district court. Thus, Auto-Owners argues that the argument was forfeited. See Richison v. Ernest Grp., 634 F.3d 1123, 1128 (10th Cir. 2011). Mr. Harris and Mr. Pettinato disagree, contending that they had no contemporaneous opportunity to object to the due-process violation because they learned of it only when they received the district court’s written order. We may assume, for the sake of argument, that Mr. Harris and Mr. Pettinato did not forfeit their due-process challenge.
5	The district court ultimately reduced Auto-Owners’ fees by $1,098 for one duplicate entry and one vague entry.
6	Alternatively, Mr. Harris and Mr. Pettinato urge reversal for more specific findings. But the district court supported its award with detailed findings. Mr. Harris and Mr. Pettinato do not say what other findings should have been made.

 

 

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Case No. 2 -- Against Client:

Auto-Owners Ins. Co. v. Summit Park Townhome Ass’n, 2018 WL 1559905 (10th Cir. Mar. 30, 2018) (amended opinion):

BACHARACH, Circuit Judge.

*1 These matters are before us, sua sponte, to withdraw and amend the decisions issued in these appeals originally on March 23, 2018. Those original opinions are hereby VACATED, and the attached revised opinions shall issue effective the date of this order and with a filing date of today. The Clerk is directed to issue and distribute the amended opinions accordingly.

 

Entered for the Court

 

ELISABETH A. SHUMAKER, Clerk

 

This appeal grew out of a dispute between an insured (Summit Park Townhome Association) and its insurer (Auto-Owners Insurance Company) over the value of property damaged in a hail storm. To determine the value, the district court ordered an appraisal and established procedural requirements governing the selection of impartial appraisers. After the appraisal was completed, Auto-Owners paid the appraised amount to Summit Park. But the court found that Summit Park had failed to make required disclosures and had selected a biased appraiser. In light of this finding, the court vacated the appraisal award, dismissed Summit Park’s counterclaims with prejudice, and awarded interest to Auto-Owners on the amount earlier paid to Summit Park.

Summit Park appeals, making six arguments:

1. The district court lacked authority to issue the procedural requirements.

2. Summit Park and its counsel did not violate the procedural requirements.

3. The district court erred by vacating the appraisal award.

4. The district court erred by using its inherent powers to sanction Summit Park.

5. The sanction (dismissal of Summit Park’s counterclaims) constituted an abuse of discretion.

6. The award of interest based on the amount paid to Summit Park constituted a deprivation of due process.

We affirm. In the absence of a successful appellate challenge to the disclosure order, Summit Park was obligated to comply and did not. The court was thus justified in dismissing Summit Park’s counterclaims. In addition, Summit Park’s failure to select an impartial appraiser compelled vacatur of the appraisal award under the insurance policy. Finally, Summit Park obtained due process through the opportunity to object to the award of interest.

I. Summit Park was sanctioned for violating the district court’s order.

The parties agreed that damage had occurred from a hail storm, but they disagreed on the value of the damage. Auto-Owners sued for a declaratory judgment to decide the value, and Summit Park filed counterclaims.

Summit Park retained Merlin Law Group attorneys Mr. William Harris and Mr. David Pettinato, who successfully moved to obtain an appraisal based on the insurance policy. In the event of an appraisal, the insurance policy required:

[E]ach party will select a competent and impartial appraiser. The two appraisers will select an umpire. If they cannot agree, either may request that selection be made by a judge of a court having jurisdiction. The appraisers will state separately the value of the property and amount of loss. If they fail to agree, they will submit their differences to the umpire. A decision agreed to by any two will be binding.

*2 Appellee’s Supp. App’x, vol. 1 at 123.

