The practice of resisting arbitration awards by whatever judicial means are available has been subject to a fair amount of “pushback” in the U.S. recently. On Friday, the U.S. Court of Appeals for the Second Circuit (Pooler, Parker, and Lohier, Circuit Judges) added to that pressure with their opinion in Enmon et al v. Prospect Capital Corporation et al, Docket No. 10-2811-cv (2d Cir. April 6, 2012). A copy of that opinion will be available Monday on TDM.
In that opinion, the Court of Appeals upheld a decision by Judge Sand of the U.S. District Court for the Southern District of New York (SDNY) to sanction a law firm (Arnold & Itkin LLP, a 10-15 lawyer Texas-based firm) for bad faith in opposing efforts by Prospect Capital Corporation to enforce an arbitration agreement and compel arbitration and then to confirm the resulting arbitration award. Arnold & Itkin had appeared pro hac vice, on behalf of Michael Enmon (the respondent in the arbitration), in judicial proceedings in the SDNY brought by Prospect (the claimant in the arbitration seeking a declaratory judgment of non-liability for failure to enter into a credit agreement with Enmon’s company) first to compel arbitration and later to confirm the resulting $2.29 million arbitration award (which sum was for recovery of Prospect’s fees and expenses in successfully obtaining the declaratory judgment from the arbitrator).
The District Court imposed (and the Court of Appeals affirmed) $354,559 in sanctions for fees and expenses incurred by Prospect as a result of Arnold & Itkin’s bad faith conduct in connection with the SDNY proceedings to compel arbitration and the proceedings to confirm the arbitration award, including $260,000 incurred in litigating the sanctions motion itself. In addition, the District Court ordered (and the Court of Appeals affirmed) that all Arnold & Itkin attorneys must attach the sanctions order to all future pro hac vice applications by the firm’s attorneys in the SDNY. The appellate court did remand Judge Sand’s sanctions order, solely “so that the District Court may consider whether a temporal limit should apply to that part of the order and whether to exclude from the order any attorneys who joined the firm after June 23, 2010 [the date of the sanctions order].”
The Court of Appeals summarized the standards for a District Court to impose sanctions as follows.
In order to impose sanctions pursuant to its inherent power, a district court must find that: (1) the challenged claim was without a colorable basis and (2) the claim was brought in bad faith, i.e., motivated by improper purposes such as harassment or delay.” Schlaifer Nance, 194 F.3d at 336; see also id. at 337 (holding that a claim is “entirely without color when it lacks any legal or factual basis. Conversely, a claim is colorable when it has some legal and factual support, considered in light of the reasonable beliefs of the individual making the claim.”) …. Although both findings “must be supported by a high degree of specificity in the factual findings,” …, “bad faith may be inferred ‘only if actions are so completely without merit as to require the conclusion that they must have been undertaken for some improper purpose such as delay,’”
District Judge Sand based his sanctions on a series of improper actions by Arnold & Itkin, as to each of which the Court of Appeals upheld the District Court’s conclusions.
According to Judge Sand, the first improper conduct occurred when the law firm engaged in “misrepresentation by omission” in an effort to obtain a temporary restraining order (TRO) from a Texas state court against Prospect’s proceedings in the U.S. District Court for the Southern District of New York to compel arbitration. On this point, the Second Circuit explained that “Arnold & Itkin acted without a colorable basis (a finding that Arnold & Itkin does not dispute) and in bad faith in procuring” an unconstitutional temporary restraining order from a Texas state court without disclosing to the Texas state court that the “Texas TRO application sought to enjoin a federal court action (as opposed to a state court action).”
For those on OGEMID/YO not familiar with the particularities of the U.S. federal system, state courts in the U.S. cannot constitutionally enjoin Federal courts. The Texas state court, as soon as it was advised by Prospect that the object of the TRO was a federal court, adjourned the TRO proceeding.
The Second Circuit further upheld Judge Sand’s finding that the Arnold & Itkin had filed in bad faith a motion with the District Court, just two weeks before the arbitration was to commence, to reopen the SDNY decision to compel arbitration on the basis of “new” or “newly discovered” evidence (a so-called FRCP Rule 60(b) motion). The Court found that the law firm had personal knowledge of the allegedly new evidence for over a year prior to the commencement of the arbitration (as well long before commencement of the SDNY proceedings to compel arbitration). In any event, Arnold & Itkin’s claim based on the purported new evidence included “persistent misrepresentations” and was made in bad faith.
We also conclude that the District Court acted within its discretion when it sanctioned Arnold & Itkin for filing the Rule 60(b) motion for relief from the order to compel arbitration. There was ample evidence that the motion as a whole contained “persistent misrepresentations” and was made in bad faith.
The proceedings to compel arbitration were not the only circumstances where Arnold & Itkin went astray from proper conduct. Judge Sand had also imposed sanctions for “frivolous” arguments by the law firm in the later confirmation proceedings in the Southern District that “misrepresented the record” of the underlying arbitration.
The District Court also sanctioned Arnold & Itkin for its opposition to Prospect’s petition to confirm the arbitration award. The court found that the law firm made “frivolous arguments that misrepresented the record” and gave as a specific example that “Arnold & Itkin objected to the arbitrator’s calling witnesses out of order, even though Arnold & Itkin had requested that it be able to call witnesses out of order.”
In addition, the District Court sanctioned Arnold & Itkin for two “voluntarily withdrawn, frivolous appeal[s]” of SDNY decisions, one related to the Rule 60(b) decision and the other opposing the eventual SDNY order confirming the arbitration award. The Court of Appeals acknowledged:
a preference that district courts not sanction parties for filing frivolous appeals in this Court. …. Our reluctance has been due in part to a concern that “[a] rule permitting a district court to sanction an attorney for appealing an adverse ruling might deter even a courageous lawyer from seeking the reversal of a district court opinion.” …. By the same token, “we . . . do not want to discourage voluntary dismissals, which save the time not only of appellees but also of this court, by a readiness to grant sanctions.”
Even with these policy concerns in mind, however, we have never established a bright line rule prohibiting district courts from ever sanctioning a party for a voluntarily withdrawn, frivolous appeal. We decline to do so now, and we affirm the District Court’s decision to sanction Arnold & Itkin for its voluntarily dismissed appeals of the court’s rulings on the Rule 60(b) motion and Prospect’s petition to confirm the arbitral award.
It is not clear from the Second Circuit decision whether the appellate panel would have been equally willing to uphold the District Court’s sanctions decisions if the misconduct by Arnold & Itkin had not been so persistent.
I hope this is useful.
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