R. Reginald Hyde, II v. George Irish

962 F.3d 1306

• Court: Court of Appeals for the Eleventh Circuit
• Decided: June 17, 2020
• Docket: 15-13010
• Status: Published

Opinion

Case: 15-13010 Date Filed: 06/17/2020 Page: 1 of 9

[PUBLISH]

IN THE UNITED STATES COURT OF APPEALS

FOR THE ELEVENTH CIRCUIT ________________________

No. 15-13010 ________________________

D.C. Docket No. 1:12-cv-20717-MGC

R. REGINALD HYDE, II, JOHN REYNOLDS,

Plaintiffs-Appellees,

ANTHONY SAUTA, et al.,

Plaintiffs,

versus

GEORGE IRISH,

Defendant-Appellant,

TIMOTHY J. KOENIG, et al.,

Defendants.

________________________

Appeal from the United States District Court for the Southern District of Florida ________________________

(June 17, 2020) Case: 15-13010 Date Filed: 06/17/2020 Page: 2 of 9

Before WILSON, MARCUS, and THAPAR,∗ Circuit Judges.

THAPAR, Circuit Judge:

A court can only decide an issue if it has the power to do so. The primary

question in this appeal is whether a district court has the power to grant or deny

sanctions (under the court’s inherent powers or 28 U.S.C. § 1927) when it lacks

subject-matter jurisdiction over the underlying case. We join our sister circuits in

answering yes and affirm the denial of sanctions.

I.

This story begins with a business idea and two Georges. George Irish, a

residential real estate broker, wanted to turn a campground in the Florida Keys into

a luxury housing development. George Hyde, a restauranteur and businessman,

decided to invest in the project. Hyde and Irish had joined forces before,

successfully investing in property throughout the Keys. Unfortunately, this project

suffered a different fate. Due to a lack of financing, the development was never built

and the property was foreclosed on. As a result, both parties lost their investments.

Hyde (along with other plaintiffs) sued Irish (along with other defendants).

The plaintiffs alleged fraud, breach of fiduciary duty, and conspiracy to defraud,

∗ Honorable Amul R. Thapar, United States Circuit Judge for the Sixth Circuit, sitting by designation.

2 Case: 15-13010 Date Filed: 06/17/2020 Page: 3 of 9

among other things. The district court eventually granted summary judgment to

Irish. On appeal, the Eleventh Circuit noted some uncertainty about its subject-

matter jurisdiction and remanded the case back to the district court to determine

whether there was still diversity jurisdiction. The district court then dismissed the

case for lack of subject-matter jurisdiction.

During all this, the parties were also locked in a separate dispute about

sanctions. Irish moved for sanctions against the plaintiffs and their attorneys

because he believed that they knowingly lied in their complaint. The complaint

alleged that the plaintiffs’ financial contribution to the project was improperly

disbursed for the benefit of others—not for the joint venture. And Irish believed that

the plaintiffs knew (or should have known) that those allegations were false. But

the district court found otherwise and denied the motion for sanctions.

That brings us to the two questions in this appeal: (1) did the district court

lack jurisdiction over the sanctions dispute because it lacked jurisdiction over the

underlying case? And (2) did the district court correctly deny the motion for

sanctions?

II.

In the world of jurisdiction, there’s an important distinction between the

underlying case or controversy and certain “collateral” matters. Cooter & Gell v.

Hartmarx Corp., 496 U.S. 384, 395 (1990). The former includes the merits of the 3 Case: 15-13010 Date Filed: 06/17/2020 Page: 4 of 9

dispute as well as many procedural questions. The latter includes a limited set of

issues “collateral to the merits” of the case. Willy v. Coastal Corp., 503 U.S. 131,

137 (1992). Think things like “the imposition of costs, attorney’s fees, and contempt

sanctions.” Cooter & Gell, 496 U.S. at 396.

Although we call these issues “collateral,” that doesn’t make them any less

important. Many involve the power to enforce compliance with the rules and

standards that keep the judiciary running smoothly. See Willy, 503 U.S. at 137, 139.