Based on continuing disputes between the parties, Auto-Owners moved for an order compelling an “appraisal agreement” that would set the procedural requirements for the appraisal. The court granted the motion and set requirements, which included disclosure of facts potentially bearing on the appraisers’ impartiality:

An individual who has a known, direct, and material interest in the outcome of the appraisal proceeding or a known, existing, and substantial relationship with a party may not serve as an appraiser. Each appraiser must, after making a reasonable inquiry, disclose to all parties and any other appraiser any known facts that a reasonable person would consider likely to affect his or her impartiality, including (a) a financial or personal interest in the outcome of the appraisal; and (b) a current or previous relationship with any of the parties (including their counsel or representatives) or with any of the participants in the appraisal proceeding ... Each appraiser shall have a continuing obligation to disclose to the parties and to any other appraiser any facts that he or she learns after accepting appointment that a reasonable person would consider likely to affect his or her impartiality.

Appellant’s App’x at 75-76. The court warned: “Notice is given that, if the court finds that the parties and/or their counsel have not complied with this order, the court will impose sanctions against the parties and/or their counsel pursuant to the court’s inherent authority.” Id. at 78 (capitalization removed).

Summit Park selected Mr. George Keys as its appraiser, but Auto-Owners expressed doubt about Mr. Keys’s impartiality. These concerns escalated when Mr. Keys and the court-appointed umpire agreed upon an appraisal award exceeding $10 million, which was 47% higher than Summit Park’s own public adjuster had determined.

Following the appraisal award, Auto-Owners objected to Mr. Keys, arguing that he was biased and that Summit Park had failed to disclose evidence bearing on Mr. Keys’s impartiality. The district court agreed, disqualifying Mr. Keys and vacating the appraisal order.

Auto-Owners then moved for sanctions against Summit Park. The district court granted the motion and dismissed with prejudice the counterclaims against Auto-Owners. In addition, the court ordered Summit Park to pay $97,797.53 in interest based on a Colorado statute governing withholding of funds. Colo. Rev. Stat. § 5-12-102(1)(a).

II. Summit Park was bound by the district court’s disclosure order.

Summit Park challenges the district court’s authority to enter the disclosure order. This argument fails for the reasons discussed in Auto-Owners Insurance Co. v. Summit Park Townhome Ass’n, No. 16-1348, slip op. at 5-6 (10th Cir. Mar. 30, 2018) (to be published). Regardless of whether the court had authority to enter the order, Summit Park was required to comply in the absence of a successful appellate challenge. Thus, Summit Park could be sanctioned for noncompliance.

III. The district court reasonably found that Summit Park had violated the disclosure order.

*3 Summit Park denies violating the disclosure requirement, arguing that

• the district court misinterpreted the term “impartial” as it applies to appraisers and

• Summit Park disclosed enough information about Mr. Keys.

We rejected both arguments in Auto-Owners Insurance Co. v. Summit Park Townhome Ass’n, No. 16-1348, slip op. at 6-14 (10th Cir. Mar. 30, 2018) (to be published). As we explained there, Summit Park’s counsel violated the disclosure order. And this violation could be attributed to Summit Park itself. See Link v. Wabash R.R. Co., 370 U.S. 626, 633-34 (1962) (a party cannot “avoid the consequences of the acts or omissions of [a] freely selected agent”).¹ As a result, we cannot disturb the finding that Summit Park violated the disclosure order.

IV. The district court did not err in vacating the appraisal award.

Summit Park challenges vacatur of the appraisal award, contending that

• the district court exceeded its authority by entering the disclosure order and

• Summit Park did not violate the disclosure order.

We rejected these arguments in Parts II and III.

But even if Summit Park had not violated the disclosure requirement, the insurance policy would have compelled vacatur of the appraisal award. The insurance policy stated that an appraisal award is valid only if signed by two impartial appraisers, and the district court reasonably concluded that Mr. Keys was biased based on his past expressions of favoritism toward policyholders and his extensive relationship with the Merlin law firm. With Mr. Keys disqualified, the appraisal award had only one valid signature (the umpire’s). The award was therefore invalid under the terms of the insurance policy.

Accordingly, we conclude that the district court did not err in vacating the appraisal award.

