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Failure to Identify Sanctioning Power Pursuant to Which Attorneys’ Fees Awarded = Abuse of Discretion, Requires Remand

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Arnold v. Fed. Nat’l Mortg. Ass’n, 2014 U.S. App. LEXIS 9711 (5th Cir. May 27, 2014):

At the initial conference in this case, the district court explicitly warned the Arnolds and their original counsel that it believed their claims lacked any merit and that if they chose to continue to prosecute their suit they might face sanctions. Nevertheless, the Arnolds continued on with their suit and their original counsel withdrew. Kelly replaced the original counsel and during a contentious pretrial conference the Arnolds requested to file an amended complaint. The judge impliedly denied their request and instead ordered that the Arnolds respond to a summary judgment motion previously filed by the Defendants. The Arnolds responded to the motion, yet also filed the amended complaint without leave of the court. Following a later hearing on the Defendants' motion for summary judgment, the district court issued a final judgment which granted Federal National Mortgage Association possession of the home, ordered the Arnolds to vacate the home, and sua sponte sanctioned the Arnolds and Kelly $7,500, an amount for which they were made jointly and severally liable. The award was calculated at the parties' summary judgment hearing based upon the Defendants' counsel's rough estimation of the resultant attorneys' fees in defending against the  [*4] Arnolds' claims.

The district court's final judgment, however, does not state the legal basis for its imposition of sanctions.1 Over a span of several conferences and hearings, the court only briefly mentioned both Rule 11 of the Federal Rules of Civil Procedure and 28 U.S.C. § 1927, but never made mention of them in detail. To further complicate this matter, the respective parties on appeal have viewed and briefed the issue of sanctions differently. The Arnolds construe the sanctions as arising under Rule 11, while the Defendants construe them as arising under the district court's inherent powers; neither party addresses 28 U.S.C. § 1927.

1   It states only that "[t]he Arnolds and their lawyer--Jeffrey Kelly--are jointly and severally liable for the defendants' attorneys' fees of $7,500."

The district court's imposition of sanctions may be reviewed under either Rule 11, 28 U.S.C. § 1927, or its inherent powers for an abuse of discretion. Jenkins v. Methodist Hosps. of Dallas, Inc., 478 F.3d 255, 263 (5th Cir. 2007) (for sanctions pursuant to Rule 11); Cambridge Toxicology Grp., Inc. v. Exnicios, 495 F.3d 169, 180 (5th Cir. 2007) (for sanctions pursuant to 28 U.S.C. § 1927); Crowe v. Smith, 151 F.3d 217, 226 (5th Cir. 1998)  [*5] (for sanctions under a court's inherent powers). We cannot, however, be left to guess at the basis for the sanctions in this case. Each possible basis for the sanctions has differing legal considerations. For instance, a district court may not impose sanctions under Rule 11 by sua sponte order unless "the court issue[s] [a] show-cause order under Rule 11(c)(3)." Marlin v. Moody Nat'l Bank, N.A., 533 F.3d 374, 378 (5th Cir. 2008) (citing Fed. R. Civ. P. 11(c)(5)(B)). On the other hand, sanctions under a court's inherent powers require a "specific finding that the [party] acted in bad faith." Crowe v. Smith, 151 F.3d at 236. If sanctions are imposed under 28 U.S.C. § 1927, a "district court must make detailed factual findings." Lawyers Title Ins. Corp. v. Doubletree Partners, L.P., 739 F.3d 848, 871 (5th Cir. 2014) (citation omitted). Additionally, other steps must be taken under § 1927; the court must "(1) identify sanctionable conduct and distinguish it from the reasons for deciding the case on the merits, (2) link the sanctionable conduct to the size of the sanctions, and (3) differentiate between sanctions awarded under different statutes." Id. at 872. The final judgment here does  [*6] not meet the requirements under any of the three possible bases for sanctions in this case.

II.

Here, the order fails to articulate the basis for the sanctions and fails to follow the proper procedure and analysis for their imposition. These inadequacies constitute an abuse of the district court's discretion. We do not express any opinion on the merits of the sanctions; we only hold that the district court abused its discretion by failing to adequately articulate the authority, the basis, and the reasoning for the sanctions. The district court did not, however, err in granting the Defendants' motion for summary judgment on the merits of this case. In sum, we AFFIRM the district court's final judgment on the merits, but VACATE and REMAND solely on the issue of sanctions so that the district court can state its basis for sanctions and follow the proper legal steps in issuing them.

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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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