Without them, “abuses of the judicial system” would go unchecked, “burdening

courts and individuals alike with needless expense and delay.” Cooter & Gell, 496

U.S. at 397–98. And that’s not just a matter of procedure. Because justice delayed

is justice denied, these powers ensure that justice is done.

The distinction between the underlying case and collateral issues is important

when it comes to jurisdiction because it affects a court’s power to decide an issue.

Once a court loses jurisdiction over a case, it may no longer decide issues arising out

of that case. See, e.g., Capron v. Van Noorden, 6 U.S. (2 Cranch) 126, 127 (1804).

But it can still decide certain “collateral” issues related to the case. See Cooter &

Gell, 496 U.S. at 395.

Here, all agree that the district court lacked subject-matter jurisdiction over

the case. So the question for us is whether Irish’s motion for sanctions under the

district court’s inherent powers or § 1927 was a part of the underlying case (which 4 Case: 15-13010 Date Filed: 06/17/2020 Page: 5 of 9

would mean that the court lacked the power to rule on the motion) or a “collateral”

issue (which would mean that it had the power to do so).

Fortunately, we don’t approach this question on a blank slate. The Supreme

Court has told us that sanctions under Federal Rule of Civil Procedure 11 are a

“collateral” issue and thus a court may decide a Rule 11 sanctions motion even if it

lacks jurisdiction over the underlying case. See Willy, 503 U.S. at 137–39. The

decision reasoned that exercising jurisdiction in this context was both

constitutionally permissible and practically important.

On the first point, the Court explained that ruling on a Rule 11 motion

“implicates no constitutional concern because it does not signify a district court’s

assessment of the . . . legal merits” of the case. Id. at 138 (cleaned up). Instead, it

concerns “a collateral issue: whether the attorney has abused the judicial process.”

Id. (cleaned up). And because a district court does not have to decide the merits to

rule on a Rule 11 motion, it does not improperly consider the ‘“case or controversy’

over which it lacks jurisdiction.” Id.

On the second point, the Court reasoned that exercising jurisdiction over a

Rule 11 motion is practically important because “[t]he interest in having rules of

procedure obeyed” outlives the merits of a case. Id. at 139. This makes sense. The

need to deter those who might violate the rules does not rise or fall with any

particular case. It is an ever-present need of all courts. Simply put, district courts 5 Case: 15-13010 Date Filed: 06/17/2020 Page: 6 of 9

need the power to rule on these issues to ensure “the maintenance of orderly

procedure.” Id. at 137.

Both these points apply equally to sanctions under a court’s inherent powers

or § 1927. These sanctions, like Rule 11 sanctions, do not require a court to rule on

the merits of the underlying case. Our analysis in the next Part makes this clear.

And the purpose of the sanctions outlasts the end of the case. Otherwise, parties

who abuse the judicial procedures could get off scot-free anytime it turned out that

the district court lacked subject-matter jurisdiction.

For good reason, then, all of our sister circuits to have faced this question have

recognized jurisdiction in this context. See, e.g., Ratliff v. Stewart, 508 F.3d 225,

231 n.7 (5th Cir. 2007); Red Carpet Studios Div. of Source Advantage, Ltd. v. Sater,

465 F.3d 642, 645 (6th Cir. 2006); In re Jaritz Indus., 151 F.3d 93, 96–97 (3d Cir.

1998); see also Fidrych v. Marriott Int’l, Inc., 952 F.3d 124, 137–38 (4th Cir. 2020);

Zerger & Mauer LLP v. City of Greenwood, 751 F.3d 928, 931 (8th Cir. 2014).

Today, we join them and hold that a district court may address a sanctions

motion based on its inherent powers or § 1927 even if it lacks jurisdiction over the

underlying case.

III.