V. The district court had the authority to dismiss Summit Park’s counterclaims under the court’s inherent power and Fed. R. Civ. P. 41(b).

We review the imposition of sanctions for abuse of discretion. Link v. Wabash R.R., 370 U.S. 626, 633 (1962). Summit Park argues that the district court abused its discretion by exercising the court’s inherent powers rather than applying Fed. R. Civ. P. 11. This argument is based on Chambers v. NASCO, Inc., 501 U.S. 32 (1991), which Summit Park interprets as requiring application of the Federal Rules of Civil Procedure (rather than the court’s inherent powers) when sanctioning a party for acts taken in bad faith.

Summit Park’s argument fails for two reasons:

1. Chambers does not require consideration of Rule 11 before a court can use its inherent powers.

2. The district court dismissed Summit Park’s counterclaims under Fed. R. Civ. P. 41(b) as well as the court’s inherent powers.

First, Summit Park misreads Chambers; it does not require a court to consider the Federal Rules of Civil Procedure before applying the court’s inherent powers. Chambers states that “when there is bad-faith conduct in the course of litigation that could be adequately sanctioned under the Rules, the court ordinarily should rely on the Rules rather than the inherent power.” 501 U.S. 32, 50 (1991). But Chambers adds that a court may impose sanctions “by means of the inherent power” even if the “conduct could also be sanctioned under the ... Rules.” Id. Thus, Chambers does not require the district court to consider Rule 11 sanctions before invoking the court’s inherent powers. See Courtesy Inns, Ltd. v. Bank of Santa Fe, 40 F.3d 1084, 1089 (10th Cir. 1994) (stating that Chambers rejected arguments that “the various sanctioning provisions of the federal rules reflect legislative intent to displace the court’s inherent powers”); accord Nat. Gas Pipeline Co. of Am. v. Energy Gathering, Inc., 2 F.3d 1397, 1407 (5th Cir. 1993) (“In Chambers ... the Court held that the inherent power to impose sanctions for bad-faith conduct during litigation was not displaced by, and went beyond, such sanctioning mechanisms as Rule 11 and 28 U.S.C. § 1927.”).

*4 Even if Chambers had required consideration of sanctions under the federal rules, the district court could reasonably conclude that Rule 11 would not have covered Summit Park’s misconduct. Rule 11 does not generally apply to a party’s out of court conduct. See Fed. R. Civ. P. 11 advisory committee note to 1993 amendment. And five of Summit Park’s acts took place outside of court:

1. Summit Park made misrepresentations about Mr. Keys.

2. Summit Park retained Mr. Keys after investigating his background.

3. Summit Park failed to disclose Mr. Keys’s original contract, which had contained a contingent-cap fee.

4. A Summit Park executive gave false testimony about the contract previously containing the contingent-cap fee.

5. Summit Park failed to correct the inaccurate testimony until after the appraisal was completed.

Chambers does not require consideration of sanctions under the federal rules before a court invokes its inherent powers. But even if Chambers had imposed such a requirement, Rule 11 would not have applied to much of Summit Park’s conduct.

Second, even under Summit Park’s reading of Chambers, the court would not have abused its discretion. The district court did consider and choose to issue a sanction under the rules: Fed. R. Civ. P. 41(b).

When imposing sanctions, the district court relied not only on its inherent powers but also on Rule 41(b). Rule 41(b) provides that if a party violates “a court order, a defendant may move to dismiss the action.” Fed. R. Civ. P. 41(b). The district court invoked this rule, stating that it “recognizes that the Court may dismiss a claim or action where a ‘plaintiff fails to ... comply with these rules or a court order.’ ” Appellant’s App’x at 395 (quoting Fed. R. Civ. P. 41(b)).

The court could apply its inherent powers or Rule 41(b). Here, the court invoked both and, in doing so, did not run afoul of Chambers.

VI. The district court did not abuse its discretion in dismissing Summit Park’s counterclaims.

Summit Park contends that the district court committed two errors in dismissing the counterclaims:

1. The dismissal was unwarranted because Summit Park had not acted in bad faith.

2. The district court misapplied the factors from Ehrenhaus v. Reynolds, 965 F.2d 916 (10th Cir. 1992).

Both arguments fail.

A. Standard of Review

In reviewing the sanction of dismissal, we apply the abuse-of-discretion standard. Archibeque v. Atchison, Topeka & Santa Fe Ry., 70 F.3d 1172, 1174 (10th Cir. 1995).

B. The district court made a finding of bad faith.

Summit Park contends that the court could dismiss the counterclaims only upon a showing of bad faith. For the sake of argument, we may assume that Summit Park is right. Even with this assumption, Summit Park’s argument would fail because the district court did find bad faith in that

1. Summit Park had concealed the existence of Mr. Keys’s prior contingent-cap fee,

2. Summit Park had selected Mr. Keys as an appraiser with apparent knowledge of his bias, and

3. Summit Park had violated the disclosure order.

The district court found that Summit Park had acted in bad faith partly by concealing the existence of Mr. Keys’s initial agreement, which had capped his fee based on the amount of his appraisal. Under this agreement, the fee cap would increase as the amount of the appraisal award increased. This compensation agreement was replaced by one without a contingent cap.

*5 But Summit Park was not immediately forthcoming about the earlier version of the agreement. For example, Summit Park’s representative, Mr. David Malucky, stated under oath that the final version (without the contingent-fee cap) was the only one that had ever been used. This testimony was not true.

Summit Park corrected the misstatement but only after the appraisal had been completed. Mr. Malucky testified that his mistake had been innocent. Perhaps it was. But Mr. Malucky’s credibility presented a factual matter for the district court, and it found Mr. Malucky’s explanation not “entirely credible.” Appellant’s App’x at 397. We will defer to the district court’s finding on Mr. Malucky’s credibility. See United States v. Jordan, 806 F.3d 1244, 1252 (10th Cir. 2015).

The district court also relied in part on Summit Park’s hiring of Mr. Keys as an appraiser after investigating his background. The court could reasonably infer that Summit Park had known that Mr. Keys was biased and that hiring him would violate the district court’s order requiring impartiality of each appraiser.

In addition, the district court relied on Summit Park’s role in violating the disclosure order. Summit Park’s investigation of Mr. Keys suggested awareness of facts bearing on his impartiality. Nonetheless, Summit Park did not make the required disclosures or correct Mr. Keys’s inadequate and misleading disclosures. As a result, the district court could reasonably infer Summit Park’s bad faith in violating the disclosure order.

* * *

Even if the district court had to find bad faith before dismissing Summit Park’s counterclaims, the court made the required finding and it was supported by the record.

C. The district court properly applied the pertinent factors.

Summit Park also asserts an abuse of discretion based on the pertinent factors. Under Ehrenhaus v. Reynolds, 965 F.2d 916 (10th Cir. 1992), a court should consider five factors before dismissing claims under Rule 41(b):

1. “the degree of actual prejudice to the defendant,”

2. “the amount of interference with the judicial process,”

3. “the culpability of the litigant,”

4. “whether the court warned the party in advance that dismissal of the action would be a likely sanction for noncompliance,” and

5. “the efficacy of lesser sanctions.”

Mobley v. McCormick, 40 F.3d 337, 340 (10th Cir. 1994) (internal quotation marks omitted). The district court did not abuse its discretion in applying the five factors.

First, the district court concluded that Auto-Owners had incurred substantial prejudice. Summit Park’s violation of the disclosure order

• sparked months of litigation over Mr. Keys’s eligibility as an appraiser and the justification for sanctions and

• wasted eight months of litigation preceding the appraisal process.

The additional months of litigation not only resulted in additional expenses for Auto-Owners but also delayed resolution of its claim for a declaratory judgment.