With jurisdiction secure, we next consider whether the district court abused

its discretion when it denied Irish’s motion for sanctions. See Amlong & Amlong, 6 Case: 15-13010 Date Filed: 06/17/2020 Page: 7 of 9

P.A. v. Denny’s, Inc., 500 F.3d 1230, 1237–38 (11th Cir. 2007). It did not. A

sanctions motion under either a court’s inherent powers or § 1927 requires a showing

that the party acted in bad faith. See Hernandez v. Acosta Tractors Inc., 898 F.3d

1301, 1306 (11th Cir. 2018); Amlong, 500 F.3d at 1239. The district court properly

found that Irish made no such showing.

First, a word on what bad faith means in each context.

In the context of inherent powers, the party moving for sanctions must show

subjective bad faith. See Hernandez, 898 F.3d at 1306; Purchasing Power, LLC v.

Bluestem Brands, Inc., 851 F.3d 1218, 1223 (11th Cir. 2017). This standard can be

met either (1) with direct evidence of the attorney’s subjective bad faith or (2) with

evidence of conduct “so egregious that it could only be committed in bad faith.”

Purchasing Power, 851 F.3d at 1224–25. Evidence of recklessness alone won’t

suffice. Id. at 1225.

Under § 1927, on the other hand, the party moving for sanctions must show

objective bad faith. See Amlong, 500 F.3d at 1239–41. Usually, this means an

attorney acted “knowingly or recklessly.” Schwartz v. Millon Air, Inc., 341 F.3d

1220, 1225 (11th Cir. 2003). The statute imposes a “high standard” that requires the

moving party to show that the other side engaged in behavior that “grossly deviates

from reasonable conduct.” Amlong, 500 F.3d at 1240, 1242. But although the

standard is objective, the moving party may still rely on evidence of subjective bad 7 Case: 15-13010 Date Filed: 06/17/2020 Page: 8 of 9

faith to make this showing. That’s because an act done in subjective bad faith is also

more likely to be objectively unreasonable. See id. at 1241.

With these principles in mind, consider this case. Irish argues that the

plaintiffs included allegations in their complaint that they either knew or should have

known were false. The paragraphs alleged that the plaintiffs’ investment had been

used for improper purposes and had been disbursed to Irish himself rather than the

joint venture. (The plaintiffs later removed the offending paragraphs during the Rule

11 safe harbor period. See Fed. R. Civ. P. 11(c)(2).)

In support of this argument, Irish points to an exhibit attached to the complaint

that, he says, made it obvious the allegations were false. The exhibit was a single

page listing wire transfers. Among them were incoming transfers reflecting the

plaintiffs’ investment plus outgoing transfers of the same amount going to the

developer or to banks. Irish reasons that these wire transfers show that the

investment was used appropriately. After all, the same amount that came in from

plaintiffs went out to the bank or the developer.

There are two problems with Irish’s argument.

First, that’s not the only way to read the exhibit. Another just-as-plausible

reading is that defendants first disbursed the investment to the bank and only then

improperly disbursed the funds. The exhibit only tells us something about where the

funds initially went, not where they finally ended up. So it really doesn’t tell us 8 Case: 15-13010 Date Filed: 06/17/2020 Page: 9 of 9

much at all. What’s more, even if the exhibit did prove that the allegations were

false, Irish hasn’t shown that any falsity arose from more than mere negligence. And

negligent conduct, by itself, does not warrant sanctions under a court’s inherent

powers or § 1927. See Purchasing Power, 851 F.3d at 1225; Amlong, 500 F.3d at

1241–42.

Second, the district court properly considered Irish’s nearly three-year delay

in bringing his sanctions motion. If Irish were right that the falsity of the allegations

was so obvious from the face of the complaint, then he should have raised his

concern when the complaint was first filed (or at least closer in time to that point).

In failing to do so, he fell short of the requirement that a motion for sanctions “should

be served promptly after the inappropriate paper is filed.” Peer v. Lewis, 606 F.3d

1306, 1312 (11th Cir. 2010) (cleaned up). In short, the district court did not abuse

its discretion.

We affirm.