Summit Park insists that Auto-Owners’ prejudice was self-inflicted by its delay in objecting to Mr. Keys. As Summit Park observes, Auto-Owners did not immediately launch a full investigation into Mr. Keys and the disclosures. But the district court could reasonably decline to find a waiver. Before the appraisal, Auto-Owners had repeatedly expressed concerns to Summit Park about Mr. Keys’s impartiality. Thus, the district court could reasonably pin fault on Summit Park rather than Auto-Owners.

*6 Second, the district court found massive interference with the judicial process. This finding was also reasonable, for the court could justifiably consider Summit Park’s conduct as the reason for hundreds of wasted hours by Auto-Owners, the court, and the appraisers.

Summit Park argues that its misconduct was not as egregious as the misconduct of the sanctioned party in Ehrenhaus. In Ehrenhaus, the sanctioned party “simply and intentionally refused to appear, which the Court [found] to be in bad faith and willful and intentional disobedience to two court orders.” 965 F.2d 916, 921 (10th Cir. 1992) (internal quotation marks omitted).

For the sake of argument, we may assume that Summit Park did not act as badly as the sanctioned party in Ehrenhaus. But Ehrenhaus did not establish a floor of culpability. See LaFleur v. Teen Help, 342 F.3d 1145, 1151-52 (10th Cir. 2003) (upholding dismissal when the plaintiffs failed to produce discovery documents by the deadline in violation of a discovery order). The district court could reasonably determine that Summit Park’s misconduct was sufficiently culpable to merit dismissal of the counterclaims. See Jones v. Thompson, 996 F.2d 261, 265 (10th Cir. 1993) (“[I]t is enough to say the [sanctioned party] repeatedly ignored court orders and thereby hindered the court’s management of its docket and its efforts to avoid unnecessary burdens on the court and the opposing party.”).

Third, the court determined that Summit Park had some culpability. As discussed above, Summit Park played a role in concealing the earlier contingent-cap fee, selecting Mr. Keys, and failing to ensure the accuracy of the disclosures. Summit Park argues that its behavior was not sufficiently culpable for dismissal. But the district court gave only moderate weight to this factor. Given the district court’s observation that Summit Park’s actions “suggest[ed] bad faith,” the assignment of moderate weight to this factor was reasonable. Appellant’s App’x at 399.

Fourth, the district court warned Summit Park of the risk of dismissal. The court cautioned the parties, in all capital letters, that “notice is given that, if the court finds that the parties and/or their counsel have not complied with this order, the court will impose sanctions against the parties and/or their counsel pursuant to the court’s inherent authority.” Appellant’s App’x at 78 (capitalization removed). The warning was early and prominent, stating that Summit Park could be sanctioned if it violated the disclosure order.

Summit Park argues that the warning failed to clarify that dismissal was a likely sanction. We have held that an express warning of dismissal is not required. Instead, we have regarded notice as sufficient even when it is constructive, rather than express. Ecclesiastes 9:10–11–12, Inc. v. LMC Holding, 497 F.3d 1135, 1149-50 (10th Cir. 2007). Here the court could regard the warning as constructive notice that dismissal of the counterclaims would be a likely sanction for noncompliance. See id. (stating that “Ehrenhaus’s notice prong was satisfied” despite the absence of an express warning that the claim would be dismissed).

Fifth, the district court concluded that lesser sanctions would be inadequate, putting great weight on this factor. Summit Park denies consideration of lesser sanctions. We disagree. The court stated that it had “given serious consideration to the efficacy of lesser sanctions and [had] determined that only dismissal” would suffice. Appellant’s App’x at 401. For this statement, the court explained that a sanction of attorneys’ fees and expenses alone would not adequately deter Summit Park, its counsel, or other potential wrongdoers from similar conduct in the future. This explanation was supported by the record, and the court acted reasonably in considering the possibility of lesser sanctions.

*7 * * *

The district court reasonably concluded that four of the factors merited great weight and one of the factors merited moderate weight. Under Ehrenhaus, the decision to order dismissal with prejudice was not an abuse of discretion. See Ehrenhaus v. Reynolds, 965 F.2d 916, 922 (10th Cir. 1992) (affirming the dismissal when two of the factors merited great weight and the other three factors had some support in the record); see also Gripe v. City of Enid, 312 F.3d 1184, 1188-89 (10th Cir. 2002) (affirming the dismissal when there was no evidence to support the third factor).

 

VII. The district court did not deprive Summit Park of due process in awarding interest on the overpayment to Summit Park.

The district court awarded Auto-Owners $97,797.53 for interest. This award was based on the amount that Auto-Owners had paid to Summit Park upon completion of the appraisal. When the appraisal was vacated, Auto-Owners obtained repayment of the amount overpaid and sought interest based on a Colorado statute:

When money or property has been wrongfully withheld, interest shall be an amount which fully recognizes the gain or benefit realized by the person withholding such money or property from the date of wrongful withholding to the date of payment or to the date judgment is entered ....

Colo. Rev. Stat. § 5-12-102(1)(a). Summit Park argues that the imposition of interest resulted in a deprivation of due process. We disagree because Summit Park had an opportunity to respond to Auto-Owners’ request for interest.²

 

After the appraisal award was vacated, Auto-Owners amended its complaint to recoup (1) payments based on the appraisal and (2) interest on the wrongfully obtained award. Summit Park moved to dismiss Auto-Owners’ claim for recoupment. The district court issued an order granting Auto-Owners’ request for interest and denying Summit Park’s motion to dismiss as moot. Summit Park argues that the court’s ruling essentially constituted a default judgment on Auto-Owners’ claim for interest, depriving Summit Park of due process by denying an opportunity to respond to Auto-Owners’ request.

Summit Park is incorrect, for it had an opportunity to respond to Auto-Owners’ request for statutory interest. This opportunity arose when Auto-Owners requested statutory interest from Summit Park in a brief filed in district court. Summit Park not only had the opportunity to respond but also took advantage of that opportunity by objecting to the request for interest. See Resolution Tr. v. Dabney, 73 F.3d 262, 268 (10th Cir. 1995) (“[T]he opportunity to fully brief the issue is sufficient to satisfy due process requirements.”).

Summit Park disagrees, pointing out that Auto-Owners’ request for interest was contained in a motion for sanctions. In light of the nature of the brief, Summit Park insists that it was on notice only as to Auto-Owners’ request for interest as a sanction, not based on the Colorado statute.

*8 This argument is not supported by the record. In requesting interest, Auto-Owners invoked Colorado Revised Statutes § 5-12-102(1)(a) and case law applying this statute. See Appellant’s App’x at 234 (explaining that under the Colorado statute, “wrongfully withheld money earns 8% interest from the date the wrongful withholding commences until the date those amounts are paid back”). With this authority, Auto-Owners asked the district court for “statutory interest.” Id. Thus, Summit Park was fully apprised of Auto-Owners’ reliance on the Colorado statute for an award of interest.

* * *

In these circumstances, the district court did not deprive Summit Park of due process because Summit Park had an opportunity to object to the award of interest under the Colorado statute.

VIII. Conclusion

The district court did not err in sanctioning Summit Park. Regardless of the validity of the disclosure order, Summit Park had a duty to comply. Summit Park violated the disclosure order by failing to disclose information bearing on Mr. Keys’s impartiality. Based on the violation of the disclosure order, the district court did not err by vacating the appraisal award and sanctioning Summit Park with dismissal of its counterclaims. Nor did the court deprive Summit Park of due process by awarding interest to Auto-Owners. We affirm.

All Citations

--- F.3d ----, 2018 WL 1559905

Footnotes
1	As discussed below, Summit Park also committed its own violations of the disclosure order. See pp. 11-12, below.
2	Auto-Owners contends that Summit Park failed to preserve its due-process challenge. For the sake of argument, we may assume that Summit Park lacked an opportunity to raise a due-process challenge in district court. Even with this assumption, the challenge would fail on the merits.